In recent years there has been an increasing trend of western multinational companies turning to Chinese partners to seek investment. This is particularly evident in the capital constrained mining industry where partnerships have provided western firms with access to Chinese project finance.
However such partnerships have also led to lengthy delays and may present reputational risks. This article highlights why West Africa has been a particularly fertile home for these relationships and some of the key partnerships have fared. based on the experiences of these firms their chief concern should be getting to know their partner before it is too late.
Falling commodity prices and a tough political environment in West Africa have soured investor perception of mining projects – despite a number of high quality reserves of iron ore – forcing Western firms to look elsewhere for investment. The major reserves in West Africa tend to be some distance from the coast meaning expensive infrastructure must be built to export the metal. Chinese firms have experience constructing railway and port infrastructure at low cost, and despite the recent slowdown in China’s manufacturing sector, China remains the world’s largest consumer of iron ore. Therefore securing supplies remains a strategic priority for Beijing.
For a Western firm the key benefits of a partnership are access to Chinese state finance and cheaper procurement and construction costs. These benefits are more likely to be enjoyed where the Chinese partner is a major Chinese State Owned Enterprise (SOE), which have closer relations with government and often bring with them a wide array of subsidiaries and affiliates able to provide low cost equipment and supplies.
For a Chinese firm, the experience of the western partner operating in that country or region negates the need to build their own relationships and understanding. Chinese companies have struggled to win major mining concessions outright, demonstrated by the fact that there are no major wholly owned Chinese mining projects in the region. By strengthening their knowledge and credibility through partnerships, Chinese firms may also increase their future chances of winning concessions.
For a West African government under pressure from its electorate (or elites) to get projects off the ground a Chinese SOE may also be more likely to push development than a western firm. A Chinese partner under pressure from Beijing or a steel making partner is, like the government, under pressure to produce quickly. If Beijing sees a project as being particularly strategically significant it may also lobby a host government on the project’s behalf, possibly offering development finance or even debt cancellation. In general terms Chinese development finance closely follows its business relationships.
International as well as national stakeholders, such as shareholders and NGO groups, may also pressure a western firm not to accept a Chinese partner. Smaller privately owned Chinese firms have a poor reputation for their labour practices and quality of goods and services. In Ghana, recent controversy around small scale Chinese mining firms engaged in gold mining has prompted a national reaction against China and Chinese firms. International investors may also be put off. For example if a company was to partner with a Chinese SOE with a defence arm, this could prompt criticism from socially responsible investors and human rights NGOs.
Has it worked in practice?
Four recent partnerships in West Africa between western and Chinese firms have enjoyed varying degrees of success. The most high profile of these has been the Simandou project in the Forestiere region of Guinea which is jointly owned by Rio Tinto, Chinalco, the government of Guinea and the IFC. For Rio Tinto and Chinalco (a large SOE) the partnership was the result of long running discussions as to how the firms could best complement each other. The partnership at Simandou has secured significant investment for Rio Tinto, and has reportedly helped to cut procurement and construction costs.
African Minerals in Sierra Leone has three such partnerships at its Tonkolili project. The company received a first tranche of investment from China Railway Materials (CRM) to develop the first phase, and then brought on Shandong Iron and Steel Group (SISG) to provide a larger injection of capital to further expand the mine. While development has been slower than hoped the company recently brought in a third partner (in late September 2013), Tianjin Materials and Equipment Corporation (Tewoo). Rather than partnering with a fellow mining firms African Minerals partnered with: a potential customers in SISG (the state steel producer of Shandong province), and Tewoo (a metals trader); and a potential infrastructure service provider in CRM.
However not all experiences have been as positive. The slow Chinese approvals process has caused considerable impact on the fortunes of Sundance Resources. Hanlong Group, a politically connected but privately owned Chinese conglomerate seemed likely to conclude a takeover in early 2013, but after 21 months of negotiations and doubts over the extent of Chinese state support for the takeover, Sundance was forced to pull out of the deal.
Bellzone’s Kalia project partnership in Guinea with China International Fund (CIF) has also failed to perform as expected. Little progress has been made on the project since the deal was signed in 2011 and CIF has been criticised by the government for illegitimately acquiring concessions under the former military government. CIF has also been criticised by Global Witness for allegedly funding Zimbabwe’s secret police force in exchange for diamonds and access to business opportunities. CIF denies any impropriety in both cases.
Securing investment from a Chinese firm may speed development of a project and reduce costs, but only if the right partner can be found. In order to protect against negative impacts it is vital to gain a strong understanding of the partner organisation. The due diligence process is likely to be challenging as Chinese firms often have a limited public profile. In general terms the larger state owned companies are more likely to be able to access state funds and support. However this is no guarantee of success and therefore it is important to take adequate time to examine whether strategies are aligned, who a company’s affiliates are, what level of support they have from the state, and whether they have any skeletons in their closet which might be criticised by investors or NGOs.