China-based corporate web behind troubled Africa resource deals

Introduction

China Sonangol is probably the most public face of the private, Hong Kong-registered China International Fund (CIF), which has risen from obscurity to become a leading player in Africa’s resource markets, promising over $18 billion of investment in several African countries in the last six years. Through China Sonangol and other affiliated companies, CIF has acquired shares in a dozen oil fields, a diamond mine in Angola and substantial ownership of “development companies” that have won rights to iron ore and bauxite deposits in Guinea.

In just a few years, CIF has parlayed the Angolan deals into a new business model for resource deals in Africa. Partnering with Angolan officials and using ties to Chinese state banks and companies, CIF has convinced officials in other African nations to sign natural-resource deals that in exchange promise big public works projects. They’ve offered to finance roads and railways in exchange for access to mines and oil fields in politically unstable, resource-rich countries — some of them tainted by corruption scandals.

CIF and its affiliated companies ended up with rights to explore, and in some cases exploit, some of Africa’s richest mineral resources. But much of the promised infrastructure has not materialized. Proceeds of those mineral transactions were invested by CIF joint ventures in places far from the reach of African law and the scrutiny of citizens in the affected states.

CIF’s first major foray into Africa was in 2005. A $2.9-billion loan would build infrastructure in oil-rich Angola, which was then emerging from 30 years of civil war. At the time it was a bold proposition for a company barely a year old and with no experience building infrastructure.

CIF pledged to work on three railway projects, build a new international airport and construct over 200,000 units of social housing. But problems soon arose. On June 27, 2007, the U.S. ambassador in Angola, Cynthia Efird, reported to Washington, D.C. that CIF’s “miscalculations of operating costs” had left the company “financially strapped,” according to a State Department cable released by Wikileaks. CIF had hired subcontractors, Efird wrote, but the Chinese state company contracted to repair the Luanda-Malange railroad had stopped work that year as laborers had not been paid for eight months.

A year later, Dan Mozena, who succeeded Efird as ambassador, wrote in a cable that “work on all three railroad projects came to a halt [in 2007]; and the international airport project stalled in the design stage.” That cable, dated July 13, 2008, reported that the railway projects were later resumed, but were funded, not by CIF but from “new domestic and Chinese financing.”

The airport — meant to be a flagship of CIF’s assistance and projected as the biggest in Africa — remains unfinished. Angolan investigative journalist Rafael Marques de Morais reported last spring that little more than a partial foundation had been built. Contacted by email in Luanda last month, Marques said not much has changed.

Complicated Corporate Structure

CIF and China Sonangol are part of a network of companies incorporated in at least seven countries. At the top of this structure is a Hong Kong company, New Bright International, which was formed in July 2003. Three months later, Beiya International Development was formed: 70 percent owned by New Bright and 30 percent owned by Beiya Industrial Group, a railway construction company based in Harbin, China. Beiya, later renamed the Dayuan International Development Corporation, owns 99 percent of CIF.

CIF’s public face is Lo Fong Hung, currently director of over 60 CIF-linked companies worldwide. She appears to have had little corporate experience prior to CIF. In Hong Kong, she has told friends that she was once the translator for Deng Xiaoping, the Communist Party leader who introduced market reforms to China. In 2004, she appeared on a TV program with Venezuelan President Hugo Chavez, who described her as the daughter of a Chinese general. Her husband, Wang Xiangfei, is a former director of China Everbright Holdings Company Limited, which is part of a state-owned investment conglomerate, the China Everbright Group.

CIF’s representative in Africa, Sam Pa, was head of a Hong Kong company that traded equipment in China. In the late 1990s and early 2000s, he was fighting over a dozen lawsuits brought against him and his companies over unpaid debts. His girlfriend, Veronica Fung, is listed as owner of 70 percent of New Bright International, which owns the controlling shares of CIF. She is also a director of 23 other firms affiliated with CIF.

The state connections of CIF executives and their high-profile meetings with African officials may have given outsiders an impression that the company had official backing from the Chinese government. But that doesn’t seem to be the case. In a January 27, 2009 cable, the U.S. ambassador reported that Bolum Zhang, the Chinese envoy to Angola, had stressed to him that CIF was a “private” company. According to the cable, Zhang also said that CIF “has weak management and poor leadership in Angola, despite its close links to the Angolan presidency.”

In October 2009, the Chinese Ministry of Foreign Affairs released a statement on CIF, saying, “The Chinese government has nothing to do with its business operations, nor does it have knowledge of the specifics.”

Reached by phone in Hong Kong this month, CIF director Wang Xiangfei refused to answer specific questions about the company and its affiliates, saying, “Other countries and CIF’s rivals are bullsh***ing about CIF because Angola didn’t sell to them but chose to sell to China.”

Multiple attempts to reach other CIF directors and their lawyers over the phone and through email proved futile. One reporter went to CIF’s Hong Kong offices in July but was turned away. Company lawyers in Hong Kong also refused to help make CIF officers available for interviews. Court records show that Sam Pa has used several aliases, among them Sam King and Ghiu Ka Leung. Calls to the CIF offices in Hong Kong requesting to speak to these people were never returned.

The Angola connection

In 2004, China Sonangol was formed in Hong Kong: 70 percent was owned by CIF’s parent company, 30 percent by Sonangol. Its directors include Lo Fong Hung, Veronica Fung and Sonangol’s CEO Manuel Vicente.

From 2005 to 2008, China Sonangol sold at least 15 million barrels of oil a year to a subsidiary of the Chinese-government owned oil company, Sinopec, according to filings in Hong Kong. China Sonangol miscalculated the cost of buying the oil by $20 a barrel and lost money on the sales, according to a 2007 cable sent to Washington, D.C. by ambassador Efird.

But the sales were valuable in other ways: mortgage documents filed in Hong Kong by China Sonangol show that the agreements were used to help secure a $2-billion loan to Sonangol from a consortium of banks. They also show that in 2006, the Bank of China issued loans to CIF and another affiliated company that were secured with China Sonangol’s oil contracts.

And a 2006 mortgage document filed by China Sonangol in Hong Kong describes the following transaction: Sonangol Sinopec International (SSI), a joint venture with a subsidiary of the Chinese state oil company, in 2004 was awarded an Angolan off-shore oil field — known in the business as a “block.” That block was previously owned by Shell. An Indian company was identified as the buyer before Sonangol interceded. In a 2009 cable made public by Wikileaks, the U.S. ambassador in Angola relayed news from his Chinese counterpart that oil from that block was being shipped directly to China.

SSI made headlines two years later amid a record-breaking round of bidding for Angolan oil sites. According to Businessweek, SSI bid $2.2 billion for two sites, outbidding Exxonmobile and BP by hundreds of millions of dollars. Sonangol’s 2011 map of oil blocks, released in June, shows that between them, SSI and China Sonangol have acquired stakes in eight Angolan oil fields. The Economist Intelligence Unit reported that, just in March, China Sonangol purchased 10 to 15 percent share in four oil concessions.

Expanding in Africa

The Angolan connection eased CIF’s subsequent entry into Guinea and later, Madagascar and Zimbabwe.

In 2008, dissident army officers ousted the Guinean government. The new regime was diplomatically isolated and desperate for cash.

Mahmoud Thiam, then Guinea’s mining minister, said CIF approached the junta in March 2009 as a “special friend” who would provide much-needed financial support. Thiam was skeptical. But two weeks later, he said, CIF arranged for Sonangol CEO Manuel Vicente to fly to Conakry, the Guinean capital city, to convince him.

On October 10 that year, Thiam signed a formal agreement he dubbed the “contract of the century,” saying at a press conference that it involved an investment of between $7 billion and $9 billion. But the contract itself did not specify any particular amounts; instead it gave CIF exploration rights in three large areas of Guinea in return for infrastructure projects proposed by the Guinean government but which CIF was not legally obliged to provide. The deal was potentially worth billions of dollars: Guinea has the world’s largest reserves of bauxite and significant deposits of unexploited iron ore.

The signing ceremony came just 12 days after one of the bloodiest events in recent Guinean history. On September 28, the Guinean military opened fire on a peaceful protest against the junta, leaving over 150 dead and over 1,200 injured. Hundreds of women were raped. In response the international community imposed sanctions. In the aftermath, Thiam said, CIF was the only foreign investor willing to negotiate with Guinea.

“There was something seriously wrong,” said Abdoulaye Yero Baldé, current vice-governor of the Guinean Central Bank who was then a part of the country’s political opposition. “The government had just raped women and killed innocent civilians, all investors were going away and yet this group stayed and signed. It’s hard to know what’s truly in it for Guinea in this contract.”

In late 2010, Thiam flew several times to Madagascar with CIF representatives to negotiate with the government, which came to power after a March 2009 coup. He was a friend of the country’s mining minister, and CIF was interested in Madagascar’s Tsimoro oil field, which is estimated to have reserves of almost a billion barrels.

In January, the finance minister announced formation of the Madagascar Development Corporation. Registered in Singapore, the joint venture between the government and CIF was to be given priority in the exploration of oil and minerals.

When China Sonangol and CIF got to Zimbabwe, they used the same template as in Angola and Guinea: they promised to help in the “refurbishment of the country’s infrastructure.”

Like elsewhere in Africa where CIF and China Sonangol have cut similar deals, few details about the Zimbabwe agreement have been released. According to a government-run radio station, the deal is supposed to include investments in gold and platinum refining, oil and gas exploration, fuel and housing development. It is unclear how much was actually promised and what CIF would get in return.

Another company, Sino Zim Development, has concessions in Zimbabwe’s controversial Marange fields, where, according to Global Witness, “Zanu PF political and military elite are seeking to capture the country’s diamond wealth through a combination of state-sponsored violence and the legally questionable introduction of opaque joint-venture companies.”

Sino Zim Development was registered as a joint venture in June 2009 in Singapore. Its directors include CIF’s Lo Fong Hung and a Zimbabwean named Masima Ignatius Kamba. Singapore records say that Sino-Zim is wholly owned by two companies registered in the British Virgin Islands. Another company also called Sino-Zim Development was registered in Zimbabwe. Lo and Veronica Fung are among its directors.

A Wall Street address and challenges ahead

Cracks have recently appeared in CIF’s corporate structure. Last year, one of its directors, Wu Yang sued several CIF companies, demanding access to their books. In 2004, the Harbin-based Beiya Industrial Group, transferred its shares to Wu. In a court hearing in March, CIF lawyers said that Wu could not see the books because he was a nominee, not the real owner of the shares.

In Guinea, where a new democratically elected government has been in power less than a year, CIF’s future seems uncertain. Last month, Reuters quoted Guinea’s current mining minister as saying that the CIF contract had been overturned. Yet, in a visit to Columbia University shortly afterward, Guinean president Alpha Conde said, “I don’t see how we can overturn the contract when we haven’t examined it yet.”

In Angola, China Sonangol chairman Manuel Vicente is widely expected to become president after next year’s election. But Deborah Brautigam, a professor from The School of International Service at American University and the author of The Dragon’s Gift: The Real Story of China in Africa, says this will not necessarily be a boost for CIF.

“They still have to have money to make deals,” she wrote in an email, but “they don’t have a good track record of delivering, even with Vicente and Sonangol behind them. And their record at actually getting productive resource concessions has been very poor, despite all the media hype.”

Amid these doubts China Sonangol’s reach has extended to the heart of the United States’ financial district.

In the early part of the last century, 23 Wall Street in New York was the most famous address in American finance. It was headquarters for the world’s first billion-dollar corporation, JP Morgan & Co. Today China Sonangol is trying to convert the space into a luxury shopping mall.

Through a Delaware company, CS Wall Street, China Sonangol bought the building in 2008. Commercial space at 23 Wall Street is being offered to upscale retailers. In February, prospective clients met over cocktails to view the property. In July, Cushman & Wakefield Inc., a leading real estate firm, was retained to recruit tenants.

Today, three years after China Sonangol bought the property, the building remains empty.

(With reporting in Guinea by Patrick Martin-Menard, in Hong Kong and Guinea by Pei Shan Hoe, and in New York by members of the Stabile class of 2011, Graduate School of Journalism, Columbia University)