Chinafrica (27) Watching for PRC Influence in Africa
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Africa Confidential (London)
Africa: CADF Expands Africa Network: The State Investment Fund is Launching Chinese Companies Into Overseas Markets Where they Pick Up Assets Abandoned by Western and African Companies
22 April 2010
The China-Africa Development Fund’s expansion plans moved a step forward with the opening of a new branch in Addis Ababa, Ethiopia, on 30 March. The office will pursue greater cooperation with the African Union, also headquartered in the city. CADF’s chief representative in Ethiopia is Wang Yong, who was Managing Director of CADF’s Eastern Africa Investment Department in Beijing.
The Fund opened its first overseas branch in Johannesburg, South Africa, in March 2009, giving it a listening post in the continent’s largest economy. A third office is planned for Zambia. CADF executives have scoured the continent for investment opportunities. But while the Fund had more than 100 projects under study in 2008, no more than 20 deals have been signed since then.
In March, CADF Chairman Zhao Jianping met officials from the New Partnership for Africa’s Development, the Economic Commission on Africa, the African Union Commission and the African Development Bank to discuss areas of potential cooperation. The AU and the CADF agreed to work out a memorandum of understanding that could lead to joint projects in the tourism, agriculture, manufacturing, transport and telecommunications sectors.
The CADF, originally promised at the November 2006 Forum on China-Africa Cooperation, is now the go-to financier for troubled Chinese companies and for manufacturing firms seeking to set up operations in Africa. The Fund was then launched in June 2007 with an initial US$1 billion from the China Development Bank (CDB) and is expected to reach $5 bn. within the next few years.
The CDB is controlled by the State Council, China’s highest decision-making body, and the CADF is treated with the secrecy expected from top-level institutions. CADF executives have been especially careful about information security after a hacking incident led to someone accessing ‘sensitive’ information. People are now wary of information leaks. When contacted byAfrica-Asia Confidential about agricultural company Hua Lien’s CADF-backed plans for ethanol production in Benin, a spokesman for the Fund replied that it was a ‘high security’ project.
CADF officials say that by the end of 2009, the Fund had invested nearly $700 million in over 30 projects, leading to a total investment of about $3 bn. by Chinese enterprises. The aim of the Fund is to ‘support and expand the investment of Chinese enterprises in Africa and promote mutual benefit of China and Africa and beyond,’ according to a spokesman in Beijing.
As a start-up in the financing business, the CADF has shown quick progress, but not always as quick as had been expected. CADF executives announced in 2009 that they would use up the initial $1 bn. two years ahead of schedule and would seek a cash injection of another $2 bn. While the first tranche had been supplied by the CDB, the CADF said that it would have to diversify its sources and seek funding from other Chinese financial bodies. The original target for the arrival of the new cash was the end of 2009, but it has not materialised.
Few of the projects chosen by the CADF lead to quick results. Shenzhen Energy’s 500 megawatt thermal power project in Ghana was one of the first to be signed by the Fund in 2008, but it is still not operational. The Chinese side blames its Ghanaian partners, who were charged with finding a reliable gas supply. The now-functioning West African Gas Pipeline brings natural gas to Ghana from the Niger Delta, which could solve supply problems.
A CADF source mentioned other ‘headaches’ like the China Union iron ore deal in Liberia. The source said that the CADF’s involvement has been problematic because of ‘conflicts of interest’ rather than financial issues. Since it won the $2.6 bn. bid to rehabilitate the Bong Mine iron ore project and build associated infrastructure, the small, Henan-based China Union has been unable to raise the necessary finance or begin work on the ground (AAC Vol 3 No 2). Dealing with billions of dollars and state and private companies seeking to expand their activities in Africa, the CADF has a politically sensitive task. It stepped in to save China Union, but sold off a majority stake to a state-owned mining house for a fraction of the cost.
The Fund typically invests in a joint venture with a Chinese company that wants to do business in Africa. It can only take a minority stake in such ventures, leaving the controlling stake to the Chinese companies which manage the projects. The CADF claims to have no strict guidelines on the industries and countries it targets. It says that it focuses instead on investments that can ‘improve the living standard of African people and promote the economic development of Africa’. However, it gives priority to agriculture, manufacturing, infrastructure and natural resources.
Though it came as part of a package of measures to boost relations and development in Africa, China has promoted the Fund as being different from the aid and loans previously made to Africa, which were criticised in the West for failing to take governance into account. The CADF says that it distinguishes itself from economic aid to Africa because it is not allocated by nation but independently operated and based on market economy principles.
According to a spokesperson, the Fund selects projects for investment according to market conditions and potential for long-term returns. Investment decisions follow policies set by the board of directors. Investments can range from $5 to $50 mn. per project, though they currently tend to be less than $25 mn. In April 2009, CADF legal advisor Mark Fung said that the Fund would begin to make larger and more active investments when it had gained a sufficient level of experience and expertise in Africa.
CADF projects are also supposed to take into account environmental and social responsibility. A CADF source says that it must have a regard for ‘ethnic customs and conventions and conform to local labour protection and environmental protection standards. The CADF prepares social and environmental assessment requirements for investment projects according to international practices.’
The Fund was aimed at pushing Chinese presence in Africa up another gear, enabling its partner companies to invest in higher-risk projects. ‘Because this is an equity investment the risk is held by the Fund, and the company does not have to find a guarantor, which it would do if it went to the bank,’ Chief Executive Chi Jianxin said after the Fund’s launch. In addition, companies are under no pressure to generate immediate profits. ‘We think we will stay in a project for 5-8 years but if some need a bit longer we can do that,’ said Chi. However, partnering up is not easy. Most companies fail because they cannot produce the required documentation.
African embassy officials in Beijing and Chinese companies agree that CADF’s due diligence process is stringent. ‘The Chinese company should have industrial advantages, investment experience and contacts,’ says Amanda Zhao from Camaco, the joint venture established by tractor maker YTO and the CADF. This was the case for YTO, which had four subsidiaries in Africa before signing an agreement with the CADF last year. ‘We’re already an international company with operations on every continent. But we needed more funds to expand,’ said Zhao.
For some companies, the easier access to Africa and high-level backing is more important than the financial support CADF offers. Angel Yeast, a Chinese company, said last November that it plans to build a $51 mn. plant in Egypt. The CADF is only investing $2 mn. in the plant. ‘It will be easier to achieve the project. They can give us support in obtaining government permits,’ said one of the firm’s sales managers.
YTO’s Zhao sees similar benefits. The Fund, she says, ‘creates positive conditions and provides opportunities for Camaco, with its experience of investment in Africa. YTO group needs a partner to enhance its reputation and market share. The CADF can provide consulting and financial advice.’ The CADF draws on CDB’s ‘profound’ experience in investing through its ‘Going Global’ initiative. Still, getting the CADF to agree to a 45% stake in the RMB250 mn. ($36.6 mn.) Camaco venture took almost two years, Zhao says.
The process may be even more difficult for African companies. Under its mission guidelines, the CADF can also directly invest in African projects involving international financial institutions or African companies in joint ventures. One African ambassador in Beijing told AAC that many companies are not able to put together valid feasibility assessments. So far, only Chinese companies have received CADF investments.
CADF’s regulations allow it to invest in offshore projects that have operations in Africa, though none have been pursued yet. CADF officials have shown an interest in using Seychelles’s financial system for offshore banking. In September 2009, Mauritius’s Finance Minister Rama Sithanen said that the government had begun discussions with the Fund to use the island as an offshore destination through which to invest in Africa.
The Fund’s managers spend a lot of time meeting African companies. ‘When we’re in Africa, we meet local companies. We’ll go back to China to find the leading companies working in the same areas to partner with the African ones,’ said a CADF manager. ‘Sometimes we go to countries simply because we haven’t been there yet and we have to find some projects. Other times we go there because we have Chinese partners who want to invest in Africa.’ In the last three years, CADF executives have prospected in Angola, Ethiopia, Ghana, Kenya, Liberia, Mauritius,Mozambique, Sudan and Zimbabwe.
Last year, CADF Managing Director Zhou Chao announced that the Fund would begin to push companies to build infrastructure through joint ventures with governments. Public-private partnerships could help overcome an obstacle to disbursing funds in Africa: the lack of detailed government plans for infrastructure projects.
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