Staking out a piece of the action

Chinese infrastructure builders have made their mark across continent, and their quest for projects is far from over

In the early 1990s the rumbling of cement mixers in Kenya signaled the arrival of European construction firms. In some cases the work they did could save lives and received the appropriate accolades in such cases as the overpass built at a level crossing in Eldoret, in the country's west.

However, the memory of those glory days for European contractors is fading as the names of Chinese companies continue to become more prominent in building infrastructure in East Africa and in Africa generally.

Whether they are rehabilitating roads and ports or laying down railway lines, the Chinese are stepping in to meet the sometimes extremely difficult challenges of modernizing the continent, with all the financial and technical muscle this entails.

Nevertheless, Europeans and Americans continue to dominate the African construction sector. The consulting firm Deloitte said in a recent report that the value of major building projects that Western countries own, fund and are responsible for in Africa is valued at more than $50 billion.

International development finance institutions accounted for 26 percent of funding for such projects last year, with the United States 10 percent, China 7 percent and Europe 3 percent.

In ownership of such projects, African governments accounted for 52 percent, Western countries 13 percent and domestic private companies 24 percent, double the figure in 2013, suggesting indigenous firms are coming of age. Chinese concerns had a total stake of 1 percent in the 257 projects reviewed.

In construction, Europe and the US accounted for 40 percent, or 103 projects; private concerns accounted for 22 percent; and China 12 percent.

The Deloitte report said the total value of all projects last year was $326 billion, 46 percent higher than in 2013.

Southern Africa boasted a total of 119 projects, most in South Africa, followed by Mozambique with 15 percent and Angola 13 percent.

Governments owned 40 percent of the assets, and domestic private concerns owned 29 percent. China improved its standing slightly as foreign investors from countries such as Australia, Brazil, India and the United Arab Emirates joined the fray.

Domestic private companies were responsible for building 28 percent of the projects, and Europe and the United States were responsible for 18 percent.

This may have been the result of support through the launch of the Infrastructure Investment Program for South Africa, a joint initiative between the African Development Bank and the European Union. The fund provides alternative financing to organizations undertaking infrastructure development projects in South Africa or projects that cross two or more borders of member countries of the Southern African Development Community.

In West Africa, China was responsible for building $9 billion worth of projects last year.

"Chinese companies dominate the development of the transport network, particularly in the rail and airport sub-sectors," the Deloitte report says.

"Two projects that demonstrate such dominance are the $1.49 billion Lagos-Ibadan railway contract awarded to China Civil Engineering Construction Corp, and the Olokola Deepwater port project awarded to the China Ocean Shipping Group."

Other projects undertaken by Chinese companies include Bonga NW project, Eko Atlantic City, Lagos Light rail, Abuja Light Rail in the Federal Capital Territory and Abuja Centenary City.

In East Africa, Chinese dominance in infrastructure building was clear. Chinese firms built 31 percent of the 51 projects under review, worth $31 billion, $18 billion more than in 2013. Europe and the US accounted for 18 percent of projects, worth $11 billion, less than half the figure in the previous year.

China for the first time owned 2 percent of infrastructure assets in East Africa.

In Central Africa, construction of mega projects accounted for $33 billion of total project value. Europe and the US were responsible for building 71 percent of projects, worth a total of $23 billion, and projects undertaken by China were worth $3 billion. China's proportion of funding fell markedly, from 17 percent in 2013 to 6 percent last year.

"Fifty-four percent of projects in the region were located in Cameroon and 15 percent in the Democratic Republic of Congo," the report says, adding that the balance of the countries each had slightly less than 8 percent of the share of projects by number.

Infrastructure development's impact on economic growth is significant. The World Economic Forum estimates that for every dollar spent on a capital project, it generates an economic return of between 5 percent and 25 percent a year.

In Africa last year there was an increase in investment and construction activity in transport. It eclipsed energy as the key sector for construction activity on the continent.

"Data reveals significant investment in rail and ports," says Andre Pottas, a partner of Infrastructure and Capital Projects at Deloitte.

"This reflects the continued economic growth on the continent as ports and rail provide the backbone for intra-African and global trade, through facilitating the efficient movement of goods and commodities."

In many African countries Chinese firms have concentrated on transport. Usually the idea is to make the transport of natural resources such as oil and minerals for export easier, with Angola and Zambia being among the countries where this has happened.

However, Chinese businesses are now spreading their wings further, bolstered by technology they have acquired. That has been an aim of the Chinese government, which has encouraged multinationals to upgrade so they can compete globally.

In addition, China suffers from industrial overproduction and market saturation in sectors including electronics, footwear and textiles. This has meant manufacturers have had to look for new markets, which also gives them the chance to diversify.

Chinese construction companies discovered that their chances of survival can be enhanced by expanding into new African markets.

However, China is considered a latecomer. It was not until the 1990s that its companies ventured out of their country, says Kwame Owino, chief executive of the Institute of Economic Affairs, a think tank in Kenya.

"They immediately identified the construction sector as an easy target or low-hanging fruit."

Africa needs basic infrastructure investment of about $100 billion a year over the next decade, a third of that for maintenance. In 2012 the continent's infrastructure stock was worth $400 billion, says the international consulting firm KPMG, in its annual report Construction in Africa for 2014.

Just four countries held half this fixed capital: South Africa, Algeria, Egypt and Morocco.

"In fact three quarters of Africa's capital stock was held by just 10 countries," the report says.

But with the involvement of China, substantial development has been carried out. This has been attributed to the businesslike approach its government has encouraged as its enterprises deal with Africa.

African countries have found the deals that Chinese firms offer are extremely competitive, so contracts have been won for projects financed by Western financial institutions and multilateral bodies such as the African Development Bank that have given the firms over a quarter of funds from the bank's total procurement contracts and a third of its civil engineering projects.

Deloitte says last year Africa's development funding institutions provided 9 percent, or $293 million, of funds, and China provided $228 million.

The choice of Chinese companies to import material and equipment from China is seen as greatly helping them undercut by more than half the offers that European companies make.

As a result, Chinese firms have hitched themselves to Africa's supply chains at the expense of local suppliers that cannot meet international quality standards or the quantity needed to complete projects.

In addition, Chinese companies enjoy a good reputation in Africa for their businesslike approach and work ethic. In Kenya the government is guaranteed of projects being completed on time and within budget.

Chinese firms also meet high quality standards set by African governments. By bringing in skilled labor, they can make up for skills shortages, particularly in engineering, where there is lack of experience and expertise.

"Intrinsically linked to the lack of skills in the markets is a lack of internal capacity," says a report issued by PricewaterhouseCoopers in November on capital projects and infrastructure in eastern, southern and western Africa. There is a lack of internal capacity to plan, procure, manage and implement capital infrastructure projects, which raises questions over whether they can be delivered, the report says.

Funding continues to be a challenge in Africa. However, this is circumvented by Chinese firms that receive long-term loans from their domestic financing channels. They have also devised alternative funding where it ties infrastructure development to natural resources. The infrastructure-for-oil model has substantially changed infrastructure in Angola.

Buddy Buruka, country program manager with the African Center for Economic Transformation, an economic think tank in Ghana, says: "The business win-win approach extended by China has provided very substantial resources for critically needed infrastructure. China's assistance to Africa has changed from grants and soft loans to commercial loans at competitive rates for projects viewed as bankable."

Chinese loans extended to Africa are highly favorable, she says.

"The returns are long term. Political and economic uncertainties in poor countries mean that private investors demand high returns to compensate (for) risks."

Politically China's relationship with Africa has been cemented over the years as Beijing has adhered to a policy of political noninterference, African countries' responsibility for dealing with their own problems, mutual trust and increasing economic aid with no political conditions. China has thus been able to make significant inroads, and 35 African countries are now working with it on infrastructure finance deals, the biggest recipients being Nigeria, Angola, Sudan and Ethiopia, says Anver Versi, of the African Center for Economic Transformation in Ghana.

These countries have been recipients of Chinese funds with no strings attached, unlike conditions often imposed by institutions such as the International Monetary Fund and the World Bank.

Such conditions crippled most African economies in the 1990s, so African governments have warmly welcomed the mutual-benefit approach that China favors.

"The current positions held by Western governments are the long-term contracts entered into between them and African governments," says Mary Kipkemoi, lecturer at the school of Finance and Applied Economics at Strathmore University in Nairobi.

"The continent lacked technological know-how, especially in the extractive sector, so it awarded contracts that saw Western firms build, own and operate such infrastructure, especially in the southern, western and central Africa."

Chinese companies have made new acquisitions in Angola, Nigeria and Sudan, but these have been modest given stiff competition for access to the continent's oil from local governments and foreign companies.

Versi says: "While it is difficult to get accurate figures of exactly how much has been invested in Africa by the Chinese, there is no doubt that their participation has been rising steeply."

The investment is "breathtaking", he says, adding that China's engagement with Africa is business based. "While Africa's traditional development partners from the West have been discussing and debating China's motives and quality of its products, the Chinese have been rolling up their sleeves and getting on with it."

In less than 15 years, China has multiplied Africa's infrastructure stock several times and is changing the face of the continent, and "that has left the world bewildered", he says.

However, falling oil prices may slow the pace of Chinese funding in oil-rich countries such as Angola and Nigeria, he says. Deloitte's construction trend report said funding by China rose one percentage point last year to $6.6 billion.

Kuria Muchiru, advisory partner at PricewaterhouseCoopers in Kenya, predicts the number of Chinese firms in Africa will continue to rise.

"The opportunities and needs for infrastructure far exceed the funds that are available and the ability to execute the projects."

Governments can only borrow so much because of the debt ceiling that is set depending on their GDP, he says. So the next trend will be private-public partnerships, a model that is already taking off in Kenya and Western Africa, Muchiru says.

He acknowledges that this is an area that has not been well received by Chinese firms, thus leaving the door open for other foreign players.

"It will require new thinking as governments pull out from guaranteeing projects and letting the private sector bear the greater financial risks and burden."

This framework has not taken off in Africa in a big way because of a lack of political will and the availability of projects that are bankable, he says.

"But the will to implement private-public partnerships is growing as governments put legislation in place. The challenge may be in its execution."

Moreover, African governments will also start warming up to financing models such as "build-own-operate-transfer," in which a company get a concession to build and run a facility for a fixed time.

Calling Chinese investment a vital contribution to the continent's development, Harry Broadman, author of Africa's Silk Road: China and India's New Economic Frontier, says China's influence will continue expanding.

"Chinese investors have been far quicker than their counterparts in developed nations to acknowledge - and benefit from - Africa's uninterrupted growth and resilience," says Broadman in his PricewaterhouseCoopers report titled Separating Fact from Fiction in the China-Africa Relationship.

However, Chinese involvement has not been without downsides.

Language barriers are seen as problematic, resulting in communications breakdowns between Chinese managers and workers. In addition, some Chinese projects employ hardly any locals in key management roles, thereby forestalling the kind of technology transfer that African governments would like to see.

Lucymorangi@chinadaily.com.cn

Buddy Buruka, country program manager with the African Center for Economic Transformation in Ghana. Photos Provided to China Daily

(China Daily Africa Weekly 05/15/2015 page1)