Ethiopia and Kenya are struggling to manage debt for their Chinese-built railways

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In the wake of the Belt and Road Initiative (BRI) Forum in Beijing six weeks ago, Ethiopia gained another Chinese debt-concession. China’s second-largest African borrower and prominent BRI partner in infrastructure finance also received a cancellation on all interest-free loans up to the end of 2018. This was on top of previous renegotiated extensions of major commercial railway loans agreed earlier in 2018.

These concessions highlight the continuing debt-struggles that governments have in taking on Chinese large infrastructure projects. But they also demonstrate the advantages and flexibility, that African governments can gain in working with China—if they can leverage it.

Ethiopia’s railway projects have been an instructive case of both the benefits and pitfalls of Chinese finance.
Ethiopia’s railway projects have been an instructive case of both the benefits and pitfalls of Chinese finance. It has been over a year since the Chinese-built and financed Addis-Djibouti standard gauge railway (SGR) opened to commercial service in January 2018. A flagship project of China’s Belt and Road Initiative in the Horn of Africa, and constructed in parallel with Kenya’s showy Chinese-built SGR, the project was Ethiopia’s first railway since a century ago (another urban-rail project, the Addis light-rail transit (LRT) was completed earlier in 2015), as well as being the first fully-electrified line in Africa.

Costing nearly $4.5 billion, the SGR was partly financed through $2.5 billion in commercial loans from China Eximbank, according to figures from SAIS-CARI with further loan packages dedicated to transmission lines and the procurement of rolling stock and locomotives. Part of China’s wider ‘export-supply chain’ strategy, the railway uses a package of Chinese trains, Chinese construction companies, Chinese standards and specifications—and is currently operated under a six-year contract by a joint venture of the two Chinese contractors, CREC and CCECC, who built it.

As part of a wider nine-line railway network plan under the Ethiopian Railway Corporation (ERC), the line cuts travel time from the capital Addis Ababa to Djibouti from two days by road to 12 hours. Passing several industrial zone clusters in Addis Ababa and Dire Dawa, it also serves the government’s wider export-led industrialization strategy, through the strategy of “transit-oriented development”, writ on a national scale.
But despite these lofty ambitions, the project has been afflicted by technical and financial challenges, calling into question the wisdom of relying on Chinese technology, as well as debt-financing, for major infrastructure. Despite the line’s completion in 2016, delays in the construction of the transmission network held up the railway’s commission, and problems with power outages and technical issues of over-voltage have continue to plague the line in the first year of operation.

Other social challenges have also emerged out of railway design choices: the decision to not erect fencing along rural tracts of the railway (both for cost-saving purposes and a concern to not divide pastoral communities) has led to the regular phenomenon of collisions between the train and livestock, resulting in conflicts over compensation; the railway become a target for blockades in regional ethnic tensions in the last year, leading several instances of disruption to service.

On an economic front, actual uptake of the railway by the industrial zones it was intended to serve remains low—even after a year, the vast majority of the railway’s freight cargo is made up of imports, not exports. Integration with export and industrial zones is low, as the main trunk line does not connect to individual industrial zones, creating significant last-mile shipping and logistics for firms, particularly at port connections. Most exporters continue to use road transport, despite the higher time and financial cost, due to its greater flexibility and reliability compared to the train’s twice-daily schedule.

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