01 May 2013 | Vol. 4, № 14.

From the Editor’s Desk

Dear FDI supporters,

Welcome to the Strategic Weekly

Analysis. This week’s issue starts with an

examination of Australian responsibility to

provide aid to Jakarta in the wake of

increasingly frequent natural disasters,

especially flooding.

We then look at the implications of Burma

becoming the new economic

battleground between China and the

West, as sanctions lift and investment

from non-Chinese backers increases.

Confrontation continues over the

disputed Himalayan border between

China and India, and we investigate the

consequences of the escalating tension

between the two powers.

Also in India we examine the economic

and political implications of the decision

by the ruling UPA party to delay several

major infrastructure projects. We also

consider the follow-up review of the

recent Food Security Bill, and whether it

has managed to gain traction in spite of

widespread criticism.

Still in South Asia, we look at the prospect

of a trans-national gas pipeline between

Pakistan and Iraq, and consider the

regional implications of such a venture.

We

Finally, we look at Africa, where massive

US investment in Djibouti’s defence

capabilities confirms the importance of

the country to Washington’s interests in

the Horn of Africa.

We also examine the upcoming elections

in Zimbabwe, in particularly a new mining

tax, and the potential impact on the

regional mining industry.

I trust that you will enjoy this edition of

the Strategic Weekly Analysis.

Major General John Hartley AO (Retd) Institute Director and CEO Future Directions International

*****

Page 2 of 16

Jakarta: Increased Risk of Disaster Merits an Effective

Response

The risks of substantial natural disasters are rising in Jakarta. Although the risk of loss of

life has been reduced, the economic costs of lowering it are increasing. Investment from

the Australian aid programme aimed at reducing the risks from disasters should be a

priority.

Background

Natural disasters in Indonesia are following a global trend: the human cost is down but the

economic cost has risen. Flooding in Jakarta in January 2013 resulted in an estimated total

cost of US$700 million, including damage and economic loss. While previous disasters have

encouraged government and aid groups to reduce risks and attempt to mitigate potential

damage, recent experience has exposed the city’s continuing vulnerability.

Comment

Several factors have increased Jakarta’s vulnerability to flooding. Ironically, one of these is

the city’s development, something that is unlikely to slow. The result of deforestation and

construction is that for the areas where water can sink into the earth have been greatly

reduced. As a result, water now flows from the surrounding highlands towards the coast and

into Jakarta at a far faster rate. Increased water runoff raises the risk of flooding

substantially. Rising sea levels also threaten the city, which falls 3.5cm further below sea

level annually, increasing the propensity of water to pool. Estimates indicate that 40 per

cent of Jakarta is already below sea level.

As the risk of a serious natural disaster rises, authorities are looking for effective risk

reduction projects. An effective solution would be widening the rivers that run through the

city. The Jakarta administration, for example, aims to widen and dredge the Ciliwung River,

to increase the capacity and flow of water. There are substantial political and social hurdles,

however, and it is not clear whether the project will ever be completed. Some 34,000

families live on the river’s banks and are reluctant to move to the proposed government-

provided apartments. Furthermore, the cost of this project is not yet clear. A master plan for

the reduction of disaster-risk is in the works; it has an estimated total implementation cost

of US$1.54 billion.

Australia expects to provide a total of $540.1 million in aid to Indonesia in the 2012/13

financial year. Approximately five per cent, or about $27 million, is designated for

humanitarian and disaster responses. This includes amounts to be spent on disaster-risk

reduction spending. The importance of disaster-risk reduction programmes cannot be

underestimated. Following the catastrophic Boxing-Day tsunami of 2004, in which more than

140,000 people died, the Howard government announced a $1 billion aid package. That

experience encouraged government and aid groups to invest in effective risk reduction

projects. If such facilities had been in place before the tsunami, the death toll would have

been drastically reduced. Additionally, foreign development assistance could then be

directed towards reducing the impact of natural disasters.

Page 3 of 16

Indonesia is an increasingly important economic partner for Australia. Over the last financial

year, two-way trade increased by 8.3 per cent. As shown by the January floods this year,

however, even small-scale natural disasters can take a serious toll on the Indonesian

economy. The floods brought Jakarta to a stand-still. Another large-scale disaster could

devastate it; however, effective risk reduction investment could minimise both loss of life

and economic loss. This would mean a faster recovery for the city itself, and would reduce

the effects flowing to the increasing number of economies interdependent with Indonesia’s.

As the risk of natural disaster rises, so must investment in disaster-risk reduction. Australia

can encourage the Jakarta administration to invest in such programmes. The direction of

current and future development assistance into such projects would also represent a more

efficient allocation of Australia’s aid budget.

James Davies Research Assistant Indian Ocean Research Programme

*****

As EU Eases Sanctions on Burma, China is forced to Reassess

Its Approach

China no longer has exclusive access to Burma. As a result of Burma’s political reforms, the

country is opening up to Western investment. The increased foreign investment is good for

Burma, but is forcing China to review its business approach there.

Background

The European Union has announced that it will lift its economic, trade and individual

sanctions against Burma, in response to the political reforms implemented since 2010. Since

military rule began in 1962, Burma’s primary foreign investor has been China. Now Europe

and the United States, which has also lifted or suspended its sanctions against Burma, have

begun to invest there. This is having strategic consequences for China and its business

strategy.

Comment

Chinese investment in Burma is very concentrated; at least US$14 billion in various projects,

including infrastructure, natural gas, an airport, and a hydroelectric project. Millions of

Chinese have migrated to Burma for work and Chinese influence is felt strongly throughout

the country. But since the government of President Thein Sein started down the path of

political reform, things have changed. Many Burmese are beginning to resent the level of

Chinese influence in their country. In 2011, the widely unpopular US$3.6 billion Myitsone

Dam project, funded by Beijing to deliver power to southern China, was suspended by the

Burmese Government.

Page 4 of 16

According to the Myanmar Times, during the military junta era Chinese businesses followed

a model in which the key to projects was to build a relationship with government officials,

without consulting non-government stakeholders.1 Garnering support among the local

community was not seen as a necessity. Now the political situation has changed. As the

civilian-influenced government has implemented reforms and members of the public are

increasingly able to voice their opinions, China has seen support for its projects evaporate.

One project that could be at particular

risk is the Burma-China Pipeline. The

strategic pipeline, scheduled for

completion on 30 May 2013, runs

from the port of Kyaukpyu, in the

troubled coastal state of Rakhine, to

the city of Ruili in the Yunnan province

of China. Once operational, it will

allow crude oil and gas to be shipped

from the Middle East via the Indian

Ocean, bypassing the vulnerable Strait

of Malacca. The pipeline has the

capacity to move 28 per cent of

current Chinese gas imports overland.

While the pipeline greatly reduces

China’s concerns surrounding the

Malacca Strait chokepoint – its so-

called “Malacca Dilemma” – it is unpopular in Burma. The project has been criticised by local

governments for land misuse, inadequate compensation and environmental problems. The

Burmese opposition considers it a violation of national sovereignty, seeing Chinese

companies as corrupt and unfairly receiving preferential concessions for projects. Even

though it is unpopular, the pipeline project is likely to continue, but future Chinese projects

to expand its capacity are likely to encounter political barriers.

China will undoubtedly worry that closer ties between Burma and the West will threaten its

interests in the region. Chinese companies no longer have exclusive access to Burma and will

need to compete with Western companies seeking investment opportunities there. Chinese

companies must change their business practices, primarily by consulting key stakeholders

outside the government. This will be especially true of projects with large environmental

footprints and significant economic and social impacts. At this stage it is still hard to know

how well China will be able to adjust to the changing political situation in Burma.

Now that Burma is opening up, one concern for China is that other regional

powers, concerned with China’s growing influence, might want to influence Burma to lean

away from Chinese interests. India, Burma’s western neighbour, is concerned about China’s

1 Gordon, J., ’China: A Hidden Danger in the Reform Process,’ Myanmar Times, 19 November 2012.

<http://www.mmtimes.com/index.php/opinion/3172-china-a-hidden-danger-in-the-reform-process.html?limitstart>

Page 5 of 16

ability to project power into the Indian Ocean region. According to the Myanmar Times,

many Chinese policy analysts perceive the rapprochement between Burma and the West,

political reform in Burma and the undermining of Chinese projects, as part of a US-led effort

to contain Chinese expansion in the region.2 In many ways, China views business

opportunities in Burma as a zero-sum game, seeing the greater Western presence resulting

in significant lost opportunities for China.

China will continue to be an important investor in Burma, but it will no longer enjoy the

almost exclusive access it once had. It will need to change its approach to business there for

future projects to be successful. On the other hand, the new competition among foreign

investors is good for Burma. The economy will improve as investment pours in and, together

with political reform, will provide much-needed economic opportunities.

Kyle Springer Research Assistant Indian Ocean Research Programme

*****

China and India Continue Border Row as Tensions Mount

China and India are once again facing off over their disputed Himalayan border. While

such incidents have occurred in the past, China’s refusal to withdraw its forces may signify

an increasingly assertive Chinese foreign policy.

Background

China and India are again contesting their disputed Himalayan border, as tensions between

the two Asian giants mount. The latest altercation began when Chinese troops allegedly

crossed India’s far north-eastern border on 15 April 2013, sparking an angry reaction from

New Delhi. The neighbours have said that they remain determined to resolve the dispute

peacefully, especially as trade between the two states continues to flourish. But there is the

possibility that China’s recent revival of its long-dormant claim to Arunachal Pradesh, is just

the latest example of Beijing’s increasingly assertive foreign policy.

Comment

The latest border episode between the two countries, the first since 2009, follows

allegations that Chinese troops entered Indian territory on 15 April, sparking concerns of a

potential renewal of frosty border relations. Speaking to al Jazeera, an Indian official claimed

that ‘Chinese troops entered 10km into Indian territory ... and pitched tents in the Despang

valley in the Ladakh region of eastern Kashmir.’ China, meanwhile, has denied any

wrongdoing and has said that Indo-Chinese relations are running smoothly as usual. ‘The

development of momentum of Chinese-Indian relations is excellent, and the two sides are

maintaining good communication and co-ordination regarding the border question,’ a

Chinese Foreign Ministry spokesman told the Financial Times.

2 Ibid.

Page 6 of 16

The two countries have remained at loggerheads over the Line of Actual Control (LAC) since

a brief war in 1962. Officially, China claims India’s north-eastern state of Arunachal Pradesh,

which, in recent years, has been referred to by Chinese commentators as “Southern Tibet”,

much to India’s displeasure. India says that China only occupies 38,000 square kilometres of

territory in the Himalayas. With an overall area three times as large as Taiwan, it holds great

importance to both states. Chinese plans to dam the Brahmaputra River, which rises in Tibet

as the Yarlung Tsangpo and passes through Arunachal Pradesh, have raised further concerns

in India.

Despite their competing claims, however, both sides have expressed a willingness to resolve

the latest impasse peacefully. On 28 April, the Foreign Ministry of China issued a statement

saying it would work together with India to ‘resolve all differences’. Similarly, Indian Prime

Minister Manmohan Singh said that ‘it is a localised problem; we do believe it can be

resolved’. Both states have been trying to downplay historical tensions as bilateral trade

continues to boom – China is already India’s largest trading partner and trade is expected to

significantly increase to an anticipated US$100 billion by 2015.

Still, many observers are concerned that China’s recent actions may signal a resurgence of

interest in Arunachal Pradesh. According to Brahma Chellaney, a professor of Strategic

Studies at the Centre for Policy Research in New Delhi, China’s stealthy strategy along the

border is not new. ‘Although the Indian Government chooses to underplay Chinese actions

so as not to provoke greater aggressiveness [sic] ... the number of stealthy Chinese forays

into Indian territory again increased last year,’ he recently wrote in a column for Mint. He

went on to say that, ‘given that the Himalayan frontier is vast and inhospitable and thus

difficult to effectively patrol in full, Chinese troops repeatedly attempt to sneak in, both to

needle India and to possibly push the line of control southward’.

The most recent incident may appear minor, at least compared to other disputes in the

South and East China Seas. More broadly, however, it could be viewed as the latest example

of Beijing’s increasingly assertive foreign policy. Such incidents remain a serious cause of

concern for India, which is keenly aware of its humiliation in 1962. It remains wary of what it

sees as Chinese attempts to disrupt the current status quo and project power into India’s

sphere of influence.

Whatever Beijing’s intentions – and they can often be opaque – the recent row highlights

the volatile side of Sino-Indian relations. As The Economist wrote recently, ‘a recent attempt

to thaw relations between the two countries is having some success. But tension along the

“line of control” that separates the two sides in the absence of an agreed border … can flare

up at any time’. With both countries refusing to demarcate a formal border, relations

between them in the Himalayas are anything but neighbourly.

Andrew Manners Research Analyst Indian Ocean Research Programme amanners@futuredirections.org.au

*****

Page 7 of 16

India’s Infrastructure Boost: Are Political Jitters Spurring the

UPA Government into Action?

The UPA government’s sudden approval of delayed projects could indicate a severe case of

pre-election nerves.

Background

Indian media sources recently reported that the ruling United Progressive Alliance (UPA)

government has given several long-delayed infrastructure projects the go ahead. The timing

of this sudden spurt of activity prompts some questions. Why now? Why the sudden need to

get these projects moving?

Comment

Indian media sources report that the UPA government has permitted thirteen long-delayed

power projects to proceed. These include ten transmission projects, two thermal and one

hydro-electric project, said to have a combined investment of approximately US$6 billion.

The government also cleared investments in twenty-five oil blocks over the protestations of

the Ministry of Defence, which had previously objected to their clearance.

While these are long-awaited and positive outcomes, the situation is far from ideal. India’s

worrying power situation aside, the sanctioning of these projects is the exception rather

than the rule. India’s bureaucratic maze has stymied other infrastructure projects worth

around US$140 billion. They include projects in the cement, ports, power, roads and steel

sectors, each with a value over US$5 million. Data acquired from various state-run banks put

the number of these projects at 255. The banks claim that the delays lead to increased costs

and risk; they have invested around US$11 billion in the corporations planning to create

these projects.

According to a report by India Ratings, projects in a number of key sectors have been

delayed: around twenty major road projects, with more than US$5 billion in investment;

power projects worth a staggering US$92 billion; roads with a total investment of US$22

billion; and steel production worth US$6 billion. The roads projects, for instance, are said to

have been delayed due to the government’s land-acquisition and environmental policies;

but, as the International Monetary Fund highlights, the delays are due to an inefficient

bureaucracy rather than a lack of funds.

The assessment by the banks that delays result in cost over-runs appears to be true. The

report states that the costs of delayed projects have escalated by 13.6 per cent over the

original costs. The most glaring cases in point are: the construction of Phase 2 of New Delhi’s

Multi-Mode mass rapid Transport System, which went up by 117 per cent; and Posco’s steel

project in Odisha, which doubled in cost from an estimated US$12 billion.

So the question arises: why has the UPA government now decided to sanction thirteen

power projects, apparently against the misgivings of the Department of Defence?

Page 8 of 16

The immediate reason that comes to mind is the general election in 2014. The UPA

government is, by and large, perceived as being inefficient and, to an extent, corrupt. It is

viewed as a non-achieving government, an assessment not helped by reports that allege the

Lok Sabha, the Lower House of Parliament, is the most unproductive in India’s history, with a

half hour of disruptions for every one of business transacted. More than likely stung by this

perception and wary of the potential effect on the election outcome, Prime Minister

Manmohan Singh has taken this action to reverse any potential adversity. This, though,

raises another issue – does the UPA believe the BJP has a good chance of winning the next

election?

The BJP appears to believe it has. Its public figurehead, the Gujarat Chief Minister Narendra

Modi, is known for his ability to get things done, albeit through measures which border on

authoritarianism. But authoritarian or not, he has changed Gujarat into the model to which

the rest of India aspires. Now, however, Mr Modi appears to be taking the fight to the UPA

government. Not content with resting on his achievements, he is now visiting the southern

state of Kerala.

Kerala, which has one of the highest educational rates in India, was once governed by the

Communist Party of India (CPI), but has been held since 1970 by the Indian National

Congress (INC) Party, which dominates the UPA government. By visiting Kerala, Mr Modi

could play upon local sentiment, which fears Hindus could become a minority in Kerala.

Furthermore, Mr Modi is scheduled to meet the head of the Syro-Malankara Catholic

Church. Effectively, Mr Modi’s divisive politics, coupled with his can-do reputation, could

detract from the INC’s voter base. The majority of Kerala’s Hindu population, which

comprises 56 per cent of the total, could be persuaded by his Hindutva (Hindu principles)

background. Christians in Kerala make up approximately 20 per cent of the population; if he

can also persuade them to back him, he will have effectively demolished the INC’s support

base in that state. It is perhaps for this reason that the INC and the CPI denounced his visit to

a famous temple in Kerala and his meeting with the Catholic Cardinal.

However, the UPA has worries closer to home than the situation in Kerala. The Standing

Committee on Coal and Steel has reportedly stated that all coal mining blocks awarded

between 1993 and 2008 are invalid and the allotments of all coal mines where production is

yet to begin should be cancelled.

Prime Minister Singh’s call.

Lindsay Hughes Research Analyst Indian Ocean Research Programme lhughes@futuredirections.org.au

Page 9 of 16

*****

Different Aims, Same Medium: Iranian and Pakistani

Objectives for the Transnational Gas Pipeline

A high-level meeting on 17 April between Iran and Pakistan has reaffirmed the importance

of the Iran-Pakistan (IP) gas pipeline for both countries’ energy crises. It also confirms

Islamabad’s shift away from Washington and towards Tehran and Beijing.

Background

The completion of the IP Pipeline – scheduled for late 2014 – provides Tehran and Islamabad

with a means of achieving their energy security objectives. But the pipeline traverses

territory that is both geographically and politically dangerous, providing a significant security

challenge to both governments. Furthermore, the importance of the project has caught the

attention of Washington,where Pakistan continues to have a rocky relationship.

Comment

Upon completion, the IP Pipeline will transport 8.7 billion cubic metres of gas per year over a

distance of 2,775 kilometres, from the Iranian South Pars Field to Multan, in the Punjab

region of Pakistan. The total cost of the project is expected to be US$7.5 billion, with

Pakistan contributing US$1.5 billion, of which US$500 million is a 20-year soft loan from Iran

to Pakistan. The area the pipeline crosses is some of the most unstable in Pakistan; it

includes the resource-rich Baluchistan region, the site of a long-running and increasingly

violent insurgency.

Despite the inherent dangers in establishing and maintaining a pipeline across Baluchistan,

the possibility of a reliable supply of energy for Pakistan has increased incumbent President

Asif Ali Zardari’s chances of being re-elected in the 11 May election. Pakistan has long

suffered an energy crisis due a combination of increasing demand and ageing and failing

infrastructure. This last point is critically important to Pakistan, because its infrastructure, as

in many other earthquake-prone countries, is subject to higher degrees of geological

pressure. In the 2010 floods, many Pakistani power stations and distribution and

transmission stations were damaged. The regular occurrence of earthquakes in Pakistan and

Iran creates another layer of instability for the IP Pipeline – the 16 April earthquake in Iran’s

southwest was the biggest in 40 years.

The pipeline construction was launched on 11 March 2013, in the border city of Chabahar in

Iran. The launch, which was attended by President Zardari and Iranian President Mahmoud

Ahmadinejad, signalled an important part of their respective foreign policies. The pipeline is

critical to Iran as it struggles to find means to evade international sanctions against its

energy and finance sectors. The revised sanctions imposed by the US on 6 February this

year, have made evasion even more difficult.

The souring of Pakistan-US relations has manifested itself in Islamabad’s increased

alignment with Iran and China with Washintgon perceiving the pipeline construction as a

deliberate snub by Islamabad to the US. The IP Pipeline is just the most recent nail in the

Page 10 of 16

coffin. The main reason behind Pakistan’s realignment lies in the anticipated US withdrawal

from Afghanistan in 2014 and the power vacuum that is likely to result. The pipeline may be

the beginning of a distinct change in Islamabad’s foreign policy. In recent months, Pakistan

has displayed its shifting alignment through the passing of the Gwadar port to Chinese

control, recently leaked details of nuclear co-operation with China and the public use of

Iranian designed Hatf-V nuclear-capable missiles.

Co-operation between Pakistan and Iran is likely to increase, as it suits the security needs of

both states. It is strategically sensible for Islamabad to take its current course, as the US

presence will be reduced post-2014 and principally focussed on India and the Middle East.

Although it is likely to agitate Washington, a closer alignment with Tehran and Beijing may

help Islamabad to achieve its longer term strategic objectives of energy and, perhaps,

military security.

Gustavo Mendiolaza Research Analyst Indian Ocean Research Programme gmendiolaza@futuredirections.org.au

*****

Price Hikes Causing Further Food Insecurity For Iran

The trend of rising prices and double-digit inflation rates continues in Iran causing further

problems for Iran’s food security and public unrest ahead of its presidential elections.

Background

Increasing food prices in Iran are raising concerns about the country’s political stability.

International, particularly Western, sanctions over Iran’s controversial nuclear programme

have damaged the local economy in multiple ways: reducing access to foreign currency;

cutting the government’s income; and prolonging inflation, which hurts consumers’ buying

power. Prices of staples, such as cooking oil, chicken and red meat, have jumped by up to 60

per cent recently, since authorities increased the special exchange rate for importers.

Iranians are rushing to supermarkets to buy cooking oil, red meat and other staples on

Tuesday, then stockpiling the goods over new fears of price spikes from a change in the

official exchange rate, which could severely reduce the already weakened purchasing power

of the rial, the national currency.

Comment

There are concerns that the growing frustration over increases in food prices could lead to

growing restlessness ahead of the June 14 presidential election. Furthermore, Iran’s double-

digit inflation rates indicate a very severe economic outlook for the Iranian government, and

Page 11 of 16

will exacerbate the population’s continued loss of confidence in the Islamic Republic’s ability

to keep the economy afloat. Although Ahmadinejad’s government has strategic food

reserves for three months, recent protests showed that growing frustration over high food

prices has the potential to provoke unrest. Experts worry about the potential implications of

Iran’s food insecurity, more so when reminded of the 2011 Arab Spring, where public

discontent, economic decline and inflation were among root causes for civil unrest in the

Middle East.

As the trend of rising food prices continues, the Iranian government has rationed vegetable

oil in all chain stores; which has doubled the price of a litre of cooking oil on the open

market. Furthermore, the government recently announced that only four imported food

staples are now eligible for foreign currency subsidies (wheat, barley, corn and soya beans),

which immediately translated into price increases of up to 35 per cent for other grocery and

food items. The change, so close to the critical national elections, appeared to cause

widespread concern, even among Iranians accustomed to chronically high inflation and

other problems – the results of a combination of severe Western sanctions and the

government’s economic mismanagement.

Although food shipments are not targeted under the sanctions, which are aimed at Tehran’s

controversial nuclear programme, the financial squeeze has cut off firms operating in Iran

from much of the global banking system. Oil exports, Iran’s major source of hard currency,

have more than halved since 2011. Food exporters largely shun Iranian deals, with the

volatile rial increasing their risk levels. Foreign banks are wary of financing the food trade for

fear of damaging their reputations. If Iran continues to be subjected to widespread oil and

financial sanctions by the United States and the European Union, limiting its ability to export

oil and further contributing to high inflation, it is possible that Iran will be forced to become

less reliant on imports and more self-sufficient.

Some experts would argue that the issue lies not with food supply in Iran, despite the

sanctions, but Iran’s food security is critical due to poverty and the decline in people’s

purchasing power. The vast majority of Iran’s population could not endure further increases

in food prices and are already unable to afford sufficient food. If the country’s per capita

income is taken into consideration, Iranians eat the most expensive food in the world.

Although there are no official figures on the decline in consumption, the drop in the rial’s

value has contributed strongly to the decline of an average Iranian’s monthly income.

Anecdotal evidence, such as shopkeepers’ complaints that people buy less red meat or fruit,

shows that the decline has worsened since the tightening of sanctions. While the sanctions

are partly responsible for Iran’s agricultural vulnerability, the government’s failure to invest

in sustainable agricultural development and instead to use its record oil revenues to stoke

an import-led boom, is a huge part of its current food security dilemma. Iran has imported

about 50 per cent of its food in recent years, even though it only imported 30 per cent of its

food when it was hit by drought in the mid-2000s.

Iran needs at least $10bn-$12bn in investments annually in the next decade to boost

productivity and help provide people with cheaper products. The problems that endanger

Iran’s food security, in order of significance, are: poverty and the decline in incomes; lack of

Page 12 of 16

investment in the agriculture sector; sanctions, which have made food imports expensive;

and rising prices of food on world markets.

Ashlyne Nair Research Assistant Global Food and Water Security Programme

*****

Patrol Boats and Surveillance Systems for Djibouti, the Latest

Move in US Consolidation in the Horn of Africa

The United States continues to deepen its strategic relationship with Djibouti. The gift of

advanced surveillance and detection equipment and two new patrol boats, confirms the

strategic importance of Djibouti to Washington, as it attempts to address the threats

posed by piracy and armed extremists in the Horn of Africa.

Background

After the 11 September 2001 terror attacks, the United States stepped up its counter-

terrorism operations around the world. The post-September 11 strategic environment

necessitated a more intensive and permanent presence in areas where terrorism was

deemed to be a sufficient threat. In the Horn of Africa, the United States took over the

former French military base, Camp Lemonnier, in Djibouti. Since 2001, the US has provided

aid to the Djiboutian armed forces. The latest provisions are two patrol vessels and

sophisticated maritime surveillance equipment, supplemeted by training in their operation.

Comment

Djibouti was recently described by a US Embassy military official as ‘…the eye of calm in the

hurricane that revolves around them.’ A decade before the September 11 attacks, during the

first Gulf War, the Djiboutian Government established a precedent for military co-operation

with the US, by allowing use of its territory and facilities for US missions in Iraq. Thus, when

the US military was seeking a stable, secure coastal location in which to set up a base of

operations in the Horn of Africa, Djibouti was a natural choice.

Although Washington’s motives for establishing an enduring presence in Djibouti became

more numerous and intense after September 11, the agreement for the US presence was

actually reached earlier that year, before the terrorist attacks. The new base was established

by renovating a derelict former Djiboutian facility, which previously hosted a contingent of

the French Foreign Legion. It became the new headquarters for the United States’ Combined

Joint Task Force-Horn of Africa (CJTF-HOA), which “moved in” in May 2003. Djibouti is home

to the only permanent US military presence in Africa.

Page 13 of 16

US-Djiboutian strategic co-operation is not limited to the US military presence. Under the US

Foreign Military Financing Programme, which finances the equipping of its allies, the US has

provided resources and training to the armed forces of Djibouti. It recently gave two Metal

Shark 28 Defiant patrol boats to the Djiboutian Navy, including technical advice and training

in their operation. It is the provision of sophisticated new electronic maritime surveillance

systems, however, which is most indicative of US strategic intent in the Horn of Africa.

For a superpower such as the United States, with global interests, particularly in the

maintenance of global free trade, it is essential to keep chokepoints, such as the Bab el-

Mandeb between the Red Sea and Gulf of Aden, open and free of threats such as piracy.

Djibouti’s new Regional Maritime Awareness Capability System allows complete coverage of

its 12 nautical mile zone of jurisdiction (troubled Yemen lies only another four nautical miles

away). Its Automatic Identification System allows region-wide coverage, out to 100 nautical

miles. Both were provided courtesy of the United States Government. These capabilities

allow Djiboutian personnel (and, hence, the United States), to closely observe the more than

20,000 ships which pass through the Bab-al-Mandeb each year.

The importance of Djibouti cannot be underestimated. The geo-political environment

surrounding the Bab el-Mandeb chokepoint is particularly fraught. Islamist extremist groups

continue to proliferate in neighbouring countries, including Somalia – the epicentre of

regional piracy and home to the al-Shabaab militia – and Yemen, where al-Qaida has a

seemingly secure presence in the Arabian Peninsula. Consequently, beyond the economic

threat posed by piracy, any number of dangerous goods, materials or weapons may fall into

the wrong hands. At the very least, strategically-valuable shipments may be prevented from

reaching their destinations, even if not actually retained by the pirates themselves. Given

the confluence of economic and strategic imperatives in the Horn of Africa, the strategic

importance of Djibouti to the United States will continue, along with further high-tech gifts.

Jeff McKinnell Research Assistant Indian Ocean Research Programme

*****

Zimbabwe’s Upcoming Elections and their Potential Impact on

the Mining Industry

As Zimbabwe’s elections loom, its government considers imposing new taxes, including a

tax on mining companies, to finance the poll. There are also concerns over a potential

amendment to the indigenous laws. Although the latter is unlikely to be passed, the

mining and resources sector is likely to face a period of uncertainty.

Background

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Elections are due to take place in Zimbabwe later in 2013; however, the country lacks the

available funds to hold a credible poll in the near future. The government has stated that it

may impose several new taxes, of which at least one will affect the mining industry. In

addition, fears were raised by reports of a possible amendment to the indigenisation laws,

which would see the Zimbabwean government taking a majority share of mining companies

without providing compensation. Although the latter is unlikely to go ahead, the issue of

additional taxes targeting mining interests is a real possibility. Such developments have

raised uncertainties among investors and may hinder the country’s ability to attract new

investors.

Comment

After holding a successful referendum on 16 March and implementing a new Constitution,

Zimbabwe is scheduled to hold elections later in 2013. Although a specific date has not been

set, Justice and Legal Affairs Minister, Patrick Chinamasa, has said that the election must

take place prior to 29 June 2013, when Parliament will be officially dissolved. Although

Zimbabwe’s Constitution allows for an extension of Parliament under section 63 paragraphs

(5) and (6); these provisions, however, permit an extension only if the country is at war or

under a declared state of public emergency. To hold these elections, Finance Minister Tendai

Biti indicated that the country needs an estimated $132 million; a sum the country cannot

fund itself. After rejecting UN funding, on the grounds that the organisation would in the

media and security sectors, Zimbabwe has called on the governments of South Africa and

Angola to assist in funding the election.

Ultimately, without adequate funding, Zimbabwe lacks the resources to hold a credible poll,

especially if the ballot date is set as early as June 2013. As a result, the mining sector looks

set to mainly bear the burden of funding the elections. Biti has said that the government is

considering creating several new taxes, including a tax on the mining and resources sector,

to raise the required funds. The country applied fuel taxes on 9 March, which are expected

to remain in place until December 2013. Although exact details surrounding the possible

new taxes remain unclear at this time, the announcement is certain to have worried would-

be, as well as current, investors. Furthermore, it is likely that such taxes will be

implemented, especially if funding for the poll is not granted by South Africa or Angola. The

expectation is that major platinum miners will be hit hardest, including Anglo American and

Impala Platinum; however, smaller mining companies are also likely to be targeted, for

example Australia’s ElDore Mining (EDM), which acquired the Lonely gold mine in February

2012.

Of further concern are possible amendments to the indigenous laws in the country. Under

the law, which was passed in 2008 and took effect in 2010, Zimbabwe gave foreign owned

companies valued at over US$500,000, five years to transfer 51 per cent of their assets to

indigenous people. This particularly affected mining firms and banks. Concerns have been

raised in recent days over news of a leaked white paper, which indicated the government’s

intent to forcibly take the majority share without compensating the companies. Zimbabwe's

Indigenisation Minister Saviour Kasukuwere said, on 24 April, that the ministry has not

changed its legislative framework.

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Even if an amendment to the legislation were to be put forward to Parliament, it requires

the approval of a parliament dominated by the opposition Movement for Democratic

Change (MDC), which has largely been against the idea. It is, therefore, unlikely to be

approved. Initial speculation over the proposed amendment to the legislation, suggested

that Robert Mugabe would use the finances to fund the upcoming polls; however, it is also

likely that the proposal is part of a tactic to garner more support for ZANU-PF. Indigenisation

laws resonate well with the civil population, who have previously shown concern that too

much of the country’s wealth is given to foreign entities, as opposed to being distributed

among the local population.

Although Zimbabwe has stabilised somewhat in recent years, the current issues

demonstrate that the country still has far to go. Zimbabwe has previously called on

Australian mining companies, in particular, to invest in Zimbabwe, citing Australia’s expertise

in the industry as a driving factor. Despite Zimbabwe’s progress, ad hoc statements and swift

changes to tax laws are often seen as a risk to investment and cause further confusion in the

political environment. Such developments hinder Zimbabwe’s ability to attract new

investors and to retain current ones.

Kim Moss Research Analyst Minerals and Energy Research Programme kmoss@futuredirections.org.au

*****

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Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International. Published by Future Directions International Pty Ltd. 80 Birdwood Parade, Dalkeith, WA 6009 Tel: +61 8 9389 9831 Fax: +61 8 9389 8803 E-mail: tdavy@futuredirections.org.au Web: www.futuredirections.org.au

What’s Next?

o 1 May: A free trade agreement signed between South Korea and Turkey will

go into effect.

o 3 May: An anti-terrorism court in Pakistan will resume its investigation of the assassination of former Pakistani Prime Minister Benazir Bhutto.

o 3 May: The seventh informal meeting of the South Asian Association for

Regional Cooperation Finance Ministers will be held in New Delhi, India.

o 5 May: Malaysia will hold general elections, expected to be the most contentious since the country's independence.

o 5 May: Israeli Prime Minister Benjamin Netanyahu will visit China, the first

visit to China by an Israeli prime minister since 2007. Netanyahu will discuss with Chinese officials Iran's nuclear program and bilateral trade.