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News : International Last Updated: Sep 22, 2009 - 9:28:42 AM

Tuesday Newspaper Review - Irish Business News and International Stories - - September 22, 2009
By Finfacts Team
Sep 22, 2009 - 7:09:55 AM

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The Irish Independent reports that middle-income families are in serious and deepening debt, startling new figures reveal -- amid stark warnings that the country is facing 'economic ruin' if it votes 'No' to Lisbon.

The frightening snapshot of indebtedness shows many families are in serious financial trouble. They have multiple credit cards, overdrafts, personal loans and top-up mortgages -- all built up during the boom.

The slump means families are now unable to meet repayments, the Government's legal watchdog, the Law Reform Commission (LRC), claims.

Separate to the LRC's figures, there were several warnings last night about how much worse the economic situation would become if there was not a 'Yes' vote on Lisbon.

Entering the final 10 days of the campaign, the focus of the debate remained sharply on the economic arguments for backing the treaty.

The organisation representing a range of US companies, employing 300,000 here, bluntly said: "As a country, we cannot afford to vote 'No'."

Pat Cox, Ireland's former president of the European Parliament, declared a 'No' vote to Lisbon on October 2 "would lead to economic ruin".

He said a 'No' vote would "collapse consumer confidence, scare off potential investors and lead to political isolation for Ireland".

And Finance Minister Brian Lenihan said a 'Yes' vote would make it cheaper for the country to borrow money on world markets.

The LRC's figures come from the state-supported Money Advice and Budgeting Service (MABS).

They show there has been a 110pc increase in the past year in those with overdrafts who are seeking debt counselling.

The number of people with difficulties repaying credit card debts who are looking for advice has shot up by 63pc this year, compared with last year.

The boom sparked the credit frenzy. Now the recession is laying bare the crisis.

In 1995, the ratio of household debt to income was 48pc. This means the total amount of debt was half of the income of all households.

By this year, the debt mountain represented 176pc of the income of all households, largely because of mortgages.

The LRC will today recommend a fundamental overhaul of our debt laws to respond to the "major problem" of consumer indebtedness.

But the country's indebtedness could worsen on the back of a 'No' vote on Lisbon, with some economists saying the cost of funding our national debt could increase by €200m. At the same time Mr Lenihan said a 'Yes' vote was crucial for a return to economic growth in this country.

Speaking at a meeting in his Dublin West constituency last night, he said exports would drive future growth and that the EU was by far our largest export market.

"Only by working with our EU partners can we stabilise the economy, create jobs and restore confidence. EU institutions have provided a lifeline to our financial system," he said.

Bloxham managing partner Pramit Ghose said a 'No' vote in the referendum was likely to widen the gap between interest rates charged on Irish government bonds and those paid on similar German bonds.


Dan O'Brien, senior economist at the Economist Intelligence Unit, added that in the event of a 'No' vote, there was "absolutely no doubt we would see a sell-off of Irish government debt, I would bet the house on that."

KBC Bank's Austin Hughes said a rejection of the treaty was likely to be seen as a negative in the bond markets.

This afternoon, Mr Lenihan will host a press conference where he will outline why the European Union and the Lisbon Treaty are central to economic recovery.

The Irish Independent also reports that developer John Fleming has secured court protection for two companies in his building group, whose inability to repay ACCBank €21.5m almost triggered the collapse of his construction and development empire with debts of more than €1bn.

The troubled Fleming Group was granted a lifeline yesterday after the High Court appointed an examiner to John J Fleming Construction (Construction), described as "the engine" of the 30-strong Fleming Group.

JJ Fleming Holdings (Holdings), an investment vehicle which cascaded borrowings down to firms within the group on an inter-company basis, has also been afforded court protection.

Holdings is the holding company of Fleming's Tivway which was given court protection last July and court protection will remain in place for all three companies until October 17.

Examiner George Maloney of Baker Tilly Ryan Glennon was appointed to Construction and Holdings despite the fact that he had given no estimate of the potential cost or timescale for the completion of "legacy" developments.

Mr Justice Daniel O'Keeffe also noted a lack of unconditional funding from banks which supported the application to complete the remaining legacy building work to be undertaken by Construction.

However, he observed that lenders may be reluctant to give unconditional support owing to the magnitude of the group's debts.

The judge said that "a lot of unfilled boxes" have to be filled, but exercised the court's discretion to bring Construction and Holdings into the examinership process.

He said this was because he believed examinership was a more preferable course of action than a winding up.

He based his decision on survival plans posed by the examiner to "hive off" the profitable part of John J Fleming Construction Company and the completion of remaining development assets.

Evidence tendered by the examiner, the report of an independent accountant, and a report from DTZ Sherry Fitzgerald were "not all assertions", but demonstrated objectivity and an objective rationale, albeit subject to conditions.

"Nobody can predict future trends and prospects with precision," said Judge O'Keeffe.

"But this (decoupling) does not preclude the revamped Construction being profitable in the future.

"The fact that Construction is engaged in a winding up of its unprofitable business does not prevent it from operating on a going-concern basis.

"I am satisfied that, if restructured in this way, as set out in the accountant's report, part of the activities of Construction will be capable of being a going concern in the short term at the very least."

ACC, which today will oppose moves in the Supreme Court by developer Liam Carroll to reverse a second High Court order refusing his Zoe Group court protection, said it would to take formal instructions on the Fleming ruling.

But the lender did not object to Judge O'Keeffe's orders extending court protection and did not seek a stay on them.

The Irish Times reports that Taoiseach Brian Cowen has confirmed that public pay and pensions are likely to be targeted for further cuts in December’s budget.

Mr Cowen said the budget would result in cuts “right across the board”, including public-sector pay and pensions. He also all but ruled out any major new taxes in December’s budget except for a carbon tax.

Mr Cowen’s comments were in response to the latest Economic and Social Research Institute (ESRI) report which identified a 25 per cent gap between public- and private-sector pay rates. It also questioned the basis for increases in the public sector. Unions rejected the findings and warned the Government any further cuts in pay and pensions would be fiercely resisted by employees in the public sector.

In interviews before he departed last night for the United Nations General Council meeting in New York, Mr Cowen said one-third of State spending was pay and pensions. He would not be drawn on the nature of the adjustments he would seek.

Mr Cowen said the Government was committed to a carbon tax. In comments taken as ruling out any other new taxes, he added the Commission on Taxation report would take a number of years to implement.

Later, he told TV3 News the Government could simply not ignore public pay: “To have a sustainable budget going forward, we have to in some way control public expenditure on the pay and pension side . . . The bottom line is that there is not enough money coming in from taxpayers to make the payments on all of these fronts . . . There will be a tough budget.”

According to the ESRI, public-sector employees earned in excess of 25 per cent more than those in the private sector in 2006, when pensions were taken into account. The research, however, does not reflect the effect the economic downturn or pension levy may have on the gap.

The research finds the gap increased greatly from under 10 per cent in 2003 and to 21.6 per cent in 2006 (pensions excluded). This occurred when Mr Cowen was minister for finance. It was particularly marked among junior grades.

The largest public service union, Impact, yesterday rejected Mr Cowen’s comments on cuts and also challenged the basis of the ESRI report.

Impact spokesman Bernard Harbor suggested it was part of a “softening up exercise for public service pay cuts in the forthcoming budget”. Blair Horan of the CPSU, which represents lower-paid public-sector workers, warned his union would fiercely resist the cuts.

Fine Gael’s finance spokesman Richard Bruton said the report vindicated its stance on benchmarking and its argument there was no justification for an award not linked to performance or change.The Labour Party reiterated its opposition to across-the-board cuts in public pay.

The Irish Times also reports that the gap between pay levels in the public and private sectors “increased dramatically” in the 2003-2006 period, according to a new study.

The public sector “pay premium” increased to 21.6 per cent, from 9.7 per cent, during the period, according to the study by researchers at the Economic and Social Research Institute.

They say their study’s findings are probably “conservative” and the differential would be even higher if later pay awards and other factors were taken into account. The study does not take into account the increased value of public sector pensions as compared with private sector pensions, or the value of the increased job security that exists for public sector workers.

The authors of the study say the findings “raise serious questions with respect to the justification for any further boost to the pay levels of public sector workers”.

The study found that, by 2006, senior public sector workers earned almost 8 per cent more than their private sector counterparts, while lower-grade public sector workers earned between 22 and 31 per cent more.

On a gender basis, it found the public sector pay premium increased to 23 per cent from 5 per cent for females, and to 21 per cent from 14 per cent for males, over the 2003-2006 period. The authors say empirical evidence supports the contention the 2002 benchmarking award was wrong and, at the time, public sector workers were ahead rather than behind private sector workers.

Quoting the International Monetary Fund’s opinion in 2006 that “generous increases” in public wages since 2001 had damaged Ireland’s international competitiveness, the authors go on to state: “Thus, not only do the results derived in this paper provide no support for the recommendations of the 2007 benchmarking report, or the General Review Body reports that called for further upward adjustments in the salary levels of some senior public service grades, but they also suggest that if such increases were to be awarded then this would further undermine Ireland’s current drive to regain its competitiveness.”

The study compared wage levels in the two sectors, ranking earnings with employees’ “human capital characteristics” rather than using the “job evaluation” techniques used by the benchmarking review body. The authors say their method is the standard international method.

When their findings were adjusted to take account of the fact employer-based pensions are more widespread in the public sector than in the private sector, the authors found that the public sector premium increased by 3.2 percentage points.

SEE Finfacts report: Public economists confirm Irish public service pay benchmarking was a fraud; Premium on private pay increased dramatically from 9.7 to 21.6% between 2003 and 2006

The Irish Examiner reports that massive pay increases for the Taoiseach, ministers and senior civil servants recommended in Government-commissioned reports were unjustified, a leading economic think-tank has found.

In 2007 and 2008, the Government-appointed Review Body on Higher Remuneration in the Public Sector published reports recommending increases for an array of senior state employees, including cabinet members, judges and secretaries-general of departments.

But the Economic and Social Research Institute (ESRI) yesterday published a detailed analysis of public sector pay in 2006 and found it had already been high enough when the review body made its recommendations.

For that reason, the ESRI said it could provide "no support" for the review body’s findings – effectively saying there had been no justification for the recommended pay increases.

As it happened, the recommendations proved hugely controversial, and the Government was forced to scrap plans to grant the increases.

The ESRI said it could also not support pay increases recommended by a separate Government-appointed expert group, the Public Service Benchmarking Body, in 2007.

While the review body examined salaries at the higher levels of the public service, the benchmarking body looked at the middle and lower grades, and it too recommended increases in a number of areas.

But the ESRI found that by 2006 – prior to the recommendations of both bodies – public servants were already earning far more than their private sector counterparts.

In 2002, public sector workers had been earning 9.7% more than private sector workers, but by 2006, the difference had risen to 21.6%.

When the value of public sector pensions was factored into the equation, the gap widened to almost 25%.

However, the ESRI stressed that as the findings related to 2006, they did not take into account the public service pension levy which took effect from March this year, and which effectively cut public-sector pay by an average of 7.5%.

Speaking following publication of the ESRI report, Taoiseach Brian Cowen refused to rule out a cut in public sector pay in the December budget.

But trade unions representing public sector workers rubbished the ESRI analysis and threatened strikes if the Government attempted a pay cut.

The Financial Times reports that three new pan-European supervisory agencies will draw up and help enforce a common rulebook for banks, insurers and securities markets under laws to be unveiled by the European Commission on Wednesday.

The plans for the long-awaited overhaul of the EU’s patchy system of financial supervision are expected to follow a two-tier approach first outlined in the De Larosière report in February and subsequently endorsed by heads of governments.

The circulation of the draft in Brussels has ignited a push by the European Commission to extract the broadest possible backing among member states for a new common set of rules.

“The Commission is walking a very tight line – and in the Council [among member states] it may find some opposition,” said Karel Lannoo, chief executive of the Centre for European Policy Studies, a Brussels-based think-tank.

The Commission, he pointed out, has traditionally been involved in regulation. “Now it is being involved indirectly in supervision.”

The proposals will include the creation of a new “European Systemic Risk Board”, made up of representatives of central banks and financial supervisory groups across the 27-country bloc, to track and analyse financial stability issues.

They will also propose the establishment of pan-EU supervisory bodies in the banking, insurance and securities areas, to augment day-to-day supervision by national authorities. The bodies will have more powers and resources than three existing EU committees, which now play only a co-ordinating role.

Final details of the legislation were still being hammered out on Monday but the new authorities were likely to be given the task of drawing up common rules in a wide range of financial services areas, from technical insurance standards to short-selling. Under the legislation, their rules would still have to be endorsed by the Commission before coming into effect but this could become a largely “rubber-stamping” exercise.

The principle of “fiscal responsibility” would be formally recognised in the legislation, meaning that the new supervisory structure should not intrude on states’ finances.

But the new authorities would also be able to rule in the event of a dispute with or between member states – although there would be an appeal process, ultimately to European Council level, where the final decision would be by qualified majority voting.

As of Monday night, there were signs in Brussels that some member states were unhappy about some of the detailed wording in the proposed legislation, although final drafts were still being worked on. As far as the UK was concerned, for example, the way in which fiscal safeguards were defined and delineated is likely to be critical.

The FT also reports that Independent News & Media, the Irish publisher of the Independent and Independent on Sunday newspapers that is locked in a battle between its largest shareholders, is on the brink of resolving its future.

The board met on Monday to consider a plan to slash group debts after getting closer to agreement with creditors about terms. Talks are continuing this week to bridge the small gap between the company, its banks and bondholders about the terms of a debt-for-equity swap.

The restructuring is likely to come with the backing of former chief executive Sir Anthony O’Reilly, who owns a 28.5 per cent stake, according to people close to the talks.

A deal could safeguard the O’Reilly family’s control of the publishing company in spite of a challenge to the board’s authority from Denis O’Brien, the second- largest shareholder with 26 per cent.

The meeting comes in advance of the expiration of a standstill agreement on Friday. The debt-for-equity swap plan under consideration would see the bondholders swap €110m-€120m ($161m-$176m) for about 45 per cent of the company’s unissued share capital at a range of between 15-17 cents.

This would be followed by a rights issue of about €100m to raise the balance of the €213m owed to bondholders. The rights offering, to be priced at 5 cents according to one of the people, will give shareholders the opportunity to preserve their stakes.

Talks continue about the exact price at which bonds would be swapped for 720m shares and whether the company should raise an additional €20m in the rights issue at the request of the banks or wait until the company has recovered, said the people.

Under the plan, INM’s banks would extend their credit lines to the company for four years and loosen covenants in order to give the company breathing space to recover. They are expected to get in exchange an increase to the interest paid on their loans, according to people with knowledge of the situation.

Creditors intend to approve the sale of the company’s South African outdoor advertising business as part of this restructuring plan and before the extension of the standstill.

The sale will be put to a shareholder vote next month.

The board was also set to discuss the standstill extension and prospect of an extraordinary meeting that was called recently by Mr O’Brien, who has three seats on the board.

A successful restructuring would mean some of Mr O’Brien’s resolutions would fall by the wayside.

This month Mr O’Brien called for the meeting to discuss disposal of the Independent newspaper titles in the UK, which he claims are losing €80,000 a day, and a halt to the sale of the advertising business, amid other things.

Under the proposed restructuring, INM will keep hold of the loss-making Independent titles – but their future remains uncertain. Alexander Lebedev, the former KGB agent who bought London’s Evening Standard, held talks with the publisher some time ago about a possible offer.

The New York Times asks: tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government.

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

“It’s a nice irony,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “Like so much of this crisis, this is an issue that involves the least worst options.”

Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.

The Federal Deposit Insurance Corporation, which oversees the fund, is said to be reluctant to use its authority to borrow from the Treasury.

Under the law, the F.D.I.C. would not need permission from the Treasury to tap into a credit line of up to $100 billion. But such a step is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.

“Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” said Camden R. Fine, president of the Independent Community Bankers. “She’d do just about anything before going there.”

Bankers worry that a special assessment of $5 billion to $10 billion over the next six months would crimp their profits and could push a handful of banks into deeper financial trouble or even receivership. And any new borrowing from the Treasury would be construed as a taxpayer bailout that could open the industry to a political reaction, resulting in a wave of restrictions like fresh limits on executive pay.

Any populist furor could be avoided, the thinking goes, if the government borrows instead from the banks.

“Borrowing from healthy banks, instead of the Treasury, has the advantage of keeping this in the family,” said Karen M. Thomas, executive vice president of government relations at the Independent Community Bankers of America, a trade group representing about 5,000 banks. “It is much better for perceptions than having the fund borrow from somewhere else.”

Ultimately, officials say, the deposit insurance corporation could settle on a plan that replenishes the insurance fund by doing some of both: borrowing from healthy banks to shore up the shorter-term liquidity needs of the fund, and imposing a special fee on banks to increase the longer-term capital level of the fund.

Since January the F.D.I.C. has seized 94 failing banks, causing a rapid decline in the deposit insurance fund. Despite a special assessment imposed on banks a few months ago to keep the fund afloat, its cash balance now stands at about $10 billion, a third of its size at the start of the year. (Another $32 billion has been set aside for failures that officials expect to occur in the coming months.)

The fund, which stands behind $4.8 trillion in insured deposits, could be wiped out by the failure of a single large bank, although the deposit insurance corporation could always seek a taxpayer bailout by borrowing from the Treasury to stay afloat.

Officials say that the F.D.I.C. will issue a proposed plan next week to begin to restore the financial health of the ailing fund.

There is no consensus among the five board members, consisting of Ms. Bair, two other F.D.I.C. officials, and the heads of the Office of Thrift Supervision and the Office of the Comptroller of the Currency. Others may propose novel ways to replenish the fund, for example, by asking the banks to prepay the premiums that they were planning to make next year.

Borrowing from the industry is allowed under an obscure provision of a 1991 law adopted during the savings and loan crisis. The lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry. The bonds would be listed as an asset on the books of the banks.

The NYT in a report from Namibia says it is not every day that global leaders set foot in this southern African nation of gravel roads, towering sand dunes and a mere two million people. So when President Hu Jintao of China  touched down there in February 2007 with a 130-person delegation in tow, it clearly was not just a courtesy call.

And in fact, China soon granted Namibia a big low-interest loan, which Namibia tapped to buy $55.3 million worth of Chinese-made cargo scanners to deter smugglers. It was a neat illustration, Chinese officials said, of how doing good in Namibia could do well for China, too.

Or so it seemed until Namibia charged that the state-controlled company selected by China to provide the scanners — a company until recently run by President Hu’s son — had facilitated the deal with millions of dollars in illegal kickbacks. And until China threw up barriers when Namibian investigators asked for help looking into the matter.

Now the scanners seem to illustrate something else: the aura of boosterism, secrecy and back-room deals that has clouded China’s use of billions of dollars in foreign aid to court the developing world.

From Pakistan to Angola to Kyrgyzstan, China is using its enormous pool of foreign currency savings to cement diplomatic alliances, secure access to natural resources and drum up business for its flagship companies. Foreign aid — typically cut-rate loans, sometimes bundled with more commercial lines of credit — is central to this effort.

Leaders of developing nations have embraced China’s sales pitch of easy credit, without Western-style demands for political or economic reform, for a host of unmet needs. The results can be clearly seen in new roads, power plants, and telecommunications networks across the African continent — more than 200 projects since 2001, many financed with preferential loans from the Chinese government’s Exim Bank.

Increasingly, though, experts argue that China’s aid comes with a major catch: It must be used to buy goods or services from companies, many of them state-controlled, that Chinese officials select themselves. Competitive bidding by the borrowing nation is discouraged, and China pulls a veil over vital data like project costs, loan terms and repayment conditions. Even the dollar amount of loans offered as foreign aid is treated as a state secret.

Anticorruption crusaders complain that secrecy invites corruption, and that corruption debases foreign assistance.

“China is using this financing to buy the loyalty of the political elite,” said Harry Roque, a University of the Philippines law professor who is challenging the legality of Chinese-financed projects in the Philippines. “It is a very effective tool of soft diplomacy. But it is bad for the citizens who have to repay these loans for graft-ridden contracts.”

In fact, such secrecy runs counter to international norms for foreign assistance. In a part of the world prone to corruption and poor governance, it also raises questions about who actually benefits from China’s projects. The answers, international development specialists say, are hidden from public view.

“We know more about China’s military expenditures than we do about its foreign aid,” said David Shambaugh, an author and China scholar at George Washington University. “Foreign aid really is a glaring contradiction to the broader trend of China’s adherence to international norms. It is so strikingly opaque it really makes one wonder what they are trying to hide.”

Until recently, wealthy nations could hardly hold themselves out as an example of how to run foreign aid, either. Many projects turned out to be tainted by corruption or geared to enrich the donor nation’s contractors, not the impoverished borrowers. But over the past 10 or 15 years, some 30 developed nations under the umbrella of the Organization of Economic Cooperation and Development (O.E.C.D.) have made a concerted effort to clean up their assistance programs.

They demanded that foreign money be awarded and spent transparently, using competitive bidding and outlawing bribery. Increasingly, they also are also pushing to give borrowers more choice among suppliers and contractors, rather than insisting that funds be recycled back to the donor nation’s companies.

China, which is not a member of the O.E.C.D., is operating under rules that the West has largely abandoned. It mixes aid and business in secret government-to-government agreements. It requires that foreign aid contracts be awarded to Chinese contractors it picks through a closed-door bidding process in Beijing. Its attempts to prevent corrupt practices by its companies overseas appear weak.

Some developing nations insist on independently comparing prices before accepting China’s largesse. Others do not bother. “Very often they are getting something they wouldn’t be able to get without China’s financing,” said Chris Alden, a specialist on China-African relations with the London School of Economics and Political Science. “They presume that the Chinese are going to give value for money.”

Development experts say they have tried to convince the Chinese government that better safeguards and a more open process will enhance its efforts to gain influence and business. If its projects collapse because of kickbacks or inflated costs, they argue, China will end up exporting not only goods and services, but a reputation for corruption that it is already battling at home.

But Deborah Brautigam, the author of a coming book on China’s economic ties with Africa titled “The Dragon’s Gift,” says Beijing is hesitant to hobble its companies with Western-style restraints before they have become world-class competitors.

Thinking Business, Not Ethics

“The Chinese are kind of starting out where everyone else was years ago, and they see themselves as being at a disadvantage,” Ms. Brautigam said. “The Chinese don’t particularly want a big scandal. That doesn’t further their interests. They just want their companies to get business.”

Sometimes they get both. In 2007, the Philippines was forced to cancel a $460 million contract with the Beijing scanner company, Nuctech Company Ltd., to set up satellite-based classroom instruction after critics protested the company had no expertise in education.

It also canceled a $329 million contract awarded to ZTE Corporation, a state-controlled Chinese communications company, after allegations of enormous kickbacks. ZTE denied bribing anyone, but the controversy has lingered. Last month an antigraft panel recommended filing criminal charges against two Philippines officials in connection with the contract.

A Manila-based nonprofit group, the Center for International Law, has mounted a legal challenge against still another Chinese contract in the Philippines, to build a $500 million railroad. Professor Roque, who leads the center, contends that the price of China’s state-owned contractor “was simply plucked out of the sky.” Officially, China’s directive to its companies is toe an ethical line overseas.

“Our enterprises must conform to international rules when running business, must be open and transparent, should go through a bidding process for big projects and forbid inappropriate deals and reject corruption and kickbacks,” Wen Jiabao, China’s prime minister, told a group of Chinese businessmen in Zambia in 2006.

But China has no specific law against bribing foreign officials. And the government seems none too eager to investigate or punish companies it selects if they turn out to have engaged in shady practices overseas.

Indeed, it has an added incentive to look the other way because of the state’s ties to many foreign aid contractors — connections that sometimes extend to families of the Communist Party elite.

In January, for example, the World Bank barred four state-controlled Chinese companies from competing for its work after an investigation showed that they tried to rig bids for bank projects in the Philippines. But two of those companies remain on the Chinese Commerce Ministry’s list of approved foreign aid contractors, according to its Web site.

The Namibia controversy is especially delicate because until late last year, the contractor’s president was Mr. Hu’s son, Hu Haifeng. The younger Mr. Hu is now Communist Party secretary of an umbrella company that includes Nuctech and dozens of other companies. As soon as allegations against the company surfaced this summer, China’s censors swung into action, blocking all mention of the scandal in the Chinese news media and on the Internet.

“This is a signal to everyone to back off,” said Russell Leigh Moses, an analyst of Chinese politics in Beijing. “Everyone goes into default mode, because once you get the ball rolling, no one knows where it will stop. No one wants their rice bowl broken.”

Nuctech has denied any wrongdoing in court papers filed here in Windhoek. A spokeswoman said the company had no comment because the matter was unresolved. China’s Commerce Ministry and other government agencies did not respond to repeated requests for comment.

Namibia’s anticorruption investigators allege that Nuctech funneled $4.2 million in kickbacks to a front company set up by a Namibian official, who split the funds with her business partner and Nuctech’s southern Africa representative, a Chinese citizen.

A Deal Ends in Arrests

China has promoted Nuctech as one of its global “champions.” In 10 years the company has gained customers in more than 60 countries, marketing advanced-technology scanners that help detect contraband or dangerous materials inside cargo containers. Nuctech’s spokesman says it is the only Chinese company that makes such equipment.

The Namibian government was interested in equipping its airports, seaports and border posts with scanners to comply with stricter regulations on international commerce. On a state visit to China in 2005, Hifikepunye Pohamba, Namibia’s president, visited Nuctech’s headquarters and factory, according to court testimony. The following year, Nuctech sent a representative, Yang Fan, to Windhoek, Namibia’s capital.

Hu Jintao’s visit to Windhoek a few months later opened up an option for finance. “China says the sky is the limit. Just say what you want,” said Carl Schlettwein, the permanent secretary of the Namibian Finance Ministry, who participated in the negotiations.

At first, Mr. Schlettwein said, the talks stalled because Namibia was unwilling to grant China access to its substantial mineral deposits in exchange for lines of credit. Once China dropped that condition, Namibia agreed in principle to a $100 million, 20-year-loan at a 2.5 percent interest rate, then well below the market. “Purely from a financial point of view, it was a fine deal,” Mr. Schlettwein said.

Namibian officials decided to draw on the credit line to finance most of the cost of the scanners. Mr. Schlettwein, who negotiated the scanner contract, said he wanted to seek competitive bids from scanner suppliers around the world, but Chinese negotiators refused.

“They said ‘that is not our system,’ “ he said. “ ‘We tell you from whom you buy the equipment.’ All of us, including the minister, were very worried about the nontransparent way of doing things,” he said, but reasoned that the Chinese government “will not unduly cheat us.”

Last March, less than a week after the Finance Ministry paid Nuctech an initial $12.8 million, Mr. Schlettwein’s unease turned to distress.

A Windhoek bank official, following the strictures of Namibia’s new money-laundering act, called to ask why Nuctech had deposited $4.2 million in the account of a consulting company set up by Tekla Lameck, a Namibian public service commissioner.

Mr. Schlettwein, who says that he has never met Ms. Lameck and that she had nothing to do with the scanner purchase, alerted Namibia’s anticorruption commission. In July, Ms. Lameck, her business partner and Nuctech’s representative in Windhoek were arrested on suspicion of violating Namibia’s anticorruption law. All three have denied wrongdoing.

Investigations Galore

Investigators charge that Nuctech agreed to hire Ms. Lameck’s consulting company, Teko Trading, in 2007, a month after President Hu’s visit. Nuctech agreed to pay Teko 10 percent of the contract if the average price of one scanner was $2.5 million. If the price was higher, Nuctech would pay Teko 50 percent of the added cost. A subsequent agreement fixed the amount of commissions at $12.8 million, according to court records.

At his bail hearing last month, Yang Fan, Nuctech’s representative, said his company hired Teko because “Teko explained how to do business here in Namibia.” He did not elaborate. But in 2007, another Namibian official complained to the anticorruption commission that Ms. Lameck had introduced herself to the Chinese Embassy in Windhoek as a representative of Swapo, Namibia’s governing political party. She claimed that no business could be done in Namibia without Swapo’s involvement, the complainant said.

Investigators have been seeking Nuctech’s explanation of the affair for more than two months. There is little sign the company has complied with their requests, although investigators say they remain hopeful.

Namibia’s chief national prosecutor, Martha Imalwa, traveled to Beijing in July, hoping to question officials from Nuctech and another company involved in a separate inquiry. But according to her deputy, Danie Small, Ms. Imalwa was allowed to present questions only to the international division of China’s Supreme People’s Procuratorate.

A court has temporarily frozen $12.8 million in Nuctech’s assets while the inquiry continues. Meanwhile, at Namibia’s Finance Ministry, Mr. Schlettwein is belatedly trying to determine what other buyers paid for comparable scanners. When he asked South African officials for pricing information, he said, he was told Nuctech’s contract there is also under investigation.

Perhaps predictably, competitors say Namibia agreed to pay far too much. Peter Kant, a vice-president at Nuctech’s American rival, Rapiscan Systems, said that comparable equipment and services costs about $28 million, or $25 million less than Nuctech’s contract.

Mr. Schlettwein last month tried to send a letter through official channels to Rong Yonglin, Nuctech’s chairman, to ask that the contract be renegotiated. But a Chinese Embassy official in Windhoek refused to accept the correspondence, saying he knew no one with that name.

© Copyright 2007 by Finfacts.com

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