Morupule B aftertaste sours China�s new push into African energy (Pt I)
Baboki Kayawe | Friday August 18, 2017 15:52
In recent weeks, the Botswana Power Corporation (BPC), the state-owned electricity utility, has been at the centre of activity in the procurement sector, with the release of two eagerly awaited Requests for Expressions of Interest (REOI).
The first, an REOI for the establishment of a joint Venture with the BPC towards a 100-megawatt solar power facility, was inundated with bidders, receiving 166 responses from across the globe within the few weeks it was open. Chinese companies dominated the list.
The second REOI, for the development of 20 hybrid mini power stations in isolated villages as part of plans to boost electricity access, equally received a robust response, with 111 number of bids, again dominated by the presence of Chinese firms.
One name among the bidders stood out, however. China Machinery Engineering Corporation (CMEC) a 39-year-old multi-billion US dollar construction and engineering company with completed power projects around the world, features on the list of bidders for both REOIs. Elsewhere in Africa, CMEC, a subsidiary of a Chinese state-owned entity, has built and partially owns two power plants in Nigeria.
The multinational company ’s name has become a household name in Botswana as CMEC is currently in negotiations with the BPC to purchase the 600MW Morupule B power station, the country’s single largest and most infamous public infrastructure project, which is yet to operate at full capacity since construction officially ended in 2012.
Early in June, acting permanent secretary in the Ministry of Mineral Resources, Green Technology and Energy Security, Obolokile Obakeng stunned a parliamentary audit committee when he revealed that from the original construction cost of about P11 billion, Morupule B was more than P4 billion over- budget and still not fully functional.
The cost overrun, according to a Root Cause Analysis conducted by an American firm in mid-2014, was linked largely to construction faults committed by another Chinese state-linked contractor, China National Electric Engineering Corporation (CNEEC). A December 2016 audit by the World Bank, which contributed a US$136 million loan to the project, found that CNEEC should never have been appointed Morupule B contractor. The World Bank found that due to a last minute twist in the design desired for Morupule B, CNEEC was awarded the contract even though the company had no experience in the Circulating Fluidised Bed (CFB) boiler technology eventually chosen for Morupule B.
“This discrepancy regarding the technology of the plant created a major risk in the selection of the contractor, as the firms prequalified for one technology, were invited to bid for another,” the World Bank noted.
“Given the central role of the contractor in delivering the overall project, the lack of contractor’s experience with CFB technology created too high a risk for the project.”
The result was frequent and costly faults and bursts of the boilers, which the World Bank said were responsible for nearly all the outages at Morupule B over the years. By comparison, the turbines and generator sets, the Bank said, have performed satisfactorily.
The billions in overruns include remedial work on the plant, as well as the costs of electricity imports to plug the gap created. They, however, do not include losses the economy suffered between 2012 and 2015 as a result of rolling power shortages.
Morupule B was built through an US$825 million loan from the Industrial and Commercial Bank of China (ICBC) to the BPC, guaranteed by government and repayable over 20 years. The BPC is repaying at a rate of close to P500 million a year, while also spending P2 billion last year in power imports, a situation that has left the Corporation entirely dependent on annual multi-billion Pula subsidies from government.
An energy sector insider summarised the situation this way: “Government borrowed from the Chinese to pay the Chinese to build a power station that did not work and government is now selling it back to the Chinese for a song, to then buy the power back at a premium.”
Tensions rising
The news that CMEC, a sister entity to CNEEC under the state-owned titan, Sinomach, has entered into exclusive talks with an inter-ministerial task force for the sale of Morupule B, has raised tensions between Botswana and China, which had already been strained as a result of the faults and blame-apportionment associated with at Morupule B.
In Parliament, politicians have come out strongly against what they view as the surrender of the sacred sovereign and strategic interest of electricity self-sufficiency to a foreign government, through a process that has already cost taxpayers billions of Pula in cost overruns.
For Leader of the Opposition in Parliament, Duma Boko, the Morupule B deal is unpalatable.
“Government acted grossly irresponsibly by selling Morupule B. It is a grossly irresponsible decision to dispose of government assets without any plan or guideline,” he says.
The Botswana Congress Party, the second largest opposition party in Parliament, has filed a legal suit to stop the sale, while within the ruling party itself, there has been discontent.
“It looks like the Executive has the power to sell national assets with impunity and without consultation,” ruling party legislator, Ignatius Moswaane, told a local weekly publication.
“The question is; , will we not wake up one day to find that our dams and diamonds have been sold to private companies?”
Critics of the deal also point to the contract between government and CNEEC, which contains a defects notification period during which the Chinese contractor is obligated to repair agreed defects at its own cost. The repairs, which are due to start soon and last four years, will cost US$120 million, according to BPC CEO, Stefan Schwarzfischer.
Commentators have thus questioned why government does not simply allow the Chinese to repair the power station, bring it to full operation and hand it back to government, instead of selling it “faults and all” at a discount to CMEC, whose own repair work will not be supervised by government.
The critique appears justified as Schwarzfischer has already revealed tensions between the BPC and CNEEC over the remedial work. By January this year, a stalemate had emerged between the two parties, which was only broken in June.
“They wanted to introduce a certain design (for the boilers) and we said we did not approve because it had never been used before in the world,” Schwarzfischer explains.
“Also, the suppliers they wanted to use had never produced high pressure boilers for CFB. We said we wanted proven technology, already being used globally. We also said the choice of suppliers should not be limited to just China, but worldwide.
“What we want is of a higher quality than what they wanted.”
Privately, highly placed sources at BPC believe the Chinese contractor was playing for time, in order to reduce the costs of remediation involved, while also holding out for the CMEC deal to conclude, at which point there would be no obligation to the BPC in terms of technology or supplier choice.
Barring any further interruptions, according to Schwarzfischer, talks with CMEC, if successful, will result in the handover of the power station early next year. At that point, China will officially have equity in the Botswana energy sector, more than three decades after first entering the local market.
A troubled history
Since Chinese contractors first set foot in Botswana in 1985, their presence in public works exploded in the last years of former President Festus Mogae’s tenure and ballooned between the 2009 and 2011 budgets, where government ran deficits totalling P16.01 billion on major public works including Morupule B, water works and road construction.
From a sole single company, China Civil Engineering Construction Company (CCECC), which arrived in 1985 to rehabilitate a railway line under a Chinese government grant, Botswana by 2009 was home to 16 Chinese State-Owned Entities (SOEs), mainly involved in the construction and energy sector.
The explosion has been triggered by, among others, Botswana’s openness to Chinese competition in sectors other African states have ringfenced for citizens, the allure of the rapidly expanding local economy and the country’s solid fiscal position which has allowed Chinese financiers such as ICBC to anchor the arrival of Chinese contractors.
It was the global recession of 2009 however that provided the single biggest boost to Chinese turnkey involvement in Botswana, as government ran multibillion deficits to sustain public works and thus support economic activity.
“Government’s challenge in 2009 was the recession, which tightened mineral revenues, while at the same time, it had to embark on the massive Morupule B project, dam construction and others, which were needed for the economy,” one public finance expert said, requesting confidentiality for professional reasons.
“There was no better time for the Chinese to come in. They offered ridiculously low prices for projects and had the added benefit of offering government loans from their banks at very concessional rates. They also promised speedy project delivery.
“Government thus believed she could cut costs in a recession, reduce the cost of borrowing and still delivery quality projects on time. For many projects, this simply did not happen and the costs actually spiralled.”
Mineral Resources, Green Technology and Energy Security minister, Sadique Kebonang explains the situation more succinctly.
“I should say this as a matter of fact that one of the attractive things about the Morupule B project then was that the Chinese government funded it through their banks, with a small portion coming from the World Bank,” he explains.
“That gave impetus to the relationship. The Chinese were not only coming as contractors and we also did not have to look for money elsewhere. That explains why we did not go to say, Murray and Roberts or others who would say ‘we need the money upfront and these are the costs’.
There is another way in which the Chinese sweetened the Morupule B deal and gained a foothold in the local energy sector.
“Most Chinese companies are state owned and the state has a say in terms of how these companies operate and the quality to be expected,” Kebonang says.
“When we ran into problems, the impasse could be resolved by engaging with the Ambassador to say ‘we got a loan from you and a company from your country is doing the work, but we are not happy with the workmanship’.
“Therefore, instead of going for arbitration, these issues are resolved at a shareholder level through dialogue.
“Look at Norilsk Nickel. They were going out aggressively to decampaign us in our dispute and it’s different when you are dealing with a state-owned company. There’s more willingness to talk, rather than fight.” Norilsk Nickel is a Russian mega-corporation and a former equity holder in BCL Mine, a major copper and nickel operation in north-east Botswana. Government and Norilsk Nickel are presently engaged in several legal suits and arbitration over a disputed share sale.
In June 2015, at the height of Morupule B’s troubles and with a deadlock having developed between the BPC and its contractor, Foreign Affairs minister, Pelonomi Venson-Moitoi jetted into Beijing for diplomatic discussions, which ultimately laid the ground for the pending remedial work funded by CNEEC.
Why Botswana, why Africa?
Despite the souring of diplomatic relations between Botswana and China over Morupule B, Botswana is a high target for Chinese players looking for equity in the African energy sector. Companies such as TBEA Xinjiang Sunoasis, China Harbour Engineering Company, China Construction Power and Environmental Engineering Co Ltd, Jinko Solar, Yingli Energy China Co. Limited, Chint Electric Corporation and several others are eager for equity space in Botswana’s energy sector, as evidenced by their bids for the BPC’s two outstanding REOIs.
In the energy sector, the interest in lighting up the Dark Continent from an equity standpoint, is not limited to Botswana alone. In fact, the high interest in Botswana is replicated across Africa, where Chinese firms are competing aggressively for space in the energy and construction space, eager to latch onto the much-lauded African growth narrative.
According to a June 2017 McKinsey & Company research report, since the turn of the 21st century, China has catapulted from being a relatively small investor in Africa to becoming the continent’s largest economic partner. Since the turn of the millennium, Africa-China trade has been growing at approximately 20% per year with Foreign Direct Investment (FDI) growing even faster over the past decade, at a “breakneck” annual growth rate of 40%. McKinsey researchers estimate that at present, at least 10,000 Chinese-owned firms are operating in Africa, with about 90% of them privately owned. However, the SOEs “tend to be bigger” and more dominant in the “energy and infrastructure” space where they have the balance sheets and labour to compete effectively. McKinsey researchers believe that the current US$180 billion in revenues Chinese firms are making annually in Africa, will rise to US$440 billion by 2025 and expand away from the current focus on infrastructure, manufacturing and resources sector.
“In this accelerated growth scenario, not only do the three established industries of Chinese investment grow faster than the economy, but Chinese firms also make significant forays into five new sectors: agriculture, banking and insurance, housing, information communications technology and telecommunications, as well as transport and logistics,” the report notes. One easy indicator of the revenues to be had from Africa can be seen in the books of the Chinese SOE finalising the purchase of Morupule B. According to CMEC’s 2016 Annual Report, its International Engineering Contracting division contributed 59% of its revenues amounting to RMB21 billion (US$3.1 billion). Within the International Engineering Contracting division’s revenues of RMB12.4 billion (US$1.9 billion), power contracting projects accounted for 58%.
“Africa has traditionally been our market with a competitive edge and (it) is now in the early stages of industrialisation, with pressing need for infrastructure construction, particularly in the areas of power plants, transportation and industrialisation development,” the Annual Report reads.
It is telling that out of the 48 locations CMEC is active in globally, Africa houses its largest workforce outside of China and Asia.
Not everything is rosy however. The McKinsey report’s researchers caution that the debt-financing approach China has been using to carve a swathe in Africa, is reaching its tipping point. The Chinese-driven infrastructure boom in Africa in the last decade has led to “many African countries” reaching their debt ceilings and defaulting on the concessional loans received from Chinese banks.
Chinese banks such as ICBC, China EXIM Bank and China Development Bank are noticing more red figures on their books from African states, where the vicissitudes of global commodity markets have left treasuries threadbare. “The government of Zambia has even stopped paying contractors for work already performed, with some local contractors telling us they have waited up to eight months for payment,” McKinsey researchers found.
*This work was produced as a result of a grant provided by the Africa China Reporting Project managed by the Journalism Department of University of Witwatersrand. Continues next week