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Borrowers and Lenders Must Come Clean on Terms of Controversial, High-Value Resource-Backed Loans

  • Press release

  • 27 February 2020

  • Resource-backed loans from China and commodity traders exacerbate debt troubles for some oil- and mineral-producing countries; new approach needed
  • China is the dominant resource-backed lender; two Chinese banks provided 77 percent of the $164 billion in resource-backed loans covered in new report
  • Loan agreements hidden from scrutiny

LONDON and NEW YORK, 27 February 2020—Resource-backed loans have contributed to crippling debt levels in developing countries and are shrouded in secrecy, according to a new report out today. These loans to governments, collateralized with oil or minerals, have been hidden from scrutiny for far too long and that must change, say the report’s authors.
A resource-backed loan is a borrowing mechanism by which a country accesses finance in exchange for, or collateralized by, future streams of income from its natural resources, such as oil or minerals. Researchers from the Natural Resource Governance Institute (NRGI) considered 52 resource-backed loans made between 2004 and 2018, with a total value of more than $164 billion. Of this amount, 77 percent came from two Chinese policy banks: China Development Bank (CDB) and the China Eximbank.
Only one of the 52 contracts between lenders and state actors was made public. Basic terms, such as the interest rate, were not available for approximately two-thirds of the loans.
“While these loans have often provided much-needed infrastructure, such as roads and hydro-dams, in many cases they have led to crippling levels of debt and the risk of losing collateral that is itself worth more than the value of the loan,” says report co-author David Mihalyi, a senior economic analyst with NRGI. He added: “Urgent changes are needed and that starts with transparency. Borrowers and lenders must allow for greater scrutiny of lending terms to ensure that these loans are sustainable and serve the interests of the people and the countries they are supposed to benefit.”
The report, Resource-Backed Loans: Pitfalls and Potential, explores both the risks and opportunities the loans represent and offers policy recommendations that borrowers and lenders can implement to improve the practice, with a greater focus on borrowers.
“Resource-backed loans are high-stakes gambles against a sophisticated opponent,” said report co-author Jyhjong Hwang. “Chinese state-owned companies have strategic interests in securing natural resources and will throw all their experience and capacity into negotiating a good deal. This allows borrowing countries to jump-start essential and expensive infrastructure projects that few others are willing to support. However, borrowers must always be mindful of the fact that these companies will prioritize their own strategic interests.”

Risky recent loans for Ghana and Guinea
Controversy surrounds new deals in Ghana and Guinea, involving the exchange of bauxite with Chinese companies for financing of infrastructure projects.
Ghana’s government is obligated to repay a $2 billion loan it agreed with Chinese state company Sinohydro in 2018. The repayment schedule requires a rapid ramp-up of bauxite production and refining, which the International Monetary Fund (IMF) has warned may not be possible and therefore could lead to loss of collateral.
Guinea signed a $20 billion loan in 2017, equivalent to 200 per cent of the country’s GDP. Bauxite production, designated to repay the loan, has already started but there is little publicly available information on how the country will repay such an enormous loan and under what conditions.  
Bauxite production in both countries carries significant environmental risks, but the affected citizens and civil society organizations that represent them have been effectively shut out of any consultations about the loans.
Crippling levels of debt
The report details how excessive debt has landed many of the countries in economic crisis. It follows a warning by the World Bank about crisis-level debt in emerging and developing nations, and identifies five countries where resource-backed loans have contributed significantly to severe debt problems: Angola, Chad, Republic of Congo, South Sudan and Venezuela.
As oil prices dropped in 2014, Congo’s debt spiraled from 70 percent to 120 percent of GDP. Venezuela is in severe crisis, with no cash to fund basic services including the provision of medicine. While the government has defaulted on debts to some bondholders, state oil company PDVSA still sends oil cargoes to repay Russian and Chinese loans. In South Sudan, repayment of resource-backed loans from Chinese banks and commodity trader Trafigura absorbed over 95 percent of oil revenues in the 2017-2018 period. This left the country without the oil revenue that it had previously relied upon to finance its budget.
Corruption risks and poor governance
Two thirds of the loans studied in the report have been made to countries with poor or failing scores in the Resource Governance Index, which includes among its assessments measures of transparency and accountability of countries’ resource sectors. Venezuela, which the report finds has the largest amount of resource-backed loans at $59 billion, was the Latin American country with the poorest natural resource governance score on the Resource Governance Index. The report also finds that Angola’s state oil company Sonangol, currently mired in a corruption scandal, took out the largest oil-backed loans in Africa.
The Democratic Republic of the Congo is the only country covered by the report to have published the contract of a loan, which was agreed between state-owned mining company Gécamines and a consortium of Chinese companies. However, 12 years after it was signed, and five years since the related copper and cobalt mining started, there is no comprehensive information publicly available about the resulting funding for infrastructure or the repayment plan.
Costly loans from commodity traders
The research also identifies a number of resource-backed loans provided by commercial oil trading firms to Chad, Republic of Congo and South Sudan. 
David Mihalyi said: “These deals, sometimes labeled as oil advances, often resemble pay-day loans: they have short maturities, high interest rates, and no commitments on how the money will be used. Countries should be particularly cautious of such advances.”
Potential for improvement
The report is not wholly critical of resource-backed loans. The authors highlight how borrowing countries obtain cheaper financing through the loans and can use them to generate economic returns that in the long term exceed their financing costs. The report also finds that countries have successfully renegotiated for improved loan terms.
However, given the largely negative experiences documented in the report, NRGI advises government officials to be cautious in agreeing to resource-backed loans and to institute safeguarding measures. These are outlined in the report as policy recommendations and include: ensuring that key loan terms are vetted by ministries of finance and available to the public; obtaining flexibility of repayments; “shopping around” with a variety of lenders to optimize terms; and employing legal experts for contract negotiations.
Authors also note that there have been positive developments in the global loan landscape. China has issued debt sustainability guidelines for borrowers. Recent steps taken by the Extractive Industries Transparency Initiative, the IMF and others have improved the transparency norms applicable to resource-backed loans.
Mihalyi concluded: “There have been improvements but there is a long way to go, especially as these commitments are yet to become standard practice. Both borrowers and lenders share a common interest in avoiding bad loans. We must learn from the mistakes made in the past. All parties to resource-backed loans should be transparent and accountable and push forward together to find more sustainable solutions.”

Note to editors
The analysis in the report relies on data collected by NRGI as well the Inter-American Dialogue at the Boston University Global Development Policy Center and the Johns Hopkins SAIS China-Africa Research Initiative (CARI). 

Lee Bailey
Communications Director
Natural Resource Governance Institute
T +44 (0)20 7332 6114
M +44 (0)7823 442 954 
[email protected]
Louise Orton
Communications Consultant
Natural Resource Governance Institute
M +44 (0)7939  141 764
[email protected]