If everything happens as planned, the construction of the new East Africa railway signed by Chinese Premier Li Keqiang and Kenyan president Kenyatta earlier this year will formally commence in October. The railway will link the Kenyan port city of Mombasa with Uganda, Rwanda, Burundi and South Sudan and is hoped to rejuvenate the existing but outdated East Africa railway system. According to a report by Bloomberg, China Exim Bank will provide 90 percent of the $3.8 billion cost of the project and Kenya will finance the remainder. One of China’s largest overseas construction contractors, China Road and Bridge Corporation (CRBC) will be the lead contractor of the project. The project has been cheered in Africa as a historical event for East Africa’s regional connectivity and integration, as well as in China for another success by Chinese companies in the railway construction business and the expansion of Chinese railway standards in the continent.
In the past few years, Chinese railway construction companies have achieved great business successes in Africa. At the top of a long list, in August 2014, China Railway 20 Bureau Group Corporation (CR20) completed the $1.83 billion reconstruction of the Benguela railway that connects Angola, Zambia and southeastern Democratic Republic of Congo. Meanwhile, China Civil Engineering Construction Corporation (CCECC) has been building the $4 billion, 740-km electric railway that connects Addis Ababa and Djibouti, as well as the $5.6 billion Chad railway network since 2012. CCECC also secured the $13 billion coastal railway project with the Nigerian Ministry of Transportation in May 2014. CRBC’s success in nailing down the East Africa railway is the latest, but likely not the last success of the Chinese railway construction contractors’ African expedition.
On Track for Success
Chinese companies hold a number of advantages in competing for railway projects in Africa. The TAZARA railway, one of China’s largest ever foreign aid projects, is still remembered fondly by many locals. At the same time, Chinese contractors have developed much more future-oriented commercial aspirations about renovating the East African railway system. Thanks to China’s domestic high-speed railway construction efforts in the past decade, Chinese construction companies have accumulated massive production capacities, experience and technical expertise. With China slowing down domestic high speed railway development, these companies have to look to the international market for business opportunities.
The overseas campaign of these construction companies is actively encouraged by the Chinese government. Beijing’s development finance and commercial loans greatly enhance the competitiveness of the Chinese contractors. In cases such as the East African railway, the projects are financed by loans provided by China Exim Bank, which naturally favors Chinese contractors in the procurement process. Furthermore, the African railway construction business has been boosted by China’s overall policy toward Africa. The emphasis on Africa in China’s foreign policy, epitomized by the frequent visits to Africa by top Chinese leaders, illustrates the importance Beijing attaches to good relations with African nations.
A key component of Chinese involvement in railway construction in Africa has been the adoption of “Chinese standards” in the railways. The different track gauge standards in Africa have been a significant obstacle in establishing the regional railway network. As a result, Chinese companies have managed to convince African governments of the need to accept Chinese technical standards in rail infrastructure. This has promoted massive procurement of Chinese construction materials, equipment, locomotives and trains.
The Risk of Derailment
Still, the construction companies’ experiences in Africa have not been without problems, often of their own making. The vicious competition and bidding war among Chinese companies pose more threats to the profitability of the projects than the bargaining power of African governments or any other local factors. In the case of the East Africa railway project, it is reported that the two leading competitors, CRBC and China Railway Construction Company (CRCC) “had been attacking each other in the local media on an almost daily basis” in the months leading up to the signing of the agreement in May 2014.
In Uganda, a similar campaign by China Harbour Engineering Company Limited (CHECL) to outbid CCECC in a railway project led to a small local political crisis. CCECC originally signed a $1.75 billion Memorandum of Understanding (MoU) with the Uganda government in 2012, which was later undermined by a subsequent proposal of $1.25 billion for the same project by CHECL. According to The Independent: “Since US$1.25 billion is enough for the project, CCECC is being edged out such that those backing CHECL can feast on the US$500 million over and above CCECC’s budget.” CCECC sued the Uganda Transportation Minister Byabahambi who terminated the MoU with CCECC and actually won the case in July 2014. The project remains frozen, so the president of Uganda will need to clean up the mess left by the Chinese competition and his own ministers.
The Chinese government has identified such aggressive competition among Chinese companies as one of the main challenges to China’s further expansion in the African market. Rumors in Beijing are that internal bureaucratic consolidation of resources and competition are already under way, and the recent reorganization of CCECC by its parent company CRCC would support this speculation. But while resource consolidation will go some way to sharpening the competitiveness of specific companies, tackling overly aggressive competition will inevitably require more targeted coordination from the central government.
This article originally appeared in Brookings’ Africa in Focus, on September 26, 2014.