Chinese dam builder seeks Congo project after avoiding World Bank penalty

A state-owned Chinese construction company that avoided debarment by the World Bank after paying a $6.9 million success fee to a local “consultant” on a hydropower project in Africa now finds itself in the running for a major hydropower project that the World Bank has supported.

But World Bank support for the project in the Democratic Republic of the Congo now is in doubt, apparently because of a decision by the Democratic Republic of the Congo to forego environmental impact studies and transfer project authority directly to the administration of President Joseph Kabila.

Another option for the DRC would be financing through China’s Export-Import Bank. Chinese financing commitments for Africa infrastructure have climbed dramatically, from $313 million in 2000 to some $4.4 billion annually in 2012, according to a Brookings Institution report. Not only do such projects face fewer institutional safeguards, they also avoid the anticorruption scrutiny exercised by multilateral donors.

The decision handed down by the World Bank’s Sanctions Board on June 29 offered a rare window into a topic often discussed but rarely opened: whether China’s construction and other companies engage in corrupt practices as they push into Africa’s infrastructure and mining sectors.

Sinohydro paid $6.9 million to a local consulting firm as a success fee after it won a contract to build the $172.6 million Felou hydroelectric plant on the Senegal River in Mali, a project largely financed by the World Bank.

The company argued that it wasn’t required to disclose the arrangement because the firm didn’t meet the legal definition of an agent, but the Sanctions Board rejected Sinohydro’s narrow reading and found the company guilty of a fraudulent practice.

However, because Sinohydro had been suspended from World Bank work since December 2013, under an internal sanction known as Early Temporary Suspension, the Sanctions Board declined to debar Sinohydro, but instead gave it credit for “time served” and issued a reprimand.

Because it isn’t a formal debarment, ETS is not recognized by other development banks under the common cross-debarment policy, and Sinohydro didn’t lose eligibility to bid on projects financed by other multilateral financing institutions.

Such an outcome is not uncommon, given the slow pace of the World Bank sanctions systems.

According to the World Bank decision, Sinohydro first disclosed the use of an agent in June 2011 in response to a World Bank query, but the bank’s investigative unit presented the case only in December 2014. Bank investigators accused Sinohydro of failing to disclose the use of an agent when submitting bid documents in November 2008.

Sinohydro’s agent earned $6.9 million for business intelligence and “promoting the Respondent among the relevant government authorities,’’ but it was not accused of a corrupt practice, highlighting another weakness of the World Bank system: because its investigators lack police powers to obtain bank records and tap phones, it often cannot uncover evidence of a quid pro quo to support a corruption charge.

The last brief was submitted to the Sanctions Board in June 2015, and the board issued its decision a year later. Overall, the World Bank’s proceedings in the matter lasted five years.

The Felou episode is not the only indiscretion to which Sinohydro has been linked in its pursuit of infrastructure contracts in Africa.

Sinohydro’s work on the $533-million Kariba South hydropower project in Zimbabwe has been accompanied by press reports that Sinohydro paid some $10 million to a transport and consulting company controlled by a Botswana legislator said to be well-connected to Harare political heavyweights.

The Botswana Directorate on Corruption and Economic Crime is investigating the matter and a press account said that investigators suspected that the company’s invoices were false.

Attempts to reach a Sinohydro spokesman for comment were not successful. China’s Ex-Im Bank has provided much of the financing for the project.

The scale of work on the Inga-3 project, including a dam on a tributary of the Congo and an associated power station and transmission lines, would dwarf both the Felou and Kariba South projects. The World Bank estimated construction costs at some $11 billion, according to a March 2014 project document.

Because of the cost, the Democratic Republic of the Congo planned to tap outside financing via a public-private partnership. Sinohydro and the Three Gorges Corporation are widely reported to be key contenders for the work, although a Spanish consortium also is in the running.

The World Bank had agreed to assist in project preparation with a $73 million grant. But the bank suspended its participation on July 25, citing the “DRC’s decision to take the project in a different strategic direction to that agreed between the World Bank and the Government in 2014.”

A World Bank spokesman declined to elaborate, but Josh Klemm, of International Rivers, a California-based civil society group that follows the project closely, points to two issues: the Kabila government has refused to establish a “ring-fenced” Inga Site Development and Promotion Authority to oversee the project, as agreed, and it hasn’t carried out the expected studies of environmental and social effects.

A June 2016 progress report from the bank said cryptically: “On the institutional side, the Client and Bank are currently clarifying implications on the (technical assistance) project of the two recently issued presidential orders creating ADPI-RDC, a specialized unit within the president office in charge of the Grand Inga project.”

Kabila is scheduled to leave office by the end of the year, but the political outlook is uncertain at best. The United States has imposed sanctions on a key Kabila government official for his role in a crackdown on the opposition.

Klemm said the World Bank had helped choose an Australian firm in September 2015 to carry out studies of environmental and social impacts, as well as a resettlement action plan for local residents affected by the work. But the government refused to issue the contract to the winning bidder.

Klemm said that China generally had been more attentive to international standards on its infrastructure work in China, but added that any decision to finance Inga-3 without environmental and other impact statements would change the perception that China wanted to play by the rules.