Sub-Saharan roulette

 
 

Barely a week goes by without Sub-Saharan Africa (SSA) figuring prominently in the Australian business and financial news. Guinea is hailed as the next Pilbara; Mozambique as the next Bowen Basin. Australian companies plan to sink billions into both countries. And in Zambia, which is currently undergoing a copper boom, Australian company Equinox Minerals is building Africa’s largest copper mine.

How do we interpret this news? Are the reported investments isolated instances, a flash in the pan? Or do they mark a broader trend for the mining sector?

In Into Africa: How the Resource Boom is Making Sub-Saharan Africa More Important to Australia, we conclude that the push into SSA is significant. The international resource boom has spurred a hunt for new mineral and hydrocarbon reserves, and an important new frontier in this hunt is SSA. Thanks to their competitive advantages, Australian resource and engineering companies figure prominently in that hunt. From a relatively small base five years ago, actual and prospective investment by Australian resource companies in SSA has now climbed to around $US20 billion. Australian companies are now the third-largest exploration spenders in SSA after South African and Canadian companies. BHP Billiton alone plans to spend $US4.7 billion on projects in Guinea and the Democratic Republic of the Congo (DRC). Moreover, Australian mining engineering companies make a substantial fraction of their sales in Africa and they have lined up work on at least a further $A4 billion worth of projects.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

What are the implications for corporate Australia when investing in SSA? First and foremost, the subcontinent can be a place to make big money but also a place to lose it.

Thanks to its resource bounty, the subcontinent can lift small companies that have won large concessions into the big league. Equinox is one such company. But there are others attempting to follow suit. Riversdale Mining, with Indian conglomerate Tata, is developing a major coal deposit in Mozambique that will feed Tata’s steel mills. Sphere Investments is developing an iron ore mine in Mauritania that will supply Gulf and African steel mills.

Equally, “political risk events” can blindside companies. Woodside has had to book a $A233 million loss on a Mauritanian investment. In the DRC, Anvil Mining has been drawn unwittingly into conflicts with artisanal miners, and into clashes between the Congolese army and rebels. Equinox is wrestling with disadvantageous changes to the tax regime in Zambia. Rio has just announced that the President of Guinea has rescinded its licence over the giant Simandou iron ore concession.

To make money, companies (and their financiers) need to manage their risks carefully. That hinges on three things: being a conspicuously good corporate citizen; assessing and rating risk carefully; and insuring insupportable risks.

As one commentator has remarked, good corporate citizenship – or “corporate social responsibility” (CSR) – is a way to gain a “social licence to operate”. Realising this, Anvil Mining allocates 10 per cent of the profits from its Dikulushi copper/silver mine in the DRC to local community development. BHP Billiton, Rio Tinto and Woodside have signed up to the Extractive Industries Transparency Initiative, a fiscal transparency initiative that calls upon companies to “publish what they pay” and governments to “disclose what they receive”. Meanwhile, among financiers, three Australian banks – the ANZ, the NAB and Westpac – have signed up to the Equator Principles, a set of “best practice” social and environmental benchmarks applied to resource projects seeking project finance.

While writing our book we tried hard to find documented, proven cases of bad corporate citizenship, but failed. If anything, companies err well on the side of caution with CSR. We were surprised by the large number of small exploration outfits employing social specialists on-site to facilitate communications with local communities, manage expectations and promote good relations.

What are the risks companies need to be on the lookout for? Political violence and licence cancellation or “adjustment” are two big ones; corruption is another. Many companies report that they have had to refrain or withdraw from an investment in SSA to comply with tough OECD anti-corruption laws.

An emerging risk is “strategic competition” from state-owned companies backed by the diplomatic and often financial clout of their governments; in the quest for energy and resource security, or simply extra reserves to sell into a booming market, some large emerging economies are clinching big deals.

We find these are sometimes financed with subsidised credit, and increasingly take the form of opaque commodity-for-infrastructure deals. The World Bank has a particular name for this financing mechanism: the “Angola Mode”. This was named after a 2004 deal in which China Eximbank lent Angola $US2 billion for infrastructure, backed by an agreement for Angola to supply China with 10,000 barrels a day of oil.

To give an idea of the sums of money being mobilised in Angola Mode deals, take two recent instances. In April, China pledged the DRC $US9.25 billion in loans and Nigeria $US40-50 billion in export credit guarantees; both deals will reportedly be backed by mineral and petroleum exports and the possible granting of resource concessions. Some companies lacking such backing worry about how they will compete for concessions and contracts.

Will the global credit squeeze and associated pullback from risk taking in financial markets bring the SSA resource boom to an end? The cost of both debt and equity capital has certainly gone up for SSA resource projects, and the availability down, since the squeeze got underway last August. But there doesn’t seem to be any wholesale flight from risk taking. Commercial banks are still reportedly interested in taking part in lending packages for projects, while the political risk insurers, which often back the banks, are indicating a preparedness in some cases to take on risk of 10 years and longer in amounts exceeding $US50 million a project. Besides, to the extent that Western financiers and insurers are stepping back, sovereign wealth funds, export credit agencies and multilateral bodies seem to be stepping up.

The greater risk to the boom is deteriorating conditions in the countries of SSA. One of the drivers of the boom so far has been peace settlements and better economic policy. But these developments have been uneven, with some countries struggling to keep pace. The subcontinent needs to keep working on its security and investment climate to sustain the boom.

A book that’s all the rage at present is Nudge: Improving Decisions About Health, Wealth, and Happiness. The authors, Cass Sunstein and Richard Thaler of the University of Chicago, ask how governments can “nudge” people to take better decisions for themselves and their families – for instance about nutrition and financial security – without restricting their freedom of choice. A similar question might be posed of Australian government policy: Can Canberra nudge African governments and strategic competitors for resources in directions that will benefit both them and Australian investors?

There does seem to be a case for a nudge or two. This is not to advocate wholesale change – our traditional diplomatic, military, trade, investment and aid partners (and rivals) continue to loom too large – but instead some marginal recalibration of policies in an African direction.  Five initiatives might be looked at: (i) providing political and diplomatic support to companies suffering unfair treatment or competition, perhaps partly through some additional diplomatic posts; (ii) negotiating with African governments over bilateral investment treaties containing protections for Australian investors, including dispute settlement mechanisms; (iii) supplying bilateral aid to targeted countries to win goodwill that would support Australian commercial interests; (iv) urging and helping governments to improve their investment climates and to treat all investors in a non-discriminatory manner; and (v) urging and helping governments engaged in strategic competition for resources to sign on to international agreements, such as those in the OECD, WTO and Berne Union, thus limiting the subsidisation of exports and investment.

The point here is that it is a given that companies more or less have to take the risks they face, whereas governments have some scope to influence the risk environment for the better.

Roger Donnelly is a chief economist and Ben Ford a senior economist with EFIC (the Export Finance and Insurance Corporation). The views they express should not be attributed to EFIC. Their paper, Into Africa: How the Resource Boom is Making Sub-Saharan Africa More Important to Australia, is published by the Lowy Institute for International Policy.

Newsletter
Sign up for our weekly newsletter
The Diplomat Brief