Biden's Potemkin Village Pivot to Africa

The White House's ideologically hobbled African investment drive is high on rhetoric, but low on practical assistance to would-be U.S. investors.

Key Takeaways

• Biden’s initiatives are high on rhetoric and aspiration, but do little to materially facilitate dealmaking (focus on prospective deals in Zambia and the Democratic Republic of the Congo (“DRC”)).

• Biden’s pivot prioritizes ideological goals that appeal to American Democratic voters rather than strategic investment projects that advance U.S. interests.

• The U.S. underinvests relative to China and uses a cumbersome aid model conditioned on structural reforms by African governments.

• American companies looking to invest in Central and Southern Africa remain largely unprotected and must structure, finance, diligence, negotiate and otherwise work their way through transactions on their own without guarantees or backing by a U.S. equivalent of China’s state-managed lending and investment entities.

• Specific business deal guidance for would-be U.S. investors at the end of this post.

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Background

U.S. President Biden says that he’s “all in” on trade and investment with Africa.

At a grand U.S.-Africa Leaders Summit (“Leaders Summit”) last month attended by representatives from 49 African states and the African Union, Biden noted that:

“Africa’s economic transition depends on good government, healthy populations, and reliable and affordable energy…the United States is committed to supporting every aspect — every aspect of Africa’s inclusive growth and creating the best possible environment for sustained commercial engagement between Africa companies and American companies.”

Biden announced $15 billion in two-way trade and investment commitments, and the White House released a detailed fact sheet touting the Administration’s African pivot. These included: (i) a sweeping Memorandum of Understanding (“MOU”) between the U.S. and the African Continental Free Trade Area (“AfCFTA”), a massive free trade bloc encompassing most of Africa, (ii) $369 million in new investments from the U.S. International Development Finance Corporation (the “DFC”) across Africa focused on food security, renewable energy infrastructure, and health projects, (iii) various MOUs between the U.S. Export-Import Bank (“Ex-Im Bank”), the African Export-Import Bank and the African Finance Corporation and (iv) various commitments from the U.S. Agency for International Development ('“USAID”) totaling some $500 million for myriad health, food security, climate, gender equality and social inclusion programs and initiatives.

Alongside these commitments, there were a few private deals inked with U.S. companies. A standout was a $150 million joint venture commitment from KoBold Metals (“KoBold”), a start-up which uses artificial intelligence technology to process drilling data and improve exploration for base and industrial metals, to develop the Mingomba copper-cobalt mine in Zambia. KoBold counts Bill Gates’ Breakthrough Energy Ventures and Australian mining giant BHP Group Limited as shareholders, and will acquire a non-operating stake in the mine together with Zambia’s state-controlled ZCCM Investments Holdings and Australian private equity firm EMR Capital.

It’s worth noting how anxious KoBold was to emphasize that (i) it isn’t a mine operator, (ii) it would limit its management of the Mingomba mine to technical assistance, and (iii) environmental rationales guided its investment decision — copper and cobalt are vital metals for lithium-ion batteries, solar cells and other clean energy products. KoBold wasn’t looking to do a traditional mining or infrastructure development deal. This seemed more like a showpiece venture for the Biden White House to signal that American capital destined for Africa would stay in an ideological lane — KoBold is backed by the “right” (politically speaking for Biden) shareholders and has appealing environmental and socially conscious reasons for investing.

A day before the Leaders Summit kicked off, U.S. Secretary of State Antony Blinken signed a separate MOU with representatives from Zambia and the DRC aimed at creating a new electric battery supply chain (the DRC is the world’s largest cobalt producer and Zambia, as mentioned, produces cobalt and copper). Blinken exuberantly remarked that:

“The DRC produces more than 70 percent of the world’s cobalt. Zambia is the world’s sixth-largest copper producer, second-largest cobalt producer in Africa. Global demand for critical minerals is going to skyrocket over the next decades. The plan to develop an electric battery supply chain opens the door for U.S. and like-minded investment to keep more value added in Africa. Electric vehicles help reduce carbon emissions; they support the global response to the climate crisis.”

Top of mind, but not mentioned, by Blinken was the specter of China’s operations in the region.

Beijing’s active involvement in the DRC’s cobalt sector goes back more than a decade. Chinese companies own or finance 80% of the country’s industrial cobalt mines. Some 15 of 19 primary cobalt mines in the DRC are Chinese-controlled, and there are reports of these being operated remotely from China with minimal high-level onsite management. The DRC’s government recently initiated a broad review of Chinese mining contracts due to concerns about everything from mistreatment of workers and corrupt mining practices (including alleged underreporting of extracted cobalt) to worsening debt exposure and accusations that Chinese companies haven’t followed through on building enough schools, roads and other hard infrastructure as contractually agreed. The Biden Administration, seeing a potential opportunity and worried about China’s surging domestic cobalt processing capacity, seems keen to take advantage and try to woo the DRC its way.

Biden’s Bowl of Steam for U.S. Investors

Despite lofty pronouncements, the Biden Administration is mostly serving up a bowl of steam for would-be U.S. private investors in Central and Southern Africa.

Not only is Biden sticking to an obsolete aid over investment model in dealing with the region, but his approach is ideologically compromised. Just look at the White House’s championed investment initiatives — clean energy, women’s empowerment, social justice, health (vaguely defined) projects and the like. This as the Chinese have and continue to focus on hard infrastructure financed by debt from Chinese development banks or equity from Chinese state-owned companies, built or overseen by Chinese imported workers and managers, and secured by strategically important assets of the host country. This is before considering the gap in volume of total regional investment, where Chinese foreign direct investment across Africa is more than double America’s and two-way trade volume exceeds ours by a factor of four.

On quality and quantity, Biden is promoting a Potemkin village. Not only that, but his Administration is putting a reform cart before the investment horse and hopes to condition a real ramp-up in US capital flows on structural, legal and other political changes African governments are expected to make; this approach, a staple of International Monetary Fund (“IMF”) lending policy and U.S. foreign aid programs, is a commercial dead-end, does next to nothing for dealmakers looking to commit capital to Africa today and acts as a comfort blanket to dither as rivals expand their market share.

Worse, nothing offered by the White House or federal agencies eases the dealmaking process for prospective U.S. investors forced to operate in a particularly high-risk environment. There is little in the way of guarantees, backstops and government resource concentration on the American side to help U.S. companies reduce the cost of financing and diligencing potential deals across Africa, obtain insurance and negotiate indemnification terms with oftentimes inadequate or circumspect business information, and/or rely on political commitments that their African counterparts will meet their obligations.

These problems, taken together, seriously undermine the Biden Administration’s entire Africa policy. Despite mounting concerns over China’s debt trap diplomacy, broken promises and overbearing influence, African states will stick with Beijing absent real alternatives.

Choosing Ideology over Strategic Investment

As Biden’s and Blinken’s remarks, and the White House’s Leaders Summit fact sheet, show, the U.S. is trying to align its African investment pivot with its domestic ideological values. Instead of pursuing practical projects with new public-private partnerships that will advance America’s narrow interests and geopolitical influence in Central and Southern Africa, the Biden Administration is furthering domestic politics by other means.

Worse, much of what’s been touted is vague, aspirational or kept deliberately ambiguous. Take the MOU with the AfCTA — a messaging document if ever there was one. Here are a few so-called “cooperation areas” between the U.S. and this massive trade bloc described in Section II (emphasis added):

The promotion of an inclusive trade environment in AfCFTA countries and the United States that promotes economic advancement for women, youth, and underserved groups in trade;

The development of relevant AfCFTA instruments to facilitate responsible digital trade to ensure movement of vital goods and services to households;

The encouragement of partnerships between the private sectors of the State Parties to the AfCFTA Agreement and the United States to establish joint programs and activities; and

The facilitation of opportunities aimed at promoting inclusive sustainable growth and facilitating private sector and civil society engagement to stimulate trade and investment and cooperation between the United States and State Parties to the AfCFTA Agreement.

The MOU provides for ongoing consultations with technical groups from the two sides, while underscoring that (i) nothing in the MOU is intended to give rise to international legal rights or obligations from either party and (ii) each party will engage in activities related to the MOU within its own legal framework. In other words, the MOU doesn’t impose any concrete obligations on African states looking to do business with U.S. companies to keep to their contractual terms.

There is no insistence by the U.S. in the MOU to, for example, have African state or private counterparties to would-be U.S. investors use U.S. law in their deal documents. Nor is there any express covenant or commitment to streamline core aspects of the dealmaking process to assuage deal costs and risks for U.S. companies. As a framework for the U.S. government to do business with most of Africa, given that the White House regards globally elevating the AfCFTA and clearing trade obstacles with its members as important policy goals, the MOU doesn’t begin to scratch the surface of what’s needed.

Broad investments in “food security”, “gender equality”, “climate” and “social inclusion” initiatives are confusing and untethered enough, but consider that the Chinese (chiefly the Ex-Im Bank of China) hold some $153 billion in African debt. They are Zambia’s largest creditors and took center stage as the country recently sought IMF relief after defaulting on its debt due to Covid-related economic shocks. To put this in perspective, America’s Ex-Im Bank authorized $5.8 billion in loans in total during its 2021 Fiscal Year. Biden’s Africa pivot commits $15 billion spread across an alphabet soup of agencies and programs covering the continent. The Chinese exceeded that level more than two years ago and have been ahead of the U.S. in foreign direct investment (and well ahead in lending) since 2014.

Where are the Chinese committing their capital? Well, take the 85% acquisition by China’s state-owned Nonferrous Mining Company of Zambia’s massive Luanshya and Chambishi copper mines over a decade ago, or the Jinchuan Mining Group’s 51% controlling stake in the country’s only nickel mine. At one point, even the predecessor entity to ZCCM Investments Holdings — the same company that did the deal with KoBold - had a Chinese controlling shareholder. What we have in Africa are two competing investment strategies and the U.S. has a lot of catching up to do. What the White House is proposing right now won’t make up the difference.

Putting the Reform Cart before the Investment Horse

Not only is the Biden Administration putting domestic ideology ahead of strategic investing, but it’s also looking to condition major increases in U.S. commercial activity in Africa on political and structural reforms by African states. This was on full display at the Leaders Summit and follow-on press releases, mission statements and remarks from representatives of leading federal agencies.

What this means in practice for would-be U.S. investors is that they can expect little practical assistance from Washington when it comes to technical aspects of their specific deals. They are largely on their own and have to rely on their African state and private counterparts to align with them on how best to do business and negotiate transactions.

Until African states, including Zambia and the DRC, materially reduce corruption, improve labor and environmental standards, fortify their capital and financial markets and offer a more transparent and predictable dealmaking process for investors, the U.S. will act cautiously where it won’t otherwise scold and press. American programs or efforts to cushion, insure or otherwise protect against at least some of the commercial risk will be few and far between. Exceptions, such as loan guarantees provided by the Ex-Im Bank to American exporters to help finance their deals (disclosure: the author has worked on several such transactions involving U.S. aircraft manufacturers while in private practice), will have narrow mandates and bureaucratic constraints.

This reform before investment approach stands in stark contrast to what the Chinese are doing at a political and transactional level. While the U.S. was waiting for investment conditions to improve and prioritized projects that suited its values, the Chinese exploited every opportunity and filled every vacuum they could to create their own version of a co-prosperity sphere connecting their manufacturing, technological, managerial and processing capabilities with African state beneficiaries’ labor and raw materials.

All of this is why even Blinken’s ostensible goal of building a separate supply chain for electric batteries in the DRC comes off as just another inside-the-Beltway gimmick. The U.S. starts the game ten points behind and with its best players hobbled by ideological albatrosses that get in the way of dealmaking. The biggest beneficiaries on the American corporate side of this situation are companies like KoBold, which check off the necessary political boxes, have liquid, well capitalized shareholders able to quickly draw down on credit lines, commit additional equity and absorb substantial losses and can easily find partners for joint ventures to limit exposure and carefully control the size and substance of their ownership stakes. Outside of these or large-cap companies for which a total loss in, say, Zambia or the DRC on even a controlling stake in a mine would be a recoverable, fiscal year end rounding error, many would-be American investors are unlikely to take the risk.

What Should Would-Be U.S. Investors in Africa Do?

• New U.S. Overseas Investment Policy Needed: The U.S. needs a fundamentally new approach to overseas strategic investment, which I will cover in later posts. For now, there is simply too little in the way of direct U.S. government assistance to companies to help them secure financing for deals, reduce the costs of insurance, regulatory compliance and transactional diligence or cushion losses from contingent liabilities not discovered during deal negotiations.

• New Contractual Provisions; Choose U.S. or English Law: Would-be investors will have to build in extensive indemnification provisions, break-up fees in the event of pre-closing contractual termination and waivers for various geopolitical and market risks in order to compel their African state or private counterparts to fulfill their obligations. Investors should also insist on having their deal documents be governed by English or U.S., rather than local, law wherever possible (worth noting that Chinese state-owned firms operating in Africa have sought the application of Chinese law to their deals as well as their litigation in Chinese courts).

• Representation and Warranty Insurance: Beyond choice of law and venue for dispute resolution, another handicap is that representation and warranty insurers will likely not provide coverage for transactions in high-risk, African jurisdictions. There has been a revolution in U.S. corporate law over the last decade where stand-alone indemnification provisions to cover breaches of representations and warranties by contracting parties have been replaced with representation and warranty insurance (i.e., instead of looking to the indemnification thresholds and maximum indemnification amounts for compensation in the event of breach, the parties would rely on a fixed amount of insurance coverage).

• Trustworthy Local Partners; More Extensive Diligence: In the absence of basic transactional protections and reliable dealmaking standards, U.S. companies will need to find local partners they can trust and do far more extensive transactional diligence than they otherwise would, particularly when it comes to deal red flags tied to changes of control or actions that would constitute material adverse effects for sellers or the target companies being acquired.

• More Extensive Deal Document Disclosure; Escrows; Earn-Outs and Additional Diligence Confirmation: U.S. investors would also need to demand far more extensive disclosure in the deal documents and more stringent closing conditions. In extreme cases, they may even opt to hold part of the acquisition or investment price in escrow subject to earn-outs or additional confirmation that what was disclosed prior to the closing of the deal was accurate.

As would-be investors grapple with these transactional challenges and think up transactional solutions for them, the added costs will only make them more cautious about where to commit their resources. This will worsen underinvestment while having harmful second and third order effects on other areas of business involving these investors. Sadly, Biden’s Africa pivot offers little in the way of practical relief.

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