Railpolitik: the strengths and pitfalls of Chinese-financed African Railways

Ethiopia is tapping into both Chinese and Turkish financing for its railway ambitions. The difference illuminates the pros and cons of China’s model of overseas infrastructure development.

By Chen Yunnan

Chinese railways are crisscrossing the world. Driven in part by domestic competition in a saturated infrastructure construction market, Chinese state-owned enterprises (SOEs) are increasingly seeking projects overseas, constructing new transboundary high-speed rail projects across Southeast Asia, and in Africa, new standard gauge railway (SGR) projects in Nigeria, Kenya, and Ethiopia. These projects have become a way to offshore China’s excess capacity in its industrial sectors, boosting Chinese manufacturing through a ‘supply chain export’ model where railways, locomotives and equipment are offered as a package to recipient governments in Africa and elsewhere, and conditional on the generous loan finance from China Eximbank that supports them.

These projects have constituted some of Africa’s largest lending from China. Up to 2016, 31% of China’s total lending in Africa has been in the transport sector: of this, over a third went to the railway sector. Many projects feed into existing domestic and regional corridor plans, but they have also become absorbed into China’s Belt and Road Initiative (BRI), particularly in the east African region. Railways also hold symbolic power in the China-Africa relationship. The first Chinese-built railway, the Tanzania-Zambia (Tazara) cross-border ‘friendship railway’, was built in the 1970s, at the height of the Cold War and China-Soviet tensions, when China was on a desperate search for international allies. It remains a potent symbol of contemporary solidarity and cooperation between China and its African partners.

But as this case study of Ethiopia’s engagement with China’s railway financing shows, the “China model” of supporting railway expansion in Africa comes with both strengths and constraints. Though “debt sustainability” concerns loom large in conversations about railway projects, the difficulties experienced in Ethiopia’s railway projects are more directly linked to its creditor-debtor and employer-contractor relationships formed under those deals. A parallel case of a Turkish-financed railway project, constructed sequentially after a major Chinese-line, highlights the pros and cons of the politically-oriented China model vis a vis a more transactional, commercially-motivated project.

Research for this case study in 2018 and 2019 involved several months of fieldwork investigations, including site visits to operational and under-construction railways, as well as around 40 interviews with representatives from the Ethiopian Railway Corporation (ERC), Chinese and Turkish contractors, and other managing agencies working on the project. Interviews were semi-structured, and conducted in English and Mandarin Chinese.

Ethiopia rail
Images: Chen Yunnan

Ethiopia’s Railway Ambitions

Ethiopia has had perhaps one of the most ambitious railway development schemes in Africa, leveraging Chinese as well as other foreign finance for its railway network. In 2007, the Ethiopian Railway Corporation (ERC) was created to oversee the construction of a new planned network spanning 5,000km. This network was seen as part of a wider industrialization and export-oriented growth strategy to connect major planned industrial zones across the country—many of which have Chinese involvement—to the sea port in Djibouti, which was also financed and constructed by Chinese institutions. Crucially, this is the justification on which the railway is supposed to make economic sense.

Economic potential—in generating trade and connectivity, and in encouraging technology transfer through foreign investment—is one of the main allures of railway technology. In China’s own domestic experience, the development of its locomotives industry benefited directly from German and Japanese technology. Further back, the construction of many of China’s main arterial railways, and the creation of professional railway institutions owed much to colonial-era foreign concessional railways by British and American companies. However, this form of technology transfer is not automatic. The Tazara railway’s decline after the departure of Chinese engineers showed a failure of management and the insufficiency of knowledge transfer.

As well as a new urban light rail project in Addis Ababa, Ethiopia has so far constructed two new standard gauge railway lines. The first, from Addis Ababa, crosses the border towards Djibouti (marked in red below) ; the second, a branch from the city of Awash northward to Weldiya, eventually to connect the trunk line to the north city of Mekele in Amhara (marked in green below). All these projects, including the light rail, are notable for being the first electrified railway projects in sub-Saharan Africa.

Ethiopia railmap

A Tale of Two Financiers

The Ethiopia case is particularly illuminating because at the same time, the country is tapping into two very different pools of funding and construction expertise to realize its railway ambitions.

Ethiopia’s first route, from Addis Ababa to the port of Djibouti, is Chinese constructed, by a joint consortium of China Railway Engineering Corporation (CREC) and China Civil Engineering and Construction Corporation (CCECC), and financed by China Eximbank through a loan of US$2.5bn. The second line from Awash to Weldiya, is a Turkish/European project, built by Yapi Merkezi, and financed by a consortium of lenders including Turkish Eximbank, who lent US$300mn, and Credit Suisse at a tune of US$1.1bn. While both are similarly financed through commercial loans and an EPC (Engineering, Procurement and Construction) contract, the different financiers and contractors at play has entailed a significant divergence in how the ERC and other agencies have been able to leverage their contractor and financier relationships, with implications for project implementation and for the agency and choice of recipient host governments.

One major material difference between the two railways’ construction are the different standards and technologies used between the two sets of contractors. The Chinese Addis-Djibouti line, completed in 2018, uses Chinese Class 2 technical standards, and CTCS (Chinese standard) signaling systems that controls locomotive speeds above 120km/h. The Turkish-built Awash-Weldiya line, meanwhile, employs European technical standards, including social and environmental safeguards, and employs ERMTS (European standard) signaling systems. As of 2019, the project was over 95% complete. It will likely require several more years for electrification and testing before it will become operational however, as well as a further challenge of integrating the operation of the two railway lines.

The two railway projects also show a very different creditor-debtor relationship, influenced by the nature of how the financing for the projects arrived. This in turn impacts the relationship between the ERC and the project contractors, as well as the implementation of the projects. For instance, the Turkish contractors Yapi Merkezi won the Awash-Weldiya project through a traditional competitive bid, where crucially, their promise to broker finance from European creditors for the EPC contract was key in winning them the bid. Meanwhile, the Chinese railway project was premised on a strategic bilateral relationship: financing was pledged first via high-level discussions between Chinese and Ethiopian governments. Contractors were subsequently determined on the Chinese side, through a selection process of the major national railway contractors—while this process is competitive, it is limited to only Chinese firms and decided in Beijing, not in Addis Ababa. Though the Turkish project also enjoyed export credit financing, the project due to its blended finance nature was far more commercial and transactional in its relationship between host and contractor.

The implications of this for the ERC’s scope of agency is significant. Contrary to common perceptions, the major advantage of choosing Chinese finance has been the flexibility in the financial relationship. Ethiopia has long-faced challenges in its foreign exchange that has seen it struggle to service external debts. With its Chinese partners, the ERC has been delaying payments on loans and on the management fees to the contractors for the first year since the project started operating. In September 2018, Ethiopia renegotiated the tenor of loan to 30 years from the original 15-year agreement, signalling a major concession on the part of China. With its European lenders, however, Ethiopia has never missed a payment.

In this area, Ethiopia has seen increased scope for maneuver. It has prioritized its European private creditors where it has less leeway, due to higher reputational and financial costs in non-repayment. Conversely, the strategic and political relationship that Ethiopia holds with China as a regional partner means it has been able to exploit the flexibility of Chinese finance that the bilateral Ethiopia-China relationship offers. Put simply, the political elevation of the railway as a ‘Belt and Road’ project means it is politically unfeasible to allow it to fail, giving the Ethiopian government significant leverage and flexibility over loan repayments.

The Double Edge of Chinese Loans

Despite the corollary of this, the ERC faced a bigger struggle when facing its Chinese contractors in applying pressure and getting compliance compared to the Turkish, where they had a more transactional commercial relationship. In this sense, the tied nature of financing has been a constraint to the exercise of agency. Firstly, in the inability to choose the contractor, which was a condition of financing in both Chinese funded light rail and standard gauge railways. Secondly, in the appointment of Chinese construction company representatives as the employer’s representative,, a position which generally takes the project owner’s side (in this case the ERC) in holding contractors to account on the project implementation and construction. This was the case in the Addis-Djibouti railway, where ERC were compelled to select CIEEC as the employer’s representative. This had repercussions for the level of trust and accountability between the ERC and contractors, as the ERC perceived the employer’s representative and contractors to be in a form of ‘collusion’, and not adequately representing the ERC’s interests.

The political model of finance, despite its advantages in terms of loan repayment, has led to an ineffective employer-contractor relationship. One example of this can be seen in when the project owner (ERC) tried to push the contractor CREC to fulfil a commitment to procure and provide spare parts for maintenance work on the light rail. Pushing the contractor directly was ineffective. Contractors were slow to respond to demands and, with the ERC behind on payments to the contractors for railway operations and management fees, their leverage over the firms was limited. Instead, according to the ERC’s manager on the light rail, they had to pull on political levers, calling on the Chinese embassy and economic counsellor’s office, who then applied direct pressure to the firms to order and pay for parts, and to pay for a new maintenance workshop.

This poor relationship between host and contractor also has implications for the long-term sustainability of the project, particularly for skills and technology transfer. Interviewees at the ERC expressed a sense of missed opportunity in the construction phase of the Addis-Djibouti railway, in terms of the potential for learning and knowledge transfer on railway construction for local staff. There is also a distrust of the firms’ interests in technology transfer on the part of Ethiopian respondents, who see genuine capacity building as a conflict of interest with the incentives of the Chinese companies to hold onto their intellectual property and knowledge, ensuring their continued involvement in the railways’ management. ERC has since learned from this experience and built in an engineering skill transfer component in its Yapi Merkezi deal.

The very fact the two contractors—specialists in construction, not operation—remained in the first place to take over the operations and management signals a failure of capacity building during the early phase. Significantly, CREC and CCECC were both pressured to extend their operation and management role beyond the initial six years agreed in contracts..

Under pressure from China’s Ministry of Commerce (MOFCOM) and the ERC, the firms have later set up a capacity building center outside of Addis Ababa, conducting in-house training sessions themselves for staff in maintenance, engineering, and even driver training. Further funding via Chinese aid have supported student exchange for ERC workers at several Chinese universities with railway specializations, and in 2018, MOFCOM pledged funds for a new railway academy, which will specialize in railway vocational training.

In this, the flexibility of this coordinated Chinese model abroad compensated for the poor employer-contractor relationship. The Chinese contractors have continued to fulfil the operation and management parts of the contract, despite late loan payments on the part of the cash-strapped ERC. The comprehensive breadth of skill transfer initiatives involved from both state actors and contractors, in financing new colleges, student exchanges and training courses, are advantages that competitors like Turkish Yapi Merkezi, cannot fulfil, and do not have an interest in.

Furthermore, these state-led and firm-led training and technology transfer initiatives offers not only the transfer of technology, equipment and contractors, but also whole systems of management: the dissemination of China’s own railway technical and managerial standards, operating procedures and protocols, all of which will have a similar impact on the development of Ethiopia’s young railway bureaucracy—in the same way that China’s own railway borrowed from European and foreign partners. This can generate potential path-dependence effects that can ‘lock-in’ advantage for Chinese firms and technology in the future. This can already be seen in the case of the Turkish-built railway, where despite the use of European construction techniques, the design of the railway itself had to conform to Chinese locomotives, and the signaling system to be integrated with the Chinese system that carries the rest of the network.

Railpolitik

The burst of Chinese lending overseas following the global financial crisis has been a boon for the development of Africa’s nascent railway sector, and a means to offshore China’s domestic capacity and promote its own railway technology. After this initial exuberance, however, the tide has been slowing down. Debt sustainability has become a keenly politicized issue in Ethiopia and elsewhere, particularly given the railway’s operational challenges. Low uptake, power supply issues, and regional ethnic grievances have complicated the operation of Africa’s first electric railway. This has become a risk to its economic profitability in the long-run—and thus the sustainability of the debt that financed it.

Notably, none of the China-financed railway projects have had independent financial feasibility studies conducted. They were driven instead by the interests of winning contracts for Chinese firms and technology manufacturers overseas, and to satisfy the infrastructure ambitions of Ethiopian political elites. However, the lingering question of the projects’ financial feasibility has induced greater risk aversion on the part of both Chinese and Ethiopian partners, seen in the skeptical comments from state insurer Sinosure, and also puts into question the future expansion of the railway network. A branch extension from the Turkish-built line from Weldiya to Mekele in the North, contracted to the China Communications Construction Corporation (CCCC), for example, has also stalled due to lack of financing. Further loans from China Eximbank will not be forthcoming until the Addis-Djibouti line can be proven to work.

As China’s Belt and Road Initiative continues to broaden in scope, the case of Ethiopia’s railways illustrates the strengths and pitfalls of China’s coordinated model of infrastructure finance. Compared to the European and Turkish project, the advantage of Chinese lending for Ethiopia’s railway infrastructure has been significant leniency and flexibility in the creditor-debtor relationship. This has enabled the ERC to expand its agency in the relationship and ability to manage and prioritise its multiple lending partners. However, there is a trade-off to this flexibility: it has not necessarily lead to a better project. In the case of the Addis-Djibouti railway, it has undermined the ability of host government agencies to oversee and control foreign contractors, which is crucial for new institutions like the ERC, as it seeks to build its own experience and capacity through working with foreign partners.

Chen Yunnan is a Senior Research Officer at the Overseas Development Institute (ODI) and PhD Candidate at Johns Hopkins School of Advanced International Studies. She was previously a Global China Initiative fellow at the Global Development Policy Centre, Boston University. At the SAIS China Africa Research Initiative (CARI), her research focused on the rise of China in global development, particularly infrastructure finance in Africa. She has worked at the Institute of Development Studies, Sussex, and China Dialogue, London. She holds an MA in political science from the University of British Columbia, and a BA in politics, philosophy and economics from the University of Oxford.