Our Analysis of Mega-Projects reveals where Chinese Companies enjoy advantages and where they fall short
How can the G-7’s New Global Infrastructure Partnership do things differently from China’s Belt & Road Initiative?
Launched at the June Group of Seven meeting, the Build Back Better World (B3W) plan aims to catalyse billions of dollars of infrastructure investment for low- and middle-income countries.
Introduced in 2013, the Belt and Road Initiative is a cornerstone of Chinese foreign policy, aimed at creating transcontinental networks of hard and soft infrastructure built largely by Chinese firms with Chinese financing. Its thematic and geographic scope is constantly expanding, shape-shifting across domains including health, agriculture and cyberspace, and extending from Europe and Africa, to Asia, the Arctic and even space.
In response to the B3W announcement and in a bid to rally support for Belt and Road projects, China proposed an “Africa Quad” to Germany and France last month, to form a “four-party framework” with African nations. My research on Belt and Road projects in Africa, where China finances 1 in 5 projects and Chinese construction companies accrued $46 billion in gross revenue in 2019, offers some insights on what the B3W might be up against.
We Analysed Five Chinese Mega-Projects
To gain a grass-roots perspective of this phenomenon, in 2018, I led a team of Tanzanian, Indian and Chinese researchers in analysing five Chinese-built infrastructure projects in Kenya and Tanzania.
Four were financed by the Export-Import Bank of China and one by the World Bank. The projects were in the telecommunications, energy and transportation sectors.
We interviewed government officials, project managers, contractors, suppliers and civil society representatives in addition to experts working on the area.
We found that the Chinese construction companies have carefully curated advantages characterised by high speed, enormous scale and low costs. The Chinese firms we studied can quickly mobilise construction equipment across the continent, employ management strategies that provide flexibility to improvise, enjoy access to cheap raw materials and maintain competitive pricing.
These firms also benefit from limited local competition. And high-skilled and inexpensive engineering, an entrepreneurial spirit, access to comprehensive industrial supply chains and financing from China give them a critical edge over other competitors.
The hospitals, stadiums, roads, ports and railways dotted along African cities and towns are evidence of the Chinese construction firms’ successes in Africa. But not every effort goes so well, as the expansion of Zanzibar’s international airport terminal shows. The construction was expected to last 18 months and cost $70.4 million, but this project turned into a nine-year saga with an inflated final price of about $129 million.
What Went Wrong?
Our interviews with multiple stakeholders in Zanzibar, Dodoma and Dar es Salaam helped piece together the story. In 2010, the Tanzanian government and the Export-Import Bank of China signed a 30-year concessional loan of $73 million to upgrade the terminal, and work began in 2011. The main contractor for the project was Beijing Construction Engineering Group.
However, after spending half of the loan amount on building the new terminal, authorities discovered a serious design error. The initial construction did not meet international standards, as there wasn’t sufficient space for large aircraft to land. The Chinese lender suspended funding for the project in 2013.
Project officials attributed the costly mistake to a lack of coordination, and dismissed the Turkish consultant hired for the project. A French consulting company stepped in and offered two mitigation options: complete demolition or significant structural changes.
With millions already spent, Zanzibar officials chose to make structural changes. In 2014, the project secured a further $73.85 million loan from the Export-Import Bank of China. After several delays and a ballooned budget, the new terminal was finally inaugurated in September 2020, at almost twice the original cost.
The expansion of the international airport was expected to bring in bigger aircraft, more cargo and more tourists to the island. The pandemic, however, has all but halted tourism in much of East Africa, calling into question the financial viability of the facility. Revenue projections for the new terminal relied extensively on growing passenger traffic, making it unclear whether Zanzibar will be able to repay its project loans on schedule.
Why B3W Projects May Cost More
We found that in the event of delays, errors or mishaps, Chinese state-owned enterprises can tap into excess capital, make quick decisions and prioritise long-term profits even in the face of heavy temporary losses.
In the case of Zanzibar’s airport, even after the Export-Import Bank of China suspended funding when the errors first came to light, the lead construction firm carried on building. The Chinese contractor invested its own resources into the project “in good faith” and continued working on the airport expansion, even as government officials in Zanzibar were unsure if the Chinese lender would resume funding.
The World Bank-funded project we studied in Dar es Salaam did not face similar challenges. Chinese managers involved in this project pointed out that comprehensive due diligence and social and environmental impact assessments were carried out, along with steps taken to ensure good living and working conditions for employees. But all these factors meant that the project was more costly than those funded by Chinese banks.
The G-7 Emphasis on “values-driven, high-standard, and transparent” partnerships may also escalate the cost of B3W projects. Another major challenge facing the G-7 will be to diversify sourcing, and decrease supply chain dependencies on Chinese manufacturing. Whether G-7 partnerships will be able to coordinate seamlessly across countries to ensure that standards and administrative and financial overheads are competitive remains to be seen.
But the Zanzibar airport case also reveals one big potential pitfall, if Chinese-built projects flounder, the long-term cost of errors for host countries is substantial.
Can the G-7 avoid similar issues with the B3W? Infrastructure development in low- and middle-income countries seem to work best when leaders and donors prioritise host country requirements.
To make the B3W an “affirmative initiative” that meets global infrastructure needs may mean prioritising knowledge transfers, subcontracting to local suppliers and manufacturers, and building local capacity, while making financing & repayment sustainable for borrowers.