C3S Article no: 0033/2017
Publisher: Routledge (2017)
The rise of China as the fasted growing economy attracted global attention. Its expansion through trade and investment with other parts of the world such as Latin America, the Caribbean and Africa has excited many scholars and triggered much research work. India has also risen as an economic power and is included in the list of economies categorised as BRICS. India and China are recognised as “levers” of global growth. Many view them as rivals or competitors.
Invariably, among economists and the academia, there is an unmistakable urge to evaluate the relative performance of the two. In terms of the clutch of scholarly studies, China seems to score. It is unavoidable, as China had remained a recluse or a ‘rebel’ for long years and shut itself away from the global system until it commenced reform efforts under Deng Xiaoping. Since then, its domestic growth and global expansion have been exponential, until the Great Recession of 2008. On the other hand, India’s record, though unique in some ways, has been steady, rather conforming to western (neo-classical) norms, and less than dramatic compared with China’s. It is not surprising that India’s story was less exciting to the academia. Indeed, there are comparative studies on broader issues like the development models adopted, the nature and pace of financial reforms, trade and technology policies, etc. Most glaringly, on specific areas like investment in the oil sector, while there are many studies on China, there is very much less on India.
It is this gap that Prof. Raj Verma seeks to fill through this book. Truly, he has all the credentials. He is now with Jilin University. He has been associated with the London School of Economics (LSE) for some years and obtained M.Phil. and PhD degrees. This book is based on his PhD thesis done at LSE during the period from October 2011 to September 2013. He says that the thesis was completed in a record time of fewer than 18 months. He has undertaken field visits to India and China and interviewed top executives and former ministers who were associated with the oil industry. He has contributed several articles, book reviews and blogs to LSE publications, especially “AFRICA at LSE.” In particular, I invite attention to the blog “The Tiger and the Dragon: a comparison of Indian and Chinese investments in West Africa’s oil industry”[i] This blog is a template of what was to come out of his PhD thesis.
Both India and China are growing economies and are energy short. They have to import oil in large volumes to meet the demands of high growth economies. They don’t have indigenous sources of oil. They are heavily dependent on oil from the Middle East and the growing political instability in that region had become a matter of serious concern, especially over the security of crude supplies. Thus, both are under compulsion to diversify their sources of oil supplies and imports. Africa, blessed with new oil discoveries, onshore or offshore, provides a valuable source to extract oil resources. India and China began their African safari long ago. There are some studies on the differences in their approaches and, invariably, the reference is to the competition between the two and India’s weaknesses.
In the blog referred to earlier, Prof. Verma identifies five important differences between India and China in their strategies to tap oil from Africa, especially West Africa. First, China is represented by State-Owned-Enterprises (SOEs) while India is represented by SOEs and/or private enterprises. Second, China has a greater outreach in West Africa operating in eleven countries compared to India which operates in three. Third, Chinese national oil companies (NOCs) are able to outbid Indian SOEs and private enterprises if and when they compete for the same oil blocks. The fourth difference is that India is more risk averse than China. While India is weighed down by prospects of political instability China braves them. Finally, international oil companies and African NOCs prefer Chinese NOCs as partners.
In this book, Prof. Verma studies in depth each of these elements through in-depth research. His research is adequately backed by field trips to India and China. He had conducted interviews with a number of oil executives, civil servants and former ministers involved in the oil sector in the two countries. These are well recorded. More importantly, he makes an attempt to analyse the developments by applying Neoclassical Realism (NCR) tenets. NCR is a new and growing theory of international relations (IR). Its emphasis is on international politics and not foreign policy and seeks to explain important outcomes. NCR is still an evolving concept. As he says, “the study uses the political economy as an intervening variable to discuss external mobilisation of resources by India and China to enhance their industrialisation and economic growth and concomitant absolute and relative power.” Prof. Verma proceeds to describe the presence of India and China in West Africa and refers to the paucity of studies on India on the subject. He feels that his study fills this gap. He undertakes it by applying the NCR tenets to the interplay between India and China and African countries. Apart from Angola and Nigeria which occupy more pages and are more detailed, he studies eight other countries in West Africa. These are Gabon, Ghana, Chad, Equatorial Guinea, Cameroon, Mauritania, Niger and Liberia.
In the early part, he studies the differences in power and political economy between India and avers that “China has greater economic and military power relative to India. India lags behind China in all the economic indicators… and India is at least a decade behind China.” He proceeds thereafter to explain the differences between them in the oil industry and concludes that the “difference in the relative power of India and China is also reflected in the oil sector.” “Chinese oil companies have greater market capitalization and financial resources at their disposal compared to Indian oil companies.” In his view, NCR captures well the differences and failure in how the two mobilise oil resources in West Africa. All his case studies are fitted or structured in the same way or as Verma himself says, it is “pattern matching.” It is more like using a slot machine or automation where similar inputs turn out similar, if not identical, outputs. This is evident while dealing with those eight West African countries. Treatment appears somewhat hurried. While China’s efforts get more attention, Indian effort is dismissed in a few sentences adding that India did not bid. If India did not bid, where was the need for comparison?
It is our view that by seeking to fit the strategies of India and China through the NCR prism, Prof. Verma misses an opportunity to traverse the whole gamut of complex issues which arise in the international arena and, in particular, in the oil sector. Politics and oil are inextricably mixed and are heady. They influence each other. For instance, he often refers repeatedly to China being a member of the UN Security Council and how it offers an undue advantage to Chinese companies vis-à-vis the Indian. He implies that China’s foreign policy plays an active role in promoting them. This is a traditional or an old world view which is no longer tenable. China’s UNSC membership was of greater advantage in securing African Group support for its “one China” policy and, in later years, to counter western attacks on China on human rights issues. China and many African countries had a common cause. However, in the oil sector, the influence was marginal. CNPC’s investment and entanglement in Sudan will illustrate this point. To elaborate this further, China’s outward investment antedates its “go out” policy. As Luke Patey says, “The corporate goal of CNPC to expand overseas and its high level of autonomy from the Chinese government have indirectly steered China’s foreign policy. Without its presence in the Sudans, China’s involvement in the crisis diplomacy in both the countries would be minimal. Instead, in the face of conflict in the Sudans in recent years, the Chinese Ministry of Foreign Affairs has in practice to discard its stringent adherence to non-interference principle by engaging in conflict resolution and urging the warring sides not to target Chinese investments and personnel.”[ii] The point we wish to urge is that there are ever growing and complex inter-relations between national corporations and foreign policy establishments and foreign policy is not the singularly operating force. It is indeed true that foreign support is essential in promoting the global interests of national corporations. But it is not a one-way traffic. Prof. Verma has explained at length how India’s foreign office has not provided adequate support to them in Africa. There are only a few Missions covering West Africa and, often, one Mission covers many countries. Further, the Missions are under- staffed. Sadly, India’s policy establishment has been more west- oriented and Africa has occupied a low priority among then. Only in recent years, there is greater attention to Africa.
The author is right in drawing attention to the fact that China operates through its state-owned-oil giants and India through both public and private sector companies. India’s efforts to get oil from Africa have always been through state-owned companies such as ONGC (OVL), IOC, HPC, etc. The only private company operating in Africa is ESSAR. Verma wonders why this is so. It is because oil ventures are highly capital- intensive and highly risky. Even in the domestic auctions for oil fields, there are hardly Indian bidders. Even those who bid do so by forming JVs or partnerships with foreign parties. All the same, one has to take note that private sector companies have been operating in Africa in areas like services, construction, transportation, etc. BHEL has invested in power projects in Rwanda, Sudan and Tanzania. Bharti Airtel has expanded aggressively in the telecom sector in the African market. Tata outbid Chinese and European companies in Senegal to become the primary supplier of vehicles for Senegal’s public transport. The projects covered by Indian investors represent a far more diversified portfolio of smaller investments than China’s. These sectors include agriculture, IT, telecom and healthcare/medicine.
An important poser raised by Verma is that China’s SOEs are able to outbid Indian companies and also bid for a large number of blocks as in Nigeria. This is indeed so. They are ready to take heavy risks and invest in countries marked by violence and civil disturbance. One major reason is that in many of these countries, western international oil majors like Shell, Exon, etc. are entrenched and hold profitable blocks. The blocks offered to new entrants like China or India are more capital intensive and less profitable. The other is that, at the national level, with concerns over build- up of foreign exchange reserves which reached $3 trillion some years ago, the Chinese authorities were keen to diversify them to get a better return instead of keeping them in low-yielding Treasuries. China’s NOCs were backed by policy banks which offered loans at low-interest rates. Over time, there were policy changes governing the relations between the Chinese government and its NOCs. For instance, by early 1990s government decided to reduce its direct financial allocations to NOCs and they were forced to assume responsibility for their balance sheets. The introduction of price controls on domestic sales made it difficult for them to profit from downstream operations. “And, given the shrinking reserve-to-production ratios in the domestic upstream, the NOCs opted to invest abroad. Moreover, overseas acquisitions were seen as a means of distancing corporate activities away from government scrutiny.” [iii] The Chinese NOCs began to follow their own strategies which diverged or event in conflict. They began to compete among themselves to acquire fields which “were either too costly to explore under market conditions, or were located in countries with high levels of political risk.” They were assisted by the deep pockets of the government. Around those years, India was passing through low rate of economic growth and began to rise some years after the reforms were introduced in 1991. It took some more years to build foreign exchange reserves which began to cross $350 billion a decade later. Unlike China, India could hardly use those reserves which were different in character. By the time India could reach higher growth, our corporates were loaded with debt, especially in foreign currency and could hardly raise the capital required to fund large value, high-risk oil ventures. On all accounts, Indian companies have been financially constrained while competing against their Chinese counterparts. Compared with China’s banks some of them had turned into global banks, India banks are relatively weak and are unable to underwrite large value projects, especially with foreign exchange risk.
China was able to create goodwill among many African governments. It began in the sixties when they gave support for their freedom struggle against colonial governments. Later, they followed it up with large value loans for building infrastructure projects such as roads, rail, bridges, housing, etc. China’s growth and the economic model it followed, described as “Beijing Consensus”, attracted them towards China. When some of those countries were indebted to the IMF/World Bank and subjected to stringent conditionalities, China bailed them out with concessional loans or outright grants. India was in no position to offer any loan or assistance on a massive scale as it was itself dependent on assistance from the IM/Bank or Western Consortium. India could offer only credit lines through Indian banks. So, when it came to the question of offering oil fields or any other project, China was the preferred partner. Moreover, in recent decades, China had also built a phenomenal reputation for its project implementation capability. Unfortunately, India’s record in this regard has been poor. It is natural that African governments and foreign IOCs also preferred China.
There is a view among many scholars, including Prof. Verma, that China’s record in Africa is a success story. This is in doubt. As David Dollar[iv] has explained, SINOPEC’s investment in Angola has turned into a black hole. Investments of the order of $10 billion have soured due to poor performance, exaggerated oil reserve estimates and sharp declines in international oil prices. Angola finds itself in a bind. If it services China’s loan through oil supplies, it will hardly be left with any surplus oil for free market sale. Since Angola is heavily dependent on oil revenues, it will face bankruptcy. As Dollar elaborates, equity returns are low and amount to wasting public resources.
Have these investments created oil security for China? The Oxford Study[v] is clear on this. Despite all the emphasis laid in the 2000s on the need to diversify import sources and “despite the billions in global oil markets, China still relies on Russia, Saudi Arabia, Angola, Oman and Iran for two-thirds of its imports.” Moreover, Chinese oil companies are known to sell the extracted oil sources to third countries! This anomaly arises due to the fact that, as suggested by some specialists, “China’s Africa strategy is not free of problems or controversies.”[vi] “The most vocal criticism inside the Chinese policy community is that China fundamentally lacks an Africa strategy and commercial interests have overtaken (and even undercut) other national interests. There is a constant tension between the narrow, mercantilist pursuit of mercantilist interests in Africa and that pursuit’s impact on the overall health of the Sino-African relationship and China’s international image.”[vii] As another African specialist explained, “one of the great misconceptions about China-Africa business relationship is that there’s some smoke- filled room where all the SOEs sit around and divvy up the projects. This doesn’t exist.”[viii] Instead, as she says, there is “a tonne of competition” among Chinese state-owned enterprises for projects, and even among subsidiaries of the same enterprise. About India too, there are similar misgivings. A study of CSFRS on international dimensions of India’s energy security concluded that “the foreign acquisition trend has not much to do with India’s energy security. Interestingly, …..OVL sells it Sakhalin oil to Russia and its Burmese gas to China.”[ix] “Indian energy majors prefer to sell their fuels abroad because the controlled price policy in India implies that they have to sell oil and gas at discounted prices that are disconnected from the global trends. It may be difficult to capture these facts and trends both in India and China within the tenets of NCR.
The idea in narrating at length these features is to capture the complexities of the oil market in the global context. Prof. Verma has indeed undertaken an extraordinary study in a record time replete with academic references and records of interviews with the leading personalities involved in policymaking. His attempt to study the currents and cross currents through only the NCR prism seems partial if not straight jacketed. This is not a criticism of his work which is truly valuable. Rather, it is an attempt to test an alternative point of view of the global developments in the oil industry.
[i] Verma, Raj (2013): The Tiger and the Dragon: A comparison of Indian and Chinese investments in West Africa’s oil industry, October 28, available at http://blogs.lse.ac.uk/africaatlse/2013/10/28/the-tiger-and-the-dragon-a-comparison-of-indian-and-chinese-investments-in-west-africas-oil-indusry/
[ii] Patey, Luke (2016): China’s New Crisis Diplomacy in Africa and the Middle East, Danish Institute for International Studies, DIIS Policy Brief, January.
[iii] Meidan, Michal (2016): China’s loans for oil: asset or liability? Oxford Institute For Energy Studies, December. I draw heavily on this paper for this part.
[iv] Dollar, David (2016): China as a Global Investor, Brookings, Asia Working Group Paper 4, May.
[v] Ibid. Item (3) above.
[vi] Sun, Yun (2014): Africa in China’s Foreign Policy, Brookings, April.
[viii] Hruby, Aubrey (2015): The Next Africa: An Emerging Continent Becomes a Global Powerhouse.
[ix] CSFRS (2014): The International Dimensions of India’s Energy Security, February. Author Isabelle Saint-Mezard, Asia Centre.