China Eximbank provides $171.08 million preferential buyer's credit for Arsi Negele-Hawassa Section of the Modjo Hawassa Highway Construction Project

Project narrative

On May 12, 2017, China Eximbank and the Government of Ethiopia signed a $171,080,321.74 preferential buyer’s credit (PBC) agreement [CHINA EXIMBANK PBC NO. 2017 (15) TOTAL NO. (441)] for the Arsi Negele Hawassa Section (Lot 4) of the Modjo Hawassa Highway Construction Project. The Ethiopian House of Representatives ratified the loan agreement on July 5, 2017 under Proclamation No.1043/2017. The proclamation entered into force on September 8, 2017. The borrowing terms of the loan included a 20.207-year maturity, an 7.703-year grace period, and a 2% interest rate. The loan's first and last scheduled principal payment dates were January 21, 2025 and January 21, 2037, respectively. Its first and last scheduled interest payment dates were January 21, 2020 and July 21, 2037, respectively. The proceeds of the loan were on-lent to Ethiopia Road Authority (ERA) and the borrower was expected to use the loan proceeds to partially finance a $196 million commercial (EPC) contract between the ERA and China Railway Seventh Group Co. Ltd (CRSG). According to official correspondence between the Concessional Loan Department of China Eximbank and the State Minister of Finance of Ethiopia (on December 25, 2019), China Eximbank made an initial loan disbursement worth $37,015,814.73 (as part of an advance payment and progress payment) on December 25, 2019. This overall loan disbursement rate was of December 25, 2019 was 21.6%. As of April 2022, no additional loan disbursements were recorded in the Government of Ethiopia’s Aid Management Platform (AMP). The purpose of the $700 million Modjo-Hawassa Highway Construction Project is to construct a 203 km expressway between the cities of Mojo and Hawassa with two carriageways, each with two 3.65-meter-wide lanes and paved outer and inner shoulders, grade separated junctions, a 9-meter wide median, and 31 local crossings for animals and pedestrians. The project is specifically tied to an effort to develop a flagship industrial park in the city of Hawassa called the Hawassa Industrial Park (HIP). The Modjo Hawassa Highway Construction Project is being financed and implemented in 4 lots. Lot 1 is a 57 km Modjo-Meki section of the highway that is being financed by the African Development Bank and the Government of Ethiopia (and implemented by CREC). Lot 2 is a 37 km Meki-Batu Ziway section of the highway that is being financed by Korea Eximbank and the Government of Ethiopia. Lot 3 is a 55 km Batu Ziway-Arsi Negele section of the highway that is being financed by the World Bank. Lot 4 is a 51.68 km Arsi Negele-Hawassa section of the highway being financed by China Eximbank. CRSG is the EPC contractor responsible for Lot 4 implementation. Lots 1 and 2 were inaugurated in May 2021. However, the infrastructure for toll services remained unfinished as of late 2021. Lot 4 entered implementation in 2017. However, as of October 2019, it had only achieved a 4% completion rate. Lot 4 encountered major implementation problems and delays. A series of seven Resettlement Action Plans related to the project were released by the World Bank between 2019 and 2022. The RAP for Lot 4 was authored by the China Communications Construction Company was released by the World Bank in 2020. China Eximbank withheld loan disbursements and halted project implementation in August 2021. However, in the absence of China Eximbank financing, the Ethiopian Government reportedly continued to finance the implementation of Lot 4. There are some indications that the China Eximbank loan for the Arsi Negele-Hawassa Section of the Modjo Hawassa Highway Construction Project may have financially underperformed vis-a-vis the original expectations of the lender. According to the Government of Ethiopia’s Aid Management Platform, as of September 2019, ICBC suspended about $67 million worth of loan disbursements 'due to [the] cross-default situation of the country’ (see Record ID#58616). Then, in August 2021, China Eximbank withheld $339 million loan disbursements for 12 projects (including the Arsi Negele-Hawassa Section of the Modjo Hawassa Highway Construction Project) and halted project implementation due to Government of Ethiopia’s rapidly dwindling foreign exchange reserves and debt sustainability challenges. Demisu Lemma, the Director of Chinese Cooperation at the Ethiopian Ministry of Finance, noted at the time that the Ethiopian Government was in discussions with China Eximbank about a potential debt rescheduling (that would involved a 5-year maturity extension and a 1-year grace period extension). Then, after considerable delay, the G20 Common Framework (CF) creditor committee for Ethiopia convened in September 2021, with the French Government and the Chinese Government serving as co-chairs. The CF debt rescheduling talks were still ongoing in mid-2023.