The banal bureaucratic bargaining of Belt and Road
In October last year a former executive of a Chinese state-owned construction company was sentenced by a Chinese court to 10 years in prison for taking kickbacks and bribes. The details of the case have not been reported previously.
What makes the case especially interesting is that it involves corruption in China’s Exim Bank, China’s Ministry of Commerce and Chinese lending to foreign governments. It demonstrates the eagerness of Chinese contractors to win projects in Africa, so much so that they are fighting for loans from Chinese banks for foreign governments. More importantly, it suggests corruption may have pushed Chinese banks to lend in foreign countries that they may have deemed too risky in the first place.
According to the court documents, Hu Wei, a 50-year-old former deputy GM of China CAMC Engineering Co.(CAMCE), was sentenced to 10 years in prison by the Intermediate People’s Court in Huanggang, Hubei for taking bribes worth of 10 million RMB.
CAMCE is a subsidiary and the international arm of the state-run giant China National Machinery Industry Corporation (SINOMACH). CAMCE builds infrastructures around the globe and is publicly listed in Shenzhen. Hu was the deputy GM that in charge of the company’s Africa and Western Asia business from 2011 till 2018, when he was detained by the CCP corruption investigators.
The case itself is revealing enough that I will write it in details below:
The Zambia Road Project
According to the verdict, in early 2011, CAMCE was working on a Zambia road project that was in need of a loan. It was then that Hu was contacted by a Chinese businessman surnamed Sun who offered to apply for loan from an unknown Chinese bank on CAMCE’s behalf.
Sun told Hu that he “has the ability” to get the loan for CAMCE’s project, but in return, CAMCE must hire Sun’s company Zhenghe as the middleman and pay 1.5% of CAMCE’s project contract value as “representation fee”. To sweeten the deal, Sun promised to pay Hu one third the fee Zhenghe received.
Hu agreed. In 2012, CAMCE paid Zhenghe US$2.66 mln in “representation fee”, and two years later the loan was approved by the unidentified Chinese bank. As promised, Hu received his share of US$ 888 thousands in kickbacks.
According to the China-Africa Research Initiative at Johns Hopkins University (CARI), which tracks Chinese lending to Africa using open sources, CAMCE did have a project in Zambia that fits the description in the verdict.
The CARI database shows that CAMCE was contracted in 2011 by the Zambia government to build the 172-km Mbala-Nakonde Road. In 2013, the Zambia government signed an agreement with China’s Exim Bank to borrow a US$196 million concessional loan for the project.
It is interesting that the Zambia government was also investigating corruption in this project but from another angle. In 2012, the Zambia Anti Corruption Committee said it was investigating a US$27 million front payment the government made to CAMCE before the Exim loan was secured. The investigation apparently didn’t lead to any major finding and the project went ahead. The construction of the road was completed in 2016.
The Uganda Industrial Parks Power Transmission Project
According to the court document, in early 2013, CAMCE again came in the need of a loan when it was planning for a power transmission project for industrial park(s) in Uganda.
Sun again told Hu that he can deliver the loan and he promised to give back one-fourth of the “representation fee” to Hu if CAMCE pays. Hu agreed.
In August 2013, CAMCE signed another agreement with Zhenghe to pay 2% of the project contract value if the loan for the Uganda project goes through. In May 2016, the loan was approved by China’s Exim Bank. Both Sun and Hu described it as a “Chinese foreign aid project”. CAMCE paid Sun’s company US$ 1.63 million in representation fee for the loan. In return the company Zhenghe paid Hu US$407 thousand.
According to the CARI database, in 2016 the Uganda government signed an US$85 million loan with China’s Exim Bank for the “Electrical Substations in Luzira, Namanve, Mukono and Iganga industrial parks”, which were contracted to CAMCE. The loan has a 15-year maturity and a 3.44% interest rate. The description is consistent with the loan described in the verdict.
Who in the Exim Bank
The verdict didn’t mention any names of the bank officials. It didn’t say whether any bank official was indicted as a co-conspirator. But if both loans are from Chinese Exim Bank, what level of corruption are we talking about here? Whom in the Exim Bank and the Chinese government Sun had to get in touch or paid off to get the loans approved?
The short answer is we don’t know. But we do know that, unlike other types of loans that may be issued from an Exim branch, all concessional loan — as in the case of Zambia — is managed directly by the Exim Bank HQ in Beijing.
And we do know that, for a foreign government to receive a concessional loan from Chinese Exim Bank, the foreign government must sign a framework agreement with Beijing before it can apply for the loan. The project also needs to be pre-approved and recommended by the foreign aid department at the Chinese Ministry of Commerce before Exim can start processing the paperwork. If both Exim HQ and MOFCOM give the go-ahead, the loan can be signed, and then it would be reported to the Administrative and Law Enforcement Department at the Ministry of Finance for records keeping purposes.
Sun must break at least one of these links to get the projects into the pipeline.
What we know about Sun is limited as well. Corporate records said his company Zhenghe Tianye Trading Co.北京正和天业经贸有限公司 is based in Beijing and now defunct. The records said the legal representative and de-facto owner of the company until 2019 was someone called Sun Yan (孙岩), who owned at least two other companies that are now defunct.
Other scandals involved Chinese banks
The Exim Bank is not short of corruption scandals. A former President of the Exim Beijing Branch was sentenced to life in prison in 2018 after he reportedly pulled off a US$240 million loan scam. Several Exim local branches have been fined by Chinese regulators in recent years for being lax in loan approval.
Exim Bank is not the only one either. Former President of China Development Bank Hu Huaibang is now behind bars for illegally giving 100 billion RMB in loans to the shady private oil company CEFC, including a $US 4.8 billion credit line for CEFC to buy shares in Rosneft. Hu’s wife committed suicide after Hu was publicly prosecuted.
But most of these corruption cases previously reported involved Chinese companies as the borrowers. The CAMCE case is rare because it involves lending to foreign governments.
Bribes from subcontractors
Coming back to the CAMCE case, the bribes mentioned above are not the only ones Hu received. According to the verdict, Hu also took bribes from multiple Chinese subcontractors for projects in Ethiopia, Uganda, Zambia and Angola. Those who bribed Hu included major state-owned companies such as China 15th Metallurgical Construction Group and Synohydro Bureau 5 Co. The companies said they gave bribes in a hope to gain favor in CAMCE subcontracting or to ensure CAMCE will pay the subcontractors in time or in advance.
There is no mention if CAMCE or the subcontractors inflated the project costs given these bribes.
Bribing the MOFCOM
On top of taking bribes, the court said Hu gave 2.2 million RMB in bribes to a staff in an unknown Beijing-based company, and through the staff, Hu gave another two million RMB to two mid-level officials in China’s Ministry of Commerce. The three have been put under separate investigations, the court said.
It is unclear how it works, but the court said Hu gave the bribes to “facilitate the CAMCE projects”. We can assume that this is to help CAMCE to win contracts for projects backed by Chinese grants, zero-interest loans and concessional loans. The MOFCOM administers these foreign aid capitals of Chinese government and it is involved in picking the contractor.
Takeaways
- The case shows that Chinese contractors are actively fighting for loans from Chinese financial institutes on behalf of governments in Africa. This is consistent with what I heard about the cut-throat competition among construction contractors, mostly Chinese contractors, in Africa. In many cases, it is no longer enough that the Chinese contractors bid with low prices. They would have to promise more, usually a Chinese loan, to the cash-strapped African governments to win the project.
- Whoever reads this should also keep in mind that corruption and bribe are common in the construction business and common in Africa. The problem discussed above may not be limited to the Chinese companies.
- We still don’t know how Sun got Exim Bank approved the two loans, and how the bribes affected the bank’s decision making. If the two projects mentioned were legitimate and feasible, the fact that it required a Chinese state-owned company to bribe to have the loans approved suggests the Chinese banking system needs some major overhauls and that the Chinese lenders are not as enthusiastic about Belt and Road as widely believed;
- If the projects were too risky and the loans should never be approved in the first place, then we must wonder how many other projects have been approved in this manner, and how the corruption and lax standards may have contributed to China’s over-lending in some places in Africa?
- Scholars and journalists should understand better the fragmented authoritarianism behind China’s contracting and lending process. When we see a Chinese project by a Chinese state-owned company, we shouldn’t assume right away it is something planned by the boss in Zhongnanhai who think nothing but “strategic gains”, “Malacca Strait”, “PLA naval base”, “Belt and Road” or “debt trap”. Quite often it is banal bureaucratic bargaining with different players and conflicting interests, and in this case, the personal interests of a company executive.
- The Chinese lending process has done a good job in preventing corruption by keeping African governments out of it: the loans are paid by Chinese banks directly to the Chinese contractors (See Deborah Brautigam’s The Dragon’s Gift, 2011), it is time for Beijing to do better in monitoring and preventing corruption among Chinese players in these overseas projects.
