Canadian companies urged to look at the cost of doing business with despots

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While the streets of North Africa were filled with revolution, dozens of Canadian mining companies were enjoying a placid convention at the southern tip of Africa, in the sleepy city of Cape Town.

Around the halls of Africa's biggest mining summit last month, there was little talk of democracy. And why would there be? Canadian investors have always cared more about political stability than political freedom. With commodity prices booming, many were confident that authoritarian regimes will continue to prove as profitable as any democracy.

But the dramatic rebellions in Egypt and Tunisia - and, a few days after the convention, in Libya - have shown the risks of relying on autocracy. Two of Canada's biggest companies, SNC-Lavalin Group Inc. and Suncor Energy Inc., suddenly found their reputations tarnished and their massive Libyan investments in jeopardy as the country collapsed into violence.

Is it time for a reassessment of doing business with despots? Around the world, Canadian companies have invested billions of dollars in dozens of undemocratic regimes, from Congo and China to Russia and Zimbabwe. Now they are facing awkward questions - and perhaps a new assessment of what "political risk" really means.

Tye Burt, chief executive officer of Toronto-based Kinross Gold Corp., one of the world's six biggest gold companies, says he wrestles with these questions all the time. He says he wouldn't have invested in Chile under the military junta of Augusto Pinochet, no matter how attractive its mining sector. And his company sold its assets in Zimbabwe in 2006, partly because of the political turmoil under the autocratic president Robert Mugabe.

In any decision on mining investments around the world, he says, Kinross must ask itself: "Can we live with the environment, politically and economically?"

The company tries to do its homework before investing. "A stable dictatorship would not be a good investment," he says. "Ultimately those regimes will face the political changes that we're seeing now [in North Africa]"

Yet while rejecting some countries, Kinross has chosen to invest billions of dollars in Russia and Mauritania - two countries that are considered "not free" in the latest reports by Freedom House, the respected U.S.-based institute that conducts an annual global survey of democratic freedoms and civil liberties.

Both countries have held elections in recent years, but there were serious doubts about their legitimacy. In both countries, opposition activists are harassed, and human-rights abuses are common. It's not something that Canadian investors like to discuss.

"We're not sitting in judgment of the political process," Mr. Burt says. "We're dealing with the administrators. At some point you have to act in the best interests of your shareholders and your employees."

Mauritania suffered a military coup in 2008 and last year's election was won by the former army commander who led the coup. But the country is "moving in the right direction," Mr. Burt insists. He notes that his company is providing thousands of jobs in Mauritania, along with $10-million for a mining school to train geologists and technicians.

On Russia, he is more cautious in what he says. "We have to be pretty circumspect on the political front," he says. "But we've found it to be stable and improving."

Canadian business leaders are generally uncomfortable with questions about the lack of democracy in the countries where they invest. Like Mr. Burt, they prefer to talk about the benefits they provide to the local population, the jobs they create, and their consultations with the local communities.

Consider the case of Eritrea - one of the most repressive countries in the world and one of the few that has never held a national election in its entire history. Human Rights Watch says the small African country is becoming "a giant prison" of torture, arbitrary arrest, forced labour and lengthy military conscription. One of the biggest investors in Eritrea is a Vancouver-based company, Nevsun Resources Ltd., which is developing a $260-million gold mine there.

Asked about the human-rights abuses and the lack of democracy, Nevsun president Cliff Davis is reluctant to discuss it. "I don't see any of that affecting us," he says. "It's a tough one for me to judge. There are always tradeoffs in where you're working. As a mining company, we shouldn't be imposing some form of political environment that we're familiar with. It's self-determination."

He prefers to talk about Eritrea's lack of corruption, its political stability and the integrity of its leaders. "It's not a wealthy elite class - they're very highly principled," he says. And he talks about the jobs and other benefits that the gold mine provides to the community. "When you have consensus and grassroots involvement by the communities, it can be just as important as a voting process."

Canadian investors are rarely in the spotlight for their business dealings in obscure countries like Mauritania and Eritrea, but they would be foolish to assume that the public will never notice. Canadian companies such as Talisman Energy Inc. and Ivanhoe Mines Ltd. sparked a furor when they invested in the autocratic regimes of Sudan and Myanmar, where they were accused of involvement in human-rights abuses.

Talisman came under such heavy criticism for its oil holdings in Sudan that the company eventually pulled out of the country in 2003. Activists accused the company of being complicit in genocide by allowing its oil revenue to help pay for Khartoum's military machinery. This campaign led to divestment by some U.S. shareholders, depressing the company's stock price until it sold its holdings.

In Myanmar, a country under the heel of a repressive military regime, Ivanhoe faced strong criticism for its major copper mine. Ivanhoe transferred its 50-per-cent stake in the mine to a third-party trust fund in 2007, but continued to receive revenue from the trust fund. Activists continue to dog the company.

In China, several Canadian companies - including Bombardier Inc., Power Corp., Nortel Networks Corp. and Continental Minerals Corp. - were subjected to pressure campaigns by Tibetan activists because of their investments in Tibet-related projects. China's human-rights abuses in Tibet have brought negative publicity to all of these companies.

Jamie Kneen, spokesman for the independent Ottawa-based group MiningWatch Canada, says there are good reasons for Canadian businesses to avoid investing in authoritarian regimes. Intentionally or not, their investments can end up supporting a regime that commits human-rights abuses, he says.

"If the company is asked, can it show that none of its payments went to support those abuses and that none of its infrastructure was used for the benefit of the military in repressive regimes?" he asks.

"There is a pragmatic reason too. Undemocratic regimes may suffer revolutions, while in democratic countries there is a process that is followed."

Yet democracy is rarely a top-of-mind issue for Canadian businesses overseas. The Fraser Institute does an annual survey of thousands of mining companies around the world, asking about the attractiveness of foreign-investment destinations. It asks about "political stability" - and many other factors - but does not ask about democracy or political freedom.

Its latest survey, released this year, found that China was ranked as more "politically stable" than California or Colorado. (In other words, investors said they were less deterred by China's political climate than by that of California or Colorado.) The authoritarian country of Vietnam is ranked as more stable than the democracies of Mexico or Peru, while the undemocratic nations of Russia and Kazakhstan are seen as more stable than the democracies of Guatemala or Bolivia.

Fred McMahon, co-author of the Fraser Institute survey, argues that these are rankings are exceptions to the trend. "The favourably ranked destinations do tend to be democratic," he says. "For the most part, stability and certainty are greater in liberal democracies. Mining companies do prefer to work in stable democratic countries."

In recent years, Canadian mining companies have become more conscious of their responsibility to the local communities where they operate. Most have invested substantial sums in social benefits - schools, clinics, training programs - and some have joined in transparency initiatives to disclose publicly their royalty payments, helping ensure that their revenue is not stolen by the wealthy political elites in authoritarian regimes.

But much more could be done. Consider the massive Canadian investment in the Democratic Republic of the Congo, the impoverished war-torn nation in central Africa. Despite holding elections in 2006, Congo is far from democratic. Opposition leaders and journalists have been assaulted, arrested, jailed or even killed.

Yet Canadian companies have scrambled into the country, competing for its mineral wealth. Today a dozen Canadian miners hold $3.3-billion in assets in Congo - one of the biggest Canadian investments in the developing world.

Denis Tougas, a Congo analyst at a church group in Montreal, says the Canadian investors could be doing more to push for transparency, fairness and public disclosure of its payments in the country. Instead they are often content to accept "the rules of the game," he says. "Stability is the key for investment, not democracy. Who can secure your investment? The people in power."

This might be finally changing. A new breed of Canadian investors in Congo is forthright in saying that they want to help build democracy in the country.

"Social and economic reform is something that forms an integral part of our core strategy," says Simon Village, executive chairman of Banro Corp. of Toronto, which is developing a $377-million gold mine in eastern Congo.

The company's strategy, he says, is "to ensure that the benefits of the mineral development are spread widely in the region and country."

Another Toronto-based miner, CuCo Resources Ltd., has raised $75-million to develop copper mines in Congo. The company's chief executive officer, Malik Talib, says there are risks to dealing with autocrats. "It has to factor into your equation," he says.

"A successful democracy would create more stability. Being transparent and fair with the authorities is important. What we're seeing in central Africa is a real push toward greater transparency."