Predatory Investment In Africa

muddy business deals

Unscrupulous investors eager to turn a quick profit have found Africa’s resource-rich governments to be attractive targets

In Brief

  • Africa’s oil and mineral wealth has failed to improve prospects for poor people. Corrupt and undemocratic regimes routinely collude with some predatory investors to plunder
  • Despite the increased global clampdown on corrupt practices, underhand deals are still rampant. Recently initiated corruption probe in Somalia illustrates the danger predatory companies pose in fragile nations
  • Resource mismanagement isn’t all about corruption; multi-national corporations with far superior technical capacities incapacitate states

They sniff a crisis from thousands of miles away and come in all shapes with the single goal of profiteering. These ‘gifts’ bearers have no regard for the havoc caused by their greed. Whatever can fatten their bank balances – arms, natural resources, drugs, diseases and defense contracts – is fair game. And they would do anything to keep the profits rolling in.

Africa’s oil and mineral wealth is one of the richest in the world. Yet strong economic growth in many of the countries with natural resources has failed to dent poverty levels.

Rich in mineral resources and gas, Mozambique is one example of resource-rich states where poverty rates are lagging behind countries without wealth on the ground. In October 2012, the southern African country finally joined other 31 countries that are compliant with Extractive Industries Transparency Initiative (EITI) Standards.

Mozambique’s craggy road to EITI compliance illuminates the key reasons many African governments have failed to manage their countries’ natural resources, and made them targets of predatory investors.

Back in 2011 the Mozambican government published an independent report on its extractive industry, as part of the application to join the EITI club. EITI rejected the application, citing failure by Maputo to publish revenues from the companies involved.

The report that was conducted by Ghanaian consulting company, Boas and Associates, noted the lack of qualified personnel in the agencies governing the sector, from licensing, prospecting and mining to drilling, sales and export.

In a nutshell, the government had no way of verifying the quality and quantity of minerals in the concessions it had leased to private companies. Mozambique’s government largely depended on the corporations for data of what they had mined and exported. It couldn’t even verify the companies’ reported profits since there were no systems to track global commodity prices or the companies’ investment costs. 

In 2013 the minister of mineral resources announced plans to train some 4,000 technicians to help regulate the sector. The training programme was to be partially funded by the companies that the government was supposed to regulate.

Huge investment in mining and related infrastructure has pushed robust economic growth of the once war-torn nation. Analysts predicted that Mozambique could potentially become a major supplier of coal and natural gas to emerging energy markets of Asia.

Maputo, eager to take advantage of the immense investor-interest, offered generous incentives to mining giants. Economists say the freebies now cost the country more than half a billion dollars annually in lost revenue. Inked mining deals weren’t always in the best interest of all citizens, according to investigations by the Human Rights Watch. Additionally, corruption and conflict of interests emerged - politicians are said to be silent partners in companies involved in joint ventures for mega projects.

Spurred by the resources boom, construction and services sectors took off and made a few millionaires along the way. South African research company New World Wealth this month predicted the number of Mozambican dollar-millionaires would reach 2,200 by 2024, an increase of 120%. The increase in high-net-worth individuals, the firm says, will be due to opportunities expected to arise out of the gas bonanza.

Mozambique’s mineral wealth hasn’t created enough jobs or improved delivery of critical services to citizens. In Tete province, which is home to an estimated 6.7 billion tons of coal reserves, rural folks are still weathering the effects of resettlements done to accommodate mining projects.

Mozambique’s resources story resonates across Africa. Corrupt, misgoverned and undemocratic regimes routinely collude with some crooked investors to steal and impoverish citizens.

While some African governments earn billions of dollars from the extractive industries annually, the bulk of the revenues are squandered. Despite the increasing global clampdown on corrupt deals and business practices between governments and private companies, underhand deals are still rampant. The complicity of government officials has made it difficult to effectively enforce taxation, anti-corruption laws and transparency.

But, resource mismanagement isn’t all about corruption and lack of political will to reform.

Kennedy Opalo, a doctorate candidate at Stanford and assistant professor of African Development at Georgetown University, reckons it is also a story of governments that remain completely incapacitated by multi-national corporations with far superior technical capacities.

For things to improve, according to Opalo, a hard push must be made towards not only political reform, but boosting government technical capacity development.

“Not all governments might find it useful to improve their technical capacity (it is easier for them to steal if the valuation of state assets remain uncertain), but I bet many African states, especially those with moderately democratic regimes, can be persuaded to boost their technical capacity, if not for anything then just to improve their bargaining position vis-a-vis mining companies. At a minimum, this would mean more money for their pockets, and perhaps also more money for roads, schools and hospitals,” says Opalo.

Moneyed oil and gas multinationals have the technical expertise and financial resources to help countries get better returns for the public. Yet, relying on the goodwill of collaborations between governments and corporations just isn’t enough.

 J.R Mailey, research associate at the African Center for Strategic Studies (ACSS) and author of the Center’s recent report on predatory investment in Africa’s extractive industries, noted that such collaborations are rarely beneficial.

“Unscrupulous investors eager to turn a quick profit have found Africa’s resource-rich governments to be attractive targets. These investors’ readiness to engage in business transactions that are illegal, morally questionable, or otherwise exploitative becomes a comparative advantage relative to more reputable firms.”

Since the discovery of oil in Uganda in 2006, exploration activities have surged in East Africa. In 2012 Tullow Oil announced Kenya’s debut find. Over 50 trillion cubic feet of natural gas exist in Tanzania, and even morein Mozambique.

North of Mozambique is Somalia, where oil is back on the agenda. Though the war-ravaged country has no proven petroleum finds, it is betting on its geology that is akin to Yemen, which holds some nine billion barrels of proven reserves.

report published in June by Mogadishu-based think tank, Heritage Institute for Policy Studies (HIPS), estimates oil deposits at 110 billion barrels. Somalia’s offshore territory may contain vast natural gas fields, which would be lucrative for prospectors if pirates remain at bay.

The country is not new to oil exploration, energy companies including ConocoPhillips, Shell, Eni, Acoco, Total and Texaco worked there in the eighties during the authoritarian rule of Mohamed Said Barre. With Barre gone in 1991, the multinationals declared force majeure and hurriedly left the country.

Roughly two decades later, Somalia is aggressively courting investment in hydrocarbons sector.

Dominik Balthasar, author of the HIPs report titled ‘Oil in Somalia: Adding fuel to the Fire?’ looked at the future of the country’s oil industry and the potential risks if the development of petroleum resources is mismanaged.

According to Balthasar, the political landscape in Somalia remains ‘shaky and hard to predict, not least due to the continued weakness of formal institutions and chronic contestations over political and resource control.’ Development of hydrocarbons in the current tense political situation in Somalia could easily renew conflict and prompt demands for secession.

Shortly after HIPS released its report news emerged that British oil company Soma Oil and Gas Company Ltd was under probe by the Serious Fraud Office for alleged corruption in Somalia.

Africa Confidential reported thatthe company made substantial payments - about US$295, 800 - over the last 18 months to top officials in the Mogadishu to influence decisions on oil and gas policy. Soma has denied any wrongdoing.

The company, which is chaired by former British cabinet minister, Michael Howard, secured an exclusive contract in Somalia in 2013 to conduct seismic surveys on 12 offshore oil and gas blocks. The deal gave Soma the right to subsequently pick other blocks it wanted to exploit.

Commenting on the Soma saga, Global Witness campaigner, Barnaby Pace, said this is one good example of the dangers of oil deals being done behind closed doors in fragile regions.

 “A major contract signed during a time of instability with a company without much track record or enough funds at the time of signing raises all sorts of alarm bells.

“There is a real danger of predatory oil companies snapping up Somalia's natural wealth,” said Pace.

The ACSS report said conflict countries or those experiencing political upheaval are particularly vulnerable to exploitation by predatory investors.

The report tracked the operations of Hong Kong-based consortium 88 Queensway Group, and it’s involvement in shady deals in at least nine Africa’s extractive sector including Tanzania, Angola, Zimbabwe, Guinea and Madagascar:

… Cultivating relationships with high-level government officials in politically isolated resource-rich states through infusions of cash, promises of billions of dollars in infrastructural development, and support for the security sector, Queensway has been able to gain access to major oil and mining concessions across Africa.

“…In many ways the prototypical predatory investor, Queensway frequently appears in resource-rich states in Africa where it can operate with high levels of opacity. In Angola and Zimbabwe, for example, few details from the contracts pertaining to Queensway’s investments—reportedly worth up to $9 billion in each country—have ever been disclosed to the public. In states where contracts have been unearthed, such as Guinea and Tanzania, the deals were revealed to be flagrantly unfavorable to the citizens of the host country. Having allegedly bribed African government officials and engaged in illicit arms trafficking and diamond smuggling, Queensway’s deals in Africa have often had a disastrous impact on governance.”

The African Center for Strategic Studies report focused on Queensway Group, which is linked to China’s government. Buried in the report are similar predatory companies trolling the continent. On its website, US-based ACSS describes itself as “the pre-eminent Department of Defense institution for strategic security studies, research, and outreach in Africa.”

Queensway’s operations in Africa are far from unique. Global Witness (whose investigations and advocacy led to the establishment of the Extractive Industries Transparency Initiative) has a fat dossier on Israeli billionaire Dan Gertler and his dealings in the Democratic Republic of the Congo.

Considered the ‘gatekeeper’ to DRC’s mining sector and friend of President Joseph Kabila, Gertler used opaque offshore companies to acquire major mining concessions on the cheap between 2010 -2012. He then sold the assets to multi-national companies in particular Swiss commodities trader GlencoreXstrata and Eurasian Natural Resources Corporation for billions of dollars. DRC is estimated to have lost out on at least US$1.36 billion in the process.

Global Witness,contends that these companies, despite knowing the corruption risk inherent in doing business with Gertler, entered into the deals and acted to protect his shareholdings in joint ventures in ways that do not make commercial sense.

Each of the deals has added to Gertler’s personal fortune –which now stands at around $1.26 billion according to the Forbes rich list – at the expense of the Congolese state and its population, most of whom are now scattered across the globe seeking refuge from conflict.

In January 2014, Gertler’s company, Nessergy, sold back oil rights to the Congolese government for 300 times the purchase price, having invested very little in developing the block.

Recommended read: How is exploitation of Africa’s natural resources shaping the development narratives of nations?