The Chinese loan conundrum: Who is benefitting from Zambia’s phantom growth in construction?

The Chinese loan conundrum: Who is benefitting from Zambia’s phantom growth in construction?


Former President Rupiah Banda and and Vice Premier of the State Council of China Hui Liangyu unveil the foundation stone of the Lusaka stadium. COPYRIGHT:Thomas Lekfeldt /MOMENT

By Kingsley Kaswende

If the figures are anything to go by, the construction industry in Zambia has grown by an average of 18% in the last eight years, translating in over US$3 billion.

However, the unprecedented growth in the sector has caused little or no ripples in the national economy, and has not created jobs on a scale that reduces the burden of unemployment.  Question is: where has the money gone?

That is a question National Council for Construction (NCC) executive director, Dr Sylvester Mashamba has been asking himself, and he has been doing so on account that figures don’t add up.

According to Dr Mashamba, Zambia currently has 13,500 formal jobs in the construction sector out of a population of 13 million people.

It is a drop from the 13,828 formal construction jobs recorded in 2000, and even more insignificant considering that Zambia had 75,000 workers in the construction industry in 1975, when the population was only four million, less than half of what it is now.

At a growth rate of 18%, the sector should ideally almost double every five years, meaning that there currently should be close to 36,000 jobs.

“When economists see these growth figures they assume that jobs have been created but this is not the case (in the construction sector),” Dr Mashamba says.

Overall, the industry has been growing at an average of 18% over the last eight years but this statistical growth has only been a phantom affair. The hypothetical growth has not translated into meaningful income and employment creation for the country despite more than US$3 billion having been spent on major constructions both in the private and public sectors.

In the public sector, Ministry of Finance data shows that 14 out of 46 external loans Zambia contracted between 2005 and 2011 were granted by China through its state-owned banks for the construction major infrastructure projects.

These loans are described as either concessional (a loan with low interest rates paid back over a long period of time, often called a soft loan) or interest free. In total, these loans amount to US$1.16 billion and account for 54% of the country’s total external loan portfolio during the period.

At private sector level, the country has more than 10 modern-concept shopping malls constructed in the last seven years at an estimated cost of US$2 billion, according to former commerce minister Felix Mutati, who presided over the ministry that attracted these investments during the period.

Together, these account for over US$3 billion, and this is a conservative figure that does not take into account other private construction that has taken places concurrently. Despite such high levels of investments, there has been little effect on job creation and monetary contribution to the economy.

Statistics in successive Bank of Zambia annual reports (2000 – 2011) show that at constant 1994 prices, GDP in the construction industry totals K3.5 trillion (about US$700 million) over the period. Compare this with the estimated US$3 billion invested during the period. What happens to the balance of US$2.3 billion? Where is the rest of the money going? What is causing this misalliance in the construction industry?

Paul Golson, the executive secretary of the Association of Building and Civil Engineering Contractors (ABCEC) said: “Not all that money circulates in Zambia. The reason is that foreign companies are doing the works that should ideally be done by Zambian firms. Even jobs that can be done by Zambians are done by them.”

Dr Mashamba was even more forthright: “Several hundreds of millions of US dollars are given by China for Zambian for the biggest construction projects but the money ends up there (in China). Not all of it reaches Zambia. There’s basically no benefit for the Zambian economy. The only few people employed are labourers, who get so little that their money has no impact on our economy.”

Like elsewhere in Africa, China has become a major player in Zambia’s main economic sectors, especially mining and construction. China critics say the country is coming to Africa for its own interests and that it is imposing a form of colonialisation not dissimilar to what the West did in the last century; that by funding and managing many of the country’s major infrastructure projects it is extending its grip on the country’s assets, natural and monetary.

 

This has raised concerns among some Zambian captains of industry, who note that Chinese companies and suppliers of materials are benefitting by dubiously winning tenders for these big, Chinese-funded infrastructure projects — at the expense of local firms.

 

Chinese companies are not being subjected to the proper procurement regulations, which require all tenders above US$8million to be openly floated.

A press query to the Zambia Public Procurement Authority questioning the procedure of awarding of tenders to Chinese firms was unanswered but insiders said the awards were tied to Chinese loan conditions.

While there has been much debate about the involvement of China in Zambia’s development, there has been little inquiry about the nature of the Chinese loans that are funding these big projects and how only Chinese firms are winning tenders.

Reports often suggest that these loans are nothing more than interest free or even “gifts” from the Chinese government. But is it really so clear cut?

While these loans have inevitably helped Zambia start and complete major infrastructure projects around the country, there are concerns over whether the tender process for Chinese-funded projects is fair and transparent, a charge fuelled by the fact that Chinese companies often seem to win the contracts associated with these projects.

Are such criticisms well-founded?

This question and many others were posed to Chinese ambassador Zhou Yuxiao via a press query but despite repeated attempts to contact him via phone, e-mail and visits to his office, the ambassador unfortunately had not by the time of going to press agreed to an interview on the subject.

However, a classified document detailing the conditions of China Exim Bank’s (the Export-Import Bank of China, one of three Chinese state-owned banks and the bank behind many of Zambia’s loans) loans to Zambia clearly stipulates that only Chinese companies are to be awarded tenders and that at least 50% of materials used in the projects must be procured exclusively from China.

 

“Chinese companies shall be selected as the project contractor. And for procurement projects, equipment supply shall come from a Chinese exporter in principle; in project procurement, priority shall be given to equipment, materials, technology or services from China,” the document states.

 

“In principle, no less than 50% of total procurement shall be made in China; equipment, materials, technology or services demanded by the project shall be procured from China in priority.”

A source close to the process of securing loans from China’s Exim Bank, who asked to remain anonymous, says the transaction is very different from typical aid projects.

Firstly, the Chinese company suggests the project to the client in the host country, which in Zambia’s case is usually government. When the loan is approved, the Ministry of Finance signs two agreements: a framework outlining the terms of the loan with China’s ministry of commerce, which is in charge of China’s overseas aid programme, and a loan agreement with China Exim Bank.

The Chinese company then carries out the construction – or provides the service or exports the goods, depending on the deal – and asks for payment from the local client, which could be a state-owned enterprise or government department. The client then applies to China Exim Bank for the funds, which are paid directly to the Chinese company. China normally transfers the money it lends directly to a Chinese company rather than to the host government and so the money does not come to Zambia at all.

This apparently shows why all the billions of US dollars provided for the infrastructure projects have little trickle down effects on the Zambian economy.

Some of the big Chinese players that have recently won major construction tenders funded by Chinese loans include Sinomach, which constructed 1,500 housing units for the Ministry of Defence in Lusaka east at US$365 million;   AVIC International Holding Company (US$244 million Mongu-Kalabo road); Shanghai Construction Group (Lusaka Stadium at US$95 million); AnHui Foreign Economic Construction (Ndola Stadium at Us$65 million),  Sino-Hydro (US$50 million Itezhi-tezhi hydro power plant); China Jiangxi (for various government building worth over US$70 million); as well as ZamCHIN, Jizan and China Geo Engineering, which all won contracts for Ministry of Defence housing in Makeni and Lusaka West.

“Instead of having billions of dollars circulating in Zambia, we have that money circulating in China, and that is where it is making a huge impact, not here,” the source said. “So, all the jobs that are not being created here are probably being created in China.”

It does appear that Chinese loans work to provide three-pronged benefits to China sometimes at the expense of the recipient country, status quo that poses several challenges on job creation and wealth distribution in Zambia. Rather than all the money circulating in Zambia, only a smaller percentage ever reaches Zambia, even though it is Zambia that will eventually repay the loan.

Needless to talk about the fact that these infrastructure projects will require exclusive maintenance during the time the tax payer will begin servicing the hefty loans.

Experts say the maintenance of these Chinese-funded and Chinese-built infrastructure projects shall in future require further importation of spare materials and expertise from China at a cost.

Mr Golson, who is also the director at a Zambia construction firm, Lewis Construction, says that foreign firms are only required to outsource a maximum of 20% of the value of the project to local firms.

He said: “This figure is vague. There are no rules and regulations on what the 20% should constitute. Is it materials? Is it the labour content? No one knows.”

Due to various frustrations over the years, including a failure to compete with Chinese firms that come to do what Zambians already do, ABCEC has lost almost 200 member companies over the years.

“We had 340 members. Now we have 130,” he says.

Firstly, the loans provide a market for Chinese construction products at the expense of local suppliers. Secondly, they provide business for Chinese firms, also potentially at the expense of local firms. Thirdly, they provide employment for Chinese nationals.

“How often do we see Chinese national pushing wheelbarrows?” Mr Golson asks.

But does any of this matter given that the loans often have very low interest rates attached? After all, it could be argued that loans from other institutions carry similar conditions. With the Inter-American Development Bank (IDB) loans, for example, the goods and services for which the loan is being secured can only be procured from “IDB participating countries”.

This means that, rather than restricting procurement to a single source country, the tenders are floated in 48 IDB participating countries and any contractor in these countries wins the tender on merit. The same applies to African Development Bank (ADB) procurement procedures, where tenders are floated in ADB participating countries.

“It is really not unusual both at the international or at the bilateral level,” the unnamed source said. “The problem is that China overdoes it. Countries like India only go as far as saying a percentage of materials can come from India.”

What, then, should countries like Zambia do to correct the situation?

In a paper titled Africa-China relations: a pan-Africanist perspective, Himuvi Mbingeneeko, who runs Diplomacy Namibia, an international affairs website, states that pan-Africanism as an ideology should inform how countries in Africa engage China.

“Pan-Africanism as an ideology has over the years given Africans direction and purpose in their struggles against slavery, colonialism and imperialism,” he writes.

“China is a country that is on the lookout for markets for its cheap products and it has found in Africa such a market. The dumping of Chinese products has the potential of retarding Africa’s efforts towards industrialisation. Therefore, Africa-China relations should complement Africa’s industrialisation efforts as well as regional integration in order to increase intra-Africa trade.”

He adds that Africa must adopt a common position with regards to its relations with China.

“Such common position will force Africa to develop a set of expectations when negotiating with China…,” Mr Mbingeneeko says.

Clearly, as long as the status quo remains, Zambia will continue recording hypothetical figures that do not translate into tangible results, as can been with those in the construction sector.

 

 

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