Sicomines Deal Offers Four Clear Resource-for-Infrastructure Lessons

In 2006, three years after the end of the Second Congo War, Joseph Kabila gained the presidency in the Democratic Republic of Congo’s first democratic election in over 40 years.

Infrastructure in the DRC has been falling apart for decades. As part of his election campaign, Kabila announced his ambitious “Cinq Chantiers” infrastructure development program. Shortly after the election, he began seeking the funding to bring the plan to life.

Unsuccessful development projects had left the DRC with a massive debt burden, which it had virtually no hope of repaying.

In 2007, Kabila’s government signed an enormous resource-for-infrastructure (RFI) deal with China Railway Engineering Corporation (CREC), valued at a total of over USD 9 billion. As part of the deal, Congolese exploitation licenses 9681 and 9682 would be allocated to a Chinese consortium led by CREC. In exchange, the consortium would secure the financing of USD 6.565 billion worth of infrastructure projects of a public goods nature and invest about USD 3 billion in the mining project itself. The mine’s revenues would be used to reimburse the financing of the infrastructure and the mine.

As the largest resource-for-infrastructure (RFI) deal ever reached at the time of its signature, the Sicomines case has generated much controversy in Kinshasa, Beijing, and Western capitals alike. It is so large in scale that its value exceeded the Congolese state budget the year it was signed.

Homing in on the Sicomines deal, this working paper addresses RFI agreements and explores their advantages and drawbacks. Seemingly simple, RFI deals carry significant risks for their signatories due to of their long time horizon.

RFI agreements have captivated analysts since China Eximbank’s extension of that type of credit to Angola’s government in 2004, but fundamentally, RFI deals are not so different from resource-backed loans that preceded them in Angola.

Throughout the 1980s and 1990s, the Angolan government secured dozens of loans using its oil reserves as collateral, and large Western financial institutions including Standard Chartered Bank, BNP Paribas and Commerzbank were among the providers of this credit. While resource-backed loans—issued by Chinese and Western creditors alike—remain relatively common in Africa, RFI agreements have predominantly been used by Chinese policy banks. (These banks were originally created by the Chinese government in 1994 to take over its lending activities.)

Resource-backed loans have allowed the governments of developing countries to leverage their resource wealth as collateral to access credit at a manageable interest rate. In theory, RFI deals only differ from resource-backed loans in terms of how loaned funds are used—to finance infrastructure projects.

In practice, however, RFI agreements comprise complex contracts that weave together multiple conditions in order to account for the substantial risks they entail. The loans are generally disbursed directly to contractors charged with delivering the infrastructure. The revenues used to reimburse the loans normally flow directly from the extractive firms to the financiers, often a decade or more later. The terms of the loans depend on the time required to develop the concessions, the size of the investments and their expected rate of return.

RFI agreements offer governments a means to access infrastructure financing in a short timeframe. Furthermore, they ensure that future resource revenues are used to finance infrastructure projects, thereby preventing other forms of political spending from taking precedence.

However, RFI agreements often lack transparency and feature weak oversight mechanisms. The way in which the Sicomines agreement has played out in the Congolese context provides important lessons for future projects. The findings highlighted in this case study lead to the following four recommendations:

1. RFI agreements would benefit from competition on the supply side of such deals. Fundamentally, RFI agreements are not so different from other financial vehicles. Therefore, more financiers should consider the possibility of extending them.
2. RFI deals lack transparency. The highly complex character of RFI deals makes them particularly difficult for third parties to analyze and monitor. This can potentially lead to a host of problems, including suboptimal infrastructure projects and poorer resource exploitation practices among debtor countries.
3. Third-party quality controls common to projects financed through traditional means should be applied to RFI agreements. This is particularly true due to the all-encompassing nature of RFI deals, which lends them political importance. This can, in turn, reduce debtor governments’ incentives to control their quality.
4. RFI projects require assiduous and conservative risk calculations. While risk looms large in any infrastructure financing or resource extraction project, it is particularly salient in the case of RFI agreements. In RFI deals, infrastructure loans are disbursed upfront, only to be repaid decades later—any significant risk exposure can jeopardize projects by dramatically reducing their net present value. Furthermore, plunges in the value of the natural resources used to repay the infrastructure loans can fundamentally raise the costs incurred by debtor countries as part of RFI deals.

David G. Landry is a current Ph.D. candidate in International Development at the Johns Hopkins University School of Advanced International Studies (SAIS). His research was sponsored by the China Africa Research Initiative at Johns Hopkins University’s School of Advanced International Studies.