China Outsmarting the West in Africa

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100718 China - Outsmarting the West in Africa

Source: IPSNews

Deborah Brautigam, author of 'The Dragon's Gift: the Real Story of China in Africa', argues that in contrast to Europe and the United States, China also sees Africa as an important market. As well as dominating exports of consumer goods to Africa, Chinese companies are exploring manufacturing and infrastructure construction across the continent, and coming up with innovative ways to profit from and pay for it. Speaking to IPS during a recent visit to South Africa, Brautigam said African governments, large and small business owners, and civil society will have to remain alert to take advantage.

Q: You write that the image of the Chinese Dragon plundering Africa for
     natural resources misses the full complexity of a business relationship
     between diverse partners.

A: South Africa provides an interesting (example of the) array of Chinese interests. What we can see about Chinese interest in South Africa is that their largest investment has been banking - they have about a 20 percent stake in Standard Bank (one of the country's largest), so that is in the financial sector. And through that investment they are co-financing (projects) with Standard Bank in a number of African countries. China is also investing in the manufacturing sector. Recently in the news was a big cement plant that Chinese financiers are going to invest in. Also FAW, an automotive manufacturer, is looking to set up in South Africa.

They have also invested in mining - they have eight projects in the country. South Africa is a huge market - one of the biggest markets for the Chinese in Africa, together with Egypt and Nigeria. You can see that everywhere you go: Chinese goods are visible. In Angola, the interests are narrower. Unlike South Africa which is well-developed, Angola is a country that is still recovering from war, so it’s not a very good place to invest in a whole array of different sectors.

In Angola, what you have is oil and the Chinese are interested in oil. But they haven’t made big investments in oil. There has been interest, but a lot of Angolan oil has been taken by Western companies and the Chinese don’t have the technology to do deep sea drilling for oil - all of Angola’s oil is off-shore, and the new oil fields are deeper and deeper. The Chinese don’t have the technologies as yet, so there hasn’t been much interest in oil. Instead the Chinese are really invested in the construction business. And that’s about the rebuilding of Angola after the war - so you have Chinese banks making export credits to Angola, for Chinese services by and large. That's $4.5 billion [worth of credits] and that’s guaranteed by oil.

So it meets two goals: it meets the Chinese government’s concerns about energy security until they have more secure contracts for oil from Angola. (But every year the amount of oil they import from Angola is far above the amount that necessary to pay those loans.) What’s more important is the construction business. Chinese companies are getting these big contracts to rebuild Angola; there are a lot of Chinese companies that are doing that work right now. The money is by and large tied to Chinese companies. Angola was able to negotiate a situation of they have 70 percent of the contracts go to Chinese companies and 30 percent is supposed to go to Angolan companies, so the Chinese companies are supposed to sub-contract usually to Angolan companies.

What I know is that there another $1 billion for agriculture projects but these are things that have not yet been decided. The money is available to go to agriculture projects and that’s not an export credit so it won’t be tied to Chinese companies.

Q: What about the much-talked about Sicomines deal in the Democratic
     Republic of Congo?

The Sicomines deal is a joint venture between a consortium of Chinese construction companies and Gécamines which is the state mining company in the DRC. Several years ago, Gécamines and these construction companies, and the Chinese government and the DRC's ministry of infrastructure came up with a plan to do something along the lines of what the Chinese have been doing in Angola. But it had to be different, because there is no steady stream of resources that could be used to secure loans for infrastructure. I call these "resource-backed infrastructure loans", because in Angola, they were backed with oil and in the DRC they also wanted to back it with a resource: but there was no ready available resource, because Gécamines was not producing enough. So the arrangement there was for Gécamines to put together enough resources so that a loan provided in two tranches of $3 billion each could be secured.

To do that, they had to develop the resources so that there was a producing mine. So three billion dollars worth of infrastructure is under way, and another three billion will finance the development of the mine itself; production from the mine will all go to China probably until the first loan is repaid, then it will be split. It's a 68-23 percent joint venture between Gécamines and a Chinese consortium.

Q: Is it a fair deal in your view?

A: What we know is the details of the joint shares. The Congolese people don’t have to put anything into the development, so it sounds like they are getting something for nothing, but the mineral resources are 100 percent theirs. A Canadian lawyer who was one of the top people who negotiated the deal said if nobody had done anything about the resource, it would still be in the ground. For the other deals that have been done with other foreign companies, the joint venture share is much smaller for the Congolese, so usually the other company puts in all the money to develop [the mine] and gives a smaller joint venture share the Congolese. We can also look at the signing bonus: the Chinese signing bonuses are quite large. One also has to look at the infrastructure that’s going to be built out of it. So I think by and large the deal is not bad for the Congolese.

The joint venture share is pretty high. Over time almost a third of that production will go Gécamines and the Congolese government will get the tax from the mine. This is different from other mining ventures where the proceeds will go offshore. At least at the end of the day they will get $3 billion worth of infrastructure... then there are other problems of whether it will be maintained, of whether the quality will be good or value for money because there may not have been competitive bidding - all those are issues that have to be worked out. One would feel more comfortable if there was more transparency and more international competitive bidding for the contracts.

Q: And the recent deal to build refineries in Nigeria?

A: First of all, it is a only a memorandum of understanding. The key thing to look at is where the financing is. There is no financing mentioned in this deal. I think it will be very brave Chinese bank that takes on a 20 something billion dollar project in Nigeria because, yes, Nigeria is much more stable than DRC, but the DRC projects are much smaller. I doubt if this project is going to happen. I think it’s just too large. I think they would be much smarter to start with one oil refinery and see how it goes. Right now 85 percent of the petroleum products consumed in Nigeria are imported and they export raw oil, so it's really a bad situation. But the reason the situation is like that is political. A few people at the top benefit from having some control over the imported oil products, and they don’t want that situation to change. So it’s a challenge for this deal to be consummated.

Q: You mentioned the situation is chaotic, are Chinese investors confident
     in the Nigerian environment?

A: The Chinese have tried to do a number of deals in Nigeria and they have had problems with all of them. For example in 2006 , a large Chinese construction company called CECC signed a firm contract to rebuild the railway from Lagos to Kano. This was an $8.3 billion contract and Nigeria government was supposed to pay for it. There was some discussion of how they could get a loan from the Chinese government, but they never finalised that until the Chinese company started the work. The Nigerian government made the first payment and they never paid anything else. And the Chinese company stopped work and they have been involved in litigation since then. Recently I heard it was going to start up again on a small scale. So that was one of deal that fell apart. There was another one, Mambila Hydropower. There have been no big deals with the Nigerian government.

Q: What are the strengths and weaknesses of China’s involvement in

A: Nigeria is a country in which there was a lot of discussions of doing these resource backed infrastructure loans. My understanding is that the Nigerian government came up with this idea. Perhaps they looked at Angola and some of the things the Chinese were doing. They proposed this to the Chinese, Indians, Koreans: so a number of different Asian companies and government got this proposal that they do oil-backed trades, getting access to concessions out in the Niger Delta and in return they could do the infrastructure projects. It is a different kind of deal than the DRC and Angola. Because in Angola the oil is being pumped so you can secure loans with oil that is already being exported. In Nigeria you could get a concession but there is no guarantee that you will actually get oil there and of course there are expenses.

In DRC the Chinese made very sure that they put in the contract that the copper concession had to be evaluated so they could be sure there was enough copper in there, and copper that could be mined at a cost-effective price. But the Nigerian deal was never very secure... we still don’t know the details about it, but everything fell apart. The Mambila Hydro project also fell apart. There was no financing, the oil concessions they were offered turned to be not of good quality. There were a lot of things that happened that stopped these kinds of deals from going forward, the biggest being that the president who had negotiated the deal, Olusegun Obasanjo, when he left [the new president[ Umar Yar’ Adua reviewed the contracts. Now there is another President, so things haven't worked and I think it has been frustrating for the Chinese. Nonetheless they have a huge amount of business in Nigeria. It’s a big market for them and they have got construction business there already; they are also investing in manufacturing.

Q: What is in it for China in the end? Why get involved in these complex,
     risky deals?

A: I think it is useful to look at China’s relationship with Africa as part of its strategy of going global. It is all about globalisation and it’s about China being part of globalisation. You can call this neo-colonialism, imperialism but what globalisation is all about is moving up the ladder, it’s about becoming a world economic power and so China looks at Africa as a partner in this. So what do the various parts Africa provide for their partnership?

What they are largely providing is raw materials; the other side of it is, [Africa is] a huge market. The West has by and large been competed out or they have given up on African markets but these markets are huge. China is the single largest exporter to Africa all across the board. The Chinese look at Africa in a different way. The West looks at Africa as a place of war, disease, chaos and terrible things and a place to be pitied.

The Chinese look at Africa as a place for consumers and business partners and it’s a very different picture. When you look at trade figures they kind of bear that out because half of the trade going from the continent of Africa - in 2008 it was about 100 billion - and just half of that was exports to China. Almost half of were imports from China going into Africa. They are interested not just in trade and natural resources, but in manufacturing opportunities, especially construction.

When they look at construction in Africa they say, There is no electricity in these places; we do electricity. They say, Those places have no internet, we can lay cables and roads and so forth. The Chinese look at Africa and say, There are a lot of opportunities for ourselves. The West have just forgotten about infrastructure as an important element. But the Chinese also say, We are not rich ourselves. We are not just going give infrastructure. We will build; but African countries are going to pay for it, they're going to exchange natural resources for it.

When they went to Ghana, they said, You want electricity, you want to develop the Bui Dam. We can do it. And they said, How we be sure you pay us? Ghana said, We have cocoa and the Chinese started up and they started an escrow account and the cocoa gets exported and money's paid into the escrow account to guarantee the loan. Deals like this happened across the continent. Its' not altruism, it's not foreign aid: it's about business, but looking at Africa in a different way.

Q: Chinese products and retailers are highly visible in African markets.
     What is their role in Africa’s economies?

A: Chinese traders are playing two roles. On the negative side, they are competing with other traders. In Tanzania for example, Chinese traders are sitting on the pavement next to the Tanzanian traders and laying out their groundnuts, speaking Swahili, calling customers to come buy their groundnuts. And this has happened in a lot of countries. To see a Chinese person there... people are not comfortable and the same applies in small shops. That provides a lot of competition for local traders who may not want someone coming in speaking their language selling right next to them. On the other hand the Chinese traders are creating more opportunities for consumers. They bring in cheaper things.

Sometimes the quality is not good, but often the quality is good and consumers learn which traders to trust. There has been very interesting research into how Africans are reacting to these kinds of products. There has been a problem of copying - this is not so much on the level of traders but Chinese coming from China and taking African fabrics back to China, having them duplicated there at a cheaper price and bringing them back to sell in Africa. That has been a problem people have been upset about.

Q: What role should governments, civil society and business play to take
     maximum advantage of the possibilities brought on by China?

A: For African governments, it is very interesting to learn more about the things the Chinese have done in order to raise themselves out of poverty. Not to copy their policies but to look and adapt their program of experimentation and try new things out. There is a lot we can learn from what the Chinese have done over the past years. So I think for African governments they also have another kind of partner and they can use this as leverage for policy space. African governments over the past couple of decades haven’t had a lot of policy space because they have been subject to conditionalities. It’s not just about governance but economic policies.

What the Chinese are saying is that there is a lot different ways to develop, and it doesn’t all have to be by Washington consensus. Business people have new partners. A lot of African traders have been going to China and picking up Chinese goods and services and bringing them back. What’s been happening in some parts of Africa is that traders have been going to China and looking at their factories and say, This is not difficult to do. And they have been seeking Chinese technical assistance to help them set up factories - I have seen this happen in Nigeria for instance.

For civil society, what will be helpful is if they can learn as much as possible about what the Chinese are doing - both the negatives and positives. As with any new partner, they need to be sure that they keep the partner on their toes. They want to push for greater transparency, they want their government to release information, they want have figures: how much aid are we getting, how much investment are we getting, how much trade are we doing, how many export products, do we have debt, can we repay it? That is what a democratic society is entitled to know and that’s the role for civil society. And also pushing for standards and enforcement of standards. I think they are doing a good job but they can do better.  

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