Africa: Exploring the China-Africa Development Fund

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Africa: Exploring the China-Africa Development Fund

China has so far invested billions of dollars in Africa, but this fairytale progress cannot be complete without mentioning the China-Africa Development Fund. The equity fund has been instrumental in supporting the trade and cooperation that has brought a clear developmental path for Africa. In fact, Chinese investment in Africa started picking up after the fund was established at the Forum for China-Africa Cooperation Summit in Beijing in 2006.

What makes this fund unique is that it actively participates in the investments by playing a major role on the market and bearing its own risks.The fund, which began operating in 2007, has become the first equity investment arm established by China to focus solely on investment in Africa.

Established by the China Development Bank, the fund is capacited to the tune of $5 billion, but at the Focac summit in South Africa last year, President Xi Jinping proposed an additional $5 billion.

What is important about this fund is that it focuses on areas that are crucial to the development of Africa and ensures that Chinese firms participate through partnerships.This promotes the concept of a “win-win” strategy in which both the African and Chinese firms benefit from the investment.

An important aspect of such joint ventures is that investment risks can easily be shared among the participating entities.This has led African firms and governments to strive to come up with viable projects that have the ability to make profits, while at the same time benefiting the people.

In fact, the China-Africa Development Fund has charted a new path in the cooperation between China and Africa in which the private sector plays a major role.In the past, development funds from China to Africa were being channelled as government grants.

With the quality of projects being undertaken by China in Africa now, government grants can no longer sustain the momentum.It became apparent that the grants were failing to meet the yawning gap in development that Africa faces. Now, the China-Africa Development Fund has managed to provide capital for some of the major projects on the continent.

The fund has forked out almost $3,5 billion on 87 projects in 30 African countries, including Zimbabwe.When all the projects become fully operational, Chinese firms would have invested almost $16 billion in such joint ventures.This alone shows that the China-Africa Development Fund can in future play an important role in changing the fortunes of the continent.

But the fact that Africa offers vast opportunities and is thirsty for investment is not enough for the fund to operate effectively.What is needed, first and foremost, is for African governments and their firms to identify viable projects that can easily attract the Chinese investors.Hard work must be put into coming up with such viable projects to convince the China-Africa Development Fund to consider such joint ventures.

Based on the work done so far, there is no denying that African countries have upped their game to attract investment from China.Explaining the fund to African journalists based in Beijing recently, managing director of operating management department, Mr Dong Fang, said its principles were based on “cooperation, development, responsibility and sharing”.

That Africa is facing a momentum of rapid growth is not in doubt, and the China-Africa Development Fund aims at helping the continent grow further.Between 2000 and 2005, the continent’s economic growth was 5,6 percent, 5,8 percent between 2005 and 2008, 3,5 percent from 2008 to 2014 and three percent in 2015.

This makes Africa the most dynamic economy in the world, second only to East and South Asia.Mr Dong said this is where the China-Africa Development Fund is needed — to help accelerate the growth of African economies.”Its investment philosophy include leading and supporting Chinese enterprises to invest in Africa, enhancing Africa’s own ability to develop in a market-oriented way, sharing investment risks,” he said.

“We help Africa to fund itself as we focus on the fields that can strengthen the capability of host countries to grow their economies in depth like infrastructure, agriculture and livelihood, industrial capacity cooperation and resource development.

“The firm does responsible investment which conforms to the social and environment standards, focuses on job creation, human well-being and local standards and requirements.”

A look at some of the projects that the China-Africa Development Fund has funded show that they have the potential to bring more revenue in exports and taxes for African countries.These projects include the Hisense South Africa Home Appliances Industrial Park, which produces 560 000 television sets and 450 000 refrigerators annually, directly contributing 500 jobs and 2 000 indirect employment opportunities.

In Ghana, the fund has invested in the Sunon-Ansogi Power Plant with the production capacity of 0,56 MkW of electricity and will generate over 20 percent of that country’s power.The Suez Economic and Trade Cooperation Zone in Egypt has attracted 68 enterprises, brought a total of $1 billion and created 2 000 jobs.

Another venture is the China-Africa Cotton Cultivation Project, a model of successful cooperation between a company and peasant households.It was implemented in Malawi, Mozambique and Zambia where it benefited more than 200 000 households.

The fund also participates in the StarAfrica Digital TV project which has opened up channels in more than 10 countries, covered a total of 4,6 million users, and created 2 500 jobs.With trade between Africa and China reaching $222 billion in 2015 and projected to hit $400 billion by 2020, the China-Africa Development Fund is expected to play a more prominent role in the economic cooperation.

The fund managers are taking a heed to what Chinese President Xi Jinping said at the Focac meeting in South Africa last year with regards to cooperation with Africa.In pursuit of the vision pronounced by President Xi, the China-Africa Development Fund is opening up a new era in the Asian economic giant’s relations with Africa.

At the Johannesburg Focac summit, President Xi said: “China-Africa relations have today reached a stage of growth unmatched in history. Let’s join hands and open a new era in China-Africa win-win cooperation and common development.”

According to the China Development Bank, the China-Africa Development Fund shares “investment risks with the enterprises and provides credit enhancement for relevant projects based on investment partnership”.

It helps bridge the gap between Chinese and African parties and helps Chinese firms familiarise with the investment environment in African countries. The fund operates through direct investment in enterprises and projects and acquiring shares, the bank says.It is also a quasi-equity investment dealing in preferred shares, convertible bonds and hybrid capital instruments.

The China-Africa Development Fund also invests in other funds in conformity with the Chinese diplomatic and trade cooperation policies for African countries.The China Development Bank says the fund can be accessed by eligible enterprises, with projects being recommended by governments and relevant organisations.

“After receiving an investment application from an enterprise, the fund assigns a dedicated liaison officer to follow up and make relevant arrangements and due diligence and negotiations will be conducted when conditions permit,” the banks says.

“Once a project has been internally approved by the fund, related documents will be executed between the fund and the partners and funding will be approved based on the schedule agreed upon between the two sides.”Post-investment management will be conducted until the fund exits the project.”

 

 

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