CDB provides $1.5 billion seller's credit to ZTE for on-lending to Ethiopian Telecommunications Corporation as supplier credit for first three phases of telecommunications infrastructure project (Linked to Project ID#30884)

At the FOCAC summit in 2006, Zhongxing Telecom Corporation (ZTE) and the Ethiopian Telecommunications Corporation (ETC), which was eventually renamed Ethio Telecom, agreed to a three-year sole supplier framework agreement worth $1.9 billion. The deal, which was finalized in March 2007, gave a single supplier (ZTE) the right to supply and install all telecommunications equipment in Ethiopia over a three-year period. According to the World Bank, there is “no evidence … that there was a commercial justification for the award of such a large contract to one supplier, that a competitive tender took place, or that there was an effective contractual mechanism for price protection and technical compliance.” Under the terms of the deal, ZTE provided a $1.5 billion supplier credit (i.e. vendor financing) for ETC to purchase its equipment. This supplier’s credit was, in turn, supported by a $1.5 billion export seller's credit from China Development Bank (CDB) to ZTE. The interest rate for the CDB export seller’s credit was reportedly set at LIBOR (in March 2007, 6-month LIBOR was at 5.3212%) plus 150 basis points (or a 1.5% margin) and the maturity was set to 10 years. The terms of the ZTE supplier’s credit reportedly included a 13 year maturity, and interest rate of LIBOR (in March 2007, 6-month LIBOR was at 5.3212%) plus 100 basis points (or a 1% margin), and a moratorium on interest payments during the first three years of the deal. ETC's national telecom network infrastructure expansion project involved three phases of construction. The first phase was the Ethiopian Millennium Project, which began in April 2007 and ended in September 2007; the second phase focused on the GSM and IP-based systems that cover the cities and roads; and the third phase started in October 2008 and covered the countryside and remote areas. By 2010, ZTE pledged to roll out a 10,000 km optical fiber transmission network; increase the number of fixed lines in operation to 4.4 million, thus raising teledensity to 6%; attain 1,000,000 Internet subscribers, thus raising Internet subscribers density from 0.02% to 0.23%; expand 3G services to rural areas, in particular to major towns out of Addis Ababa; install wireless and VSAT connections to 15,000 villages including installation of CDMA Wireless Local Loop; expand the CDMA network with a capacity of 2.5 million subscribers; install 50,000 public telephones all over the country; establish a Network Operation Centre; establish a state-of-the art call centre; and establish a modern customer care and billing system. As a result of the project's completion, the number of mobile subscribers grew sharply from less than 1.2 million in September 2007 to around 17.5 million in 2012. This was augmented by 2.4 million CDMA customers. The number of internet and data subscribers grew sevenfold, from 71,059 in 2009 to around 221,000 by the end of 2012. In 2013, it was reported that the third phase of construction would be jointly undertaken by ZTE and Huawei (captured via Project ID#30884), but that project was later suspended. There is also some circumstantial evidence that this project may have been plagued by corruption. Press reports cite three cases of alleged corruption between July 2007 and August 2008: (1) In July 2007, the ETC allegedly dismissed 16 high-level employees for corruption as a result of an audit report that suggested irregularities in purchases from international suppliers. The contracts in question allegedly were worth US$54 million. (2) In January 2008, the country’s Federal Ethics and Anti-Corruption Commission (FEACC) brought charges against a former ETC CEO and 26 former ETC executives for allegedly “procuring low quality equipment from companies that were supposed to be rejected on the basis of procurement regulations.” The contracts in question allegedly were worth US$154 million. (3) In August 2008, the FEACC arrested a senior ETC manager after receiving an audio recording and transcript from an anonymous source in which the manager is allegedly recorded soliciting a bribe from an international supplier.

Additional details

1. China Development Bank offers export seller’s credits to Chinese companies that are implementing overseas projects. The companies may, in turn, use the proceeds of an export seller's credit to either make equity investments or provide loans (i.e. supplier’s credits) to the host government or other entities in the host country. In this particular case, China Development Bank provided a $1.5 billion export seller's credit to ZTE, and ZTE then used the proceeds of the export seller's credit to lend to the Government of Ethiopia. Under the deal, ZTE provided a $1.5 billion supplier credit (I.e. vendor financing) to ETC to help it acquire equipment from ZTE. 2. Some sources also indicate that ZTE may have offered ETC a separate $400 million supplier’s credit for engineering construction activities, although it is unclear if this agreement was ever finalized (and whether a Chinese bank provided ZTE with an additional export seller’s credit). The terms of the framework agreement between Ethiopian Telecommunications Corporation (ETC) and ZTE specified the commercial terms and conditions under which nine telecommunication equipment acquisition contracts would be placed. ZTE committed, under the agreement, that all technology supplied would be state of the art and all its prices internationally competitive. For each of the nine equipment packages, the ETC agreed to provide technical specifications, in response to which ZTE would submit a technical proposal to meet those specifications. The proposals for each package were then to be agreed on, and ZTE would provide ETC with its price for the supply and installation of compliant equipment. The contract for that package was then to be signed, incorporating the terms of the financing agreement and framework agreement. The contract would grant the ETC 30 days from the date of signature to verify whether there were any “big problems with the technical proposal” and whether the supplier’s prices “far exceed[ed] reasonable industry prices.” If any such problems were identified, ZTE was required to adjust the technical proposal or price accordingly. During the 30-day verification period, the ETC (with the help of its consultants) would assesses ZTE’s prices by comparing them with market prices of comparable equipment. When agreed-on milestones were reached during execution of the telecommunication equipment acquisition contracts, the ETC would pay ZTE by issuing a promissory note that stated the amount payable. The promissory note would record a debt due from the ETC to ZTE. The ETC would then pay the capital plus interest due on the promissory note to ZTE under the terms of the financing agreement.

Number of official sources

7

Number of total sources

18