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Vol 7 (AAC) No 1

Published 1st November 2013

Africa gets into the driving seat

Governments are negotiating much more robustly with Chinese companies and cancelling those contracts they judge to be poor value

It had seemed that the big-ticket investors in African countries sponsored by China would be free to run rough-shod over investment and other legislation, given the fervour with which African countries sought foreign direct investment. The huge funds involved and the promise of accelerated development initially handed the bargaining advantage to Bejing. Now, it seems, the tide is turning and African governments are upping the ante. Business is increasingly done on African governments’ own terms. This little-noticed trend started some years ago in the oil sector and has gradually gained momentum.

In 2009, Angola’s state-owned oil company, Sonangol, rejected an unprecedented joint bid by Sinopec and its rival, the China National Offshore Oil Company, for a 20% stake in Block 32 held by the United States-based Marathon Oil. Both Chinese oil majors have since failed in further bids, despite Beijing’s more than US$15 billion in credit line to Luanda through China Export-Import Bank, China Development Bank and the Industrial and Commercial Bank of China.

Other African oil-producing countries have since followed suit in standing up to Chinese companies. Libya, for instance, in September 2010 vetoed a $462 million bid by China National Petroleum Corporation (CNPC) for Verenex Energy (AAC Vol 4 No 5, Solid foundations).

Another example is Gabon’s bid to revoke the Obangue oil field licence held by Addax, one of Sinopec’s subsidiaries. Addax has operated in Gabon since 1996; it is the country’s fourth-largest producer and derives 15-20% of its production from Gabon. The licence was revoked due to non-payment of customs duties since 2009 and the flaunting of Gabon’s hydrocarbons and environment code (AAC Vol 6 No 9, Tax troubles but business buoyant). Complaints by the government ranged from ‘bad management’ to ‘instances of corruption,’ ‘shortfalls in the respect of the environment’ and dodging taxes on oil exports. Oil Minister Etienne Ngoubou has also threatened to withdraw Addax’s rights to the Tsiengui oil field.

In September 2013, the Paris-based arbitration court of the Chambre de Commerce Internationale ruled in Libreville’s favour on some claims, but the $1 bn. legal battle continues. State-owned Gabon Oil Company, established in June 2011, seeks participation in foreign-owned blocks and has duly assumed control of Addax’s stake in Obangue. Locals told Africa-Asia Confidential that operations were better run under Chinese management. However, it is a bold move by Gabon and comes after the cancellation of its joint-venture iron-ore development with China National Machinery and Equipment Corporation in late 2010. Gabon will now re-evaluate the reserves and look for new partners (AAC Vol 5 No 4, China loses Bélinga).

Chad shows who’s boss
In August 2013, Chad suspended all CNPC operations there due to oil spills near forested areas (AAC Vol 6 No 11, CNPC suspended). CNPC’s $780 mn. The Djermaya Refinery outside Ndjamena started up in 2011 and is a 60/40 joint venture with the Chadian national oil company, the Société des Hydrocarbures du Tchad, which owns the minority share. The refinery processes 15,000 barrels per day from CNPC’s operations in Koudalwa, producing fuel for the local market. This is not the first time CNPC has had to close its operations. In January 2012, amid a price-dispute, the Chadian government shut down the Djermaya refinery for weeks.

Oil is not the only sector in which African governments are asserting themselves. Beijing may have sighed with relief in 2011, when Zambia’s newly-elected President Michael Sata invited Chinese Ambassador Zhou Yuxiao for tea. During his election campaign, Sata had threatened to evict all Chinese investors. After winning the Presidency, Sata softened his stance but many problems remain

According to official statistics, Chinese companies have invested $2.1 bn., making China Zambia’s third-largest investor. This investment has concentrated on the Copperbelt where – since 2008 – one of China’s African-based special economic zones is situated. China Non-ferrous Metal Company (CNMC) bought the Chambishi Copper Mine in 1998. Relations with Chinese investors in the Copperbelt, which is also Sata’s electoral stronghold, have been strained since an explosion on a CNMC-owned mine in 2005 killed more than 51 Zambian miners.

More recently, in February 2013, Zambia revoked all three mining licences of the Chinese-owned Collum Coal Mine (AAC Vol 6 No 5, Collum Coal Mine takeover). The mine had been plagued by strikes and riots since 2010, largely over pay and working conditions. In August 2012, Chinese managers opened fire on striking miners, injuring thirteen Zambians. In a separate strike, a Chinese manager was killed. The Chinese embassy in Lusaka, rather than support the Collum Coal Mine owners, noticeably distanced itself from the company.

The large corporates are not the only Chinese outfits which are finding life more difficult. Embarrassingly, more than 4,500 Chinese nationals were deported from Ghana for illegal artisanal gold mining in June 2013 (AAC Vol 6 No 9, Miners out but no funds in). Such incidents are also growing more common in telecommunications. In September 2013, Zambia cancelled a $210 mn. closed-circuit television camera contract with China’s ZTE in the wake of claims of corruption (AAC Vol 6 No 12, Controversy over contracts).

The Ministry of Home Affairs had awarded the contract by direct agreement rather than open tender. Shortly after rescinding ZTE’s contract, the government cancelled a $220 mn. digital migration contract initially awarded to Star Software Technologies because of tender irregularities. In another twist, it appears that this was due to rivals Huawei and ZTE, China’s flagship telecoms companies, appealing the award of the contract.

Both companies, while posting stellar growth in Africa, have faced their own troubles. In June 2012, ZTE and Huawei were convicted of corruption charges in Algeria and landed a two-year ban from state tenders, which was far more damaging than the wrist-slap fine of $30,000 each. In addition, three Chinese executives were sentenced to ten years in gaol in absentia for paying $10 mn. in bribes to Algérie Télécom executives via offshore accounts in Luxembourg. ZTE has also been investigated in Nigeria for tender irregularities related to a $470 mn. contract for the National Communications Security System, but the outcome was never made public. Uganda investigated Huawei over suspicions of inflated costs and incorrect cabling in 2010 for its digital migration and fibre-optic cabling projects (AAC Vol 4 No 10, Uganda to miss digital deadline).

Corruption warning
An editorial in China Daily’s African edition this August railed that ‘corruption can damage a company far more than its worst enemies could hope to do’, losing business to rivals and damaging investor confidence. Amid the general praise for South-South ties, African leaders such as South Africa’s former President Thabo Mbeki have on occasion warned against an over-reliance on China. Central Bank of Nigeria Governor Sanusi Lamido Aminu Sanusi was more forthright when, in March, he openly accused China of being the cause of Africa’s de-industrialisation, while imploring African governments to ‘wake up to the realities’ of ties with China.

An increasingly frequent accusation is that Chinese companies inflate the costs of the infrastructure projects to which they are contracted. Part of the problem may be that many such projects are financed by China Export-Import Bank which, like most export credit agencies, makes loans to stimulate demand for Chinese goods and services: China Exim Bank stipulates that the contractor must be Chinese and that at least 50% of the contract procurement must be sourced from China.

Conservative estimates reckon China Exim Bank disbursals to African countries at $50 bn. since 2004. Initially, such financing was hailed as a solution to Africa’s infrastructure deficit, offering ready capital and access to Chinese contractors. But, as with as with all such arrangements that include a tied procurement policy, the system is open to abuse. With their market entry a condition of the project finance and the absence of an open tender process, Chinese companies have little incentive to price competitively, especially on large-scale construction and telecoms projects.

It had long been thought that those African governments which valued Beijing’s friendship would balk at taking punitive action against Chinese companies. That is no longer the case. And, contrary to expectations, Beijing has accepted the penalties and given assurances that they will not result in diplomatic incidents. Yet this is only likely to see more African governments plucking up the courage to hold Beijing’s emissaries to account.

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