DRC:“A geologic scandal”? Scandal is the word…./The Economist
Business in the Democratic Republic of Congo
How bad is it?
THE business climate in Congo “is disgusting”, says an adviser to the government in Kinshasa. Any casual visitor has probably noticed. Traffic police stop cars for no reason, force their way in and refuse to leave until paid off. Tax agents arrive at company offices with seven- and eight-figure demands that—of course—can be negotiated down.
Small wonder this central African nation’s biggest business—digging in the dirt to extract precious minerals—is so dirty. An expert panel led by Kofi Annan, a former UN secretary-general, looked at five deals struck between 2010 and 2012, and compared the sums for which government-owned mines were sold with independent assessments of their value. It found a gap of $1.36 billion, double the state’s annual budget for health and education. And these deals are just a small subset of all the bargains struck, says the report, which Mr Annan presented in Cape Town, South Africa, on May 10th.
The report highlights some puzzling details. For instance ENRC, a London-listed Kazakh mining firm, waived its rights to buy out a stake in a mining enterprise owned by Gécamines, Congo’s state miner, only to acquire it for $75m from a company owned by Dan Gertler, an Israeli businessman, which had paid $15m for it just months earlier. Mr Gertler is close to Joseph Kabila, Congo’s president. ENRC, which is being investigated by the Serious Fraud Office in Britain, was Congo’s third-largest copper producer last year. Both ENRC and Mr Gertler deny wrongdoing.
African countries often fail to collect reasonable taxes on mining, says Mr Annan’s panel. For example, Zambia’s copper exports were worth $10 billion in 2011, but its tax receipts from mining were a meagre $240m. The widespread use by mining firms of offshore investment vehicles as conduits for profits creates scope for tax avoidance. Their use is not restricted to rich-world companies. Much of the oil that Angola ships to China is via a company called the China International Fund. Its trading prices are not made public.
Even by the standards of very poor countries, Congo scores abysmally. The country was robbed into paralysis under Mobutu Sese Seko, the leopard-hatted despot who ruled from 1965 to 1997. It was then scorched by two civil wars which left untold millions dead.
Mr Kabila was elected in 2006 promising clean government. He has not delivered. Miners are still asked to pay five-figure sums to meet ministers. Some hire “consultants” to make the payments, to keep their own hands clean. The payoffs work both ways, says the government adviser: “If someone offers you $100,000 because they’ll make $10m, you have to be very strong to resist that.”
ENRC raised eyebrows in Congo in 2010, when it bought a copper and cobalt tailings project near the town of Kolwezi that the government had controversially stripped from its previous owners, Canada’s First Quantum Minerals. The tailings project is essentially a pile of money on the ground, waiting to be processed. But it won’t begin production until 2015. Last year ENRC paid a $1.25 billion settlement to First Quantum, and severed ties with Mr Gertler for $550m.
In November the International Monetary Fund cancelled its loan programme with Congo after the government refused to explain fully a 2011 deal between Gécamines, the state-owned miner, and Mr Gertler for a stake in another ENRC copper project, Comide.
Congo’s prime minister, Matata Ponyo Mapon, promises change. A former minister of finance, he has a reputation as a reformer. He has kept inflation in check while the economy grew by more than 7% last year. He started paying civil servants through banks instead of by cash, uncovering thousands of “ghost” employees who drew salaries despite not existing.
In January, after the IMF kerfuffle, Mr Ponyo said he would rein in the state-owned mining companies and increase transparency in the industry. “We must avoid situations where we’re not publishing our mining contracts, where our state assets are undervalued, and where the government doesn’t know what its state mining companies are doing,” he told miners and officials at a conference in January.
However, those decisions might not be his to make. Mr Kabila’s allies control the state-owned companies, and according to sources in the government and the IMF it was Mr Kabila himself who blocked the publication of the Comide deal details. Congolese officials like to talk about how their vast mineral riches are “a geologic scandal”. Scandal is the word.
Last year miners in Congo, which include Freeport-McMoRan and Glencore Xstrata, shipped $6.7 billion-worth of copper and cobalt from the country. It would be far more if the country were better run. In March the UN Development Programme named Congo the least-developed country in the world (see table). It was tied with Niger, a desert.