Belt and Road explores opportunities in East Africa as geo-political challenges grow
 Doubts grow about the sustainability of China's Belt and Road Initiative in East Africa, where big spending is focused around the newly-built standard gauge railway from the Port of Mombasa to the Kenyan capital Nairobi, 274 miles away.
Recent sustainability doubts are fuelled by the cooling of relations between China and the West, which has dampened China's income from trade, the profits of which largely sustains ambitious mega projects like Belt and Road.
It is in East Africa where Belt and Road activity is most evident. Ethiopia and Kenya are an integral part of the Chinese scheme, primarily due to the established port infrastructure at Djibouti, the manufacturing capability available in Ethiopia and the regional connectivity via road, rail and energy supplies within Kenya.
Already, Chinese imports to East Africa via Djibouti have averaged a growth 33 per cent from 2009 to 2017, from a few hundred million dollars to US$2.2 billion in Chinese goods, which are today distributed throughout the East African hinterland.
But there is also greater awareness that Chinese outward direct investment (ODI) has below average returns, notes London-based private equity firm Actis. (ODI is when a domestic firm expands operations to a foreign country.) To counter both increasing scrutiny from Western countries and to increase financial return, the policy of Chinese ODI is increasingly to focus on ensuring decisions are based on commercial reasons, and that investment entities are not linked to the Chinese government - though this is difficult when it comes to Chinese state-owned enterprises (SOE). Deploying ODI is tempting if firms' domestic markets are saturated.
London's Overseas Development Institute (ODI) made much the same point, and advised East Africa to follow the course taken by Cambodia and Myanmar when assessing the value of financing from China.
"Cambodia's approach focuses on the borrowing aspects," said the ODI analyst. "The country has developed a conservative debt management strategy, borrowing only under specific conditions - only to finance productive infrastructure, and only at very concessional rates. This makes the government confident that Cambodia will not be in trouble because of excessive borrowing.
"A similarly conservative debt management approach could help African countries avoid a proliferation of ‘white elephant’ projects that break the bank," she said.
"Myanmar, meanwhile, has developed a stringent screening process for proposed Belt and Road projects. Each proposal is examined by a high-level committee, led by top figures in government, who are responsible for ensuring that approved projects fit into Myanmar’s own development plans. The government is also creating a ‘project bank’ to screen all potential infrastructure projects," she said.
Africa is one of the most significant beneficiaries of Belt and Road funding. Between 1992 and 2011, trade between China and Sub Saharan Africa rose from US$1 billion to a colossal $140 billion. Foreign direct investment (FDI) has grown at an annual rate of 40 per cent. China has recognised the potential of building business relationships with a continent that has 15 per cent of the world’s population but accounts for only three per cent of global world trade.
"From the Chinese perspective, there is a huge opportunity for companies to work with African countries," said the Actis analyst. "Compared to China’s ageing demographics, Africa is projected to have 50 per cent of the world’s newly added working population by 2050. This aligns well with the needs of Chinese industries looking to export manufacturing knowhow, management skills and particularly funding that an industrialising Africa will need," he said.
Chinese companies are increasingly finding success in infrastructure, labour intensive manufacturing, telecommunications and financial services such as mobile payment services. Chinese investments in Africa are moving from general merchandise trade to setting up manufacturing facilities, from engineering, procurement and construction (EPC) infrastructure projects to building and operating and financing infrastructure and industrial parks.
According to McKinsey there are 10,000 Chinese firms operating in Africa today and 12 per cent of Africa’s industrial production ($500 billion) is already handled by these firms.
But while physical capital like a new port or railway can be built in just a few years, building the human and institutional capital that allow that port to operate efficiently and to contribute effectively to economic and social progress is a slower process, say Actis analysts.
"The two need to go hand in hand, which is why multi-lateral lenders like the World Bank lay such heavy stress on best practice. The senior officials charged with implementing China’s grand plan appreciate these capacity constraints, and appear to be scaling down their ambitions. That’s sensible, but it means Belt and Road will fall far short of its original objectives," they said.
It would be well to remember the Japanese forerunner of Belt and Road 20 years ago when Japanese Prime Minister Keizo Obuchi rolled out a scheme that promised to provide work for Japan’s recession-hit construction sector. The idea was to build Japanese-funded infrastructure projects around Asia. It even included a proposal “never realized” to establish an Asian Monetary Fund to lend on easier terms than either the IMF or World Bank.
From the start the scheme was plagued by bickering over conditions and allegations of corruption. A handful of infrastructure projects were built, but fell far short of Tokyo’s dreams. "Far from cementing Japan’s economic ascendancy across Asia, the project left a legacy of bad blood, and marked the beginning of a financial retreat from around the region that Japan has only recently begun to reverse," said Actis analysts.
All the signs, they say, is that China’s Belt and Road plan will end much the same way. First, the idea that foreign infrastructure projects can absorb a sizeable portion of China’s excess industrial capacity is unrealistic.
For instance, China’s steel mills can turn out some 1.1 billion tonnes a year. Yet even with economic stimulus efforts in full swing, no one expects domestic demand to exceed 700 million tonnes a year. It is hard to imagine China building enough roads, ports and pipelines in foreign lands to use up the extra 300 million tonnes of capacity, especially when you consider that the World Steel Association forecasts demand in the European Union, the world’s largest economy, to be just 150 million tonnes a year.
Let us add to that a growing hostility to China from the West for its patently dictatorial governance at a time when dictatorships are virtually extinct in the West. At an earlier time, when it was not as clear as it has since become, that Communist Party was no longer becoming a governor of Chinese affairs, but instead re-asserting its old role as a director and initiator, the world grew more hostile and suspicious of Belt and Road.
It became increasingly apparent that the state no longer restricted itself to curbing excesses of its growing free market, shedding loss-making SOEs and selling them to the private sector, the West could no longer view Belt and Road in a charitable, even encouraging light.
One is certain that Kenya's standard gauge railway between Mombasa will be gratefully received, but it is doubtful if this and other initiatives in the Belt and Road scheme can achieve their full potential given the present international mood. |
