Transparency will help Chinese companies make more gains in Africa

Africa has become one of the main destinations for overseas mining investment by Chinese companies, considering the continent accounts for more than two-thirds of untapped global ore resources.

Population growth, an expanding middle-class and rapid urbanization in developing countries have contributed to a growing demand for commodities and also put pressure on existing supplies. This, to some extent, also explains why a large number of international companies are looking to invest in Africa's mining industry, as its potential remains largely untapped.

According to a report published by the Mining Products Division of the Standard Bank of South Africa in 2011, Africa accounts for more than 89 percent of the total global reserves of platinum group metals, 66 percent of diamond reserves, 56 percent of cobalt, 37 percent of chromium, 34 percent of magnesium, 16 percent of gold, 9 percent of oil and 8 percent of natural gas.

Africa also produces more than 60 kinds of minerals, and is the world's leading producer of gold, platinum, diamonds, uranium, magnesium, nickel, aluminum, cobalt and chromium.

Statistics from global consultancy firm Ernst & Young show that in 2011, foreign direct investment projects in Africa witnessed a growth of 27 percent. Since 2007, the average annual growth rate of such projects has been around 20 percent. By 2014, foreign direct investment in the African mining sector is expected to surpass $48 billion.

Many Western mining investments in Africa have languished since the global financial crisis. Chinese enterprises have been quick to seize the opportunity and further increase their investments in mining and other related projects.

In 2011, Chinese investment in the African mining sector was estimated to be around $15.1 billion and has been growing since then. Most Chinese investment has gone to resource-rich African nations with stable political climates. These nations have also offered a good investment environment, particularly in Zambia, Zimbabwe, Sierra Leone and the Democratic Republic of Congo. Most investment has been in sectors such as iron ore, copper, gold, chrome ore, manganese ore, diamond and phosphate.

According to the World Bank, the mining industry is the major revenue earner for most of these resource-rich countries. Revenues obtained from the mining and oil sectors on average account for about 28 percent of their GDP. Natural resource exports account for 77 percent of their export earnings, and 42 percent of government revenue.

The mining industry is also a major foreign exchange earner in nations like Angola, Sierra Leone, Namibia, Zambia and Botswana.

There are many positive factors for sustained Chinese mining investment in Africa. It is clear that from the current perspective many African nations are keen on foreign investment to develop their mineral resources. However, the African region is also relatively weak in terms of economic strength, while the technology level still has considerable room for improvement. This also leads to low domestic market demand.

To attract more foreign investment, many African nations are actively speeding up infrastructure construction. After years of effort, they have made great progress in developing railways, highways, ports, water, electricity and communications.

Mozambique, for example, has improved and strengthened the supply of electricity in its mining investment regions, while Ghana has improved roads, electricity and communication facilities. Guinea and Gabon have improved railway systems within their territory. Sudan, Tanzania, Mozambique and Egypt have consolidated port construction. Namibia, Botswana, Zambia, Zimbabwe and Burkina Faso have improved communication and airport facilities.

Objectively speaking, the continent's mining investment environment, compared with other parts of the world, still faces many barriers, including war, corruption and political instability. Hence it is important for Chinese mining enterprises to pay attention to some important aspects before making investments.

First, investments require transparency. It is difficult to measure this when it causes damage to the local environment, especially during mining infrastructure construction, in long-term investment contracts. The investment must be reasonable, legitimate and in line with international standards. Investors need to obey the law, and keep the local populace informed about their business activities.

Second, Chinese enterprises' development goals must be consistent with the development strategy of the host country. Whether the investment can create more jobs is one of the standards that the local government often uses to evaluate a project's sustainability. If Chinese companies wish to enter the mining market, it is also necessary to consider the overall development strategy of the country.

Third, Chinese enterprises need to fulfill their corporate social responsibility to the local community. Many large-scale Chinese mining companies are building roads, schools or hospitals in Africa, which is encouraging. Chinese enterprises should also increase image promotion, so that the local people have a better understanding of them.

Fourth, political stability is the foundation and prerequisite particularly for mining investment. Hence it is important for Chinese companies to maintain constant communication with local governments.

Some African countries have also signed the Extractive Industries Transparency Initiative (EITI). This will enable investors to understand local regulations better.

The author is an economics professor at the China University of Mining and Technology in Beijing. The views do not necessarily reflect those of China Daily.

(China Daily 03/08/2013 page7)