NEWS: Here is why Chinese construction firms will remain the big builders in Africa

Price-competitive Chinese companies are expected to continue to dominate construction of Africa’s power dams, highways, ports and railways, even as China’s official export credit agency takes a more cautious approach to lending, observers say.

The outlook on China dominating construction in Africa was reinforced earlier this week when state-owned China Communication Construction Company (CCCC) won a US$166 million contract to build a 453km (281-mile) road as part of a megaproject linking Kenya with Ethiopia and South Sudan.

The contract was signed less than a week after Kenya announced that a new seaport being built in Manda Bay in Lamu, on the Kenyan coast, by CCCC, would start operating in June. The company had won the contract to build the first three of 32 berths of the seaport for US$480 million.

China Merchants Group is also building and operating ports in Africa while technology giant Huawei, which dominates the continent’s telecoms equipment supplier market, is helping countries including Kenya and South Africa roll out 5G technology.

In all, China accounted for 31.4 per cent, 121 projects, of the infrastructure projects under construction in Africa last year, according to a report released last month by consulting firm Deloitte. In East Africa, half of the construction activity was undertaken by companies from China, again making it the biggest builder in the region.

W. Gyude Moore, a senior policy fellow at the Centre for Global Development and a former Liberian minister of public works, said much of the success Chinese companies had had in winning open bids over the last decade was linked to their competitive pricing, both in equipment and expertise.

“[They can] deliver high-quality civil works at very competitive prices compared to their Western counterparts,” Moore said

“The amenities built into the project implementation may be significantly lower in the Chinese bid than the Western one.

“Africa is largely a utility and price-sensitive market. If a contractor offers comparable quality at lower prices – they will consistently win bids in this market.”

Zhou Yuyuan, a fellow at the Centre for West Asian and African Studies at the Shanghai Institutes for International Studies, agreed but also said the contracts Chinese companies won were mainly for construction projects, such as transport, power plants and ports, which attracted less interest from Western companies because they were expensive to do and difficult to fund.

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“Chinese companies have their comparative advantage in the speed and quality of projects implementation, which are much attractive to African countries,” Zhou said.

Another factor in the Chinese companies’ favour has also been access to Chinese government financing, with Exim Bank of China, China’s official export credit agency, previously funding many projects in Africa.

Yun Sun, director of the China programme at the Stimson Centre in Washington, said the Chinese government often stepped in to use financing to secure exports of Chinese products and services, but Chinese providers “do not always have to rely on the Chinese government financing to win the contract”.

“Chinese can offer competitive bids – although some argue the quality of their projects is inferior. They can offer faster completion and lower costs – as the Chinese workers have a different set of work ethics and patterns,” Sun said.

In any case, there are signs that Chinese financing to the continent has slowed, with studies showing that Chinese lending to Africa peaked in 2013, the year the Belt and Road Initiative was launched.

In particular, Exim Bank has lately taken a cautious approach in its funding amid debt distress in the continent. However, the slack is slowly being taken up by Chinese commercial lenders including China Development Bank (CDB), Industrial and Commercial Bank of China (ICBC) and Bank of China (BOC).

Between 2000 and 2009, Exim Bank advanced about 71 per cent of all Chinese loans in Africa but in the past decade the lender’s share of total commitments dropped to 53 per cent (US$67 billion), according to data by the China Africa Research Initiative (CARI) at Johns Hopkins University’s School of Advanced International Studies.

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At the same time, CDB, which advanced little finance to Africa in 2000-2009, has become the second-largest financier on the continent, accounting for US$37 billion, or 30 per cent, of all Chinese loan commitments in the last decade, according to CARI data.

“China Exim Bank, the largest financier in Africa and China’s official export credit agency, has reduced its lending in Africa over the past decade, and commercial Chinese banks have increased their exposure,” CARI researchers said.

“We expect this trend to continue as Chinese commercial banks seek to expand their overseas markets.”

Zhou, from the Shanghai Institutes for International Studies, said Chinese companies were also looking into the possibility of more flexible investment as more African countries varied their development partnerships models.

“This is very helpful in a tough business environment,” he said.

Source: SCMP