East African countries seem to have cracked the Chinese code

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 22 Dec 2015. See link viz. http://businessdayonline.com/2015/12/east-african-countries-seem-to-have-cracked-the-chinese-code/  

Africa can still industrialize. Its relationship with China, if well harnessed, provides it with an opportunity to do so. Labour-intensive manufacturing jobs are leaving China as wages rise. African countries are targeting these. “Industry partnering and industrial capacity cooperation”, a key milestone of the Forum of China-Africa Cooperation (FOCAC) 2016-18 action plan of “The Johannesburg Declaration” is aimed at ensuring the smooth transition of these jobs to the continent. But only a few seem to have the necessary conditions to accommodate them. East African countries – Ethiopia and Kenya in particular – seem better prepared. They have been making significant efforts at ramping up their power generation capacity and electricity grids. The US$ 24 billion China-backed Lamu Port Southern Sudan-Ethiopia Transport (LAPSSET) corridor project being built in Kenya is also gathering pace. Ethiopia, which does not have a sovereign route to the sea, has also partnered rather well with neighbouring Djibouti to overcome this constraint. With Chinese backing, Kenya and Ethiopia have also been building roads and railway lines linking ports. Although China has declared its intention to help other African countries in this regard, these two East African countries seem to have had a good head start. A key commonality they also have is that they are non-resource intensive economies. Their increasing success on the back of China’s help is a counter-argument to well-voiced views of an exploitative intent. That said, China’s interest in Africa is strategic as well as economic. Its continued support for African countries in spite of its economic slowdown buttress this view.

China’s industrial leap came on the back of special economic zones (SEZs). Its “open-door policy” – which started in 1978 – saw it create four (4) SEZs spread across two major provinces by October 1980. More than thirty years later, China would have almost two hundred economic and technological development zones (ETDZs) or industrial parks. Varied countries that have since tried to copy this Chinese model have had mixed results. There is a consistency, however. African countries have performed poorly. Power deficits, corruption and cumbersome bureaucracies have been adduced for why. Within the sub-continent, however, East African countries seem to have done relatively better. Chinese-backed free trade zones can be found in a number of African countries. Prominent ones are the Eastern Industry Zone (EIZ) in Dukem, near Addis Ababa in Ethiopia and the Lekki Free Trade Zone (LFTZ) on the outskirts of Lagos, Nigeria. Although both were approved as “Overseas Economic and Trade Cooperation Zones” by the Chinese commerce and trade ministry in 2007, the former has developed faster it seems.

In November 2015, Ethiopia launched the second of its US$ 475 million Chinese-funded two-line 34km Addis Ababa light railway transport (LRT) system. Under a Build-Operate-Transfer (BOT) contract, construction began by the China Railway Engineering Corporation in December 2011. The current Chinese management is expected to transfer operations to an indigenous team in five years time. An LRT is also being built by the Chinese in Lagos, Nigeria. One of the planned seven lines of the Lagos Urban Rail Network (LURN) – the 27km “blue line” – is expected to be ready before the end of 2016. Construction work, which began in July 2010, is being done by the China Civil Engineering Construction Company (CCECC) under a design and build contract. The project has met with several delays. There is one key difference between the two examples. The former was predominantly Chinese-funded.

There are also interesting contrasts to be made between Kenya’s Mombasa-Nairobi Standard Gauge Railway (SGR) and Nigeria’s Lagos-Kano Railway projects. The China Import and Export (Exim) Bank-funded Mombasa-Nairobi SGR is expected to open commercially in 2017. China’s Exim bank also provided US$ 1 billion part funding for the estimated US$ 8 billion Lagos-Kano railway project. In August 2015, Nigeria’s current president revealed that a substantial part of the loan was diverted to other projects by the preceding administration. The project stalled consequently, albeit the Kaduna-Abuja section has been completed.

There is clearly one key characteristic of the relatively successful East African projects highlighted above. Chinese funding was provided directly to a Chinese company or consortium to build, operate and transfer the projects, thus reducing the risk of diversion or funding shortfalls. Comments by Nigerian officials ahead of the FOCAC summit in December 2015 suggest there was a desire to restructure the country’s infrastructure arrangements with China along these lines as well. In a show of confidence, Kenyan authorities actually secured an additional US$ 1.5 billion Chinese loan at the summit for an extension of the SGR from Nairobi to Naivasha, a rift valley town where industrial parks are planned. The 290MW Olkaria geothermal power plants are located in Naivasha. Other industrial parks are planned along the SGR route by Kenyan authorities. This strategic approach is admirable.

On a trip to China a few years ago, a Chinese man nodded repeatedly during a conversation and one erroneously thought he was showing agreement. It turned out our views couldn’t be more different. Although, the above examples do not qualify as a robust sample, it does seem Chinese-funded projects that are constructed and operated by Chinese companies are completed on target. It is not likely the Chinese would make this point all too clear in negotiations with their African counterparts. Labour on these projects is also largely Chinese, unfortunately. But that is common to almost all Chinese-sponsored projects on the continent. And even as Chinese authorities seek to change this practice, they are entrenched. Thus, progress would likely be slow. In the meantime, African authorities have to make the best of what is clearly not ideal. That pragmatism may be the reason why the East Africans have gained more from their relationship with China.

Also published on my company’s website accessible via the link viz. http://macroafricaintelligence.com/2015/12/23/thematic-east-african-countries-seem-to-have-cracked-the-chinese-code/ 

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