MAC: Mines and Communities

Congo squanders its crown jewels

Published by MAC on 2006-03-15

Congo squanders its crown jewels

by John Vandaele


MOndiaal Magazine (MO*)

March 2006

Although Congo is poverty-stricken, its subsoil is overflowing with wealth. But who profits from Congolese copper, cobalt or uranium? MO* got hold of two mining exploitation contracts and had them analyzed by a specialized law firm. Conclusion: Congo is being looted. A Congolese parliamentary Commission warned about this, but its report was suppressed. MO* however got hold of it. Belgian authorities are observing while the Belgian entrepreneur George Forrest takes a leading role.

If all goes well the first elections in forty years will take place in Congo. Almost 26 million people have registered in the last couple of months for the elections, a major effort in a country with hardly any roads. The voting computers that run on generators and gasoline were brought to the most remote areas by all-terrain vehicles or helicopter in order to register the voters with waterproof identity cards with a picture and two fingerprints. 'A nightmare was turned into a miracle', says Ross Mountain, deputy chief of the UN operation in Congo - with 23.000 people, of which 17.000 military.

The international community contributed 450 million Euro for the organisation of the elections. Belgium put 16 million Euro on the table. One hopes that these elections will lead to a better government. The needs are high: parents are still paying the major part of the teachers' salaries, health care is very weak, the Congolese are among the poorest people on earth. Even the money to paint the taxis yellow lacks. The international community provides sixty percent of the Congolese government's budget and is proposing to pay more if the elections turn out well. The Belgian Minister of Foreign Affairs Karel de Gucht promised beginning of February in Congo to almost double Belgian aid. But Congo cannot continue to import goods with money it receives. It must also export.

To do so it has to be internationally competitive, not easy for a county with weak infrastructure and a population that has very little schooling. Congo's trump card is its subsoil, stuffed with raw materials the rest of the world needs. It is scandalous that till now the Congolese have had hardly any benefit from this wealth. During the colonial times it was mainly the Belgians who profited from it and during the Mobutu era it was le president-fondateur who stole the money from the treasury. Will the rich subsoil finally provide a sound basis for rebuilding the country? The answer to this question primarily depends on what will happen in the province of Katanga, which is overflowing with raw materials and has always made the largest contribution to the national treasury. The external conditions have not been as good for a long time: the hunger for raw materials of the emerging economic giants China and India is driving
up the prices of raw materials. But what about Congo itself?

Plundering defined

According to the IMF about one fifth of the Congolese population depends on artisanal or informal mining. 800.000 people are working in the diamond sector, 60.000 in the so-called copper belt of Katanga. A visit to the open mine of Ruashi, 20 km from the centre of the Katangan capital, Lubumbashi, shows how primitive artisanal mining is. Young men are digging and chopping away the dirt with simple shovels, looking for ore-bearing pieces of subsoil. Children as young as 8 years old are aiding and abetting them for a couple of cents. Ore-bearing rocks are transported in bags to the road where middlemen -negociants -load up the bags to transport them to the so-called comptoirs, mostly run by foreigners. The work of these creuseurs is dangerous and unhealthy, and they are poorly paid. In 2004 creuseurs got about 1.000 US dollars per ton of cobalt, worth 55.000 US dollars on the global market. Most of the profit goes to the comptoirs and the authorities who allow them to operate. This is not the way to use the raw materials wealth and lay a sound basis for sustainable development in Congo. No roads are being built or teachers being paid. The Belgian Senate's Commission of Inquiry into the illegal exploitation of the Congo's natural resources (2003) defined plundering as 'exploitation of the Congolese wealth without benefit to the Congolese people or their government' . This definition applies to the current situation.

A lot of unprocessed ore is being smuggled out of the country: by train or truck to Zambia, South-Africa and the global market. China has become the most important customer, but also the suppliers of Umicore, like the Indian company Chemaf, get their raw materials out of this circuit. 'Umicore's Senior Management is embarrassed by the problem of child labour and tries to remedy it by inserting clauses into their supplier contracts', says Marc-Olivier Herman of the Belgian ngo Broederlijk Delen. 'It is a first step. But there's a long way to go'.

Belgium is very critical about the role the Chinese play in this trade. 'The Belgian Forrest group also buys from the creuseurs, but on this issue the Belgian government remains silent', says Herman. Belgium wants to set up a system which makes the Congolese ore traceable, in order to isolate the illegal circuits. The Belgian government also supports projects that try to reduce child labour in the long run and wants to gradually incorporate the creuseurs into the formal mining circuit.

The sell out years

It used to be different. Until 1990 the government enterprise Gécamines, which owns all the mining rights in Katanga, was the government's money-spinner, providing at least one third of the government's income. The secret of this high profitability was that the ore was refined on a large scale in Congo itself, up to purety levels of 98%. Today one can only dream about this. Nowaday Gécamines hardly produces 20.000 ton of copper while in 1985 it was still 470.000 ton. Bad management, the plundering by Mobutu, governmental chaos during the war... all led to the collapse of the state owned enterprise, with all imaginable consequences for its 30.000 employees. Today Gécamines still has 12.000 employees and the new manager stated recently that this number would be reduced by half. In 2004 Gécamines paid 450.000 US dollars in taxes. This was peanuts compared to the hundreds of millions the company used to contribute to the state revenues.

Over the last 10 years parts of Gécamines have gradually been privatized through joint ventures in which Gécamines contributed its mining rights and the private partners put up the money. These joint ventures produced 12.000 tons of copper in 2004 but the level of refining that is reached currently, is rarely more than 20 per cent. With 9.000 tons the cobalt revenue in that year almost matched the output in the nineteen eighties. For the last couple of years mineral exploitation in Katanga has concentrated on cobalt since its short term returns are high.

The joint ventures came into being in an extremely obscure and chaotic way. During the war years 1996-1998 Laurent-Désiré Kabila, father of the current president Joseph Kabila, financed his armies by selling parts of Gécamines' mining rights to foreign private parties. After the war the path of privatisation was continued, in part due to the pressure of the World Bank and the IMF. The population however can only benefit from privatisation when it is guided by a strong and competent government, as experience in other countries over the last twenty years has shown. This clearly has not been the case in Congo. The IMF found that all private mining corporations together, mainly joint ventures with Gécamines, only paid 400.000 US dollar in taxes during 2004. The government income from the mining sector equalled 0,18 percent of the national income, compared to 22 percent in Botswana, which is also rich in raw materials. 'There is a lot of room for improvement', according to the IMF in 2004. So, the Congolese should be able to profit much more from the mining sector. The question is then: why is this not the case now, and what should be done to increase earnings?

The hidden report

Several extremely interesting reports have been written on these questions. A Commission of Inquiry set up by the Congolese Transitional Government was asked to review the validity of the contracts concluded during the war years 1996-1998. This commission, under the chairmanship of Christophe Lutundula, finished its report on June 25, 2005, but the Office of the Congolese Parliament, which has representatives of all the major parties, refused to publish it for seven months. Those in high places - starting with Kabila - feared that it might cost them votes when its conclusions are known. MO* was able to get hold of the report and the 20th of february the Lutundula-report was finally officially released. It severely criticises the contracts that were signed concerning Katanga's mineral resources.

To summarize:

* No evaluation is made in the contracts of the natural wealth the government contributes to the partnerships, which makes it difficult to determine a fair compensation. No feasibility study was made either.

* Hardly any demands are made of the private partners to contribute capital. The private partners do not contribute anything more than their access to credit, an access the heavily indebted Gécamines lost. This means that possible profits will serve in the first place to pay off debts, and Gécamines will get no money.

* Management of the joint venture is controlled by the private partner, without any control over costs (transport, chemical products, management fees) which reduces profits and therefore Gécamines' dividends.

* The minimal mining regulations as determined by the government itself, were disregarded by ministers and even by the President (then Kabila senior)

* Private partners are located off shore. The result: if they go bust Gécamines is left with the debts

* No partner has mining experience that matches the scale of the projects.

Therefore neither Gécamines, nor Congo benefit much from these joint ventures. This makes the employees angry. They see how Gécamines is being ripped off, while they have to wait for their overdue salaries. Gécamines' current labour costs are 3 million dollars, whereas its earnings are only 1,5 million dollars.

Forrest: Viceroy of Katanga

The findings of the Lutundula Commission perfectly match the 2003 report on Gécamines that the International Mining Consultants (IMC) prepared for the World Bank. The IMC report, which was not published either, found the same pattern whereby private partners contributed hardly anything, but obtained much more out of the joint ventures then Gécamines.

According to the IMC-report it is crucial that the contracts allow the profits to be made outside Congo. Since the private partner has overall management control in all those contracts, and supplies a lot of services, he can play at will with the costs of these services. The same criticism applies to the joint ventures between Gécamines and the group of the Belgian George Forrest, since this group supplies a lot of services itself as the contractor of projects.

The IMC indicated for example that the Forrest group was allowed to build the STL factory in Lubumbashi (joint venture with Gécamines and the US company OMG) without any international invitation to tender to control the price.

Luiswishi, which is another partnership between Gécamines and the Forrest Group, is mentioned in the Lutundula-report as one of the few partnerships that actually gets the government some money. Questioned on this Christophe Lutundula said 'A lot can be said about the contracts with Forrest, but he seems to me the least bad of those that are active in Katanga. He is also the only one who is really known.' Tricia Feeney of the UK-based ngo Raid counters this argument: 'Forrest ensures that he is the only serious contractor in Katanga. Through his social network which he has built up during the last thirty years he has no need for clear rules, on the contrary. His competitive advantage is that he can function in an environment without clear legal directives.'

The joint ventures do not generate a lot of profit but they do generate employment. And one has to admit that Forrest pays his employees the best salaries and fringe benefits of the region. Recently he also allowed unions, which cannot be said about the Indian companies like Chemaf. Jean-Pierre Muteba of Nouvelle Dynamique Sociale, a union which represents a large number of employees from Gécamines and who is very critical towards Forrest, also recognizes this. 'The main problem is that he gets access to the best mining concessions without giving anything in return, except for some jobs.' This is essentially correct: Forrest may treat his employees relatively well but that does not mean that he isn't damaging the interests of Congo by the nature of the contracts he signs with Gécamines, and the way he executes them.

And now the crown jewels

Mainly because these joint ventures scarcely generate any money, both the IMC and the Lutundula reports called on Gécamines to suspend all further negotiations. According to the IMC report, the mining concessions that Gécamines still owned in 2003 would have been sufficient to relaunch the company. The Lutundula Commission also recommended that 'all negotiations for the sale of the mine of Kamoto, Kamoto Oliviera Virgule(KOV), the Luilu installations and the Kamoto concentrator, which form the backbone of Gécamines, should be immediately halted.'

That Lutundula-report was handed over on June 25, 2005 to the Office of Congolese Parliament, in which all major parties are represented. In August 2005 President Kabila signed a decree which handed over for at least 20 years exactly this backbone of Gécamines: Kamoto, KOV, the Luilu factory and other important processing installations into private hands, to the Forrest group and Dan Gertler, an Israeli with a very strong position in the Congolese diamond sector. According to the IMC, Kamoto and KOV hold 70 percent of the available copper reserves in Katanga.

Mo* managed to get hold of these two contracts. Together with 11.11.11 and the British NGO Raid they gathered the means for an analysis by the specialized law firm Fasken, Martineau and DuMoulin (cf. frame). Even without this specific know-how it is clear that these contracts are in violation of all do's and don'ts mentioned by the Lutundula Commission. Gécamines' partners are both located in the British Virgin Islands; once again the assets Gécamines contributes, are not valued, even though they contain the richest copper reserves in the world, with ore that has a copper value of 3 to 5 percent. The world's largest copper producer Chile works with values of 0,8 percent!

Management will be controlled by private partners who will transfer all income to accounts on the British Virgin Islands. There was no international invitation to tender. Once again no minimal conditions were set for the partners to contribute their own capital, most is to be borrowed, which reduces Gécamines' expected income, since the profits will mainly have to go on down-payments. Neither partner has the mining experience for the huge scale of the project. This is not true for the mine of Tenke Fungurume where Phelps-Dodge, one of the greatest mining companies in the world, is one of the partners. Phelps does have the necessary competencies to exploit this rich copper reserve of 547 million ton with 3,5 percent copper and 0,27 percent cobalt.

The contracts exposed

The specialized Canadian law firm Fasken, Martineau and DuMoulin analyzed two recent mining contracts for us in which the crown jewels of the Katangese mining industry have been handed over to private companies. One contract is between Gécamines and Kinross-Forrest (Katanga Mining Ltd in the mean time), who together funded Kamoto Copper Company (KCC). This joint venture will exploit the Kamoto mine and concentrator and the hydrometallurgical factory of Luilu. These very rich copper reserves and important processing installations are in fact the core of Gécamines . Katanga Mining, controlled by George Forrest and the Canadian Arthur Ditto, owns 75 percent of the KCC stocks, Gécamines 25 percent. We have the contract dated February 2004, n° 632 6711 SG/GC/2004.

The other contract between Global Enterprises Corporate (GEC) of Dan Gertler and Gécamines deals with the exploitation of the open mine of KOV and the Kananga and Tilwezembe deposits. This dates from September 2004, n°656/6755/SG/GC/2004.

Fasken, Martineau and DuMoulin have a lot of questions with regard to the contracts. Some excerpts from the analysis of the Kinross-Forrest contract: 'In cases like this it is common practice, sometimes even legally defined, to organize an audit and an evaluation of the deposit in kind, so that both partners are sure that their contribution gets a fair value. The shares in capital are divided based on this contribution. Here the distribution was done without a feasibility study. Has the contribution of Gécamines been fairly estimated? What would have been the cost to build a complete infrastructure (roads, electricity stations, water canals, railroads, access to public facilities) in that area, or a new factory and installations? How do the relative risks have to be weighed since none of the assets of Kinross-Forrest are given as a guarantee for the loans?'

Kinross-Forrest can deduct a very wide range of costs from the gross profits. This raises questions at FMD, since it provokes abuses. 'A payment (of rental costs) based on net profits is speculative. For this reason the percentage will usually be higher, between 10 and 15 percent. (here it is only 2 percent, jvd). But even a higher percentage does not compensate completely the risk linked to a payment based on a net amount, certainly in the case that all operations are being controlled by the one who has to pay the rent.'

The conclusions from FMD are clear:

• it is not unreasonable to assume that Kinross-Forrest will have been repaid in interests and capital from all loans and advances, and will have retrieved substantial advantages from the control it will have exercised on the operation before Gécamines receives any reward for its contribution

• It is not unreasonable to assume that the payment for rented installations and machines will be minimal or zero

• It is not unreasonable to assume that the available cash for the payment of dividends will be minimized because it is more profitable for Kinross-Forrest to be paid in full via contracts with the manager (for exercising services for the joint venture, jvd) than sharing the existing cash with Gécamines.

For the GEC-contract a remark is added that dividends and royalties will not suffice to repay the loan and that Gécamines' burden of debt may even increase by signing this contract.

The investigation by Fasken, Martineau and DuMoulin was financed by MO*, Broederlijk Delen, 11.11.11 and Raid.

A deadly tango

Fasken, Martineau and DuMoulin's conclusion is clear: once more Gécamines, and the Congolese population, will derive little benefit from this partnership, even when it concerns about the largest known reserves in Katanga. The definition of the Belgian government of plundering (cf. above) seems to be valid here. A chance to turn the wealth of Katanga into the cash-cow of the Congolese state has been lost. A parliamentary commission and a World Bank report advised against these sorts of contracts. Yet they have been signed. In August 2004 it was decided that the French company, Sofreco would take over the management of Gécamines. The Congolese politicians managed to postpone the appointment of a new international senior manager until the beginning 2006, to leave themselves free to negotiate Gécamines' crown jewels without foreign interference. Why is the Congolese government doing this? According to a consultant who witnessed things from the inside: 'Because Gécamines' management did not really have the competencies to negotiate and because politicians can be bought.'According to Christophe Lutundula: 'The leaders have little respect for parliament. As long as the same people stay on top, this policy will continue. What's more, politicians finance their elections this way, and so damage the long term interests of Congo.' Some time ago a document of the PPRD, Joseph Kabila's party, was leaked: 'We should stress the outstanding role that Mr. George Forrest and his group have played since they have supported us step by step in establishing our party.'

A lot of people are demanding that the Lutundula report should be debated only after the elections, since the explosive content could put the whole election process at risk. Mwando Nsimba, who has been active in Congolese politics his whole life, disagrees with this strategy: 'The fact that this is not known by the Congolese means that they cannot play a role in the elections. It increases the chance that Kabila will be elected. A lot of people believe that it will be better after the elections, that everything will be made right. I am afraid that it will become worse. The president will feel he has support and will carry on. It was the same under Mobutu. The international community thought: we shouldn't bother him, and he became bolder by the day.'

Lutundula thinks that the international community should insist much harder on good governance. 'Why have they allowed those two contracts to be signed? There was a year between the signing of the contracts and the presidential approval. The international community knew of these contracts and had the time to intervene. I am afraid that economic interests are involved. Also with Belgium; it does a lot of positive things here, but it did not criticize these contracts. That is an ambiguous policy. Belgium and the EU should criticize our leaders much harder. That is not neo-colonialism if you know that 60 percent of the government budget comes from abroad.' Marc-Olivier Herman from Broederlijk Delen also feels that Belgium does a good job on the military and political level, but is too easy going on the economic front. 'Our country also wants a piece of the cake - through Forrest - and is willing to take risks and mortgage Congo's future.'

It takes two to sign a contract. It is surprising that Belgium's Foreign Minister De Gucht criticizes the Congolese leaders on one hand, but has almost nothing to say about the private actors, the other partner in this tango mortale. He even appointed one of them, George Forrest, as an advisor for Foreign Trade. Karel De Gucht declined to comment on contracts he has not read.. 'With the Tanzania case (where De Gucht blocked a Forrest company project to refurbish an ammunition factory in Tanzania,jvd) I think I have proved my independence from George Forrest. But I do not want to make the bad guy out of him. He is better than most entrepreneurs in Katanga. Furthermore he will have to adapt once there is a constitutional state in Congo. His reappointment as advisor for Foreign Trade is merely symbolic.' Symbols however have meanings and the Congolese people will understand.

We want to thank International Peace Information Service (Antwerp) for their support with the research for this article.

MO*31, march 2006,

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