For Ethiopians, a Chinese Telecom Project Changes Lives but Draws ScrutinyJanuary 7, 2014 LAKE WENCHI, Ethiopia (The Wall Street Journal)—In the green highlands here southwest of Addis Ababa, farmers like Darara Baysa are proud owners of cellphones that run on a network built by China’sZTE Corp. 000063.SZ -1.91%
The trouble is, they have to walk several miles to get a good signal. “The network doesn’t work well,” says Mr. Baysa, a former army sergeant, stopping on the unpaved road near his home to show his hot-pink smartphone.
Among other troubles: Ethiopian government officials have in recent years complained to ZTE that the company’s contract for building the network requires Ethiopia to pay too much, say people familiar with the discussions.
The Ethiopian network’s glitches underline the broader troubles that sometimes face poorer nations as they borrow heavily to invest in telecommunications, roads, utilities and other infrastructure to help lift them out of poverty.
China’s financial firepower helps its firms win many of these contracts. But in agreeing to such deals, some governments appear to have flouted rules meant to foster sound public investment. When countries sidestep such rules, say experts at institutions such as the World Bank, big projects often cost more and are more likely to be poorly executed.
China’s impact has been particularly visible in telecom projects. In Ethiopia, ZTE beat out Western competitors in 2006 for a major telecom project by offering $1.5 billion in low-interest financing, funded by Chinese state-run banks.
A World Bank investigation found that the Ethiopian government appeared to ignore its own procurement rules requiring competitive bidding when it awarded the contract, which gave ZTE a monopoly on supplying telecom equipment for several years. The 2013 report also criticized Ethiopia for giving such a big project to one company and called for the country to audit the contract. It didn’t find that ZTE acted improperly.
Ethiopia ended ZTE’s monopoly in July 2013, bringing in its main Chinese rival, Huawei Technologies Co. The two companies split another big contract, for the next phase of the network’s expansion. Again, financing won the day, with the two pledging a total of $1.6 billion, people close to the negotiations say. Western equipment suppliers, such as Ericsson and Alcatel Lucent SA, ALU.FR +1.79% couldn’t match the Chinese offer, these people say.
A ZTE spokesman says it has complied with Ethiopia’s regulations. Ethiopia’s telecommunications minister and a spokesman for the state-owned telecom monopoly, Ethio Telecom, didn’t respond to queries. The World Bank report notes that Ethiopian authorities told its investigators that they invited eight companies to bid for the project.
Tony Duan, chief executive of Huawei’s Ethiopian division, says the company is “fully aware of the issues linked to poor quality telecom services and frequent interruptions of mobile networks in the country.”
Jia Chen, chief executive of ZTE’s Ethiopian business, acknowledges that the network’s service has been uneven. He blames delays in awarding the next phase of expansion, construction projects that cut telecom lines and slack maintenance by Ethio Telecom. “Maintaining the network is not our job,” he says. “We guarantee the quality of the network, but you have to guarantee our base stations get electricity.” He says ZTE must charge more in Ethiopia than elsewhere partly to offset the project loans’ large size and long repayment period of 13 years.
Ericsson and Alcatel decline to comment.
Complaints have surfaced in other developing countries about alleged overbilling, mismanagement and flouted contracting rules in telecom deals financed by Chinese state-run banks.
Kenya’s government late last year canceled a contract for a national police-communication system that was tentatively awarded to ZTE last year, with funding to come from loans pledged by China, according to Kenyan government documents. Anticorruption activists say Kenya violated its constitution by letting only Chinese firms bid on the deal, while a government review of ZTE’s bid claimed the company offered its equipment at double normal market prices.
ZTE appealed the decision to a review board, which sided with the Kenyan government: “It does not require rocket science in view of the evidence before the Board to establish that (ZTE’s) financial proposal was highly exaggerated,” according to the board’s decision, reviewed by The Wall Street Journal.
ZTE declines to comment. The Kenyan government didn’t respond to queries.
Uganda in 2011 canceled a $74 million contract that the Uganda Broadcasting Corporation signed with Huawei—with Export-Import Bank of China funding—saying procurement rules were flouted. Ugandan government officials didn’t respond to queries. Huawei declines to comment on the Uganda matter. The Export-Import Bank of China declines to comment for this article.
A $330 million Philippines contract with ZTE in 2007 to build a broadband network—using money from the Export-Import Bank of China—negotiated without competitive bidding, rocked the government after lawmakers alleged that ZTE inflated the project’s price to pay kickbacks to government officials.
Anticorruption prosecutors charged then-President Gloria Macapagal Arroyo with accepting bribes to approve the deal; the trial is continuing. Ms. Arroyo canceled the contract when she was president, and her lawyer says she maintains her innocence. ZTE declines to comment, citing the ongoing legal process. In a statement to the Chinese press in 2007, ZTE said it had done nothing wrong.
Governments need competitive bidding and other controls to get the best prices and ensure projects are well-planned, says Neill Stansbury, director of London-based Global Infrastructure Anti-Corruption Centre, who contributed to the World Bank report on Ethiopia’s project.
Large loans can obscure project costs, he says: “You may end up overall, over 20 years, with a much more expensive package than you would have done buying another manufacturer’s equipment at a more expensive financing cost.”
ZTE and Huawei have grown to be two of the world’s largest telecom-equipment makers, aided by access to hefty financing that helps them outbid Western rivals.
Western companies can get loans supported by government export-finance banks. But almost all these banks, unlike China’s, have signed an agreement backed by the Organization for Economic Cooperation and Development limiting such lending, especially to countries with debt-problem histories.
The state-owned Export-Import Bank of China and the China Development Bank finance exports and overseas projects. They provided nearly $50 billion in financing for Africa from 1995 through 2012, mostly export credits, according to estimates by Deborah Brautigam, director of the International Development Program at Johns Hopkins University. Chinese companies also get financing from state-run China Export and Credit Insurance Corp.
The U.S. Export-Import Bank has provided about $12 billion in financing for African buyers during the same period. The U.S., the European Union, China and other nations have been negotiating international guidelines on export financing that Western governments hope will restrain Chinese state-run banks.
China has had a sizable presence in Ethiopia for more than a decade, and ties between the two grew closer after Ethiopia’s disputed elections in 2005. Then-Prime Minister Meles Zenawi, who led Ethiopia for more than 20 years until his death in 2012, began to view the West as less friendly.
He aligned Ethiopia with China, awarding ZTE the 2006 telecom deal, which was funded with loans from the Export-Import Bank and China Development Bank. China Development Bank didn’t respond to a request for comment.
A ZTE spokesman says it has built more than 2,000 cellphone transmission sites in Ethiopia and laid about 5,000 miles of fiber-optic cable in forbidding terrain. ZTE says paying cellphone users in Ethiopia have soared from around one million in 2005 to over 12 million in 2013, a seventh of the population.
The network has vastly improved quality of life for many. Cellphone service now extends across much of Ethiopia, an impoverished country whose 90 million people form one of Africa’s largest, fastest-growing markets.
In rural areas, where most live, the network has ushered in new ways of doing business.
Afework Wondimu uses his cellphone to check the price of teff, a millet-like grain used to make injera, the Ethiopian cuisine’s ubiquitous flat bread. If the price is good, he loads big bundles of teff onto donkeys and heads into town.
“Otherwise we keep it and find another way to sell it another time,” he says, as a team of oxen threshed golden piles of teff on his farm west of the capital.
Two years ago, before he got a cellphone, Mr. Baysa, the farmer with the pink phone, says he sometimes had to travel three days from his home by foot, horse and bus simply to check on friends and family.
Still, he wouldn’t mind a luxury he has heard others enjoy: phoning from bed.
Ethiopians elsewhere also complain about the network’s spottiness. In the capital of Addis Ababa, the phone network appears overburdened and is sometimes inaccessible during the day.
If the network and other infrastructure projects don’t work well, Ethiopia could see economic growth suffer and its foreign-exchange reserves depleted to repay debts, says Benedicte Vibe Christensen, an economist who was an Africa expert at the International Monetary Fund until 2009.
“If the quality of investment projects is not good, at the end of the day the risk is that foreign exchange reserves would be insufficient to repay all loans,” she says.
The Chinese loans for the 2006 project account for about 12% of Ethiopia’s nondomestic public-sector debt, according to government data. Ethio Telecom doesn’t publish financial statements. It started repaying the loan in 2010, and it has repaid around $300 million in principal, according to a person familiar with the repayment.
Financing has a cost: ZTE’s Mr. Jia says ZTE must charge Ethiopia more for its network partly because the loans are large, the repayment period is long—13 years—and ZTE is liable if Ethio Telecom doesn’t repay.
“If you just think about the price compared with the others, you think, ‘Oh, your prices are very high, then you make a lot of money,’ ” Mr. Jia says. “But you have to think: This money, I’m going to get it back in 13 years!”
The network’s uneven performance echoes worries that former Ethiopian telecom managers say they had about ZTE’s gear before it won the 2006 contract. Calls to and from ZTE-covered areas were frequently dropped, and the mobile-phone signal in those areas was so weak that people living in brick or stone houses often had to go outside to use their phones, the former managers say.
A ZTE spokesman says interconnection problems such as those the network experienced in that era are a common result of different suppliers’ equipment using the same frequency.
Some of those managers say they raised concerns about giving contracts to ZTE—and were punished for it.
The former managers say they argued that Ethiopia’s telecom operator hadn’t run a proper competitive bidding process for the 2006 ZTE contract. They say they worried the deal would make Ethiopia completely dependent on ZTE.
“We complained: It will damage the future of the Ethiopian Telecommunications Corporation,” says a former manager at the ETC, a predecessor to Ethio Telecom. “If we select only one company, we are going to depend on one company.”
The managers who say they raised the concerns were among two dozen employees that the Federal Ethics and Anti-Corruption Commission of Ethiopia prosecuted in 2008 for violating government contracting rules, mainly for a previous contract that they awarded to Ericsson in 2005.
A court sentenced some to jail, including the former chief executive, Tesfaye Birru, who has denied the charges and remains in jail.
Senior government officials “tried to intimidate others not to speak against the Chinese company,” says the former ETC manager.
Officials at the anticorruption commission deny the prosecutions were an attempt to silence ZTE’s critics. The commission didn’t accuse the managers of personally profiting from the Ericsson deal.
The anticorruption commission says: “What is confirmed is that the defendants abused their power, violated existing rules and regulations, conspired to benefit others and caused the government to incur unnecessary costs.”
A former Ericsson manager in Ethiopia who is no longer in the country, Moncef Mettiji, says there were no improprieties involved in the 2005 contract.
—Olivia Geng contributed to this article.
Write to Matthew Dalton at Matthew.Dalton@wsj.com