POLICY BRIEFING 10
China in Africa Project
November 2009
Chinese Investment in African Free Trade Zones: Lessons from Nigeria’s Experience
Gregory Mthembu-Salter1 RECOMMENDATIONS
• African governments need to EXECUTIVE SUMMARY show political commitment at the highest level to free trade zones (FTZs) for these FTZs to succeed. igeria’s free trade zone (FTZ) legislation has been in place for 17 years, but progress in implementation has been uneven and slow. • Technology transfer should N The main FTZ in which Chinese companies play a signifi cant role is the be a core objective for African Lekki Free Trade Zone (LFTZ), where work began in 2006. A Chinese governments negotiating consortium led by the China Civil Engineering Construction Company agreements with Chinese investors holds a majority stake in the Lekki Free Zone Development Company for FTZs. (LFZDC), which has a 50-year lease on the site. The first phase of • To maximise the prospects development is due for completion in 2014, at an estimated cost of of technology transfer from $700–800 million. The LFZDC has faced major diffi culties, including a Chinese investors in FTZs, African dispute within the Chinese consortium and a continuing lack of certainty governments should not only make about its power supply, but enjoys strong support from the Lagos State clear, achievable demands of these governor, Babatunde Fashola, and construction is pushing ahead. investors during negotiations, A number of lessons can be derived from the LFZDC’s experience, but also take steps to improve the including the need for greater confi dence in negotiating with potential overall business climate in which Chinese investors, even in cases where countries have a high-risk profi le. the negotiations are taking place. Finally, it is clear that the more promising the business climate, the greater the prospect of technology transfer from Chinese investors, increasing the • African governments should not overall benefi t to the host country. offer potential Chinese investors in FTZs over-generous terms, even FREE TRADE ZONES IN NIGERIA if they are the only prospective investors, but must also recognise The Nigeria Export Processing Zones Authority (NEPZA), with the power that the riskier the business to license, monitor and regulate tax-exempted FTZs, was established in climate, the greater the leverage 1992 during the rule of Major-General Ibrahim Babangida. Investors investors have to dictate terms. in Nigeria’s FTZs are promised a ‘complete tax holiday’; one-stop approvals for all permits and licences; duty-free imports; permission to sell everything made in the zones to the domestic market; 100% foreign
AFRICAN INSIGHTS. GLOBAL PERSPECTIVES. CHINESE INVESTMENT IN AFRICAN FREE TRADE ZONES: NIGERIA
ownership of investments; 100% repatriation of displaced villagers, and identify Nigerian investors capital, profi ts and dividends; and a prohibition to provide an additional $67 million. The LSG had on strikes and lock-outs.2 Yet, because of the apparently been under the impression that all the uncertainties surrounding governance and the Chinese consortium’s money would be delivered country’s infrastructural weaknesses, particularly up front, but the contract did not specify that, concerning power generation, international and this was not how the consortium proceeded. investor take-up of these generous incentives has Instead, as of April 2009, the consortium was said been low. to have provided only $50 million in cash and kind for the project, while no money has been CHINESE INVESTMENT IN forthcoming from Nigerian investors. The lack NIGERIAN FREE TRADE ZONES of Nigerian investment has obliged the LSG to step in, and $67 million has been allocated to the The first FTZ where Chinese companies have LFTZ in the state’s 2009 budget.6 had a signifi cant stake is the LFTZ near Lagos. The LFTZ experienced diffi culties in late 2008 The LFTZ is a 16 500-hectare area, about due to confl icts within the Chinese consortium. 60 kilometres east of central Lagos, and was One of the main consortium members, identified for development by the Lagos State the China Civil Engineering Construction government (LSG) in 2005. The LSG had Corporation (CCECC), which is the second- originally hoped to identify Western companies largest construction company in Nigeria, had prepared to join it in a consortium to develop the assumed it would handle the bulk of the LFTZ’s site, but failed to do so. It then ‘looked East’ and construction needs. Instead, however, another in April 2006, via a new company wholly owned consortium member, Nanjing Jiangning Economic by the LSG called Lekki Worldwide Investments and Technical Development Zone (Nanjing), (LWI), formed a joint venture, Lekki Free Zone appropriated more and more of the task of Development Company (LFZDC), with a Chinese completing the fi rst 1 000-hectare development consortium. The Chinese consortium holds 60% phase. Concerned that the quality of the work of LFZDC, LWI holds 20%, and 20% has been left being carried out might suffer, the LSG lodged for Nigerian investors.3 a formal complaint, halting work on the project The second FTZ where China has invested is and demanding that CCECC return. The Chinese the Ogun Guangdong Free Trade Zone (OGFTZ), government then intervened and unilaterally in Igbesa, Ogun State, which in mid-2009 was at restructured the Chinese consortium in CCECC’s the site clearance stage. The OGFTZ is run by a favour. The Chinese government also brought joint venture between the Ogun State government in a new investment partner, the China–Africa and a Chinese consortium called the China African Development Fund, which is managed by the Investment Company, which was approved by the China Development Bank. This satisfi ed the LSG NEPZA in mid-2008.4 The Ogun State government and construction work resumed, this time carried has an 18% stake in the joint venture, and the out by CCECC, in early 2009.7 China African Investment Company, which is led Work during the fi rst half of 2009, before the by China’s Guangdong, has the balance, plus 100% arrival of seasonal rains halted most construction, management control and a 100-year concession for was slow going, since the land is boggy and has the OGFTZ.5 required extensive fi lling.8 In April 2009 phase I was scheduled for completion in 2014.9 Total THE LEKKI FREE TRADE ZONE investment for the phase was scheduled to run to $700–800 million, with the idea being to spend The LSG and Chinese consortium agreed in 2006 the initial $267 million getting to the point where that the consortium would invest $200 million LFZDC has a bankable project for which it can in the LFTZ, while the LSG would arrange the seek fi nancing. The China–Africa Development licence, provide the land, move and compensate Fund is said to be interested in contributing a
SAIIA POLICY BRIEFING 10 2 CHINESE INVESTMENT IN AFRICAN FREE TRADE ZONES: NIGERIA
signifi cant proportion of these funds. hectare site for a payment of just $200 million, A major challenge is securing a reliable without even the stipulation that all the money power supply for the LFTZ. LFZDC’s plan is to be delivered up front. The reason for these construct a gas turbine power plant, but neither terms was, fi rstly, the lack of interest in Lekki it nor the Lagos FTZ has yet resolved the issue from any investors apart from the Chinese and, of where to access the gas. Running a pipeline secondly, the LSG’s inexperience in establishing from the violent and troubled Niger Delta region and running an FTZ. An LSG representative said has problematic security implications, and that the state government now recognises that not LFZDC has said it is exploring alternative energy only was the original agreement far too generous, sources. In the meantime, however, LFZDC is but it was also unworkable, since at the current running expensive diesel generators to power its pace of construction, for LFZDC to develop the construction programme.10 whole site would take 30 years.12 The agreement Despite the challenges, LFZDC has the has since been renegotiated, allocating LFZDC considerable benefi t of strong political support. just a 3 000-hectare site within the 16 500-hectare Like his predecessor, the present Lagos State total and creating the space for the LSG to invite governor, Babatunde Fashola, is strongly in other investors to handle other parts of the site. behind the FTZ and made it a central part of his Another issue that has been renegotiated since election manifesto. Less clear, perhaps, is the the original agreement concerns the number of enthusiasm of the Chinese consortium for the Chinese workers employed by LFZDC. Initially, project, which has been alleged by some involved it appears, there were no restrictions on this, and to have waned since the disagreements of the result was that Chinese companies imported late 2008.11 and employed mostly Chinese workers, much to the resentment of local Nigerians. Since then, a LESSONS FROM THE LEKKI FREE local content agreement has been negotiated, TRADE ZONE which guarantees that a minimum of 40% of the LFZDC workforce must be Nigerian and that any When a country has a high-risk profile, this work that can be performed by Nigerians must be. gives investors powerful leverage to dictate As a result, many among the Chinese workforce terms. have been sent home. The LSG representative A major constraint for the LSG, other state in LFZDC has commented that while the new governments and the federal authorities is that agreement is still not perfect, it is much better for as long as Nigeria is perceived as a high-risk than the old one, and that the LSG will handle investment destination, they will always struggle negotiations with other prospective partners more to secure agreements with investors in sectors confi dently and assertively in the future. beyond the offshore oil and gas industry. This means that investors, such as Chinese companies, The LFTZ illustrates the complex interplay that are prepared to risk investing in these sectors between Chinese companies and the Chinese will enjoy strong leverage, enabling them to government. continue to impose terms that are decidedly The Chinese government is adamant that Chinese suboptimal from the Nigerian point of view. companies are encouraged to compete with one another at home and in foreign markets. Lack of confidence can lead to African Nigeria’s experience suggests that this is indeed governments offering Chinese investors over- the case, particularly in telecommunications generous deals. and construction. Yet the LFTZ’s experience The original agreement between the LSG and the offers an indication of the limits of the Chinese Chinese consortium gave LFZDC, which is 60% government’s free market stance. When Nanjing owned by the Chinese consortium, the exclusive moved aggressively to appropriate as much of right for 50 years to develop a massive, 16 500- the LFTZ work for itself as it could, to CCECC’s
SAIIA POLICY BRIEFING 10 3 CHINESE INVESTMENT IN AFRICAN FREE TRADE ZONES: NIGERIA
detriment, Beijing fi rmly intervened, forcing a not in establishing an enduring manufacturing restructuring of the consortium to give CCECC a presence in the zone. Yet the Mauritian experience stronger role, increasing its stake from 25% of the suggests that when the operational environment consortium to 75%. The Chinese government’s is conducive, Chinese companies are prepared intervention was largely motivated by the LSG’s to invest in manufacturing and the transfer of complaints, illustrating the importance Beijing technology. The Nigerian authorities’ challenge if attaches to maintaining good political relations they wish to achieve the same result is to continue in the Lekki project. Another factor was that the the diffi cult, but ultimately rewarding, work they LSG’s main stated concern was the implications have started of shaping this environment. of Nanjing’s increased role for the quality of the consortium’s work. Chinese companies are ENDNOTES often criticised internationally for poor-quality workmanship and it seems that another reason for 1 Gregory Mthembu-Salter is a researcher, author the intervention was that the Chinese government and journalist on Africa’s political economy, and wants to improve this image. has served on the UN Panel of Experts on the Democratic Republic of Congo. CONCLUSION 2 NEPZA (Nigeria Export Processing Zone Authority),
The China in Africa Project is funded by the United Kingdom Department for International Development (DfID) and the Swedish International Development Co-operation Agency (SIDA). SAIIA gratefully acknowledges this support.
© SAIIA 2009 All rights reserved. Opinions expressed are the responsibility of the individual authors and not of SAIIA.
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