Extractive Industries and Conflict Risk

In what circumstances can the discovery and/or development of large-scale mineral resources bring countries or communities together, consolidating peace rather than driving conflict?

This question is the subject of the recently published Chatham House report 'Investing in Stability' (here).

As co-authors we found this a tricky subject area, filled with counter-factuals, definitional minefields, and serious methodological problems: how do we measure in what ways major resource projects increase or mitigate conflict risk? How do we attribute 'peace-positive' events or processes to the conduct of firms or others? How do we define 'peace' (net peace? local or national? etc) and who gets to do so? And so on.

The report proceeds on the basis that while energy and mining firms have increasingly clear responsibilities in ensuring conflict-sensitive operations and practices, the principal responsibilities are those of governmental authorities.

The tricky fact is that in fragile and contested states and situations -- the topic of this report -- governmental capacity is by definition very low or compromised. This increases the onus on responsible firms (and their financiers and insurers) to decide how, when and indeed whether to pursue large-scale projects in areas where the historical and political context makes it very difficult to see resource extraction and related revenues as capable of contributing to peaceful outcomes and processes. 

Jo

'Engage or fail'? Stakeholders in African investing

Africa investment risk advisers can sound good and play it safe by merely stating the obvious.

Yet the obvious is never pure and rarely simple. If it were otherwise, such advisers would find little demand for their services.

A recent report by FTI Consulting warns that investors in Africa risk failure if they do not 'engage' with government and social stakeholders: here.

Two remarks here. The first is that this is not new insight. The report calls itself -- and the strategy of engagement -- 'a new approach' to risk management in Africa. Well, not quite.

True, directly invested firms, especially in time- and capital-intensive sectors such as mining, have over time shifted towards seeking positive social impact, rather than just attempting neutral impact, mitigating negative impact, or not considering local impact at all. They have faced pressure to do so, on various fronts. To shift effectively they have had to re-conceptualise their relationship to host governments and communities. Some have also sought to see this embedded-ness as a value-creating exercise not just a risk-managing one. Still, it is a bold consultancy that presents as a new idea the notion that firms might further their objectives by engaging their host governments, and might protect and enhance their long-term value proposition by deepening their social license to operate through various forms of local inclusion, investment, outreach and disclosure.

The second remark is that consultants do their clients a disservice to simply state the obvious ('engage with stakeholders' ...) as if (a) the process of doing so will be self-evident, (b) the consequences of enhanced engagement are always manageable and foreseeable, (c) the identity of relevant stakeholders is clear and (d) these stakeholders are passively awaiting engagement by corporates and have no mixed feelings or motives of their own. None of these is typically the case in fact.

True, responsible firms with long-term plans in African localities would be well advised to pursue more deliberate, strategic and intensive stakeholder engagement. But the FTI report frames this as a risk-management strategy, when in fact the process of expanding and deepening links to host governments and social groups is neither easy nor risk-free. Few serious firms in Africa would read such a report and say 'Thank you -- it had never occurred to us to reach out locally'. They are far more likely to say 'Yes but it is hard, who is who, what do stakeholders really want, is this our role, where does it expose us?' and so on.

Reports such as FTIs make it seem as if not engaging is risky, but simply 'engaging' solves all social and political risks. That is far from obvious. 'Engaging' can itself become the source of (ok often manageable) risk. It assumes governments and communities speak with one voice, know what they want, understand firms' viewpoints, etc. Now these things are better handled by firms adopting an explicit pro-engagement mindset, actively seeking to find shared ground with authorities or other stakeholders, or delineating the extent of their responsibility. But merely calling on firms to 'engage with stakeholders' tells them nothing about how to do so, and suggests a far easier, smoother process than ever exists in fact.

I say all this partly because of my own fatigue (and my perception of generalised fatigue) at the constant refrain about 'engaging'. It heavily marks the whole area of sustainable / responsible business, and of cross-sector cooperation on development issues. My own blog goes on about it. So does a policy brief I wrote, published last week, on engaging the private sector in peaceful development in Africa. Yet I think a healthy dose of realism is required.

We use 'engage' as a short-hand, convenient phrase in the context of business-government-social relations because our intuition and ideals tell us it is better (for development impact, risk management, etc) than non-engagement. Yet it is far easier to call for than to do. Too few in my field seem prepared to admit this, as a recent post in effect noted, as did another post on enthusiasm for the act of public-private 'partnering'.

Last week's post made the same point in relation to NGO-business collaboration: on balance productive and advisable, but hardly a smooth ride.

Jo

Post-script:

The FTI report's mini-poll of WEF-Africa attendees does reinforce a good point: foreign investors in Africa have a long way to go in communicating better with / to local stakeholders. In previous posts (see 'Corporates, Communities, Communicating' here) I've noted that firms involved in the bumpy African growth story can improve their messaging about the nature of the constraints they face, their limited ability to meet social demands, the delineation of their responsibilities from those of government, and so on. High expectations of firms (individually and as a class) are a source of risk, both directly and in feeding arbitrary and/or populist-placating fiscal demands and regulatory actions.

The politics of business: 'crazy for good'

Politics, as they say, is a tricky business.

For companies this makes the politics of doing business in tricky places ... particularly tricky.

This is so even (or perhaps, in complex settings, especially ...) where a firm is trying to promote public good-spiritedness and aspirational values, typically in pursuit of its strategy for market position or building reputation / mitigating reputational risk.

Last week in Zimbabwe, Coca Cola found that its new can of Coke opened something of a small can of worms -- highlighting how even firms which adopt a studied neutrality on domestic politics can unwittingly find themselves forced to say where they stand on tense, changing local political issues, and in hard cases to make or avoid value-ridden judgments about which side of history they [may be perceived to] stand on.

The Zimbabwe issue arose as an incidental part of Coca Cola's global marketing / social awareness campaign 'Crazy for Good'. One feature of this is an adaptation of the standard red Coke can, altered to show open hands -- waving, reaching out to each other.

The problem (if it is one) is that in Zimbabwe, red is the colour of the Movement for Democratic Change (MDC-T); an open-palmed hand has long been its distinctive party symbol.

By contrast, its rival (Robert Mugabe's ZANU-PF party) is typically associated with the clenched fist gesture so often used by its long-time leader.

The 'Crazy for Good' / 'Open Friendship' campaign and its new Coke can happened to coincide with the lead-up to probable 2013 elections given that the mandate for Zimbabwe's dysfunctional post-2008 ZANU-MDC power-sharing government expires at the end of next month. Some over-sensitive ZANU politicians accused Coca Cola of blatantly aligning its brand with the MDC -- just in time for electioneering. The brand I suppose is typically associated, through the company's efforts over decades, with fun, freedom and friendship.

Coca Cola of course can easily refute the suggestion, pointing out that its brand colour has been red for decades and that this is a global campaign. (In a post-Arab Spring world in places with restless politicised youth one wonders how threatening some of the world's more paranoid and less secure leaders might find any new version of Pepsi's long-running mantra with its emphasis on a 'New Generation... !').

Anyway, the incident neatly raises the dilemmas that brand-sensitive firms can face in juggling neutrality on political issues (on the one hand ...) with their desire to align their brand with aspirational sentiments or universal values (on the other hand ...).

This dilemma is a subset of the wider difficulties global firms have in navigating local political turbulence, and often the strategic decision of whether to abandon pretence at neutrality, subtly re-align oneself for alternative possible futures, or hope that one's firm is not found exposed at the intersection of politics and business.

Coca Cola's recent full-page newspaper advert in nearby Swaziland raised some controversy -- it wished happy official birthday to the king of Africa's last absolute monarchy, which has strongly suppressed alternative political expression (even if the royal family as an institution retains considerable popular loyalty especially in rural areas).

Then there's a firm like South Africa's Nando's which took a different tack: one advert openly mocked Mugabe, resulting in threats to its staff in neighbouring Zimbabwe -- it withdrew the adverts, perhaps having calculated that Youtube hits would continue soaring and that the kudos in the SA market was worth whatever happened in the much smaller Zimbabwe one.

Close political ties can be handy, but also be a handicap ... That is, these issues are obviously especially acute in places like Angola where the local business elite (whose cooperation may, as there, be needed for any viable corporate strategy) is for all material purposes indistinguishable from the political elite. Relations, explicit or otherwise, that make things easy or which are unavoidable in the short term might carry with them long-term liabilities (whatever their implications on foreign corrupt practices laws and the like). Operating hand-in-glove with political elites carries both near-term reassurance and longer-term risks...; yet remaining even-handed can be difficult where one's brand or operation is singled out by either the incumbent or the opposition (or activists).

Greater demand for electoral democracy in sub-Saharan Africa means that firms which in the old days needed only to appease the incumbent may need to consider, for example, the risk that a change of administration might make them vulnerable where they are perceived to have 'taken sides'. Firms that have already sunk a lot of capital into a country or which hope to be there for a long time to come will need to strategise around the prospects of change and of the implications (there and abroad) of enforced lack-of-change.

Sometimes the risks are in plain sight; sometimes they are foreseeable even if unlikely; sometimes they take firms by surprise. In some cases, mere presence in a controversial country represents a value-based decision by reference to democratic or human rights norms -- or is seen that way.

In many cases, the firm's licence-to-operate and brand will emerge intact, perhaps only with a rap on the knuckles; most will be able to make a good fist of staying well away from political controversy. Firms that are newly entering have one set of dilemmas, but those with existing investments tied up in a country to some extent have one hand tied behind their backs in terms of backing down in the face of politicised counter-campaigns. The main consideration for brands with global exposure is an awareness of the importance of consistency across markets on value-based issues: the left hand needs to know what the right hand is doing.

Policy choices impacting the business environment can be highly political -- raising the question for business of when and how to explicitly join national conversations about such issues. In considering the role for socio-political leadership by business, this blog has referred for example to the dilemma individual firms face in South Africa in putting their heads 'above the parapet' rather than remaining silent. Speaking under the umbrella of a business chamber mitigates that risk. Note that this last week apparently saw a Guatemala business group criticising the genocide conviction of a former head of state: now that takes 'private' business engagement on public interest issues to a whole different level!

Jo

See the South Africa version of the Coca Cola 'Crazy for Good' campaign -- here.

See one (note -- mainly anti-ZANU) news story of the Zimbabwe-Coke story -- here.

See my earlier post on the Swaziland-Coke story -- here.

See the Nando's advert about Mugabe -- here.

See discussion in an earlier post of Coca Cola's entry into Myanmar -- here.

See discussion in an earlier post of (limited) reputational risk from mere country presence -- here.

Corporate (re-)entry, sanctions and risk: the Myanmar / Burma example

Geopolitics, universal values and corporate strategies intersect where firms decide to (re-)enter 'transitional' states emerging from relative international isolation.

Previous posts have discussed African settings where bilateral or bloc-mandated sanctions apply (from Sudan and Eritrea in the Horn of Africa, to Zimbabwe and Madagascar in southern Africa), but this week's post looks at Myanmar (Burma).

On April 22 the EU lifted all its remaining trade, economic and personal sanctions on Myanmar (bar the arms embargo) in recognition of its reforms towards greater inclusivity and political space.

So I asked my Oxford Analytica colleague Herve Lemahieu -- who follows the country closely -- a few questions about the issues where risk, regulation, reputation and responsible business conduct meet in post-sanctions Myanmar:

JF: What have been historical (1990s and on) patterns of Western corporate engagement and how quickly is this changing?

HL: “Two decades ago, Western companies were rushing out of Myanmar under pressure from shareholders and activists. Pepsi Cola, Apple, Levi Strauss, Unilver, Texaco, Carlsberg, Heineken, Disney and Hewlett-Packard were just a few of the big names to exit the country following high-profile campaigns. In the mid-1990s and into the early 2000s, Western economic, financial and political restrictions, in place ever since the failed pro-democracy uprising of August 1988, were steadily ratcheted up and bolstered by consumer and civic pressure groups discouraging all trade, investment and tourism.

There is little evidence that this boycott had much more than symbolic value. Twenty years of military rule and Western sanctions allowed a narrow, state-linked business elite to thrive while hitting the general population the hardest. The West lost influence while allowing Asian competitors an open field. Rather than acquiesce in Western calls for sanctions or add to pressure for regime change, Beijing and ASEAN favoured the military regime's own top-down transition and seven-point roadmap to ‘discipline flourishing-democracy’.

Many western observers failed to recognise what the military regime was trying to do during its two-decade rule because it did not conform to categorical ideals of democratisation. However, the integration of opposition leader Aung San Suu Kyi and her National League for Democracy (NLD) into the fold of the country's ‘disciplined democracy’, in which the military remains the most influential de-facto and constitutional powerbroker, has been judged ‘good enough’ for Western businesses to rapidly return to one of Asia’s last remaining frontier markets.”

JF: Are corporate engagement strategies out of line with diplomatic ones, and does it depend on whether Western or other company / government?

HL: “Government and corporate policies are now, broadly speaking, mutually reinforcing. Most Western governments have conceded that sanctions exercised only limited political leverage over the previous military regime, and are opting instead for pragmatic engagement to secure political and commercial goals in the country. For their part, many companies have learned from past experience to become more risk-averse and reputation-conscious as they prepare for market re-entry. However, there are still nuanced differences in the economic diplomacy espoused by different capitals, with varying private-sector implications:

· Japan has led the field in normalising ties and increasing its commercial presence in Myanmar -- something political liberalisation now allows it to do at far less cost to its international reputation.

· The EU has today agreed to follow Norway, Australia and Canada by permanently lifting sanctions, rather than conditionally renewing their suspension.

· That leaves the US the only country to maintain curbs on the country as part of its piecemeal ‘action-with-action’ approach of easing sanctions through presidential waivers.

Corporate and diplomatic strategies still clash in as much as US business leaders have complained that Washington's policies require extensive compliance paperwork and present legal/reputational uncertainty, while European and Asian rivals gain first-movers advantages. Many US multinationals are undeterred, including Coca-Cola, General Electric, Hilton Worldwide, Visa International and MasterCard which have all entered Myanmar in the past six months.”

JF: Is there a case for saying that corporate engagement at this time helps support wider reform / transition in Myanmar? What counter-arguments do you hear among those watching the country?

HL: Some Western politicians and lobby-groups have sought to portray Myanmar’s transition and the resurfacing of ethnic and religious violence as, respectively, evidence of the effectiveness of, and continued need for, conditionally withholding western business activity in the country. However, governments and voters alike are becoming more sceptical of their ability (or indeed the general desirability) to micro-manage political change through blunt economic polices implemented from half-a-world away.

As the logic for broad-brush 'complicity-by-general-association-or-presence' risk starts to recede for corporates re-investing in the country, risk will start to lie far more in particular relationships and actions that firms might take, such as labour relations, community and environmental impacts. Given the absence of well-developed physical, financial and regulatory infrastructure, the challenge will be for corporations to self-regulate, hedge risks, and assess their own ways in which they can contribute to the wider reform process.

Already, we have seen prospective and actual businesses drive the government’s efforts to adopt international standards, from labour rights to financial regulation and environmental protection:

· Nearly 400 government officials were sent to jail on corruption-related charges between mid-2011 and December 2012 (almost as many as political prisoners released in the same period). This includes a crackdown on the endemic practice of accepting or soliciting kickbacks and bribes to award contracts.

· The government is negotiating entry into the Norway-based Extractive Industries Transparency Initiative and will likely remodel its energy contracts according to the voluntary regime’s stringent requirements for financial transparency, environmental standards and corporate governance for the natural resources industry.

· Japanese trading houses – including Mitsubishi, Mitsui, Marubeni and Sumitomo – have spearheaded efforts to diversify away from the extractives sector by investing in the labour-intensive sectors, such as manufacturing, services and agriculture.”

My thanks to Hervé.

The Myanmar outcome came a day after the Bahrain Formula 1 Grand Prix, where the organisers (and indirectly, the sport's many sponsors) were forced to defend their decision to hold the race in the face of a campaign for greater political freedoms in the Gulf state. Politics, human rights and calls for sporting boycotts are nothing new, but there is no doubt that especially brand-sensitive corporates nowadays need to navigate these issues more swiftly, consistently and comprehensively.

For previous posts on this topic, see here (corporate engagement in ‘pariah’ states), here (entering 'closed' complex settings like Ethiopia) and here (reputational risk from mere presence?).

Jo

ps -- of note to a blog on this general subject matter relating mainly to Africa, the US Supreme Court last week rejected Nigerian plaintiffs' arguments that US courts should exercise jurisdiction (under the ATC Act) over claims against Shell for conduct allegedly occuring outside the US. In a future post I'll reflect on litigation strategies in the context of wider efforts to 'level the playing field' for responsible business activities by firms -- whether from the 'West' or 'emerging markets' -- in Africa.

Corporate Sustainability in Africa: below the State

Big multinational firms operating in Africa are finding host governments ever more proactive about seeking the private sector's help in improving the business climate -- and in helping government's political and policy challenges in meeting social and developmental goals.[*]

Business-government relations were one topic under discussion at the summit I attended last week in Cape Town, 'Growing Beyond Borders' (Strategic Growth Forum).

Discussion on the topic covered familiar issues, for instance, delineating the proper relative roles of governments and business in providing public goods and services like safety, healthcare and basic infrastructure (see previous posts on this Blog on 'business and government').

Yet what about relations below the national level, between foreign firms and provincial/state or municipal/local government authorities?

This relatively neglected topic did not come up at the Forum -- or at least the distinctions between different tiers of government did not. What important public policy (and related corporate strategy) issues arise when influential firms and sub-national governments engage one another -- what opportunities exist to promote public interests, what risks arise to private sector interests?

The fact that a large majority of corporate social investment / corporate responsibility strategies and spending are very local in nature and impact means that firms are, especially in the extractive sectors, often very familiar with sub-national government relations. Moreover, it is only natural that where the subject is nationally-applicable fiscal or other regulatory measures, the focus will instead be on business dialogue with the national government.

But in general I think it is fair to say that debate on business-government relations in Africa focusses on national goverments in a way that neglects an important trend: in the same way that investment into Africa often focusses on cities rather than countries (many firms have a Lagos city/state strategy not a Nigeria-wide one, for instance), city and provincial/state leaders in Africa appear to be becoming more proactive about directly engaging externally on everything from investment self-promotion to climate change mitigation.

If so, this trend holds the promise of finding, beneath the national-level, a wider set of people and institutions among which business-government dialogue and cooperation can occur on alleviating social or environmental or governance bottlenecks or backlogs, on giving substance to rhetoric about pro-sustainability public-private development partnerships, and so on. For example, corporate contributions on air or water pollution mitigation, youth job-creation, or greener supply-chains may be too political or daunting when approached at a national level, but responsible business might find more to talk about and do (and show measurable progress on) with a mayor's office.

This 'emerging' trend of greater foreign investor engagement with sub-national African public authorities may not be new (much pre-colonial trade and diplomacy developed between city-states that pre-dated present-day countries; city officials have a taste of 'foreign policy' roles when they bid to host major world sporting events). Nor of course are more recent trends of sub-national government pro-activity on foreign policy or global issues limited to Africa -- witness various US states moving ahead with their own carbon emissions-related legislation whatever Washington's position in multilateral forums; my friend Jabin Jacob, for example, is an expert on sub-national investment and other relations between Chinese provinces and Indian states; Australian state governments have fairly developed 'foreign investor relations' capacities.

In the African context, Nikia Clarke (here in Oxford) has recently pointed out the growing direct bilateral relations between Chinese cities and provinces with African ones, irrespective of national-level interactions. Mineral-rich provinces of large states with weak central governments -- like Congo-Kinshasa -- are increasingly confident in making direct overtures to foreign investment. One is just as likely, at an African investment conference, to find a Nigerian state governor as one is to meet a federal investment promotion official. Often, there is considerable scope for such city or state officials to discuss where the private sector can help alleviate local social or developmental problems, furthering the local public interest while cementing a firms' local 'social license' to operate, or its ease of operations.

Having briefly mentioned above the promising dimensions of such trends and relationships in terms of advancing sustainability concerns, two caveats spring to mind.

First is that while we should welcome plurality of 'bottom-up' inputs and initiatives by all levels of sub-national government on globally-shared sustainability challenges, and the private sector's role in these conversations and activities, these are ultimately no substitute for the sort of multilateral or bilateral movement that follows dialogue between sovereign states. Second is that in the African context, relations between central and provincial or city authorities will often be highly political, some even fraught with a history of secessionism: corporate engagement with sub-national governments to address particular localised issues or build local regulatory capacity might, executed poorly, create risks of adverse reaction from central government.

Jo

* Ps -- the pattern of greater business-government dialogue relates to countries other than South Africa, where relations between big business and the ANC-led Alliance have particular distinguishing features: for previous posts see for example here (balancing too much and too little business access to officials) and here (building trust) and here (private sector role in development).

Mining and development: 'A' to 'Z' of the 2013 Mining Indaba

The nature and extent of mining firms' role in meeting host country / community development aspirations is a daunting and complex topic.

This post comes from South Africa, where yesterday I attended the final day of the mammoth African Mining Indaba (investment conference).

The final day focusses on sustainability issues in large-scale mining -- but the 'A' to 'Z' title of this post over-promises, since I have no intention on summarising the conference.

I propose only to mention two thoughts I had while listening to experienced CEOs, the ICMM and others on sustainability / mining-for-development / mining-as-development issues. One ('A') is an Australia-related thought (or attempted analogy); the other ('Z') is Zimbabwe related. Mining has been a big part of the industrial history of both these vastly different countries that have in common only that I happen to have lived in each!

Scaling-up social investment

How do firms under pressure to improve livelihoods balance payments to appease individual workers (and so the collective labour-force), with large-scale social investment that benefits such a group but in a less direct fashion?

The Australia example is this. In 2009, in an effort to stimulate consumer spending and stave off recession, the government offered individuals small packages of cash that together amounted to billions of dollars. I was able to buy the predecessor to this laptop. Yet the pay-outs were criticised on the basis that one-off cash to individuals could not be justified relative to the large, once-in-a-generation infrastructure project that the same cash total could fund (with ancillary job-creation and other benefits).

Major South African platinum (and other) mining firms last year offered wage increases in response to stoppages partly caused by complaints about cost-of-living and access-to-basic-services issues in the mine site area. Such strategies may come at the cost of longer-term ones, where the same funds are used to build shared infrastructure (such as water and sanitation). The latter strategy raises a host of difficult, familiar issues about distinguishing corporate from government duties. Nevertheless, yesterday's discussion at times seemed apolitical: it will be intensely political, for example, to persuade local authorities in the Rustenberg area of South Africa to build (or allow companies to build) more permanent housing for a workforce that local residents sees as foreign (being heavily comprised of migrants from the eastern Cape, Lesotho and elsewhere).

Scaling up research on social investment

The Zimbabwe analogy is this -- and it relates to the need, in my view, for more research on the empirical links between social investment and reduced political risk.

It is routinely -- as at Indaba -- stated that increased corporate investment in social services builds the social license to operate, and it is inferred that this lessens the overall risk of sudden or catastrophic governmental interference with a mining asset. As well as reducing the prospects of local friction and resulting disruption (although spending and local procurement or hiring can create or worsen local grievances and competition, too), it is certainly arguable that investment that consolidates the social license also reduces the likelihood that a mining or oil/gas site will provoke local political energies that lead to national adverse political attention, thus putting the overall formal license to operate at risk of political scapegoating.

Yet this link is not a necessary one -- hence the need for more empirical studies. It is not necessarily the case (look at platinum firms' experiences in Zimbabwe recently) that a better social performance profile immunises a firm from high-level political pressures. Many of the processes at work are driven by issues and forces far bigger than an individual site or firm; the company's reputation and goodwill might be irrelevant in terms of how government treats it.

The actual Zimbabwe analogy I meant is from white commercial farming in the 2000s. Others have studied this far more closely, but it seems to me that there was no necessary link between farmers who had refrained from developing their workers' livelihoods (electrifying compounds, water, clinics, etc) and the likelihood of their properties being subject to formal compulsory requisition (or informal and illegal seizure by political elites or groups). Being a better citizen farmer might have helped reduce the scope for scapegoating any individual, but most farmers were at the mercy of a much wider and more complex, irresistible set of forces. In that process, their responsible actions in social investment terms often had little impact on whether they retained their property or not.

The point is that social investment strategies are both right, and make business sense. Yet more research is needed on the link between them and reduced political risk. Indaba speakers merely asserted this link.

So what?

Each year that I've been, the Indaba highlights how intensely political, ultimately, it is to enter another country and extract its resources. Navigating the risks and opportunities involved is part of my day job; thinking about the duties and dilemmas of the private sector (vis a vis government) is this blog's subject. No-one has a monopoly on solutions to these pressing, difficult issues.

Input welcome!

Jo

See previous posts on resource nationalism and other topics for discussion of related issues, both in South Africa's (rather unique, yet also not) context and more broadly.

Corporate diplomacy: engagement in 'pariah' states

2012 saw a somewhat unprecedented level of Western diplomatic engagement in Myanmar / Burma. Accompanying this has been a surge of commercial interest in the opportunities apparent in the country's re-opening.

2013 then began with Google's chairman announcing plans to visit a far more diplomatically isolated country, North Korea (despite the US state department's discomfort).

2013 is also the year that I hope will finally see publication of a chapter I co-wrote, albeit on aid not investment, for a book on Principled Engagment in 'Pariah' States (Kinley and Pedersen, eds.).*

The Google-North Korea visit was not necessarily undertaken in a corporate 'pre-entry' capacity, but raises interesting questions not just about diplomatic strategies for engaging with isolated regimes, but for the role of corporate country entry or outreach in such 're-opening' processes or attempts -- whether by state diplomatic design or independent initiative.**

In the continent I cover, Western business activity in a number of countries is constrained by, among other things, the real or perceived reputational or regulatory risks of seeking to enter where US or other sanctions apply in some form or another.

Sudan, Zimbabwe, Eritrea and Madagascar all (I think that's all) to some extent can be categorised as sanctioned and subject to varying degrees of Western diplomatic isolation. The late apartheid era in South Africa, or business activity in Rhodesia after 1965 are obvious African examples of controversial corporate engagement continuing. If, as some think, this year brings the prospect of transformative political change in Zimbabwe, the question could arise inside firm X or Y of whether a more proactive country engagement strategy ought to have been undertaken or planned in anticipation of a more relaxed or less controversial and complex environment for business.

Reach out or hold back?

Such situations raise peculiar issues for firms and for policymakers, ones where private initiative and public interest overlap closely.

Corporate strategies in such situations must balance potential 'first mover' advantage with the potential to miscalculate the extent of transformative change, leading to serious commercial losses or sustained pro-democracy activist campaigning (the latter on the basis that the engagement with a 'reforming' regime lacks a sufficiently principled basis). Moreover, if the firm's move is considerably out of sync with its home state there is also the possibility of limited home country diplomatic support in navigating complex local politics in the receiving country.

Firms like Google whose products or services so directly involve questions of political values and human rights such as freedom of expression have a clear commercial and reputational imperative to develop a clear, consistent and communicable 'foreign policy', for example in situations where more repressive governments seek to very narrowly constrain the company's operations. Such strategic issues are not limited to 'pariah' states, but the extra public attention and diplomatic sensitivities involved in such settings raise the stakes.

This blog post cops out now -- I don't purport to offer a 'solution'.

At the level of state diplomacy, my own instinct tends to lie with principled engagement, given how counter-productive (and damaging to the ordinary citizen) isolation can be. The UN's 2011 'Ruggie' guidelines on business and human rights, among other things, give increasing normative guidance to firms in terms of what the 'principles' might be in 'principled engagement' by corporates in politically isolated states:

* In some situations, a US company (say) that is far more comfortable with country (re)-entry than the US State Department could have a role in contributing to political 'normalisation', and so lead the way...

* ... Yet diplomacy is an art, and there will remain many situations where firms would be well advised to follow their government's lead even if this feels excessively cautious and appears to handicap them relative to competitors from other states.

It will depend on the situation, and the company's exposure in particular to reputational risk: the private sector inhabits a public world. In high-profile 'pariah' country entries, it can quickly become a very publicised world indeed.

Happy 2013!

Jo

Related previous posts include those on 'corporate foreign policy' (here) and on 'business and nationalism: foreign policy attribution' (here).

Here is a link to a paper related to the 'Principled Engagement' project / book.

If you're interested, Jabin's blog (China in India) is here.

* The idea that Zimbabwe, for instance, is a 'pariah' state is one that I find somewhat problematic, not least because such mindsets / categories obscure avenues for principled engagement; it is debateable whether targetted Western sanctions there are having their intended effects, while I am told there are many in Washington who see US sanctions on Sudan as obsolete and retarding a whole generation's development.

** There's a lot to be said about avoiding seeing such settings as vacuums free of transnational business activity or penetration and simply lying waiting for 'entry'. Also, 're-entry' overlooks that many Western banks and firms have never left a place like Zimbabwe throughout its 'isolation', and there's by no means any particular principled reason why they should have done so.

Inclusive growth in Africa: the 'good-times gap'

Is there a name for the high expectations accompanying new major resource finds in sub-Saharan Africa? I will call it the 'good-times gap': the distance between what locals might hope to see, and the potential for a significantly less transformational outcome.

Last week I attended the 'Galvanising Growth' conference at Oxford's Blavatnik School of Government. Of the many issues that emerged, one stood out -- at least in the session on governance of natural resources.

One can approach that issue from many angles -- revenue transparency and management, conflict prevention, sustainability and environmental issues, or (which was the conference's intended overall theme) in terms of capitalising on natural resource wealth to deliver economic growth.

I think we all should have revised the topic explicitly to 'galvanising inclusive growth' and spent more time developing the points made by various speakers -- from Nigeria's finance minister to a senior Rio Tinto executive -- on the imperatives of local job-creation and appropriate sharing (as between investors, governments and communities) of both the revenues and responsibilities related to major resources projects.

On the Paul Collier-mediated resources panel, in my view one issue came through strongest: the problem of explaining, to those populations who should stand to benefit from newly-tapped resource wealth, the many caveats potentially involved in its realisation. The challenge is really one of education, of 'public relations' in its literal or deeper sense. Especially where youth unemployment is high, the disappointment from unmet high expectations can translate into political instability, or 'vuvuzela politics', resource nationalism and populist politics. Sometimes 'populism' is merely a call for fair terms or distribution, but it can have significant impact on investment. Poor information compounds it.

It is a problem shared by governments and firms exposed to the consequences. Often even the officials involved in negotiating deals may not fully appreciate the long timeframes and the potential for changed global conditions to substantially affect local projects, or other variables. Misapprehension is likely to be higher on the street. Listed firms are obliged to report finds or deals to the market. Increasingly, this information (often expressed in terms of billions of dollars of reserves or projected capital investment) is available in the host community. Yet its wider context may not be appreciated. Locals who receive news of a $1.2 billion dollar project may believe that this sum represents what will be transferred to government.

Many colleagues working in corporate external affairs, corporate responsibility etc., spend a lot of their energy on social impact / social investment reporting where the audience is the market, the potential regulator, the Western media or NGO world, all in the home country. Yet from a risk perspective, the main audience that suggests itself is perhaps in the host country where projects are actually situated. Major mining and hydrocarbons projects that have triggered many media headlines -- and boosted GDP growth projections -- seldom directly create as many jobs, at least for the less-skilled. Helping to stimulate local economic opportunities while addressing job-creation expectations will remain pressing challenges for extractive sector firms and their host governments.

If 'uncertainty' is an indicator for risk calculations, the uncertainty of host populations about what developing their resource entails is a relevant issue on which risk-mitigation and 'external relations' might focus. It is tricky: how do firms stimulate a national conversation about new revenue wealth and its management -- and in the process, say, manage overall popular expectations -- without either trespassing into government's zone or triggering its disapproval, or other unexpected consequences? How do firms align themselves with government education programmes, if any, on the new resource?

One other stand-out theme from the expert panels was this: the immense difficulty, whatever the design of one's policy, of implementing public policy generally. The humility that shared experience suggests we should harbour on implementation is not unrelated to the 'good-times gap': if policymakers should be more realistic about what is really do-able, one can see why there's a need to dilute the expectations of recipient / host communities about major resources projects.

As we know, and may come in future to see more starkly, greater awareness + unmet expectations = a source of instability risk for investors and governments. Yet from the perspective of a transparency activist -- of which there were a few at the conference -- these high hopes might also help fuel local demand for greater accountability on the part of state officials for the proceeds of natural resource extraction.

Jo

Various previous posts (for example, here) have dealt with dilemmas where the private sector attempts overtly to enter public policy debates in Africa.

Many previous posts deal with the related issue of firms 'educating' counterparts in government about their constraints or contingencies -- and problems with thinking of it like that.

Last week's post, including the Blavatnik conference link, is here.

Business and nationalism: foreign policy attribution

Are there potential African analogies to the way that recent anti-Japanese nationalism in China included calls in China for boycotts of Japanese products?

The issue illustrates the potential rapid (and rabid) emergence of a nexus between high geopolitics and the ostensibly apolitical sphere of private firms and consumers:

* So it is that contested Beijing-Tokyo (and Taipei) claims to the Senkaku ('Diaoyu') Islands have led recently to campaigns in China to boycott Japanese electronics, cars and other goods, and indeed to violence targetting such. Moreover, iPhone mapmakers are now more conscious that hosting a map stating one status or another may be taken as a corporate endorsement of a state position.

* So too French winemakers over twenty years ago suddenly found their produce boycotted by Australasians not because of anything relating to how it was made (or tasted) but -- as my colleague Stephanie Hare reminded us -- as a mark of protest against the French government's persistence with South Pacific nuclear tests.

But this blog focusses on Africa. What scope exists for acute periods of high nationalist (or racial) sentiment, stirred up by popular reactions to foreign policy-level / state-to-state issues, to manifest as boycotts or violence against firms and individuals -- not because of any conduct on their part, but only by virtue of their association with the country whose foreign policy actions or positions are seen locally as problematic?

[We can put aside South Africa's recent government regulation compelling vendors to label goods made in Israeli settlements beyond the 1948 borders as made in the 'occupied Palestinian territories'. That is a different case, one of state action, founded in a classic foreign policy position dispute, affecting private commercial conduct.]

Bigger transnational firms may be advised to develop a 'corporate foreign policy' to anticipate or respond, among other things, to cases where they face public pressure in a host state as a result of being associated, in local minds, with the geopolitics of their home state.

South African retail and telecoms firms doing strong business in Nigeria this year experienced a brief period of turbulence as Nigerians responded to a diplomatic dispute between the two countries over visa issues.

But I think that in the main in Africa, future boycotts or violence that we may see targetting foreign firms or businesspeople are more likely to be relatively unorganised (and so possibly more dangerous) and based on local grievances about perceived exploitation or comparative success, than about indignation following the attribution, in effect, of their countries' foreign policy.

The saying that 'all politics is local' is particularly apposite in this sense. In most conceivable African scenarios, a firm or its brands or staff are far more likely to be exposed on the basis of local social, environmental or governance performance than local anger at the Great Games of its home state.

[By 'foreign' I here mean non-African: there is no shortage of intra-African xenophobia, for example against Congolese smalltraders in north-eastern Angola, Somali stallkeepers in South Africa or Burkinabe migrants in Ivory Coast.]

Foreign firms and businesspeople are often vulnerable to being political scapegoats -- especially as economic times get tougher -- but in general, and until the link is explicitly made in some way in some context, it is embassies rather than businesses that will feel the force of any local protest at some state-to-state insult or insinuation.

Jo

Ps - This post ties in with last week's (on dilemmas for CEOs speaking out on politicised policy issues).

It also relates to a recent one on corporate diplomacy in Africa -- briefly discussing the potential, across the continent, for locals to attribute many of the actions of individuals or firms to their government of origin. The example there (Chinese nationals and attribution to Beijing) might create image management issues for the government, although it is also arguable that local perceptions of Beijing's influence might restrain groups from violent acts against Chinese nationals and stimulate greater local government protection. In this sense, being a firm or businessperson attributed to a major power may provide both a shield and a source of vulnerability from organised or spontaneous violence or boycott.

[Speaking of 'attribution', I'd like to acknowledge the recent discussions with work colleagues on which this post has partly drawn].

Resource nationalism and risk

This year a lot of my work has been helping firms navigate and anticipate the demands of governments and/or communities in African countries for a greater stake in natural resource projects -- mainly mining.

It's made me wonder about how we tend to think about 'political risk'.

The term one often hears with clients facing these demands is 'resource nationalism'. Now, the term is not particularly helpful: such demands partly reflect cyclical patterns (much of the 2000s was a commodities price boom), and so its hardly surprising that from Australia to Zimbabwe there'll be some seeking to re-adjust relationships for more favourable terms; the phenomenon is not limited to emerging or developing economies; and where a country's strategic longer-term interests are involved the term 'nationalism' seems pejorative, whereas its perhaps only natural that sovereigns move to protect their resources...

Also, the term is unhelpful because it suggests radical postures like the outright nationalisation of sectors experienced in Africa and Latin America in the late 1960s and 1970s (and sometimes since). Whereas what we see in the recent actions of governments such as those in Zambia, Namibia or Guinea may alarm investors and threaten margins and contradict existing agreements, but are not necessarily tantamount to expropriation or nationalisation. As I suggest below, in some cases we can understand these moves as mitigating, not increasing, longer-term investor risk.

I recently came across an in-house report from October 2005. At the time South Africa's parliament was considering a law compelling firms to process a portion of rough diamonds locally, in order to create more jobs. The report's title was 'Diamond law raises nationalisation fears'. But it struck me as wrongly stated: regulation like that makes full-scale nationalisation or other radical future action less likely, not more so.

In some cases -- Guinea is a good example -- new mining codes and revenue arrangements simply reflect a somewhat understandable readjustment of terms by newly-elected or post-conflict governments (facing huge development challenges and revenue shortfalls) after a generation or more in which unaccountable administrations did not necessarily pursue the wider national public interest in negotiating terms for the extraction of finite mineral resources, or were weakly placed to do this.

Sometimes 'resource nationalism' reflects nothing more than popular demand to see a greater share of natural resource wealth benefit the host country or community. Of course, the dynamic is open to abuse: Zimbabwe's indigenisation laws are an example of very small numbers of political actors using 'national entitlement' discourse to enrich their person or party; some accuse the ANC Youth League in South Africa of promoting mines nationalisation in recent years -- by invoking historic demands to ensure mineral wealth benefits 'the people' -- merely as a means to get the state to bail out distressed black empowerment investors.

However, in Zimbabwe's case the hijacking of indigenisation for political ends should not obscure how the notion that foreign investors should yield a greater share or show tangible livelihoods gains is a popular one in countries with high youth unemployment and levels of poverty. So on one level the term 'nationalism' is, after all, apposite to what is going on in many African mining jurisdictions, in the sense that it involves emotional issues as much as rational ones.

South African business leader Bobby Godsell was right when he said that ANC Youth League leader Julius Malema -- who has driven nationalisation calls there -- was giving some very bad answers to some very good questions. [See my subsequent post elsewhere on this: here].

One of the questions is 'how do we reach a proper balance between what is commercially viable in private sector investment, and what is publicly credible for communities increasingly conscious of the value of what lies beneath their soil?' These are difficult questions -- for one thing, South Africa's case is scarcely analogous to Guinea, or anywhere else -- but I wonder if many investors have misconceived political risk when it comes to the principle of the state taking a bigger stake in extractive projects. In the short term, such moves are ostensibly alarming. In the longer-term, when the state (and workers or communities) have a stake in a firm's success it can help stabilise the whole investment, grounding and legitimising it; the state then becomes a partner in the project in a more meaningful way, and when faced with local demands the firm can point locals to the government for answers, rather than dealing with creeping high expectations alone.

So when executives react to the state making noises about, say, a 'free' 10% stake in new exploration projects as indicating 'political risk', I sometimes wonder whether it isn't more risk-laden to believe one can enter on easy terms only to wake up three to five years into a project with the state demanding it all be renegotiated.

I often think that mining executives who 'high-five' each other for securing a good deal from an African mining jurisdiction might be unaware that there is such thing, in my mind, as a deal that is too good. If its terms seem very favourable but insufficiently match the local public interest, it seems almost inevitable that there'll be pressure to revisit the whole deal structure. Predictability is of high value in mining. In the longer term, a 'good' deal may be one that makes it very hard for even a populist government to justify alterations.

That is, one cannot guarantee everything and prevent every eventuality; but one can safeguard longer-term moves by narrowing the grounds on which host publics and governments can claim to not be getting a fair deal. Fairness may sound like tree-hugging in the hard world of mining. But a clear-eyed view of risk will often tell one that it is implicit in bargaining. Even Zimbabwe's self-interested ministers find it hard to sustain demands that are unfair for firms; but firms feel very exposed without being able to point to fair terms.

Renegotiation of terms can provide opportunities for firms (and others) to promote revenue transparency or tie further payments to improving social or national infrastructure -- perhaps providing greater insulation from accusations of extracting without truly investing.

Practical, country-specific manifestations of broader 'resource nationalism' ideas and trends are a big part of my 'day job', but also at the heart of what it means for the private sector to operate in an increasingly public world...