Disclosures Pave the Way for Transparency in Resource-Backed Loans
During the commodity boom of the last two decades, many governments and state-owned enterprises in developing countries signed significant “resource-backed loans” (RBLs). These loans provide governments access to finance in exchange for, or collateralized by, future streams of income from natural resource wealth, such as oil and minerals; Chinese entities are the dominant lenders in this space. In NRGI’s 2020 study on RBLs, which explored the experience of RBL borrowers in sub-Saharan Africa and Latin America between 2004 and 2018, we found that Chinese entities account for $152 billion (more than 90 percent) of the total amount lent through identified RBLs.
NRGI and others have frequently criticized RBL deals for their opacity. Information about agreed terms and conditions is scant. At the time of our study, we lacked basic information, such as the interest rate, for 33 out of the 52 cases surveyed, and just one loan document was publicly accessible: the Sicomines loan that the Democratic Republic of the Congo (DRC) signed in 2011. But since the publication of our report a year ago, the transparency landscape has already showed signs of change.
Last week, AidData released a trove of loan agreements between Chinese entities and sovereign borrowers in developing countries. The researchers scoured debt information management systems, official registers and gazettes, and parliamentary websites to find 100 publicly available Chinese loan agreements in 24 countries. Their database, and accompanying “How China Lends” report comparing terms with other loan agreements from a benchmark sample, both confirms and expands our understanding of sovereign debt agreements involving Chinese state lenders.
One key finding of the report is the widespread use of far-reaching confidentiality clauses in the Chinese loan agreements meant to restrict borrowers from disclosing loan information. This confirms worries about opacity and the need to rein in confidentiality provisions in sovereign debt agreements, as previously highlighted. However, the fact that a significant number of Chinese loan agreements were publicly accessible despite these confidentiality provisions may point to a pathway to greater transparency: leveraging and building on borrower country laws and procedures requiring parliamentary ratification and/or disclosure of sovereign debt agreements. Carve-outs from confidentiality, where applicable law requires disclosure, are relatively common and is likely how many of the Chinese loan agreements ended up publicly disclosed and in the database notwithstanding the confidentiality clauses.
In addition to the Sicomines loan, the AidData database includes contracts for five more RBLs: three with the government of Ecuador, one with the government of Ghana and one with Venezuela’s state-owned enterprises (SOEs) PDVSA and BANDES. We featured these deals in the 2020 NRGI report, and the key terms we had reported in relation to loan amounts, interest and maturities were the same or very similar to those included in the contracts. (We plan to update our report’s dataset with insights from the AidData work, adding new details such as missing grace period information).
Access to the contracts allows us to better understand certain critical details about these loans. For example, while we and others have reported Ghana’s 2018 loan from Sinohydro, a Chinese SOE, as a $2 billion loan, the published agreement clarifies that the Chinese lenders offered $1.7 billion and that the Ghanaian government sought an additional $300 million elsewhere. The contracts also shed light on how the government has used Ghana’s bauxite revenues as collateral and how this approach fits within broader patterns of collateralization in Chinese lending described in the AidData report, namely the requirement to maintain a funded bank account with the lender that could be seized in case of non-payment. In Ghana’s case, the agreement specifies that bauxite proceeds be kept in an offshore escrow account and that the government entered into an escrow agreement with creditor Sinohydro.
Disclosed loan agreements can also be useful for countries, like Guinea, with similar Chinese loans that are not yet disclosed. In 2017 the Guinean government signed an agreement with China for a $20 billion credit line, from which loans backed by bauxite receipts would be drawn with a group of Chinese state-owned companies and lenders. Information on the credit line and loans signed in 2018 was limited, but we now have the headline parameters through Guinea’s latest Extractive Industries Transparency Initiative (EITI) report (broadly aligned with EITI’s recent guidance on barter deals). Guinean civil society organizations and EITI Guinea have been instrumental in making this disclosure happen. The remaining challenge is access to the actual loan and infrastructure contracts that would unveil the overall commitments between the government and its Chinese partners. This would enable oversight actors to undertake a comprehensive risk assessment, both of the government’s ability to repay existing loans and whether it is advisable for the government to draw down further loans on the existing line of credit given the uncertain future economic context.
The need for transparency around loans and financing arrangements involving natural resources is not limited to those involving Chinese lenders. RBLs from commodity trading firms are often even more opaque than those from Chinese lenders and have destabilized economies in borrower countries. Transparency is also essential as governments use increasingly creative ways to raise finances leveraging their natural resources, as recent developments in the DRC and Ghana illustrate. The DRC’s commitment to disclose mining contracts, and civil society monitoring of the commitment, resulted in the recent publication of one such contract. In 2017, the country’s giant state-owned mineral company Gécamines sold its future mining royalty revenues from the Metalkol cobalt and copper project to Multree Limited, a company associated with Dan Gertler, who has faced U.S. sanctions on the basis of alleged corruption. While certain details of the deal remain unclear, it appears that Gécamines exchanged future royalties for an upfront payment of $55 million and Multree’s assumption of a $28 million debt owed by Gécamines to Metalkol. In Ghana, the government recently confirmed that it will resume its own controversial plan to sell an interest in future gold royalties to private investors through a stock exchange listing.
As many developing countries struggle with debt, increased transparency around Chinese lending and resource-based financing is critically important. Access to information about past deals will enable borrower countries seeking fresh financing or contemplating debt renegotiation to better structure and negotiate. And other lenders can use the information to lead by example in providing finance on more sustainable terms. Perhaps most importantly, sovereign debt transparency is also critical for civil society organizations and other oversight actors. According to the authors of the “How China Lends” report:
Disclosing all debt contracts, however difficult politically, should become the norm rather than the exception. This would give citizens the ability to hold their governments accountable for the debt contracts signed in their name. Public debt should be public.
Disclosure of sovereign loan agreements is a natural progression from the publication of oil, gas and mining contracts, which has improved markedly in recent years. In 2009, governments and companies expressed skepticism around the publication of these documents, but just over 10 years later at least 49 countries have officially disclosed contracts and over 20 companies publicly support the practice. Extractive sector contract transparency is now an established global norm endorsed by the IMF and required by EITI.
Given the similar public interest questions surrounding the management of public debt and the governance of natural resource wealth, those working for greater transparency of sovereign debt should build on these gains. RBLs are of particular importance—they are the intersection of extractives transparency and debt transparency. Momentum around greater sovereign debt transparency is building and this can only benefit the governance of natural resources.
