Chinese state-owned enterprises (SOEs) are often depicted as the new colonials in Africa, rapacious exploiters who lack transparency and good corporate citizenship. But the reality is rather different
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.
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.
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.
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.
Reprint from Ivey Business Journal
[© Reprinted and used by permission of the Ivey Business School]