Coen Welsh | Nov 14, 2017 | 0
Emotionally it sounds good, but it is not good investment
It is somewhat baffling to find a foreign investor so eager to enter the local scene, it embarks on a social investment programme less than a month after it started construction of its facility. To the shareholders of that entity, it means that after all statutory obligations have been complied with and after all levies and other charges have been settled, the local community gets to benefit before the investors who supplied the capital, see any return on investment.
Recent events are not the first instance of social investment taking precedence over dividends. This pattern has been repeated so often over the past few years, it has now almost become a new standard to all foreign investors. This is indeed an indication of a very high expectation of future profits.
Looking at this from an analytical point of view, it seems the substantial social investment before even an ounce of metal has been produced, has replaced the older, more entrenched form of bribery where a project would not fly, were it not for a fat upfront lining of either the governor or the local general’s pockets. The latter is the more typical pattern in the extractive industries in African countries, and one that has often escalated into unrest and even civil war, when another beneficiary felt left out or not adequately rewarded.
It certainly is very noble that a foreign investor should think first of the local community before it thinks of its shareholders, but I wonder if the shareholders knew this. Would they have been so keen to invest in that particular entity if all these additional costs were reflected in the prospectus?.
There is no doubt that a successful mine, or any large industrial project, has an obligation to support the community that it operates in, more specifically the community on whose land the project is situated. But it becomes a merry-go-round type of argument when extractive companies complain about levies on the export of unprocessed minerals, and then dish out hundreds of thousands to local communities before even the most basic operational infrastructure has been established. To me, this has become the new currency of corruption and the only benefit is that the upfront “investment” goes to a large group of people, usually the poorest, and not only into the pockets of the governor or general. It is also noticeable that these upfront softeners are typically in infrastructure and not in cash. I strongly suspect this is done intentionally to ensure that the investment stays where it was intended to go.
But it is rather futile to erect a structure and then not support its functioning and operation. Everyday we hear about capacity building here and capacity building there. What is seldom realised is that the emphasis on capacity building is an acknowledgement that the local community does not have a single individual with the skill and competence to manage or administrate the new asset they have just graciously received from the over-eager foreign investor. It reminds me of the many pictures I have seen of Russian tractors on Zambian ploughlands, or locomotive units derailed and left to rot, on Tanzanian railway lines. Or fancy irrigation schemes that never dripped one drop, or whatever scheme in so many countries where the social funding was just the pretext to obtain permission for the real asset, usually a mine or a very large infrastructure project.
Social investment is the new vehicle to relieve foreign investors from the cash in their pockets, only it is done as part of the project finance, and it relieves the government from its own obligations to take care of those citizens in need. It can not be called bribery in the strictest sense but it certainly fulfils the same function. It buys approval where it typically would not have been forthcoming without some form of monetary benefit to all the clowns in the queue who deem it their right to pocket something in return for either permission or protection. In short, it is a form of extortion but one that has a respectable ring to it, is legal, and apparently benefits an entire community.
My conviction is that the foreign investor must pay what is required by law, then it must start its operation and get it to profitability so that it can pay taxes and royalties. Then, through its wage bill, both during construction and operation, must it spread the benefit wider into the community. And only then must it budget for social investment projects, and be prepared, not only to establish that project but also to carry it for several years as it matures and develops capacity. In my mind, that is the only ethical way of going about it.