Chinese companies are in Africa to stay or at least until they accomplish their mission here. Through Chinese foreign direct investment (FDI) and aid, they have invested in sectors such as transport, telecommunications, construction, energy, waste disposal and port refurbishment. Their timely completion of projects like modern highways has earned them admiration from Kenyans.
Up to last year, Chinese direct investment in Kenya was $537 million (Sh48 billion), which compares favorably with China’s direct investment in Africa which stood at $3.5 billion (Sh318 billion) in 2013. Today, an estimated 50 Chinese companies are working on about 80 projects in Kenya with a value of $2 billion (Sh182 billion).
There is no doubt that their presence in Kenya has had a positive impact especially the improved infrastructure. This is in sync with our vision 2030 which identifies infrastructure as one of the sectors that will drive economic growth. However the critical question remains: “who has really profited from China’s intervention?” it is obvious China is driven by its own need for economic prosperity and not the solidarity with any government.
Most of the Chinese corporations operating in Kenya are either fully or partially owned by the Chinese government, therefore have access to very low cost capital and can operate with a longer repayment period. Through their government’s “going global strategy” Chinese companies enjoy four types of incentives: a) Special and general tax incentives b) credits and loans C) foreign exchange allowance d) favourable import and export regime. Compare this with locally owned firms who have to work with commercial loans which attract a high interest rates and a shorter repayment periods and it is clear the Chinese have an upper hand.
Chinese firms are funded by the Export-Import Bank (Exim) of China which is a state bank solely owned by the Chinese government. In cases where the Chinese government are the lenders, Kenya government has to demonstrate that it is a Chinese contractor who will handle a project.
In this case, local contractors are disadvantaged but this can be turned around to become a win-win situation for all parties involved. There must be a way in which Chinese interests can be met and local firms protected as well. Though local contractors had a reputation of being corrupt, incompetent and delivering substandard work, blanket condemnation should not be used to deny them contracts.
Governments in Africa, Kenya included, are desperate to attract and retain foreign investors and at the same time diversify their sources of funding from the traditional IMF, World Bank and western governments. This desire should not be met by encouraging or overlooking practices that may spell doom to local firms and deny Kenyans lucrative job opportunities. Local contractors have continually decried the rate at which the Kenyan government is awarding tenders and consenting to Chinese investments.
Local firms need to be empowered such that they will be in a position to undertake mega infrastructure projects in the future on their own. This can be done if structures are put in place for knowledge transfer and capacity building as current projects are being implemented.
Local firms should petition the government to adopt policies advocating for the following:
The government has in the recent past raised the demands on firms and their personnel during tendering of projects like requiring experience on big projects. To counter this shortcoming for local firms, it can be made mandatory for Chinese and other foreign firms bidding for infrastructure jobs in this country to enter into legally binding joint ventures (JVs) with Local firms and to subcontract a higher percentage of work to local firms.
This way, local firms can gain technical skills, build experience and bid competitively for big projects in the future. They will also be in a position to maintain the infrastructure successively once it has been handed over to the government.
Arab Countries have done before this in order to protect their infant industries. Employing locals in casual positions is not enough to facilitate knowledge transfer and capacity building.
Failure to have inbuilt partnership system to allow transfer of technologies and knowledge from Chinese firms will breed a culture of dependency and Kenya will find itself in a position where it cannot maintain the infrastructure after handing over.
With a fast-growing population and a high unemployment rate Kenya’s main priority is jobs. China is providing excellent infrastructure but has brought its own workforce. Many Kenyans complain that Chinese projects do not employ enough Africans or do not transfer enough of skills and technology.
The Chinese should make available to Kenyans top level managerial and technical jobs so in the future they can be in a position to run projects undertaken by local firms. Currently, Chinese firms offer all their managerial and technical jobs to their nationals.
Locals are engaged in low skill activities, which they have to compete for with the Chinese as well. The companies also do not have structured training programmes to facilitate upgrading of skills and professional development for workers. Locals have little or no control over the construction and production processes in those firms.
The Chinese deliberately do not pass skills to the locals because they prefer to communicate in their language. The machine operators cannot or do not speak English or Swahili so it is difficult to pass on skills they have to local workers.
Materials and Equipment
The government should make it mandatory for foreign firms to use locally available materials like cement, reinforcement bars, paint etc. for their construction works. This will increase the participation of local industries in projects. In some past instances, the Chinese have imported these materials which are exempted from taxes and therefore cheaper than locally manufactured ones.
The same should be done for equipment and machinery. A foreign contractor should demonstrate that a certain machine or equipment is not available locally either for buying or hire before they are allowed to import the same.
The policy that the lowest technically qualified bidder must be awarded the tender should be revised. Some foreign firms have been known to deliberately underquote for projects in order to ensure they are awarded tenders. In such a scenario, the contractor is unable to deliver the entire project scope in time and within the required quality specifications.
Through feasibility studies, economic evaluation of a project by consultants and by studying previous projects of similar magnitude in other parts of the world, the government gets to know the approximate cost of a project. With this knowledge, it should have the right to award the tender to the lowest, most reasonably priced and technically qualified bidder and not just the lowest.
Restrictions on Bidding by Foreign firms
Through consultations with industry players, caps should be put in place to restrict the type of projects that foreign firms can bid for. This criteria should be according to project scope, size in terms of money and the technological aspects. This will reduce unfair competition and protect local firms.
Affirmative action by the government during bid evaluation should be encouraged. The Kenyan government should make sure that 10% of the marks are given free to local contractors. That would means that if the pass mark is 75%, then a local contractor needs only 65% as they have already earned 10% ahead of the foreigners.
On their part, local firms can increase their competitive edge through the following:
Local firms should aim towards achieving and maintaining global standards of operation, technical know-how and project delivery. They should adopt modern technologies that are in use globally to increase their competitiveness.
They should invest in the training of their workforce through institutions of higher learning, conferences and seminars and make sure their knowledge and skills are at par with international standards.
This will endear them not only to the government but the private sector as well which has in the recent past engaged the services of Chinese firms to put up their structures.
Local contractors should be aggressive and bid for international projects in Africa and especially within the East Africa Community (EAC) since governments and trade relationships have improved tremendously. They can also work as subcontractors to the main contractors in this projects. This would provide good international experience which in some cases is usually a requirement for some projects in Kenya.
Local firms should embrace Joint Ventures to improve their chances when bidding. Local firms have a problem inviting each other to join in order to boost their chances at winning tenders. This has always resulted in them always falling short of the minimum requirements during evaluation. If the locals combined firms, and this is usually allowed for as long the legal framework is in place, then local contractors will get more work. The joint venture approach will work very well with Financial Institutions, as the main failure of contractors is financial capability.
Instead of relying on loans from commercial banks, local contractors can look into other ways of acquiring project financing. An example is investment firms. Currently, two investment firms in Kenya, i.e. TransCentury and Centum, are involved in mega energy generation projects ($130 million 50 MW wind power plant and a coal powered power plant respectively) through partnerships with EPC contractors. With this kind of partnerships, local contractors can have the financial capability to bid for big projects without having to pay high interest like for commercial loans with strict short repayment schedules.
With such policies in place, Kenya and other African countries will reap long term benefits from foreign Chinese investment into the country.