7 January 2013

Namibia: Chinese Building Loan Hits Snag

Photo: Herr Bert/Flickr
Chinese flag.

THE Namibian government is stalling on two Chinese loans allegedy because the borrowing costs are too high and other terms are stacked against the country's policies.

The loans of more than US$126 million from the Export-Import Bank of China - or the Chinese state-owned Exim Bank - were meant for the construction of two roads in northern Namibia, whose costs experts believed were inflated when the bids were awarded last year.

The two roads - MR67 Omakange to Ruacana and the DR3602 road between Omafo and Outapi - were awarded by the Ministry of Works and Transport to two Chinese companies without an open tendering process.

The Chinese Exim Bank approved a more than US$46 million [over N$397 million] loan for the Omakange- Ruacana road, and US$80 million [over N$684 million] for the Omafo-Outapi road.

In February last year, the Deputy Permanent Secretary of Works and Transport, Balbiena Pienaar, acknowledged that the N$1,4 billion road construction tenders had been awarded to China Gezhouba Group International Engineering (CGG) and China National Machinery and Equipment Import and Export (CMEC).

In the next month, the then Permanent Secretary in the Works Ministry, George Simataa, said the cost of building the roads would be N$4,9 million and N$7,6 million per kilometre respectively, instead of the average road construction cost of N$3 million per kilometre.

An industry insider at the time said the road construction costs of the two roads ought to be N$3,7 million and N$3,8 million per kilometre for each of the roads.

But now the Permanent Secretary in the Ministry of Finance, Ericah Shafudah, yesterday said the proposed terms of the two loans are "relatively cheap", but what Government now wants to re-negotiate with Exim Bank of China is the "sourcing fees" condition built into the loan agreements.

This condition stipulates that construction materials and services for the projects must be supplied from China only. It states that all goods, technologies, and services be purchased from China.

When Government raised its concern with the bank, it stated that the terms provided are standard to all its bilateral loans and cannot be changed.

"We did not find the funding offer to be risky or expensive, but only want the two parties to reach consensus on local sourcing of services and materials as this is the Government principle of public procurement," Shafudah said.

The newly appointed Minister of Trade and Industry and former Finance Ministry PS, Calle Schlettwein, shared her sentiments.

He said from a trade perspective, it is important that local content and services be sourced locally.

"We will try to negotiate terms to increase local sourcing. The Chinese side would obviously try to source maximally from its own economy. But while we need money to develop our infrastructure, we must also develop our own economy and add to the value chain," Schlettwein said.

Shafudah said the two parties will return to the negotiating table once all are back at their offices after the holidays.

Other conditions set by the bank is a "commitment fee" of 0,5 per cent on "undisbursed" funds which are paid on a semi-annual basis and increases on a daily basis from the inception of the loan. This means that Government would have to pay the 0,5 per cent as 'commitment fee' on those portions of the loans not yet disbursed from the time the loans are issued.

Yet another condition is a pre-payment penalty of 1,8 per cent, which government says would make it costly to repay the loans when market conditions allow it to do so at favourable exchange rates.

Then there are management fees that have to be paid upfront at 0,5 per cent of the total loan payable within 30 days after the loan agreement becomes effective. This means lump sum payments of 2,5 million Chinese Yuan Renminbi [or close to N$3,5 million] and 1,5 million Chinese Yuan Renminbi [or just over N$2 million] for each of the loans.

Shafudah yesterday said no other banking institution has been approached to fund the road upgrades, but that Exim Bank of China had made the offer to provide the funding.

She did, however, say that any offer has to be subjected to scrutiny and negotiations.

The two road projects have raised controversy from the start.

The Chinese loan offer has been rejected by Government already in 2009 as "onerous" and "risky", and concerns were then expressed that the road construction tenders had bypassed official open tender processes.

People familiar with Chinese loans to Namibia say they may appear relatively cheap on face-value but have more in-built conditions that make them more expensive to repay than, for instance, domestic borrowings.

In 2011, the Works Ministry once again wanted Government to consider the Chinese loans for the road construction projects, and Simataa then said that the two Chinese companies, CGG and CMEC, were selected to do the job. He later said that negotiations and agreement on the pricing of the projects had to be finalised before technical and framework agreements could be signed.

"It is only at that stage that the Ministry of Finance will be approached to apply for a loan from the Chinese government," Simataa said in March last year.

But under pressure from President Hifikepunye Pohamba over the delay in the road construction works, the Works Ministry hastily signed an agreement with the two Chinese companies on March 14, 2012.

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