Last November, a Ugandan newspaper published a bombshell report claiming the country could lose Entebbe International Airport to China in an arbitration case with China EXIM Bank, which is funding the $200 million expansion. dollars of installation.

The story, originally published by Uganda’s Daily Monitor, quickly took on a life of its own, transforming as it spread through regional and global press.

In India, state-aligned private news outlets have entered the fray, mixing the original report with misinformation. A leading Indian website falsely claimed that Uganda had already “lost its only international airport”.

The story of Uganda’s airport also inspired a hilarious segment on American television comedy show ‘The Daily Show’, which has received almost four million views on YouTube.

But the text of the actual contract – revealed last month by AidData, a US research organization – is no laughing matter. It reveals a more complicated story and presents another cautionary tale about Chinese loans.

Has China seized Ugandan airport?

No, China has not taken control of Entebbe International Airport or, for that matter, any of Uganda’s airports.

The $200 million loan from China’s EXIM bank is currently in its grace period. In other words, Uganda is not even obligated to repay China at this time.

So the claims that Uganda defaulted on its loan are not only false, they are also absurd.

The repayment period is expected to start in less than a month, on April 1, 2022.

What does the Entebbe airport loan contract actually say?

The current contract is a mixed bag for Uganda. Let’s break down the good, bad and ugly of the Entebbe International Airport contract.

Good

The China-Uganda airport agreement has four very good features.

First, the loan funds are being used to build new passenger and cargo terminals at Uganda’s international airport, rehabilitate its runways and link it to a highway that leads to the capital, Kampala.

Tourism is a big part of Uganda’s economy. With these infrastructure upgrades, Uganda hopes to attract more foreign visitors with cash.

Second, the $200 million loan comes with a low interest rate of 2%. In the world of development finance, this classifies as “concessional”.

Third, as mentioned earlier, Uganda has a grace period of seven years. Not bad.

Fourth, repayment is scheduled over an extended period of 20 years.

As Larry David likes to say, these terms are:

The bad

Now the refund is where things get tricky.

Although a senior Ugandan official says his government is capable of repaying the loan, senior Ugandan officials reportedly traveled to Beijing in March 2021 to renegotiate the terms of the contract. It should be noted that the loan negotiation and the construction of the project both started before the COVID-19 pandemic.

The airport expansion idea was perhaps a more solid bet before COVID. But the pandemic has hit tourism-dependent countries particularly hard. And even amid the ongoing recovery, the outlook for the tourism industry remains murky. This alone justifies Kampala’s attempts to renegotiate the loan deal. But the pandemic is not the only reason the Ugandan government would want to do this.

The Entebbe International Airport expansion contract requires the Ugandan government to deposit all revenues of the Civil Aviation Authority, which operates the airport, into a bank account controlled by China’s EXIM bank.

Yes, you read that right. All revenue from the airport, even from the existing terminal, must be paid into an account controlled by China EXIM Bank, a bank owned by a foreign government. And these funds will be used first to repay the loan.

Escrow or debt service reserve accounts are not uncommon in the world of project finance today. But their use in sovereign loans is unusual, as the Wall Street Journal notes.

Uganda is by no means a rich country. Its GDP per capita is just over $2,000. And its tax-to-GDP ratio is relatively low. The Ugandan government must develop physical infrastructure to stimulate economic growth. It must also use scarce public funds to improve the quality of life and skills of its people.

But China will get the funds generated from airport operations first – even before Uganda can spend them on services such as education and healthcare.

The ugly one

Now, if those terms weren’t egregious enough, wait until you see what the contract says about loan dispute resolution, including non-payment.

The contract states that if the two parties – the Ugandan government (the borrower) and China EXIM Bank (the lender) – come into conflict over any matter relating to the loan or if Kampala defaults on the loan, then they will go to arbitration. .

And guess where these arbitration hearings will take place?

Yes, you read that right. Uganda is therefore borrowing from a Chinese state-owned bank and the loan contract requires that any arbitration “take place in Beijing”. It also states that “the arbitration award is final and binding on both parties”. On top of all this, Uganda has agreed to exclude the Entebbe airport loan from debt restructuring initiatives of developing countries like those of the Paris Club.

These are the terms that the experts at AidData call “aggressive” and “toxic”.

To be clear, the contract does not stipulate that China can seize Uganda’s Entebbe International Airport in the event of default. But it is conceivable that a Chinese arbitration court could award the airport to Beijing if Kampala fails to honor the loan. And in such a scenario, the Ugandan government would have no choice but to oblige.

Uganda reacts to Entebbe airport loan deal revelations

Understandably, Ugandan politicians have reacted with concern since some terms of the airport project’s loan contract began to be revealed last year.

Ugandan lawmaker Joel Ssenyonyi told Reuters the arbitration clauses leave Uganda “entirely locked out”. The contract, he said, “is one-sided” – completely in favor of Beijing.

Last October, before “China took over Uganda’s airport” became an international myth, Ugandan Finance Minister Matia Kasaija appeared to apologize to his country’s parliamentarians. He said to them, “We saw that one [China EXIM Bank loan] be the cheaper alternative. And we jumped on it. I would apologize if we did not agree to some of the clauses.

Entebbe International Airport is not a Chinese debt trap

So here’s the gist: Uganda is in no immediate danger of losing its only international airport. But while the loan is offered on concessional terms, it includes very strict provisions that weigh heavily in favor of Beijing. This forces Kampala to prioritize Chinese debt repayment above all other spending obligations.

That said, the Entebbe International Airport contract is not a Chinese debt trap. For two decades, Beijing has been pushing domestic companies to continue operating overseas as part of its “going out” policy.

State-owned banks like China EXIM Bank finance these projects, which are built by Chinese companies. The Entebbe International Airport expansion project is being led by the state-owned China Construction Communications Company or CCCC. Institutions like the China Development Bank and the China EXIM Bank lend, even to high-risk creditors, but they expect to be repaid.

As an AidData study of around 100 Chinese debt contracts with foreign governments shows, the strict terms of the Entebbe International Airport loan contract are characteristic of Chinese loans. This is a lesson that many Chinese funding recipients are learning. Karoli Ssemogerere, a Ugandan political analyst, rightly observes: “For years Chinese money was mistakenly believed to be free money. But China is now increasingly watching its debt portfolio with great interest.

Thanks to the Belt and Road Initiative, China has become the world’s largest official creditor. It capitalizes on the high unmet demand for infrastructure financing in the developing world.

Beijing plays a distinct role in the development finance space. It builds and lends all over the world, financing projects that other lenders find “unbankable”. But it provides few grants. And even when China offers concessional loans, the terms of its contracts are very harsh, even with poor countries or friends like Russia.

Uganda will begin repayment of its debt next month. If the airport does not generate enough revenue to repay the loan, the federal government, according to Finance Minister Kasaija, “will have to step in” and make those payments. Thus, the immediate risk for the Ugandan government is not the loss of its only international airport, but that of having to redirect precious public resources to repay a Chinese bank.

The Ugandan government will soon see if its bet on China will pay off.