In theory, MCC should have had plenty of competition to secure the rights to this world-scale deposit. Yet many multinational miners, which must answer to shareholders in multiple countries, were put off by fragile security and widespread corruption. They also lacked a home government willing to work on their behalf. A handful of mining companies did apply for the international tender, but soon discovered that MCC had an asset with which they could not compete: the full diplomatic and financial support of Beijing. In the race to acquire natural resources in tricky parts of the world, China’s business model—providing sovereign backing to profit-driven yet state-owned national champions—is successfully squeezing out the competition. (Komesaroff, supra, 7).
MCC agreed to a number of pricey conditions. In addition to a sign-on bonus of US$808m, it will pay the Afghan government a royalty of 19.5%. At current copper prices, this will add more than US$115m to Kabul’s coffers every year. Beijing also agreed to build a 400 MW power station with integrated coal mine, plus a US$4 bn railway linking the mine through Kabul to neighboring Uzbekistan and Pakistan. Finally, MCC said it would consider building a downstream copper refinery and smelter. None of these expensive facilities are essen- tial for the mine’s operation, but they were offered by MCC and Beijing in order to win the deal. In total, Aynak will require Chinese corporate and sovereign investment exceeding US$10 bn.(Ibid).
But more interesting was the way in which the Chinese state and private enterprise combined their efforts to ensure a successful bid.The World Bank and its consultants reported nothing irregular in the tender process, but other participants and experts claim the process was rigged. Most of the criticism revolved around Mohammad Ibrahim Adel, the Soviet-educated Minister of Mines, who is accused of shutting foreign advisors and government officials out of the tender process to ensure that the contract went to MCC. US officials told the Washington Post that Adel received a US$30m bribe to favor the Chinese bid. The integrity of the process was further impugned by Hunter Dickinson’s claim that aspects of its confidential offer were passed to rival bidders. While these allegations are plausible, none of them have been substantiated. (Ibid., 8).
MCC offered a higher sign-on bonus and royalty than other bidders—yet it was also aided greatly by Beijing, which used its diplomatic and regulatory clout to help it across the finish line. Chinese diplomats in Kabul provided MCC with valuable commercial intelligence and briefings on the nuances of government policy. Beijing also eased MCC’s path by instructing Zijin Group, another state-owned enterprise with strong credentials in the copper industry, to withdraw from the process. In return, Beijing required MCC to form a joint venture with Jiangxi Copper Ltd (JCL), a dual Hong Kong- and Shanghai-listed company controlled by Jiangxi Copper Corporation, a provincially owned SOE. JCL, which holds a 25% stake in the Aynak venture, is experienced in operating copper mines and marketing copper concentrate. Its skills complement those of MCC, which specializes in engineering, design and construction. (Ibid., 8)
The Aynak tender demonstrates the competitive advantage Chinese SOEs derive from their cozy relationship with Beijing. The extent of this sup- port does, however, raise the question of whether the Aynak mine is justified on a commercial basis. Using a conservative US$3,200 per ton price for copper, MCC estimates that the construction of the mine, associated copper concentrate facility and directly related local infrastructure will generate a more than acceptable 11% return. While national interest is an important element in China’s overseas investment decisions, SOE managers are also rewarded for their financial performance—so they are hardly likely to propose loss-making investments.
Yet China’s support for MCC also serves the national interest in a number of ways. First, it addresses China’s need to diversify, expand and secure its supply of copper. This has a commercial as well as a strategic purpose, as developing new sources of copper supply will benefit all Chinese consumers by dampening prices. Second, encouraging national champions to acquire assets abroad is an important step in creating globally competitive companies. Making a success of foreign acquisitions is vital if China is to nurture multinationals with the same global clout as BHP Billiton or Rio Tinto.
In addition, investing in Afghanistan serves broader, geopolitical concerns. China fears that any instability in Afghanistan could spill over the border into Xinjiang Uighur Autonomous Region, where many native Muslims resent Chinese control. With independence fighters already running insurgent operations from neighboring Pakistan, an unstable Afghanistan would risk compounding ethnic tension and creating a new sanctuary for Muslim rebels. Stability is also essential for MCC to ensure a healthy return on its massive investment. Aynak represents an obvious and lucrative target for rebels who might want to deprive Kabul of critical royalty revenues. To shore up security both at the mine and along China’s vulnerable western border, Beijing is working closely with the Afghan government to help train and equip local police. Ensuring a stable and friendly political environment is in everyone’s interests. (Komesaroff, supra, 8-9).
In other parts of the world, Chinese enterprises are frequently criticized for employing mainly Chinese workers and riding roughshod over local interests. Chinese investors are chided both for damaging the local environment and for offering bribes and secret commissions to local elites, much to the fury of ordinary people. Protests directed at Chinese investors have turned violent in several countries, and greater sensitivity is needed in Afghanistan to prevent similar disturbances. There are already signs of problems in Aynak, where local residents attacked MCC employees after they were forcibly removed from their land by Afghan officials fulfilling the requirements of MCC’s land lease. Locals are also frustrated by what they perceive as MCC’s failure to deliver on their promises to create jobs and build schools and mosques. (Komesaroff, supra, 9).
their financial dealings. The challenge for Chinese companies is to emulate these practices in a way that does not destroy the leverage provided by their distinctive investment model." (Ibid). The answer, of course, will ultimately depend on the long term welfare maximization of either mode. The likely outcome will likely push Western enterprises to more closely imitate the Chinese model--expect Western governments to more aggressively underwrite and manage the economic activities of large and tactically important enterprises. But also expect Chinese enterprises to more aggressively embrace Western standards of enterprise activities, especially with respect to activities outside of China.