BRICS investment in resource-laden Africa
As their own resources dwindle, countries from the former BRIC economic group of developing countries, namely Brazil, Russia, India and China, have been forced to look abroad for minerals and other natural resources.
Shaun Lightfoot, MD of Zimbabwean-based international investment company Zimvest, expands on this: “China in particular has industry to sustain; if you look at Chinese resources, their internal mining sector is under pressure and some resources are no longer allowed to be exported. The message is clear; they have to look outwards for resources.”
Africa, with its wealth of mineral reserves and many countries desperate for foreign investment, appears an attractive target.
Alex Benkenstein, senior researcher for the Governance of Africa’s Resources Programme at the South African Institute of International Affairs (SAIIA), sees great potential for future investments: “Africa has an incredible wealth of natural resources and new reserves should be discovered as exploration efforts continue. It is very likely that the DRC has significant oil deposits, while Namibia has already announced the discovery of oil and Mozambique is beginning to exploit large coal deposits.”
“The most active country in Africa has been China, gradually being caught up by Indian and Brazilian firms,” said an analyst from Business Monitor International (BMI), a leading supplier of country risk and financial markets analysis. “Much of this investment is heading towards West African states, mainly for iron ore and gold production.”
The analyst also notes, “Brazil, India and China are most in need of the strategic metals which Africa can provide, whereas Russia has substantial reserves of its own. Aside from the Russian miner Kazakhmys, there has been very little Russian involvement in African mining and we do not expect this to change anytime soon.”
Lightfoot believes China’s large African footprint, on the other hand, will only get bigger, saying “Chinese companies are better funded, more resourceful and more prepared to set up operations in the middle of nowhere than any of the other BRIC countries.
“It is this combination of raw determination, resourcefulness and funding that will continue to make China the number one presence in Africa.”
Benkenstein draws attention to the fact that foreign direct investment (FDI) flowing into Africa from the BRIC grouping have traditionally been shaped by a number of factors. “These include the size of the domestic market, natural resource investment opportunities and historical ties between countries. Chinese FDI into Africa has been concentrated in South Africa, Nigeria, Zambia, Sudan, Algeria and Angola, while India has focused on Nigeria and the East African region and Brazil primarily on Angola and Mozambique.”
Benkenstein says that although China currently leads BRICS countries in terms of FDI into Africa, the others are also increasingly active, with some examples being India’s coal investments in Mozambique and oil operations in Sudan and West Africa, as well as Brazil’s Angolan diamond mines and Russian uranium mining in Namibia. “While India still relies mainly on the Middle East for oil, it also has significant oil imports from Nigeria and Angola,” he said, adding: “Imports of iron ore and coal are also important for both India and China.”
Benkenstein acknowledges that access to hydrocarbon resources is a key strategic concern for all major economies, revealing, “Angola was the second largest source of crude oil imports to China in 2010, accounting for 16% of total crude imports.”
However, he also points out: “It is misleading to portray foreign interest in the continent as being determined only by a ‘scramble’ for mineral resources. While Chinese and Indian trade and investment relations are dominated by the need to secure hydrocarbon and mineral resources, there are also significant investments in telecommunications, infrastructure projects, banking and other industries.”
From BRIC to BRICS
In April 2011, South Africa joined the BRIC, in a move that confirms the quest for Africa’s rich mineral reserves and other natural resources is a major aim for these countries.
Professor He Wenping, director of African Studies at the Chinese Academy of Social Sciences’ (CASS’s) Institute of West Asian & African Studies (IWAAS), points to the potential role South Africa could play as Africa’s largest economy and leading diplomatic and political superpower in the BRICS grouping, stating “South Africa’s accession will strengthen communication and cooperation between BRIC countries and the whole African continent.”
He goes on to claim that closer cooperation between South Africa and the BRIC group “will help fuel economic development and poverty alleviation in both South Africa and other parts of the continent”.
According to Benkenstein, South Africa is already a major source of FDI into the rest of Africa, with its FDI inflows having been, until recently, even ahead of China’s.
But as a far smaller economy than the other four members, it needs to tread carefully. “While South African companies do have certain advantages in terms of FDI, these should not be overstated,” Benkenstein warned. “South African companies are not necessarily well received in the rest of Africa, and in terms of linking investments with infrastructure projects or development assistance, they may find themselves outmanoeuvred by Chinese or other companies.”
South African mining giant Gold Fields‘ corporate affairs manager, Sven Lunsche, believes South Africa’s position in the BRICS group provides exciting opportunities. In April, Lunsche told Chinese media that, because they require significant raw materials, BRIC countries could become a major source of investment, merger and acquisition activity for South Africa (particularly in the local mining sector) and heralded the possibility of BRIC companies again emerging as shareholders in South African mining companies as “a welcome development”.
Likewise, He Wenping stressed the importance of the strong links already forged between China and South Africa, as well as other African economic powers, concluding that they “can not only boost expansion of Sino-African relations overall, but also set an example for, as well as guide and lead, the establishment of a new type of strategic partnership between China and Africa.”
The legacy of BRICS group mining in African countries
Benkenstein said that although African countries can potentially reap significant rewards from foreign investment in their resource sectors: “The crucial point to emphasise is that these investments will only translate into economic benefits if they are successfully managed by African governments.”
The BMI analyst confirmed this: “Whether African countries benefit from their mineral reserves depends on how governments respond to the arrival of foreign mining companies.
At the moment governments are increasingly taxing mining companies, however the main beneficiaries of recent FDI are likely to be the destinations for these reserves rather than their source.”
This is one of the main struggles facing African countries. “The problem is that the benefits of foreign investments may be compromised by corruption, weak institutions, a lack of transparency, a disregard for local communities and other aspects of poor governance,” explains Benkenstein. “The extent to which African countries benefit from the growth in demand for their mineral resources from large emerging markets will depend crucially on the governance systems in place.”
Even if the local government receives a significant share of any economic wealth generated by investments in their mineral resources, there is a risk. “Too often one finds that wealth does not translate into effective government investments in education, health and infrastructure,” said Benkenstein.
“Good governance, transparency and accountability are therefore essential, while tax regimes, environmental legislation and mining codes in general must be structured so as to ensure that all citizens, rather than just the political and economic elite of those countries, benefit from the exploitation of their mineral resources.”
There is also a well-founded fear that large foreign investments will entice host countries to disregard environmental or social concerns. “This is especially a problem in countries with weak institutions to ensure accountability and transparency, such as a strong and independent judiciary, parliament, press and civil society,” reveals Benkenstein.
One example of this is Zimbabwe, where Lightfoot says China was the worst culprit. “From what I have seen in Russian gold mining operations, safe, environmentally best mining practices are the norm. Chinese companies, however, are a different story: they routinely ignore environmental impact assessments (EIAs) and other environmental and participatory processes – hence the ban on our chrome exports (which I suspect was introduced largely to deter Chinese companies), which China is heavily involved in along with chrome smelting, tantalite, gold and other resources.”
Benkenstein notes, however, that this problem is not unique to investments from BRICS countries, a sentiment shared by BMI’s analyst, who claims: “Many BRICS companies have been accused of environmental or human rights abuses. However, whilst Western companies are under greater domestic pressure to observe these norms, as was shown with the case of Trafigura in Côte d’Ivoire, these concerns are not always the preserve of Western companies.”
Lightfoot believes one example of positive FDI in Zimbabwe’s mining industry is Indian conglomerate Essar Africa Holdings’ (Essar’s) acquisition of Zisco Steel (now New Zim Steel). “The Essar deal could reinvigorate Zimbabwe’s entire midlands region if New Zim Steel reopens steel production,” he said. “While sceptics take the view that they will asset strip and export raw ores, I don’t see this as viable for the size of investment they have made, as they will need to value-add.”
BMI indicates that while BRICS investment can lead to development, of sorts, this can be misleading. “Vale, Brazil’s largest mines company, is building roads and railways from their mines in Mozambique and Guinea, whilst Chinese miner Jinchuan is doing the same in West Africa. Obviously, however, most of this development is geared solely towards the mining projects and is unlikely to have a significant impact on the daily lives of the countries’ inhabitants,” the analyst divulges.
Clearly then, if countries in Africa are to take advantage of the ever-increasing interest in their mineral reserves, particularly from the new BRICS economic bloc, they will need to ensure the correct systems of governance are in place and that foreign investments do not simply drain resources, but actively contribute to the economic upliftment of the country – whilst remembering this should encompass the country at large and not only select individuals from the political or social elite.