As excitement over World Cup competition in Brazil ebbed in mid-July, Latin American politicians were still busy playing host to China’s President Xi Jinping, who dashed through Brazil, Argentina, Peru and Venezuela signing deals for about 150 projects worth some $70 billion. They included construction of a metro rail in Brazil and several projects in Argentina worth $7 billion.
"We know that cooperation with China has not brought us debt, but greater development," Venezuelan President Nicolas Maduro said after shaking hands with the Chinese president over a bouquet of deals, including a $700-million gold exploration project and a cash offer of $4 billion.
According to the China-Latin America Finance Database (a collaboration between the Inter-American Dialogue and the Global Economic Governance Initiative at Boston University), since 2005, China has provided more than $100 billion in loan commitments to Latin American countries and firms. In addition, it adds, China's loan commitments of $37 billion in 2010 were more than those of the World Bank, Inter-American Development Bank and U.S. Export-Import Bank combined.
Xi’s Latin American success suggests that China is extending its African romance to other parts of the globe. It follows a surprise decision by Uganda to invite only a Chinese contractor to bid on an $8-billion rail project in May while excluding U.S. companies from competing.
These successes might seem surreal to western contractors, who regard Chinese construction services providers (CSPs) as backward entities lacking sophisticated project management and technological capabilities. What is more, the Chinese government consciously keeps them isolated from Western companies with the use of legal barriers against collaboration.
According to the Chinese Ministry of Construction's "Regulations on the Administration of Foreign Invested Construction Enterprises," fully owned foreign companies are restricted to building only a few projects that are financed by international institutions, which have at least 50% foreign investments and projects that are “so technically demanding that Chinese CSPs will not able to undertake by themselves.”
Lobbying for a larger role, the "Construction Position Paper" of the European Chamber of Commerce in China said, “Many Chinese CSPs are in huge need for professional teams which possess international qualifications and are familiar with the best practices of international construction market. The lack of such international qualifications and expertise has, to some extent, acted as a barrier to prevent Chinese CSPs from competing for top-level international projects.”
It said collaboration with European firms will “facilitate Chinese CSPs to gain greater exposure to best international practices and improve their efficiency and competency in the international market.”
But it seems China’s state-owned construction companies are doing quite well without these advantages. Chinese firms such as China Railway Construction Corp. have other qualities that U.S. or European companies would not be able to match.
“An important reason for the successes of Chinese companies is the fact that they often offer lower costs with the same good quality,” He Weiwen, a professor of economics at Beijing’s Renmin University, told ENR.
A crucial reason is that the Chinese Premier Li Keqiang and other party officials put their own weight, and indeed the entire might of Communist China, behind project proposals. This translates to a larger package that includes financing instead of mere construction capabilities.
“If the Chinese president says he will deliver, the leader of a foreign country would be sure it will be done. That is the advantage of a command and control system as in China,” Anil K.Gupta, professor of strategy and globalization at University of Maryland’s Smith Business School, who co-authored a recent book, “The Silk Road Rediscovered,” on Indian and Chinese companies, told ENR. “If Xi gives the word, the China Development Bank will put up the money. Other state-run agencies will join together to make a project successful,” he added. Xi is also general secretary of China's Communist Party.
“The U.S. president or the German chancellor cannot get companies in their countries do [this kind of] bidding,” Gupta continued. Barack Obama could not direct GE and Westinghouse to abide by his government’s wishes after signing the nuclear deal with India, he asserted.
Chinese financing agencies are known to support barely bankable projects and offer relaxed terms to help state-owned contractors and equipment manufacturers gain leverage in foreign markets, sources said. Most construction firms are fully owned by the state. Construction is one rare business in which China has not relaxed foreign investments.
A deal signed last May between Kenya Railways Corp. and China Road & Bridge Corp. for laying a 609.3-kilometer section of track from the port of Mombassa to Nairobi exemplifies the Chinese approach to African infrastructure projects. According to coverage of the agreement in the magazine Ventures Africa, CR&BC agreed to provide 5,000 trained Chinese workers, and the China Exim Bank and the Kenyan government will share costs in a 9-to-1 ratio.
Atanas Maina, managing director of KRC, said, “The contractor will bring in the workers and get additional ones locally. We have also commenced discussions to reduce timelines and ensure that the project is completed by 2017.”