ANGOLA: WORK STOPS ON THE MALANJE RAILROAD

C O N F I D E N T I A L SECTION 01 OF 02 LUANDA 000648

SIPDIS

SIPDIS

FOR AF/S AND EAP/CM

E.O. 12958: DECL: 06/20/2017
TAGS: ELTN ETRD EFIN EPET PINR CH AO
SUBJECT: ANGOLA: WORK STOPS ON THE MALANJE RAILROAD

LUANDA 00000648 001.2 OF 002


Classified By: Ambassador Cynthia G. Efird. Reason 1.4 (b) and (d)


1. (C) Summary. Work has apparently stopped along the
railroad line linking Luanda and Malanje with Chinese
railroad workers claiming they have not been paid for eight
months. At the root of the problem is the nature of the deal
between China International Fund (CIF) a private Hong Kong
corporation financing the project and the GRA. CIF was
contracted to rebuild this rail link in exchange for oil, but
CIF,s use of a high price per barrel for barter and its
miscalculations of operating costs have left it financially
strapped. CIF,s management-ordered work stoppage may be a
plea to both the GRA and the GOC for a bail out, but the
company's plight highlights the difficulties that some
Chinese companies are having doing business in Angola. End
Summary.

Linking Angola by Rail
--------------

2. (U) Background: During Angola,s colonial period three
major rail lines traversed Angola, all in East-West
directions. The northernmost line linked the port of Luanda
with Malanje; the central line linked the port of Lobito with
Zambia and Congo and was used to transport copper and other
minerals; the southernmost line linked the port of Namibe
with Lubango and eastern Huila province, a rich cattle and
agricultural area. All the lines suffered extensive damage
during the civil war and were heavily land mined. The GRA is
currently demining the rail beds and repairing the lines,
principally by using Chinese companies financed through the
Chinese line of credit for the rail reconstruction. Embassy
Luanda,s Chinese-speaking Econoff and P/E Intern traveled to
Ndalatando in Kwanza Norte Province to observe the work on
the Malanje railway from June 19-20, 2007.

Work Stoppage on the Malanje Rail Line
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3. (SBU) The Luanda-Malanje line now reaches from 60
kilometers east of Luanda to within 40 kilometers of
N,Dalatando, capital of Kwanza Norte Province.
Construction teams are pushing toward each other from Malanje
and N,Dalatando. Econoff was not able to access most
stretches of rail line because of no direct access from the
road to the rail line. However, he examined the line where
it parallels the Luanda-N,Dalatando road and found a visible
waviness to the rails at several points, as though the track
bed had settled and slightly bent the rails after the line
was laid.


4. (C) In N,Dalatando, Econoff found the supervisor of crews
laying track between Dondo and N,Dalatando, Mr. Li, at the
N,Dalatando train station, which serves as a temporary
dormitory and workshop for the Brigade. Li explained to
Econoff that his team recently stopped its work because the
Angolan government was experiencing &financial problems.8
His Chinese workers, he explained, had not been paid in eight
months. At 1:30 p.m. on a Tuesday Li and four colleagues
welcomed their unexpected visitor. The only person visibly
doing any work was the cook, who was washing pots. Li said
that he hoped work would resume as soon as Monday, June 25.
He added that he normally employs 2,000 Angolan day laborers
but has let them go until work can resume. By contrast,
Governor Henrique Andre Junior of Kwanza Norte Province,
meeting with Emboffs on June 19, said that as far as he knew,
the work was underway.

Poor Calculations, Underestimated Costs
--------------

5. (C) Sources in Angola,s Chinese community had told Post
that financial difficulties have slowed progress on
rebuilding the rail line from Luanda to Malanje and that work
recently had stopped altogether. The 20th Railroad
Construction Brigade has a contract with Hong Kong-based
China International Fund (CIF) to rebuild the line, but both
CIF and the Brigade underestimated the cost of doing business
in Angola. The Brigade took on the Angola project because of
its experience with operating in some of China,s worst
environments. Angola, however, surpassed anything in the
Brigade,s experience. Among the problems: lengthy port
clearance times for building materials and slow land mine
clearance along the right-of-way. Higher operating costs
forced it first to reduce the scale of its operations and now
to stop work.


6. (C) A lot of finger-pointing is underway to cast blame for
what may have become a bad business decision. Liu Daiwen,
the former Angolan resident Deputy Manager of the Brigade,
complained that CIF,s founder, Mr. Xu Jinghua,

LUANDA 00000648 002.2 OF 002


misrepresented how much the Brigade could earn in Angola.
Higher-than-expected costs then forced the Brigade to reduce
its expatriate Chinese workers from 1,000 in 2006 to fewer
than 300 as of June 2007. Meanwhile, Liu,s responsibility
for the decision to come to Angola damaged his career and
forced him to return to China in late 2006. However, Luanda
sources suggest that Liu,s judgment of Xu may be too harsh.
Liu,s own actions did him and CIF damage, as well.


7. (C) China International Fund (CIF) financial plight is
also due to major miscalculation regarding the price of oil.
CIF is the only Chinese company, according to our Chinese
interlocutors, to directly barter its services for oil. In
making its oil-for-work deal CIF apparently calculated too
high, using an oil price of USD 70 per barrel. (By
comparison, the GRA used USD 50 per barrel in drawing up its
2007 budget.) CIF's other project, a 24-story office complex
in Luanda, is not stopped, however and may have used a
different financing scheme. CIF, according to interlocutors,
is hoping for a new infusion of cash from both the Government
of China, betting that the GOC does not want one of its major
overseas investors and large-scale employers to fail, and
from the GRA, which wants its railway built.

The Mechanics of the Chinese Line of Credit
--------------

8. (SBU) Most Chinese firms working in Angola get paid
through the Chinese line of credit to Angola: they submit
invoices for work completed under their contract with the
Office of National Reconstruction (GRN). The GRA approves
the invoices and notifies the Bank of China (BOC),which pays
the firms, accounts at the BOC and adds the sums to
Angola,s debt to China. Angola, which sold China USD 10
billion worth of oil in 2006, has enough money to pay for all
its ongoing rehabilitation projects. Angola,s Ministry of
Finance (MOF) keeps an account at the Bank of China (BOC),
where China pays for the oil it buys from Angola, according
to an expatriate financial expert in Luanda. The MOF,s
account serves as collateral for BOC loans to Angola.

Comment
--------------

9. (C) Several sources in the Chinese community here link the
Brigade,s and CIF,s financial problems to CIF,s
miscalculating both the cost of doing business and the price
of oil. The private CIF deal with the GRA and Sonangol
further complicates the picture with barter arrangements
being used to swap Angolan oil for Chinese services.
However, this arrangement looks far more like poor planning
and verification by CIF than anything underhanded. CIF's
survival and its future as a conduit for Chinese investment
in Angola (as well as the future of the oil for services
model) may depend on its ability to re-calculate its barter
arrangement with the GRA to more accurately reflect costs and
the price of oil. If CIF's deal collapses, however, it would
send a clear message to potential Chinese investors that they
may not be able to count on being bailed-out for bad business
decisions.
EFIRD