The idea that China engages in so-called “Debt Trap Diplomacy” is almost apocryphal. There is a persistent media narrative that China makes big infrastructure investments oversees as part of its Belt and Road Initiative, and when countries cant replay those loans China seizes infrastructure.
My guest today, Deborah Brautigam, is the director of the China Africa Research Initiative at the Johns Hopkins School of Advanced International Studies. She has done extensive research on Chinese-financed infrastructure investment projects in Asia and Africa and has definitively shown that the narrative of Chinese Debt Trap diplomacy is not supported by facts.
We kick off discussion the origin of this myth, which stems from media commentary around Chinese investment in a port in Sri Lanka. We then discuss other examples of the perpetuation of this myth and have a broad conversation about how China (and other lenders) actually seek repayment of loans.
Deborah Brautigam [00:02:58] The Hambantota port is a port along the southern coast of Sri Lanka. It’s about ten or so nautical miles from the main shipping lines that go through the Indian Ocean and it’s also the most undeveloped — the poorest part of Sri Lanka. So, the Sri Lankan government has long wanted to boost economic development in that region. They’ve had a lot of different programs to do that. So, the port was financed by the Chinese in 2008 and then a second phase was rolled out around 2012 and around 2015 a new government came into power. And by that point, Sri Lanka was in trouble in terms of debt, so they were looking at ways that they had taken out a lot of loans from the Chinese for infrastructure, but they had taken out even more importantly, issued bonds on the international capital markets. So those bonds were quite high interest rates, and they’re very unforgiving. When a bond payment has to be made, it has to be made. So, the new government came in facing this debt situation and they were trying to figure out ways to deal with that. And one of the things that they wanted to do was to get rid of some of their state-owned investments, their state-owned enterprises, and one of them was this port. So, the port was not profitable yet. Ports take quite a long time to become profitable, and this one had started in on its second phase too early. That was one of the mistakes that the government made and the Chinese financiers as well. So, it wasn’t yet making enough money to repay the loans, so the Sri Lankan government privatized it. They offered a concession, two Chinese companies bid on it and it was privatized. So that enabled them to shift some of the burden and then to bring in actually an influx of over $1,000,000,000 in foreign exchange that they could use to make debt payments. And not just to the Chinese, of course.
What is the Hambantota port in Sri Lanka and why does it matter for the so-called Chinese debt trap myth?
Mark L. Goldberg [00:05:02] And it was around this time that you began seeing articles about how the Chinese had seized this port or one way or another, assumed control of the port at the expense of Sri Lanka. But your research points to something much more nuanced and complicated. What did your research suggest? What happened?
Deborah Brautigam [00:05:21] Well, I think you’re right that the story developed, and it really developed in two phases. The first was there was an Indian analyst, a pundit in New Delhi who first came up with this term debt trap diplomacy and he didn’t actually do any research on this. He just wrote an op ed and he referred to this case in Sri Lanka, along with several others. And he said that the Chinese had deliberately masterminded this for a strategic advantage. But then what happened was The New York Times wrote an investigative study of this and surprisingly, they got two things really wrong in that study. And those are two of the most important underpinnings of their proposition that this was an asset seizure. And the first thing that they said is right in the beginning of their article: they said that the port was judged not to be feasible and that’s just not true. My colleague, Meg Rithmire at Harvard Business School and I have done extensive research on this. It took us a year and a half to get the feasibility study that the Canadians had done, and it was judged to be feasible. We also saw the feasibility study done by a Danish firm. It was also judged to be feasible so that just wasn’t true. And the second thing they said was that the loans from the Chinese started out to be cheap and then they got more and more expensive, you know, like a drug addict or something like that and that’s the opposite of what happened. The very first loan for the first phase of the port was at a commercial rate. And then the ones after that, including $800 million, were at a fixed rate of 2%. That’s a concessional rate. So, the loans got easier as the commercial feasibility of the port started to become more problematic because the Sri Lankan government decided to expand it too early. So, what Meg and I did, both of us knew something about this port. I knew something about it because a student I knew had been a summer intern on that port project, so she knew it quite well. And we had discussed this New York Times article, which ended up describing this as an asset seizure and she said, you know, that’s not at all what happened. The whole way that the project is described in that New York Times article, there’s so many errors in that. And Meg and I found the same thing.
Mark L. Goldberg [00:07:50] What you found, as you said earlier, is that they decided to privatize this port. They sold the ports operation to a Chinese company, and they used that money generated to pay off debts, but not debts to the Chinese debts, to bondholders, principally not in China, correct?
Deborah Brautigam [00:08:07] Yes, that’s correct. So, we don’t know exactly what they did with that money because it went into the national treasury of Sri Lanka so that all of the money went into the national treasury and the national treasury also took on the debt away from the Port Authority so that the Port Authority would be relieved of that responsibility. But it wasn’t a debt equity swap. Many people have gotten that wrong as well. So, it’s still owned by Sri Lanka, and it’s owned by a joint venture between the Chinese and the Sri Lankan Ports Authority. But the debt is owned by Sri Lanka.
What happened with Chinese-Kenyan diplomacy surrounding Kenya’s Mombasa port?
Mark L. Goldberg [00:08:40] Nonetheless, this myth that the Sri Lankan port had been trapped by the Chinese, captured by the Chinese as part of like a nefarious diplomatic plot to seize assets as part of its Belt and Road initiative. That myth lived on and more recently in 2018, there was new life given to this myth over the purported leak of information regarding the terms of a deal between the Chinese and the port of Mombasa in Kenya, which is now by far the largest port in the region. Can you explain what happened back in December 2018?
Deborah Brautigam [00:09:25] Well, in December of 2018, a rumor began that Mombasa port had been used as collateral for the Chinese financed standard gauge railway. And this is something that together with a team of colleagues, including an international lawyer and a project finance specialist, we dug into this rumor as well. What we found was that this rumor originated in the leak of a letter from the Auditor General’s office. They were doing an audit of the Kenya Ports Authority, and they said in this audit that the Ports Authority was a borrower of this railway loan and we thought that was very curious and that therefore they were responsible for repaying the loan and they also said because the ports authority has signed a waiver of sovereign immunity, that also means that their assets are pledged to guarantee this long. And so, it wasn’t terribly much information. It was just three pages of a letter that were leaked. And so, we started teaching this case to try to figure out — it was full of all of these complex terms — and then we started diving into it more. And we were helped greatly by the release of the actual audit report, which was released a couple of years after that letter. And what the audit report did make clear was that the Auditor General did believe that the Ports Authority was a borrower. Why did he believe that? So, it took us months to dig through all the documents to map these contractual structures. But what we found is that this was a very complicated project, that the Ports Authority was connected to the project through what’s called a take or pay agreement because the railway company in Kenya was loss making. So, the Chinese didn’t want to finance this railway if the railway company was unprofitable. So, they were looking for ways to ensure that the loan could be repaid. And so, they did what’s called credit enhancements and one of them was they had this take or pay agreement with the Ports Authority, which owns Mombasa port. And the agreement is that Mombasa Port agrees to use the services of the railway to transport goods from Mombasa port to Nairobi and beyond, and that they would agree every year for 15 years of the loan period to transport a certain minimum of cargo. And if they didn’t transport that much, they would pay that equivalent fee. And so that’s called a take or pay agreement. So that was one way that the bankability of the project was enhanced. The other way was through a 1.5% tax on all the imports coming into the port, into Kenya in general, and that went into the railway development fund. Because all of these parties, the Railway Corporation, the Ports Authority, the National Treasury, they’re all linked together in this in a number of different contracts, so they all had to sign what’s called a waiver of sovereign immunity, which is a normal but complicated waiver that I had never heard of when I started doing this research.
What is a sovereign immunity waiver and how does it relate to China’s contract with Kenya on Mombasa port?
Mark L. Goldberg [00:12:42] Can you just explain what we mean by sovereign immunity and why in a situation like this, a waiver would be a conventional thing to include in a contract?
Deborah Brautigam [00:12:52] Yes, I’d be very happy to do that because it is something that most people have never heard of. And what I found out is that it’s absolutely standard in any commercial international loan contract, because under international law, sovereign states have what’s called immunity. They have immunity from being sued by other entities and having to answer in the court of law, so they’ve got immunity from those lawsuits, and they also have immunity from enforcement. So even if you were to sue them and they didn’t show up and you won by default, you couldn’t go to that country and then try to enforce your judgment and seize an asset, so to speak. So, because they have this immunity, no bank will lend to a sovereign borrower unless they waive that sovereign immunity for the purposes of that particular loan.
Mark L. Goldberg [00:13:47] Like agree to arbitration or something like that.
Deborah Brautigam [00:13:49] Exactly so it enables arbitration to take place. And of course, you have to have that waiver when the loan is signed, because you can’t just bring it in later, say, oh, we’re having a problem here and now we’ve got to sort this out in an arbitration. And the government would just say, well, no, you know, we have sovereign immunity. We don’t have to do that. So, it has to be part of the loan contract. And it’s absolutely standard. Germany, does it, France does it, the UK does it, we do it. So that was nothing unusual. And a waiver of sovereign immunity, it mentions that the government and its assets, none of them will be held immune from these court proceedings, but it doesn’t mean that something is then therefore pledged as collateral. It’s just a very general waiver. And so, the auditor general actually called that wrong. He was mistaken about the waiver, and he was also mistaken to say that the Ports Authority was a borrower because they had signed that waiver. And there’s a tiny clause in there that that enabled us to just nail that fact that he had mistakenly thought the Port Authority and the railway company were borrowers and it was just on the basis of misreading. He misread one part of the contract.
How did Kenyans react to the rumor that the Kenyan government had put the Mombasa port up as collateral to China?
Mark L. Goldberg [00:15:07] And you know, it became a whole media and political brouhaha in Kenya for a while that the Kenyan government, it was erroneously believed, had put up this extremely valuable port as collateral to the Chinese should the major investment in the standard gauge railway go awry somehow?
Deborah Brautigam [00:15:27] That’s absolutely right and what’s interesting to me is that I really believe this was a contagion effect from the Sri Lanka case because that idea was out there in 2018. None of the research that has been done by myself, Meg Rithmire, and a number of other people who have actually done research on this: none of that was out yet. And so, this was essentially unchallenged. Certainly, in Kenya they were reading about these things. They were reading that their assets might be at risk from Chinese loans. So, the idea was out there and I’m sure the auditor general — I wish I could interview him — but I’m sure that he was kind of infected by this contagious idea that was out in the public.
What rumor spread around the Entebbe airport in Uganda and its Chinese investment?
Mark L. Goldberg [00:16:13] And that contagion spread to neighboring Uganda more recently in an erroneous media report that the airport in Entebbe, the main international airport linking Uganda to the rest of the world, was put up as collateral for a major Chinese investment in the airport. And it was it was wild to see how far that erroneous idea spread to the point where, like The Daily Show did a whole long segment, you know, mocking and exposing, supposedly this issue around the Entebbe Airport.
Deborah Brautigam [00:16:54] That’s absolutely right, Mark. So, what happens is that I think a journalist gets an idea to do an article on this, or someone just writes an op ed, which is what happened in the first instance in Sri Lanka with this Indian pundit. And that gets the first headline and then all of the rest of it is catch up. And so, the government says, no, no, it’s not collateral. The Chinese say it’s not collateral, but it’s like having a correction section. Once the first headline is out there, then that’s the one that just gets carried away. And so, you have people on Capitol Hill saying that the Chinese are seizing Entebbe Airport. So first of all, the project wasn’t even finished when this article came out and then it has a five-year grace period. So, it just wasn’t even any question whatsoever of this but again, it was this sovereign immunity waiver that was what they were concerned about.
Mark L. Goldberg [00:17:53] And my understanding with the Entebbe loan situation is that the Chinese are financing an expansion of the airport and that a certain percentage of profits from the airport are going into an escrow account and the Chinese get some beneficial priority in terms of how that money is dispersed from the escrow account.
How do international project finance deals typically work?
Deborah Brautigam [00:18:13] That’s absolutely right. There’s a repayment account and there’s also a sales collection account. There are two different accounts there but the whole thing is this is how international project finance works. And when we were looking at the case in Kenya, this is how our colleague who does and structures these kinds of deals was so helpful because he kept saying over and over, this is just normal. These are gold standard things that we ask for. Having an escrow account, having the revenues from the airport go into the escrow account. And other lawyers that I consulted to that work in international project finance say over and over again, yes, this is how we do these deals.
What happens when an indebted country cannot pay its debts back to China like in the case of Zambia?
Mark L. Goldberg [00:18:55] So if seizing major infrastructure as part of this nefarious debt trap scheme is not part of China’s deliberate strategy in Africa and beyond, I’m interested to learn how does China and frankly, the rest of the world approach a situation when a country is deeply in debt? And the case of Zambia, I know, is ongoing right now. The country, I think, is like $17 billion in debt to external lenders, about one third of which is to the Chinese. And the country is seemingly in the midst of negotiations with these borrowers. Can you just explain that situation and more generally how countries, China specifically, approaches situations when a country cannot repay its debts?
Deborah Brautigam [00:19:50] Well, there are two answers to that. The first is what have the Chinese done traditionally? And then what are the Chinese doing now? So traditionally, I’ll say that what’s happened is that the Chinese have extended the repayment terms. And so, what’s traditional for them to do, and we see a number of different cases over the past five years or so. We’ve seen this in Mozambique, we’ve seen that in Ethiopia, in Cameroon, in the Republic of Congo. They will lengthen the repayment period. And in some instances, they’ve changed the interest rate, lowered the interest rate but it’s much more common just to leave the terms the same and then just give the country a longer period of time, perhaps a grace period, where they don’t have to make payments on the principal. So, give them breathing room, but not to do what’s called a haircut, which would be cutting the principal value of the loan. And so that’s what they have traditionally done. Now, what’s happening today is in parallel with the Chinese, of course, there are other lenders and the other major bilateral official creditors have traditionally joined in what’s called the Paris Club, and they do these debt negotiations together. And so, it’s all done transparently, and they negotiate and give a haircut or not through these multilateral negotiations. So, the Chinese have not become part of the Paris Club. So, they’ve been doing that all bilaterally and outside of that. Today, after the pandemic, there’s a new experiment, really. It’s called the common framework. And it’s a combination of the Group of 20, the G20’s debt service suspension initiative. There are a number of poor countries that the G20 quickly negotiated a suspension of debt service from these, the poorer countries in the world, it’s 60 some or so. And so that was for a period up until the end of 2021. And then as part of the G20 negotiations, they came up with this idea of the common framework. So that would be the Paris Club and the non-Paris Club, official lenders, bilateral lenders. The World Bank is not included. They have not offered any debt relief. So, these bilateral lenders were supposed to come together, that are members of the G20, in this common framework. So only three countries have applied for common framework treatment of their debts. And that’s Chad, Ethiopia, and Zambia. I think the other countries are just waiting to see what happens and they’re letting these countries go through the experience first. So, then we get to Zambia. So, what’s happening with Zambia? Well, we’ve been following this very closely. And it’s interesting that in Chad, it took about four months to get the common framework, but the creditors committee together and they negotiated a deal. But what happened then was that Chad has not yet been able to get commercial creditors — and these are oil traders and others who have lent to the government — they haven’t yet joined in to see what kind of debt relief they’re going to give. So that Chad situation is still on hold. Then in Ethiopia, they’ve been at war, basically in a civil war. So that doesn’t move forward. And that took about, let’s say, about 8 to 10 months to get the creditors committee together. And it took 14 months for Zambia to get the creditors committee together. So, it’s just very, very slow.
Is China a part of Zambia’s creditor’s committee?
Mark L. Goldberg [00:23:31] China has joined this creditors committee. Is that right?
Deborah Brautigam [00:23:35] They have said they are going to join, and my understanding is that not much has happened since then. That happened during the World Bank and IMF spring meetings. So, they did say they would join and my sense of this is there is a lot going on in China. Xi Jinping is standing for reappointment, even though they’ve agreed now that he can stay on for a third term it’s still not sewn up. And so, they’re like in an election season. So, the fate of Zambia far away in southern Africa is really not a priority. And I think to do anything like a haircut, it’s going to involve very high-level decisions in China. The banks don’t want to do it. That’s going to have to be higher up because they’re going to have to be paid. So, if they do a haircut, someone’s going to have to compensate them.
Why won’t China seize assets in countries that are deeply in debt to them?
Mark L. Goldberg [00:24:35] So chances are that this common framework will work up some sort of deal, you know, probably not to include a haircut, but who knows. But China is not going to like seize copper mines in Zambia. The point is, rather, China is joining and doing what in normal circumstances, normal countries, and lenders, would do, which is trying to renegotiate the terms of the loan.
Deborah Brautigam [00:25:02] That’s exactly right, Mark. And it’s actually very difficult to seize assets inside a country. And you can just imagine that. How do you do it? The Sri Lanka case we know is not an asset seizure but if the Chinese did want to seize assets, they would have to go through courts in a local country. There would have to be a court case outside. It’s very unlikely that that could ever be politically feasible. And the optics of it are, even though they’ve been accused of this and basically convicted of the court of international public opinion to actually do this is really highly unlikely.
Does China go about their debt collection differently than other lending countries?
Mark L. Goldberg [00:25:43] So is there anything just unique or uncommon about how China tries to go after its debts, either in Africa or in other places that it’s leant along the Belt and Road Initiative and other countries in Asia or elsewhere?
Deborah Brautigam [00:25:58] I think what’s unusual is that they do it bilaterally and they negotiate it. There can be a lot of different outcomes. So, it’s no one size fits all. There’s no standard pattern of how they do this. But it’s also unusual that I don’t think for sovereign debt, I don’t know of any instances where they have gone to arbitration. You know, these long contracts all say the waiver of sovereign immunity, they can go to arbitration, but I don’t think they do it. There are very few cases in which they do it. I think a lawyer colleague of mine told me that there were a dozen or so cases that she had seen, but those might have been private. We do know that they go after private borrowers. There’s a case in India where a magnet billionaire that borrowed from a Chinese bank and didn’t repay and so they went after him in the courts. But in terms of sovereign borrowers, they don’t, and this is unlike Western lenders. There’s a case that I’ve been following in Zimbabwe where a German bank that’s owned by the German government, KSW, went after Zimbabwe for not paying loans for a number of, about five different, loans and so they got a judgment through this arbitration process and then they hired a collection agency in Singapore to go after the Zimbabwe government. And so, the collection agency was running around southern Africa trying to find properties that the Zimbabwe government owned so that they might be able to attach them to enforce this judgment. And so that was different. We don’t see any examples of the Chinese doing that. But what was so interesting to me in Sri Lanka was that the first feasibility study that was done for this by the Canadians said that that Sri Lanka should have a private consortium build that project. It should be a joint venture and it should be a build own operate transfer project in which a company receives a contract, gets support up and running, and then operates it for a number of years and then turns it back to the port. And essentially that’s what they have now with the Chinese. So that’s what the Canadians had recommended long ago. So, they kind of went back to the proposal that was the feasibility study that was done 20 years ago.
Mark L. Goldberg [00:28:20] So really, this is all a nefarious Canadian plot now.
Deborah Brautigam [00:28:24] Well, it is ironic, isn’t it? And it’s also interesting that the Canadians were pushing so hard for this project because they thought the French were going to get it. So, all the different actors in those days.
Mark L. Goldberg [00:28:37] Well, thank you so much for your time and for your very helpful research. This is great.
Deborah Brautigam [00:28:42] Well, thank you, Mark. I’m always glad to talk to people about it.
Mark L. Goldberg [00:28:47] All right. A big thank you to Deborah Brautigam. That was great. And as I mentioned at the outset of this conversation, this episode was recommended to me by a listener and that recommendation led me to the excellent podcast, China in Africa, which is part of the SupChina Network. And there is an episode of that excellent podcast dedicated to the Port of Mombasa myth and Deborah Brautigam and her team’s deep research exposing what was really in that complex infrastructure investment deal. It was fascinating stuff. Again, I highly recommend the China in Africa podcast. I will see next time. Thanks, bye!