NORINCO provides $1.92 billion oil prepayment facility for general budget and short-term liquidity management purposes

In 2015, the Government of South Sudan signed a $1,920,953,994 oil prepayment facility agreement — also known as a pre-export finance (PXF) facility agreement — with China North Industries Group Corporation Limited (NORINCO) for general budget and short-term liquidity management purposes. The borrowing terms of the loan are unknown. However, it is known that the Government of South Sudan had repaid $163,840,776.11 of its outstanding obligations under the loan agreement as of March 31, 2016. The loan’s outstanding amount was $1,757,113,217.89 as of March 31, 2016. The Government of South Sudan's decision to enter into oil prepayment facility agreements (also known as oil advances, forward oil-swaps, PXF facilities, and pre-sales oil contracts) eventually created significant cash flow problems. In April 2019, a Panel of Experts on South Sudan submitted a report to the United Nations Security Council. It concluded that ‘[t]he Government of South Sudan, however, pre-sells almost all of its oil, meaning that it takes advance payment for oil that it will deliver in the future, usually within a number of months. Companies receive a discount in exchange for making an advance payment and charge significant interest on the amount they have prepaid. Given that the number and terms of these pre-purchase agreements are not disclosed and revenues can be generated well in advance of actual production, the oversight of revenue flows is impeded. Agreements of this kind also have the effect of saddling future Governments with debts and obligations, including the Revitalized Transitional Government of National Unity scheduled for appointment in May 2019.’ Then, in June 2019, the Government of South Sudan announced that ‘[t]he president directed that all pre-sales [oil] contract[s] should be suspended. These pre-sales [oil] contracts are not healthy and they are actually destroying the economy […] When you sell to a specific company without competition, definitely you agree on certain rates but when it is free competition you give to the highest bidder’. Nearly two years later, in April 2021, another Panel of Experts on South Sudan submitted another report to the United Nations Security Council. It reviewed four oil prepayment facility agreements and concluded that these agreements had led to a 24% reduction in potential revenue for the Government of South Sudan.

Additional details

1. A pre-export finance (PXF) facility is an arrangement in which a commodity (e.g. oil) producer gets up-front cash from a customer in return for a promise to repay the customer with that commodity (possibly at a discount) in the future. PXF funds may be advanced by a lender or syndicate of lenders to a commodity producer to assist the company in meeting either its working capital needs (for example, to cover the purchase of raw materials and costs associated with processing, storage and transport) or its capital investment needs (for example, investment in plant and machinery and other elements of infrastructure). PXF facilities are usually secured by (1) an assignment of rights by the producer under an ‘offtake contract’ (i.e., a sale and purchase contract between the producer and a buyer of that producer of goods or commodities), and (2) a collection account charge over a bank account into which proceeds due to the producer from the buyer of the goods or commodities under the offtake contract are credited. There are two key documents in prepayment finance transactions: a contract providing for the advance payment by the offtaker to the producer for the purchase of goods/commodities (the 'Prepayment Contract'), and a loan agreement between a lender and the offtaker (the 'Offtaker Loan Agreement') under which the advance payment is financed. 2. According to a Global Witness report, ‘[w]hile this large Oil Advance to Norinco is clearly noted in the Ministry of Finance’s October 2016 Quarterly Macroeconomic Update for Q3 2015/2016, it does not appear in the Q2 Update for the same financial year, nor in subsequent reporting from the Ministry of Petroleum.’ 3. China North Industries Group Corporation Limited, doing business internationally as Norinco Group, and known within China as China Ordnance Industries Group Corporation Limited, is a Chinese state-owned defense corporation that manufactures a diverse range of commercial and military products. 4. An April 2021 report submitted by a Panel of Experts to the United Nations Security Council found that ‘[d]uring the period April 2018–August 2019, the Government [of South Sudan] received access to advanced financing through the four prepayment agreements, which resulted in the company making eight advanced payments to the Government that [totaled] $446,973,882.79. At the same time, as stipulated in the prepayment agreements, the Government [of South Sudan] paid the company $95,138,582.61 in interest, fees and costs. As detailed in the prepayment agreements and in Ministry of Petroleum reconciliation documents reviewed by the Panel, the Government [of South Sudan] was responsible for three main costs. First, the Government [of South Sudan] paid upfront arrangement fees, which incorporate the administrative costs of the financing agreement, of 1.25–3.5 per cent on the full value of the financing agreement. In total, the Government [of South Sudan] paid $68,238,400.00 in arrangement fees under the four prepayment agreements over the course of 17 months in 2018 and 2019. Second, the Government [of South Sudan] paid interest of 7 per cent above the benchmark global interest rate, [totally] $13,079,925.55, on the outstanding balance of the financing. Third, because the Government [of South Sudan] received upfront payment for the oil, the company received the oil at a predetermined discount rate below the spot market price. The four prepayment plans reviewed by the Panel included a discount rate of $1.15–$1.35 per barrel of crude oil, which resulted in $8,504,139.85 of decreased revenue in the sale of 11 cargoes from May 2018 to July 2019. The Panel estimates that the various fees and interest payments under the four short-term prepayment agreements resulted in a decrease of 24 per cent of potential government revenue, or about $5.5 million per month, compared with the expected oil value through the spot tender contracts […]. The Panel has not identified any diversion of public funds related to the four prepayment agreements. However, officials in the Ministry of Finance and Planning and the Ministry of Petroleum told the Panel that the ministries had been unable to fully track the repayment of the loans in part because of the way in which the finances were calculated and reported’. More detailed information can be found at https://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C-8CD3-CF6E4FF96FF9%7D/S_2021_365.pdf. 5. In May 2014, NORINCO dispatched two large shipments by sea to Juba, via the Kenyan port city of Mombasa. The shipments were consigned to the South Sudanese Ministry of Defence (MOD) and comprised more than 27 million rounds of small-calibre ammunition, 40,000 Type 69 40 mm rockets, 20,000 BGL2 40 mm anti-personnel spin-stabilized grenades, 2,394 40 mm under-barrel grenade launchers, 1,200 Type HJ-73D anti-tank guided missiles, 100 HJ-73D launchers, 9,574 Type 56 (AK-pattern) 7.62 × 39 mm assault rifles, 660 NP42 9 mm pistols, 319 Type 80 general-purpose machine guns, and other military equipment. Norinco shipped this materiel under contracts concluded in 2011 and 2013, with the respective contract numbers MOD/001/2011 and MODVA/001/2013 […]. Given the absence of a UN arms embargo on South Sudan at the time, these transfers were lawful. 6. This loan is not captured in the Chinese Loans to Africa (CLA) Database that SAIS-CARI released in July 2020 and updated in March 2021 (which is now maintained by Boston University’s Global Development Policy Center). 7. The NORINCO oil prepayment facility was apparently collateralized against the sale of oil cargoes to UNIPEC between 2014 and 2016 (see https://radiotamazuj.org/uploads/media/627b639c4472d/627cf16a350e7.pdf and https://www.dropbox.com/s/inurypxldaqf9tm/2015-16.pdf?dl=0 and https://www.africa-energy.com/news-centre/article/south-sudan-oil-production-drop-cost-2m-day). NORINCO and UNIPEC are part of the same parent organization: the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), which is a special commission of the People's Republic of China, directly under the State Council. SASAC was founded in 2003 through the consolidation of various other industry-specific ministries. It is responsible for managing state-owned enterprises (SOEs), including appointing top executives and approving any mergers or sales of stock or assets, as well as drafting laws related to SOEs.

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