Probing the dragon: China Inc runs into ethics barrier

Saturday January 25 2014

With China-linked projects showing a penchant for attracting controversy, the Chinese way of doing business in Africa is on trial. TEA Graphic

With a sensational claims being made against a key Chinese-funded project in a parliamentary probe in Kenya, the former country’s dominance in the battle for regional infrastructure contracts now faces a severe integrity test.

While the probe has centred on the propriety and legality of the procurement process for the standard gauge railway line from Mombasa to Nairobi, its cost and whether Kenyan taxpayers will be getting value for their money if the project goes ahead, what is really on trial is the Chinese way of doing business in Africa.

And with the rising number of China-linked projects in the region showing a penchant for attracting controversy and accusations of “not playing by the rules,” several questions are inevitable: Is the open partiality governments have shown for Chinese contractors wise?

Are citizens getting value for money in these mega infrastructure projects, or are the projects merely creating new frontiers for Chinese labour, capital and construction materials, in the process opening avenues to exploit the region’s natural resources? What is the level of complicity of the ruling elite and other rent-seekers in all this?

In the case of Kenya’s biggest ever infrastructure job, the government handed the SGR contract to China Road and Bridge Corporation in what the bureaucrats describe as a “government to government” deal, awarded without competitive bidding.

READ: Kenya railway project starts amid controversy


Even then, Attorney-General Githu Muigai has differed with his colleagues, Transport and Infrastructure Cabinet Secretary Michael Kamau and Principal Secretary Nduva Muli, echoing critics’ views that even in the case of government-to-government transactions, the Public Procurement and Disposal Act, which calls for open tendering, still applies.

Firm blacklisted

It will be interesting to see what direction the project takes at the end of the probe by the Public Investment Committee, considering that some preliminary works have already started.

However, the deals signed between Kenya Railways and CRBC — which is a subsidiary of CCCC (China Communications Construction Company), a firm blacklisted by the World Bank in 2009 over fraud in a project in the Philippines — are subject to the AG’s approval.

The other major point of contention in the Kenyan SGR project is the cost, which critics say has been inflated without justification, ostensibly due to variations to the original design.

It does not help the government’s case that its officials have erected a virtual Tower of Babel over the issue before the PIC, quoting different figures.

While Mr Kamau and Mr Muli have stuck to Ksh327 billion ($3.27 billion) as the total cost of the project, Treasury Cabinet Secretary Henry Rotich has introduced a new figure into the discussion, Ksh447 billion ($5.13 billion), after factoring in elements such as interest, compensation for land, insurance, management and commitment fees.

Uganda must be watching the events in Kenya keenly. Its own recent dalliance with Chinese contractors, who seem to be snapping up all the big infrastructure jobs in Kampala, has not been without controversy.

The high-stakes battle for the SGR project in Uganda saw at least three different Chinese companies sign separate memoranda with different arms of government.

The issue had to be referred to the president’s office for determination in November last year. The firms in question were China Communications Construction Company (CCCC), China Civil Engineering Construction Corporation (CCECC) and China Harbour Engineering Corporation (CHEC).

READ: Museveni to meet feuding rail contractors

To untangle the mess created by the firms and their promoters in the government bureaucracy, it was suggested that they form a consortium and share out the project.

According to a source familiar with the high-level discussions, the CCCC, which is the parent company of the firm contracted by Kenya to build the Mombasa-Nairobi line, has now been put out of the race due to its “lack of background” in rail building, amid fears that it would have to sub-contract, potentially inflating the cost. The firm is also said not to have done a good job on the 51km Entebbe Express Highway.

The EastAfrican has learnt that the tide seems to have changed in favour of CHEC for the Kampala-Malaba-Soroti-Gulu-Juba segment of the SGR, following high-level consultations in which US lobbyist Rosa Whitaker is understood to have played a key role.

On January 22, Ms Whitaker led a delegation of American, British and Chinese businessmen to State House Entebbe.

Twenty four hours later, it was announced that British civil contractor Mott MacDonald would work with CHEC to build a new 670km SGR line running from Kampala to Pakwach and Nimule on the border with South Sudan.

While this gives provides some clarity on the project finally getting off the ground, it does not address lingering questions about CHEC’s lack of background in railway construction and the cost implications of it sub-contracting the work to Mott Macdonald.

Perhaps it is only in Tanzania that projects involving Chinese funds or contractors have not generated major controversy recently. The latest big contract there, the construction of a $1.2 billion gas pipeline from Mtwara to Dar es Salaam, was awarded to three Chinese companies in July last year: China Petroleum Technology Development Corporation, Petroleum Pipeline Engineering Bureau and China Petroleum Pipeline Engineering Corporation.

After Dar put down violent demonstrations by locals who wanted the refinery and other key installations located around the gas fields, and a bigger say in jobs, construction is reported to be underway, for a project that is, like Kenya’s railway, also funded by the Chinese Exim Bank.

So what is it about the Chinese “model” that has seen it record so much success in snapping up regional infrastructure projects, while at the same time making its firms susceptible to accusations of impropriety or not playing by the rules?

West pitches

“China fronts government departments while the West pitches for its private firms. By the time the private firms get wind of a deal, the two governments will have probably signed a memorandum of understanding (MoU). The Chinese also tend to be more aggressive and competition between state firms tends to be intense,” said a consultant who is currently involved in a project for a Kenyan utility, in which the contractor is a Chinese firm.

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Since 2006, which it declared the Year of Africa, and during which it quadrupled its investment in sub-Saharan African infrastructure to over $7 billion, China has become a major player in this arena, according to a World Bank study titled “Building Bridges: China’s Growing Role as Infrastructure Financier for Africa.”

For China, these projects are seen not just as providing a market for Chinese labour but materials such as steel and cement. Increasingly, they are also paid for with the region’s natural resources like oil, gas and coal.

READ: China struggles against weak global demand, targets exports to E. Africa

Another common denominator in most Chinese deals is the Chinese Exim Bank. Where it trumps most competitors is in the fact that unlike traditional overseas development aid, Chinese financing is not given through a development agency, but rather through this government institution, whose key mandate is to promote trade.

“China has actually been very strategic in how it has supported its companies to look for investments in Africa… a lot of the companies that are participating in regional infrastructure projects are actually state-owned entities,” said Julius Ngonga, partner for transaction advisory services and infrastructure at corporate consultancy firm Ernst & Young.

China also tends to be “accommodative” on governance parameters like human, gender, community and environmental concerns, with countries like Zimbabwe, considered a pariah by the West, getting funding from Beijing.

Another key feature of the Chinese approach is the practice of offering a “full solution,” something almost akin to a one-stop-shop.

For instance, one of the key accusations against CRBC in the Kenyan SGR contract is the fact that it was involved in all aspects of the project: Design, feasibility study, costing and procurement of finance. This has made it susceptible to accusations of “conflict of interest.”