Armed with wiretaps, tax documents and witness statements, on February 22 Ecuador’s attorney general Diana Salazar ordered the arrest of 36 individuals for allegedly receiving kickbacks from the construction of the Coca Codo Sinclair hydroelectric dam, the country’s largest ever infrastructure project.

The accused include former president Lenín Moreno; his wife and daughter; two former Chinese ambassadors to the capital, Quito; and two former executives from state utility, Conelec. According to the prosecutor’s case, around $76m was syphoned off from the $2bn project via an account in Panama. Mr Moreno allegedly received a $200,000 apartment in Alicante, Spain, plus $19,000-worth of Swiss furniture.

The scandal is the latest fallout from China’s growing role in building key infrastructure across the developing world, especially for governments in political and financial difficulties.

Cut off from international financial markets after turning his back on the IMF in 2008, Ecuador’s then president Rafael Correa turned to Beijing to finance a huge expansion of infrastructure. In 2009, he signed a contract to build the giant dam with Sinohydro, a subsidiary of Power Construction Corporation of China (PowerChina). Completed in 2016, the structure now supplies around a fifth of Ecuador’s electricity.

Mr Moreno — who was Mr Correa’s vice-president before succeeding him in 2017 and serving until 2021 — has denied the charges, or playing any role in the decision. Supporters say he is the victim of a political witch-hunt to divert attention from the current government’s legal problems.

In a statement, Sinohydro said it was committed to continuing collaborating with the authorities and acting transparently. “It appears to us untimely, inappropriate and unfair to use Sinohydro’s image in the case without any justification,” the company added.

Expanding reach

Chinese-built infrastructure in Latin America has expanded rapidly over the past two decades and shows no signs of stopping. Of the $98bn-worth of projects developed since 2005, more than half were launched between 2019 and 2021, according to a database compiled by Enrique Dussel, economics professor at Mexico’s National Autonomous University.

Initially concentrated in energy projects, Chinese firms can now be found building metro systems in Bogotá, phone networks in Chile and hospitals in Colombia. “For the last five years, the catchword has been diversification,” Mr Dussel says.

It is a global phenomenon. Under its Belt and Road Initiative, launched in 2013, China has become the world’s builder, backing the construction of ports, railroads, and power lines under a strategy to boost trade and its influence in the world. Chinese contractors such as Sinohydro and PowerChina have played a key part in China’s infrastructure push, participating in projects worth $14bn in Latin America alone. 

But many fear that China’s concrete diplomacy is not all its cracked up to be.

Two years after completion, inspectors have detected more than 8000 fissures in the Coca Codo Sinclair hydroelectric dam, which has been operated by state power firm Celec since coming online. The US Bureau of Reclamation project has also blamed the project for major erosion along the Coca river, including the collapse of the San Rafael waterfall, a nearby tourist attraction.

Western critics also accuse China of saddling developing countries with unsustainable levels of debts as they struggle to pay for Chinese-built large-scale projects. Loans linked to Coca Codo Sinclair and three other hydroelectric projects across Ecuador accounted for four-fifths of Quito’s $5.4bn debt to China.

The US government fears this leverage could be increasing Beijing’s influence across the region. In March, Honduras became the latest country to break ties with Taiwan, Beijing’s non-negotiable condition to establish diplomatic, trade and investment ties with any country around the globe. Seeking to counter what it labelled China’s “debt-trap diplomacy”, Washington’s Development Finance Corporation agreed in 2021 to extend Ecuador a $3.5bn credit line for the early redemption of Chinese debt. 

A different approach

But China’s growing role in emerging markets comes after decades of relative neglect from governments in Europe and North America. For example, Chinese companies have often shown greater tolerance for risk than their Western counterparts, investing heavily in countries shunned by financial markets or wracked by civil strife. 

“European and American firms have shied away from projects in Latin America because they are not profitable in the medium term. But China has a more long-term vision,” notes Mr Dussel.

And while Chinese engineering may sometimes lack the finesse of its Western rivals, its projects are not the only ones to get into difficulties, says Ismael Arciniegas, an energy expert at the Washington-based Rand Corporation.  

Hydroelectric projects require highly complex engineering that is rarely completed on time and to budget. Launched last year, the Alto Maipo project in Chile was finished eight years behind schedule after tunnel diggers ran into complicated geology. Built by Austria’s Strabag and Germany’s Hochtief for a special purpose vehicle (SPV) owned by US power company AES, the SPV went bankrupt and had to restructure its debt after it incurred a total cost of $3bn — three times above budget. 

Meanwhile, infrastructure and corruption is hardly a novelty in Latin America. Only a few years ago, the Odebrecht corruption scandal — where the Brazilian construction firm handed bribes to local ruling elites in exchange for infrastructure contracts — swept the region and dragged down local politicians at the highest levels. 

Conversely, the majority of the 200 Chinese-built infrastructure projects in Latin America are operating normally, according Mr Dussel. “I’ve not seen any study that says all Chinese firms are corrupt and those from Switzerland aren’t,” he adds.

And after two decades of incessant activity, China’s builders are growing increasingly skilled in how to operate abroad and are becoming important providers of critical infrastructure. In the Chilean capital Santiago, once famed for its dire air quality, commuters scoot up and down the busy Avenida Grecia on hundreds of Chinese electric buses running on Chinese charging infrastructure. Meanwhile, Colombians and Mexicans will soon be getting to work on Chinese-built metro systems.

“If these work — and I think they will — this will be the best propaganda for Chinese infrastructure projects,” says Mr Dussel.

This article first appeared in the April/May 2023 print edition of fDi Intelligence.