Tuesday, February 23, 2016

Guest Post: In The Zone: An Insiders' View of Sino-African Investment in Special Economic Zones

The team at the Ogun Guangdong Free Trade Zone

The China Africa Research Initiative (CARI) at the Johns Hopkins School of Advanced International Studies (SAIS) connected two teams of SAIS International Development Program students to organizations in Africa for their 2015-2016 practicum course. In this guest post, the team of students who consulted for the Ogun-Guangdong Free Trade Zone in Nigeria reflect on their experience. Support for the practicum was provided by a grant from Carnegie Corporation of New York and the Starr Foundation.

By Andrew Caruso, Danielle Nesmith, Teresa Peterburs, Egle Vilkelyte

“When we ask locals where China is, they point down the road to the zone,” said John Xue, COO for the Ogun-Guandong Free Trade Zone in Igbesa, Nigeria. China’s presence in Africa is growing through a number of vehicles, not the least of which are sizeable investments in special economic zones across the continent. The use of special economic zones as conduits for global economic integration and growth is familiar for China, having pioneered the transformative change of SEZs on their own domestic economy for several decades. The application of the SEZ strategy to the African context, however, has produced mixed results by most accounts. As part of the International Development practicum program, an intrepid team of SAIS students spent two weeks inside the Ogun-Guandong Free Trade Zone (OGFTZ) to understand the political, social and economic implications of the China-Africa SEZ strategy.

The Ogun-Guandong Free Trade Zone partnership began in the mid 2000s between China’s Guandong province and Nigeria’s Ogun state government. Located roughly 30 kilometers outside of Lagos, the OGFTZ was positioned to take advantage of one of Africa’s largest and fastest growing economies. Yet, hampered by a number of infrastructure and management challenges, performance of the OGFTZ in its early years was disappointing, and through a series of transitions, a new management team took control of operations in 2012. Now, as the zone’s majority owner and operator, the privately-owned Zhongfu Management Company represents an outlier for Chinese investment in Africa away from state-owned-enterprises and toward private industry. The novelty of the zone’s management model is further underscored by its recent performance – the OGFTZ has rebounded from a potential shut-down to its current position as one of the country’s most successful zones. One customs official indicated that customs duties have increased nearly 1000-fold since the time of management transition from 500,000 NGN in annual customs duties to over 500 million NGN.

Monday, February 15, 2016

Chinese Mining Projects in Africa: Is it an Investment?

Image credit: Stratfor 2012
After doing research on Chinese aid, loans, and investment in Africa for decades, and publishing a book in November 2015 on Chinese agricultural investment (or not) in Africa (Will Africa Feed China?) I have a healthy skepticism about claims that a Chinese company (or bank) has actually made an investment (or loan).

I think one of the reasons there is so much breathless reporting on the scale of what "China" or Chinese companies are doing (for example, this image) is that many reporters (and researchers) are not experienced with the challenges of investment in Africa. And they often don't know much about the details of the lifecycle of loans, mining investments, and other areas of business.

Take mining for example. You might read, as I just did in a student's paper, a source that says that a Chinese company is making an $8 million (800万美元) investment in uranium in Zambia. But let's put this into perspective. Mining has a number of stages, and a long lifecycle. It can take 10 to 15 years just to get a mine into production. An $8 million investment can only cover some early prospecting cost or between 1 and 2 years of advanced exploration. As a Canadian website points out: "Very few discovered mineral deposits become producing mines. ... About 1 out of every 200 projects that reaches the discovery stage moves to development." Below, some helpful guidance on the stages of mining investment and why a pledge may not become a project.

(1) Prospecting and Exploration.  This involves mapping, surveying, sampling and normally lasts for 3 to 5 years in a given area and costs about $1.75 million per year.

(2) Discovery and Advanced Exploration. Channel sampling, drilling, etc. This costs about $5 million per year and it lasts from 5 to 15 years.

(3) Development and Construction. Actually building the mine, bringing in the mining machinery, and so on, takes at least 3 more years, and is the most costly stage, usually at least $1.5 billion.

(4) Operation and Production. Up to this point, the mine is all cost and no benefit. Now there is some production, but many costs are still involved.

(5) Reclamation. Shutting down and reclaiming a site at the end of a mining investment can take 2 to 10 years, and cost $150 million or more.

These are Canadian costs in Canada (Canada is one of the top investors in African mining, quite likely larger than China). Working in difficult conditions in many African countries might lead to higher costs.