Chinese 'push factors' and the EITI in Zambia

Dear readers,

I wanted to add some comments on some recent MWZ postings.

FIRST POINT – Chinese government involvement with SOEs and individuals in Zambia

My first point is regarding Chinese investment in Zambia, and the question of support from the Chinese government. In the blog from 24 May 2008, Alastair asks the question of which push factors are at play behind Chinese investment into Zambia, citing an article by Richard Behar in Fastcopany.com where the author cites interviews with two Chinese brothers who claim that ‘if we invest a certain amount abroad, we can qualify for a zero-interest loan’. I just returned from China where I have tried to get to the bottom of this ‘state-financing’ question through interviews with representatives of the Chinese Ministry of Commerce, CITIC Group (one of the large state-owned banks). I’ve also spoken to a private entrepreneur I was lucky to meet in Kitwe last year when he was there to try to buy copper ore to export to China. All these people have been very clear that no, private companies cannot get below-market (preferential) loans.

Also, it seems that the only Chinese banks that provide below market financing or investment guarantees for overseas projects are what people refer to as the Chinese ‘policy banks’, of which there are three: Exim Bank, China Development Bank, and the Rural Development Bank. The latter two have historically been focused on providing credit to domestic projects (although CDB is now looking to start funding projects abroad), leaving Exim Bank as the main policy bank to provide concessional financing for overseas projects. It thus seems that we should be cautious in assessing the Chinese government’s role in financing/subsidising private ventures abroad, in the sense that with exception of Exim Bank, other Chinese banks, albeit state-owned, do not provide below-market financing. And with regards to private investors, interviews here in China suggests that this ‘push factor’ is completely absent.

Regarding political protection and support given by Chinese diplomats, again, I think that dynamic does exist with the SOEs (am less sure about the privateers). My interviewees say that yes, if there is a conflict, the company may go to the Chinese Embassy, to ask the Ambassador to speak to relevant government officials. Whether this happens more (or in a different way) compared to the way e.g. the French oil company Elf Aquitaine in DRC would ask the French Ambassador for help in discussing sensitive issues with government is open to question. However, we can probably safely say that any state-owned company is likely to make *more* use of this diplomatic channel of influence.

Moving away from the Chinese state for a moment and just looking at the relationships between SOE-employees and ‘private’ Chinese e.g. in Zambia, I have personally been interested in whether the two groups interact much, whether the SOE representatives may somehow broker relationships or support the smaller guys, and whether there are emerging networks of overseas Chinese in countries such as Zambia. My friend the copper traders noted that, yes, the Chinese in Zambia do know each other, congregate at Chinese restaurants in Kitwe and so on, but he emphasised that they (in his experience) do not talk much about business. The main reason he gave was that Chinese private entrepreneurs in Zambia are generally in direct competition with each other, and this cut-throat competition (which comes out very strongly as well when visiting mainland China) means that business contacts/connections are generally not what the talk about. They may, however, talk to each other about administrative stuff, how to go about getting a business visa extension, who has a vehicle for sale, and share some experiences in working with Zambians. Finally, he also said that now, following the new fiscal regime which places a 15% tax on the export of copper ore, most Chinese ore traders (and there used to be, according to him, “so many” of them) have gone home – apparently his profit margin was only about 10%, so this business is no longer profitable.

SECOND POINT – EITI and the potential for a ‘local development fund’

Regarding the EITI discussed in the blog dated 25 of May, where a Daily Mail article is cited in which Minister Mwanza talks about GRZ having asked the World Bank to do a scoping study. I wanted to clarify something: this scoping report was carried out during the fall of 2007, partly by WB staff and partly by a researcher at the Copperbelt University. According to the latter, mining companies were in general very positive towards it, something which also comes out in the scoping report... The GRZ told the WB in early 2008 that they had agreed to make the report public, but I have not seen anything in the press about ‘launching’ this report to a wider public. Still, the WB told me that this document is now public, so here it is (have tried to upload it with this blog posting).

Regarding the possibility of earmarking some of the taxes for local development, the idea of establishing a ‘Local Development Fund’ was on the agenda throughout the second half of 2007, and several mining companies frequently told me that such a set up would be seen as something the GRZ could ‘give back’ to the mining companies (who had argued that ‘yes we are very willing to renegotiate, but that it should be a two-way process’). Mining companies, through a CoM submission on the 2007 budget, even proposed a structure: 60% to central government, 20% to local government, and 20% directly allocated to community development. However I don’t know what the GRZ’s response was, or what the current status is, though I suspect that the conversation has halted on the back of adversarial relations.

THIRD POINT – Labour standards and contractors

Finally, I wanted to add my two cents to the criticisms of NFC Africa’s labour standards, for instance raised in Mr Behar’s Fastcompany.com article linked to on this blog. To maintain perspective, let us not forget that even if NFC Africa pays the lowest salaries of the big mining houses, it is not the case that people on K4-800k per month do not exist at KCM or MCM! There are contractors, for example Mpelembe Drilling and Prosec, who are very active at KCM and MCM but who pay their workers similar wages to what NFC Africa pays. When I was in Zambia in the fall of 2007, about half of the 16,000 people working on MCM’s premises were contractors, so in absolute terms the number of people with unacceptably poor conditions of service may be greater at KCM and MCM compared to NFC Africa! This does of course not absolve anybody from failing to provide descent working conditions, but I think it does put the singling-out of the Chinese into perspective.

One might think that companies would see it in their interest to ensure contractor workers are adequately paid, as strikes over terms and conditions might affect the companies operations… However, those who favour this argument should bear in mind that the threat of disruption due to work stoppage is not so great when a mining operation is in development, as mining managers have scope to accelerate/re-shuffle development activities if these stop for a while due to industrial action. When the mine is in production, however, it is a different story, as any work stoppage then has direct implications for profits. However, and conveniently for mining companies, contractors are mainly used during the development non-core phase, which can explain why they see little value in forcing higher standards upon their contractors (and thus higher costs upon themselves).

Personally I think a big reason for why the Chinese might be more exploitative of Zambian workers relates to the time preferences of Chinese investors. When an investor (big or small) comes to Zambia, if they are there for the short-term, they will not be averse to sowing seeds of future discontent. And there seems to be very high turnover of the smaller Chinese moms-and-pops traders on the Copperbelt, as well as for NFC Africa. At the latter firm, company managers are generally there for a three-year period before going back to China, with a Zambian employee complaining that he is constantly “having to train a new Chinese manager”.
Any alternative takes on this would be welcome! Thanks for a great blog.

Dan Haglund
University of Bath
dan.haglund@gmail.com EITI%20Scoping%20Report%20-%20November%202007-1.doc