The Challenges to Chinese Extractive Investment in Latin America: A South – South Conversation
By Cynthia Sanborn and Weijun Xie
February 21 – March 9, 2019
Weijun Xie’s views expressed in this dialogue are his own and do not represent any official views or perspectives of China Minmetals, the Chinese government or other institutions.
The expanded presence of China – as a trade partner, investor, lender, and geopolitical ally – is one of the most significant changes to have taken place in Latin America and the Caribbean in the 21st century.
Chinese state-owned enterprises (SOE), backed by China’s own development banks, have assumed a significant share of this region’s mining and hydrocarbon portfolios, as well as investing in major infrastructure projects including roads, railroads, ports and hydroelectric plans. China is also the main market for Latin America’s leading exports.
The presence of China thus far has been a mixed blessing for this region’s economies, offering new supplies of capital and technology while sustaining the region’s historical dependency on the extractive industries. Chinese investments also tend to be located in sectors and regions with high environmental risk and high levels of social and political conflict, while Chinese loans in some cases have helped to sustain irresponsible policies and politicians. Although this situation is not the direct responsibility of China, it puts to test the country’s commitment to being a socially responsible global superpower, one that is concerned with the sustainable development of its Southern allies.
How is China responding to this situation? What is the Chinese state doing to enhance the developmental benefits of its presence overseas? What guidelines are applied to Chinese State-owned enterprises (SOE) around the world? And how do Chinese executives manage the political challenges of investing in the extractive sectors, in such diverse cultural settings?
To discuss these issues, Cynthia Sanborn of the Universidad del Pacífico in Lima, Peru, recently interviewed Weijun Xie, Vice President of China Minmetals Rare Earth Co., Ltd, and a fellow member of the CCSI Executive Session on the Politics of Extractive Industries. China Minmetals is China’s largest and most international metal ore mining company, and the world’s largest metallurgical engineering service provider. It operates extractive and engineering projects in China and more than 60 other countries, and its largest investment is the US $10 billion Las Bambas copper mine in the southern highlands of Peru, which currently produces over half of the copper that country exports. Weijun Xie has guided China Minmetals in its efforts to be an international leader in corporate social and environmental responsibility, and he is a frequent speaker at international conferences on sustainable mining practice. He also created the Scenario CSR Training that is promoted by China’s State-owned Assets Supervision and Administration Commission (SACAC). He holds a PhD in Economics and an MSc in Economics and Finance from the London School of Economics.
Questions & Answers, Round 1:
Sanborn: What are the most important political risk factors that companies like yours face overseas? And what lessons have you learned about the politics of extractive industries?
Xie: Basically, there are two main important political risk factors we face overseas. The first is political bias, which includes protectionism and the unfair-level playing field. We cannot play equally as other companies, especially Western ones. For example, the IMF, with the intention of some third country, thwarted the agreement for exchanging infrastructure with minerals between China and the Congo. In Niger, a coup was launched to block China’s investment in uranium. And there are many similar cases.
The other important political risk factor is the host countries’ turbulent political situations. We may face high instability, volatility and inconsistency in policies, depressed economies with social chaos and deteriorating social order. Such factors have become a huge obstacle to the development of overseas markets by Chinese enterprises.
The lessons that we have learned include the need to conduct sufficient communications with different stakeholders in host countries, including various political parties, indigenous and native peoples, media, NGOs and community organizations. We also must carry out sufficient due diligence for political concerns, not only from the host countries, but also from the international community and other countries, especially western countries.
Sanborn: Can you give examples from Latin America, of political bias or an unfair playing field? Or is this mainly a concern in other regions? Because it is my impression that most Latin American governments have been eager to attract Chinese investment and have been quite accommodating.
Xie: You are totally right. Political risk is mainly a concern in other regions. Most Latin American governments welcome Chinese investment and the cooperation between the two sides has been of mutual benefit and basically satisfactory. But some projects were blocked or suspended in some Latin American countries because of pressure from other North American and European countries. Isn’t this a kind of bias?
In addition, some Chinese companies have been criticized for not fulfilling their social responsibility, although there is no evidence that investment from China has a greater impact on local environments than investments from Europe and North America. Chinese investors are generally concerned about the local investment environment and the difficulty for cooperative projects to proceed as planned; they greatly worry about the increased investment risk. Yet sometimes local public opinion has a certain prejudice against Chinese enterprises, and the requirements for Chinese enterprises in the fields of legal compliance, social responsibility and environmental protection can be especially harsh. Some media even distort the normal business behavior of Chinese enterprises, while ignoring the bad behavior of others. These concerns have made some Chinese companies less likely to invest much in industry, especially in heavy industry, which requires deep and sustained communication and mutual understanding from both sides.
Sanborn: I am glad to hear that Chinese firms are learning how to navigate the turbulent social and political contexts of other regions through more communication with diverse stakeholders and due diligence regarding the history and context of each location. This is so important. Can you give some examples from Latin America about “lessons that have been learned”? Especially regarding engagement with indigenous and native peoples?
Xie: There have been many lessons that had to be learned by Chinese enterprises in overseas investment and operations. For example, Shougang Hierro Peru has suffered hundreds of strikes since it first invested in Peruvian iron mining in the early 1990s, causing serious losses and problems for the company. Chinalco in Peru has been subject to controversy over its local development plans and issues related to environmental protection, and it has had to invest some $300 million for relocation of local peoples. Zijin Mining in Northern Peru is accused of not disclosing the significant environmental and social risks of its Rio Blanco project, and was heavily fined by local environmental protection agencies. From these negative experiences, we have learned that starting from the initial due diligence stage, we must pay more attention to communications with different stakeholders, including native peoples, trade unions and laborers, understanding and guaranteeing their interests. We also must attach great importance to environmental protection and take effective measures to prevent risks.
Sanborn: Do you find that Chinese SOEs are treated differently from other firms in the mining sector when seeking opportunities overseas?
Xie: Yes, this has happened under many circumstances. For example, the Canadian Parliament denied China Minmetals’s acquisition of Noranda Inc. in 2005 just because we are a Chinese SOE. And with the argument of state security, the Committee on Foreign Investment in the United States (CFIUS) denied China’s Northwest Non-ferrous International Co. of its acquisition of 51% equity of the US mining Company Firstgold in 2009 and denied CNOOC of its acquisition of Unocal Corporation in 2005.
Many countries have SOEs likes China does, and Chinese SOEs are the same as other such enterprises. They are independently managed and operated economic entities that need to be responsible for their own profits and losses. If their performance is bad, they will go bankrupt. They should be treated equally as others.
Sanborn: Don’t Chinese SOEs need authorization from the state to invest overseas? If a company is nearly bankrupt or poorly managed, could it still be independent enough to invest around the world, make mistakes and fail?
Xie: In general, Chinese corporate investors, including SOEs, must be registered or approved by at least three government ministries, namely, the State Development and Reform Commission (in charge of the approval of foreign investment projects), the Ministry of Commerce (in charge of the examination and approval of specific overseas investment, and issuing the overseas investment certificate), and the State Administration of Foreign Exchange (in charge of foreign exchange registration and filing of overseas investment).
If a company is nearly bankrupt or poorly managed, it will be forbidden to invest around the world. Each year there is an assessment and an audit of SOEs, so the status of their business, investment and performance can be supervised and managed timely.
Sanborn: Does the Chinese government help facilitate your relations with host governments, or other stakeholders, in countries where you operate?
Xie: We do undertake projects under some inter-governmental cooperation frameworks between Chinese and foreign governments. We also learn basic information regarding economy, politics, culture and other issues in host countries from relevant Chinese embassies and consulates. We might also seek consular assistance from our overseas embassies or consulates, but up to now, there is no other specific facilitation from the government for concrete projects.
Sanborn: The professional foreign service personnel of developed countries, including the U.S. and much of Europe, tend to be trained in area studies, knowing the languages, histories and cultures of the countries in which they are stationed. It is our understanding that at least in parts of Latin America, this is not necessarily the case for Chinese embassy staff. With exceptions, we find that Chinese foreign service staff may not be as familiar with the countries they are sent to or may not have the language skills or experience to help potential investors do the due diligence needed to make investment decisions and interact with different stakeholders. Has this been your experience overseas?
Xie: Basically speaking, and from my own perception, Chinese foreign service personnel and those of developed countries have many things in common. They serve for their respective country, and they try their best to perform their duties. And no doubt they also have many differences, such as their characters, working styles and abilities. I know this, as I have many diplomatic friends from China as well as from developed countries like the UK, Australia and Sweden.
But I agree with you in that these phenomena do exist. China’s reform and opening up process is still recent, and people with excellent inter-disciplinary talents, good professional training and skills for foreign affairs, are still scarce. Although China’s international influence continues to rise, there is a lack of diplomatic talent for the work of foreign embassies and global institutions. For example, the Chinese account for less than 3 percent of the employees of major international agencies such as the United Nations, and only about 200 of the roughly 10,000 people employed by the World Bank’s headquarters and country offices. Part of the reason is that Chinese candidates lack professional skills as well as diplomatic knowledge and experience. Therefore, it is both an urgent issue and a long-term task to build capacity, strengthen the development of our professional and diplomatic corps, and enhance the accumulation of experience for Chinese foreign service staff.
Sanborn: What kind of monitoring mechanisms, and grievance procedures do Chinese firms such as yours have in place to assure that the highest standards for social and environmental responsibility are implemented on the ground?
Xie: We recognize that mining activities have both positive and negative impacts on communities and that these impacts can lead to significant stakeholder concerns. Accordingly, each Minmetals operation has a site-specific grievance mechanism in place, aligned with the common Grievance Procedure, to facilitate the timely, culturally appropriate investigation and response to grievances raised by community members. This process is non-judicial, complements existing legislative remedies and reflects our commitment to the UN Guiding Principles on Business and Human Rights.
In 2017, we received 367 grievances across our operations. Of these complaints, 249 – more than 67% – were related to local employment and procurement matters at our Las Bambas operation in Peru. Specifically, these grievances highlighted the clear expectations of the community regarding sharing in the economic benefits of our operation, and the complexity of managing the transition from construction to operations. These grievances were resolved through appropriate processes tailored to each case and engaging all affected parties.
Sanborn: It is rather surprising to hear that most of the complaints made through your company’s grievance procedures come from Las Bambas, that they have been about employment and procurement issues, and that they have been resolved.[1] Here in Peru, the main points of conflict around Las Bambas would appear to be transportation and land issues. In particular, there has been unrest related to the real or potential impacts of changing your transport plans, from building a pipeline to using overland transportation, along roads that are not yet paved or fortified for such heavy traffic. Protests have led to violence on several occasions, and according to Peruvian government officials, these conflicts have not yet been fully resolved.
Are these grievances not the ones received by China Minmetals? Or do you really consider that they have been resolved?
Xie: Las Bambas is a new project in our company, so it’s normal that most overseas complaints made through our company’s grievance procedures come from Las Bambas. In Australia, Congo, Laos, and other countries where our operations have been going on successfully for years, we do not receive many grievances.
To my knowledge, the grievances had all been resolved up to 2017. But we cannot put things right once and for all. There’s no guarantee that new grievances will not take place. The case you mentioned happened in the Nueva Fuerabamba community, where their representative said the Peruvian government had illegally transformed a road passing through farmland into a state expressway, and they are hoping to reach a deal for use of the expressway. But the Nueva Fuerabamba community prohibited MMG from using this route, and MMG is currently using another road to transport copper concentrate to port. My colleagues have been working there to learn their grievances and find suitable and win-win outcomes. I hope this can be finally resolved peacefully and satisfactorily.
Sanborn: Most Latin American countries have large indigenous populations, whose customs and habitats may be threatened by the expansion of unregulated extractive activity. Implementing free, prior and informed consent (FPIC), or at least mechanisms of prior consultation, has been seen as one way of assuring that these communities understand the risks and benefits of extractive investments. From a Chinese perspective, is this an appropriate way to proceed in dealing with indigenous peoples? How often have you engaged with indigenous peoples in your overseas operations?
Xie: Without any doubt, this is absolutely an appropriate and basic way to proceed in dealing with indigenous peoples. We fully respect their traditions and customs, provide training and job opportunities, and protect their cultural heritage. We have also initiated some programs and projects to protect the interests of indigenous peoples. For example, in Queensland, Australia, we have the Gulf Agreement for career development and cultural heritage protection of indigenous people. In Peru, we set up the Social Development Plan to improve the quality of life of local people, and in 2017 our Las Bambas operation worked with the local community of Manuel Seoane Corrales in the district of Challhuahuacho to deliver a new chapel. We also worked with the United Nations Global Compact to take the opinions of the indigenous people in Australia into account around our mines and to formulate and consummate relevant policies.
We have engaged with indigenous peoples quite often in our overseas operations. We have implemented prior consultation and obtained their consent for mining development. We have also conducted stakeholder engagement consultancy during different stages of our projects, including due diligence, the feasibility study, construction, operation and closure. During the life time of normal mining operations, we conduct an engagement consultancy at least once a year, and more often depending on the needs.
Sanborn: The Las Bambas mine is now producing 450,000 tonnes of copper per year, nearly the total amount of copper that the United States purchases from China. At the same time, social tensions are high in the surrounding communities, and the Peruvian government has had to renew a State of Emergency nine times to maintain order. From your perspective, why do you think this tension persists? What more could the company do to ease the tension? What more could the Peruvian government or other political actors do?
Xie: There are many reasons that the tension persists, from historical, political, social and economic perspectives. Theoretically speaking, the efficiency priority theory means that the increase of wealth accelerates the over-exploitation of mining resources and the deterioration of the ecological environment; that is, the price of increased wealth that benefits a few people conflicts with the goal of social equity. The key to understanding the conflict is the external diseconomy generated by the social costs of these private benefits.
Peru is a country with a strong Latin American character and cultural tradition, and it is the birthplace of the Inca civilization. The indigenous people who believe in the philosophy of a “good life” make up an important part of the population, and mainly live in undeveloped areas with rich resources. Influenced by the memory of their colonial history, Peruvians recall their exploitation by Spain and other European and American powers and have always carried the historical pain. In the perception of these people, mining is often closely linked to exploitation and plunder.
This demographic structure means that on the one hand, the inheritance and imprint of history will not be easily erased, and on the other hand, the strong indigenous culture will have varying degrees of influence on the development of the country. The rich mineral resources have provided a constant source of impetus for Peru’s economic development, but few of the results of economic growth have reached indigenous peoples, where the resources are located, and 71 per cent of the people who live in extreme poverty in Peru (who are 15 percent of the total population), are indigenous people living in rural areas. As we see it, these people have played too passive a role in the process of resource development. This has affected not only Peru’s domestic politics, but also the overseas companies investing in the country, especially Chinese mining companies, which hold around a third of Peru’s total mineral investment.
Because of their lack of overseas operation experience and understanding of local conditions, some Chinese mining companies feel unable to deal with the issues of local administrative approval and legal proceedings, as well as with local trade unions, indigenous associations and NGOs. Some of them have been charged – fairly or unfairly – with polluting the environment, reducing employment opportunities or doing improper resettlement. Some of them don’t know how to communicate with the media and local peoples.
However, studies show that China’s overseas mining investment has consistently generated huge gains for host countries, boosting employment and economic growth. We can do more to fully guarantee the interests of host countries and local people, by increasing their national income and through taxation, as well as enhancing employee localization, protecting the environment, understanding the appeals of different stakeholders, and strengthening communications with local people.
But the negative externality of the economy mentioned above is due to the absence of a market. The position of the government is to establish the mining market system, the resource factor market and the industrial management market. The goal of corresponding institutional change is to unify social efficiency and fairness, and the emphasis is to ensure the safety of resources and the environment. The Peruvian government should find a balance point between mining, community and environmental protection. They can improve the investment environment for the mining industry, and at the same time help promote community investment plans to improve the basic public services near the mining areas. Relevant local officials involved in community governance could also focus more on reducing conflict and improving community relations.
Questions & Answers, Round 2:
Xie: Dr. Sanborn, I also have some questions for you. In your view, how do you evaluate the overseas behavior and performance of Chinese companies?
Sanborn: Our research has found that Chinese firms vary considerably, even among the SOEs. Some have had outstanding overseas performance, on par with or better than many Western firms.[2] Others have been unable to operate effectively, at least in the Latin American region, and have unresolved tensions – either with their labor force and unions, or with local communities, or other stakeholders. So, although our governments encourage investments from China, we know that not all Chinese investors and firms are alike, and hence there is a need for better understanding and due diligence on all sides.
What do most Chinese firms have in common, at least those operating in Latin America? As you recognize they tend to lack experience with communications, especially with multiple stakeholders (not just government officials). They do not tend to hire good communications teams, and do not seem comfortable relating with the diverse media and others that want information. They prefer to keep a low profile, but that can work against them when there are tensions or misunderstandings. Chinese companies have also tended to rely on local staff to manage their distant operations, and their high-level executives are rarely seen or known.
In the case of Las Bambas, and some other Chinese operations in the Peruvian mining sector, the companies have not been so proactive in communicating all that they are doing, for example with and for local communities. Their version of events is not often heard, and their Chinese executives and company histories are unknown here. It is still inconceivable to me, for example, that Las Bambas is your largest operation overseas – indeed, the largest Chinese overseas investment ever in mining – yet you have never visited it.
Most Chinese firms also have Chinese bank finance backing them up, and Chinese banks are also hard to access and communicate with, for example regarding their safeguards or loan practices. The personnel working for Chinese banks on the ground in this region, at least, are not always familiar with the region, or even with local languages and customs.
Xie: You are absolutely right about Las Bambas, I need to go there. At the moment we have a very experienced team working on site, and our top executives have paid several visits there. In spite of this, I should conduct a site visit to Peru in person, to learn the status of the project and communicate with stakeholders.
How do Peruvian people view Chinese mining investment? As an opportunity or threat to your economy and society? Some newspapers have used the term “Imperialismo Chino” – do you agree with that?
Sanborn: Most Peruvians surveyed have very positive perceptions of China, considering it to be a friend and partner to their country rather than a rival or enemy. In fact, China today is perceived as more of a partner than the United States, which reflects that fact that many Peruvians understand that China is now our main trading partner. Peru also has a large Chinese immigrant population, including people who came here generations ago as indentured servants, but over time have been successful in commerce, education, gastronomy and the arts, and they own some of the country´s most widely respected family firms. At the same time, very few Peruvians have traveled to China, or know much about your country. There is still a great distance between us, one that both Chinese and Peruvian authorities should do more to overcome.
In the mining sector more specifically, perceptions vary depending on what group you are interested in. Most government officials see Chinese investment as extremely important, as do business leaders and bankers. They also see the Chinese market for our minerals as fundamental to our economy – minerals are still around 60% of our total exports and an important source of tax income and indirect employment in various regions. The mainstream media has also been relatively fair when covering Chinese firms, and I have not seen the kind of accusations of “Chinese imperialism” that that has appeared much more strongly in other countries.
Among NGOs concerned about social and environmental issues, the entire mining industry comes under criticism, and some have perceived Chinese firms as especially worrisome, because of the negative stories and stereotypes about how they operate at home in China, or in other regions, particularly Africa, allegedly with little regard to the concerns of local communities. There is also an idea among some trade unions, that Chinese firms do not treat workers very well, or do not respect union rights. Some NGOs believe that Chinese companies are used to having government do the “hard work” of community relations for them – expropriating land, relocating people, and defusing protests.
Such ideas may be exacerbated when Chinese firms do not open up to the media, do not meet with community leaders or NGOs, or do not communicate effectively how their operations actually work. Western multinationals in mining are still learning how to do this also – by giving people tours of their operations, holding town meetings, giving interviews to journalists and answering questions openly, and also inviting stakeholders to visit the firm operations in other countries, and back in the home country as well. Chinese firms should do the same.
In Peru, as you may know, we have a lot of grassroots social and political organizations. As you may also know, one of the stronger political traditions in Peru is Maoism, or local versions of Maoism; and an older generation of political and trade union leaders had political training in China. Some analysts believe that they are less likely to be confrontational with Chinese investors because of these historical sympathies. However, we also have a younger generation of social activists who are more concerned about environmental issues, and more defensive of indigenous rights and cultures, which are often associated with collective landholding and often in areas with heavy mining concessions. They do not know much about China directly but tend to have more concerns about Chinese operations and their impacts.
Xie: What are the general impression and expectation of Peruvian people on China Minmetals’ Las Bambas copper mine project? What have we done can meet their requirement and expectation and what should we do more?
Sanborn: I may be wrong, but it is my sense from your prior comments that you do not have a clear idea of what kind of conflicts have emerged around Las Bambas, or what the media has reported here in Peru. Although the operations continue, in that the minerals are getting to port despite occasional blockages of the highway, there have been violent protests with loss of life, and the government has renewed the State of Emergency in your area of operations at least nine times. This is not “normal” in a democracy, to have the police entrenched in an area over the long term to keep order.
I understand that your company’s decision to not build a mineral pipeline was a logical one from an economic standpoint, since the projects that were to have shared the pipeline now have different owners and structures. However, the pipeline was promised and communicated to the communities as a more environmentally secure form of transportation, and compensation for those living along the pipeline route had been negotiated. The changes in plans for transportation, and related changes in operating facilities, were apparently not consulted.
People were not adequately informed, because – I suspect – the Peruvian government wanted Las Bambas to move along quickly and thought that consulting this change would bring unnecessary delay. However, in hindsight I think it brought more tensions that could have been avoided if people had been well informed in advance. And the rights to land use and related issues settled.
The fact that the road you are using for transport is unpaved in long stretches, and your trucks are coming through around the clock, kicking up dust and making noise, also makes for negative public opinion. That is what many Peruvians can see in the media, because Las Bambas is in a remote location that most will never visit. I suspect the reasons for not paving the road and assuring the user rights issues beforehand, were also associated with avoiding delays in production. But sooner or later, these issues must be settled.
The people who live in your area of influence are not anti-mining. On the countrary, they do seem to see opportunities for improving their welfare by engagement with Las Bambas and other mining operations in the area, directly or indirectly. But there is also a lot of concern about what the operation entails, and resentment that the change of ownership led to changes in plans for operation and transport that were not explained. There are also lingering demands for compensation that won’t go away on their own, negotiation and strategy are needed on the part of the company as well as the Peruvian authorities.
Finally, I will repeat that it seems very important that China Minmetals executives – including yourself – visit Peru and see for themselves how their operation is perceived, among national opinion leaders, in the media, and in the mine location itself.
Concluding Remarks:
Xie: It’s no doubt that we will meet many challenges, problems and difficulties during the process of cross-border investment, international trade and transnational operations. To address these challenges, we need to pursue the right path and apply effective methods, which include but are not limited to conducting extensive consultation, making joint contributions and sharing benefits.
It’s so nice to work with you, Dr. Sanborn! I think our conversation is very frank and honest, straightforward and problem-solving. It has inspired genuine, insightful, innovative and suggestive thoughts.
Sanborn: We all hope that engagement with China in the future can help us diversify our economies and pursue more equitable and sustainable development forms of development. To this end, I agree that it is important to try and overcome the physical and cultural distances through frank and open discussion. Although the power relations between our countries are highly asymmetrical, our hope is that academic and professional relations between peers can help shorten this distance. This is a good start.
[1] Editor’s note. Social conflicts related to the Las Bambas project in Peru are recurring, and incidents since this dialogue temporarily interrupted normal operations.
[2] See for example: http://www.anthempress.com/china-and-sustainable-development-in-latin-america-hb and https://www.bu.edu/pardeeschool/files/2014/12/Peru2.pdf