China as Africa’s New Overlord

 

Africa is becoming the new battleground for the global infrastructure race. China is winning, and the West is starting to sweat.

 The next time you're in Africa, look around. Chances are, you will see something that was built by the Chinese. In plain terms, China has become the leader in constructing large projects in Africa. Chinese companies, supported by Beijing, have transformed the transportation system on the continent. They have built railways connecting cities, shortened travel time in Congo, and improved numerous airports. In addition to these achievements, China has constructed skyscrapers, bridges, dams, and ports, making a significant impact in Africa.

However, things were different in the past. In 1990, American and European companies dominated the construction industry in Africa, securing more than 85% of the contracts. Chinese companies were not even considered. But now, Western companies are struggling to compete in this rapidly growing market. The World Bank reported that by the year 2040, the need for money to build infrastructure will be more than $300 billion every year. Africa's population is growing faster than any other continent, and people are migrating to cities at a rapid pace. These factors will drive the demand for infrastructure. Chinese companies currently account for 31% of all infrastructure projects valued at $50 million or more in Africa, up from 12% in 2013, while Western companies are responsible for only about 12%, compared to 37% in 2013, according to Deloitte, a consulting firm.

This shift in favor of Chinese companies concerns not only shareholders of Western firms but also their governments. Western governments view China's increasing economic influence in Africa as a threat to their own strategic and diplomatic power. China's Belt and Road Initiative (BRI), which finances infrastructure projects, including ports and roads, has raised concerns that it may lead to China establishing naval bases in Africa, similar to the one in Djibouti. Western governments are also worried that Chinese investments in African mines could give China control over strategic minerals like cobalt, which is used in electric cars. Recently, the United States has prioritized competition with China in its foreign policy. Both the US and Europe have been trying to provide African countries with alternative financing options to the Belt and Road Initiative. European leaders, for example, earmarked over  €150 billion ($170 billion) for investment in African infrastructure during their  EU-Africa summit in February 2022.

Western governments are urging their companies to invest more and undertake more projects in Africa. However, this is challenging because Western construction firms feel disadvantaged from the beginning, primarily due to China's significant financial resources. Between 2007 and 2020, Chinese development banks provided $23 billion for African infrastructure, while all other development banks combined only contributed $9.1 billion, according to the Centre for Global Development, a think-tank in Washington (See figure 1 below).

 Table 1

Finance for Sub-Saharan Africa from Bilateral Development Finance Institutions

(2007 – 2020) 

Bilateral Finance Institution	Amount ($)
China EXIM Bank	$20 Billion
China Development Bank	$2.50 Billion
Oversea Private Investment Corporation (US)	$2.10 Billion
Japan’s Bank for International Development	$1.70 Billion
KfW (Germany)	$1.60 Billion
FMO (Netherland)	$1.40 Billion
Development Bank of Southern Africa	$1.10 Billion
Proparco (France)	$0.90 Billion

               Source: Culled from The Economist, 2022.

Pluckier, Riskier, and Hilariously Reckless

Chinese lenders in Africa are generally braver than Western lenders. Sometimes they take big risks. When Kenya's president, Uhuru Kenyatta, wanted $4.7 billion to build a new railway, the World Bank said it would never make money. But Chinese lenders supported the project. Unfortunately, the railway has lost over $200 million. Chinese companies are also tough when it comes to making deals. They have made agreements in Ghana and Guinea, where they give loans for roads in exchange for valuable resources like bauxite. A study by AidData, which is part of William & Mary University, found that Chinese lenders often put tough conditions to make sure they get their money back.

Western companies also complain that their governments don't offer as many benefits. In 2021, China said it would use its own money to build new foreign ministries in Congo and Kenya. They have also paid for other important buildings, like parliament complexes in Sierra Leone and Zimbabwe, and presidential palaces in Burundi, Guinea-Bissau, and Togo. Because of this generosity, it's not surprising that some African governments prefer Chinese companies. On the other hand, Western governments often use their aid for less glamorous and sometimes unpopular things, like educating girls.

One important thing is that Chinese companies are known for building things quickly. They get money from Chinese banks easily, and some projects in Africa look like copies of ones built in China. This probably saves time because they don't have to make new plans. For example, the stations along the new railway between Ethiopia and Djibouti, which China built, look like they were taken from China. They might be able to work fast by not doing things like checking the impact on the environment.

Because of this, Chinese companies can finish a big project before the next election. This gives the current leaders a chance to take pictures cutting ribbons right before people vote. Western companies are usually not as quick. Someone from a European engineering company said that it can be hard for Western companies to even start a project.

It is also worth noting here that Chinese companies often win contracts because they are more competitive, says a study by Brookings, an American think-tank that looked at projects financed by the World Bank. Western companies complain that some Chinese projects are poorly built, and there are stories of roads that fall apart after a few years. However, another study by the China-Africa Research Initiative at Johns Hopkins University found no difference in the quality of work between Chinese and Western contractors on infrastructure projects funded by the World Bank. The World Bank is strict about fair bidding and high construction standards, so companies bidding on its projects need to be on their best behavior.

In many cases, Chinese companies get the work because there is no competition. Many Western companies avoid Africa because they see it as too risky. And indeed, there are risks. Property rights are often weak, and there is a lot of fraud. One Western manager described trying to buy land and later finding out that the people they were negotiating with didn't actually own it.

These challenges explain why many infrastructure projects fail before they even begin. McKinsey, a consultancy firm, estimates that 80% of infrastructure projects in Africa never progress past the planning stage, and only one in ten successfully secure the necessary funds.

Corruption is another major problem. In the past, Western companies would often pay bribes to win contracts in Africa and other places. A survey conducted in 1999-2000 found that construction companies spent 1-2% of their revenue on bribes, according to a World Bank report by Charles Kenny. He also noted that in 2005, 40% of international construction companies reported losing contracts because a competitor had paid a bribe.

Today, anti-corruption laws in the United States and Britain are stricter and apply regardless of where the bribery occurs. Western companies are now more reluctant to pay bribes, although some still get into trouble. For instance, in 2017, Halliburton, an American company, was fined $29.2 million for violations in Angola, and the World Bank has imposed sanctions on a subsidiary of Bouygues, a French construction company, due to irregularities in contracts.

However, a Western project manager complains that some African officials don't care about anti-corruption laws. They still expect bribes in the form of "brown envelopes" for ministers and permanent secretaries. The leader of a Western mining company is frustrated because Chinese firms have more freedom to operate. They can work without licenses and even without permission from the government in places like the Central African Republic, as long as they have paid off local warlords.

Some Western companies still try to compete for business in Africa. However, not all of them have positive experiences. In 2017, Bechtel, a large American construction company, won a $2.7 billion contract to build a major road in Kenya. But then the Kenyan government changed its mind and asked for a loan instead of upfront payment for the road. When the American government refused, Kenya lost interest in the project.

Another example involves GBM Engineering, a British company that won a $2 billion contract to build a dam in Kenya. They got the contract because five Chinese competitors failed to submit their bids on time. However, six months later, GBM's contract was canceled due to allegations of Chinese pressure on the government board that awarded the tender. GBM appealed five times, but their appeals were ignored. The case is still going through the courts, and the dam, like Bechtel's highway, remains unbuilt.

Not all Western executives are disappointed, though. More and more French companies are now working together with Chinese companies. Initially, these relationships were informal, with French and Chinese firms separately working on the same project, often with the French companies handling the more complicated tasks.

In recent times, the collaboration between France and China has become more formal. For example, CMA CGM, a French logistics company, has entered into partnerships with firms like China Harbour Engineering Company. Sometimes French companies want Chinese partners because they can provide state-backed financing that is not available in Paris. In other cases, formal collaborations emerge after years of informal work together. According to Deloitte, in 2020, around 15% of all major infrastructure projects were being built by consortia consisting of both Western and Chinese firms.

China's Chuckles

China's involvement in African infrastructure is a double-edged sword. It's like a storm that brings both destruction and blessings. On one hand, it has burdened countries with overwhelming debt and fueled corruption, creating projects that will never make a dime, just like Kenya's unprofitable railway. However, as time goes by, the scandals will fade away, and the debts will be left unpaid. What remains will be China's lasting legacy: the much-needed roads and ports that Africa desperately requires for its economic growth.

Interestingly, China's actions are unintentionally attracting Western money by igniting the fears of Western leaders, like throwing fuel on a fire. The British government, for example, recently announced that its development arm would invest $1 billion in Kenyan infrastructure. Additionally, a British company will construct a brand-new railway hub in central Nairobi. Furthermore, the g7 group of countries launched the Build Back Better World initiative last year, shamelessly imitating China's strategy. All of these developments should create more opportunities for construction companies from various nations, whether they are Western, Chinese, or, if luck is on their side, even African firms.

 

Notes

 

Albert, E. (2017, July 12). China in Africa. Retrieved from Council on Foreign Relations: https://www.cfr.org/backgrounder/china-africa

Cassin, R. L. (2017, July 27). Halliburton Pays $29 Million to Settle Angola FCPA Offenses. Retrieved from The FCPA Blog: https://fcpablog.com/2017/07/27/halliburton-pays-29-million-to-settle-angola-fcpa-offenses/#:~:text=Halliburton%20Company%20paid%20the%20SEC,friend%20of%20an%20Angolan%20official.

Deloitte Global. (2019, March 22). If You Want to Prosper, Consider building Roads: China’s Role in African Infrastructure and Capital Projects. Retrieved from Deloitte Global: https://www.deloitte.com/global/en/our-thinking/insights/industry/government-public-services/china-investment-africa-infrastructure-development.html

GCR. (2018, April 10). British Engineer Wins $2bn Kenya Dam After Legal Wrangle. Retrieved from Global Construction Review: https://www.globalconstructionreview.com/british-engineer-wins-2bn-kenya-dam-after-legal-wr/

Gelpern, A., Horn, S., Morris, S., Parks, B., & Trebesch, C. (2021). How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments. Retrieved from Aid Data: https://docs.aiddata.org/reports/how-china-lends.html

Kenny, C. (2007). Construction, Corruption, and Developing Countries . World Bank Policy Research Working Paper , World Bank. Retrieved from https://documents1.worldbank.org/curated/en/571281468137721953/pdf/wps4271.pdf

Lakmeeharan, K., Manji, Q., Nyairo, R., & Pöltner, H. (2020, March 6). Solving Africa’s infrastructure paradox. Retrieved from McKinsey & Company: https://www.mckinsey.com/capabilities/operations/our-insights/solving-africas-infrastructure-paradox

Reuters. (2022, February 10). EU Earmarks 150 Billion Euros for Investment in Africa. Retrieved from Reuters - Africa: https://www.reuters.com/world/africa/eu-earmarks-150-billion-euros-investment-africa-2022-02-10/

Stein, P. (2021, August 25). China in Africa: The Role of Trade, Investments, and Loans Amidst Shifting Geopolitical Ambitions. Retrieved from Observer Research Foundation: https://www.orfonline.org/research/china-in-africa/

The Economist. (2022, February 19). Chasing the Dragon: How Chinese Firms Have Dominated African Infrastructure. Retrieved from https://www.economist.com/middle-east-and-africa/how-chinese-firms-have-dominated-african-infrastructure/21807721

The Zimbabwean. (2023, June 22). How Zimbabwe’s new Parliament Symbolises China’s Chequebook Diplomacy Approach to Africa. Retrieved from https://www.thezimbabwean.co/2020/01/how-zimbabwes-new-parliament-symbolises-chinas-chequebook-diplomacy-approach-to-africa/

Warters, N. (2021, April 28). AidData’s Work on Chinese Lending Study Draws Attention from Governments and Media Outlets Worldwide. Retrieved from W&M News Archive - AidData: https://www.wm.edu/news/stories/2021/aiddatas-work-on-chinese-lending-study-draws-attention-from-governments-and-media-outlets-worldwide.php

Wiegert, J., & Schneidman, W. (2018, April 16). Competing in Africa: China, the European Union, and the United States. Retrieved from Brookings Institution: https://www.brookings.edu/blog/africa-in-focus/2018/04/16/competing-in-africa-china-the-european-union-and-the-united-states/