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[Dehai-WN] Crisisgroup.org: China's New Courtship in South Sudan

From: Berhane Habtemariam <Berhane.Habtemariam_at_gmx.de_at_dehai.org>
Date: Mon, 9 Apr 2012 23:31:14 +0200

China’s New Courtship in South Sudan

Africa Report N186 4 Apr 2012

http://www.crisisgroup.org/~/media/Files/africa/horn-of-africa/sudan/186-chi
nas-new-courtship-in-south-sudan.pdf

EXECUTIVE SUMMARY AND RECOMMENDATIONS

In the wake of Sudan’s partition, Beijing has accelerated a re-orientation
of its engagement in the resulting two states, most significantly through a
new courtship in Juba. China’s historical support for Khartoum left a sour
legacy in the South, but the potential for mutual economic benefit means a
new chapter in bilateral relations is now being written. Balancing new
friends in Juba with old friends in Khartoum, however, has proven a delicate
dance. China has been drawn into a high-stakes oil crisis between the two,
the consequences of which may temper an otherwise rapidly expanding
relationship with Juba. A sustainable solution to the crisis cannot be
achieved in isolation; North-South stability, mutual economic viability and
the security of Chinese interests will also depend on answers to other
unresolved political and security issues, including in Sudan’s marginalised
peripheries. The future of Beijing’s dual engagement, and the kind of
relationship that emerges in the South, will depend in part on how the oil
standoff – and this broader reform agenda – are confronted.

As South Sudan prepared for its 2011 self-determination referendum, China
recognised the increasing inevitability of independence. Eager to maintain
stable relationships and the continuity of its oil investments – now
situated primarily in the South – its stance evolved to reflect changing
political realities. Beijing is keen to preserve and expand its footprint in
South Sudan’s oil sector, but Chinese companies are also flocking to other
sectors, above all to build infrastructure in a country that has almost
none.

China’s cultivation of new political and economic relations has been most
visible in the surge of bilateral exchanges with Juba over the last year,
which is expected to be capped in the coming weeks by President Salva Kiir’s
first visit to Beijing as head of state. As they seek to build bridges with
the South, the Chinese are keen to draw comparisons with their own
experience of economic transformation and rapid rural development, as well
as to emphasise a sense of shared historical experience at the hands of
imperial powers.

South Sudan is very much “open for business”, actively seeking foreign
direct investment from West, East, and everywhere in between. Historical
ties may be strongest with the West, but Juba has made clear that if the
Chinese are first to come and partner in developing the new nation, they
will not hesitate to welcome them. Furthermore, China’s “no strings
attached” political approach and economic cooperation model is as attractive
in Juba as it has proven elsewhere on the continent, not least in
resource-rich states eager to develop fast.

As Juba opens up to new investment, it should take two critical factors into
consideration. First are potential correlations between the economic
partnerships it forges, the character of the state that emerges and its
foreign policy. While it hopes to remain politically aligned with the West,
time will tell whether expanding economic partnerships with China or others
will have a gravitational effect. For now, it wants to welcome, and
leverage, the interest of all actors.

Secondly, in the midst of a mounting budget crisis, Juba must consider how
to secure and direct investment so as to best serve its development agenda,
calm its own domestic insecurity and prevent even greater state fragility.
It must actively shape new economic relationships rather than become a
passive recipient of foreign-authored investment. Given limited government
capacity and an untested legislative framework, its economic planners must
take care to harness such investment for its own benefit, lest Africa’s
newest state be overrun in a resource scramble.

The number of Chinese nationals and commercial actors in Juba has spiked
dramatically in the nine months since independence. Beyond oil, Chinese
companies are most interested in infrastructure, and South Sudan needs
everything: roads, bridges, telecommunications, power plants, electricity
grids, schools, hospitals, municipal buildings, water treatment facilities,
dams and irrigation systems and new oil infrastructure. Companies are
registering, conducting feasibility studies, and drafting proposals, but
major deals are yet to be landed. Though China’s central government often
plays a role in helping secure market access, Chinese engagement in South
Sudan is not monolithic. Private businesses and small-scale entrepreneurs
are driving new investment as much as the state.

Some of Juba’s elite remain hesitant about putting too many eggs in one
basket, and even those most eager to secure a major economic partnership
argue there will be no Chinese monopoly. Beijing affirmed in January 2012
its intent to offer an economic package, including development grants and a
possible billion-dollar infrastructure loan, and details are being
negotiated. But new uncertainty over the future of Juba’s oil sector and
continued North-South instability have altered the equation and may reduce
the total offered in the end. Given the greater variety of financing
opportunities now available to Beijing’s government “policy” banks and thus
an increased sensitivity to risk, the scale of a loan may not match those
extended to other resource-rich African states. Chinese companies will
actively pursue contracts in any case, though most would prefer the loan
financing that normally ties contracts to Chinese firms.

The budding bilateral relationship has strained of late, as Beijing has been
drawn uncomfortably into the oil dispute between North and South. An African
Union (AU) team, backed by the UN and other partners, continues to
facilitate talks between the parties. Tense negotiations on security,
borders, citizenship, financial arrangement and the export of oil have yet
to yield concrete agreements and are complicated by ongoing conflict in
Sudan’s border states. The impasse led to a shutdown of the oil sector in
early 2012 that has imperilled both economies and prompted renewed war
rhetoric. Most remaining oil is now in the South, but the predominantly
Chinese-built infrastructure to exploit it – pipelines, refinery and export
terminal – is in the North. Given comparatively modest proven reserves, oil
imports, whether from North or South, no longer occupy the significant
position in China’s global energy strategy they once did. But given the
considerable investment in developing and operating the oil sector, the
Sudans remain important for China National Petroleum Company (CNPC), the
state-owned oil giant, and thus a focus for the government.

As negotiations toward a North-South oil deal foundered dangerously in late
2011, the role of China came centre stage, and many in the international
community (and in the two Sudans) thought Beijing would be forced to
intervene. Juba wanted help in pressuring Khartoum to cut a reasonable deal,
and when the North began to confiscate Southern oil instead, it interpreted
China’s inaction as passive complicity and moved to leverage its
increasingly uncomfortable position.

At the same time, Chinese-led oil consortia were engaged in their own set of
negotiations with Juba over the transition of oil contracts previously held
by Khartoum. The financial terms were retained, but significant changes were
made to strengthen previously neglected social, environmental, and
employment standards. In light of the heated row with Khartoum, Juba also
bargained hard to include measures that would bring oil company interests in
line with its own and secure considerable legal rights and compensatory
protections in the event of an oil-sector shutdown. It also secured
discretion over the post-shutdown extension of contracts based on, among
other things, companies’ cooperation in helping resolve the impasse with
Khartoum. The interplay between the parallel negotiations added another
dimension to China’s increasingly complicated position.

Both sides, as well as many international actors, assumed China would weigh
in more assertively, though perceptions of Beijing’s influence and readiness
to employ it were unrealistic. The shutdown of the oil fields, abduction of
Chinese construction workers in Southern Kordofan and expulsion of the head
of a Chinese-led oil consortium added to Beijing’s vexing political problem
and generated anxiety among Chinese nationals in North and South. Both
Sudans continue to try to pull China into their respective corners, but
Beijing has resisted taking sides, as its principal objective remains
balanced relations with North and South.

That said, many – including in Beijing – argue China can and should do more
to ensure peaceful resolution, without compromising its interests or
traditional adherence to a principle of non-interference. A recent shift in
the North-South negotiation presents a possible new entry point for the
international community, including opportunities for China to help break the
deadlock, ease its own position and bolster stability within and between the
two states. Beijing has shown signs of new engagement in recent weeks, but
the comparatively weak domestic status and limited resources afforded to the
foreign ministry must also be considered. China’s diplomatic capacity does
not always reflect the powerful position the country enjoys on the world
stage.

The oil impasse may temper the pace of Chinese engagement in the South but
is unlikely to stall it. Angered by its sense that China still “treats it as
a province rather than an independent state” Juba will continue to make
demands, particularly with regard to management of its oil sector. But if
managed pragmatically, the opportunities for mutual economic benefit should
trump episodic tensions. China’s new expedition in the South and its attempt
to balance relations with the two Sudans have proven tricky tasks, however,
that will continue to challenge the boundaries of its foreign policy.

RECOMMENDATIONS

To the Government of South Sudan:

1. Manage relations with China so as to pursue legitimate near-term demands
in the oil sector without endangering the broader political and economic
relationship.

2. Articulate to Beijing a detailed set of priority projects for loan
financing based on an assessment of current financial constraints, future
debt burden, projected oil revenue and other donor commitments; harmonise
the inputs and experience of Juba’s traditional development partners with
the comparative advantages of Chinese entities in a way that best serves
South Sudan’s development agenda.

3. Formalise an economic task force to consider the country’s investment
strategy and partnerships and their effect on national development and
foreign policy.

4. Harness new foreign investment, including by:

a) ensuring transparency and cost efficiency through competitive bidding;

b) setting clear social, environmental, and quality standards; and

c) negotiating training and employment targets for both skilled and
non-skilled positions so as to maximise employment of South Sudanese
nationals.

To the Government of China:

5. Assume political responsibilities commensurate with economic status by:

a) building on recent diplomatic efforts through more active and regular
involvement in the North-South negotiations, including by directly engaging,
via an empowered special envoy, the parties in support of African Union (AU)
efforts to secure an agreement on the export of oil, as well as other
outstanding political and security issues;

b) offering financial assistance to help cover a portion of Khartoum’s
coming revenue gap, per the AU proposal, in combination with Juba’s proposed
contribution and necessary austerity measures in the North. Given the need
for considerable restructuring in Khartoum’s flawed economic model, such
funds may best be administered in conjunction with an
internationally-monitored program and guided toward smoothing the fiscal
transition; promoting productive sectors beyond oil; and fostering greater
economic decentralisation; and

c) recognising, given the interconnected nature of security between Sudan
and South Sudan, that financial assistance alone will not yield a
sustainable solution. Continued instability along the shared border and in
Sudan’s marginalised peripheries will remain a threat to peace and to mutual
economic viability, as well as to Chinese interests in both. Credible
progress on these fronts must accompany financial assistance, or the money
will be wasted.

6. Consolidate relations with Juba and protect the security of Chinese
investments by ensuring Chinese companies in South Sudan exercise good
business practices; place emphasis on areas that have hurt China’s
reputation in the past, notably transparency, social and environmental
considerations, local employment targets and quality delivery; and improve
China’s standing by ensuring the benefits of commercial engagement and
partnerships extend beyond government elites.

7. Extend a preferential loan package from the Chinese Export-Import (Exim)
Bank – in coordination with other creditors – to support development of
South Sudan’s infrastructure, so as to aid in opening up non-revenue
sectors.

Juba/Beijing/Nairobi/Brussels, 4 April 2012

 




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