The emerging powers provide development finance for Africa in a different way from traditional partners. Tracking and comparing the two is a challenge. A look at the investment and aid flows in this section shows that the surge in relations with countries that are not members of the OECD Development Assistance Committee (DAC) has led to a broadening of finance possibilities.

Emerging partners, as defined in this report, are not members of the DAC. The exception is Korea which changed status when it joined the DAC in 2010. This chapter looks at the whole of the last decade however, which is why Korea is nonetheless analysed and included as an emerging partner. Korea’s graduation from emerging to established development partner is symptomatic of the rapid pace of change in the landscape of Africa’s partners.

The Development Assistance Committee has strict principles for conducting and accounting for Official Development Assistance (ODA). The committee has been negotiating “best practice” guiding principles in several areas. One is the relaxation of restrictions preventing aid recipients from buying the goods and services they need from wherever they can get the best quality at the lowest price – i.e. to untie development assistance from trade. Thus, credit granted by governments that are committee members to promote the country’s exports is not accounted as official development assistance. Budget support, although not universally practised, is considered superior to finance on a project basis.

Emerging partners tend to adopt a more holistic approach to promoting exports, supporting direct investment and offering development assistance. In partnerships with other southern countries, in Africa and elsewhere, the new economic powers tend to bundle the negotiation and implementation of activities together. South-South co-operation is based on the notion of a win-win relationship where trade and investment are conceived as legitimate, effective ways to further economic development for both sides. For many emerging partners, development co-operation is only one element of a broader engagement aimed at boosting bilateral trade and gaining access to new markets. International co-operation efforts are often conducted jointly with the private sector. For instance, export credit subsidies are used by a government to reduce the risk of market entry for companies, or to reduce operational costs by creating necessary infrastructure (Potter, 2008; Chanana, 2009; Kiala, 2010).

Europe and North America therefore tend to rely on FDI12 and ODA in their engagement with Africa. The emerging powers are not yet major players in FDI, but they outplay traditional partners in alternative finance, the growth of which has been such that in 2011 the OECD development committee has started to work more actively on these “other official flows” (OOF, see Zimmermann and Smith, forthcoming). China in particular uses the following:

  • Export credits.13 It supports national exporters competing for overseas sales. The sum of all export credits by DAC members between 2004 and 2008 averaged USD 4.2 billion, of which less than USD 500 million annually was disbursed to Africa. By contrast, in 2009 China disbursed USD 29.6 billion in export credit globally.14 India has a high share of classical FDI activity and low levels of export credit relative to China (Athukorala, 2009) but Chanana (2009) reckons that India’s Exim Bank extended credit lines of INR 2 266 million (50 million USD) and INR 4 300 million (89 million USD) in 2004 and in 2010, respectively, of which over 60% were targeted to Africa.
  • Natural resource-backed lines of credit. China’s Exim Bank also uses natural resource exports or preferential access to natural resources as collateral for infrastructure projects and as means to repay a loan. The most famous example of such deals concerns the USD 6 billion joint venture negotiated by China with Democratic Republic of Congo in 2007 which is discussed in Box 6.8. Other well-known examples of such credit lines were for USD 2 billion in  2004 and USD 2.5 billion in 2007 issued by Exim Bank for the construction in Angola of 1 300 km of railways, 300 km of roads, hospitals, schools, social housing, telecommunications network and agriculture investment. These credit lines were secured by crude oil exports (Brautigam 2010a). This mode of financing, previously used by Japan in China, became known as the “Angola model” or “resource for infrastructure” (R4I) deals.
  • “Mixed credits”. Emerging partners also use financing packages in which concessional and market rate loans are combined (Brautigam, 2010a). China is the most active emerging partner using hybrid financing mechanisms including mixes of FDI and export credits, the latter sometimes with concessional elements. Brautigam (2010b) estimates that purely concessional loans, zero-interest loans and grant commitments from China to Africa (excluding debt relief) reached USD 1 billion in 2007, USD 1.4 billion in 2008, and USD 2.1 billion in 2009. She also estimates that preferential export credit commitments amounted to USD 2 billion between 2007 and 2009 while non-concessional finance approximated USD 5 billion per year. Taken together, all these alternative financial flows add up to an annual average commitment of USD 7.1 billion over 2007-09, much higher than the Smith and Zimmermann DAC-equivalent global estimate of USD 1.9 billion for 2009, which accounts only for concessional finance (Table 6.4a and 6.4b).

Emerging partners seem to offer a twin benefit: a longer time horizon that allows for a period of loss-financing, combined with the efficiency of the profit-oriented private sector. This method offers African countries a greater potential to move up the value chain, as resources would be extracted and new value-adding processing industries, such as refineries or petro-chemical complexes, are built. Projects that private actors would otherwise be reluctant to finance are undertaken. China’s notable examples include the 2007 credit line of more than USD 6 billion that China gave to Democratic Republic of Congo for projects such as 6 000 km of roads linking Kinshasa to the east of the country, 3 000 km of railways, hospitals, schools and social housing (Marysse and Geenen, 2009). In 2010, China made a USD 23 billion deal with Nigeria to construct three oil refineries and a petro-chemical complex. Moreover, some of the new modalities such as resource-for-infrastructure deals are compelling resource rich African countries to re-invest at least part of their resource revenues into wider national development.

Emerging partners other than China are increasingly emulating China’s model of mixing aid and investment, albeit on a smaller scale. For instance, in 2007 Senegal struck a USD 2.2 billion agreement with the Indian government and Arcelor Mittal to launch an iron ore extraction project accompanied by plans to construct and renovate railway lines, and to build a steel industry complex and a port. This year’s AEO note on Sao Tomé and Principe reports that India has issued a credit line of USD 5 million and a grant of USD 1 million to set up a “technology incubation centre” for the development of small and medium enterprises (SMEs) and for technical co-operation in agriculture, infrastructure and the hydrocarbon sector. In 2010, the Gabonese government announced a EUR 3.5 billion investment by Indian and Singapore multinationals for 1 000 km of roads, 5 000 social housing units and the creation of a special economic zone to process palm oil. By contrast, Brazil follows a more traditional approach, more clearly separating aid and investment. Arab countries’ co‑operation practices are typically closer to the Western model although their most preferred aid sectors, e.g. telecommunications and tourism, reflect the donor’s comparative advantage rather than the recipient’s development priorities. A case in point is the USD 540 million investment in Democratic Republic of Congo by Rakeen of the United Arab Emirates to build a hotel complex and several commercial centres.

The impact of those changing practices and broadening of actors on the global governance of development assistance are explored in Box 6.2.

Box 6.2. The global governance of development co-operation: changing patterns

Emerging partners’ more integrated approach to development partnerships is not as foreign to traditional partners as one may think. For a start, they used to practise tied aid themselves. Traditional partners chose to give up this practice with the “Helsinki-Package” of 1991 under the principle that tied aid distorted trade often to the detriment of the recipient (Morrisey, 1993). Besides, there has always been some degree of diversity in philosophy and practice amongst OECD members. Japan and Korea have traditionally shown more sympathy to combining trade, finance and co-operation than their Western counterparts. This is partly a reflection of their own experience pursuing economic development and making the best of their own development partnerships. Perhaps influenced by the new powers, some traditional partners are seeking fresh synergies between aid and other official flows, including export credits, to promote developing countries’ access to long-term finance. Some of these adjustments can be traced back to the rise of emerging partners’ engagement. Like some bilaterals, the World Bank lays renewed emphasis in the region’s private sector, job creation and competitiveness. Agriculture and rural development as well as infrastructure are featuring more prominently in traditional donors’ portfolios than in the last decade.

Conversely, the emerging nations are changing fast and taking on some of the practices and standards of the OECD committee. As their development co-operation matures, they are hitting some of the challenges that Europe and North America have struggled with: coherence between co-operation programmes and national strategic objectives, controlling a large variety of actors, protecting a country's public image as a development partner. These challenges are more acute for large nations with a lot of government layers involved with a large number of development partners. Some non-OECD countries have therefore started using its standards, for example to report their development assistance. United Arab Emirates started reporting assistance in 2010. Others, like Brazil, are opting to report development assistance according to principles that are close to, or inspired by the OECD principles. An increasing number of emerging partners are establishing institutions like the development assistance committee's bodies to inform and direct their development assistance framework.

A more diverse landscape of international co-operation is thus emerging. First, emerging partners are offering alternative ways for African countries to co-operate with them. Second, traditional partners, while remaining committed to their principles of aid effectiveness, policy coherence for development and aid untying, are welcoming these development partnerships (OECD, 2011) and have set out to promote mutual learning with emerging partners (Bogota Statement, March 2010). A notable example of such institutionalised experience-sharing is the China-DAC study group.15

However, a single paradigm for international co-operation is unlikely to emerge in the foreseeable future. This need not be bad news, though. From the perspective of African countries, it is doubtful that such a single paradigm would be desirable anyway. Key voices in Africa actually see reason in emerging partners’ rise and successes for traditional partners to accelerate their delivering on the Paris Declaration on Aid Effectiveness. Meanwhile, some emerging partners are adopting some principles and practices akin to those of traditional partners. A negative outcome for African countries would be that emerging partners’ “unorthodoxy” is used as a reason for traditional partners to slow down on implementing the Paris Declaration. In this context, DAC donors have repeated their commitment to the Paris Declaration. The 2008 Accra Agenda for Action invited providers of South-South Co-operation to help shape the aid effectiveness agenda. The Busan High Level Forum (HLF-4, 2011) is also conceived as a key step in developing a common understanding of “development effectiveness”.

Source: OECD Development Centre

Emerging partners, especially China, are viewed as delivering “turn-key projects” and faster than traditional partners. For instance, this report’s note on Benin highlights the fact that, in general, emerging partners are perceived as less bureaucratic than traditional partners. Another important difference between emerging and traditional partners concerns the use of policy conditions, an important feature of multilateral and bilateral aid programmes by traditional partners since the 1980s (Nissanke, 2010). However, the reluctance of emerging partners to set conditions does not imply a lack of control on projects. Evidence suggests that Chinese officials are very demanding when it comes to the use and implementation of credit lines (Aguilar and Goldstein, 2009). Further, emerging partners generally offer project-aid rather than programme-aid like traditional partners. Consequently, funds are channelled directly to the contracted emerging partners’ firms, providing a strong incentive to complete projects successfully and reducing the risk of fund misappropriation. For instance, the two Chinese deals signed by Exim Bank in Angola specify that 70% of the civil engineering contracts have to be awarded to Chinese firms and at least 50% of the inputs have to be procured by China, a share even higher in practice (Tan-Mullins et al., 2010). There is no evidence, however, that emerging partners’ co-operation is systematically more effective. The AEO notes on Angola and Equatorial Guinea point to concerns expressed over the quality of some Chinese projects.16

Can triangular co-operation maximise complementarities between emerging and traditional partners? The AEO note on Cape Verde points to a technological centre project involving several emerging and traditional partners. The traditional powers brought finance and the emerging partners know-how that is more adapted to the African context. The Mozambique note reports that Brazil engages in triangular co‑operation on research projects to boost agricultural productivity, notably with Japan and South Africa. Box 6.3 explores the potential for triangular co-operation further.

Box 6.3. Triangular co-operation: making the most of the complementarity between Africa’s traditional and emerging partners

Broadly, trilateral co-operation is understood as international co-operation with the explicit goal of advancing development, involving three partners, at times explicitly referring to traditional partners, emerging partners and beneficiary countries (see Altenburg and Weikert, 2007).

Core benefits of trilateral co-operation are sought in capacity development and mutual learning processes: “South-South and trilateral co-operation are new modalities of aid that may have a strong potential for capacity development” (Key messages to the Accra High Level Forum Ministerial Meeting, also compare for example Altenburg and Weikert, 2007). The developed country may act as the mere financier for what could essentially be seen as South-South co-operation, or may be fully involved, contributing its expertise and technical advice to the project.

Trilateral cooperation can also aspire to make use of any specific expertise emerging donors are bringing to the table (UNDP, 2004; Yamashiro Fordelone, 2009). In this context, ECOSOC argues that emerging donors, who are still in the process of developing themselves, “are felt to be better placed and have the relevant experience to respond to the needs and problems of programme countries”17 (ECOSOC, 2008; for a debate of the advantages of intermediate technologies see CUTS-CITEE, 2005). Emerging partners that have been receiving aid in the past (or still continue to do so) are assumed to bring experience and know-how to the table when it comes to advising developing countries: they often share economic, social and political characteristics and language, enabling them to tailor their assistance to local conditions at low transaction cost.

Examples of high-level political co-operation on development in the framework of trilateral co‑operation are still scarce and at present exist rather in the form of small-scale co‑operation programmes, mostly in training and capacity building. However, it is manifest that various countries are actively seeking trilateral co‑operation, with an increasing trend. Among them are Brazil, South Africa and Mexico. Others, such as China, appear to be more cautious in their approach towards trilateral co‑operation. This might well be the case as their success in Africa is based upon the dissociation from “traditional donors”, with a narrative of never having colonised Africa and also being a developing country. Closely co-operating with Western states would challenge this alternative position. An explicit worry exists in African states about trilateral co-operation, as it might reduce the bargaining power for African governments by lining up the partners in one grouping.

Source: Sven Grimm and Sanne van der Lugt, Centre for Chinese Studies, Stellenbosch University.

Theme 2011

Experts from different fields analyse what measures should African governments take in order to engage effectively with emerging economic partners in Africa, such as China, India, Brasil or Turkey.

 

Tax expenditure surveys


Jean-Philippe Stijns, co-author of the "Public Resource Mobilisation" study, highlights Morocco's practices while observing their taxation policies.