By All Means Necessary (13 page)

The ultimate upshot of Kolstad and Wiig's analysis may be that when it comes to corruption, it takes two to tango. The 2011 investment by the state-owned China Metallurgical Group Corporation in Afghanistan's Aynak copper mine illustrates this. Following a highly competitive bidding process (in which the MCC beat out nine other firms), accusations of corruption emerged. A U.S. official
claimed that the Afghan minister of mines and industry accepted $30 million in bribes for awarding MCC the contract, and James Yeager, a consultant to the Afghan Ministry of Mines and Industry, concluded that the Aynak deal had undergone a “murky and insufficient tender process” and that “bribes were paid to Afghan officials at clandestine meetings in Dubai in the Aynak tender process.”
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Yet Yeager's seventy-eight-page, in-depth review of the deal ultimately ended up highlighting wrongdoing not by MCC but rather by the Afghan minister of mines and industry.

Yeager criticized the Ministry on several grounds. The Aynak Tender Evaluation Committee was ill equipped to evaluate the bids: the members themselves questioned their fitness to participate since they lacked the skills necessary to understand the process or determine which aspects of a bid were most important. (Not one had ever been part of a tender process.) Moreover, despite substantial support for institutional development by the World Bank, “licensing [and] contracting” were conducted as if “going through the motions” in order to fulfill some expectation of market standards. The reality was that considerable deal making and personal relations were essential to securing the mine rights. And perhaps of greatest concern, the minister hired a mandated outside transaction adviser who did not have the requisite experience, and then the minister proceeded to lock documents in his office, not sharing them with the transaction adviser. Yeager raised the possibility that bids were tampered with.
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In contrast to the Aynak mine case, opportunities for corruption are more limited in states with better transparency and stronger governance institutions. A senior oil official in Mozambique (itself hardly known for strong institutions) claimed that when the Chinese seek extralegal options they are rebuffed, and that when China occasionally presses for new rules they get the message: “Go back and refresh.”
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In Brazil, officials have found that despite their frequent explanations to the contrary, Chinese officials and businesspeople continue to believe that, with a sweep of the pen, Brazilian officials can overcome various restrictions and regulations on foreign investment in
agricultural land. The result is far less Chinese investment in Brazil's natural resources than many on either side would like.
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In 2005, the Communist Party theoretician Zheng Bijian articulated a developmental path for China that differed radically from that of earlier maturing economies. Zheng claimed China had rejected the model of industrialization that relied on “high investment, high consumption of energy, and high pollution.” Instead, its path forward would be marked by “economic efficiency, low consumption of natural resources relative to the size of its population, low environmental pollution, and the optimal allocation of human resources.”
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Unlike previous emerging powers, China also would not “plunder other countries' resources through invasion, colonization, expansion or even large-scale wars of aggression.”
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Chinese officials and media promoted the theory heavily for a few years, but few analysts in or outside the country would describe Chinese natural resource investment as Zheng did. China has not managed to follow a resource-efficient, environmentally friendly developmental path; by most measures, it ranks as one of the most energy-inefficient and polluted countries in the world, and one in which unsafe working conditions and low wages are common. And Chinese companies, used to operating in such an environment at home, are prone to export their practices abroad. China has, of course, not invaded other countries to exploit their natural resources. Still, many have argued that the pattern of extracting resources abroad but shipping them home for processing is colonialism in another form. For example, Nigeria's widely respected and pro-foreign investment Central Bank governor, Lamido Sanusi, writing in the
Financial Times
, called China's practice of taking primary goods from Africa and selling manufactured ones “the essence of colonialism.”
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Start with corporate performance on the social and environmental fronts. (We'll come back to the question of neocolonialism soon.) Chinese companies whose primary experience is within China tend to have limited experience operating at international
standards for social and environmental performance. To appreciate the consequences of this, it is useful to understand something about Chinese conceptions of corporate social responsibility (CSR). In the West, CSR typically focuses on voluntary social and environmental initiatives that go beyond measures directly benefiting the bottom line or required by law. In China, CSR is typically prescribed by the government, and it encompasses a much wider range of activities, everything from ensuring strong corporate governance to following national laws when operating abroad.
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(One way to think about this is that in China, the line between the legal and political realms is far more blurred than in the West, leading to a less clear distinction between social and legal responsibilities.) In the context of this broad conception, the results of China's national 2010 CSR survey are particularly striking. Only 5 percent of Chinese company officials surveyed said they had a high level of CSR understanding, 26.7 percent claimed a reasonably good understanding, 40 percent had heard of CSR but didn't know what it meant, and 22.9 percent said they had never heard of it. According to the survey's authors, there are several reasons for the weakness of CSR among Chinese companies: sometimes they lack an effective CSR evaluation system, sometimes there are few government incentives to encourage companies to engage in long-term CSR programs, and a third reason—perhaps offered tongue in cheek—is that “the world is not perfect.”
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One result for Chinese companies investing abroad, as noted by Professors Chen Dun and Zhou Jialei of the Beijing Technology and Business University and China Politics and Law University, respectively, is a serious image problem: “The lack of [CSR] initiatives has tarnished the overall reputation of Chinese enterprises, brands, and the country as a whole, greatly hindering the ability for new Chinese companies to continue the going out strategy.”
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Weak Chinese practices also mean that the prospect of companies exporting social and environmental standards to the rest of the world is exceedingly small.

This is perhaps clearest when it comes to environmental performance. Extractive industries such as mining and oil and gas
production are often problem-ridden regardless of who conducts them, prone to generate environmental difficulties, labor challenges, and social discontent if handled poorly. Contrary to Zheng's claim that China will somehow be different, Chinese multinationals engender at least as many problems in their drive for resources as firms from any other country do. Indeed, according to many observers in resource-rich countries, Chinese companies tend to come in below average in the corporate behavior ranks.

When it comes to the environment, this result is not surprising, given China's environmental conditions and corporate practices at home. The environment has long taken a back seat to rapid economic development in China, with low investment in environmental protection, few political and economic incentives for firms to minimize pollution, and only weakly enforced regulations and laws. As a result, China endures some of the world's worst air pollution, water pollution and scarcity, and land degradation. Pictures of Beijing's life-threatening smog or sixteen thousand dead pigs floating down Shanghai's Huangpu River in 2013 can be seen by anyone with an Internet connection. And what can't be seen is equally concerning: Beijing often refuses to release the full results of pollution studies, but without public information there is no accountability mechanism for polluters.

Without effective environmental regulations, transparency, and enforcement at home, Chinese companies are unlikely to bring strong environmental practices when they invest abroad. Instead, extractive industries bring with them the business model that has succeeded at home. One element of this is a lack of tradition in environmental impact assessments (EIAs), which are evaluations of the likely and potential environmental implications of a particular development project. Although EIAs are legally required for large development projects in China, companies frequently ignore the regulation. In many instances, they have similarly failed to comply with EIA regulations abroad.

The story of the Zhonghui Mining Group, the largest privately owned Chinese company operating in sub-Saharan Africa, reveals how difficult it is for Beijing to control the actions of Chinese
companies operating abroad. In 2009, Zhonghui signed a $3.6 billion deal with the Zambian government under President Rupiah Banda to develop copper reserves in Zambia. Chinese investment in the Ichimpe copper mine, one of two projects the company planned to develop, was estimated to create three thousand jobs for Zambians.
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The Banda government supported Zhonghui's investments; President Banda himself reportedly called the Ichimpe mine investment a “positive development that demonstrates the relevance of private investment in the mining industry.”
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Zhonghui, although a private company, received loans from and enjoyed a close relationship with the EXIM Bank.

As soon as construction began in 2011, however, Zhonghui encountered problems. It began building the mine without conducting an environmental impact assessment, violating Zambia's 1997 EIA regulations. A change in Zambian leadership in 2011 brought increased scrutiny to a large number of previous land and mining deals. Those favorable to the new administration described the scrutiny in terms of a shift toward better government; some of those who were skeptical believed that the new administration simply wanted to nullify previous deals to reap its own payments and bribes as the various concessions were sold anew.
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Which motivation prevailed in the Zhonghui case is unclear, but either way, the consequences were stark. The new minister of mines and natural resources, Wylbur Simuusa, told Zhonghui to “stop immediately” because the EIA and mine plan were not approved. The new government halted the Ichimpe project until Zhonghui could produce a valid EIA. By February 2012, Zhonghui had not done so, and the next month, the Ministry of Mines and Natural Resources issued default notices to Zhonghui, threatening to cancel their mineral processing and exploration licenses if they did not pay restitution. In May, the government charged Zhonghui, as well as Zambia's former minister of mines and minerals, with graft in the allocation of mining rights to Ichimpe.
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Whatever the ultimate reason the new Zambian government pursued Zhonghui, the company's ability to begin building a mine without an environmental impact assessment reflects weak accountability
in both the Chinese and the Zambian systems. Zhonghui was able to ignore the regulations of the EXIM Bank and the warnings of the Ministry of Commerce. EXIM Bank's environmental policy, for example, calls for corporations to undertake and enforce EIAs; if a company fails to complete an EIA, EXIM Bank funding is prohibited.
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In addition, China's Ministry of Commerce released a set of guidelines for foreign investment immediately prior to the Zambian election and identified the environment as an area for particular attention on the part of Chinese companies operating in Zambia.
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Yet Zhonghui was able to ignore all of this.

The capacity of Zambian governance institutions was also an enabling factor. Indeed, officials and activists there remain concerned about the country's overall capacity to protect the environment, particularly when dealing with firms that do not pay careful attention to environmental regulations. According to a Zambian copper mining expert, one EIA submitted by a Chinese firm for another mine investment was approved even though the EIA was in Chinese—a language no one in the Ministry read.
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Transparency is also a significant problem: even monies set aside for environmental protection often end up in general accounts. Environmental activists and others further observe that even if EIAs are sufficient on paper, it is a problem to ensure they are monitored for compliance. And as one activist noted, pollution in Zambia has been a long-term problem: “Penalties for pollution are far cheaper than not polluting in the first place, so companies will simply go to court.”
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Such a weak regulatory environment enables companies that are not subject to environmental rules by their home countries to pollute.

For the Chinese government, the challenge of ensuring that companies adhere to both domestic regulations and those of host countries is compounded by a second wave of investment led by small-scale enterprises. Fully two-thirds of the Chinese domestic mining industry is composed of these small firms, which operate outside the direct supervision of the central government, and whose environment, labor, and safety practices are only poorly regulated by local officials.

The reputational risk for China of these largely unregulated Chinese miners going out is significant. In March 2013, the Ghanaian
sector minister for lands and natural resources, Alhaji Inusah Fuseini, warned that small, unauthorized Chinese miners were creating a “bad public image” for China in Ghana and “could damage the growing friendship between Ghana and China.”
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The Chinese ambassador reassured the Ghanaian government that Beijing was launching a campaign to discourage Chinese miners—most of whom originated from one particular county in southern China—from coming to Ghana to mine.
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At the same time, he reflected a widely held belief within China that Ghana's problems must be addressed by the Ghanaian government. He recommended that the government tackle the problem by prohibiting local miners and chiefs from selling their land to Chinese miners, and ensuring that the Ministry of Land and Natural Resources more carefully scrutinize the licenses they grant.
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This senior-level diplomacy notwithstanding, during the summer of 2013, the Ghanaian government, through a combined military, police, and immigration task force, led a series of often violent raids against the illegal miners, leading to the deportation of more than forty-five hundred Chinese by mid-July.
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