Governance in the Mining Sector -Mozambique and Botswana

Governance, Shmuverance

Last week the EU and US ambassadors in South Africa were reported to have  at the Ernst and Young  Strategic Growth Forum Africa 2014, saying that their private sector was really looking for places to invest but was highly concerned about good governance. The  EU ambassador to South Africa Roeland van de Geer was reported to have said last week “Governance, the political will and the political climate is incredibly important, and there is an increased interest in investing outside the EU in countries that are transparent and open. Money will go where it’s welcome,” he noted during a panel discussion at the EY Strategic Growth Forum Africa 2014. US ambassador to South Africa Patrick Gaspard was reported to have added that a combination of good governance and effective regulation in any State culminated in the “perfect storm” for attracting investment.

Responding politely and with all due respect to their excellencies, their conclusions  regarding the importance of corruption in determining investment seem to be at variance with the facts on the ground.  There is no doubt that the appetite for corruption varies from country to country and firm to firm and US and EU firms are under strict national laws such as the Foreign Corrupt Practices Act in the US not to offer bribes or involve themselves in corrupt practices when operating abroad. There is no way that large mining companies want to do business in the eastern Congo but there are people who will help. That is precisely why in every capital or every country in Africa and throughout large parts of the world you will find ‘brown bag men’ who are paid ‘commissions or finder fees’ to act as ‘agents’ for large transnationals and pay the bribes to corrupt officials, something that could not be done directly. In this way the good and the virtuous Americans and Europeans do not have to do precisely what businesses from Latin America and Asia have no compunctions or even national legal restraints in doing. Thus the commissions paid to the brown bag men are efficient ways  to operate in environments where their governments and share holders do not wish to dirty their hands with the reality of daily business.

Of Botswana and Mozambique

Perhaps no contrast is sharper than that between Botswana and Mozambique. On the Transparency International Index Botswana ranks as the least corrupt country in Africa with a position of 30^th in the Transparency International Index but  Mozambique on the other hand ranks as 119^th out of 177. It has minimal budget openness and while it is a  beautiful country, with fine food  and wonderful people  it is just not a country that has  developed a  reputation for the probity of its officials and ministers.

Corruption exists everywhere and Batswana complain bitterly about corruption in the country but they are simply not used to the sort of grand malfeasance found in Mozambique. It is simply on another plain, another dimension altogether from the corruption found in Botswana. Perhaps the best example from Mozambique of the nature of that country’s  corruption problem is the murder of Mr Orlando José, who was Director of Audit, Intelligence and Investigation of Mozambique. His responsibility had included the internal investigation of customs services. He was killed on 26 April 2010, only three hours after announcing on national television that three imported luxury cars had been impounded in Maputo for various illegalities. Regrettably the death of Mr Jose is not the only case in Mozambique’s struggle against corruption. The violence and level of corruption in Mozambique is simply off Botswana’s scale.

 Location, Location, Location!

If one believes their excellencies, and you have to be very young to do so, then all the good governance loving resource firms of the  developed world would be investing in Botswana and not touching Mozambique with a proverbial barge pole.  Yet the opposite is of course the case. Mozambique is experiencing a massive boom in foreign direct investment and it is expected that Mozambique will have a growth rate of 8.3% this year, up from 7.1% the previous year Why, one asks in  Botswana  which is not only highly placed by Transparency International but also by  Canada’s  Fraser Institute  which ranks it very highly as a place to do be involved in mining activities. So why is Botswana getting very little FDI and Mozambique is booming?

Botswana has Africa’s biggest deposits of coal,  with an estimated resource of some 212 billion tonnes though the known reserves are much smaller. Yet it is the smaller coal fields in Mozambique that are being developed by the Brazilian giant Vale and exports are expected to reach 50 million tonnes per annum within a decade. The answer is location, it will cost Botswana USD10 billion to build a heavy duty railway from the Eastern Kalahari coal fields to the Indian Ocean and then if we are lucky we will have to pay USD20 per tonne to get Botswana’s coal to Mozambique. Being landlocked is a real drain on the development of Botswana.  For that sort of money you can put up with a whole lot of corrupt officials and so the choice is obvious, the rich deposits of the eastern Kalahari are still in the ground while Mozambique’s coal is already on the market. On top of the coal Mozambique has huge off-shore gas fields which being developed by, you guessed it, European firms like ENI and American firms like Anadarko. 

To give primacy to the role of corruption in dissuading investors from exploring and developing highly profitable natural resources is simply disingenuous. But equally underestimating the potential longer term effects of severe corruption is commercial folly. Companies enter many countries expecting to deal with corrupt officials. But sometimes they find the level of corruption is such that it is simply not worth the effort of staying and they leave, no matter how rich the resource or the market. This departure of foreign investors happens frequently and often quite publicly in countries like Nigeria.

These are the views of the author and not necessarily those of any institution with which he may be affiliated.