• Scott Wingo

Resource-Backed Loans, Revisited: Infrastructure for Aluminum in Ghana and Guinea

This two-part series analyzes past, present, and future trends in China’s resource-backed loans. Part I looked at why China made frequent use of this tool in the 2000s and early 2010s and why it has since diminished in stature. This installment (Part II) turns to how China might change its approach to correct for some of the issues that arose with the older deals. This includes a look at two recent arrangements with Ghana and Guinea.

Despite the setbacks described in Part I of this series, resource-backed loans have a future in Chinese strategy but in a more circumscribed context. In Chinese policy circles, discussion has begun about how to adjust the model to account for the pitfalls of the older model. Early indicators suggest that newer deals will be better at dealing with commodity price and local capacity issues but little different from the old on cost inflation, quality control, and corruption. I discuss this new model before turning to a pair of major bauxite deals in Ghana and Guinea, both made in 2018. In West Africa, China is taking steps toward returning to resource-backed loans, providing some suggestion of what the future might hold.

A New Model?

Several notable changes to the previous resource swap model are being discussed. One change is a shift toward greater long-term Chinese equity or other stakes in projects. On the infrastructure side, this means a transition from acting as builders to integrated builder-operators. Many lower-income countries have shortages of skilled professionals, meaning project operation and maintenance can be a challenge. As Chinese firms gain more experience abroad, they are already engaging in more “build-operate-transfer” (BOT) contracts in which they receive concessions to operate a project for a fixed period of time after construction; this is happening in deals with or without commodity financing. The new model may also bring in more Chinese firms as investors in commodity production. Under older deals, they were often brought in as service providers hired to extract resource deposits owned by the local government, but purchasing licenses may facilitate higher investment and thus production levels.

This strategy was already used in Venezuela, where Chinese oil firms began investing in joint ventures to boost crude production toward repaying oil-backed loans. This ad hoc response to Venezuelan debt distress might preemptively be included in future deals. The risk of commodity price fluctuation could also lead to more deals to buy fixed commodities at a fixed price. Most deals had previously been indexed to market prices. As prices fell during the 2010s, many borrowers struggled to produce enough to keep up with debt payments. Fixed prices would invert the relationship between market prices and returns to the borrower: the borrower would be insulated against falling prices but might miss out on a future boom in prices. This tradeoff may be acceptable given many poor countries’ lack of resilience to downward price shocks.

Some problems, however, remain unresolved. Most Chinese loans are conditioned on the use of Chinese firms, which thus face little competition. As a result, numerous problems with project quality and cost inflation have emerged. In some cases, firms’ ability to overcharge without losing out to competitors has generated opportunities for kickbacks to local governments, especially amid low degrees of transparency. Granting firms a longer-term equity or operational stake may alleviate these problems as the companies have a more vested interest in profitability, but only if they cannot count on banks to prop them up in the event of losses. The roots of the problem—the non-competitive bidding system and banks’ mandate to support firms even at a loss—is unlikely to change as Beijing seeks to keep many construction-sector workers on the job amid slowing demand at home. China’s new oversight agency might help, but changes to the structure of commodity financing do not go far enough to make much of a difference by themselves.

Bauxite Deals

Resource-backed financing has dropped off since commodity prices fell sharply in 2014, and there is a limited track record of recent deals by which to assess how the new type of resource-backed financing might look in practice. However, a pair of recent West African mega-deals offer a preliminary glimpse at possible trends. In both Ghana and Guinea, China has pledged billions for infrastructure in exchange not for oil but for bauxite, the raw material to create aluminum. As discussed in the previous installment of this article, only 8 percent of China’s resource-backed loans through 2014 went to metals of any kind, and none at all to bauxite. However, China’s role in global aluminum and bauxite markets is substantially more important than in energy markets; as of 2017, it imports 67.0 percent of the world’s internationally traded aluminum, as opposed to 16.7 percent of crude oil and 9.7 percent of natural gas. The US Geological Survey further estimates that China refines over half of the world’s aluminum output. This dominance creates a strength for China giving firms deeper pockets than their competitors, but creates a vulnerability in that its refining industry suffers from overcapacity. China’s government faces particular pressure to either prop up refiners indefinitely, provide them with capital to move overseas, or allow some of them to close with adverse effects for domestic employment. This particularly acute iteration of the pressure facing many Chinese industries in the post-boom era is keeping resource-backed loans alive in one sector while they have receded from others. Recipients include a minor producer in Ghana and a major one in Guinea.

Deal with Ghana

Atypically for a resource-backed loan customer, Ghana has a fairly strong market reputation and access to international capital but has still shown a willingness to collateralize some of its commodities. Examples include funding a hydroelectric dam with cocoa beans destined for China as well as other infrastructure as part of a partially canceled oil-backed loan. However, Ghana’s fledgling bauxite industry had faced steeper obstacles than many other sectors of the country’s economy. Ghana has long hoped not just to export raw bauxite but to capture the value-added from refining. Over the course of decades, several producers have attempted to integrate mining and refining operations but have struggled to achieve profitability due to high transportation costs, a lack of economy of scale, and an unreliable electrical supply (aluminum smelting is highly energy-intensive). The most recent investor was China’s Bosai Minerals, which in 2009 bought Ghana's only mine, this time without any active refining operations attached.

Little else happened in the Ghanaian bauxite industry in subsequent years, and exports never exceeded $71 million per year. It was in this unremarkable context that in 2018, the Ghanaian and Chinese governments announced a deal under which China would provide $2 billion in infrastructure loans to be repaid in aluminum. Bosai had already been mining Ghanaian bauxite for nine years at this point and there appeared to be fewer others interested in joining their ranks. The Ghanaian government may not have been isolated from international financial markets in most respects—it even discussed the new Chinese deal with the IMF with which it was in the closing phases of repaying a 2015 bailout loan—but China was the only immediate option for greater engagement in the aluminum industry and Ghana simply decided to make the most of it even if that involved collateralizing minerals.

Indeed, Ghana appears to have played its hand fairly well. An an early example of the new resource swap model, Ghana pays its bauxite back at a fixed price. Although this does mean Ghana could miss out on a rise in prices, it also shifts price risk to China which as a much larger economy is in a better position to absorb the blow. Project infrastructure is to be built by Sinohydro, but Ghana managed to guarantee at least 30 percent local content, a figure which might not impress most but is more favorable than in many comparable deals. One source reports that typically at least 70 percent of Chinese policy bank loans are required to go to Chinese firms; the Ghanaian government may have known exactly how far to push. The Ghanaian Vice President told reporters that only refined bauxite would be used as repayment and that Ghana was recruiting partners to build a refinery. Bosai is reportedly in talks to invest $1.2 billion in the project using funding separate from the infrastructure loans. On the plus side, this is a sign that China is serious about its firms making longer-term equity commitments as part of resource-backed deals. However, it is not without risk. Bloomberg ominously reported that Ghana would have to use “alternative sources” to service the loan if the aluminum project cannot do so by itself.

Furthermore, Ghana has managed to put the funds toward productive use for a broad swath of society beyond those directly involved in the mining sector. The first tranche of $649 million focuses on road construction, but only one of the ten announced projects is in the vicinity of the bauxite mines and accounts for only 15 percent of the length of roads being built. The second tranche is expected in early 2020 and according to one press report may also include health, housing, and electrical projects. The Ghanaian Vice President has indicated that the second tranche will come alongside a 300M RMB grant and 250M RMB debt write-off. In effect, this move converts a small percentage of Ghana’s debt stock into aluminum-collateralized debt. Finally, it is worth noting that initial announcements place this $2 billion loan within a larger $19 billion package, but few details about the larger package have emerged since, and the IMF’s most recent report lists the total amount as $2 billion. It is possible more funds could be forthcoming, but given a history of initial exaggeration with many such deals, the $19 billion figure should be taken with a large grain of salt. Some vagueness may actually benefit Ghana; collateralizing a loan with refined aluminum before the ink was dry on a refinery deal was a very risky move, but the prospect of future business could provide enough leverage to spur China into following through on a refinery investment that has gone poorly for those who have tried previously.

Deal with Guinea

Ghana’s aluminum gambit is risky, but in a relatively circumscribed way: $2 billion of infrastructure is a large but not unmanageable amount for an economy which produces $47.3 billion in output per year. The same could not be said for $20 billion in loans to Guinea made in 2018, whose GDP totals only $10.5 billion. Unlike Ghana’s somewhat speculative “$19 billion,” the $20 billion loan figure has been more consistent across Chinese and Guinean statements. Furthermore, a greater percentage is slated for infrastructure related to mining and is thus less negotiable. Guinea has a long history of political instability and corruption which has affected its mining industry. Allegations of bribery surrounding the enormous Simandou iron project, one of the world’s largest untapped deposits, led the World Bank-affiliated International Finance Corporation (IFC) to exit a consortium of private firms. Of the remaining multinational companies, most were forced out or left; one managed to stay only after paying a $700 million settlement. Guinea’s market reputation suffered badly.

As has happened for many resource-rich countries, China arrived to fill the void. Resource-backed loans may have faded in importance over time, but this was a special case. Guinea contains around one quarter of the world’s bauxite deposits, and China absorbs over half of the world’s imports. In this extreme case of economic complementarity, it made sense for China to simply deal with risks to the best of its ability. In 2017, a consortium of Chinese banks led by the Industrial and Commercial Bank of China (ICBC) announced $20 billion in loans backed with bauxite. The loans were slated to a number of projects, including three mines to be operated by China Power Investment (CPI), Chinalco, and China Henan International Cooperation (“Chico”). Again, China is shifting toward making greater on-the-ground commitment to extraction as part of resource-backed deals, and this despite some risk: Chinalco’s $500 million mine lies on a site originally set to be explored by Australia’s BHP Billiton, which withdrew in 2012 as prices fell.

In return, Reuters reports that the ICBC-led consortium will provide loans to Guinea “on a case-by-case basis for essential, non-mining infrastructure projects.” This part of the project is still in early phases but so far has included upgrades to roads within the capital of Conakry, on the coast, as well as into the country’s interior. It may also include a $770 million expansion of the main port at Conakry as well as electrical transmission and building a university. The handful of projects announced to date come nowhere near the $20 billion originally announced and the “case-by-case” extension of loans means that China and Guinea have some flexibility as to whether and when to actually use the full amount. This is a helpful safety mechanism in light of the troubles encountered by resource-backed borrowers, who started at a faster pace only to watch commodity prices subsequently fall.

At the same time, another Chinese group is betting big on Guinea: SMB-Winning. The consortium is led by Winning International, a Singaporean private firm which was originally incorporated in Hong Kong by a Chinese national bringing Indonesian bauxite to Chinese smelters. The consortium also includes China Hongqiao Group, the world’s largest aluminum smelter, which is in the process of closing down older, inefficient plants at home and is a good example of China’s need to offshore excess capacity. Also included are Guinean logistics firm UMS International and Chinese maritime firm Yantai Port Group. The SMB-Winning consortium is building a $3 billion series of projects surrounding the three mines backed by the aluminum loan. These include a railway from the mining region to the coast and a refinery at the coast.

It is to date unclear where SMB-Winning is getting its money. It may be deriving some funding from the resource-backed loan package which is already funding the mines proper. The fact that the loan consortium is led by ICBC may matter here. Typically, resource-backed loans are issued by China Development Bank or the Export-Import Bank of China, two “policy banks” with restrictions on loans to non-Chinese entities. Winning’s Singaporean domicile would present difficulties here, but running the loan through a less restricted commercial bank like ICBC would allow for loans to go to a substantively but not legally Chinese firm like Winning. On the other hand, SMB-Winning may have a separate arrangement; if so, it is riding on the coattails of the resource-backed loan reducing risk for the mines, even if it is not technically part of the commodity-backed deal.

Whatever the case, SMB-Winning apparently has very deep pockets. In November 2019, it won a $14 billion bid to exploit the iron reserves abandoned due to the bribery lawsuit. This is an extraordinarily difficult project both due to its checkered history and because of the government’s requirement that the investor build a railway from the mines to the Guinean coast despite the mineral deposits lying a short distance from the Liberian border within easy transporting distance to Liberian ports. The SMB-Winning Chairman somewhat cryptically told reporters that he expected “to secure $5bn for the rail almost immediately,” including some of the firm’s own money, and the firm would then move on to building a Guinean port. Because this is an iron project, it is unlikely to be directly supported by the bauxite loan, but bauxite collateralization opened the door for SMB-Winning’s success in Guinea.


Quantitative and qualitative changes in resource-backed lending show increased caution on the part of Beijing but leave some issues unaddressed. Narrowing current activities to bauxite, an area of particular need, may demonstrate that China will use resource-backed loans only where the economic logic is strongest. The trend toward metals may continue—the Export-Import Bank of China is reportedly considering adding “mining assets" (probably copper) as collateral for a distressed loan to Zambia—although it is too soon to say for sure. Qualitatively speaking, a fixed price structure shifts market price risk from smaller countries with little ability to withstand price shocks to China which can. This is a positive development. The same goes for a turn to greater equity investments, which can keep commodity production levels high enough to service debt and may give Chinese firms a greater stake in maintaining operational, higher-quality infrastructure. However, Chinese loans still do not allow for much competition for projects, and it is unclear whether they will cut off firms for poor performance. Even as project operators, firms may still be able to inflate prices and cut corners on quality with the knowledge that banks will bail them out indefinitely. The lack of transparency surrounding deals has not improved either. Daylight is the enemy of graft, and while Ghana has a strong enough record on governance, Guinea and many others do not. China’s desire to limit losses to its banks has led to positive steps toward managing market price risk, but its need to keep its firms at full employment may inhibit progress elsewhere.

Scott Wingo is a doctoral candidate in political science at the University of Pennsylvania focusing on China’s economic engagement in the developing world and why its modes of doing business are different from those used by Western governments, international organizations, and multinational corporations. He has previously worked with the Woodrow Wilson Center, the World Bank, and in the private sector, and has served as a teaching assistant for five semesters at Penn. Scott is proficient in Mandarin Chinese and Spanish and reads Portuguese. He holds both a Bachelor’s of Science in Foreign Service and a Master’s of Arts in Asian Studies from Georgetown University. You can follow him on Twitter @ScottCWingo.