“Quad C” Buys Canadian Construction Company

Editor’s Note: I feel the need to warn you, dear readers, that this article is really long. That’s what happens when you start writing about a company with annual revenue of US$55 billion and 100,000 employees. But since it’s also a company that has been cited in reference to not one but two Cape Breton ports — remember, CCCC first expressed interest in Melford — I figure the length is justified. Besides which, it’s all pretty interesting.

China Communications Construction Company International Holding Ltd, or CCCCI, the overseas investment and financing arm of China Communications Construction Company (CCCC), is poised to buy the Canadian construction company Aecon for $1.5 billion.

CCCC is, of course, “Quad C,” the company our port promoter Albert Barbusci says may build a $1.5 billion mega-container-ship terminal in Sydney harbour. (For the record, nowhere, in any of the coverage I’ve seen, has anyone referred to the state-owned CCCC as “Quad C.” Apparently, it’s a private nickname between the company and Barbusci. Also, why does everything cost $1.5 billion?)

Aecon Group Inc, with offices in Vancouver, Calgary and Toronto, has what the CBC termed a “storied 140-year history in landmark Canadian construction and engineering projects such as the CN Tower, Vancouver’s SkyTrain and the Halifax Shipyard.” But don’t think that means its technology is anything special. As China’s ambassador to Canada, Lu Shaye, told reporters in Halifax on November 7:

The technology from the Chinese side is much higher than the Canadian side… it is not necessary for them [the Chinese government] to steal the technologies from Canadian companies.

Lu was making the case — not particularly diplomatically — that no national security review would be necessary for the deal, which requires the approval of two-thirds of the votes cast at a special meeting of Aecon shareholders as well as government and regulatory approvals under the Investment Canada Act, the Canadian Competition Act and authorities in China.

Announcing the Aecon purchase in a filing with the Hong Kong Stock Exchange, CCCC explained the advantages this way:

The Proposed Acquisition offers the Company a strong presence in the attractive Canadian construction market which expects to see favourable growth driven by the infrastructure investment commitment of the government. Following the successful acquisitions of John Holland Group Pty Ltd in Australia and Friede Goldman United, Ltd. in the U.S., the Proposed Acquisition further positions the Company as a global engineering and construction leader with enhanced geographic presence and capabilities offering, especially with a new platform and partnership for continued growth in Canada and abroad.

Winning Canadian infrastructure contracts would be in keeping with CCCC’s stated overseas goals. According to a report in the October 2016 Nikkei Asian Review:

“Our ultimate goal is to have 50% of our revenue from overseas,” Fu Junyuan, executive director and chief financial officer, told reporters without giving a timeline, adding that the group has had a “good start” this year.

By a “good start” he meant that in 2016, according to the South China Morning Post, CCCC’s:

…new contracts for overseas infrastructure construction signed amounted to 205.9 billion yuan (US$29.8 billion), a 51 per cent increase over the previous year. It has also ventured into Italy and Canada for the first time in 2016, and looks to expand in Europe next, as well as the US.

 

Cross-debarment

I’ve been pondering this for a couple of days now, and I think that the Aecon deal and what Barbusci and and his partner Barry Sheehy (formerly Harbor Port Development Partners now Sydney Harbour Investment Partners) have been peddling for Sydney represent two very different phenomenon.

The Aecon purchase, as CCCC stated in its securities filing, can be compared to the company’s 2015 purchase of Australia’s John Holland Group. I’m no market analyst, but I don’t think it’s going too far to suggest that buying an Australian company is probably a better way into the Australian construction market than simply setting up shop as a state-owned Chinese enterprise, especially given current Australian jitters over Chinese influence over the country’s universities and politics.

Barbusci and Sheehy’s proposal pre-dated the John Holland Group purchase and sounds much more like the kind of deal CCCC has been entering into in Africa and Asia and the Caribbean for years now. Consider this: upon returning from a trip to China in 2015 with the promoters, Port of Sydney CEO Marlene Usher told the Cape Breton Post that during her 10 days in China she had attended 12 meetings:

Those meetings were with representatives of state-owned companies, including terminal operators, shipping lines and the China Development Bank, as well as the embassy.

The China Development Bank (CDB) is one of two state-owned financial institutions (the other being the China Exim Bank) that finance many of CCCC’s projects. Between 2011 and January 2017, such funding was especially necessary because CCCC was barred from projects funded by the World Bank. (That ban was originally applied to the China Road and Bridge Corporation, CRBC, in 2009 for “fraudulent practices under Phase 1 of the Philippines National Roads Improvement and Management Project,” but was extended to CCCC in 2011 when the two companies merged.) Moreover, thanks to a 2010 “cross-debarment” agreement, CCCC was also barred by many other multinational lenders, including the Asian Development Bank Group, the African Development Bank, the European Bank for Reconstruction and Development, the InterAmerican Development Bank Group and the World Bank Group.

(Before we get up too high on our high Canadian horses, however, let us recall that Canada’s SNC Lavalin is currently subject to a similar World Bank ban, which covers 10 of its subsidiaries, including, believe it or not, an Antigonish company purchased by SNC in 2008, CJ MacLellan and Associates. The ban, which expires in 2023, was imposed for “the company’s misconduct in relation to the Padma Multipurpose Bridge Project in Bangladesh, as well as misconduct under another Bank-financed project.” Clearly, no one country — or company — as a monopoly on “misconduct.”)

Analysts with the international law firm Kings&Wood Mallesons explain that, in developing regions, the China Development Bank and China Exim:

…often structure the financing package, obtain export credit insurance and bring in Chinese companies to build the infrastructure. Many of their concessional loans are conditional upon Chinese enterprises being awarded construction or export contracts (so-called “tied lending”). For example, the CDB previously lent Nigeria $200 million on condition that it was used to purchase products from Chinese telecoms giant Huawei. Loan conditions often require that 50% of loan proceeds be applied towards acquiring Chinese goods and services, although in Angola’s case the figure has reportedly exceeded 70%.

Tied aid has, of course, has been offered by Western countries for years, so again, no high horses, but it’s worth noting we’re finally starting to admit that if your goal is actually helping less-developed countries, it’s not as effective as untied aid.

 

OBOR

Many of CCCC’s overseas projects are in Africa and Asia and are part of China’s “One Belt, One Road” or OBOR program, which Port of Sydney CEO Marlene Usher explained to the Post this way in 2015:

…China currently has a “one belt, one road” strategy to bring its goods through the Suez Canal to Europe and North America.

That’s an interesting take on the massive infrastructure project announced by the Chinese president in 2013, but not one shared by most analysts. Here, for example, is Joshua Kurlantzick, a senior fellow for Asia at the Council on Foreign Relations:

Beijing plans to spend and raise as much as $1 trillion in an effort to create a vast new road and rail infrastructure, energy projects, and other needed infrastructure across many parts of Eurasia and even in Africa and parts of Western Europe.

And it is much more than simply a “strategy” for moving goods, as Jane Perlez and Yufan Huang explained in the New York Times earlier this year:

The massive infrastructure projects…form the backbone of China’s ambitious economic and geopolitical agenda. President Xi Jinping of China is literally and figuratively forging ties, creating new markets for the country’s construction companies and exporting its model of state-led development in a quest to create deep economic connections and strong diplomatic relationships.

Do a Google image search for OBOR and you get lots of results, all of which look basically like this:

 

Source: McKinsey&Company

As you can see, it’s not just that Sydney, Nova Scotia is not on the map, it’s that the entire North American continent is conspicuously absent.

 

99-year lease

All that said, there are comparisons to be drawn between what Sheehy and Barbusci have been promising the Chinese will do for Sydney and what the Chinese have actually been doing elsewhere in the world. China has built greenfield ports, providing both the financing and the expertise; however, it has been undertaking such projects in partnership with governments. According to Christopher Balding, associate professor at the HSBC School of Business at Peking University in Shenzhen:

China lends money to countries so that they can build infrastructure that is built by Chinese firms. Infrastructure is built. The money is sent back to Chinese firms. The country now has new infrastructure, and a lot more debt.

Balding made the remarks to Illaria Maria Sala in a Quartz article entitled, “Chinese investment aid to Sri Lanka has been a major success—for China.” Sala continues:

The debt, in turn, can result in Beijing getting something rather useful in nations with resources it covets: negotiating leverage to gain access to those resources, including land.

Sala’s article focuses on the $1.4 billion Colombo Port City project, which will see 2km of land on the city’s waterfront reclaimed for “luxury flats, office buildings, and hotels, not to mention a theme park, marina, and golf course.”

Colombo Port City seen from the Galle Road. (Photo by Dinil Samarasinha, own work, CC BY-SA 4.0 https://creativecommons.org/licenses/by-sa/4.0, via Wikimedia Commons)

Colombo Port City seen from the Galle Road. (Photo by Dinil Samarasinha, own work, CC BY-SA 4.0, via Wikimedia Commons)

CCCC is the main contractor on the project although its subsidiary, China Harbour Engineering Company (CHEC) is doing most of the work. The project was approved by former Sri Lankan President Mahinda Rajapaksa under circumstances Sala characterizes as “so dubious” they helped lose him an election in 2015. The new government of President Maithripala Sirisena suspended the project, “citing the need for a proper environmental assessment.” In particular, it wanted to look into “a generous freehold given to China on 50 hectares of land in the Colombo port area. The new administration negotiated that down to a more limited arrangement, but one Beijing probably still didn’t mind: a 99-year lease on 110 hectares of reclaimed land.”

In the end, the government realized its $8 billion debt to China was too big “to work around.” The project was allowed to continue.

Sala is careful to point out that not all the Chinese infrastructure projects have been problematic — “the Colombo International Container Terminal, also financed through Chinese loans and built by Chinese companies, is already profitable.” But a second port project, in Hambantota, cost over $1 billion and has lost money since opening in 2010. There again, said Sala, Sri Lanka’s huge debt to the Chinese left it little room to maneuver. The Sirisena government:

…had to agree to an “equity swap” with China. Last October China Merchants Port Holdings secured a 99-year lease of the port with an 80% stake, along with 15,000 acres of land around it for a projected industrial zone for Chinese investors. In exchange China forgave most of the debt Sri Lanka acquired to develop the port in the first place. Beijing ended up with a strategically located outpost on the Indian Ocean, a nice piece of the OBOR puzzle.

Does the phrase “99-year lease” jump out at you the way it jumps out at me? Is this where Barbusci got his conviction that a 99-year lease is standard in the shipping industry? Because I’ve heard from other sources that it’s not. In fact, the Port of Saint John NB recently signed a “long-term” lease with terminal operator DP World that “starts January 1, 2017 and will continue for about 30 years following completion of the Port’s expansion program.”

 

Taking a toll on Jamaica

CCCC has also completed infrastructure projects on a “build-operate-transfer” or BOT model. One such project is in Jamaica.

The Caribbean nation is one of the world’s most indebted and one that, as Nick Dearden explained in the Guardian in 2013, has had the misfortune to be “rescued” repeatedly by the International Monetary Fund (IMF) and the World Bank. Dearden says the country became synonymous, in the ’80s, with “structural adjustment,” which I think today we would just call “austerity.” By 2013, Jamaica had repaid more money ($19.8 billion) than it had been lent ($18.5 billon)” and yet “still ‘owe[d]’ $7.8 billion, as a result of huge interest payments.” Cuts to government spending on health and education have left their mark: compared to 1990, fewer Jamaican children finish elementary school today and more women die in child birth. (It’s worth noting that the kind of strings traditionally attached to World Bank and IMF money can make Chinese loans look very attractive.)

With little money to spend on infrastructure, it’s not surprising that Jamaica would welcome the arrival of a company like the China Harbour Engineering Company, which set up offices there in 2010 after landing a ‘sole-sourced’ US$400 million government contract. (There was some controversy as to whether the China Exim bank, which financed the contract, actually insisted the work be given to a Chinese company. The Jamaican government said it did but the country’s auditor general said it didn’t, which seems like a good time to note that many of the governments CCCC deals with have corruption issues of their own. On a scale of 0 for totally corrupt and 100 for completely clean, Transparency International gave Jamaica a score of 39 in its 2016 “perceived corruption” rankings; Sri Lanka scored 36.)

In 2012, CCCC approached the Jamaican government with an offer to design, finance (with the assistance of the China Exim Bank), construct and operate the North/South Link of Highway 2000. CCCC would build the US$600 million highway in return for a 50-year toll road concession that included exclusive rights over signs, billboards and any other form of for-profit advertising along  the highway and 1,200 acres of land on which the company planned to build three luxury hotels.

The Jamaican government agreed to the deal and CCCC built the 68km, four-lane highway linking the Jamaican capital Kingston with the resort town of Ocho Rios on the country’s north coast.

The road opened officially in March 2016 and motorists immediately began to complain about the tolls, which ran as high as $3,700 Jamaican dollars (CDN$37) for the largest vehicles traveling the full stretch of highway. To put that in perspective, according to journalist George Davis, the minimum wage in Jamaica is US$1.21 per hour, US$9.68 for an eight-hour day, and US$48.40 for a 40-hour workweek.

(To add insult to injury, in June 2016 — three months after the North/South toll road opened — a landslide blocked a section of it, causing Gary Walters, the president of the Jamaica Institution of Engineers to ask “whether adequate systems are in place to prevent similar events along the roadway.”)

CCCC has since asked for — and been granted — toll increases but the Jamaican government has said debt payments on the project are such, the Chinese firm does not expect to make a profit for 20 years.

 

Goat Islands

I don’t have time to discuss other issues that have arisen with CCCC in Jamaica — like local workers who’ve been injured and received no compensation, labor disputes and the question of how many locals are actually being employed by Chinese firms — but there is one final project I’d like to mention briefly, because it is rather incredible.

During a visit to Beijing in 2015, Jamaican Prime Minster Portia Simpson announced the Chinese would build “a $1.5bn [of course] deep water container port on islands in Jamaica using dredging and land reclamation to accommodate mega ships coming through the expanded Panama Canal.”

The only problem? The islands selected by the Chinese for the project — Goat Island and Little Goat Island — are situated in Portland Bight, Jamaica’s largest Protected Area.

Jamaican iguana. Photo by By Yinan Chen (www.goodfreephotos.com (gallery, image)) [Public Domain], via Wikimedia Commons

Jamaican iguana. (Public Domain, via Wikimedia Commons)

The announcement, as you can imagine, prompted an outcry from environmentalists, pitting those who wanted to protect the islands (and the Jamaican Iguana, an island species that had been brought back from the brink of extinction) against those who believed the transshipment hub would turn Jamaica’s economy around. The Jamaican government would later say it had offered the Chinese other possible locations for the port, but CHEC would have none of it, it wanted the Goat Islands.

Then, in a move that suggests that however close they may be to world domination, the Chinese still have a thing or two to learn about public relations, CHEC announced that the price of electricity was too high in Jamaica, so it was going to build a coal-fired generating plant to power its transshipment terminal in the Protected Area.

Things went quiet for a time and then, while attending a Town Hall in New York of all places, in the fall of 2016, Jamaica’s current prime minister, Andrew Holness, was asked about Goat Islands and replied that the port project would go ahead — but not on Goat Islands.

And that’s where the issue apparently still stands, although The Gleaner seemed pretty sure not just the Goat Islands project but any other port project was dead in the water:

So, the Goat Islands project became a metaphor of hordes of Chinese storming across Jamaica, laying waste to the land in conquest, and installing themselves as overlords of a newly enslaved people. CHEC, fighting to complete its other Jamaican projects, including the US$650-million north-south highway, seems unwilling to maintain a battle on another front.

The company had established Jamaica as its Americas headquarters, and that may nominally still be the case. But it is to be noted that it has shifted much of its operations, including equipment and staff, to Panama where it says it is gone in search of logics-related and other construction projects. And these days, CHEC, like the Government, says little to nothing about the Goat Islands proposal.

I take the Gleaner’s point, to a certain extent — xenophobia is ugly and should obviously not be the basis for decisions about infrastructure. But I’m quite sure environmentalists would have protested the construction of a mega-port in a protected area even if the plan had come from Usain Bolt himself. And the tolls on that wonderful North-South Highway must be a financial burden for average Jamaicans.

And so, while Jamaica’s loss might be Panama’s gain, it could actually be that Jamaica’s loss is Jamaica’s gain. Time will tell.

 

Port of Sydney

So what am I trying to say here? That’s a good question. There are so many unknowns in our situation that it’s hard to figure out whether CCCC buying a Canadian construction company actually means anything to us but I’m guessing it doesn’t — our port project is supposed to be a “private” venture, not dependent on federal infrastructure funding, and CCCC is pretty clear the Aecon purchase is intended to allow it to capitalize on federal infrastructure funding.

I also note that CCCC is not part of the “consortium” Barbusci has put together for our port project (it consists of SHIP and the Montreal land developer Canderel) and that Chang Yunbo, the “International” VP of CCCC who visited us in 2015, is now apparently “chief executive of CCCC South America.

But the idea that Barbusci and Sheehy, who speak no dialect of Chinese, know nothing about construction and have no experience running a port were actually trying to negotiate with CCCC is kind of terrifying. CCCC is going to come out on top of any deal it negotiates and if the company is still somewhere in the picture locally, it would be wise for us to remember that.

 

 

 

 

 

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