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«      Working Paper Series            #2011-005 Assessment of Effectiveness of China Aid in Financing Development in Sudan  ...»

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The fifth motive recently become more popular among Western OECD donor countries and World Bank implies focusing aid more towards the beneficiaries of poor to contribute towards achieving UN Millennium Development Goal (MDG) of halving the share of people living in poverty by 2015. Analysis of foreign aid offered by donors to poor countries implies that Western donors are more likely to increase offering aid to poor countries, they are increasingly and more directly concerned with aid to poverty than Arab donors (Neumayer, 2003; 2004; Villanger, 2007).

Apart from of the main motives of giving foreign aid, since long there is increasing interest and debate in the international literature on utilization, allocation and effectiveness of foreign aid in financing development and achieving their assigned economic growth objectives in the recipient developing countries. For instance, several studies in the literature find that foreign aid caused mixed positive and negative impacts. Notably, foreign aid has caused positive impact by offering huge external aid flows to developing countries to achieve two objectives: to reduce poverty and accelerate economic growth. For the majority of poor countries, foreign aid part II of the DAC list of recipient countries, which includes more advanced countries of Central and Eastern Europe, the countries of the former Soviet Union and certain advanced developing countries and territories.

The US has not report the share of tied aid since the OECD-DAC exerted pressure towards untying aid. However, the US has traditionally tied three-quarters of its aid.

Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 9 _______________________________________________________________________________________________________

represents a vital external source of finance that was often used to close the resources gap;

supplement internal resources; complement low savings; enhance economic growth and to accelerate achievement of MDGs. However, foreign aid has caused negative impact by causing the debt problem and therefore, adversely affecting the public expenditure. The literature indicates the micro-macro paradox in effectiveness of foreign aid in developing countries. A well-known stylized fact is that donors often offered aid funds either through providing aid directly related to specific projects (project aid), or through providing support to the recipient government's budget (budget support, or project financing) while imposing conditionality on how to allocate the available resources. There is a large debate in the literature on the effectiveness and preference of either form of the two instruments of foreign aid, some studies show evidence in support of project aid and in opposition to budget support, whereas, other studies show evidence in support of budget support and in opposition to project aid. 7 Few studies in the Sudanese literature focus on the impacts of foreign aid in Sudan. ElSayed (1998) presents a historical overview of foreign aid and their impacts on Sudan's economy over the period (1958-1996) and finds that the inflow of foreign aid lead to mixed positive and negative impacts in Sudan during the period (1958-1996). As for the positive impact, the inflow of loans and grants from the other countries and international and regional funding institutions had effective contribution to partially complement the shortage of domestic capital to offer fund to cover the need for hard currencies that required for implementation of development projects.

As for the negative impact the expansion in foreign aid and loans lead to increase in total debt obligations.8 Abulagasim (2007) discuses the Sudanese Chinese economic Cooperation and shows the positive impacts on development of electricity sector in Sudan, focusing on the case study of Garri Electricity Project. Based on the above and since the impact and effectiveness of Chinese aid and development assistance, notably Chinese project aid has not been adequately covered in the literature. Therefore, it is interesting and important to fill this gap in the literature and to discuss the effectiveness of Chinese aid and development assistance to Sudan, especially, at project level as we will explain in section 5 below.

4. Research Methodology Based on the above, this section explains the methodology and data we use to assess the effectiveness, notably, the positive and negative impacts of Chinese aid, development assistance, loans and grants to Sudan over the period (1997-2007). As for assessment of the positive impacts we use the results of the interview questionnaire with the managers of the selected projects using the following indicators: increase or growth in production, increase in employment opportunities, For detailed literature review on aid effectiveness, allocation, macro-micro paradox, positive and negative impacts see for instance, White (1992), Griffin (1970), Cassen et. al., (1986); Tarp (2000), Thorbecke, (2000), Robinson and Tarp (2000), Hansen and Tarp (2000); Mosley, (1980; 1986); Burnside and Dollar (1997); Mavrotas and McGillivray (2009).

See El-Sayed (1998).

Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 10 _______________________________________________________________________________________________________

increase in skill level and increase in knowledge and technology transfer for the key selected Chinese aid and development assistance projects implemented in Sudan over the period (1997As for assessment of the negative impact, we will use the increase in total debt to Sudan as a result of the Chinese loans to Sudan over the time period (1997-2007). We are aware of the fact that loans and debt are not the only negative impacts, and assessment should include adverse side effects of aid, notably, unemployment, environmental impacts, displacement of people, waste disposal, wages, incomes, poverty, in addition to other negative impacts as a result of the aid conditionality set between the two governments in the agreements signed which sometimes indicate the level to which China will be using its own inputs. In general, it is clear that China's development assistance is closely tied to state sponsored investment projects, while limited information is available to understand the various objectives of such assistance, or to assess its wider impacts, particularly its social and environmental impacts and contribution to poverty reduction. For instance, there is no adequate data to assess the little systematic evidence on the effectiveness of Chinese aid in reducing poverty or improving the distributional impacts of China's engagement and China's labour practices and implications on Chinese labour or the local workers. Moreover, in some cases such assistance is perceived as not having widespread social benefits (such as the presidential palace). In addition to potential negative impact probably related to the requirements of importation of too many unskilled foreign workers from abroad. In particular, it is useful to provide a comprehensive assessment and cost-benefit analysis of the impacts of aid on the environmental impact. But due to practical problems related to inadequate availability of accurate and reliable data and information it is somewhat problematic to cover all these issues in this paper. So, we leave that for more in-depth future study when adequate, accurate and reliable data and information are available. Therefore, we limit our assessment of the negative impacts to available data on the negative impact of the increase in total debt to Sudan as a result of Chinese loans to Sudan (1997-2007).





Since the Chinese aid policy toward Sudan is mainly based on giving aid and development assistance to projects, this stylised fact implies that the best assessment of the effectiveness of Chinese aid is through assessment of the effectiveness: positive and negative impacts at project level. Therefore, the next section will use primary data from the interview with the mangers of the selected cases studies of seven projects to examine the effectiveness or impacts of Chinese aid, development assistance, loans and grants in Sudan over the period (1999-2007). The selection of these cases is based on the findings in section 2 above which implies that the Chinese aid, development assistance, loans and grants offered to Sudan are biased towards specific sectors (services and infrastructure: building and construction, electricity and water supply) over the period (1997-2007). For instance, the share of electricity projects, Khartoum refinery project and Merowe dam and related projects represent 70% of the total Chinese aid and development assistance offered to Sudan over the period (1997-2007)- see Table Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 11 _______________________________________________________________________________________________________

4 above. Therefore, based on this finding, it is useful to discuss the results and the implications of the eight selected cases studies in section 4 below.9 5. Research Results Based on the above and based on projects assessment, this section discusses the results and assesses the effectiveness of Chinese aid, loans and grants to Sudan in financing development in Sudan over the period (1997-2007).10 We first discuss the positive impacts and then show the negative impacts of Chinese aid and loans to Sudan during the period (1999-2007).

To examine the impacts of Chinese aid, loans and grants to Sudan over the period (1999we use primary data from the interview with the mangers of the selected cases studies of seven projects. The results of the interviews with these managers of the projects indicate the effectiveness and significant contribution of China aid, loans and grants in the implementation of their projects. In particular, in these projects the percentage share of the contribution of the Chinese aid, loans and grants in total aid, loans and grants offered for implementation of these projects is important as can be seen from many important indicators. For instance, the share of China in total capital and finance (71%-100%), increase availability of machines and equipment (70%-100%), improve training and capacity building in the project (50%-100%), increase in technology transfer and knowledge transfer (50%-90%), increase employment opportunities (26%-100%) and increase availability of raw materials (5%-100%). Therefore, Chinese aid, loans and grants offered for implementation of these projects has been extremely important for creating many positive impacts in many important indicators. For instance, increase availability of the services (100%), increase in skill level (100%), increase or growth in production (88%), increase in transfer of knowledge (88%), increase availability of machines, equipment and raw materials (75%), increase in employment opportunities (75%), improve capacity building in the project (75%) and increase in technology transfer (63%). For example, the Chinese aid, loans and grants offered for implementation of these projects has been extremely important for creating many positive impacts in many important indicators. For instance, increase or growth in production (12%-120%), increase availability of the services (60%-120%), increase in technology transfer (50%-100%), increase in the transfer of knowledge (30%-100%), increase in skill level (25%-100%), increase availability of machines, equipment and raw materials (20%improve capacity building in the project (10%-100%) and increase in employment The interviews were conducted with the mangers of the selected cases studies of seven projects in Sudan in 2009. The eight selected cases studies include four fully completely projects: Merowe Dam Project, Merowe-Karima Friendship Bridge Project, Khartoum

Refinery Project and Elgaili-Garri 2 Electricity Project. In addition to two projects in which 95% of the work is almost completed:

Garri 4: Petroleum Charcoal Electricity Project and White Nile Grids: Rabak-Obied Third Circuit Elroseires-Khartoum Electricity Project. Further to two proposed projects in which the work is recently started: Al Fula Electricity Power Plant Project and DonglaWadi Halfa Electricity Transmission Line Project.

Although it is difficult to distinguish between the classification of aid and investment projects which the Chinese implemented in Sudan, but the case studies discussed in this section as classified by Sudan's ministry of finance and national economy and Sudan's ministry of international cooperation and the central bank of Sudan are project implemented with Chinese loans and grants and as such are classified as projects implemented within Chinese aid and development assistance to Sudan.

Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 12 _______________________________________________________________________________________________________

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