In today’s environment the label “State-Owned Enterprise (SOE)” hardly conjures up a positive image for most of us. Since the 1980s and in many countries, SOEs have been seen as inefficient, unprofitable dinosaurs that stifle competition, misallocate resources, and act as a drag on economic growth. Numerous governments have eliminated them through mass privatisation. China has also privatised many of its SOEs over the past two decades, although many still remain, particularly in the natural resources, energy and construction sectors.
Viewed from abroad, China’s SOEs are often regarded as either “menacing agents of a foreign government or muscle-bound goons—heavy on brawn, light on brain.” Even in China itself, some worry that they might have become over-powerful monopolists pursuing their own agendas rather than acting in the best interests of the country. However, the reality is that many Chinese SOEs can marshal the huge amounts of capital, people and expertise that are required to undertake large projects. Moreover, they have shown themselves to be competent, cost-effective and fast in delivering those projects.
The success of these SOEs today shows that state ownership is not always a bad thing. Moreover, as the Chinese economy has evolved, SOEs have not acted so very differently from private behemoths. It is true that the state provided Chinese SOEs with initial advantages in the form of cheap access to hard assets, capital, and intellectual property. However, beyond these initial endowments, and once they have been restructured or partly privatised, SOEs are run less as pure arms of the state and more as complex, hybrid organizations. This is the first gap between common perception and reality that we need to correct before assessing the balance of benefits and shortcomings in governance, environmental and social accountability that might characterise Chinese SOEs in Africa. This article will discuss this and other gaps in assessing their performance and behaviour. China’s thirst for resources leads SOEs to Africa
Chinese firms are now fanning out all over Africa, becoming involved in everything from consumer products to machinery. They include the full range of firms from large, global companies such as the privately owned telecommunications equipment maker Huawei and SOEs such as Industrial and Commercial Bank of China (ICBC), to small, family-owned traders. Yet, in fact, the total stock of Chinese foreign investment in Africa is still relatively small. As of the end of 2011, according to the last figures published by the United Nations Conference on Trade and Development (UNCTAD), China accounted for just 2.6 percent of the total US$570 billion stock of foreign direct investment (FDI) in Africa.[iii] One reason Chinese investment has attracted attention is the phenomenal rate at which it is growing: it multiplied 10 times between 2005 and 2011. A second reason is that in some sectors Chinese investment is much more significant, most notably in mining and energy extraction (and related infrastructure). This is also one of the sectors whichSOEs dominate. Hence, the debate about the behaviour of Chinese SOEs and their impact on African economies and societies is most heated. Therefore, in trying to separate myths from realties about Chinese SOEs in Africa, the mining industry is a good place to look.
Contrary to theories that depict Chinese interest in Africa as part of a grand political game or an emerging world power struggle, China’s drive into Africa is both more obvious and more mundane: China has an almost insatiable thirst for natural resources and energy, and Africa probably has the largest untapped reserves on earth. Moreover, given the simple fact that SOEs predominate in the resource and energy industries (not only in China but also in many other countries), it is hardly surprising that they are leading the charge. These Chinese SOEs are also giants, so that if they were the most light-footed of elephants, they would surely have an impact wherever they tread. Consider the facts: China is consuming more than 25 percent of the world’s total annual production of minerals. Chinese SOEs are now major players in the world mining industry. Data from the World Bank and Intierra Raw Materials Group for extraction of metals, for example, show that Chinese SOEs control almost 15 percent of global metal production. China’s Shenhua ranks fourth in the top 40 mining companies by market capitalisation, along with giants BHP Billiton, Rio Tinto and Vale[v]. Africa, meanwhile accounts for around 30 percent of the total mineral reserves on the planet.
While China’s annual investment in African mining is still relatively low, accounting for 6 percent of total Chinese FDI last year, it is growing rapidly with large-scale greenfield projects such as Aluminium Corporation of China’s (Chalco) joint venture with Rio Tinto, in Guinea’s Simandou iron ore blocks 3 and 4, and major acquisitions such as Jinchuan Group’s purchase of South Africa’s Metorex, both valued in the range of US$1.3 billion[vi]. South African investors still dominate their domestic market, and Canadian and Australian companies have the largest pan-African mining footprint. But Chinese SOEs are also increasing their involvement in this existing network by acquiring all or part of these Canadian and Australian companies who entered the market in the 1990s, during a period of depressed mineral prices.
The overall picture, therefore, is of Chinese SOEs investing in Africa in line with the potential of its mineral reserves, and for China’s huge and growing demand for resources, and the SOEs dominant role in China’s natural resource industries both at home and abroad. Investment is taking place both through greenfield projects, sometimes in partnership with global mining majors, as well as through acquisitions of existing mining operations or through the acquisition of Western companies who established their presence in Africa in earlier decades. In short, supply and demand considerations – not political factors – are the primary drivers of Chinese investment. The benefits of investment by Chinese SOEs
In assessing the pros and cons of investments by Chinese mining SOEs in Africa, let’s start with the positives. The SOEs’ investments have explicit government backing in line with China’s policy of zou chu qu (or “go out”) and so can draw on support from the Forum for Cooperation between Africa and China (FOCAC). This allows SOEs to incorporate their investments within the broader framework of cooperation between the Chinese and African States giving them visibility with African governments, improving alignment with national development policies, increasing the chances of becoming partners in African government projects, and helping reduce political risk. As a result, they can tap, as well as contribute towards, a wide range of complementary investment projects that help unlock new natural resource deposits but extend far beyond the confines of any individual mining project itself. Since the declaration of the Year of Africa in 2006, the Chinese government has carried out numerous initiatives to facilitate access to the continent’s natural resources. Being part of this broader set of activities allows the SOEs to shape and execute extensive investments that benefit both their specific mining projects and the broader economy and society in a way that many Western corporate investors find impossibly “out of scope.”
A good example is the establishment by Chinese SOEs of seven Special Economic Zones in Zambia, Mauritius, Egypt, Ethiopia, Nigeria (two), and Algeria. These were designed and approved by China’s Ministry of Commerce but executed by Chinese SOEs (see Exhibit 1). They have facilitated the establishment of complementary local activities in mineral processing, construction materials, logistics, solar energy, and the manufacture of equipment that can support the SOEs’ projects. The seven zones have also made a broader contribution to economic development in the country by supporting other industries ranging from seafood processing to production of ceramics, textiles, medicines and furniture.
Exhibit 1: Africa’s Special Economic Zones Source: Deborah Bräutigam and Tang Xiaoyang (2011)
Chinese SOEs’ ability to play this broader role in development has been further facilitated by access to preferential loans for infrastructure and social development from the China-Africa Development fund. Other sources of preferential project financing for Chinese SOEs in Africa come from the China Export-Import (Ex-Im) Bank and ICBC – which now has access to an extensive network across the continent through its 20 percent shareholding in South Africa’s Standard Bank Group.
Other forms of investment by Chinese mining SOEs outside the Special Economic Zones are also substantial. Most of these involve large-scale infrastructure projects. Take for example, the 2008 Sicomines resource-for-infrastructure deal in the Democratic Republic of Congo (DRC), undertaken with China Railway Group Limited and Sinohydro and worth US$9.25 billion. The Chinese enterprises agreed to undertake extensive infrastructure works, guaranteed and financed through revenues from a joint mining venture covering copper and cobalt concessions in the province of Katanga. With US$6 billion earmarked for road, railway and water projects, it will represent the largest infrastructure investment in the DRC since colonisation. The deal involves the upgrading, modernisation and construction of 3,000 km of railway, 3,900 km of asphalt and 2,700 km of beaten-earth road projects. It was agreed that 10 to 12 percent of the work for each project must be sub-contracted to Congolese companies. The use of Chinese labour is limited to 20 percent of the required workforce, while 0.5 percent of each investment project is to be devoted to technology transfer and the training of Congolese labour.
Investors from other emerging economies have been willing to make similar, but smaller investments with broader economic and social spinoff benefits for African host countries. India’s privately owned ONGC Mittal committed US$6 billion to construct an oil refinery, a 2,000-megawatt power plant and a 1,000 km railway in Nigeria. In Sudan, Indian SOEs financed US$600 million worth of energy infrastructure including an oil pipeline, and a power plant and a power transmission system in Angola. It also committed $40 million towards railroad rehabilitation. Vale, Brazil’s diversified mining giant and the world’s second-biggest mining company by market capitalisation, has announced that it is set to make investments of up to US$12 billion in Mozambique, Guinea, Zambia, Malawi, Congo and Liberia by 2016. However, none of these investments match the scale and breadth of those made by Chinese SOEs: the investments by others are generally restricted to infrastructure closely tied to a core mining project and very seldom extend to development of “soft infrastructure” such as that associated with establishing Special Economic Zones.
Western investors, meanwhile, have been willing to engage in public-private partnerships (PPPs) in infrastructure and job creation, but generally only where these are directly linked to their core mining operations. Pressures from shareholders to keep their activities focused and to justify each investment on its own merits have generally made Western multinationals less willing and able to become involved in broader development projects and institution building than Chinese SOEs. Compared with their counterparts, therefore, Chinese SOEs have made a significantly greater contribution to helping Africa meet acute infrastructure needs, while creating employment and promoting economic growth. This deserves kudos from the point of view of a region plagued with poverty and slow economic growth in past decades. Concerns about Chinese SOEs’ practices and impact
Despite the benefits Chinese SOEs have brought to their host countries in Africa, there have been significant concerns about the potential side effects of their activities and the quality of their governance processes – processes that are supposed to ensure that they adhere to local laws and maintain high standards of integrity. These relate to a lack of disclosure and transparency, environmental and labour standards, and the ways they respond to widespread institutional weakness in many African countries. Disclosure and Transparency
There is widespread concern that mining companies the world over are not as transparent about their operations as they could be. This is certainly true of Chinese SOEs, particularly in African environments where corruption and instability can be endemic. Various policy instruments have been put forward to address these concerns and to promote good governance, transparency and best practices in natural resources industries. Instruments include the United Nations Global Compact, the Global Reporting Initiative and the International Finance Corporation’s “equator principle.” The most notable in the mining sector is the Extractive Industries Transparency Initiative (EITI), a coalition of 37 member governments, companies, civil society, investor and international organisations which publishes what companies spend and what governments receive from mining. The data covers royalties, revenues, costs, taxes, bonuses, dividends, licence fees, production data, price and transfer pricing information, as well as contributions to social programs, above and beyond the requirements of global reporting standards
China, along with many other countries, is not a member of the EITI so Chinese enterprises are not required to subscribe to these disclosure initiatives. In an attempt to fill this gap, SynTao (Beijing-based consultancy promoting sustainability) and Global Witness (a campaign group seeking to prevent natural resource related conflict and corruption working out of London and Washington, DC) presented a rigorous assessment of the tax payments made by Shanghai-listed extractive companies to governments in resource-rich countries in 2010 and 2011. It is entitled Transparency Matters: Disclosure of payments to governments by Chinese extractive companies. They found that while several Chinese companies positively stood out as exemplars for the amount and quality of information they published, many others (and their local regulators) could have done much more.
The reporting of local tax payments was inadequate and for the most part not standardised, while other important payment types were omitted altogether. Ten of the 15 companies covered in the study disclosed some information linked to their overseas revenues, such as the aggregate revenues generated by country and the percentage of income tax paid to host governments. Nevertheless, many questions remained unanswered. For example, US$24million of a “signature bonus” paid by a Chinese SOE in relation to the “resource for infrastructure deal” in the Democratic Republic of Congo was unaccounted for. As well, the interests and activities of Chinese SOEs in the oil industry of troubled North and South Sudan were opaque. Furthermore, critics argue that the financial structures of Chinese SOEs’ infrastructure deals, despite apparently having better terms than commercial and multilateral lenders on average, do not give enough weight to the ability of recipient countries to sustain the debt incurred. Critics also contend that the murky nature of some of these transactions makes it difficult to properly assess their value.
On the other hand, many of the criticisms of poor transparency and turning a blind eye to corruption have also been levied at SOEs and private firms from other countries that operate in Africa. For example, in December 2012, the London-listed Eurasian Natural Resources Corporation (ENRC) sealed a deal to buy out the company’s controversial business partner in the Democratic Republic of Congo, even though the partner had been accused of corruption.[xiii] Western multinationals have also been involved in disputes concerning their transfer pricing between subsidiaries, with claims that profits are artificially shifted offshore to reduce local taxes. Glencore, for example, was embroiled in a transfer-pricing dispute with the Zambian government that, had it not been resolved, could have imperilled its IPO in 2011. Environmental and labour concerns
Given that the enforcement of environmental standards in China itself is often lax, and that a number of Chinese SOEs have been involved in environmental catastrophes at home, critics of Chinese SOEs in Africa have grounds for concern about weak environmental standards that, for example, cause worries about pollution and unrestored land. Likewise, there are worries about the internal displacement of people impacted by the grant of mining licences or the construction of infrastructure, especially given that disputes and riots between the government, SOEs and displaced landholders are common in China. It is certainly true that Chinese SOEs often adopt a more rapid and, they would say, “pragmatic” approach to these issues than is commonly accepted in many Western countries. On the other hand, China National Petroleum Corporation has built the world’s largest biodegradable wastewater treatment facility in Sudan to eliminate the discharge of effluents. China Exim Bank and China Development Bank, meanwhile, also have their own environmental and social responsibility policies (although these may differ somewhat from the environmental impact assessments required by global financial institutions such as the International Finance Corporation and the European Investment Bank).
In the area of labour relations, Chinese SOEs have been involved in disputes resulting in strikes and even loss of life in Africa’s mining industry. The Chinese-owned Chambishi mine in Zambia, for example, has been plagued by tensions between workers and management, with 13 miners shot in 2006 and 1,000 dismissed in 2011 for going on strike. But here the Chinese SOEs are hardly alone. At South Africa’s Lonmin mine, majority- owned by Swiss-based Xtrata, a massacre of 34 striking workers took place in August 2012. Several illegal strikes followed at Anglo American, AngloGold Ashanti and Goldfields, resulting in over 35,000 miners being dismissed. Responses to Institutional Voids
Weak and non-existent institutional structures and incomplete and poorly-enforced regulations are realities that all firms have to face in doing business throughout much of Africa. These include the absence of clear industry policies and a lack of harmonization with laws in other domains such as labour, environment, community-level regulations and inefficient judicial systems. Critics of the behaviour of Chinese SOEs claim that they take advantage of these institutional “voids” to gainsay the system while others view what SOEs regard as pragmatism and a laissez faire attitude to African politics as unethical behaviour. What is clear, however, is that Chinese SOEs have often been much more heavily involved in guiding the evolution of Africa’s “soft” institutional infrastructure compared to Western investors. That includes shaping the regulatory infrastructure and development strategies under umbrellas such as the South-South and FOCAC cooperation agenda. In the process, Chinese SOEs have brought innovative solutions to overcoming institutional voids, solutions they have learned from solving similar problems back in China[xvi]. On the other hand, as newcomers to investing overseas, they have suffered the difficulties of operating in environments with unfamiliar cultures and institutions without the extensive experience of operating abroad accumulated over many decades by some of their Western counterparts. Chinese SOEs would admit that they have therefore made mistakes on the road to becoming more international. Neither wholly saints nor sinners
The reality, then, is that Chinese SOEs investing in Africa are neither wholly saints nor sinners. In large part this reflects their limited experience in internationalisation. On the positive side, their lack of legacy, combined with their close relationship with the Chinese government and its broader set of policy initiatives in Africa, has allowed them to engage more broadly in the processes of African development than most Western investors, including taking a role in building both hard infrastructure and soft institutions such as Special Economic Zones. On the downside, Chinese SOEs have made mistakes because of their lack of experience. And given their lack of robust practices to ensure transparency and good governance, they have sometimes acted in ways that their critics believe are unethical and harmful in the name of Chinese pragmatism and flexibility.
While Chinese SOEs are not participating in global initiatives that aim to improve corporate and national governance to the extent that they might be expected to, China has developed a number of internal polices followed by SOEs and private firms (that may or may not align exactly with existing global standards but are closer to full alignment than previously). In 2008, the state-owned Assets Supervision and Administration Commission of the State Council issued specific Guidance on CSR for state-owned enterprises, including an obligation for all state-owned enterprises to release CSR reports. Subsequently, there has been an increase in CSR training and skills development programs and the adoption of process based standards for environmental management and occupational safety. The reality, however, is that Africa’s institutional voids, and complex and uncertain politics inevitably pose challenges for all foreign investors. Some rise to those challenges more effectively than others. Chinese SOEs are no exception.Reprint from Ivey Business Journal
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Reprint from Ivey Business Journal
[© Reprinted and used by permission of the Ivey Business School]