This post originally appeared at Brookings.
Chinese companies are adopting new approaches to investing in Africa. These changes, if they become widespread, will boost the positive impact of China on Africa’s development agenda and improve how Chinese companies are perceived on the continent.
Conversations in China last month suggest a growing perception that the country’s model of extending low-interest commercial loans to African governments for large infrastructure projects—loans that are used to finance the purchase of Chinese labor, goods and services and are in turn repaid through the transfer of oil, minerals or other natural resources—is not sustainable.
With government support, state-owned enterprises (SOEs) have begun to look at alternative, market-based financing solutions for their projects, possibly including Western private equity and other sources of funding. An example of Beijing’s new thinking was the announcement earlier this year by the People’s Bank of China and the African Development Bank (AfDB) of the establishment of a $2 billion co-financing fund. The partnership with the African Development Bank has been described, accurately, “as an attempt to rebrand Chinese economic activities in Africa and improve their effectiveness.”
This shift in approach creates new opportunities for trilateral cooperation with other AfDB donors, including the United States. China can also leverage its new type of participation in the international development institution to resolve commercial disputes.
Chinese officials are also recognizing the need to participate more actively in the communities where they invest in Africa. In fact, while corporate social responsibility is still a new concept for many Chinese companies, it received attention in the 2013 report on China-Africa trade published by the Chinese Academy of International Trade and Economic Cooperation (CAITEC), a think tank of the Ministry of Commerce.
In addition, the CAITEC report states that 82%, or 17,600 employees, of the Chinese National Petroleum Corporation staff in Africa are local hires. The Chinese National Minerals Corporation has hired 12,500 workers in Zambia. Despite these positive developments, it seems that company investments in local training, health and education programs, local sourcing initiatives and compliance with international environmental, transparency or labor standards might still be missing, as they are not mentioned in the report.
The decision by the Huajian shoe company to establish a production facility in Ethiopia is also a reflection of China’s new thinking about Africa and using certain markets as manufacturing platforms to export to global markets. It is projected that rising labor costs could cause China to export 80 million manufacturing jobs, and both Chinese manufacturers and African governments understand the opportunity that exists to relocate many of those jobs to the African continent. The Huajian factory already employs 3,500 Ethiopian workers and last year produced two million pairs of shoes, which are eligible for export to the US under the African Growth and Opportunity Act.
Chinese companies have gained a greater appreciation for the risks and complexities of investing in the African market. Several mega-deals gone wrong have generated an awareness that a singular reliance on government-to-government relations is not sufficient for commercial success in Africa. The recent decision by the China Machine Engineering Corporation to pull out of the Belinga iron ore mine in Gabon, valued at $3.5 billion, is a case in point.
Indeed, the kidnapping of Chinese workers in northern Nigeria, Sudan, Ethiopia and Somalia reflect the reality that Chinese nationals run risks similar to other expatriate employees. The experience of China in Libya in the aftermath of the uprising against Moammar Gadhafi was especially sobering as more than 35,000 Chinese workers from 75 companies had to be evacuated, and Chinese companies lost nearly $20 billion in investments.
Despite the awareness in some quarters of the need for a new business model, problems still persist for Chinese companies in Africa. In May, Chinese Premier Li Keqiang signed a multibillion dollar deal in Nairobi with the leaders of Kenya, Uganda, South Sudan and Rwanda to build a standard gauge railway that is projected to cut freight costs by more than 60% and boost regional trade.
Almost immediately however, local communities in Kenya protested reports that China would import 5,000 laborers to work on the project. The Kenya portion of the rail was awarded to the China Road and Bridge Corporation (CRBC) without a competitive bidding process, reportedly a condition of the financing. The CRBC is a subsidiary of the China Communications Construction Company, which has been debarred by the World Bank from bidding on any tenders from 2009 until 2017 due to allegations of fraud and corruption. In Uganda, its parliament has initiated a probe into the procurement process of its portion of the railroad after the government overturned a construction award to the China Civil Engineering Construction Company in favor of China Harbour Engineering Company.
To achieve long-term commercial success in Africa, Chinese companies need to invest in Africans in a more substantial way (while investing on the continent), comply with rule of law and maintain transparent business procedures. These realities have been recognized by some in Beijing and, as a result, have the potential for enhancing the positive impact of China’s engagement in Africa.
This post originally appeared at Brookings.