Chinese Contractors in Africa: Insights from a Survey

安德烈格斯丁 (资深经济学家)

经合组织 发展中心

Shanghai – 16 May 2007

2

About this presentation

1. OECD and its partners1. OECD and its partners

2. Contractors’ Survey2. Contractors’ Survey

3. Financial Issues 3. Financial Issues

4. Conclusions 4. Conclusions

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The OECD groups 30 member countries sharing a commitment to democratic government and the market economy. With active relationships with some 70 other countries and economies, NGOs and civil society, it has a global reach. Best known

for its publications and its statistics, its work covers economic and social issues from macroeconomics, to trade, education, development and science and innovation.

Co-operation programmes (49)Co-operation programmes and participation in OECD bodies* (16)OECD Members (31)

* Non-Members not participating in OECD bodies take part in OECD meetings and activitiesupon ad hoc invitations.

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Cooperative Framework

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Works vs. OrganizationsWB OECD Stanford Tsinghua

Surveying Chinese Contractors in AfricaEnhancing Factiva DatabaseClassifying Terms of FinancingProject Coordination

Compilation of Joint PublicationOther Research Reports

Research & administrative: [main], [support]; Final report: [main], [support]

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Methodology

1. Constructed a database of all Chinese financed projects in Africa based on press reports with verification from Chinese sources

2. Interviewed representatives from the top contractors and financial institutions in China involved in Africa

3. Surveyed 32 Chinese contractors in Africa

4. Compared China Ex-Im Bank’s financing model to that of French, Japanese and US bilateral lenders

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Topic on the Survey

Number of ProjectsMarkets/Countries where the contractor has presenceTotal Revenue in AfricaLabor SourceManagement SourceProcurement MethodsFinancial terms and supportThe most potential market segmentsEnvironmental and Social Safeguards for the ContractsOpportunities vs. ThreatsSuccessful Markets and Entry Modes

7

8

Sample

32 contractors

8

9 9

10 109

10A

10B

8

7A

7B

7C7D

13

12

11

General development of Chinese Contractors in Africa

Year 2000 2001 2002 2003 2004

New Contract No.

757 737 584 699 2721

Total Contract Price (Billion US$)

2.08 2.46 2.79 3.87 6.43

Average Contract Price (Million US$)

2.75 3.34 4.78 5.54 2.36

Turnover

(Billion US$)1.10 1.52 1.81 2.60 3.81

Labor Working in Africa

15,177 16,671 28,991 39,473 44,919

Turnover / person(Thousand US$)

7.2 9.1 6.2 6.6 8.5

2000 2001 2002 2003 2004

Total Contract Price Average Contract Price

Turnover Turnover Per Person

Source: Annual Report of Oversea Business Statistics, Ministry of Commerce, 2005

11

12

Procurement Methods

Bidding amongChinese

contractors40%

Internationalbidding49%

Sole sourcenegotiation

11%

12

13

Entry Modes

Entry M odes

0

1

2

2

2

6

8

10

10

13

13

0 2 4 6 8 10 12 14

Others

Joint Venture Project

BOT/Equity Project

Licensing

Sole Venture Project

Joint Venture Company

Local Agent

Sole Venture Company

Strategic Alliance

Branch Office/Company

Representative Office

No. of Respondents

13

14

Labor Source

Labor Source

China48%

Africa51%

Thirdcountries

1%

14

15

Labor Source

0 200 400 600 800

Person/Year

Top Manager

Management Staff1

Technician

Site Engineer

Skilled Labour

Unskilled Labour

Comparison of Chinese and Ethiopian Staff Working in the Ring RoadProject per Year

Chinese StaffEthiopian Staff

Data Source: Peng Mo, ADDIS ABABA RING ROAD PROJECT: A Case Study of a Chinese Construction Project in Ethiopia

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16

Management Source

Management Source

China91%

Thirdcountries

1%

Africa8%

16

17

Comparing the Cost of Managerial Staff

Chinese managers in China - $200 to $400 per month

Chinese managers in Ethiopia - $700 per month

US managers in Africa - $10,000+ per month

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Equipment ProcurementCheap, Disposable, Accelerated Depreciation

For a 3-year project, we can import a foreign bulldozer, for US$300,000, to work for 10+ yrs.

If we do not win the next project, this bulldozer remains idle with high residual value. In contrast, although a Chinese bulldozer can only work 3 years, it is very cheap US$100,000 and completely depreciated by the end of the project.

--A Respondent at CIWEC

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Opportunity

Opportunities

11

222

3333

455

610

1112

1618

0 2 4 6 8 10 12 14 16 18 20

Friendly local regulationsReliable Payment

China's African policyEstablishing local cooperative network in Africa

Open biddingEarly-entered advantage of Chinese firms

Limited local resource for construction in AfricaLow entry barrier for Chinese firms

Management advantage of Chinese firmsLabor advantage of Chinese firms

Cost advantage of Chinese firmsPolitical Stablization in Africa

Technology advantage of Chinese firmsEconomic growth in Africa

Financing sources for constructionNatural resources in Africa

Diplomatic tie between Africa and ChinaNeeds for good infrastructures

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20

Threats

Threats

11111

222

3333

44

555

67

812

20

0 5 10 15 20 25

Competitors' early-entered advantageHigh risk

Increditablity of clientsInternational environment

Project delaysAdvancement /economic growth of Africa

Limitation of inmittance of foreign currencyPoor local productivity and management

Cultural issuesFluctuation of exchange rate

Lack of construction materials and equipmentsRemote sites and poor infrastructure

High costHuman resource issues

Capital appropriationCompetition with other foreign firms

Economic undevelopment, decline and inflationPayment Problems

Health problemsCompetition between Chinese firms

Security problemsPolitical instability and government restrictions

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Financial Terms

Fiancial Term

1

1

3

3

3

4

5

9

10

11

11

16

0 2 4 6 8 10 12 14 16 18

Contractor's own capital

Import credit

Loan without interest

Multilateral financial organization project

Private investment

Local government project

BOT

FDI

Concession loan

Market-based loan

Export credit

Grant project

No. of Usage

21

22

Financial SupportLoans, Guarantees and Bonds

Financial Support-Loans, Guarantees and Bonds

6

1

1

1

1

2

4

4

14

0 2 4 6 8 10 12 14 16

Anonymous Banks

Parent firm of respondent

Sinosure

Standard Chartered Bank

Bank of Communications

China Agricultural Bank

China Construction Bank

China Exim Bank

Bank of China

No. of Respondents

22

23

Financial SupportDebt

Fianacial Support-De bt

5

1

1

1

1

2

2

3

13

0 2 4 6 8 10 12 14

Anonymous Banks

China Agricultural Bank

China State Development Bank

CITIC Bank

Contractor of respondent

China Construction Bank

Chinese Government

Bank of China

China Exim Bank

No. of Respondents

23

24

Financial SupportInsurance

Financial Support-Insurance

5

1

1

1

4

5

0 1 2 3 4 5 6

Anonymous insurance/guarantee companies

China Pacific Insurance Co.

Morocco Insurance Co.

PingAn Insurance Company

PICC

Sinosure

No.of Respondents

24

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SWOT Analysis of the Addis Ababa Ring Road Project

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Strengths Strengths

• Experience in Developing Country

• Low-cost Chinese work force as compared to western countries

• Fiscal stability and low inflation

• Support from Democratic national government

• Mature and suitable technology

• Friendly bilateral relationship

OpportunitiesOpportunities

• RSDP and dramatically increase of Road Construction Project compared to the rest of Africa

• Infrastructure development, including telecommunications

• Increase and stable funding

• Mining and resource development

• Tax incentives (without VAT before 2003)

• Access to regional markets

Weaknesses Weaknesses

• Lack of skilled, semi-skilled labor

• Weak communications / infrastructure

• Bad Construction conditions

• construction materials imported

• Internal managerial problem

• Absence of reliable database for Bidding and cost control

Threats Threats

• Most Funding from abroad

• Increased competition from other nations like Korea, Pakistan and JVs

• Failure to resolve some compensation claims

• Continuing war with neighboring countries

• Riots