VZCZCXRO6953
RR RUEHMR RUEHRN
DE RUEHLU #0648/01 1781055
ZNY CCCCC ZZH
R 271055Z JUN 07
FM AMEMBASSY LUANDA
TO RUEHC/SECSTATE WASHDC 4112
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHBJ/AMEMBASSY BEIJING 0099
RUEHHK/AMCONSUL HONG KONG 0003
RUEHGH/AMCONSUL SHANGHAI 0005

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 
-------------------------------------- 
¶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