India should pioneer new forms of responsible investment in the continent
On May 25,the African Union completed 25 years. Along with the surge in Indian investment in Africa,there is a rising clamour in the Western,and now the Indian,media about the cleanness of some of these investments. The fear is that Indian investors are ganging up with undemocratic governments,in non-transparent deals,to avoid losing out to Chinese competitors backed by Chinas multi-billion dollar campaign to win African hearts and minds. Most flamboyant in this charm offensive is Chinas gift of an opera house to Algeria,a country from which it has won billions of dollars in infrastructure contracts these past few years.
While India might not have the deep pockets to match this offensive,it has a more priceless asset the special Indo-African bond cemented by centuries of trade,shared colonial heritage,and language. Equally crucial,Indian firms engage with local stakeholders quite differently from Chinese rivals,according to the Multilateral Investment Guarantee Agencys 2009 survey of leading BRIC outward investors. Two-thirds of Indian firms tie up with local partners,it says,double the number of Chinese companies. Forty per cent of Indian firms engage strategically with local communities and 13 per cent with NGOs,compared to 3 per cent and 0 per cent of Chinese firms,respectively.
While these figures are heartening,critics fears are not completely unfounded. Over a half of Indian respondents say they engage closely with host governments to protect emerging market investments,double the percentage for Chinese respondents. This is partly because Indian firms worry significantly more than firms from other BRICS countries about sudden adverse regulatory changes,transfer and convertibility restrictions,corruption and political risks that make it difficult if not impossible to buy insurance. For this reason,allying closely with local governments is a powerful form of self-protection,though a sudden political shift might render this illusory,as Enrons India experience highlights.
Political risk perceptions,however,are not the only reason for India Incs tightening association with African governments. Possibly more important is the poor capacity of investment promotion and facilitation agencies (IPAs). While investment promotion and facilitation should ideally be the remit of professionally managed,independently operating entities,in India and much of Africa,they are still within the purview of government activity. In both regions,high-profile political leaders pull in big investments,since they want to visibly create jobs for their electorate. Narendra Modis much-hyped annual Vibrant Gujarat summits,or the $70 billion in deals contracted at the CII-Exim Bank India-Africa conclave,are fitting examples. In contrast,the worlds best practice IPAs (led by Hong Kong,Austria,Finland,Denmark,Sweden and Nicaragua) successfully bag and realise large-target investments by presenting investors with customised and compelling business cases,with no involvement from heads of state and ministers.
In most developing countries,poor governance forces investors to sustain relationship-building with key cabinet ministers and heads of state to obtain the approvals necessary to operationalise and protect investments. Many of these visits receive media attention,in complete contrast to the quiet and routine manner in which most foreign direct investment is pursued,approved and implemented in best practice economies.
Private firms have driven Indian investment to Africa,in contrast to Chinese government-to-government deal-making
Worryingly,since politicians tend to drive investment promotion in South Asia and sub-Saharan Africa,governments are not investing sufficiently in strengthening,professionalising and publicising their IPAs. This is why their IPAs score the lowest in the World Banks Global Investment Promotion Best Practice assessments (2009,2012). Forty per cent of the foreign investors in Africa interviewed for the United Nations Industrial Development
Organisations Africa Investor Report 2011 did not know their host country had an IPA. For this reason,only 5 per cent of Indian firms used local IPAs when investing in Africa.
To the credit of India Inc,much of its African FDI has been relatively independent from government,at both ends. Private,not public,firms have driven Indian investment to Africa,in contrast to the predominant Chinese pattern of government-to-government deal-making. Indian firms also tend to invest in human resource-developing manufacturing and services activities,in contrast to the Chinese concentration in natural resources and infrastructure.
This might be why African governments have been so enthusiastic about reviving South-South cooperation with India. Not only does Africa see India’s development experience and technology as most relevant,it also considers it a more open,trustworthy partner than China.
India should strategically intensify this advantage by pioneering new forms of responsible investment in Africa,with the support and encouragement of the Indian government. Investors and host countries would do well to incorporate key elements of the UNs Guiding Principles on Business and Human Rights (2011),the UN-World Banks Principles for Responsible Agricultural Investment and the Extractive Industry Transparency Initiative. We must also improve the quality of our outward FDI data. Currently,even the most transparency-committed policymaker cannot trace the true scale and nature of Indias African investments,in the absence of segregated data on petroleum,natural gas,agriculture and mining investments and a detailed analysis of outflows to Mauritius.
The writer is a Delhi-based consultant who has worked with the UN,the Economist Intelligence Unit and the World Bank Group