Beyond the Zapata Scandal: Outsourcing Bolivia’s National Development to China

Thursday, February 18, 2016

OPINION | Beyond the Zapata Scandal: Outsourcing Bolivia’s National Development to China

 2/18/2016

By Dr. R. Evan Ellis

As Bolivians prepare to go to the polls on February 21st to vote on a constitutional referendum that will permit President Evo Morales to run for a third consecutive term, a scandal is rocking the country. The affair not only raises questions about the President’s character but is also a demonstration of the extent that Chinese companies have increased their presence in Bolivia—often engaging in less-than transparent procurement deals and largely without the attention of the U.S. and Bolivia’s neighbors.

The basic details behind the scandal have been confirmed by President Morales himself. In 2007 or shortly before, the President had a relationship with Gabriela Zapata, resulting in a child who died shortly after birth. Zapata went on obtain a university education and a law degree, and in 2013 was contracted by the Chinese company CAMC Engineering which won an estimated $580 million in work from the Bolivian state, of which, $366 million was awarded after Ms. Zapata was hired to represent the company.

What happened raises questions about President Morales’ integrity, including whether his relationship with Ms. Zapata began before she turned 18 and his denial of having been in touch with her since 2007. That is until a photo appeared of him embracing her in 2015 at the Carnival of Oruro. Adding insult to injury, he explained the discrepancy by dismissing the mother of his child as someone who seemed only vaguely familiar at the time among the many people who approached him at such public events.

The timing of the revelations regarding President Morales and Ms. Zapata, just days before the referendum vote, is likely no coincidence. Yet the scandal also highlights how Morales has placed Chinese-funded infrastructure projects, contracted to PRC-based companies, at the center of Bolivia’s national development strategy.

Even prior to assuming the Bolivian presidency, Morales signaled his interest in a special relationship with China, traveling to the PRC in January 2006, where he publicly declared himself to be a great admirer of Chinese revolutionary leader Mao Zedong.

In the years that followed, due to political instability, uncertain legal protection for companies, and the difficulties of doing business in Bolivia, the Morales government had few successes in attracting Chinese equity investment in sectors such as mining, petroleum or agriculture, despite the country’s abundance of natural resources.

PRC-based companies did, however, make enormous advances in selling to Bolivia Chinese goods and services, including numerous public works projects financed by Chinese banks.

In the first 15 years of the current millennium, according to the International Monetary Fund, China-Bolivia bilateral trade expanded by a factor of six, from a mere $75.3 million in 2000, to $2.25 billion in 2014. Yet, while other commodity-rich Latin American countries were enjoying trade surpluses with the PRC, Bolivia’s $1.82 billion in imports from China exceeded its exports to the PRC by more than 4:1.

In Bolivia’s commodity sectors, Chinese commercial activity principally involved sales of goods and services on credit, rather than equity investments by PRC-based firms. Notable examples included the 2011 sale of $60 million in drilling equipment to YPFB, financed by China Export-Import bank, a contract with the Chinese firm CITIC to explore for lithium and other mineral salts near Coipasa, paying the Chinese firm Linyi Gelon New Battery Materials Company to build a small plant making lithium batteries, paying CAMC Engineering to build a facility for extracting and refining potassium chloride, paying Henan Yuguang to build infrastructure in Oruro and Potosí to refine and cast zinc, and a $50 million contract with the Chinese firm Vicstar for a tin ore processing facility at the Huanuni mine in Potosi, among other projects.

The crown jewel in hiring Chinese companies to provide mining services, however, occurred in January 2016, when the Bolivian government announced a $450 million contract to the Chinese firm SinoSteel. The deal pays SinoSteel to build and administer facilities to extract and process iron from the country’s massive El Mutún mineral deposit. Previously, a contract to develop El Mutún had been awarded to the Indian company Jindal, but had been put on hold because of a contract dispute.

During the Morales presidency, Chinese companies also won significant transportation and electricity infrastructure construction work from his government, with 11 of 49 Bolivian public works outstanding in 2015 awarded to Chinese companies.

Thanks to Chinese financing of such projects, by the end of 2015, the PRC was Bolivia’s largest creditor, with an outstanding debt to Chinese banks of $533 million.

But even leaving aside the possibility of nepotism and favoritism and the risk of mortgaging Bolivia’s revenues to easy-to-obtain, Chinese-financed projects, an extraordinarily high number of these projects have been also been plagued by delays and difficulties. Work was suspended on an urban bridge being built by the Shenzen-based company Vicstar in Cochabamba when it began sinking into the earth. A highway being built by Sinohydro from Ivirgarzama to Ichilo was paralyzed by five work stoppages in 14 months. A $250 million contract for a railway and road connection between Montero and Bulo Bulo included the award of two segments to Chinese companies: China Railway Road and CAMC Engineering, of which both were rescinded when neither company could complete the work on schedule.

In the hydroelectric sector, work by Sinohydro on a $235 million contract to build the 124 MW San Jose hydroelectric facility in Cochabamba was halted in January 2016 by a strike. Similarly, CAMC Engineering became the target of protests when it ran out of money to pay truck operators who had been working for it on the Misicuni hydroelectric facility.

Despite this record of difficulties, another Chinese company, Sinohydro, appeared poised to win a contract to build the $1.3 billion, 600 MW Rositas hydroelectric complex on the Grande River in Santa Cruz. Critics charged that the award was rigged when the government gave only 21 days for interested companies to bid, based on a design that had not even been finished.

In manufacturing, as in the other sectors previously mentioned, in lieu of investing in factories, as the Chinese have done in the automotive, heavy equipment, and electronics sectors in Brazil and Mexico, PRC-based companies have built facilities, of questionable utility for the Bolivian state. Examples include an asphalt production plant in El Alto, a paper mill in Villa Tunari in the Department of Chapare, and the San Buenaventura sugar refinery in the Department of La Paz.

In telecommunications, in 2009, the Bolivian state communications company Entel signed a $120 million contract with the Chinese firm Huawei to provide service to 12,000 localities across the country. Five years later, in 2014, Entel made the Chinese company ZTE the exclusive supplier for building the new FTTx national broadband network.

In the space sector, the PRC built and launched Bolivia’s first satellite, including the construction of its ground infrastructure and the training of the personnel for the Bolivian Space Agency formed to administer the satellite, financing 85% of the $302 million collective costs of the work. Bolivia subsequently committed to contract the PRC to build and launch a second satellite, the Bartolina Sisa, for $150 million.

In the military arena, Bolivia was one of the first countries in the region to purchase Chinese equipment, buying 10,000 AK-47 assault rifles from the PRC during the period 1987-1996, as well as purchasing man-portable HN-5 air defense missiles from the Chinese, although the latter never functioned properly, and were eventually delivered to the United States in November 2005 to be dismantled. More recently, the Bolivian government has acquired Chinese trucks, busses and SUVs, as well as other military equipment, yet reportedly almost none of the Chinese vehicles is currently in service due to mechanical failures.

Undaunted by such experiences, during the Morales presidency, Bolivia began acquiring Chinese military aircraft, leasing two MA-60 mid-sized transports in 2007, and purchasing six K-8 fighter-interceptors in 2010. In 2014, Bolivia further acquired six Chinese H-425 / Z-9 helicopters, and most recently expressed interest in buying radars from the PRC.

If such projects presented a disturbing pattern, the Bolivian government promised to take its engagement with the PRC to an entirely new level with a $7.5 billion Chinese line of credit to fund a series of 11 strategic development projects. The realization of such work by Chinese companies would not only make the PRC the dominant player in Bolivian development, but would more than double Bolivia’s national debt. Particularly in the wake of the current scandal, the Morales strategy of using the PRC to conduct and finance its national development raises multiple concerns.

Based on the track record of the Morales government to date, it is not clear that the current regime is effective in choosing and contracting for the public infrastructure projects that most effectively promote national development. Nor is it certain that the regime can work effectively with its PRC-based partners to deliver quality products on time, without generating significant social unrest in the process.

Nor is it necessarily wise to more than double Bolivia’s foreign debt at a time when the prices for the country’s principal export commodities, metals, minerals, and gas, are at record lows, with no relief in sight.

One mystery is how the PRC plans to guarantee repayment of such risky business ventures. Chinese state officials and businesses need only look at the painful collapse of their other principal development partner in the region, Venezuela, to which China has lent more than $56 billion.

Bolivian voters would do well to look beyond the Zapata affair, but not overlook it. The current scandal is not just about Evo Morales, who has done much during the past decade to make the long-marginalized indigenous majority in Bolivia feel that they have a voice in the country’s politics. It is about choosing a path in which transparency and strong institutions ensure that the country most effectively leverages its resources and the help available to it, whether from China, Germany, or the U.S., to realize the legitimate dreams of national development and dignity in a pluralistic society.