Telecom Deal by China's ZTE, Huawei in Ethiopia Faces Criticism

Telecoms

Ethiopian government officials have in recent years complained to ZTE that the company's contract for building the network requires Ethiopia to pay too much, say people familiar with the discussions, WSJ's Matthew Dalton reports.

The Ethiopian network's glitches underline the broader troubles that sometimes face poorer nations as they borrow heavily to invest in telecommunications, roads, utilities and other infrastructure to help lift them out of poverty.

China's financial firepower helps its firms win many of these contracts. But in agreeing to such deals, some governments appear to have flouted rules meant to foster sound public investment. When countries sidestep such rules, say experts at institutions such as the World Bank, big projects often cost more and are more likely to be poorly executed.

China's impact has been particularly visible in telecom projects. In Ethiopia, ZTE beat out Western competitors in 2006 for a major telecom project by offering $1.5 billion in low-interest financing, funded by Chinese state-run banks.

A World Bank investigation found that the Ethiopian government appeared to ignore its own procurement rules requiring competitive bidding when it awarded the contract, which gave ZTE a monopoly on supplying telecom equipment for several years. The 2013 report also criticized Ethiopia for giving such a big project to one company and called for the country to audit the contract. It didn't find that ZTE acted improperly.

Ethiopia ended ZTE's monopoly in July 2013, bringing in its main Chinese rival, Huawei Technologies Co. The two companies split another big contract, for the next phase of the network's expansion. Again, financing won the day, with the two pledging a total of $1.6 billion, people close to the negotiations say. Western equipment suppliers, such as Ericsson and Alcatel Lucent SA, ALU.FR -1.59% couldn't match the Chinese offer, these people say.

A ZTE spokesman says it has complied with Ethiopia's regulations. Ethiopia's telecommunications minister and a spokesman for the state-owned telecom monopoly, Ethio Telecom, didn't respond to queries. The World Bank report notes that Ethiopian authorities told its investigators that they invited eight companies to bid for the project.

Tony Duan, Chief Executive of Huawei's Ethiopian division, says the company is "fully aware of the issues linked to poor quality telecom services and frequent interruptions of mobile networks in the country."

Jia Chen, chief executive of ZTE's Ethiopian business, acknowledges that the network's service has been uneven. He blames delays in awarding the next phase of expansion, construction projects that cut telecom lines and slack maintenance by Ethio Telecom. "Maintaining the network is not our job," he says. "We guarantee the quality of the network, but you have to guarantee our base stations get electricity." He says ZTE must charge more in Ethiopia than elsewhere partly to offset the project loans' large size and long repayment period of 13 years.

Ericsson and Alcatel decline to comment.