China, the Fierce Partner

Venezuela holds onto China. In mid-September 2017, the state oil company Petróleos de Venezuela (Pdvsa) published for the first time the price of Venezuelan oil in yuans. It was Caracas response to the financial sanctions imposed by the Donald Trump administration to prevent the Venezuelan government from issuing a new debt. "We have decided to start a new stage of foreign trade with the use of internationally convertible currencies beyond the US dollar," Venezuelan President Nicolás Maduro had warned in early September, after the US measure was known.

The price of the Venezuelan crude oil in yuans seems more than a symbol. It looks like the corollary of the relationship that Caracas and Beijing forged from the government of Hugo Chávez as soon as the new century began. Although initially conceived as the formula for the "development" of "socialist" Venezuela, it has resulted in an increasing dependence on the Caribbean nation with the Asian nation.

The relationship between the Ecuadorian Government and several Chinese companies is deep and hard to unravel. The contracts that bind them are difficult to access. Knowing the precise amounts, conditions, institutions involved is a complex task: there is no state office or a single web portal that gathers all the information. The information is scattered among the government entities that have signed the contracts, where everything happens slowly, and not all the information requested is obtained: only three out of thirteen requests for information received a positive response through the submission of seven contracts. Give reasons to explain what motivates the labyrinth that has to be walked to find the contracts of Chinese companies would be speculating. However, there is an obvious truth: the lack of transparency is one of the roots of corruption, both here and in China.

The lack of transparency also has a cost. A study by the FARO group —made in 2011 with support from the Inter-American Development Bank (IDB)— determined that, for example, the lack of transparency in the oil area entails a cost to Ecuador of at least 2.87% of the gross domestic product —more than 2,000 million dollars, a lot of money. And if it is public money, it is even much more. For example, is it enough to pay in full for the Coca Codo Sinclair hydroelectric plant (the largest dam in the country, in the northeast, on the Napo province).

In the seven contracts obtained by requesting information, there is a common denominator: hiring was made under a special system, a modality that allows, in certain cases, contracting under more flexible parameters. In five of the seven contracts, the work was tied to the financing of Chinese banks. Both possibilities are provided for in the Organic Law on Public Enterprises, approved in 2009. According to the councilor and former mayor of Quito, Daniela Chacón, this type of contracting is very beneficial for politicians who "want to do things without transparency". Chacón says that the fact that the contracts themselves determine the contracting processes (and how they will be regulated) creates a vacuum to supervise. Transparency loses under these conditions.

On July 30, 2009, CREC, one of the companies of holding China Railway Construction Corporation (CRCC), signed a contract with the State Railways Institution (IFE) for 7.5 million dollars for the construction of the railway system "eje norte-llanero (north-plain axis), Tinaco-Anaco stretch, under the turnkey-total amount closed modality." Hugo Chávez had authorized the hiring of that company in the 073-2009 "report" of March 3, 2009, based in turn on the agreement of economic and technical cooperation signed by both Governments on September 24, 2008, in Beijing.

"Have credit with the second largest economy in the world, which is a great guarantee for us. In addition, the important thing is how those resources have been allocated," presumed in 2011 Jorge Giordani, then Minister of Planning and economic mentor of Chávez. But today the train is an unfinished project. Despite the millionaire outlay —the figure today represents 70% of Venezuela's international reserves and exceeds the cost of the recent expansion of the Panama Canal—, the work that would allow the train trip between the center and the east of Venezuela at 220 kilometers per hour is in ruins. According to the contract, CREC had to complete it in "40 continuous months from the signing of the initial instrument."

Venezuela paid CREC 10.66% of the total in 2009, another 26.67% of the "total amount closed" in 2010, 30% in 2011 and finally, the remaining 32.67% in 2012, as agreed. Although the payments were subject to "valuations for work performed", the company guaranteed the possibility that the final price could rise even more during the course of the work for "additional works". The company also established that the expenses associated with the importation of machinery and equipment to carry out the work would be borne by the Venezuelan Government.

" IFE will be responsible for paying all expenses related to the temporary admission of equipment or clearance of materials, parts and pieces required to carry out the work, as well as all expenses related to the importation and clearance of those equipment, materials, parts and pieces to be included in the work," provides clause 95 of the contract. In the event of "delay in the introduction of the imported goods and equipment into the country, for causes not attributable to CREC, and provided that the import has been processed in due time, such delay shall result in an automatic extension of the execution period for the same term of the delay." This last provision is not a minor condition if bearing in mind that Venezuelan ports are among the most inefficient in the region.

Despite the millionaire amount and the extent of the work, the contract also established the possibility of CREC outsourcing companies without major restrictions. "CREC must notify IFE of the subcontractors that it intends to outsource and IFE reserves the right to disapprove said subcontracts where, at IFE’s sole discretion, there are well-founded reasons for such decision, which shall be made within eleven consecutive days from receipt of the notification and the subcontractor documents," specifies clause 83 of the agreement.

Thanks to this provision, the Chinese company, after charging the Government in dollars, was able to outsource Venezuelan construction companies in bolivars, which ended up imposing more rigorous conditions than those set by IFE on CREC. "The price of this contract cannot be modified or adjusted," say the contracts that CREC entered into with Consorcio Maquivial-Otassca and Basis C.A., two of the companies outsourced in 2010. This clause was not only a straitjacket for local companies in the middle of an economy that already accumulated a double-digit inflation, it also allowed CREC to play in an economy with several exchange rates, including the "parallel" market, well above official rates. "Although the work was financed with the Chinese Fund, those payments were made in local currency. How did they (the Chinese) sell the dollars? That was something that the Chinese did not detail to contractors," explains a source familiar with the project, who prefers to remain anonymous.

The agreement with Consorcio Maquivial-Otassca even sets forth that "the lack of payment will not lead to work stoppage by contractor," while in the contract with Basis CREC it is established that "contractor must work on weekends and holidays," a provision that clashes with Venezuelan labor laws. “To get on with the stretches during weekends, the Chinese workers took the machinery of private companies", adds the consulted source.

The possibility of hiring Chinese personnel was also allowed in the contract between CREC and IFE. In principle, the company had to "make use of mostly Venezuelan human resources" (clause 21), but in the cases of hiring Chinese personnel it was agreed that "IFE shall cooperate and provide all necessary support to process and issue work visas or of any other nature, that allow permanence of such personnel in Venezuelan territory in a legal manner and for the time necessary to execute the work" (clause 91). This condition appears in other contracts of Chinese companies with the Venezuelan Government and, in some cases, has been the subject of complaints by Government-related unions.

The questions have also come from China. In July of this year, the National Railway Administration, the regulatory agency of the sector in China, sanctioned and imposed a penalty on CRCC, the parent company of CREC, due to shortcuts and non-compliance in several projects of its subsidiaries, as well as modifications without consent in the railway works it has participated in.

The link between China and Ecuador got stronger in 2009. The break between the government of former President of Ecuador Rafael Correa and the agencies that had traditionally financed the country (World Bank, International Monetary Fund) forced him to look for money on the other side of the world. "There is preferential treatment for China," says Carolina Viola, a professor at Pontificia Universidad Católica of Ecuador, who studies labor and environmental issues in Sino-Ecuadorian projects. "Because when Ecuador received zero external financing, China covered its back."

Under those circumstances, the big Asian country became the great financier of Ecuador. According to Paulina Garzón, a specialist in Chinese investment in Latin America, companies in that country were awarded 70% of the largest public contracts in the mining, oil and water sectors during Correa’s government. Researcher Diana Castro has been able to establish that there are 21 companies contracted by public entities from ten areas for at least 63 projects: construction of hospitals, schools, bridges, buildings, roads.

Castro also reports difficulty in accessing contracts between China and Ecuador. Contracts that are usually tied to the credits to pay for the works to be executed and are, in general, 5% more expensive than those granted by the World Bank.

The past decade was characterized by its hunger for Pharaonic works. The Government Financial Platform, a mega building constructed to receive 3800 public officials from the economic areas of the State, is one of them. It was built by Chinese company CAMC, and the amounts of its contract have varied according to who reported its costs (and when they were reported). The structure was criticized for the price increase without apparent justification. Urban planner John Dunn wrote, "For the first time in Quito, a building has been built that breaks the geographical condition of the valley containing the city. You can no longer see the Pichincha (volcano) from avenida de los Shyris and from calle Japón (in the north center of Quito). Perhaps we have confused "monumentality" with "hypertrophy".

Days before its inauguration, after a heavy rain, the gigantic work was flooded. The parking lots were filled with so much water that the cars were submerged halfway.

It is not the only project in the hands of a Chinese company with inconsistencies and inconveniences. The Quijos hydroelectric plant was promoted as another of Rafael Correa's emblematic works. Its construction was awarded to the Chinese company National Electric Engineering (Cneec) for 94 million dollars. It had to start operating in 2015. But the cost what not as expected, neither was it finished when expected. The budget went up to 110 million dollars, and the completion of the work was postponed to March 2016. The latest information available from Corporación Eléctrica del Ecuador - Celec (June 2015) says that the Quijos project was completed at just over 45%.

In December 2015, Celec unilaterally terminated the contract with the Chinese company. "Due to breaches of technical, quality and engineering standards in the execution of the work," said Manuel Andrade, head of civil works of the project and a Celec official. He also explained that the collection of 25 million dollars for the performance bonds was in progress. Celec was asked to confirm if the payment had been collected, but it gave no answer. That same company had been declared a non-compliant contractor due to faults in the Mazar-Dudas hydroelectric project, one of the eight hydroelectric plants of the self-proclaimed Citizen Revolution, the government process led for ten years by President Rafael Correa.

Coca Codo Sinclair was also an emblematic work and in trouble. Another of the eight hydroelectric plants built during the government of Rafael Correa, according to the Ministry of Energy, was 95% finished in April 2017. When it was tendered in 2008, the international call for tender was conditioned, it was open but it was tied to financing. The only bidders were two Chinese companies. Sinohydro Corporation won the heads-up with a proposal of 1,979 million dollars, about 400 million dollars more than the cost that had been predicted in the 2006-2015 Electrification Plan. Let’s put these numbers into perspective: 1,979 million dollars would be enough to launch a space shuttle four times. The difference between what was planned and its cost, 400 million dollars, would have paid for the 80 millennium schools that the government of Rafael Correa managed to build until he left power in 2017 (when he had to stop producing them due to lack of resources, and prefer the less sumptuous model of the so-called 21st century schools, even though that amount would have been enough to cover around 2,000).

The multimillion-dollar Coca Codo Sinclair project was surrounded by technical questions and accusations of irregularities in its execution. In the book” Ecuador made in China,” political activist Fernando Villavicencio details three problems of Coca Codo. It had no technical studies to justify the power (the amount of energy it can generate) of the hydroelectric plant. Nor did it have the final studies for hiring when the tender was launched. The Comptroller's Office, in charge of overseeing the use of state assets and monies, determined that from March 2010 to February 2012, not all the corresponding penalties for failure to comply were imposed on Sinohydro. The amount should be 425,000 dollars a day, but according to the control entity, only phase I and II of the project were penalized, leaving out non-compliance of supervisions or delays in the incorporation of personnel and equipment, among others. "In the development of the project, it did not comply with the supervision and overseeing orders, regarding the completion of the plan. It delayed the start of works in several work fronts, delayed the completion of several contractual milestones, breaches for which no penalties are provided for in the contract."

Failure to finish the works has not stopped the hiring of Chinese companies by the Venezuelan Government. Last July, China Camc Engineering, a subsidiary of the China National Machinery Industry Corporation (Sinomach), which in 2007 incorporated company Camce Sudamerica in Caracas, was appointed by the Maduro Government for a nickel mining project. Previously, in February 2016, a "memorandum of understanding" had been announced for the company to also participate in the Southeast of the territory in the "certification of resources of the Orinoco Mining Arc", the plan with which Venezuela seeks to counteract the fall of oil revenues.

These businesses are in addition to those achieved by CAMC in areas like power, agriculture and infrastructure in over a decade, which exceed 3,000 million dollars, despite the fact that the Office of the Comptroller General of the Republic noticed irregularities of this company in the execution of its first contract in 2003. It was the agreement for the construction of the "Bolivarian Aqueduct of the State of Falcon," in the northwest of Venezuela, considered at that time as "one of the most important hydraulic projects in Venezuela" and thanks to the "loan agreement" of December 20, 2002, between the Venezuelan Ministry of Finance and the Bank of China, according to the 2007 management report prepared by the Office of the Comptroller General of the Republic.

The document is an inventory of Camc irregularities and breaches. "Deficiencies were observed in the planning and in its administrative processes that resulted in the reduction of the scope of the work and additional costs to the project. This situation was reflected in the delay of 352 days in its completion; expenses the description of which does not directly relate to the project, nor to the object of the contract; payments higher than those established contractually; omissions of relevant aspects in the contractual terms and conditions (guarantee terms of the works); incorporations of confusing contractual clauses, among others." The Office of the Comptroller General of the Republic also recommended "to urge Chinese company Camc to proceed with the replacement of 335 meters of pipeline" as it did not meet the agreed technical specifications, and it required the authorities "to ensure that the costs of excavation, extraction and transportation are not listed through valuations to the Ministry of People’s Power for the Environment."

Conclusions similar to those of the Office of the Comptroller General of the Republic can be reached based on the contract entered in November 2005 between Citic Construction Co Ltd, a subsidiary of Citic Group, and the Venezuelan Ministry of Housing and Habitat. In that first agreement between both parties for the construction of 20,000 homes for the amount of 905 million dollars, the Chinese company established confidentiality conditions like "contractor shall not be required to disclose to employer, or any third party on behalf of the employer, any financial or trade information, or any document related to the contractor, its outsourced companies, suppliers, carriers, agents, appointed manufacturers, consultants and staff (of any nationality, including Chinese, Venezuelan or third-country)”.

Just like CREC did for the construction of the Tinaco-Anaco railway, Citic included in the agreement the option of hiring Chinese personnel. A clause of the document provided that "employer shall make arrangements for contractor to be authorized to conduct the activity of non-Venezuelan expatriate personnel of contractor in accordance with Chinese labor regulations, including, but not limited to, maximum daily working hours" and that in the event "employer does not achieve these exemptions, contractor shall be entitled to an extension of time."

Tax exemptions, payment of the contract "exclusively in US dollars" ??and the option of "increasing prices in each payment for inflation of material and labor" were other conditions imposed by Citic to the Venezuelan authorities in that first agreement of November 2005. Some of those conditions were softened by the Venezuelan counterpart in an "addendum to the contract" signed almost a year later, in August 2006. However, Citic had managed to secure a very favorable business in Venezuela. In that first modification, the contract was quoted in euros. "Each home had an average cost of 80,000 euros," says a builder. According to him, like with CREC or CAMC, the contract with Citic was reviewed several times to the point that in 2011 more changes were made to the initial agreement and the price of the homes continued to escalate. The facts seem to validate his information, since it was only in last July when the President of the Republic handed over some homes built by Citic at the Tiuna Military Fort in Caracas, one of the six places where the Chinese company had to build the homes.

"I thank China, the Chinese companies, the Venezuelan workers and companies. Thank you for everything you have done permanently, because our commander laid the foundations of this new Ciudad Tiuna in the parish of El Valle," said Maduro that day. On Citic website, a press release also echoed the event. "During his speech, (Nicolás Maduro) he expressed his gratitude to Citic Construction for his great contributions to the Great Housing Mission Venezuela (GMVV) (...) He also read with enthusiasm the names of the main Chinese attendees one by one and sincerely thanked the Chinese people for their contribution to the construction and development of Venezuela."

Both opinions are far from that of Venezuelan academics and economists. In 2016, professor and researcher of Universidad de Carabobo Giovanni Gómez Ysea requested before the Finance Committee of the National Assembly and the then Public Prosecutor General, Luisa Ortega Díaz, the revision of the financing system with China "as these are illegal and onerous agreements with draconian terms and conditions against the interests of the Republic, which have caused and continue to cause irreversible economic losses to the nation."

Since the early 2000s, the China’s state "zhou chu qu" (Go-global) policy encouraged large Chinese industrialists, like Sinohydro and Gezhouba, to seek projects abroad. "These companies were once ministries, and then they became state-owned companies and then companies in which the government still has a majority," says Darrin Magee, water expert at Hobart University & William Smith Colleges.

According to Magee, these companies have internal divisions and are executing hydroelectric projects basically anywhere where "development" is needed, especially if the construction of dams, roads, and other infrastructure facilitates China's access to mineral, timber, and agricultural resources.

When the political map in Latin America turned to the left, the expanding giant saw the opportunity. Away from their traditional financiers, countries like Ecuador, Venezuela and Bolivia would look for alternative sources to fulfill the promises of development of their populist leaders. Chávez (and Maduro) in Venezuela saw in the Chinese banks and companies the solution of the national progress equation. Rafael Correa, in Ecuador, followed them very soon. But the results of the alliance with China, announced as a formula for Venezuelan development for over a decade, are discreet. Some of them are now failed projects. Something similar happened -and still happens in Ecuador-, where the construction of mega projects by Chinese companies has not been exempt from problems, delays and terminations due to breach. Both stories are just a mark of the influence of the extension.

This work is the product of a collaborative project between Armando.info (Venezuela) and Gkillcity (Ecuador), managed by China Dialogue (United Kingdom).

* Mayela Armas contributed to the reporting work in Caracas.