China Wu Yi expects to earn an abnormal profit of Sh8.6 billion from a contract to upgrade a 25km section of the Nairobi-Nakuru Highway.
Directors of the Chinese State-owned firm were told yesterday that more than half of the contract sum of Sh16.4 billion would accrue as profits. The message to directors offers Kenyans a rare glimpse of how lucrative infrastructure projects are for Chinese firms, and more broadly, what informs the scramble for African opportunities.
“The project is expected to achieve a total profit of $85 million,” China Wu Yi said in a special announcement to its directors signed yesterday. At the stated contract price, the firm would be making more than 100 per cent profit in the 36-month period that the project is expected to be completed.
Internationally, contractors are thought to be making just about 2 per cent in net margin for projects such as this. Sageworks, a global financial information company, also reported in a recently published analysis that average gross profit margins have fallen from nearly 21 per cent in 2007 to around 16 per cent in 2013.
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World Bank is the main source of funding for the project that involves developing a dual carriage way with six lanes, three on either direction, 13 bridges at interchange locations as well as 21 pedestrian overpasses and five underpasses. The contract was signed on Sunday, September 4, in Nairobi before the information was transmitted to the company headquarters in Fuzhou.
But despite the size of the transaction which could sound big for many local contractors, the Chinese firm that is also involved in the upgrade of Jomo Kenyatta International Airport doesn’t expect that the transaction would have any material impact on its financial books. “The contract has no significant effect on the Company’s operating results year,” the directors were informed, and that the firm had generated combined revenues worth Sh21 billion in the three years to 2015.
But even with the seemingly high profit margin, China Wu Yi was still the lowest bidder for the project, in a country it describes as politically stable. The firm, whose parent is listed at the Shenzhen Stock Exchange, has been winning most of the public sector infrastructure projects to the envy of local and international rivals – including Chinese.
In the last month for instance, China Wu Yi had the lowest bid to develop the Malindi-Salaa road but the contract was given to a Kenyan firm, SS Mehta only on patriotic considerations, according to Infrastructure Cabinet Secretary James Macharia.
SS Mehta would now develop the road at Sh2.7 billion even though its financial bid was inferior, Mr Macharia said. But the dominance of China Wu Yi, and other Chinese firms, in the development of infrastructure projects may have unsettled contractors from other countries.
Just last week, the Japan Prime Minister Shinzo Abe led tens of companies from his country in pursuit of similar opportunities in Kenya and other countries in continent the Tokyo International Conference of African Development. Mr Abe’s pitch was that Japan could offer a higher quality of roads, ports and other infrastructure in a veiled onslaught on China.
Kenya defended the Chinese contractors as providing affordable projects that were of acceptable standards, while acknowledging the quality offered by the Japanese – who were however too expensive.