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.

 

Empty trains on the modern Silk Road: when Belt and Road interests don’t align

China’s provinces are sending empty freight trains to Europe. Chinese media explains why.

China is sending empty freight trains to Europe through one of its key Belt and Road Initiative (BRI) projects: the China-Europe Railway Express. The bizarre phenomenon caught the attention of Depth Paper (等深线), a Chinese online news platform. In a rare move by a Chinese media outlet in today’s media environment, Depth Paper probed critically into one of the BRI’s most visible “connectivity” projects, uncovering the perverse incentives that are luring China’s local governments and companies to create huge “bubbles” of ostensibly flourishing rail routes that run tens of thousands of kilometers across the vast landmass of Eurasia.

The revelation partly confirms what some observers have suspected all along: that China’s central government lacks the ability to keep BRI strategically tight and coordinated. Sub-national stakeholders, as they do in other policy areas, have the incentives to bend the initiative to their own narrowly defined interests and in the process undermine the overarching strategy, if such a strategy indeed exists at all. The curious case uncovers some important dynamics playing out among Belt and Road’s diverse stakeholders.

China Railway Express
Depth Paper uncovered the perverse incentives that are luring China’s local governments and companies to create huge “bubbles” of ostensibly flourishing rail routes that run tens of thousands of kilometers across the vast landmass of Eurasia.

The China-Europe Railway Express

Transporting goods between China and Europe through railroads is not a common choice for traders. Up to now, it only makes up 4.8% of the total bilateral trade volume, far behind commodities moved by sea (68%) and air (19.4%). For many years, the China-Europe rail routes were interrupted by the fragmented customs, quarantine and taxation regimes of countries along the way. As a rail transport agent in west China told Depth Paper, sending cargo to Germany through rail was unimaginable as recently as 1997. “Central Asia was as far as we could go.”

But, according to the report, things changed about a decade ago. Years before the advent of the Belt and Road Initiative, the instigator of this change was in fact the American computer company Hewlett-Packard. In 2009, as the computer giant negotiated a major investment deal with Chongqing, the city on the upstream Yangtze River with no easy access to a sea port, it included a condition that it should be able to transport its products to the European market by train: westbound directly from the city, instead of first going east to the sea. The Chongqing government accepted the condition and after two years, the Chongqing to Duisburg rail route was made navigable, allowing HP to ship to Europe in a relatively low cost (compared to air transport) and speedy way (compared to shipping by sea).

Before 2013, the year when BRI was formally announced, a few other freight rail routes were made possible by such bottom-up commercial interests. The city of Wuhan in central China, a major base for car manufacturing, developed Wuhan to Europe routes upon which half of its car outputs now depend for transportation. Similarly, Yiwu, the light industry powerhouse of Zhejiang province, opened up its own rail route to ship large quantities of small commodities, from garments to needles, to Europe. Ironically, those early trials, mostly developed by landlocked Chinese municipalities, received little central government support around that time. According to Depth Paper, China’s railway administrators even charged a fee for the extra burden those freight lines created. Its attitude toward such initiatives would make a 180 turn after BRI came into being.

2013 saw the creation of BRI and the incorporation of China-Europe rail links under the umbrella of Xi’s signature initiative as a key connectivity component. As China’s 2015 Vision and Strategy document for the BRI declared the intention of building the rail routes into a “brand name service”, the number of routes began to explode. Dozens of Chinese cities, including those on the east coast with easy access to ports, joined the bandwagon of rail transportation.

China Europe train routes
Planned train routes from China to Europe through Central Asia/Russia, source: NDRC

Growing bubble

In 2016, the National Development and Reform Commission (NDRC) laid out a five year plan for the expansion of westbound rail routes. And China’s railway planner published a blueprint document on building up the brand reputation of China Railway Express. China State Railway Group Corporation, which used to be the railway ministry, began to highlight the growth of Europe-bound voyages as a major achievement.

The elevation of the freight service in political importance created powerful incentives for players to “rig the game”. Depth Paper reveals two groups of schemers in the game:

Provincial and local governments: As the number of freight trips to and from Europe become a measurable indicator, local governments, particularly those sitting at key railway hubs, saw a clear opportunity to boost their visibility under the BRI (and probably to the leadership). At their disposal were subsidies to lower the cost of freight services and make them competitive with cargo ships.

The Ministry of Finance provides a guiding subsidy ceiling of 0.8USD/container/kilometer. But ambitious local governments circumvent it by inventing all kinds of additional rewards to lure businesses to their train terminals, sometimes even compensating for the extra mileage of truck transportation to bring containers from thousands of kilometers away. According to a chart collated by Sino Trade and Finance, many municipal government offer around 3000USD per container for a one-way Europe bound trip and a whole train could receive a total of 123,000USD worth of subsidies per trip. These local governments also use tax rebate and land use subsidies to sweeten the deal for freight service companies.

International railway service companies: Competition with each other and pressure from local governments eager for BRI visibility has incentivized the companies who actually run the numerous rail routes to Europe to increase the number of train trips. Every month these companies have to book planned trips from the railway regulators and get what is called a “route slip” that permits them to run those trains. The ratio of actual trips to the applied number is called  “realization rate” that regulators use to monitor rail capacity utilization.

The interplay of these incentives drives both groups to boost indicators that make them look good in this game, creating scenes that are outright bizarre. The government of Xi’an is one of the most active players starting from 2018. The city, 1000 kilometers to the west of Beijing and the former capital of Tang Dynasty more than a millennium ago, considers itself the “starting point of the ancient Silk Road” and strives to restore its glory in the Belt and Road era. With full support from its provincial bosses, it is the most generous with subsidies, dwarfing other provinces by a wide margin. “Subsidized per container transportation price from Xi’an is constantly below RMB 8500, while it costs over 20000 RMB from Shandong,” a trade agent told Depth Paper.

The subsidies are of the scale that they bend the gravity of trade. In the most extreme cases, traders in the far west Xinjiang Autonomous Region, which already borders Central Asia and is itself a Belt and Road rail hub, would move their cargo thousands of kilometers to the east to capitalize on the Xi’an government’s free handouts before transporting west across the Eurasian continent. Similarly, traders in coastal Shandong provinces would truck their goods all the way to Xi’an and load them onto trains, as it is cheaper even after taking into account the 5000 RMB per container transportation cost by truck (for which the Xi’an government also partially remunerates). The result is that Europe-bound freight train trips from Xi’an grew by a whopping 536.6% in just one year from 2017 to 2018.

The railway service companies, on the other hand, blow up their trip numbers even when they have very little to ship. Before Xi’an arrived on the scene in 2018, the competition between Chongqing and Chengdu, two nearby cities, was so fierce that the two cities would refuse to merge cargo loads back from Germany despite neither being able to fill a whole train themselves. When the pressure (and reward) to be the top railway service company facilitating “Belt and Road” trips to Europe becomes huge, the companies simply start loading empty containers to their trains. They must ensure that each train meets the regulator’s 40-container minimum before it leaves the station, but there is no obligation and no ability (for lack of demand) to fill those containers.

In the most extreme case, one train carried 40 empty containers and just one full container all the way to Europe. This makes the China Railway Express’s impressive growth number highly dubious, and most certainly a “bubble”. Even with all their tricks, companies can barely fulfill their promise to regulators: they have overbooked railway resources. In Q2 of 2019, Chongqing’s “realization rate” dipped to as low as 64% for some routes.

BRI undermined

Artificially enabled transportation routes are more of a disruption to than facilitation of trade, as China’s policy makers are slowly but painfully beginning to realize. Subsidies are both unsustainable and capricious: “Sometimes a city changes a Party Secretary and the new boss has other priorities for his budget.” This makes it hard for businesses to make long term plans and build China Railway Express into their logistic strategies.

Heavy subsidies also encourage opportunistic behavior that runs against the original intention of the policy. “[Subsidies] are supposed to help first-time users overcome initial transition difficulties and cultivate user acceptance of freight rail as a reliable means of transportation”, says one anonymous Liaoning provincial official to Depth Paper. “[But] what Xi’an does can hardly nurture real needs. Traders will go back to sea and air as soon as subsidies disappear.” The official also warns that such unpredictability and fluctuation would hurt the China Railway Express’s reputation overseas and permanently scare clients away.

The Ministry of Finance is reportedly determined to pierce the bubble by enforcing a schedule for phased subsidy reduction. Subsidies by local government are to be no more than 40% of a route’s total cost in 2019. The ceiling will be further lowered to 30% in 2020 and zero by 2022. The Ministry is hoping that by then the trains running up and down routes would be completely market driven and China Railway Express will stand on its own two feet.

The episode reveals the fundamental difficulties for China’s central leadership to implement its vision by reducing it to seemingly measurable indicators and supposedly workable incentives that mobilize local players to participate in a central government cause. Distortions and outright undermining of central government agenda happens with GDP numbers, air pollution targets, and other domestic issues. BRI is no exception.

It also calls into question a key underlying assumption of the BRI, that the power and “deep pocket” of the Chinese state can overcome problems that the market cannot solve when left alone. Trade flows, it turns out, are not easily bendable by the sheer will of the state. It is a rare occasion for a Chinese media outlet to so directly call out systemic problems in Xi Jinping’s signature initiative. As China embarks on other overseas adventures that premise on the ability of state capitalism to shift the center of gravity of global trade (through new ports and rail hubs), the troubles of China Railway Express should serve as a cautionary tale of the limits of state power.

Additional food for thought… when personal guanxi is more important than national strategy

CDBCaixin
Caixin’s frontpage story about the corrupt deeds of disgraced former CDB president Hu Huaibang

In another example of Chinese media exposing the “underbelly of BRI” , on August 3, Caixin Media published a frontpage story about the corrupt deeds of China Development Bank’s former President Hu Huaibang, who was recently investigated by the disciplinary arm of the Communist Party. The report, which has since been taken down from Caixin’s website, contains jaw-dropping, mind-boggling details of how recklessly senior officials of China’s largest policy bank (and a major instrument of the BRI) pursued their own interests at the expense of the bank’s financial health.

Hu’s tenure at the CDB (2013-2018) overlaps with the inception of the BRI. But according to Caixin, he was never much into the bank’s international adventures, which got expanded substantially under the leadership of Hu’s predecessor Chen Yuan. Hu reportedly shrank the bank’s international presence by cutting its commercial banking businesses overseas and only involved the bank with overseas financing when directed to by the top leadership (e.g. at deal signing ceremonies during state visits). The revelation somewhat shatters outside impression that CDB has been masterminding China’s BRI financing strategies, as one source told Caixin: “CDB almost never proactively sought overseas financing opportunities under Hu.”

Instead, Hu concentrated his political resources on two major clients: HNA Group and CEFC, both were offered exceptionally generous credit lines from CDB (at least 80 billion RMB for HNA Group, 42 billion RMB for CEFC). In both cases, Hu Huaibang rammed the deals through the bank’s internal risk management and gatekeeping mechanisms. In the face of resistance, he did not hesitate to replace officials who dared to disagree. The payback to his family members and political allies was fat, which, at one point, supported Hu’s unsuccessful bid to take the helm of China’s central bank.

As both companies later got embroiled in scandals in 2018 (CEFC founder Ye Jianming was detained in January and HNA Group’s chairman Wang Jian died in France in July), CDB faced the prospect of tremendous loss. HNA Group is reported to have accumulated 40 billion RMB of overdue loans to the bank, while the exposure to CEFC would cost CDB at least another 20 billion. Whether this will dampen the bank’s appetite for increased BRI involvement is unknown. But the Caixin report opened a rare window into the inner workings of arguably the world’s most powerful policy bank, and what it depicts is troubling.

With Belt and Road a top priority in Chinese foreign policy, space for calling out its flaws and problems is inevitably being curtailed. That makes reports such as Depth Paper’s and Caixin’s all the more remarkable, and all the more valuable for Belt and Road Watchers.

 

The Politics of Vexed Capital: China’s Railway Projects in Southeast Asia

Alvin Camba develops a conceptual model to explain why certain Chinese overseas projects progress while others get stalled

By Alvin Camba

Why do some Chinese large-scale projects progress while others have been unable to do so? By interviewing political elites, Chinese officials, and members of various social movements, my ongoing research is currently examining four comparable cases of Chinese railway projects in Southeast Asia: South Rail in the Philippines (2017-), Sino-Thai high-speed railway (2013-), High-speed rail (HSR) in Indonesia (2016-), and the East Coast Railway in Malaysia (2016-2018). My preliminary research finds that the continuation or progression of China’s major railway projects depend on the coalition that Chinese actors form with host state actors. The success of these coalitions depend on (1) whether or not they hold the power resources to implement the project, which depend on the institutional structures of the state; (2) or how immediately vulnerable to electoral cycles or political turnover they are, which could usher in a new regime that reneges on the previous agreement with China.

To demonstrate the framework, this blog post focuses on the East Coast Rail Link (ECRL) case in Malaysia, which was started by former Prime Minister Najib Razak, suspended by the new Prime Minister Mahathir, and recently resumed ahead of the 2nd Belt and Road Forum in Beijing. The case is for critics a classic example of a developing country “pushing back” against China’s debt-driven Belt and Road Initiative. But my analysis will show that it is more of a case where a recipient country tries to leverage the BRI for economically viable and politically strategic projects that are with international credibility and domestic legitimacy.

ECRL-Malaysia
The ECRL will link the wealthier Malaysian states to the developing eastern regions. Source: Alvin Camba

In the ECRL case, a political elite coalition between Najib Razak and the Chinese firm (China Communications Construction Company, CCCC) was initially formed, which concentrated power resources in the hands of the United Malay National Organization (UMNO). Even though the project only began in 2016, it has made substantial gains in terms of land acquisition, rail track construction, and project coordination with state governments. Due to the centralization of power in the hands of the federal and state governments, the ECRL has made great progress relative to projects that have started earlier, such as Indonesia’s HSR and Thailand’s Sino-Thai Railway. Some officials of the “Alliance of Hope” (Pangkatan Harapan) attempted to derail the project but Najib’s power resources and UMNO’s control of the government limited these contentious activities.

Nonetheless, since the ECRL started seven years into Najib’s term, the project became very vulnerable to electoral turnover. This made Mahathir and the Alliance of Hope concentrate their efforts on winning the national elections, which capitalized on the 1MDB scandal, and the complicity of Chinese firms to corruption.

Numerous Chinese-financed projects were later linked to a massive rent-seeking venture for Najib. For instance, the MPP Malacca-Johor pipeline and Trans-Sabah Gas Pipeline (TSGP) were most likely used to illicitly transfer funds into the 1MDB fund by overpricing the project cost, which would have burdened Malaysia’s coffers, constraining medium- to long-term benefits and limiting welfare gains.

When Mahathir won the election, the state’s juridical power and political power resources were transferred to the new government. This led to the cancellation of both pipeline projects. However, the Malaysian government needed to compensate the contractors $2 billion USD or 88 percent of the total worth of both projects for just 15% of project’s completion rate.

The ECRL was more difficult to scrap because of the actual economic need to link the wealthier Malaysian states to the developing eastern regions. Furthermore, the Kuantan Industrial Park, which houses the Chinese firm Alliance Steel’s investment that employs locals and generates a multiplier effect on the state’s local economy, stands to benefit from the ECRL’s construction.  These considerations led to the negotiations to bring down to cost by roughly one-third. As of April 2019, the project is back on track.

AlvinGame2
Alvin Camba develops a conceptual model to explain why certain China-financed rail projects progress when others get stalled

The fates of rail projects in three other Southeast countries are all different depending on how a coalition between China and host state actors negotiate their way through political dynamics involving multiple obstructing and rent-seeking local elites. In Indonesia, Jokowi Widodo’s Jakarta-Bandung High-Speed Railway (HSR) started early in his term and China offered better project terms in order to win the deal over Japan. Project timing, limited geographical coverage, and Jokowi’s political position enabled the project to progress. In the Philippines, the project started at the beginning of Rodrigo Duterte’s tenure, forming a coalition between the Duterte administration and the Chinese firm. However, regional-local elites lobbied the Duterte government for train stops in their own provinces. For the elites, economic activity and political gain will cluster cities or province who receive the stop. The Duterte government and the Chinese firm mediated these conflicts, promising livelihood projects and electoral support in return. In Thailand, a coalition between the Yingluk Shinawatra and the Chinese state agreed on a train project in 2013. However, Thailand’s internal political dynamics, particularly Prayut Chan-o-Cha’s coup and the emergence of the military regime, effectively deposed Yingluk and delayed all the major projects. The Chinese government was willing to renegotiate with Thailand, but Prayut wanted better term than the ones that Yingluk acquired. Recently, new terms are being renegotiated.

In sum, the progression and delays of these major railway projects depend on the coalitions that the Chinese government and firms form with host state elites. Contrary to perceptions of China “dictating” tough terms, host countries do have some agency to decide which projects to finance, terms to accept, and conditions to execute.

Alvin Camba is a China Initiative Fellow at the Global Development Policy Center and a Ph.D. Candidate at Johns Hopkins University. He works on the political economy of Chinese foreign capital and elite theory. His works can be found at alvincamba.com