China in Uganda: The Highs and Lows of the Belt and Road
Depending on who you talk to, China’s economic engagement in developing countries could be construed as an absolute positive or an absolute negative. Proponents cast it as a “win-win” in which Chinese firms and government agencies respond to local demand, build up local infrastructure and productive capacity—and, yes, make some money in the process. Critics point to problems with project quality, cost inflation, corruption, labor standards, environmental damage, and the like. Both camps have many examples to back their arguments. Cheerleaders of China might point to Ghana, whose cocoa bean exports were used to build a hydroelectric dam supplying rural markets, or to Ethiopia, where an ongoing industrial boom is being achieved partially due to Chinese capital. Skeptics might bring up Ecuador’s Coca Codo dam, which has developed a series of cracks numbering in the thousands, or the decision of Malaysia’s prior administration to accept an overpriced Chinese-built railroad in exchange for China’s support against an embezzlement investigation. It bears out explaining why Chinese development finance can go so right, or so wrong.
The answer has a lot to do with local governance. As a relative latecomer to global development finance, China is often left to either enter isolated markets rife with endemic corruption or compete in stable but crowded places. In the first group of countries, “China, Inc.” often arrives via non-competitive backroom deals involving state-owned firms backed by Chinese state-owned banks, local governments, or both. Cut off from most capital markets, these governments are typically in no position to bargain for better terms, and in some cases may not have many qualms about non-competitive bidding processes. A lack of competition and pre-existing patterns of corruption sum to… well, nothing good. The second group of countries is more likely to have open bidding processes as a matter of course and to have enough potential sources of capital to be able to extract better deals at the bargaining table. When Chinese firms enter these countries, they are less likely to do so as part of a “China, Inc.” package deal with other Chinese firms and banks, and more likely via winning open bids and/or collaboration with local or multinational firms. These cases are much less likely to be afflicted by graft, quality issues, and other results of weak oversight.
Uganda, which signed a memorandum of understanding to join the Belt and Road Initiative last year, straddles the boundary between these two sets of countries and contains microcosms of both. Its pattern of governance is atypical: strong in some areas, but weak in others. The World Bank’s Worldwide Governance Indicators measure quality of governance across six dimensions: voice and accountability, political stability and the absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. Typically, these measures are all highly correlated. For example, a country with strong rule of law is also likely to have less corruption, and to be more politically stable, and so on. However, some countries may score substantially better in some respects than others. Uganda is one of these:
Graphic created from Worldwide Governance Indicators.
With respect to regulatory quality—a measure of the ability to foster the growth of private business—and rule of law, Uganda scores better than the regional average. Indeed, its placement just shy of the global average is quite respectable given its low level of development and puts it in between Rwanda, a darling of international financial circles, and Nigeria, whose struggles with armed conflict and oil-fueled corruption probably need no introduction. As such, Uganda has reasonably strong access to international capital. However, the country’s score at the 14th percentile for control of corruption leaves something to be desired.
So, both types of Chinese actors are present here: the backroom dealers and the transparent bidders. Uganda provides an interesting test case to see both types at work in the same country. In sectors such as public health, oil, and manufacturing, Chinese firms have worked relatively transparently in conjunction with local and international stakeholders and have had appreciable success. Some infrastructure projects, on the other hand, have been marked by cronyism and opacity and have run into a variety of problems. The rest of this article looks at the strategies of Chinese actors in 1) public health and public services, where they have had more success; 2) a series of more problematic projects building connective infrastructure; and 3) budding potential success stories in productive industry. As we will see, the transparent, open approach has proven superior in maintaining quality control and minimizing corruption and waste.
Source: Nations Online Project
Public Health and Public Services
Public health is a high priority both for Ugandan development and for Sino-Ugandan relations. Apart from being an obvious humanitarian issue, economists such as Jeffrey Sachs hold that public health can be an economic issue as well. Workers sidelined with illnesses contribute less to economic output; children missing school inhibit the formation of human capital; relatives taking care of both of the above groups may also miss out on work or schooling. Given that most economies only grow by a few percentage points per year, a week or two of lost productivity per year can actually make a substantively important difference.
Per AidData, from 2000 to 2014, China provided at least US $111.8 million in health assistance to Uganda. China is hardly alone in this effort: over the same time period, the OECD estimates that other official donors contributed $2.1 billion to Ugandan public health initiatives. This impressive number is unsurprising given many Western donors’ and the World Bank’s emphasis on social sectors such as health and education since the 1990s, as well as their relative budgetary advantage over China in the early 2000s. Two individual diseases stand out as worthy of special attention. First, Ebola has periodically appeared in Uganda since the early 2000s. It is currently raging just across the country’s western border with the Democratic Republic of the Congo (DRC) and as of this writing may have spread to Uganda. Second, Uganda has a relatively high malaria burden. The particularly lethal Ebola virus is a high-impact, low-probability threat—it usually afflicts relatively small numbers of people but is highly fatal. Malaria, on the other hand, is a low-impact, high-probability problem—an unfortunately common occurrence, but one which most patients survive.
From 2000 to 2012, Uganda had five Ebola outbreaks, with a possible sixth currently emerging. By far the worst happened in late 2000 in the northern district of Gulu, when camps of internally displaced persons fleeing the Lord’s Resistance Army (LRA) insurgency were afflicted, and the insurgency itself complicated efforts to bring medical care. Northern Uganda suffered 393 Ebola cases and 203 deaths as a result. The Lord’s Resistance Army is now a shell of its former self, but the main Ebola threat has now shifted from the North to the West. The conflict-torn DRC has periodic outbreaks of Ebola, and Uganda’s smaller Ebola outbreaks since 2000 have been concentrated in the West, closer to the Congo. An ongoing Ebola outbreak in the DRC’s North Kivu province, which borders Uganda, has as of this writing infected 2,014 people and killed at least 1,411. On June 13, the New York Times reported that two members of a Congolese family died on the Ugandan side of the border, and three unrelated people suspected to have the disease are at a hospital in the Ugandan border town of Bwera.
A large coalition of actors has responded to fight the Ebola outbreak, albeit with mixed success to date. This effort has been hampered by the fact that the outbreak is taking place in an active war zone with no functioning government to speak of. Healthcare providers have difficulty reaching patients, and often face substantial risk in doing so. The World Health Organization is spearheading a response team to which the Chinese government has contributed experts. Some Chinese doctors have brought doses of a new experimental Ebola vaccine to PRC nationals living in the DRC. Like several other candidate vaccines, the Chinese vaccine has not yet been fully tested and is available only in small quantities, but it is being used on an accelerated timeline relative to most vaccines under development due to the severity of the disease. The dispatch of physicians to the DRC is not technically Sino-Ugandan cooperation, but it is clearly beneficial to Uganda nonetheless. Efforts to prevent Ebola in peaceful western Uganda are not quite as challenging, and the China Center for Disease Control and Prevention has sent doctors to support the Africa Center for Disease Prevention and Control in Uganda.
Malaria has been present in Uganda since before humans walked the earth, and presents a less eye-grabbing, more routine kind of challenge. Like many tropical countries, Uganda has a high burden of malaria. The World Health Organization estimates that in 2017, Uganda had 8.6 million cases of malaria; using World Bank population data, this comes out to 20.1 cases per 100 people, the 18th highest incidence in the world. This number is staggering but appears less so when one learns that as recently as 2010, Uganda had 33.9 cases per 100 people. In 2017, roughly 14,400 Ugandans died of malaria. On one hand, this means that over 99% of those infected survived; on the other, this is seven times as many deaths as have been caused by the Ebola epidemic next door in Congo, not to mention the economic damage wrought by such a large portion of the population missing productive work or schooling. Donors are aware of this issue. From 2000 to 2014, the OECD estimates that official donors committed around US $603 million to antimalarial efforts in Uganda. The dollar value of Chinese commitments is somewhat unclear, but of the twenty-six projects listed in AidData—again, these totaled $111 million—seven involved malaria, with an eighth involving both malaria and general health. Rates of malaria infection in Uganda are indeed falling, and the multinational effort appears to be paying off.
China’s contributions by no means constitute the majority of the push for public health in Uganda, but they are likely appreciated as any others’ would be. Also earning diplomatic kudos are China’s donations of government buildings: China has contributed new buildings for the Ministry of Foreign Affairs, State House, and Presidential and Prime Ministerial offices, as well as an expansion of the Parliament building. In a less political sphere, Uganda’s Mandela National Stadium was a gift from China as part of Beijing’s so-called “stadium diplomacy,” a nod to the fact that few things win hearts and minds like sports.
China prides itself on taking a “horizontal” or “win-win” approach to international development, emphasizing business transactions between equal partners instead of vertical relationships between donors and recipients. The above contributions possess an undeniably vertical flair, but much of China’s engagement in Uganda does not. We next turn to an area in which Chinese organizations have drawn substantial financial benefit: Uganda’s push for better national infrastructure.
Cables, Roads, and Railways
Connectivity is a major issue for Uganda. Scholars such as Jeffrey Herbst have long noted that many African leaders have historically struggled to effectively exert control over territory that is any distance from the capital. The continent is characterized by formidable mountains, hills, forests, and deserts, with only a few navigable rivers providing natural arteries of communication and commerce.
Source: International Livestock Research Institute (2005)
As a geographically compact country, Uganda has it easier than most, but its center of gravity remains anchored in the country’s south, near the four million-strong metropolitan area surrounding the capital of Kampala as well as the nearby shores of Lake Victoria. The north, on the other hand, was home to the aforementioned Lord’s Resistance Army (LRA) insurgency. Even today, remnants of the insurgency remain in northern Uganda and neighboring countries, and the Ugandan military retains a strong presence in the north. The LRA may be on its back foot, but much larger insurgencies exist in South Sudan, to Uganda’s north, and the DRC, to the west. The “usual suspects” of this type of insurgency—refugees, public health concerns, transnational smuggling, etc.—are a concern. To China, building infrastructure is about earning cash for firms which built themselves out of a job in their saturated home market. To Uganda, it is about something much more fundamental: consolidating control over the entirety of the national territory and enabling safe commerce within Uganda’s borders and onward to neighboring countries. This is even more important for Uganda than for most other countries because it is landlocked, relying on eastward passage through either Kenya or Tanzania to access the Indian Ocean. Uganda is in the midst of building up intranational and transnational connectivity via telecommunications, air travel, highways, and railways, and China is involved in many of these areas.
Better Internet connectivity can assist the delivery of public services, provision of security, and access to markets via e-commerce platforms or even simple real-time knowledge of prices across the country. Mindful of this fact, the Ugandan government in 2008 installed a Motorola Tetra system to be used by the national security services. This development came in the midst of a much larger network connectivity project built by Chinese telecoms giant Huawei. In 2006, Uganda agreed to a US $106 million loan from the Export-Import Bank of China (Exim) to build a national fiber optic system. Under this agreement, Huawei would first build cables between government offices across the country and then proceed to linking up with networks in South Sudan and Kenya (the second phase) and Rwanda (the third phase). The idea was to lower costs and increase the efficiency of the government, which before then often relied on satellite phones for communications between different parts of the country.
It is hard to argue with the basic idea behind the project, but the implementation has left something to be desired. In 2012, Ugandan President Yoweri Museveni sent a letter to Prime Minister Amama Mbabazi stating that Huawei had used a lower grade of cable than previously agreed upon, buried it at a sub-standard depth, and overcharged the Ugandan government relative to what Rwanda had paid for a similar project. President Museveni asked the Auditor General to look into the issue, and the Auditor General essentially confirmed Museveni’s suspicions, estimated losses from overpricing at $41 million, faulted insufficient procurement and planning processes, and recommended that the project be canceled. As of this writing, the project appears to still be in limbo. (The project made it toward the end of the second phase, linking Uganda to South Sudan and Kenya, before these problems came to light.) Huawei has not been totally iced out of the Ugandan market by the scandal; to the contrary, the firm has been contracted to bolster Uganda’s security in a different way by installing a nationwide network of CCTV cameras to the tune of $103 million. However, this time the financial backer is not Exim or a fellow Chinese lender, but UK-based Standard Charter Bank. This tells us something. The Ugandan Auditor General identified procurement as a serious problem in the fiber optic case. China Exim and China’s other major international policy bank, the China Development Bank (CDB), both require the majority of funded contracts to go to Chinese firms, which are in practice either hand-picked or selected by the borrower from a limited menu of options. Huawei faced little or possibly no competition for the bid, and as Uganda’s Ministry of Information and Communications Technology was still being set up at the time, probably received minimal oversight. It should not come as a total surprise that some corner-cutting ensued. Uganda’s decision to handle the CCTV project differently makes sense. First, the decision to borrow from Standard Chartered over Exim might have been aimed at preventing a repeat of the fiber optic project’s failure. Standard Chartered is a private organization concerned primarily with profitability. This may make it a better overseer than Exim, whose core mission is not profitability so much as promotion of Chinese interests. Second, there appears to have been at least a limited degree of competition for the tender. According to the proceeds of a Ugandan Parliament committee meeting, four companies were offered the chance to bid, and two actually submitted bids.
Of course, digital connectivity is not the only kind of connectivity. Uganda is also beefing up its air travel system, especially via the primary hub at Entebbe. Entebbe, on the shores of Lake Victoria, sits 43.7 kilometers from Kampala, meaning Uganda faces the dual challenge of expanding the airport’s capacity and improving connectivity between Kampala and the airport to keep up with greater air traffic. China is involved in both. The $480 million airport expansion project is nearing the completion of its first phase, which was backed by a $200 million loan from China Exim and a $9 million grant from the South Korean government. Oddly, however, China’s marquee project in the country has not been the renovation of the airport itself but the construction of a toll road between the airport and Kampala. When the road opened last year, one source reported that the transit time between the capital and the airport fell from two hours to forty-five minutes. Backed by a $476 million loan from China Exim, the road was built by China Communications Construction Corporation (CCCC), the same firm which carried out the first phase of airport expansion, and the road has helped them get materials to construction sites. Unfortunately, this “package deal” involving Exim and CCCC has run into difficulties. At one point, the project was delayed due to disagreements over land compensation, although in all fairness, this is an extremely common issue for large infrastructure projects. More unambiguously problematic is the observation by Ugandan Auditor General John Muwanga that the road was much more expensive than one might expect. Its cost per kilometer was double what Ethiopia paid CCCC to build a highway of a similar nature. The head of design at the Uganda National Roads Authority commented that, to use Reuters’ paraphrasing, “single-sourcing was a requirement for China providing a $350 million Exim bank loan for the road.” (The loan’s value grew from $350 million to over $400 million over time.) Again, Exim brokers a blockbuster deal involving a large Chinese firm, and things don’t go completely smoothly.
Not all deals are blockbusters, and while the airport overhaul and new toll road will likely increase tourism revenues and facilitate business travel, many of these benefits will be concentrated in Kampala and Entebbe. If Uganda is to promote security and commerce across its entire territory, many smaller roads will be necessary. Toward this end, the Uganda National Roads Authority coordinates a national effort to improve both the reach and quality of Uganda’s roads. These roads are typically small, scattered across the country, and funded by Ugandan government revenues. In 2011, a Chinese loan covered the export of $100 million worth of road construction equipment, with the generous repayment period of forty years. Chinese firms are also frequently contracted to build these roads. Of Uganda’s 2,563 kilometers of roads listed as under construction as of December 2018, 1,924 kilometers (75.1%) are being built by Chinese firms. A 2018 investigative piece by Quartz similarly found that 70 percent of the value of a sample of road contracts went to Chinese firms. However, they found that only 20 percent of the funds were actually backed by Chinese lenders; most Chinese contractors were either working with funding from the Ugandan government or a third party like the African Development Bank.
This would seem to reduce some of the risk of malfeasance and cost inflation that has plagued Exim-backed infrastructure deals in Uganda, but the track record so far has not been quite so encouraging. In 2015, it came to light that the Mukono-Katosi road project had been awarded to an American company called Eutaw which improperly entered the bidding process without the usual screening and qualification and later turned over work to the Chongqing International Construction Corporation (CICO), despite an explicit ban on subcontracting. In hindsight, it became clear that Eutaw was a front to allow CICO to cut the line in front of other bidders, and Eutaw’s “Ugandan representative” was convicted of theft last year. This may be part of a broader pattern: in 2017, Kenya’s EastAfrican reported that six Chinese firms misappropriated funds meant for compensation of landowners, and a parliamentary committee recommended that they be blacklisted. The EastAfrican noted that UNRA was still doing business with many of them. All of the blacklisted companies are still listed as active contract participants as of December 2018. One of them, CICO, provided the surfacing work on a $175 million bridge across the Nile built by a Japanese-Korean consortium. The bridge’s asphalt began to peel away almost immediately, and a Japanese company official told reporters that the selection of CICO had been “against our wish.”
At this point, we should dispel the notion that Chinese banks’ ability to choose contractors in non-competitive bids is the entirety of the problem. The Ugandan National Roads Authority mostly provided its own funding, but its bidding process was fundamentally flawed. The above anecdotes involving Chinese firms are just the tip of the iceberg. A commission appointed by President Museveni found that over four trillion Ugandan shillings (over US $1 billion) had gone missing from UNRA. (For reference, the World Bank puts Uganda’s 2017 GDP at $25.9 billion.) Clearly, there was a serious and long-standing pattern of malfeasance at the agency that Chinese firms did not create but did not make any better either.
One last infrastructure item merits mention before we proceed to the productive sector. The Kampala-Entebbe highway may be China’s most visible project in Uganda to date, but that could have changed. With the goal of facilitating commerce and industrialization through better access to markets and seaports in neighboring countries, Uganda hopes to upgrade its network of railways connecting Kampala to the borders with Kenya, South Sudan, the DRC, and Rwanda. These tracks date back to the British colonial era and are in bad shape. The eastern portion leading to Kenya is particularly important, since it could connect onward to the port of Mombasa and from there to a planet’s worth of potential consumers for landlocked Uganda’s goods.
The original plan had been for China to build a standard-gauge railway (SGR) connecting Mombasa to Kampala. Indeed, two-thirds of the Kenyan portion of this project have already been built. In 2017, President Museveni approved a loan deal with China Exim under which China Harbour Engineering Company would build the part of the railway system connecting Kampala to Kenya. The reported value of the loan has fluctuated over time as negotiations continue, but a report from late 2018 puts the bill for the Kampala-Kenya stretch, the first to be built, at $2.2 billion. The system as a whole was expected to cost around $12.8 billion, although there is always a bit of uncertainty in the cost of a project of this size.
The project has run into several obstacles, and over the past weeks it has come to appear increasingly unlikely that it will be completed. The first problems came from within Kenya itself. In December 2018, it leaked out that the Port of Mombasa is being used as collateral to be repossessed by China in the event that Kenya cannot pay its railway debt. The image of China moving in on poor countries’ critical infrastructure was already in the press following a similar situation in Sri Lanka, and Kenyan public support for the railway took a hit. On a related note, the Kenyan portion of the railway—keeping in mind that the stretch between Mombasa and the inland capital of Nairobi is already complete—has not been as profitable as hoped and is subject to a series of legal restrictions which places most of the project’s financial downside risk on Kenya Railways and off the shoulders of the operators, the China Road and Bridge Corporation. It is possible that the railway could trim its losses over time as usage increases, but it is also possible that it never turns profitable. Neither the Chinese nor Kenyan government is quite as bullish on this question as before. In May 2019, following a series of delays in funding from Exim for the final third of the project, Kenya decided to cancel it. Kenya is instead opting to use private funding to overhaul its old metre-gauge railway, a narrower (and cheaper) alternative to the Chinese-built standard gauge. What this means for Uganda is quite clear. There is no reason to build a standard gauge railway to the Kenyan border if goods will then have to be transferred to the old metre gauge anyway. Uganda is now planning to overhaul its metre-gauge tracks to the Kenyan border for only $205 million—an impressive bargain next to the $2.2 billion that the standard gauge tracks would have cost. As of June 13, Ugandan President Museveni has stated that procurement is still under negotiation, and the odds would seem to be against China remaining involved.
Quality control issues, cost inflation, corruption, and (in the railroad’s case) a lack of profitability have taken a toll on many Chinese infrastructure projects in Uganda. However, China’s engagement in Uganda’s productive sectors such as oil, agriculture, and industry has so far been more successful. Finally, we arrive at the good news.
Fuel, Food, and Factories: A Ugandan Boom?
Uganda exports many agricultural products but imports many manufactured goods and runs a serial current account deficit. This poses some obvious challenges to debt repayment, which could be addressed through a combination of industries. Chinese firms are involved in many of them.
Perhaps the biggest card in the deck is oil. There are known but as yet unexploited oil deposits under Lake Albert, along Uganda’s border with the DRC. Along with Britain’s Tullow Oil and France’s Total, the China National Offshore Oil Corporation (CNOOC) is part of a consortium to begin production there. A GE-led group (without Chinese membership) is building a refinery at Hoima, near the production site. Of course, the production sites themselves are not enough to bring oil to market. CNOOC is also part of a consortium with Total, Tullow, and Tanzanian and Ugandan government interests to build a pipeline to the Tanzanian port of Tanga. Britain’s Standard Chartered Bank, with the backing of UK Export Finance, is financing Uganda’s second international airport at Hoima, where the refinery is to be located. The project is being built by the Israeli firm Shikun & Binui. This airport should help with the construction of the refinery in the near term as well as routine operations later on. On the ground, a series of “oil roads”—this is the official nomenclature—are being built in the area to service what are now construction sites and will be production facilities. The Ugandan Parliament is currently considering a $456 million loan from China Exim to build the roads, and a Chinese firm has been named as the general contractor for a $134 million segment. Perhaps in response to prior mishaps, thirty percent of the value of this segment must go to Ugandan firms, but per the sources listed above, the Chinese general contractor was on Parliament’s blacklist.
The situation with the oil roads may be a cause for concern, but the oil project overall has run into fewer obstacles than the telecoms or highway contracts. Those even a little bit familiar with the history of extractive industries in Africa might find it surprising that oil has, at least to date, come across as one of the cleaner sectors. Chinese interests—in this case, CNOOC—are part of a large, multifaceted effort which brings in both the local government and an array of firms and funders from across the world. It is much more difficult for graft to thrive under the gaze of so many different sets of eyes. Contrast this with the results of deals between a bank and a handpicked firm, or a cronyistic relationship between firms and a compromised government ministry. It is probably too soon to say what impact Uganda’s oil will have on the country. The Museveni administration appears to be banking on oil to pay back at least a large part of the debt incurred from Uganda’s infrastructure buildup. In this way, there are some parallels to what China has done by collateralizing loans with oil in countries like Angola and Brazil, but with a more complex multinational oil investment structure instead of a simple deal involving one bank and one or two oil firms. Uganda’s strategy necessarily involves a gamble that oil prices will not fall any further, but given the current trough in prices and Uganda’s large development needs, one cannot blame the country’s leadership for being willing to take the risk.
Fortunately, oil is not Uganda’s only means of generating greater cash flows to repay its debt. The aforementioned rail and road projects are partially motivated by a desire to help industrial producers, who typically operate at a disadvantage due to Uganda’s landlocked location and high transportation costs. This will require investment in reliable electricity generation as well as industrial buildings themselves. Uganda is criss-crossed by rivers flowing into the Great Lakes that surround it; its location at the headwaters of the Nile, the world’s longest river, is by itself noteworthy. This puts Uganda in a favorable location for hydroelectric power generation. China has been involved in the construction of two large dams at Karuma and Isimba. The Isimba dam, backed by Exim with a $482.5 million loan at only 2 percent interest and built by China’s Three Gorges, is located along the Victoria Nile not far from Kampala and went online in March. Exim backed the even larger Karuma dam with $1.4 billion, again at 2 percent interest, and brought in Sinohydro to build the project. Electricity proceeds will be placed in an escrow account which will repay the loan. Karuma is located further north and is more oriented toward underserved rural areas.
There is both good news and bad news here. The good news is that these projects together are expanding Uganda’s electricity supply by an order of magnitude. The EastAfrican cites estimates that Isimba’s 183 megawatts (MW) of capacity brings Uganda’s national total to 1,167 MW, as opposed to 600 MW of peak demand. A majority of Ugandan households do not have access to electricity, and there are relatively few electricity-using industrial firms, so Uganda is clearly banking on an expansion of supply to facilitate greater usage. Indeed, The EastAfrican estimates that prices could fall from $0.08 per MW to $0.05, although with a large margin of error depending on future market trends. The Karuma dam, still under construction, will be even larger, at 600 MW. This is a game-changing investment for the Ugandan power sector.
As in the case of the highways, though, the bad news has come in the implementation phase. Both dams have shown signs of cracking and other quality control problems. The Ugandan government nominally opted not to renew the contract of India-based Energy Infratech to oversee construction and quality assurance at Isimba and Karuma, although they were seen onsite after this announcement. Three Gorges completed construction at Isimba, and Sinohydro is still building at Karuma. Again, Exim’s anointment of preferred firms has inhibited competition and opened the door for suboptimal outcomes.
Uganda's President Yoweri Museveni Chinese Ambassador to Uganda Zheng Zhuqiang inaugurated the Chinese-built Isimba Hydropower Plant on the Victoria Nile in the central part of the African country.
It may be too soon to say how well the hydroelectric projects pan out in the long run, but I will end on a more optimistic note. China is investing in a series of industrial zones across Uganda. The China-Uganda Agricultural Industrial Zone is one novel such example. Funded by the Sichuan-based Kehong Group as part of a longstanding program of cooperation between Sichuan province and Uganda, the $220 million zone focuses on boosting local agricultural output and value added through agricultural processing. President Museveni himself attended the zone’s 2016 groundbreaking, stating that “what was a forest is going to turn into a city for agricultural produce and factories.” Left unstated is the fact that an agricultural park plays to Uganda’s natural advantages: the country’s principal goods exports are coffee, tea, and foodstuffs. Increasing output in these sectors and capturing larger parts of the value chain through processing could trim Uganda’s trade deficit and make it easier to repay its infrastructure debts.
The same goes for conventional industrialization. The Belt and Road frequently offshores lower-tech mature industries which are less in demand in China following its 2000s construction boom, and Uganda is receiving its share of this windfall. Guangzhou DongSong Energy Group is working on a $600 million industrial park near Tororo, along Uganda’s border with Kenya. The park is near a series of phosphate and iron deposits. The phosphate is already being used to produce fertilizer as of 2018, and the iron ore will be used to make steel and other iron products. Other planned businesses include factories to make glass and bricks. It is not hard to see the investors’ strategy here. Lack of access to fertilizer is typically a major constraint for African farmers, and if Uganda wants to increase farm output, this will be an important step. The other materials are useful for the large volumes of construction that typically happen during industrialization. Already, a small Chinese-invested cement plant near Tororo has been contracted to supply cement for the Entebbe airport expansion and two highway projects.
Another $600 million park backed by Tian Tang Group in Mbale, (again) in the east by Kenya, is also in the works. As of 2018, eight Chinese businesses had already subscribed in sectors including food processing, wood products, and glass-making. Chinese construction materials heavyweight Sinoma has reportedly agreed to invest in a $500 million cement plant at the site as well. Both of these parks’ locations near Kenya is a nod to export ambitions—President Museveni said as much at the Mbale park’s groundbreaking ceremony, stating that “Mbale cannot become a city when it’s filled with shops dealing in selling phones, razorblades and paraffin instead of factories that manufacture goods and services for export.” Tororo, the site of the Guangzhou DongSong park, just so happens to be the border crossing site of the Kenya-Uganda railway slated for rehabilitation.
These industrial parks are in their early stages, and success is not guaranteed. While the model of tax-preferred industrial parks has been wildly successful in parts of Asia, it has regrettably had less success in Africa to date. The obvious exception is Ethiopia, where a large domestic consumer market helped begin what has become an export-oriented light manufacturing boom, especially in textiles and leather goods. Most African countries do not have the population density or internal market size to match Ethiopia, but compact, relatively populated Uganda is in a better position than most. Its issue with corruption is less of a problem for factories than for other sectors. Construction contracts can be inflated or skimmed relatively easily, and oil funds are typically centralized and easy to expropriate. Factories, however, operate in a world of diffuse ownership across many small plants and competitive, market-determined prices for inputs and outputs. Skullduggery is typically more difficult to accomplish here. Indeed, corruption never got in the way of success in Ethiopia or, for that matter, Bangladesh, Cambodia, or China itself. A bigger obstacle has to do with basic infrastructure. Transportation costs in Uganda are relatively high, and better road infrastructure and (later on) railway infrastructure will be important. In the near term, Ugandan manufacturing can serve the domestic market and neighboring countries—the new African Continental Free Trade Area could be a boon in this respect—but in the longer term, Ugandans will probably want to think even bigger, and this will require reliable access to the port at Mombasa. Electricity is also an issue. If quality control problems turn out to inhibit the Isimba and Karuma dams’ electrical output, Uganda will have to lean more heavily on other power investments to make up the shortfall. Even if the electricity arithmetic still works, this could leave Uganda in the unenviable position of having to repay debt on two large white elephants. Another wild card is the effect of oil prices. High oil prices could make it easier to repay debts, but could also lead to a “Dutch disease” effect whereby demand for the Ugandan shilling causes it to gain value and make Ugandan manufacturing exports less competitive. Essentially, there may be a tradeoff between relying on oil and relying on manufacturing. A wide range of outcomes are possible here, and it is worth following future developments in an economic development story that is far from over.
Uganda’s simultaneous economic promise and struggles with corruption provide something of a microcosm of the Belt and Road worldwide. At times, weak governance gets in the way of success. Non-competitive bidding processes in construction sectors can predictably lead to cost inflation, quality issues, and graft. On the other hand, a different kind of Chinese investment is also seen worldwide, albeit with much less fanfare. Light manufacturing and building materials factories are being outsourced across the globe, and China’s largest oil companies frequently participate in relatively transparent multinational consortia. Instead of relying on connections to local governments and/or state-owned banks, this approach has companies act according to more traditional market incentives.
Is it possible that the cooperative, transparent approach begins to overtake the old single procurement model? Or, at the very least, could the single procurement model be tamed? Perhaps. The establishment of the China International Development Cooperation Agency aims to increase oversight of firms carrying out grants and concessional loan contracts. The new agency has a steep hill to climb in asserting control over distant overseas actors, but in time it might make a difference. The Asian Infrastructure Investment Bank (AIIB), a Chinese-led multilateral organization which formally began operations in 2016, appears to be taking environmental, social, and governance standards more seriously. Its legal standards bear the influence of leading development banks such as the World Bank. Similarly, it has recruited staff from many multinational development organizations and co-finances most of its projects.
The Belt and Road itself has been an undeniably Chinese initiative, with the lion’s share of contract value reserved for domestic firms. Last month, AIIB President Jin Liqun told an audience at Boao that “I think they [many foreign analysts] misunderstand Chinese strategy. They think only Chinese projects can be part of the Belt and Road, but this is not true, and it is not the Chinese leadership’s intention.” Statements about the universality of the Belt and Road have been around since the beginning, but they take on a different character now that the Chinese leadership is having to react to global concerns about its economic outreach, including many calling for greater transparency and oversight. Quite a bit is up in the air right now. This author finds it hard to imagine that China Exim and the China Development Bank, the two “policy banks” backing many overseas deals, will shy away from their core mission of supporting Chinese firms, especially given an overcapacity crunch and slowing economy at home. However, other types of business arrangements might allow a greater degree of openness. Chinese commercial banks are both more flexible in their dealings with recipient country or third country firms and are subject to greater profitability requirements than the policy banks, whose ability to lose money can be a positive for encouraging slow-moving long-term infrastructure investments, but a negative for opening the door to bad behavior by contractors. Equity investments also give Chinese firms more of a vested interest in what they are building, instead of simply trying to build very quickly at a very high price. Smaller, private Chinese firms are likely to act on a more arms-length basis precisely because they have fewer connections to large state-owned banks. These rarely grab as much attention as the state-owned giants whose pockets are admittedly much deeper, but they can quietly make a difference. The Belt and Road may continue to evolve toward allowing growth in these types of arrangements.
Scott Wingo is a doctoral candidate in political science at the University of Pennsylvania focusing on China’s economic engagement in the developing world and why its modes of doing business are different from those used by Western governments, international organizations, and multinational corporations. He has previously worked with the Woodrow Wilson Center, the World Bank, and in the private sector, and has served as a teaching assistant for five semesters at Penn. He holds both a Bachelor’s of Science in Foreign Service and a Master’s of Arts in Asian Studies from Georgetown University. You can follow him on Twitter @ScottCWingo.