Dams and Debt

China’s large hydro-power projects have been controversial in Africa. Large hydro-power dams provide renewable energy free of the cost of expensive fossil fuels, and can provide an enormous proportion of African countries’ energy needs. Electricity provision is a fundamental tool for broad economic development, and larger projects can provide electricity to tens of millions.

On a local level however, these projects have enormous negative impacts. Often newly flooded land can destroy both human and animal habitats, creating large numbers of refugees and irrevocably damaging regional biodiversity. This is a quandary faced by governments all over the world when large construction projects require relocation and environmental management.

The problem in developing countries is that government is not sufficiently representative or accountable to those affected, so that the local impact is not sufficiently taken into account. It is the same issue for an extra runway at Heathrow airport, or construction of the Gibe Dam. A decision eventually has to be made as to whether the benefits to national development outweigh the local costs. This is made a clearer transaction through accurately valuing the local cost through compensation to those affected.

This week’s news features the Gibe III dam 450km southwest of the Ethiopian capital, Addis Ababa, near the border with Kenya. The dam will potentially double Ethiopia’s generation capacity, but carries enormous social and environmental cost. The dam is already 41% complete, so that increasingly visible local campaigns will face serious opposition from government. This demonstrates the necessity of carrying through proper scoping studies in advance of these projects. The projects scale, cost, and stage of completion create a momentum which is unlikely to be halted.

The careful spending mantra is reinforced this week by former Zambian Finance minister Ng’andu Magande. He warns that the rising debt in the country should be tracked carefully, and that project spending should be limited to those projects that can generate the revenues to pay back the loans. Where less scrupulous operators like the CIF are involved this is particularly dangerous. The glut of Chinese credit on the continent is likely to result in a number of white elephants which will one day have to be paid for out of resource receipts.

While this resource super-cycle brings credit and high tax revenues to the African continent, governments must remain vigilant in their spending. Although recent African growth gives cause for optimism, a downturn in commodity prices will come eventually, and the investments in infrastructure, education and capacity building taking place now, will be requisite to Africa avoiding another slump.

While Chinese investment and loans have been abundant and generous, they are rarely grants, and governments must not lose site of the need to be scrupulous in agreeing new projects. However as mentioned previously, the lack of accountability and transparency in these large projects makes circumspect investment less likely.