After decades of brutal dictatorship, the mismanagement of its economy and rampant corruption, the Democratic Republic of Congo looks set to turn the corner as investment in its copper industry is poised to herald a new wave of socioeconomic development. Ayo Akinfe reports.
By any standards one wants to use, the Democratic Republic of Congo (DRC) is by far one of the world’s biggest under-performing economies. Mineral-rich, blessed with huge tracts of fertile land and located within the lush and rich tropical rainforest, the country has ingredients to be a developed nation but it is one of the poorest nations on earth.
However, after decades of mismanagement, certain regions in the country could finally be on the verge of industrialisation.
Sparsely populated in relation to its area, DRC, with 64mn people spread over a vast area of 2.34mn kilometres, has been one of the most unfortunate countries on earth. It suffered from appalling colonial exploitation under the Belgians, which left about 10mn people dead. As if this was not punishment enough, the country then had to further endure decades of brutal and corrupt rule under the ruthless dictator Mobutu Sesse Sekou.
Industry, especially mining, remains a great potential source of wealth for DRC and in 1997 it accounted for 16.9% of gross domestic product (GDP). In the 1980s, the country was the world’s fourth-largest producer of industrial diamonds and as recently as 1997, diamonds earned DRC US$717m in export earnings, representing 52% of total export revenue.
Opic lends support
Copper is a major export earner, with the industry being dominated by Gecamines, the state-owned mining giant. However production, and in turn revenues, have faltered of late due in part to competition in the global markets.
But the sector has just secured itself something of a lifeline, with the board of directors of the US Overseas Private Investment Corporation (Opic) having approved US$400m in financing and political risk insurance for the development of one of the world’s largest copper deposits located in the country.
Also funded by the European Investment Bank (EIB), the Tenke Fungurume concession covers what is reportedly the world’s largest untapped copper-cobalt deposit.
Under the terms of the deal, Opic will provide US$250mn in financing to an affiliate of Freeport-McMoran, Copper & Gold, the world’s largest publicly-traded copper company to construct a mining operation at the Tenke Fungurume ore deposit in southeastern DRC.
To ensure that its exposure to the project does not exceed US$400mn, Opic insurance coverage will be limited to US$150mn and as the loan is repaid, insurance coverage will be increased to a maximum of US$250mn.
Over its first 10 years of operation, the Tenke Fungurume project is expected to produce an annual average of 250mn pounds of grade A copper cathode and 18mn pounds of cobalt. This ambitious project is expected to directly create more than 800 permanent local jobs, result in more than US$50mn in host-country procurement of goods and services and generate over US$100mn annually in taxes and other payments to the DRC government.
It will also provide healthcare to all employees and their dependents through on-site medical facilities, in a country in which the majority of the population has little or no access to health care.
Mining contracts in dispute
In July, the EIB approved €100mn for the Tenke Fungurume project, despite calls for public lenders to await the outcome of an ongoing examination of 60 mining contracts.
Critics argued that the EIB’s decision to finance the project prejudges the outcomes of the ongoing government review process despite the fact that it made disbursement of its loan conditional on final approval of financing by other lenders, as well as the DRC government’s non-objection to the loan. The Tenke deal is among the 60 contracts signed over the last decade, during the Congolese civil war and under the transitional government, that are now under examination by an inter-ministerial commission in the capital, Kinshasa.
Opic was also slated to approve its guarantee and investment programme in July, but it postponed its announcement until August in response to concerns over the project’s impacts on the contract review process and questions about compliance with certain statutes limiting the agency’s mining investments.
Now that the funding has been granted, there are indications that other public financing bodies, such as Export Development Canada (EDC) and the Multilateral Investment Guarantee Agency (Miga), may also be planning to support the project.
Robert Mosbacher, the Opic president and chief executive, says: “Development of the Democratic Republic of Congo’s significant natural resources will be critical to the reconstruction of its economy. This copper mining project, supported by the expertise of a highly successful American mining company in Freeport-McMoRan, will help to develop economic infrastructure, and in the process deliver many secondary benefits to people in an underserved region of the country.
“In addition, the Tenke project also has a strong community outreach and social development programme, which includes the installation of water wells, an agricultural extension programme and support for start-up small and medium enterprises through the provision of equipment and micro-credit. The project will also include the building and refurbishment of several schools.”
Due to be initiated next year, the initial project will focus on 103mn tonnes of oxide ore reserves. These reserves for the first phase of the project, which is anticipated to stretch over about 40 years, are expected to last for 41 years. During the first 10 years of mining, aggregate annual production is projected to be approximately 250mn pounds of copper and 18mn pounds of cobalt.
Corruption undermines potential
Despite its mineral rich deposits, agriculture is the mainstay of the DRC economy, accounting for about 57.9% of GDP. Main cash crops include coffee, palm oil, rubber, cotton, sugar, tea and cocoa, while food crops include cassava, plantains, maize, groundnuts and rice.
However, in spite of the country’s vast potential, under the Mobutu regime widespread corruption, economic controls, and the diversion of public resources for personal gain thwarted economic growth. It is estimated that unrecorded and illicit transactions within DRC unofficial economy in the early 1990s were estimated to be three times the size of the official GDP figure.
Despite a succession of economic plans financed by the World Bank and the International Monetary Fund (IMF) since independence, budgetary imbalance, inflation and debt consistently plagued the Mobutu government. In early 1990, both the World Bank and the IMF suspended most disbursements and the majority of bilateral aid was cut off.
Unable to meet debt payments, DRC’s borrowing rights with the IMF were cut off in February 1992 and its World Bank credits were frozen in July 1993. Despite the introduction of a new currency, the New Zaire (NZ), currency issuance remained disorderly and large scale inflation rose to over 9,000% by early 1994.
In May 1997 Laurent Kabila overthrew the regime of Mobutu and the new government began a programme of reconstruction. Changes the Kabila government introduced included the reformation of the corrupt tax system and repairing transportation networks.
In August 1998, a fresh war broke out attracting the country’s neighbours, stifling some of the progress that had been made in the economic reconstruction of the country.
In addition to the war burden, major problems continued to exist in transportation infrastructure, customs administration and the tax system.
Government finances had still not been put in order and relations with the IMF and World Bank were in disarray.
Much of the government’s revenue was kept off book and not included in published statistics on revenue and expenditure. Relations with the World Bank were on hold as a result of the government’s failure to finalise an agreement for administration of the International Bank for Reconstruction and Development (IBRD) Trust Fund for the Congo.
The outbreak of war in the early days of August 1998 caused a major decline in economic activity that continues to the present day. After a surge in inflation during August 1998, the government began enforcing price control laws and began regulating foreign exchange markets. Taken together, these measures have severely damaged the ability of businesses depending on imports to continue operations.
Growth was negative in 2000 because of the difficulty of meeting the conditions of international donors, continued low prices of key exports and post-coup instability. Conditions improved in late 2002 with the withdrawal of a large portion of the invading foreign troops and a number of IMF and World Bank missions met with the government to help it develop a coherent economic plan.
Things now appear to be gradually improving as democratic elections last year have ushered in some sort of stability after a shaky start and international donors are once more prepared to help the country. Over the last fiscal year, the World Bank Group committed a record US$5.7bn in International Development Association (IDA) resources to Sub-Saharan Africa and DRC is one of the beneficiaries of the investment.
In addition, the International Finance Corporation (IFC), the bank’s private sector arm, provided US$1.38bn in financing for its own account and mobilised an additional US$261mn in financing through syndications. Among other things, it helped increase cellular access in the DRC and some other African countries by mobilising loans from international commercial banks to rebuild communications infrastructure.
Robert Zoellick, the World Bank president, says: “During the fiscal year 2007, the World Bank provided over US$34bn of financial support for developing countries to invest in practical plans to move from poverty to prosperity.”
The IDA provides interest-free loans and grants to the world’s poorest countries, of which 39 are in Africa.
Obiageli Ezekwesili, the World Bank’s vice-president for Africa, says: “We are now seeing increases in African countries’s per capital income consistent with those of other developing countries and African countries have made great strides in expanding access to health and education. African leaders are well aware of the support that IDA provides and this is why they are strong supporters of a robust replenishment of IDA this year.”
With such investments in infrastructure coming on top of commercial expansion in its minerals sector, DRC looks set for a revival that could spark off widespread economic development.
Tenke Fungurume for instance is considered to be one of the largest, highest-grade, undeveloped copper/cobalt concessions in the world today and its development could have far-reaching effects.
Peter Faur, speaking on behalf of Freeport-McMoRan Americas, comments on the project’s progress: “We have had good support from the government of the DRC at national and regional levels and are pleased with the progress being made there. As conditions progress in the DRC, particularly with infrastructure, we plan to reinvest and expand.
“Our goal is to produce 400,000 tonnes per year of copper within 10 or 12 years, with associated increases in cobalt production as well. We are working with world-class professionals to address health concerns, social issues and other matters.
“We have a responsibility to play a role in addressing other issues, including community health, safety and education. We are establishing a baseline to better understand the communities, what they need, and how we can best work with them.
“We have provided hundreds of immediate jobs preparing roads and other infrastructure and the mine itself will provide good jobs and will generate significant tax revenue. We will train residents to work in our mine and the mining industry so that they learn safe, responsible, productive and useful skills.”
He adds that local towns are also working with the company to develop education and other resources. So far, Freeport-McMoRan has helped develop three schools that are providing education for 900 students and the company is optimistic that over the long term, its presence will have a fundamental impact on social infrastructure.
For now, the company is focusing on this major project and following the votes of confidence DRC is increasingly getting from international agencies, Freeport-McMoRan believes it could be the frontrunner in what could be a major renaissance. As is the case with other troubled economies, investor confidence is key to confining negative thoughts of the past to history and facing the future.
Only time will tell if this latest investment is the first trickle of what might later develop into a deluge. One fact no one can deny, however, is that DRC certainly has the natural resources required to make it investor-friendly.
Risks of worsening conflicts
The majority of investment in the DRC usually ends up in the Katanga province which shares its borders with Angola, Zambia, and Tanzania. It is a region rich in minerals such as copper and it is here that the majority of the mining projects are found, including the Tenke Fungurume project and Katanga Mining’s Kamoto joint venture copper-cobalt mine. The region has also been attracting the interest of the Chinese, with a US$5bn draft loan agreement to support much-needed infrastructure under negotiation between the Chinese and Congolese governments.
Despite the return of international investment to this region, and the relative success and stabilising effect of the recent elections, conflict continues in the eastern region of the DRC, and recent events hint that it could worsen, and spill over into outright war.
Rebel groups led by General Laurent Nkunda have been fighting government troops in the eastern Nord-Kivu region of the country that borders Rwanda and Uganda, with attacks worsening during the beginning of October.
The government had set the rebels a deadline of October 15 to disband their forces, but in statements released to the international press General Nkunda has rejected this deadline, refusing to surrender under attack and instead has called for a ceasefire and talks.
Nkunda defends the action of his troops saying that he is defending local Tutsi ethnic minorities against Hutu militants in the region who have crossed over the border from Rwanda from the Tutsi genocide in 1994.
In a statement issued by Monuc, the UN mission in DRC, it outlines its hope that a ceasefire can be reached, followed by the reintegration of some of the rebel forces into the DRC’s army.
However, DRC president Joseph Kabila has told various new agencies that he will not negotiate with Nkunda, and plans to “stamp out” the violence. Many observers in the region are expecting an imminent offensive led by government troops against Nkunda’s soldiers.
The humanitarian impact of this conflict is worsening, with nearly 700,000 people in the region displaced by the fighting. Over 370,000 of these have been displaced in the last year according to UN estimates.