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China partnerships offer benefits in Africa

Originally published WA Business News - Duncan Calder

MORE than 200 Australian companies are exploring or developing projects in Africa in 40 different countries. Perth leads the way as the home to 85 per cent of the Australian listed resource companies working in Africa. This is a very impressive presence.

These companies bring to Africa our strengths in developing opportunities, exploring effectively and using our geological and engineering skills to create exciting projects.

However, even with our expertise in operating in emerging economies, investments in Africa don’t come without challenges. These often include uncertain or changing political environments, high capital costs, hostile working environments, and labour, infrastructure, security and corruption challenges.

So a partner who can deliver political strength to protect investments, a partner who can deliver construction power and expertise with massive, low-cost labour supply, and a partner who can provide financial strength and access to both equity and low- cost large debt capital is very welcome.

And China is the perfect partner. China brings to the table political muscle, construction muscle and financial muscle.

And, of course, China is a hungry dragon looking for new resources to fuel its ongoing growth and its ambitious urbanisation program.

So China also brings a strong demand for commodities and a hunger to secure off- take from new resources projects that makes them bankable.

China is now active in Africa on a scale not previously witnessed. About 2,500 Chinese companies are currently active in Africa and China is reported to be Africa’s largest trading partner.

Statistics from China’s Ministry of Commerce show that trade between China and African nations has grown significantly during the past decade, from $US10 billion in 2000 to $US107 billion in 2008. While it fell in 2009 due to the GFC, it has climbed to $US61.2 billion in the first half of this year, up 65 per cent on 2009 levels for the same period.

Recent reports suggest there have been 8,000 China-Africa co-operation projects undertaken, ranging from power stations, ports, airports, roads, medical clinics and hospitals to solar power generation projects.

Africa has also been a valuable political ally for China with China’s accession to the UN General Assembly and Security Council assisted by 26 supporting votes cast by African countries.

And Africa has benefited in return.

Chinese equity investment has been supported by Chinese debt and institutional support. For example, the China Africa Development Fund, established by China Development Bank in 2007 as an investment vehicle in Africa, has invested in more than 30 projects in Africa.

Last year, Premier Wen Jiabao announced $US10 billion in preferential loans to support African countries. Given the expectation that the G8 will not reach its 2005 promise of $US50 billion in foreign aid to the poorest and most vulnerable by the end of this year, it is hardly surprising that China is gaining influence with African leaders.

If it is managed well, the Sino-African relationship could provide the foundation for the African continent to take its place as a key player in the global economy.

Africa, as a whole, has close to 1 billion people; not that much less than China at around 1.3 billion people. Importantly, however, demographics will also work in Africa’s favour, more so than in favour of China and the West. Africa currently has more than 500 million people of working age and by 2040 will have the world’s largest working-age population.

We may be in the century of the East, but this century also promises much for Africa. This message was emphasised by Foreign Minister Kevin Rudd when he delivered a major foreign policy speech on the Indian Ocean region at the University of Western Australia last month.

Mr Rudd emphasised that Australia will work with Africa to tackle its development needs as well as its security challenges. The Australian government is keen to take advantage of the continent’s slow but tangible move towards stability and prosperity.

But as those Australian companies who have adventured in Africa can attest, it is still enormously challenging. Africa has 33 of the world’s 49 least developed countries and poverty still covers half the continent.

The need for vigilance is very important, given the far-reaching and serious implications should any of the many Australian companies on the ground in Africa accidentally breach US and UK anti-bribery legislation.

Australia is very active and committed in Africa. Australian companies now have the third largest exploration spend in sub Saharan Africa, behind only South Africa and Canada. Australian mining/engineering companies now make a substantial proportion of their sales in Africa.

Our level of engagement is increasing. This year already, 30 new companies have started projects in Africa and more than 100 new projects have started. More than 350 of a total of 560 current Australian resources projects have started since 2006.

Fear and uncertainty around resource rent tax threats in Australia have only fed the desire for Australian companies to look elsewhere for opportunity. And Africa offers much in the way of opportunity and rich rewards for them.

Australian investment in Africa was historically centred in South Africa and Mozambique, but now Australian companies have spread out north and west. They can be found in the Democratic Republic of Congo, Angola, Ghana, Burkina Faso, Guinea, Equatorial Guinea, Kenya, Mali, Nigeria, Mauritania, Senegal, Sierra Leone and Zambia, among others.

Australian companies bring energy, creativity, geological and engineering know- how. They engage with and support African communities and have learned that an important strategy to contain political risk is to ensure a fair sharing of benefits between the company, the local community and the national government.

For example, Anvil Mining, which has been producing copper at the 60,000 tonnes per annum Kinsevere copper mine in the DRC since 2002, have sponsored education initiatives, more than 200 local micro-enterprise initiatives and public infrastructure. Australian companies that have been in Africa for many years have shown they can act transparently as good corporate citizens. But many of the Australian companies active in Africa are junior companies, living on their wits and exposed to the risks of project development in Africa.

China can deliver the funding to develop the mines and associated port and rail and power infrastructure, often on attractive terms, especially where China sees the opportunity to secure supply of important commodities and the opportunity to sell its heavy engineering production capability.

Importantly, much of the activity in Africa by China is by large state owned enterprises (SOEs). This means that there is extensive government-to-government dialogue.

And China has delivered a great deal in Africa. China has invested massively inAnd China has delivered a great deal in Africa. China has invested massively in infrastructure projects, with investments this year including:

  • ! Shandong Iron and Steel’s $US1.5 billion investment in UK listed African Minerals, which will secure a 10mtpa iron ore offtake supply;

  • ! Jinchuan Nickel’s acquisition of a controlling stake in a South African platinum mine for $US227 million; and

  • ! Chinese investors will fund at least 25 per cent of a $US8 billion oil refinery in Lagos, Nigeria, with China Development Bank providing an accompanying debt package.

Importantly, China often invests without the conditions attached to Western finance into Africa. This level of engagement and investment and cultural affinity means that China has a large and powerful voice in Africa.

A small Australian resources or energy company operating to develop a project in Africa can be vulnerable to sovereign risk and even project expropriation. But if that same company is operating in joint venture or in collaboration with a Chinese SOE, then those political and sovereign risks are significantly reduced.

Many new projects are a long way from power sources, transport lines and port facilities. Often billions of dollars needs to be spent to create the infrastructure pathways necessary for commodities to travel from mine to market. China not only provides the debt funding needed, but China can bring in labour solutions in- country that can significantly reduce project costs and project timelines.

One example of where this is being explored is the Mbalam iron ore project being developed in Cameroon by Sundance Resources. Sundance has appointed a Chinese investment bank to assist in securing project finance and is working with Chinese construction companies to develop cost-effective infrastructure solutions.

It is perhaps not surprising that Sundance recruited Giulio Casello as CEO from Sinosteel Midwest, bringing in further expertise in dealing with Chinese SOEs to complement the contacts and experience in China of the returning chairman and legendary mining figure, George Jones.

But it is not just the emerging and junior mining companies who understand the benefits of partnering with China in Africa.

Guinea is potentially a globally significant iron ore province and is comparable in many respects to the Pilbara of 40 years ago. Rio Tinto is developing the massive Simandou iron ore project in Guinea that will produce 70mtpa of iron ore. Rio Tinto has brought in its largest shareholder, Chinalco, in joint venture to harness the strengths of China in Africa to help to co-develop the project.

So, with Australian companies so active in Africa and with so many compelling reasons for Australian companies to partner with Chinese companies in developing resources and energy projects successfully, the Australia China Business Council is keen to use its networks to assist its members to develop these partnerships.

Indeed, ‘Australia and China – Together in Africa’ is the theme behind the ACBC’s Chinese New Year dinner on February 16 2011 with keynote speakers to include a senior representative from Rio Tinto.

• Duncan Calder is founding national chairman of KPMG Australia’s China business practice, and President of the Australia China Business Council WA.

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