The Looting Machine – An insightful read into the shady world of resource extraction in Africa
Unveiling the dark side of African investment: Tom Burgis' cautionary tale of local powerbrokers and multinationals
To give our readers a sense of how we make rhyme and reason out of the emerging and frontier markets covered on Pyramids and Pagodas, we will start sharing reviews and summaries of some of the interesting books we have read over the years. Our first such piece looks at The Looting Machine by Tom Burgis, a veteran Financial Times journalist who spent much of his career in Africa. The book highlights the interrelation between politics and resource extraction on the mineral-rich continent. Although published in 2015, the dynamics Burgis highlights remain very much relevant today and investors hoping to cash in on resource plays would do well to grasp the underpinnings of these deals.
The book makes for an entertaining yet informative read, with both the narrative flow of a good thriller and hard substance of investigative reporting. Burgis presents a refreshing take on Africa’s “resource curse” – so often painted as predatory foreign firms looting an unsuspecting continent – by examining the enabling role played by local elites. The book provides a level-headed analysis of the Chinese companies increasingly involved in these deals, pointing out how Western states which cry foul over this also play host to blue chip multinationals which have long engaged in the very same practices.
Resource dependence engendering local elite hegemony on power
Burgis’ account paints a harrowing tale of Africa’s resource dependence and the ease with which international corporations plunder these riches through a network of shady middlemen and corrupt politicians. The book points out the absence of development beyond resource extraction across most of the continent. This dynamic allows local elites in control of these resources disproportionate power and a near-total lack of accountability. Burgis’ leans on rentier state theory in explaining this, which in a nutshell means resource-rich governments are not beholden to the economic and political needs of the general public as they do not rely on taxes for state revenues.
The Looting Machine explains that much like oil-producing states in the Middle East, rentierism is prevalent in many African countries.
Africa accounts for 13% of the world's population and just 2% of its cumulative gross domestic product, but it is the repository of 15% of the planet's crude oil reserves, 40% of its gold and 80% of its platinum - and that is probably and underestimate, given that the continent has been less thoroughly prospected than others.
Burgis points out that at least 20 African countries fall into the IMF-defined category of “resource-rich” (states which derive more than a quarter of export revenue from natural resources. He juxtaposes the situation in countries like Nigeria and Angola (where oil alone accounts for 97% and 98% of exports, respectively) with European and Asian economies, where resources account for 11% and 12% of exports on average.
During the very years when Brazil, India, China and the other "emerging markets" were transforming their economies, Africa's resource states remained tethered to the bottom of the industrial supply chain. Africa's share of global manufacturing stood in 2011 exactly where it stood in 2000: at 1%.
Hands in the till at every stage and the failings of due diligence
As resources are so central to political power on the continent, foreign businesses entering the space are often forced to partner with local companies indirectly owned by officials involved in granting extraction rights. The book points out the failings of traditional due diligence in uncovering these ownership structures, a situation which due diligence companies and investors alike are often complicit in – treating the process as a tick box exercise. Burgis quotes a senior banker in asserting that the due diligence process often amounts to “manufacturing deniability.”
Even the revenues that are not directly embezzled through such shaded deals are often diluted as governments newly-awash with cash splash out on subsidies and infrastructure. Burgis cites a depressing statistic from Angola in reporting that more than a quarter of construction costs in infrastructure projects are eaten up by kickbacks to the relevant officials.
Chinese companies use a well-established playbook in Africa
The book was also interesting to us due to its focus on China’s role in Africa’s resource bonanza, the dynamics of which are also relevant to Beijing’s dealings in other developing countries / resource-rich states. Burgis notes:
Chinese state-owned banks have provided much of the credit through which African government finance infrastructure projects. These Chinese loans have interest rates higher than what traditional donors like the World Bank offer but lower than those available from commercial banks. Often, as in Angola, the repayments are not in cash but in natural resources.
China’s state-owned banks provide financing where traditional donors will not. They offer loans at somewhat higher interest rates but still lower than commercial banks and provide funding even to problematic or pariah governments that other donors shun. The symbiotic relationship between emerging /frontier market governments and China due to shared animosity of the West is an ongoing theme in this blog. Such relationships fill an important gap and allows China to gain influence as it does not place as many governance or human rights conditions on their financing as Western counterparts. However, as mentioned above, we felt that Burgis provided a fair commentary on China’s role in Africa and did not neglect to mention that the playbook used by Chinese companies was well established by Western multinationals with the tacit approval of their resource-hungry governments.
For background here, the higher interest rates suggest a more commercial approach aimed at benefiting Chinese lenders. Many of the countries receiving Chinese rescue loans already have significant debts to China, indicating that China is looking to protect its existing financial interests more than simply providing relief. This contrasts with the more unconditional approach of donors like the IMF. Chinese rescue lending has primarily gone to BRI partner countries in Africa and Asia, which effectively shows that China prioritizes helping countries that are important to its strategic and economic goals.
China repeats African playbook with Russia
The book also highlights how through low-profile Hong Kong-based intermediaries (with apparent links to the central government), China was already willing to skirt Western sanctions on Moscow long before the 2022 invasion of Ukraine. Burgis explains how one Hong Kong intermediary, Sam Pa (a central figure in the book) was heavily involved in these efforts
He [Sam Pa] sat next to Marat Khusnullin, the deputy mayor of Moscow, and Hu Zhenyi, the vice president of China Railway Construction Corporation. Pa was representing China International Fund in an agreement to build a new metro line in Moscow. Khusnullin, the deputy mayor, was in town as part of the delegation accompanying Vladimir Putin to China. Two months earlier Putin had annexed Crimea following the fall of the pro-Russian president of Ukraine, prompting the US and Europe to impose sanctions on Putin's inner circle and Russia's oil industry. It was a deal straight out of the Queensway Groups' [Pa’s low-profile Hong Kong entity] African playbook: cultivating a regime recently placed under international sanctions, denounced as a pariah in the West, mired in corruption and rich in natural resources.
China perceives Western sanctions as creating opportunities for them – look at the trade data between Russia and China today. As Robin Brooks has reported, China’s imports from Russia have soared since the 2022 Ukraine invasion.
Burgis highlights this dynamic even back in 2015, long before we started discussing it here on the blog. When the West shuns countries like Russia and some African nations, China sees a chance to fill the void and gain influence through economic ties. China uses a pragmatic, resource-driven approach that is insensitive to governance and human rights concerns.