Secrecy clouds the scene as China spreads aid

From Pakistan to Angola to Kyrgyzstan, China is using its enormous pool of foreign currency savings to cement diplomatic alliances, secure access to natural resources and drum up business for its flagship companies. Foreign aid — typically cut-rate loans, sometimes bundled with more commercial lines of credit — is central to this effort.
The results can be clearly seen in new roads, power plants, and telecommunications networks, many financed with preferential loans from the Chinese Government’s Exim Bank.

However, an aura of boosterism, secrecy and back-room deals has clouded China’s use of billions of dollars in foreign aid to court the developing world. Increasingly, experts argue that China’s aid comes with a major catch: It must be used to buy goods or services from companies, many of them state-controlled, that Chinese officials select themselves. Competitive bidding by the borrowing nation is discouraged, and China pulls a veil over vital data like project costs, loan terms and repayment conditions. Even the dollar amount of loans offered as foreign aid is treated as a state secret.
Anticorruption crusaders complain that secrecy invites corruption, and that corruption debases foreign assistance. “China is using this financing to buy the loyalty of the political elite,” said Harry Roque, a University of the Philippines law professor who is challenging the legality of Chinese-financed projects in the Philippines. “It is a very effective tool of soft diplomacy. But it is bad for the citizens who have to repay these loans for graft-ridden contracts.”
In fact, such secrecy runs counter to international norms for foreign assistance. In countries prone to corruption and poor governance, it also raises questions about who actually benefits from China’s projects. The answers, international development specialists say, are hidden from public view.

“We know more about China’s military expenditures than we do about its foreign aid,” said David Shambaugh, an author and China scholar at George Washington University. “Foreign aid really is a glaring contradiction to the broader trend of China’s adherence to international norms. It is so strikingly opaque it really makes one wonder what they are trying to hide.”

Until recently, wealthy nations could hardly hold themselves out as an example of how to run foreign aid, either. Many projects turned out to be tainted by corruption or geared to enrich the donor nation’s contractors, not the impoverished borrowers. But over the past 10 or 15 years, some 30 developed nations under the umbrella of the Organization of Economic Cooperation and Development (O.E.C.D.) have made a concerted effort to clean up their assistance programs.

They demanded that foreign money be awarded and spent transparently, using competitive bidding and outlawing bribery. Increasingly, they also are also pushing to give borrowers more choice among suppliers and contractors, rather than insisting that funds be recycled back to the donor nation’s companies.
China, which is not a member of the O.E.C.D., is operating under rules that the West has largely abandoned. It mixes aid and business in secret government-to-government agreements. It requires that foreign aid contracts be awarded to Chinese contractors it picks through a closed-door bidding process in Beijing. Its attempts to prevent corrupt practices by its companies overseas appear weak.

Some developing nations insist on independently comparing prices before accepting China’s largesse. Others do not bother. “Very often they are getting something they wouldn’t be able to get without China’s financing,“ said Chris Alden, a specialist on China-African relations with the London School of Economics and Political Science. “They presume that the Chinese are going to give value for money.“Development experts say they have tried to convince the Chinese Government that better safeguards and a more open process will enhance its efforts to gain influence and business. If its projects collapse because of kickbacks or inflated costs, they argue, China will end up exporting not only goods and services, but a reputation for corruption that it is already battling at home.

But Deborah Brautigam, the author of a coming book on China’s economic ties with Africa titled “The Dragon’s Gift“, says Beijing is hesitant to hobble its companies with Western-style restraints before they have become world-class competitors. “The Chinese are kind of starting out where everyone else was years ago, and they see themselves as being at a disadvantage,“Ms. Brautigam said. “The Chinese don’t particularly want a scandal. That doesn’t further their interests. They just want their companies to get business.”

Sometimes they get both. In 2007, the Philippines was forced to cancel a USD460-million contract with the Beijing scanner company, Nuctech Company Ltd., to set up satellite-based classroom instruction after critics protested the company had no expertise in education. It also canceled a USD329-million contract awarded to ZTE Corporation, a state-controlled Chinese communications company, after allegations of enormous kickbacks. ZTE denied bribing anyone, but the controversy has lingered. An anti-graft panel has recommended filing criminal charges against two Philippines officials in connection with the contract.

A Manila-based nonprofit group, the Center for International Law, has mounted a legal challenge against still another Chinese contract in the Philippines, to build a USD500-million railroad. Professor Roque, who leads the center, contends that the price of China’s state-owned contractor “was simply plucked out of the sky“.
Officially, China’s directive to its companies is to toe an ethical line overseas. “Our enterprises must conform to international rules when running business, must be open and transparent, should go through a bidding process for projects and forbid inappropriate deals and reject corruption and kickbacks,“ Wen Jiabao, China’s prime minister, told a group of Chinese businessmen in Zambia in 2006.

But China has no specific law against bribing foreign officials. And the government seems none too eager to investigate or punish companies it selects if they turn out to have engaged in shady practices overseas. Indeed, it has an added incentive to look the other way because of the state’s ties to many foreign aid contractors — connections that sometimes extend to families of the Communist Party elite.
In January, for example, the World Bank barred four state-controlled Chinese companies from competing for its work after an investigation showed that they tried to rig bids for bank projects in the Philippines. But two of those companies remain on the Chinese Commerce Ministry’s list of approved foreign aid contractors, according to its Web site. n


(This is an edited and abridged version of a report written by Sharon LaFraniere and John Grobler and published in The New York Times on September 22, 2009.)