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Economy

How China contractors drove Kenyan firms out of mega projects

The Outer Ring Road in Nairobi is one of the major construction projects being undertaken by Chinese contractors across the country.  FILE | NATION MEDIA GROUP
Outer Ring Road in Nairobi is one of the major construction projects being undertaken by Chinese contractors across the country. FILE PHOTO | NATION MEDIA GROUP 

Big Kenyan contractors are feeling the heat of competition from deep-pocketed Chinese rivals whose superior machinery and lower bids for lucrative State tenders have driven local firms out of business.

Kundan Singh, Spencon Holdings and Mugoya Construction are some of the erstwhile big names that have fallen on hard times due to the Chinese invasion, ending up under receivership with hundreds of job losses and billions of shillings worth of bad debts. 

The growing dominance of Chinese firms including Sinohydro Corporation Limited, China Wu Yi and China Roads and Bridges Construction Company can be traced back to then President Mwai Kibaki’s policy shift to the Asian giant nearly a decade and a half ago.

The shift opened aid taps for construction of roads and upgrade of airports, but it also came with strings attached, with State agencies required to only contract Chinese firms for Chinese-funded projects.

Many local contractors such as Kirinyaga Construction Company, which thrived under former president Daniel Moi’s regime, are now confined to undertaking small projects in rural areas. 

Others like H Young and Intex Construction have since resorted to forming consortia with European and Indian conglomerates when bidding for government tenders, where Chinese firms enjoy pre-qualification status tied to the funding of the projects.

“It’s an open field for Chinese contractors whose key advantage is lower bids,” said Jason Schwartzman, the chief executive of H Young.

“Kenyan firms find it hard to compete. Some have folded up and others have cut back their operations.”

Massive resources

China’s allure has been its detachment from local politics and its massive resources that allows it to finance mega projects built by its multinationals, with Kenya repaying the loans over lengthy periods.

Hamstrung by relatively lower economies of scale and lack of cheap financing, Kenyan firms have suffered at the hands of China’s export finance policy, which extends cheap to state-owned contractors.

The fall of Spencon, which was placed under administration last month, is illustrative of the rapidly changing landscape in Kenya’s construction industry.

“The company’s performance peaked in 2007 when it recorded revenues of $100 million (Sh10.3 billion),” says a status report on Spencon by consultancy firm PricewaterhouseCoopers (PwC) seen by the Business Daily.

“However, the entrance of Chinese construction companies around this period led to increased competition in the construction industry.”

Spencon was previously one of the largest local construction firms with more than three decades’ experience building roads, bridges and water infrastructure.

The company currently has no ongoing projects and some of its assets are being sold to repay bank loans and compensate retrenched staff.

Its civil engineering subsidiary, Spencon Kenya Limited, is in the process of being sold to an unnamed investor as part of the ongoing liquidation.

Kundan Singh and Mugoya Construction also went into receivership after failing to meet their obligations to creditors.

Delayed payments

Kenyan construction firms have cited delayed payments by the government as a major factor for breaching loan terms, revealing an operational reality that favours Chinese firms.

While local firms take loans from local banks at double-digit interest rates, their Chinese rivals have large cash reserves besides an option to access subsidised credit from the state-owned China Export-Import (EXIM) Bank.

Mr Schwartzman argues that this well-oiled machine is what helps Chinese firms to complete their projects relatively faster, enhancing their reputation in public and private sector contracts.

“Chinese companies have substantial resources which allow them to complete projects without constraints,” Mr Schwartzman said.

The ability of Chinese firms to arrange financing for their projects and complete them on time has seen many of them pre-qualified to build 2,000 kilometres of roads across the country.

Having dominated public infrastructure tenders, Chinese firms are also diversifying into real estate construction.

China Wu Yi, which built the Thika Superhighway, has also constructed apartments in Nairobi and the University of Nairobi Towers.

To get a piece of the mega projects during these times when the Chinese presence looms large, local contractors have had to team up with conglomerates from markets like Europe in consortia where they are junior partners.

Engineering firm Civicon, a subsidiary of TransCentury, was recently shortlisted by Kenya National Highways Authority to bid for road projects alongside its lead partner Eiffage SA, a French company.

A consortium formed by H Young, Gibb Africa Limited and Sogea Satom (of France) was also cleared to bid for the multi-billion shilling projects.

Intex Construction has formed joint ventures, including one with India’s Punj Lloyd with which it won a $54 million (Sh5.6 billion) contract to build the Loruk-Barpelo Road.

Mr Schwartzman said Chinese firms, which often build projects single-handedly, are not open to working with local companies.

Short-term contracts

While the government prefers Chinese firms for their ability to finance projects, this has been criticised for promoting short-term contracts at the expense of long-term investments.

“The bulk of Chinese work in infrastructure is not investment, but contracting,” says a World Bank report, which looks into the Asian giant’s economic engagement with Kenya.

“Kenya has taken on debt for many major construction projects, and Chinese companies typically have no equity stake in the particular building, road, or port,” adds the report titled ‘Deal or No Deal’.

Some Chinese contractors have, however, started making local investments, encouraged by the growth potential in the country’s construction sector.

China Wu Yi, for instance, is building a Sh10 billion housing materials plant in Athi River for its own use and sale to other construction firms.

The factory, which will produce precast construction materials, is the company’s first such facility outside China.

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