Tuesday, February 20, 2018

Guest Post - China in Africa: Much Ado about Investment - Part 1

This guest post, the first of three, is by Dr. Thierry Pairault, research director at France's Centre National de la Recherche Scientifique (CNRS). [1]

Once upon a time... Africa met the good fairy China who became a very significant investor. It's a beautiful story, but how accurate is this fairy tale?

The latest The Africa Investment Report published by the Financial Times is an excellent example of why the fairy tale needs reappraisal. Indeed, it states: "China was the number one source country in Africa by capital expenditure, investing $36.1bn into Africa and accounting for 39% of total investment" (The Africa Investment Report, p. 6.)

This reading aroused profound doubts in my mind as to the methodology used for a document read by many people and widely cited in the press. I shall provide here two flagrant examples of bald misstatements, conveyed by this report.

Fig. 1: The Africa Investment Report Source: Financial Times

A "Chinese-owned" El Hamdania Port?

The first example is taken from page 5 (see Figure 1). We are told that the China State Construction Engineering Corporation (CSCEC) has invested $ 3.3 billion in Algeria in 2016. The information is false. This very large sum refers to the expected construction cost for the deep water El Hamdania port in Algeria.

A Chinese consortium of banks may finance a portion of this project, although no loans have been signed. But this loan if it happens will be taken out by the Algerian government. Neither the CSCEC nor the other Chinese engineering firm involved in the project -- China Harbour Engineering Company, CHEC -- are investors, but service providers on behalf of the Algerian government, which is the sole investor.

Therefore, this $ 3.3 billion project cannot be considered as a Chinese investment in Algeria in 2016, or even as a future Chinese investment project.

Perhaps the confusion comes from the structure of the project, which provides for the establishment of a joint venture under Algerian law between Serport (the Algerian public group acting as a port authority) and the two Chinese construction companies (CSCEC and CHEC): 51% of the shares will be reserved for the Algerian shareholder as required by local regulations on foreign investment. However, in contrast to the case of the Piraeus Port in Greece, where half the port was leased long-term to the Chinese company COSCO, the Algeria port project structure does not grant any ownership right, its guidance is de facto limited to the construction and re-payment period. [2] The Algerian authorities do not currently intend to privatize the public domain.

Why has this structure been adopted? Algeria can't finance the port themselves due to low oil prices and related economic difficulties. If the project does receive Chinese finance, it would be a long-term loan of anywhere up to $3.3 bn. Chinese banks want Chinese companies to participate in a structure that lowers the risk of nonpayment. Chinese firms would not acquire or own the port, but through this vehicle would be in a position to better control and guarantee that the port's profits will go to repay the loans. And in any case, nothing has yet been definitively settled as of February 2018.

Fig. 2: The Africa Investment Report (Financial Times)

A $20 bn Chinese Investment in Egypt?

The second example declares that the China Fortune Land Company (CFLD) will make a $20 bn investment to implement the second phase of the construction site for the new Egyptian capital (Figure 2).

There was indeed an MoU signed in mid-October 2016. However, if one reads this MoU, there is no reference to the value of the work to be undertaken (i.e. no allusion to "$ 20 billion").

Let us look further at the MoU:

"This MoU only signifies the intention to co-operate with the signatory parties, it lays the groundwork for them to carry forward the discussion, it expresses their agreement to continue the negotiations after the signature, to undertake a study of the rights and duties of each party and the content projects. [...] In order to reach a definitive agreement, CFLD (Singapore) Investment Pte. Ltd will conduct a study to establish the negotiability and feasibility of the project either by its own means or by subcontracting it." [3]
In short, by this non-binding agreement, the Egyptian government is only accepting that the CFLD should take charge of the preliminary studies. Most likely, should this project go forward, CLFD will act as a project designer and manager: it will be responsible for organizing the financing of the Egyptian investment.

To sum up, a project whose cost is not yet fixed and which is still at the MoU stage is said to be "22% of total capital investment in Africa in 2016"!

These two examples seriously hamper the conclusions drawn by The Africa Investment Report 2017. Whatever The African Investment Report had in mind and however proactive China may be in Africa, its FDI has not bought Africa yet.

In my second post, I will explain the real trends in China's African Investment.

 [1] Dr. Thierry Pairault is research director at France's Centre National de la Recherche Scientifique (CNRS) and at the Center of Studies on Modern and Contemporary China at the École des Hautes Études en Sciences Sociales (EHESS - School of Advanced Studies in Social Sciences). Please see http://pairault.fr/sinaf/ for more information about his work.
 [2] In Greece there have been two very different distinct operations. The first one was to concede two terminals (not the port) for 35 years (concession, not FDI). The second one was the partial privatization (67%) of the port itself (cession of the public domain to a foreign company, i.e. FDI). In another case in Djibouti, it is called an asset company 資產公司. Its purpose is to guarantee the interests of Chinese companies as long as the foreign government has not repaid its loan. Often, the client would pledge a certain amount of his own shares as in Djibouti and elsewhere. SEPCO3 has a subsidiary specialized in this practice. In Algeria, the problem is the limit imposed by 51%. Regarding Djibouti, see my post at http://pairault.fr/sinaf/index.php/les-afriques-et-la-chine/les-nouvelles-routes-de-la-soie/1248-djibouti-et-les-routes-electroniques-de-la-soie.
 [3] A memorandum of understanding, i.e. a framework agreement (in Chinese: kuangjia xieyi) is not a contract just a statement of co-operation or understanding which is not a legally enforceable arrangement.

1 comment:

  1. At last, decent analyses. Thank you for your excellent work, Deborah