Funds conundrum

Gabon's debt aversion increases business risks

There is a common perception that all the sub-Saharan African nations are "least developed countries", but there are some exceptions such as Gabon that are prompting Chinese companies to chalk out new business strategies to stay ahead.

Although there remain major inequalities, Gabon now ranks as a middle-income country. As such it is less dependent or rather reluctant to seek external funding for infrastructure projects.

Many Chinese infrastructure companies have found that money is not necessarily the top draw in Gabon, sources say. "Good investment proposals from Chinese companies are welcome in Gabon. But if the companies try to sweeten the offer with low-interest loans from Chinese lenders, then it is very likely that the proposal will be rejected," says Wu Jingchun, economic counselor of the Chinese embassy in Gabon.

Sinohydro, which has a presence in more than 30 African nations, is one Chinese company that has managed to carve a niche in the Gabon infrastructure market. The state-owned hydropower engineering and construction company has businesses spanning road construction, grid systems and hydropower generation.

It recently completed the $400 million Grand Poubara power generation and electricity transmission project in Franceville, Gabon. The project is expected to give a major fillip to the third-largest city in Gabon as it seeks to unlock fresh investment potential.

Qiu Xin, deputy general manager of Sinohydro Gabon, says demand for electricity has been spiraling in the African nation. "The old power facilities in Gabon are unable to cope with the rising demand triggered by a growing population. With several Gabonese cities charting plans for industrial transformation, the country also needs more power for industrial activities."

Gabon has many rivers flowing through it, especially the Ogooue, the fourth-largest river in Africa by volume of discharge, which gives it a tremendous advantage in hydropower generation. "Only 2 percent of the estimated hydropower potential of more than 8,000 megawatts has been exploited in Gabon," Qiu says.

According to Qiu, Gabon's reluctance to use debt for infrastructure development is proving to be a major challenge for the state-owned Chinese companies. "Most of the Chinese investments are linked to financing, from China Exim Bank or China Development Bank, in the form of low-interest loans and are backed through the sovereign guarantee of African nations," he says.

"Gabon is a small country and its total annual GDP is around $15 billion. But a mega hydro project can easily cost billions. So that poses a contradiction between the needs and the supply," Qiu says.

Besides the different attitude toward loans, cheap labor is something that does not exist in Gabon, he says, adding that China Hydro has already felt such pressures.

"Gabon is the only medium-income country in West Africa, and the drawback associated with this is that the overall costs are very high, not only in terms of food, but also labor," Qiu says.

"The labor cost is double that of the Democratic Republic of Congo," Qiu says. "We normally pay $400 monthly for a skilled worker there, but here we pay $800."

Qiu estimates that the overall cost of a project in Gabon is 50 percent more than in the Democratic Republic of Congo or Cameroon. Nevertheless, the company has 4,000 workers in Gabon, with 20 percent of them coming from outside the country.

China Harbor Engineering Company Ltd is another Chinese construction company that is looking for a place under the Gabonese sun.

The company entered Africa in 2006 for a port-dredging project in Angola and has executed several harbor projects in Luanda, Lobito and other Angolan cities. Last year it handed over the completed Lobito port to the Angolan government. The $1.2 billion project is the company's biggest overseas harbor project.

The company is now working on a harbor project in Libreville, the capital of Gabon. The port is located in downtown Libreville, and the government plans to build it into a huge complex with multiple functions such as accommodation, shopping and entertainment. The contract value is estimated at around $120 million.

Though the blueprint looks grand, the project is still in the preliminary stage because the port needs to be built before related facilities. China Harbor won the bid in June 2013 and is expected to finish the project by the end of this year.

Currently, the company has around 350 people working on the project, including 200 Chinese engineers and managers, and more than 100 local workers.

Carrying out such a big project in West Africa, is however, not so easy. The company has to bring in dredgers from places such as Saudi Arabia and Cameroon, where the company has ongoing projects, to remove the silt and deepen the harbor. The dredgers also need to excavate sand from the seabed and then use it for land reclamation.

Like Sinohydro, China Harbor too has run into funding problems. The harbor complex project is massive and requires enormous amount of capital, which Gabon does not have. Since Gabon is reluctant to seek external funding the available funds are not enough to cover the expenses, company officials say.

Zhao Yang, deputy general manager of China Harbor, says that after the port is expanded, he hopes his company will be involved in other follow-up projects such as building hotels, cinemas and roads. A city center axis is also on the cards, which will start from the port and lead all the way to the city government.

But the government has not announced any information on the follow-up bids, Zhao says.

Fortunately, China Harbor has secured another major project in Gabon, the Gentil harbor project, which is close to the mineral-rich Franceville region and mainly handles fertilizers.

"We have to adapt to this kind of situation in Gabon, especially as the decision-making process is slower and highly vulnerable to political changes. It keeps us on the guard always," he says.

(China Daily Africa Weekly 04/04/2014 page7)