By Sid Verma
China has become a major force in developing African infrastructure. But the biggest risk-takers are in Africa, not China
At first glance it seems a fair swap. In exchange: foreign expertise, technology and finance to build up a nation’s infrastructure. In return: raw commodities – most particularly guaranteed oil and mineral wealth – to fuel China’s economic growth.
But it hasn’t worked out that way. China may have signed a host of resources-for-infrastructure contracts with African governments sweetened by the promise of aid and political capital, but its scramble to tap into the rich resources of Africa is proving one-sided.
At first glance, however, this is not apparent. Most recently in April, China offered Nigeria $50 billion in export credits to tackle its electricity shortages in return for a stake in Africa’s largest oil producer.
Western market players were quick to point out the benefits. “China brings good equipment, technology and a capital. This is a win for win everyone involved,” says Ravi Suri, head of Middle East and Africa project finance at Standard Chartered.
Indeed by the beginning of 2006, the Export-Import Bank of China (China Exim) had sanctioned more than $6.5 billion for projects in Africa – 10% of the bank’s total approvals. Although up-to-date figures are not available, analysts suggest the figure has increased significantly.
According to a survey conducted by the Collaboratory for Research on Global Projects at Stanford University (CRGP), Chinese construction firms get 49% of their work in the region from World Bank and AfDB supported projects, and 40% from China Exim-financed deals.
The rest comes from direct negotiation with federal authorities or open bidding for government-backed concessions.
But the nature of Chinese investments is without precedent. It has fuelled fears that the world’s newest driver for global growth is furtively taking strategic –and controlling – stakes in key African economies.
Rather than competing with local companies or setting up joint ventures, Chinese contractors populate segregated fortress-like compounds employing a limited number of African workers.
Easy access
Chinese state-owned enterprises have easy access to cheap materials from China, political support from Beijing and subsidized capital from the country’s state-owned banks. As a result, Western players – including donors and private financiers – are unable to compete on the same scale.
“We have seen a massive deepening of investment and Chinese financial institutions have unrivalled cost-competitiveness in overall bidding price for projects,” says Lucy Corkin, projects director at the Centre for Chinese Studies at Stellenbosch University in South Africa.
For example in March 2004, China Exim provided Angola with a $2 billion loan, later increased to $3 billion at only 0.25% interest, payable over 17 years in exchange for 10,000 barrels of oil per day.
The credit was to fund infrastructure projects on the condition that 70% of the work would be contracted to Chinese firms. As a long-term, oil-backed loan that priced out other financiers, China’s involvement blended aid with commercial trade and project finance.
“Most Western activity follows the business thesis of providing growth to equity by combining appropriate technologies and entrepreneurial capital while ensuring improved governance and transparency. This is clearly not the focus of the Chinese,” says Thomas Gibian, chief executive of Emerging Capital Partners, a private equity firm.
Analysts say the Chinese often fund infrastructure projects that they entirely run and so bypass the host government. This helps mitigate the risk of corruption or expropriation that plagues many projects – and which is a key turn-off to Western investors.
But China’s much-criticized lax environmental, health and safety standards suggest its investments risk a domestic backlash. Earlier in March, workers at Zambia’s Chinese-owned Chambishi copper smelter rioted over pay and working conditions amid fears of a repeat of the mine explosion that killed 46 workers in 2005.
In April, a labour dispute at a Chinese construction project in Equatorial Guinea turned violent after Chinese workers protested over poor working conditions. China withdrew 400 of them from the country.
“Labour rights are increasingly going to be an issue – and trade unions will take it into their own hands if the Chinese do not address these problems,” says Corkin.
Long-dated loans and labour intensive construction projects means China will be in the continent for the long-haul.
But the biggest risk faces Africa and not China. Projects solely driven and overseen by the Chinese will fail to transfer skills to the local population. By encouraging greater African participation, the Chinese will also be able to safeguard the longevity of their investments.