Chinese have headstart in infrastructure stakes

But after the cost advantage, there are hurdles along the way

With closer bilateral economic and trade ties, China and Africa have been consolidating their new strategic partnership, particularly in infrastructure construction, where Chinese enterprises, with their lower prices and quality products and services, have been playing an active role.

In 2011 China's direct investment in Africa reached $1.7 billion, 58.9 percent higher than the previous year, of which 73 percent went into infrastructure. Africa has become China's second-largest overseas destination for contracted infrastructure construction projects.

Chinese investment in Africa and their economic and trade cooperation have promoted the development of African countries, increased local employment opportunities and delivered them technologies. All these have helped African countries quicken their march to economic independence. But it has not been problem-free.

First, poor infrastructure has hampered the continent's economic and social development. The World Bank says a 40 percent short fall in Africa's production capacity is primarily due to the lack of electricity, water, roads and information technology. And poor infrastructure costs the sub-Saharan region 2 percentage points of annual GDP.

Apart from resource-rich countries such as Nigeria and Zambia that can cover the infrastructure funding gap, other African countries have problems in this regard.

Second, Africa's superior natural conditions mean locals do not need to work hard. Together with relatively poor education, the continent lacks a high-quality labor force, and it is difficult to recruit qualified mechanics in the local market. At the same time, some African countries strictly limit the use of expatriate labor management.

In Egypt, for example, foreign businesses have to form joint ventures to set up a construction company. The foreign equity share is not allowed to exceed 49 percent, and the proportion of non-Egyptian employees in the company must not exceed 10 percent.

Nigeria's foreign labor quota system strictly limits the number of foreign workers to protect local jobs and reduce unemployment.

These countries' work visas are generally very difficult to obtain and are for very short periods. So Chinese enterprises encounter difficulties in their investment projects in Africa every working day.

Third, Chinese enterprises, especially small and medium-sized ones, lack the financial and technical wherewithal to adapt to the investment environment in Africa. Their African market sales and after-sales service system is non-existent. They lack an understanding of the market and need to do something about it.

Chinese enterprises also need to be alert to problems such as the single economic development mode, strict foreign exchange controls and high inflation caused by the risk of currency devaluation in some African countries.

But, of course, there are also many opportunities for Chinese companies.

Upgrading and maintaining infrastructure in Africa needs about $100 billion a year. Since 2007, about two-thirds of the continent's infrastructure has been funded by China. Chinese enterprises often stand a chance of making better returns from these projects as they enjoy a price difference of 20 percent over their Western rivals.

China is by no means a latecomer to Africa. As early as the 1960s, Chinese engineering teams came to Africa to help build large-scale projects, of which the most famous was the Tanzania-Zambia railway in 1976. The Chinese with their cost advantage and experience in large-scale infrastructure projects back home can help African governments find the necessary funds.

The Chinese government has adopted policies and measures that ease the way for Chinese businesses in Africa. Compared with the World Bank and OECD countries, China's aid and concessional loans to Africa are not accompanied with conditions such as increasing transparency and accountability. Some African countries that were regarded by the West as high risks politically have thus opened their markets to China.

In addition, China's financial institutions are increasing their support. From 2001 to 2010, the Export-Import Bank of China provided $67.2 billion in loans to Africa, and the World Bank $54.7 billion. There are no political strings attached to Chinese loans, and they offer more favorable interest rates and flexible repayment arrangements, attractive to those who rely on foreign aid, such as Ghana and Mozambique.

Chinese loans provide an additional source of funding, especially to Africa's growing infrastructure construction needs.

The African infrastructure market is not yet saturated, and the Chinese can take the opportunities by picking investment-friendly countries, then gradually extending to other countries. Efforts should also be made to adapt to the local market and to build quality projects.

The author is professor of economics and vice-president of Chengdu University who specializes in China-Africa trade and investment. The views do not necessarily reflect those of China Daily.

(China Daily 01/11/2013 page7)