Today, AidData has published the final, unredacted version of a $200 million loan contract between China Eximbank and the Government of Uganda for the Entebbe International Airport Upgrading and Expansion Project.
The contract—shrouded in secrecy until now—has become a source of international controversy, prompting sustained media speculation and public debate about whether China is engaging in “debt trap diplomacy.”
Our analysis of the terms and conditions in the contract does not support the allegation that China engages in predatory lending. We instead find that Beijing is a shrewd negotiator who is willing to impose intrusive conditions upon sovereign borrowers to protect its balance sheet.
The contract, as well as an accompanying AidData policy brief, can be accessed via: www.aiddata.org/publications/uganda-entebbe-airport-china-eximbank.
AidData recently shared the unredacted contract and its analysis with The Financial Times, which published its own investigation of the airport deal earlier today.
The contract reveals that Entebbe Airport itself—a physical, illiquid asset—is not a source of collateral that the lender can seize in the event of default. Instead, China Eximbank required its borrower, the Government of Uganda, to provide a fully liquid source of collateral: a cash deposit in an escrow account that the lender can unilaterally seize in the event the borrower defaults on its repayment obligations.
AidData’s examination of the loan contract answers questions raised by a flurry of reports in international and Ugandan media about whether the lender has legal grounds to seize Entebbe Airport if the borrower fails to meet its repayment obligations.
In November 2021, The Times, a London-based newspaper, sounded the alarm: "China has [...] been accused of trying to take over Uganda's sole international airport if the east African country fails to pay a $200 million loan for the expansion of the site.” The Wall Street Journal, The Financial Times, and Reuters quickly published stories of their own. The Daily Monitor, a local newspaper in Uganda, suggested that the loan contract might “expose the airport and other government assets to potential attachments and take-over by China upon arbitration awards in Beijing.” The East African warned of contract clauses that were “unfriendly and as good as mortgaging the airport to China.”
The possibility that China would seize a major infrastructure asset in Africa quickly made its way into popular culture. Trevor Noah, the host of The Daily Show, a satirical U.S. television news program, participated in a skit in which fellow comedian Ronny Chieng parodied a Chinese loan shark coming to Uganda to collect on an overdue debt. Chieng says, “We’re here for your airport. Hand over the keys. [...] Now it’s [our] airport. The runways, the terminals, the soggy tuna sandwiches that we made in 2019—it's all ours!” Noah, playing the borrower, protests: “The terms of this deal are unfair!” The loan shark responds: “Well, then maybe you shouldn’t have agreed to it!” On social media in Uganda, a photoshopped image went viral showing the Chinese flag flying over the airport, with a satirical banner reading “Welcome to China Entebbe International Airport.”
With questions swirling in mainstream and social media, the Chinese Embassy in Uganda denied reports that Beijing could or would take over the airport in event of default: “Not a single project in Africa has ever been confiscated by China because of failing to pay Chinese loans.” The Global Times, a daily tabloid published by The People’s Daily—the official newspaper of the Chinese Communist Party—pushed back on foreign media coverage of the controversy with a story titled “Chinese experts slam foreign media hype over Uganda airport.”
However, Beijing’s efforts to put the issue to rest were unsuccessful. It did not disclose the specific terms and conditions in the loan contract, which generated even more speculation in Uganda and around the globe (see examples here, here, and here).
China Eximbank tried to prevent the contract from spilling into public view by imposing expansive confidentiality obligations on its borrower. But advocates of transparency and good governance need not despair: the shield of confidentiality can be pierced. AidData recently made a major discovery during the implementation of its Tracking Underreported Financial Flows (TUFF) methodology: the final, unredacted version of the loan contract for the Entebbe International Airport Upgrading and Expansion Project.
With the verbatim text of the contract in hand, it is finally possible to separate fact from fiction. The idea that China is a predatory lender engaging in “debt trap diplomacy” has quickly become an article of faith among think tank researchers, media outlets, and policymakers in Western capitals. But the loan contract reveals a very different picture: the airport is not identified as a source of collateral that the lender can seize in the event of default. Instead, the borrower agreed to maintain a minimum cash balance in a lender-controlled bank account, giving China Eximbank access to a fully liquid source of collateral that it can unilaterally debit if the Government of Uganda defaults on its repayment obligations.
Although this finding flies in the face of the conventional wisdom about debt trap diplomacy, it is consistent with one of the major takeaways from the How China Lends report that AidData published last year in partnership with the Center for Global Development, the Kiel Institute for the World Economy, and the Peterson Institute for International Economics: that Chinese state-owned lenders prefer to collateralize on foreign currency deposits in bank accounts that they control.
AidData’s analysis also reveals that China Eximbank required that all revenues generated by Uganda’s main international airport be used to repay the loan on a priority basis for 20 years. This condition, which was previously undisclosed, is extraordinary given that the airport—a public infrastructure asset—existed and generated substantial government revenue for 42 years before the loan was issued. AidData also discovered that China Eximbank demanded the right to reject or approve the annual operating budgets of the Uganda Civil Aviation Authority (UCAA), which is the government entity responsible for Entebbe International Airport.
Beijing claims that it strictly adheres to a policy of non-interference in the internal affairs of other countries. But developing countries should be careful not to take this rhetorical commitment at face value. Beijing has no compunction about asking sovereign borrowers to accept intrusive conditions if doing so will maximize its repayment prospects. Therefore, borrowing institutions need to step up their due diligence efforts and be careful to negotiate contractual terms and conditions that they consider to be reasonable and acceptable.
For a deeper dive into the terms and conditions that govern the loan contract, you can access our brief here: www.aiddata.org/publications/uganda-entebbe-airport-china-eximbank.