What you need to know:
- We may aim for better loan terms in future if necessary, but current alarms about this project are disproportionately too loud.
The loan for the Entebbe Airport Expansion and Upgrading project is $200million. The possibility that Uganda may fail to pay such an amount of money and lose control of Entebbe Airport to China does not strike me as high, even when the amount is viewed within the context of overall national debt.
Concerns and worries so far highlighted in the press point to the key issue to be one of national pride and sentiment – more or less like what would befall a family where the family head stakes their matrimonial home for a bank loan, especially if other family members consider the lender’s terms as too intrusive.
I have not come across a case of personal credit in which the borrower considers that their collateral is owned by the bank, as soon as they pledge the said collateral to the bank, even when the bank places caveats upon the said collateral. Loans extended to borrowers against landed property come with an extreme level of ceding of ownership rights by borrowers, and yet the borrowers are confident of their ownership of pledged properties until the loan agreement is violated to a level where the bank takes steps to foreclose the property.
This scenario should relate, ordinarily, to the Entebbe Airport loan transaction and therefore media headlines implying that China has taken over the airport at this stage are terribly alarmist.
While national debt presents higher stakes and comparisons of it with personal debt may not take care of all relevant matters, the spirit of the borrower-lender relationship and credit risk concerns of lenders are the same for both.
The high sentiments around national debt, anywhere, are understandable. However, we can subject our sentiments to a more factual and objective view of this particular case. One way to do this is to look at the risks borne by the lender and the borrower, vis-à-vis the terms in the loan agreement.
The airport is an immovable property which the Chinese would only be able to operate within Uganda, were they to take it over. If therefore Uganda was to fail to repay the amount on this loan, and China had to realize her funds from taking over the airport, they would have to still rely on the good functioning of the Ugandan economy, to realize their monies from the airport. I do not know if they would opt to sell airport assets to recoup their funds or if this would make sense in the first place. Logically speaking therefore, the Chinese have no direct control of the circumstances that protect their position as a lender as far as recovering their funds is concerned.
In such a case, a lender would focus on ensuring that the funds they have lent out are strictly used as agreed. They would also prefer that the loan agreement extends significant privileges to them, regarding the funded venture, during the lifespan of the loan. This is part of normal credit risk control by lenders.
Four ordinary lending transactions, the lender’s biggest hope of recovering their funds relies on the ability of the funded project to return the value for which it is funded and enable the borrower to pay back.
This, in turn, depends on the funds being used as agreed so that the project succeeds and can generate funds enough to repay the loan or it can play a critical revenue contribution role among the borrowers’ asset portfolio to be able to improve the borrower’s overall loan repayment capacity significantly and make the repayment easier.
It should therefore be understandable if China pursues a high level of assurance around the cashflows related to the project, even if national debt repayment may not be pegged on the success of one sole project. Pursuing such a level of assurance is what would have resulted in clauses in the lending agreement that appear too intrusive in the operations surrounding the airport administration.
On the side of Uganda, the risk relating to this loan lies in whether there will be value for money spent on reworking the airport – whether the project will return value for the borrowed funds if it is successfully completed. There is also the primary risk of execution, to do with whether the project will be executed as planned.
The other concern would be whether Uganda can pay this amount from other sources, without the project’s direct contribution in case of project eventualities. Viewed in the context of the amount of funds involved, and the administrative structure around the project, all the above risks are significantly, if not wholly, within Uganda’s control.
We may aim for better loan terms in future if necessary, but current alarms about this project are disproportionately too loud.
Raymond is a Chartered Risk Analyst and risk management consultant