China's play for African gold: At what cost?October 31, 2012: 9:56 AM ET
China's emergence as a major player in Africa is fueling an intense debate over the nature and motive of its involvement. China National Gold's bid for Tanzania's largest gold mine adds kindling to this fire.
By David Rice
FORTUNE -- The ugly side of mining in Africa made global headlines this summer, with strikes and protests following violent clashes in South Africa, resulting in the death of 44 miners and a policeman.
Many of the work stoppages that spread across South Africa following the violence have ended, but there is another story in African mining that has received comparatively little coverage, although the implications are just as significant.
In August, the state-owned China National Gold Corporation announced a $3.9 billion bid to acquire African Barrick Gold, Tanzania's largest gold miner -- a wholly owned subsidiary of Canada's Barrick Gold Corp (ABX). If approved by regulators in Tanzania as well as in London, where African Barrick Gold is traded, it will become China's first gold mine outside its borders and will double China National Gold's total production capacity.
China seems to have the Midas touch in Africa, steadily turning vast natural resource wealth into gold through investments in oil, gas, and mineral projects around the continent. Last year, Chinese interests invested nearly $16 billion in African mining projects -- a tenfold increase from 2010 -- according to the China Mining Association.
The purchase of Barrick, which is expected to go through, would represent a new front in China's acquisition of Africa's natural resources, one where Chinese interests increasingly buy-out Western owned companies operating in African regions that are financial, public, and political liabilities. Barrick declined to provide comment for this article.
Parsing China's motives
China's emergence as a major player in Africa is fueling an intense debate over the nature of and motive behind its involvement. Critics argue China's strategy is driven by self-interest to the point of malevolence, while defenders hail its ability to achieve success where traditional partners from the West have consistently, and sometimes dramatically, failed.
Both sides have a point. Western initiatives designed to alleviate poverty are well intentioned, but these programs are top heavy and the administrative requirements on African governments receiving the funds are unduly cumbersome. The Chinese government's approach, on the other hand, is much less bureaucratic, but opaque to the point of being secretive, which invites corrupt behavior by African leaders, and is overtly focused on securing access to African natural resources as opposed to elevating Africa's poor.
China's commercial strategy in Africa is deeply tied to the Asian superpower's political and economic goals. According to data published by The Economist, Chinese state-owned companies have funded four-fifths of all Chinese foreign direct investment, which motivates the direct, high-level relationships between senior leaders in China and African governments.
Compared to the typical drive-by diplomacy and lecturing of African leaders for which the U.S. is well known, China has put significant financial and political weight behind its efforts in Africa. In July of this year, for example, former President Hu Jintao hosted the Fifth Forum on China-Africa Cooperation in Beijing, where he highlighted the $165 billion in trade between China and Africa last year, a tripling since 2006, making China the continent's largest trading partner. Moreover, Hu Jintao sent a message to the dozens of African heads of state and hundreds of senior African and Chinese government officials in attendance that the commitment behind the Sino-African relationship is consistent, comprehensive, and forged at the highest levels.
The Chinese are able to offer quite a bit to Africa, including help with infrastructure development for natural resource extraction. They are also able to add sweeteners to their deals with African governments, like grand public projects such as soccer stadiums and new government office buildings. Just last year, the Chinese government completed the African Union's brand new $200 million headquarters building in Addis Ababa, as a gift from the Chinese people.
Barrick's African Albatross
Despite investing hundreds of millions of dollars over the last several years and a robust global market for gold, Barrick's Tanzanian mines have produced lackluster results due to electricity shortages, labor protests, and incursions by thieves. But it is unrest at the mine that has proven even more problematic. According to the Legal and Human Rights Centre, an advocacy group, dozens of local residents have been killed every year at the hands of Barrick's security and the police who help patrol the mines. As recently as September 11 of this year, two residents in the area of the North Mara mine were shot and killed by police as they attempted to enter the grounds and steal gold sand, according to several media reports. The violence at the mine has set off an intense public backlash against the company in Tanzania and back in Canada.
To calm the communities surrounding the Tanzania mines, Barrick has spent tens of millions on development projects such as improving access to water and electricity and building new schools and health clinics. Just last year, Barrick signed the "Village Implementation Benefits Agreement" with Tanzanian officials, which directs an additional $10 million a year to support affected villages, and funds partnerships with local NGOs and agencies like Africare and the U.S. Agency for International Development.
Tanzanian officials applauded the company for making such a large financial commitment. If the China National Gold deal goes through, the new Chinese owners are not expected to continue those programs. China National Gold could not be reached for comment.
A look at current Chinese standards
Barrick's problems at its mine in North Mara have been widely publicized in Tanzania, Canada, and many places in between. Barrick is listed on the London Stock Exchange and is required to make regular disclosures about its operations. And even if such disclosures were not required, an array of local and international NGOs, the media, social networks, and Canadian law governing corporate actions abroad serve as additional sources of accountability.
Chinese mining operations in Africa, on the other hand, have a less than stellar track record. In neighboring Zambia, for example, where China is the primary investor in copper mining, the Chinese have faced troubles with the local community. In October 2010, two Chinese managers shot and killed 13 protesting workers at their Collum mine. The Zambian government brought charges against the managers, but they were eventually dropped. A 2011 report by Human Rights Watch said that, despite improvements in recent years, safety and labor conditions at Chinese mines in Zambia were worse than at other foreign-owned mines.
Even within China, an estimated 5,000 miners die on the job each year, which, based on figures from the World Coal Institute, is four times higher than in the U.S.
Western companies are held to high standards when they invest in developing countries, in part because the governments where these companies are headquartered formally monitor their actions abroad. The U.S., for example, has the Foreign Corrupt Practices Act, which prohibits U.S.-based companies to use bribery or engage in other corrupt behavior in other countries. Western firms are also scrutinized publicly by NGOs, the media, and shareholders.
The media in China is an extension of the state, information on the Internet and through social media is restricted, and individuals and groups are not empowered to speak out against the Chinese government or its policies and interests. They do not have their own Foreign Corrupt Practices Act, or a free press, unfettered access to the Internet, or non-governmental watchdogs.
How China is more competitive in Africa than the West
Typically, China has pursued Africa through natural resource concessions, the purchase of uncultivated land for farming, and contracts for large-scale infrastructure financed by low-cost Chinese loans and built by Chinese companies and workers. A state-owned Chinese entity such as China National Gold buying out another company, particularly one from the West, African Barrick Gold, is unique. And in this new effort, China has a number of distinct advantages over Western nations.
For one, the Chinese government can direct and coordinate a comprehensive package of aid, loans, and investment to African nations through these deals. Some Western companies may receive government financial incentives, but most depend purely on private capital and their efforts rarely benefit directly from their home government's aid projects.
China also has open-ended preferential trade agreements with their African partners. The U.S. and Europe are comparatively restrictive when it comes to trade.
China's is willing to do business with African governments even if they are long-standing dictatorships, democratic in name only, or if they are openly oppressive and have documented human rights abuses. Western firms are often formally restricted from doing business with undemocratic regimes.
And China's reserves allow the government to provide below-market debt to African governments for massive infrastructure projects, not to mention that Chinese firms typically receive the contract to do the construction.
Another thing: While Western companies operating in Africa typically exceed the local legal environmental and labor standards, Chinese entities in Africa have a reputation for not meeting established international norms or industry operating standards.
Slipping standards in Africa?
Some critics of China, and globalization overall, argue that more open trade will encourage companies from developed economies working in developing nations to cut costs and lower their standards. A combination of laws enforced by Western governments and informal standards from non-governmental groups and the media has helped prevent this. China, however, is not adhering to a set of formal or informal standards remotely close to those in the West.
Not only does this put Western companies at a competitive disadvantage, it may lead to worsening conditions for African workers at Chinese-owned operations, and reduce the economic and social benefits to those who need these things most.
For now, U.S. and European interests still predominate in most of Africa, but the competition is fierce and heating up. As China strives to gain the lead in Africa, their path to the top just might be a race to the bottom.