China's role in infrastructure development in Botswana [Part II]

Staff Writer
In this final instalment part of a two part series on the Chinese involvement in Botswana's construction industry *ANNA YI NG CHEN explains the effect the Chinese construction giants have had on the local industry.

One of the key success factors of the Chinese construction firms is their low bidding price. For instance, of the six companies that tendered for the Sir Seretse Khama International Airport project, Sinohydro's submission was the lowest in price. The deputy director of the Department of Civil Aviation acknowledged that Sinohydro won the bid because of its low bid. How are Chinese firms able to do this? Chinese companies adopt a low-profit-margin strategy and use a substantially lower price to undercut other competitors. Firstly, it is a Chinese belief that smaller profits attract bigger turnover, which eventually increases the sum of the total profit. Therefore, they adopt a different budget/cost structure as compared to their foreign competitors. While their European or South African competitors add a 30-50 percent profit margin, the Chinese companies only work on 10-15 percent. However, the narrow margin is also risky in terms of accommodating any mistake/setback in the project. Secondly, all Chinese firms adopt a hands-on management style that not only enhances productivity, but also strengthens efficient cost-saving. Thirdly, the labour cost of Chinese management is substantially cheaper than that of its competitors.

A survey of 35 Chinese construction companies throughout Africa shows that 91 percent of the Chinese companies management personnel came from China, 8 percent were local Africans and 1 percent from a third country. The same survey also reveals that Chinese managers in Ethiopia are paid $700 per month, and those working in China receive $200-400 per month, whereas American managers working in Africa are paid over $10,000 per month.  Last, but not least, as China becomes the world's manufacturing base, Chinese companies take advantage of importing materials and machinery that China can supply at a competitive price. However, the Chinese firms in Botswana indicated that most of their machinery is internationally sourced. When procuring materials, they take into consideration the time constraints of procurement, as well as the cost of transport and custom duties. They will not import unless there are no or limited supplies locally (which includes supplies in the region, e.g. South Africa and other Southern African countries in the case of Botswana).

Hands-on management strategy
As noted above, one of the key differences between Chinese firms and their competitors is that Chinese companies adopt a hands-on management style. Except for the head office of the company, which in Botswana is normally located in the capital city, Gaborone, all management teams for particular projects reside on or close to site. There are several reasons for this. Firstly, it makes for the efficiency and convenience of the management process, as the management team can deal with problems as they emerge on site, thus avoiding any delay or further damage. Secondly, it saves on the cost of transportation and accommodation. Usually, there is a staff canteen for the team and a Chinese chef who also grows some Chinese vegetables to suit Chinese preferences.Thirdly, it is because most of the team cannot communicate in English or any local languages and will surely encounter communication problems should they reside separately, by themselves. The rumour that Chinese companies employ prisoners who are confined to their own camp to save costs is indeed a misperception.

Experience and expertise in building infrastructure in developing countries
Given the demand for infrastructure in a booming economy in the last 30 years in China, Chinese construction companies have gained experience and expertise in operating in a market with a developing economy where time and budget are the common constraints. Moreover, apart from operating in China, many of them have ventured into the international market and have globalised their brand. CSCEC serves as a case in point. The company came to Botswana in 1988 to build the Chinese Embassy and then started to work on more local government projects thereafter. Gaborone now serves as CSCEC's head office in overseeing its projects in Southern Africa, e.g. in Angola and the Democratic Republic of Congo. Besides Southern Africa, CSCEC has projects in East Asia, and North and South America. It won a bid in 2003 to build a $240 million Marriott Hotel in New York. CSCEC is also reported to have built a $17 million conference centre at the University of South Carolina and a school in South Carolina worth $15 million. In 2005 it was reported that CSCEC had sales volumes of $300 million in the United States (US). According to the international ranking of construction companies, in 2008 CSCEC ranked 21st and another five Chinese firms were all ranked in the top 100, as shown in Companies from South Africa and some European countries had long dominated the construction industry in Botswana before the Chinese companies arrived. The Chinese Embassy, the Chinese companies and many Botswana government officials interviewed for this research all agreed that the Chinese construction firms bring competition into the construction industry in Botswana. The government of Botswana thus gained substantial savings in its public infrastructure projects, which in turn bring in broader benefits to the taxpayers of Botswana. The cost saved is estimated to be about one fourth to as much as one third. For the construction industry in Botswana, Chinese firms are seen as an alternative choice to the European or South African firms. Moreover, many government departments in Botswana welcome the participation of Chinese companies. In a country that lacks the capacity to develop its own infrastructure, Chinese firms add value to the competitiveness of the tendering process.

More recently, the presence of Chinese companies in the infrastructure sector in Botswana has been growing, as many South African firms are operating at full capacity to meet the infrastructure demands for the Soccer World Cup in South Africa to be held in 2010. This echoes the findings of a recent World Bank study on infrastructure in Africa, which suggests that there was an annual $22 billion infrastructure backlog on the continent and, consequently, plenty of opportunities for traditional actors and newcomers like China. However, Chinese companies' competitive advantages are also becoming more salient: they offer lower costs and comparable quality standards, and they are prepared to work longer hours and commit to delivering the projects in a shorter time.

Quality is always on top of the agenda when evaluating Chinese projects or products. As an interviewee for this research remarked, people associate China with poor quality work - 'quality from Fong Kong' are the words Botswana people use to describe the substandard of Chinese products or Chinese work. This is, however, a complex issue where perceptions mix with facts, which is further confused by the issue of responsibility. Some of the Botswana officials and researchers interviewed for this research show understanding and regard the issue of standards as part and parcel of the developmental process, echoing the trajectory towards improving outputs as seen in the economies of South Korea and Japan. They feel that Chinese companies will start to realise the problems associated with this issue and improve their quality control.

At the same time, many other people interviewed for the research show deep concern over the issue. They say that the end users' or beneficiaries' interests are severely damaged because of the poor standard of work and the bad quality of cheap Chinese imports. There are indeed many complaints regarding the quality standard of Chinese work/products. For example, a resident in a house built by the Chinese for the Botswana Housing Corporation (BHC) complained that the Chinese contractor used stainless steel pipes instead of the normal brass pipes to save money. When there are problems with the stainless steel pipes, the residents cannot find replacements in the local market, as they are not a standardised item. Complaints like this need further investigation as to who should take responsibility for these problems, i.e. whether or not the developer - in this case, the BHC - clearly specified the technical standards to be met in the tender document. If it did, it has the right of recourse with the Chinese contractor. It is, however, a pity that many complaints on quality are informal and have not been properly documented or investigated. A major issue contributing to this problem or, at the very least, the perception of problems is the fact that no proper evaluation or assessment has been done of project delivery by these particular Chinese firms.

There are fewer quality complaints in road construction, according to the chief engineer of the Department of Road Works, and the same quality rules are applicable to everyone. He said that the percentage of rejects is not high when comparing Chinese work with that of other contractors. In general, the Chinese companies keep a good working relationship with the department and they are willing to take advice and instruction from the government.

The biggest challenges faced by Chinese construction firms in Botswana, according to Counsellor Gong from the Chinese Embassy, is manpower. He said that both the local government and the Chinese government encourage firms to employ local people; however, there is not a sufficient local supply of skilled labour in Botswana.Sinohydro once advertised in a local newspaper to recruit skilled professionals for its airport project, but received no response locally. Chinese firms face the risk of winning the tender but having not enough staff running the project should their Chinese team not be granted visas. Gong explained that it is not Chinese companies' preference to bring in Chinese staff, because if all the costs are taken into consideration (accommodation, international flight, insurance, salary, etc.), the cost of employing a Chinese from China is higher than the salary of an equivalent local employee. However, in general, Chinese staff are more productive and efficient in their work.

According to Gong, the ratio of Chinese employees to local employees among Chinese firms operating in Botswana is between 1:6 and 1:10. There are in total 900 Chinese people working for Chinese SOEs in Botswana, and the total number of local staff amounts to over 5,270, according to the companies' reports to the embassy.The Chinese Embassy requires the Chinese SOEs to conform to the minimum wages of

Botswana. A conflict hence arises: on the one hand, there is a shortage of skilled labour locally, while, on the other, the Chinese companies are always blamed for not employing local people, for bad labour relations and for lack of technology transfer.

Other challenges
Many Chinese firms face the risk of losing money on their projects because they tender in terms of market entry and do not make adequate provision for the costs and risks involved in the projects themselves. The Chinese government-funded finance is a source of finance administered by the Ministry of Finance and the Ministry of Commerce; it is, however, not a guarantee of commercial profit. The companies may lose money even in these government grant projects if a project is not properly managed. They need to understand and assess the market carefully in order not to lose money and to succeed. Chinese companies have also been criticised for their lack of fulfillment of social responsibilities. The Chinese government encourages Chinese companies to give back to the society in which they are working and the SOEs are starting to put corporate social responsibility higher on their agendas. To list a few examples: CSCEC invited two Chinese agricultural specialists to teach the local people about irrigating using recycled waste water in its first local projects as early as the mid-1990s; China Jiangsu donated computers to the office of the Ministry of Foreign Affairs in Botswana and built houses for the local people; while Sinohydro donated generators to the school it helped to build. These Chinese companies might have done a lot, but they did not publicise this properly or communicate it to the public. Chinese companies still need to learn to work with the media on how to manage their public relations.

Interestingly enough, given the high profile that corruption assumes in many discussions of investment in Africa, Chinese officials do not see this as particularly problematic in Botswana. This is due to the robust attitude that the Botswana government has with respect to transparency and accountability, giving rise to a zero tolerance for corruption. Finally, language and cultural barriers cause a lot of misunderstanding in labour relations, because the middle management of the Chinese team on site is usually an individual technician with no or little English, and it is hard for such a person to communicate efficiently with the local workers. The less communication, the more barriers, and hence misunderstandings arise between the local people and the Chinese. A case in point is local people's complaints about the labour practices of the Chinese firms, on the one hand, while on the other, the Chinese firms complain about the lack of understanding of their local staff and the latter's low productivity output.

A new model developed
On May 12, 2009 the Standard Bank Group and the Industrial and Commercial Bank of China (ICBC) announced that they had been mandated as joint lead arrangers to finance the expansion of the Morupule B Power Station project in Botswana. Driven by the Botswana Power Corporation, the $1.6 billion power station is a major Botswana government initiative that involves the installation of four 150 megawatt coal-fired air- cooled units. With the China National Electric Equipment Corporation being granted the $970 million contract to supply and build a significant portion of the power station, ICBC and the Standard Bank Group are arranging a $825 million loan for 20 years, backed by a Botswana Ministry of Finance guarantee and a Sinosure guarantee covering the project's political and commercial risks.

This is the first project of its kind since ICBC became a 20 percent stakeholder of Standard Bank in late 2007. A new funding model is being shaped for infrastructure development in Africa through this project. When a Chinese company is appointed to carry out an infrastructure project that is being guaranteed by a local government, Sinosure is willing to provide a credit insurance/guarantee so that the Chinese bank, ICBC, together with its local business partner, Standard Bank (which has an on-the-ground presence in Botswana as well as experience and expertise in project finance), can work jointly to present a single funding proposal for the project. Facing the challenges of the current (2009) credit crunch and financial crisis, this is a milestone project for both the banks and infrastructure development in Africa. If they are granted the abovementioned financial support, the Chinese construction firms are better positioned in their competition with firms from Europe, the US and South Africa.
Echoing this new trend towards diversification of Chinese support for African infrastructure development is the recent conclusion of an unprecedented deal in Mozambique, in which China Exim Bank agreed to finance a Brazilian company to build the Mphana Nkuwa hydroelectric dam on the Zambezi River. This increasing commercialisation of Chinese financing in Africa reflects the changing nature of the Chinese banking sector since 1994.

Chinese firms involved in infrastructure construction in Botswana have carved out a prominent place in a sector once dominated by South African and European firms. Their methods have contributed to the longstanding development aims of the Botswana state, while the experience they have gained has enabled them to establish a foothold in Southern Africa. At the same time, there are both opportunities and risks in the infrastructure construction industry in Botswana. Chinese companies bring competition to the industry that to a certain extent benefits the local people. At the same time, these firms need to be aware of the risks involved in operating in Botswana and work to ensure that they observe quality standards.

Misperceptions about China and Chinese companies need to be addressed and informed by empirical evidence rather than rumour. Therefore, more fieldwork needs to be done to get first-hand information and enable more objective discussion and analysis in this regard. Research of this kind is extremely helpful in overcoming misunderstandings: for example, one of the Botswana interviewees for this research believed that all Chinese SOEs get government finance and that their staff are paid by the government, and for that reason these companies did not need to make a profit.

Debates around the importation of Chinese labour, material and equipment need to be balanced against the availability of material and local labour, as well as the commercial needs of participating firms. If all sustainable business runs on earning commercial profit, then the Chinese companies will have to budget for their costs in labour, material and equipment, and therefore need to source globally for the cheapest available. Concurrently, who is responsible for the training of local labour and skills transfer? Is time allowed and are channels in place for such transfer? How should the language and cultural differences be addressed along with training and skills transfer? Should the burden of responsibility rest with the host government to set more strict rules on skills and technology transfer when negotiating projects with either the Chinese government or Chinese firms? Projects are initiated by the Botswana government, whose responsibility it is to assess and address the needs of the local people. However, once a project is proposed for Chinese involvement, the Chinese government should also evaluate the project holistically from all perspectives, including its technical practicality and standards, economic feasibility, environmental impacts, and the social responsibilities involved.

It is the responsibility of the local government to put adequate law in place and monitor the enforcement of such law. The evaluation of projects and proper communication between the contractor and the project owner are vital.At the moment, although there are complaints from the end users, such complaints are neither investigated nor documented; therefore, there are no forms of recourse with the Chinese contractors, and more sadly, nothing can be learned from these problems. It also important to investigate and differentiate whose fault it is when there is a problem. With the complaints that Chinese contractors deliver substandard projects and use Chinese products of bad quality, one also needs to investigate the tender document closely to check the particular specifications to find out whether the Chinese are in fact to blame or rather just a scapegoat for the failures of the developer of the project. Finally, Chinese firms also need to assess the local market more carefully and adopt a better management style, otherwise they will suffer the consequences. Although market entry is important, profit generation is the only way to achieve sustainable business development.

Poor assessment of risk cannot only cost the business, but in the long run is damaging to future opportunities and the general reputation of Chinese companies operating in a particular country. As this paper has demonstrated, there are many 'Chinese companies'. They range from Chinese SOEs to private Chinese businesses, while some of these firms are under the direct leadership of the national government and others are under a particular provincial government. Although to a certain extent the state can monitor the business operation of SOEs, it has no or little control over private Chinese businesses. Competition among these different Chinese entities is also a feature of China's engagement in Botswana, along with the potential risks to the reputation of Chinese operations in general posed by their conduct. Recognising this diversity and the fact that it is replicated across Africa are crucial to understanding the changing and deepening pattern of Chinese engagement on the continent.

* This study was released in September 2009. We hereby publish it to give context to the current debate on the Chinese role in the local construction industry in light of the on-going case between Chinese construction giants over the North South Water Carrier Project 2.  Anna Ying Chen is a research associate at SAIIA and a research fellow at the Centre  for Sociological Research at the University of Johannesburg. She has an MBA from the University of the Witwatersrand and has extensive research interests in Sino-African relations and the economic impacts of Chinese aid to and investment in Africa. She initiated the  South Africa-China Economic and Cultural Exchange Centre in 2001 and helped set up the representative office of the China Mining Association in South Africa.




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