Africa Confidential, January 2007

AFRICAN DEVELOPMENT BANK
Interview with ADB President Donald Kaberuka
China accelerates its fast growing role in Africa

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A US$20 billion package of trade and investment deals over the next three years will make China the single biggest source of new capital for Africa, according to African Development Bank President Donald Kaberuka.

Recent surveys indicating that Chinese companies were winning about 50% of Africa’s state-funded public works were ‘very near the mark’, Kaberuka said.  African governments were choosing Chinese contractors because they were often cheaper, he added, and it was up to those governments to ensure that all public contracts were of good quality.

Kaberuka was speaking to Africa Confidential Editor Patrick Smith and Financial Times’ Africa Editor William Wallis, on the closing day of the African Development Bank’s annual meeting on 17 May, held this year in Shanghai because of China’s growing economic role in Africa.

In his next email alert, Patrick Smith in Shanghai will offer an analysis of China’s new deals with Africa and its growing relations with the African Development Bank. To subscribe to the letter, register on the homepage. For a full report on the Bank’s annual meeting and details of China’s deals with Africa, please see the next issue of Africa Confidential, out on 24 May.

Below we present a full transcript of the interview with African Development Bank President, Donald Kaberuka.

Q: Around the world development specialists are talking about the importance of regional development banks. Is there any additional importance in the fact that this African Development Bank meeting is taking place in China while in Washington the World Bank and its President have been under exceptional scrutiny, and we have had this spectacle of the Europeans and Americans fighting over the Bank’s direction?

Donald Kaberuka:  No. This meeting was planned a year ago. No one would have foreseen these special circumstances today. I think the importance of us being here is a result of the dramatic increase in the economic links between Africa and China. The African Development Bank is a common vehicle for Africa and a number of Asian actors, Japan, Korea, China, India, can use this vehicle to channel resources to Africa. So what we discussed with (Chinese) EXIM bank officials is how this can be done. What you will be seeing is much more collaboration between us and EXIM bank in the coming months.

Q: Does that mean you will have a better idea of the nature of the financing that is coming from China, some of which to date has been opaque and difficult to analyse as a result?

DK: It is not opaque. It is mainly in procurement and in procurement it is very hard to come to rough numbers. But what the EXIM bank told me in terms of commitments in the next three years, they are looking in the neighbourhood of $20bn…for financing railway rehabilitation in Nigeria, in Angola as well, and building dams in Ethiopia and other places. This is the number he gave me over three years.

Q: This is mainly for infrastructure?

DK: Yes. Mainly infrastructure. Now that is quite something because it shows you what traditional donors are up against. What we do at the AfDB using donor money for the African Development Fund, we do $5.4bn in 3 years. (World Bank) IDA is about four times that. Which means the combined IDA and ADF is even not what EXIM bank counts in 3 years. In money terms that is what is happening.

Q: What are the terms of this financing?

DK: Well, in the case of Angola you know what is happening, it is against oil. In the case of Nigeria, it is straightforward financing.

Q: What about Ethiopia?

DK: The conditions, I will have to check on this. My teams are here talking to the EXIM bank. But I wanted you to know the magnitudes of what we are talking about. The Chairman of the EXIM bank used a word, which is very interesting. He said 'yes, debt sustainability is important but development sustainability is what we are after.'

Q: They don’t mean the same thing?

DK: No. Until recently debt sustainability analysis by us and the Bretton woods organisations was very static. You take the exports and you estimate how much the government can carry on the books with a cut off number of 50%. You know that this has been criticized. It is not forward looking to the potential of the country to repay debt. That is happening now, but what the Chinese are doing is taking an even long-term perspective of the ability to repay debts. Let me give you an example. Take a country with a rich sub-soil that is emerging from war and therefore in terms of its static numbers it doesn’t look good. It would be a Highly Indebted Poor Country case or a grant case from the traditional donors. The Chinese are looking at it and saying what is the capacity of this country, which is unexploited? So they exploit that capacity, build infrastructure. Taking a long-term view the country is able to assess the risk. It is a different analysis. Of course they have their mercantile interest. That is normal. You can’t blame them. My take on this is that it is Africa and Africans who should try to define and influence the relationship. It is not the Chinese. It is Africans who should define what they want to get from this relationship.

Q: Is there any sign of a collective African strategy towards China’s rapidly expanding interests on the continent?

DK: That is why we are here. We brought finance ministers here planning ministers, bank governors to try to build up a consensus.

Q: What are you hearing from African governments about what they want from China?

DK: You can imagine that. They want more infrastructure. (Their main preoccupation) is the shortfalls in infrastructure.

Q: What about the impact of Chinese imports and how these are impacting on nascent industries?

DK: Yes. But that is a much more manageable problem. Infrastructure requires a lot of investment. Textiles are about commercial relationships as are labour issues.
 
Q: You mean productive investments are not going to make much sense unless the infrastructure problems are dealt with?

DK: Precisely.

Q: Do you think there is an implicit deal with the Chinese that if they come in and fix up infrastructure - so that for example in Senegal they have better power provision so textile industries will become competitive - they will then come in and build factories in Africa.

DK: The laws of the market will do that. These are the same in the UK, in China, everywhere. Here over time real wages will increase. The firms and managers will be looking for other competitive locations. A lot of companies are going to Vietnam from here and in Vietnam, the real wage is certainly higher than Africa but it has healthy infrastructure. I am certain that at some point we’ll see delocalisation of the textile base value chain to nearer centres of production, which is West Africa. But we need to resolve the roads, power plants. Even governor Zhou (of the Central bank of China) referred to this. But it will not happen easily.

Q: Will this $20bn from China over the next 3 years make up to an extent for the shortfall in funding for the New Partnership for African Development?

DK: The needs are enormous.

Q: But there is no sign of anywhere near the levels of funding necessary to meet the goals of NEPAD in terms of infrastructure projects?

DK: Looking at the commitments made by different traditional partners we are at about $7bn. Now that’s an increase on 2005. That’s not bad. 2006 commitments show an increase over 2005 but it is still a drop in the ocean. This is why I very much like the European Union infrastructure trust fund. The EU plus 8 member states and the EIB have set up the Africa infrastructure trust fund. It is important. Also we launched this morning, Trevor Manuel (South Africa’s finance minister) and I, this Panafrica infrastructure fund. This was Thabo Mbeki’s idea - mobilizing domestic savings and pension funds. Now the fund is being created. I think they are targeting $1bn. They are very close, at about $650m.

It is all these combined efforts the trust fund, ourselves, the panafrica fund, the Chinese, of course the Japanese are also doing a lot in infrastructure. We are co-financing with them this road from Arusha to Nairobi. We are also funding together a highway between Marakesh and Agadir in Morocco. We are also funding another corridor between Mali and Senegal. So things are moving.

Q: In terms of funding what proportion of your funding is now going towards infrastructure, given that this is a continental priority?

DK: We would be at 47% but if you include water we are 60%. That is quite important. It is part of our attempt to focus. Now I know this is a different subject but the dichotomy between infrastructure and social sectors is extremely artificial and unhelpful. Walk into any Africa village, and if there is anything that can dramatically improve the ability of children’s health and education it is the availability of light and water. People say oh you are doing too much infrastructure and not enough for social sectors – please give me a break. This is the best way to get social development.

Q: Can I take a case from the DR Congo, where funding was provided from the World Bank in the aftermath of the war to build a road between Kinshasa and the University. There is still no road. I understand that this is one of the projects that has been investigated by the integrity department of the World Bank. It reveals perhaps the problems in funding infrastructure and other projects in post conflict, fragile states like Congo. You’ve put a lot of emphasis on this kind of funding for fragile states. How do you at the AfDB plan to make sure it is well spent?

DK: Be careful. Fragility is not a permanent status. It is a transitional phase. My country was a fragile state for about five years. But you can’t describe Rwanda as a fragile state now - far from it. A fragile state for me is not something that should worry me from the point of view of investing. But you have to do some other things to help the country emerge from fragility. So I will still go in and do roads and water for the people and the economy will pick up at some point. If you wait that long: a dam takes about five years to develop a project, building it eight nine years. There are some precautions to take during the execution to make sure a road does not disappear, like you say. But I think we need to be investing across Africa, and right now we are looking seriously at (the rehabilitation of the ) Inga (hydro-electric dam on the Congo river).

Q: With the World Bank?

DK: We are leading. We are doing the study now. It will be a consortium. Be careful with fragile states. People talk about them as a special category of African state condemned to be fragile forever. They aren’t. 
Initially I would like to concentrate my fire on this category of countries basically to help them build institutions so they can absorb other resources. Secondly, to kick-start their economies by doing basic infrastructure.

Q: Going back to this issue of who is doing what in Africa between China and traditional donors. We were at a seminar yesterday in which some OECD figures were kicking about. They reckon by now around 50 percent of public works projects are being done by Chinese contractors. Does that sound about right to you?

DK: It is very close to the reality.

Q: Chinese contractors are it seems about 20 to 30 per cent cheaper than traditional contractors.  But there have been concerns raise about the quality and financing terms of some of these projects. Is there any validity in these complaints?

DK: First of all, the Chinese tend to be cheaper. That is a fact. Second, the issue of quality of the works is the responsibility of the Africans. They are the owners. Because when a company wins a tender to do a road you have got another company unrelated to the other company doing supervision. That is how we do roads. It is up to that company to ensure on behalf of the government that the infrastructure being put in place is of the desired quality. But if it doesn’t happen is it the fault of the Chinese? I don’t think so. I can tell also you examples of a couple of European companies who don’t do the right thing.

Q:  Is the West's carping about Chinese loans to Africa valid or is it just a concern about losing market share?

DK: I think the carping will gradually decrease. It (the Chinese economic expansion in Africa) all happened so quickly; at the same time as this major debt cancellation initiative was being put in place So the two side by side led to some issues of the type -- such as 'free riders'.   Western countries will argue – that we've cancelled $50 bn of debt and we've cleaned up the balance sheet of some countries and then someone comes and benefits.  Well why not them? They should move in.

Q: In a copy of a draft G8 communiqué that we've seen, there is a proposal to get all donors to Africa to sign up to a common set of principles and conditions. It seems the idea is to bring China into this scheme. Has there been any African input to these proposals?

DK: I'm going to Berlin today.  There will be a G8 meeting of finance ministers this weekend. It's about harmonisation … its something we all signed up to and it's a very good thing. It can reduce transaction costs and so on. Instead of finger pointing at China – I think it would be better to bring them in. I'm sure they have their own position, so engage them rather than finger pointing.

If this paper (in the communiqué) is a form of engagement, it is an aspiration: better harmonisation of aid among donors. For me the most important thing is to bring the Chinese in and we engage on the best practices. When we were first studying these issues of harmonisation, someone used the term  'drowning in the same pool'. No I said it's about 'swimming in the same pool.'   
Q: Presumably when you go to Berlin you want strong African input into those terms and conditions being proposed.
 
DK: That is why I am going there. I don’t know what has been written but I will look at it and ask what's good for Africa.

Q: When we started talking you were saying the Chinese take a different point of view on debt sustainability. Europeans will take a more conservative Bretton Woods approach. Will Africans be arguing with China for the long term development view?

DK:  We are all trying to have an MOU with the Chinese on best practices. But please understand… even traditional donors have not yet got there. On my own board of directors when you say harmonization of aid, it means doing the same things. But if you have five countries you have five views. So again I want to resist finger pointing. Even among the traditional donors there are very serious weaknesses. Some have tied up aid. Some have untied aid like the UK. If you give them the money they can buy their goods anywhere. Others still tie their goods to their aid.

Q: Will the problems of the World Bank in Washington impact on the AfDB?   DK: Our bank's capital is fine. According to the donors, our bank is over capitalised, we're sitting on huge amounts of reserves. On replenishment (of the AfDB’s soft loan fund) I think donors should commit to the African people. Gleneagles (G8 summit of 2005) was about committing to African people and African development. They promised a doubling of aid. Last year, before this Wolfowitz problem, there was a decline of 2.5% in core ODA.  I say core ODA that means excluding peacekeeping, excluding debt cancellation. That decline was not because of Wolfowitz. I think we should keep our commitment to institutions.    Q: But the leadership crisis in the World Bank has exposed serious weaknesses in the organisation itself?

DK: But on the other hand IDA has delivered $5.5 bn for Africa this year.  IDA is an extremely good instrument for Africa.  Nothing should be done to shake up the integrity of IDA.

Q: Are you not concerned the Wolfowitz affair may affect the willingess of donors to commit money to the World Bank?  

DK:  It should not happen. I'm trying to distinguish deeper longer term issues of fighting poverty in africa. IDA the instrument is there. The staff of the World Bank are there. Leaders come and go. But IDA as an instrument is very important as is the African Development Bank. But again I put back to you the decline in core ODA –  we have seen it from this year and last year. At the World Bank's development committee when we saw these numbers we were a bit taken aback. This habit of saying aid has increased when there is debt cancellation for Iraq, and Nigeria…But when you look at the numbers it’s down.

Q: It’s interesting that is happening with the multilaterals but your own institution is growing fast – 30% last year.

DK: The donors I've seen here and there's a long list – have all promised to make an effort for our next replenishment.  

Q: Do you have any indicative figures of target for the replenishment of the African Development Fund? Last time it was $5.4bn – do you want to double it?

DK: I have them but the donors don't like them being made public until they have discussed them. There is a commitment to double aid to Africa. They didn't say they would double through the AfDB. But the principle of doubling aid to Africa is the one I go by.  By this I mean core aid.

Q:  At this meeting, some of the central governors have raised issues about the AfDB as an institution and its efficiency and procedures.

DK: I'm the one who raised it when I went to the bank. The AfDB is an extremely strong institution, financially. Even in terms of delivering results. Where the problem was that by trying to do too much in too many sectors you end up being less efficient than you could be. And since I've been in the Bank my message has been: let's focus on a few key areas where we can deliver excellence on. Where we are able to make a difference. Let's zero in on infrastructure, water governance.

We have doubled private sector operations. ADF is up by 10% We don't have the number of staff of the World Bank.  By trying to resolve all the problems of 53 countries through one institution you end being less efficient. My strategy is to refocus and decentralise. We have opened 22 regional offices. The target is 25 – the next three are in Angola, Sudan and Algeria. The negotiations can take a long time. In Kenya, for example, they have taken months and months until I went down there myself and met with the finance and foreign minister.

Q: You talk about the focus. Is one other issue that is Africa is under selling itself? How concerned are you that African countries are losing out in some of the big resource deals because they fail to push harder in the negotiations with foreign multinational companies or state entities like those from China?

DK: There's an issue of capacity to negotiate. We are trying to help countries build this capacity so there are balanced deals.  Every deal is different from another.  We are prepared to offer different forms of support to them.  The bank will not negotiate for them but we will give them capacity to know whether they've got a good deal or not.

Q: Will there be a research department associated with that?

DK:  Legal capacity is one of the things we have to improve. These are complex legal arguments. There aren’t many corporate lawyers in Africa who are experienced in these kind of things.

Q: What is the purpose of the high-level panel that has been set up to advise the AfDB with Canada’s former Prime Minister Paul Martin, Mozambique’s former President Joaquim Chissano and former World bank economist Joseph Stgilitz?   DK: It's to produce a business model for this bank. Is it a mini World Bank? Is it a gap filler? It's 40 years since it was set up. What's coming up is that this is Africa's bank. It should be built up to become the premier institution for Africa.  That's the conclusion they gave us yesterday. They're coming in very strongly for a bank that contributes meaningfully to African regional integration they're going to come in strongly I think for a Bank that uses its enormous risk-bearing capacity to act as a catalyst for the private sector…which convinces business people to look at Africa much more positively. For example we just put $150 mn into a mining project in Madagascar in nickel. But putting in our dollar we were able to attract four times more dollars from private business. They're coming in very strongly with those kind of models. No I don't what they're going to say eventually…  

Q: We don’t hear much about the New Partnership for Africa's Development (Nepad) these days. Is it still necessary to have it as a separate institution?

DK: This is Nepad. It's about governance and economic integration.  Nepad is a concept for advocacy.  It's important that all the different organs that support Africa will support Nepad. We support the APRM  (African Peer Review Mechanism). We're doing all the projects in the Nepad short-term action plan. We're doing the West African power pool; we are doing the parts of this road from Lusaka to Addis which are missing, and for me that is Nepad on the ground. And we're looking at the Inga power project in the Congo.

Q: Will China take on a bigger formal role in the AfDB?

DK: Prime minister Wen Jiabao said to me they're going to take a 'very positive attitude' to the replenishment of the African Development Fund.

Q: Will they increase their shareholding in the AfDB?

DK: We're not expanding the capital base of the bank. We already over-capitalized. That is the big fight I am having with the British and the French. They think we have too much capital. The AfDB have enormous risk bearing capacity.    The bank's paid in capital plus reserves is around $6.5 bn. We're using only 47% of our risk bearing capacity – that's the best of all the multilateral development banks. My argument to the donors is that Africa is the riskiest place. We want to expand in the risky areas.  Even if I do that I will still have what the British call a double mattress. I don’t agree with them, being a banker I have to be prudent in my numbers.