Asia Times : China has a Congo copper headache

China has a Congo copper headache
by Peter Lee 
Asia Times, 11 mars 2010

http://www.atimes.com/atimes/China_Business/LC11Cb02.html   

An agreement between the Democratic Republic of Congo (DRC) and China in 2008 to swap 10 million tonnes of copper ore for US$9 billion worth of mine and civic infrastructure looked like a genuine win-win. 

But ever since the International Monetary Fund (IMF) demanded renegotiation of the deal in May 2009, China and the DRC have been on a roller-coaster ride of risk. Today, Beijing anxiously eyes a growing list of major dysfunctional problems - and a $100 million adverse judgment in a Hong Kong court - that could derail the "deal of the century". 

The deal, as originally conceived, cannily addressed three major issues. 

The first was China's desire to make a big resource play and secure a source of copper and cobalt in Africa. 

The second was DRC President Joseph Kabila's need to demonstrate progress on the reconstruction of his country, shattered by two decades of war that claimed as many as five million civilian lives, to increasingly dissatisfied voters as the 2010 presidential elections approached. 

The third was onerous indebtedness, which forced the DRC to concentrate on the IMF's priorities of debt repayment and fiscal and financial reform instead of its own desperate need for social and infrastructure spending. 

The Chinese deal was, in its essence, barter. The state-owned Export-Import Bank of China (China Eximbank) would fund the opening of a copper mine in the DRC's Katanga province for $3 billion and underwrite $6 billion of infrastructure projects, paid in two tranches. The bank would be repaid using profits of Sicomines, a joint venture between the DRC and China that would receive the rights to extract 10 million tonnes of copper and 600,000 tonnes of cobalt reserves from the Katanga mine. 

Undoubtedly, the deal was a potential bonanza for China. In addition, Chinese companies might well have hoped to take advantage of the DRC government by manipulating the contracting process to provide the capacity-challenged and corruption-prone nation with overpriced infrastructure. 

An expert on the DRC's developmental challenges told Asia Times Online he was pessimistic about what might be delivered. "I'm not sure what to expect, beyond a bit of new pavement on some old roads. I 'trust' a corrupt, but efficient government like Angola to squeeze value out of Chinese and Western companies. Not the DRC." 

Nevertheless, for China as well the deal represented a remarkable leap of faith. At the time when the DRC was a financial, political and economic basket case, China agreed to put $6 billion into the country up front in the first four years before the mine - which would enter into production at 2014 at the earliest - had produced a pound of copper. 

To its discredit, the West's response to news of the agreement was anger compounded by fear and jealousy. Kabila conveyed his resentment of this response in an interview with the New York Times: [1]

No sooner had the agreement been praised in Congo as a desperately needed lifeline than Congo's Western allies started griping that the Chinese got a sweetheart deal and began pressing Mr Kabila to revise the terms. 

"What revolted me was the fact that there was resistance to this agreement and there was no counterproposal," Mr Kabila said.

The West expressed its displeasure in a concrete way through the most effective avenue available to it - the IMF. 

The IMF dominates the DRC's international economic activity through its administration of a debt workout process for so-called HIPC or "Highly Indebted Poor Countries". 

The HIPC workout has been criticized as a coercive and self-serving exercise designed primarily to protect the interests of Western sovereign creditors who over-lent to developing countries.

To prevent a wave of national defaults, and avoid the need for creditors to immediately write off foreign debt that impoverished borrowers are unable to service, the IMF interposes itself to set fiscal and structural reform obligations in return for bridge financing and the employment of its good offices to effect eventual cancelation of debts by the Paris Club of the largest Western holders of bad national debt. 

Somewhat absurdly, the DRC, even in the depths of the global recession in 2009, was making more than $170 million in interest payments to stay in the good graces of the IMF. 

This self-sacrifice is necessary so that the IMF will eventually certify to the Paris Club creditors that their $6 billion share of the DRC's $11 billion foreign debt is worthy of being written off. The debt was actually incurred by the kleptocratic predecessor regime of Mobuto Sesi Seko, who fled the country in 1997 when it was still called Zaire; he died the same year. 

It would appear that the IMF relishes the leverage it holds over the DRC by virtue of its control of the country's financial lifeline to the outside world, and resented the idea that the DRC could, through an ore-for-infrastructure swap, pursue its developmental goals in disregard of the priorities of the IMF and its Western backers. 

In Le Monde diplomatique, journalist Colette Braeckman observed that "the institution headed by Mr Dominique Strauss-Kahn [the IMF] appears not to appreciate barter". [2] 

She quoted Wu Zexian, the Chinese ambassador to the DRC, who dismissed the IMF's concerns about increased indebtedness:

"We have asked only one guarantee: that the state, where existing fields would not keep commitments, would allow us to undertake further exploration. We explained it in perfect French. The risks would be taken by China Eximbank, and alone ... "

Nevertheless, the IMF declared that the China deal increased the DRC's potential foreign debt exposure to an unacceptable level and demanded that it be reduced in size. The IMF also made it clear that without a reduction in the deal it would not provide the necessary endorsements to the "Paris Club" that were needed to write off the DRC's debt. 

After a brief show of defiance, the DRC crumbled, agreeing to defer the second $3 billion infrastructure tranche. 

In this context, it is interesting to note that the reported scope of the reserves ceded to China under the deal is apparently unchanged: it is still 10 million tonnes of copper and 600,000 tonnes of cobalt. It could be argued that the Chinese obligations have been reduced by 33%, and the infrastructure benefits to the Congo reduced by 50%, while China still gets access to mineral reserves worth over $50 billion - not exactly a triumph of negotiating by the IMF on behalf of the DRC, if this is the actual state of play of the revised agreement. 

The IMF's judgment in opposing the China deal in its original scope is open to question. 

If the Congo was poised for free-market takeoff, the China deal could be criticized for crowding out development of the DRC's copper and cobalt reserves by eager private companies ready to risk their capital in a free market environment. 

But this was manifestly not the case. 

As the DRC's point man for mineral negotiations, Victor Kasongo, put it [3]:

"If China wants to dominate the world, it's not our business to stop them," Kasongo continues. "Who are we to close the door to them when we don't have water or electricity? If China doesn't come [to Congo], we're in big sh*t."

It was widely believed that the IMF was simply taking sides with the West in the geopolitical tussle with China in Africa. Ghana Business News reported [4]:

The IMF's opposition to the deal represents an attempt by the West to counter China's investments in Africa, according to Gregory Mthembu-Salter of the South African Institute of International Affairs. "It's a confrontation between the Western donors and China in Congo," he said in a June 2 interview. "The fall guy in this will be the Congolese."

In some quarters there were also suspicions that the IMF's campaign against the China deal was part of an effort to coerce the DRC into abandoning an initiative to which the West was violently opposed: the renegotiation of resource contracts concluded during the chaotic transitional period before the first DRC presidential election in 2006. 

The most important contract at issue was for the immense copper mine at Tenke Fungurume, with reserves roughly twice the size of those ceded to the Chinese project. 

During negotiations with the transitional regime in 2005, Western owners achieved enormous reductions in the entry fees and shares they had to set aside for the local partner under the original agreement concluded in 1996. 

In 2005, the DRC negotiators on the Tenke Fungurume project blithely agreed to reduce the fee from $250 million to $50 million (which was an additional payment to $50 million that a predecessor company paid in 1997), and reduce their country's share from 45% to 17.5%. The reduction in share by the DRC represented the surrender of revenues from 5 million tonnes of copper - worth at least $30 billion - over the life of the mine. 

By contrast, the 2008 Chinese deal promised a signing bonus of $350 million and a 32% share going to the DRC side, which included the parastatal mining company Gecamines and a somewhat mysterious local partner. 

The appearance of impropriety was, if anything, exacerbated by the participation of the US government in the Tenke Fungurume talks. 

The World Bank had mandated a moratorium on new mineral contract negotiations pending a legal review of existing contracts and Tenke Fungurume was apparently flagged as problematic. 

The US government apparently ignored the ban. Indeed, it looks like the US government helped push through a renegotiated deal with the transitional regime in order to obtain more favorable terms, and a more solid legal footing than the project, as a relic of the previous dictatorship, originally possessed. 

At the DRC's request, the Carter Center reviewed the 2005 minerals contract mess and painted a dispiriting picture of greed, opportunism, and apparent self-dealing at the expense of one of the poorest countries on earth: [5]

Nevertheless, according to information from Congolese and international sources, the US Embassy lobbied for the DRC government to sign the agreement with Phelps Dodge, the US mining company. 

There are several reports that the embassy's political officer and temporary Charge d'Affairs was personally engaged in urging the President's office to sign. At the very least, there was no indication at any time that the US was concerned with the request for a moratorium. In fact, the ICG's [International Crisis Group's] July 2007 report notes that US officials attended a signing party hosted by Phelps Dodge upon conclusion of its contract, demonstrating unambiguous disregard for the moratorium.

There's more:

The same official that is said to have actively lobbied for Phelps Dodge retired from the State Department in 2006. In September of that same year, she became "Vice-President for Government Relations, Africa" for Phelps Dodge, whose only major African interest is Tenke Fungurume. This official's important role at the US embassy and the timing of the move have fueled suspicion on the part of DRC government officials and others regarding the interests of Western governments.

Despite its dismal provenance and calls to delay commitments until the pending contract reviews were completed, the Tenke Fungurume deal received a further seal of approval in the form of sizable investments from Western public financial institutions - $250 million from the US Overseas Private Investment Corporation, 100 million euros (US$136 million at today's rate) from the European Investment Bank and another $100 million from the African Development Bank. Quixotically or determinedly, at the same time the Kabila government pursued the China agreement it decided to renegotiate the Tenke Fungurume contract and, in the process, pick a fight with the US and European Union countries that were backing the project. 

There was a rush of anxiety in the West about "resource nationalism", coupled with concern that, if the DRC had ready recourse to Chinese support, it might become emboldened in its dealings with Tenke Fungurume - perhaps even threatening to modify the concession and re-allocate some of its reserves near the Sicomines site for China to develop. 

There was also a silence on the apparent inequities of the Tenke Fungurume contract that contrasted with the widely and efficiently disseminated expressions of concern by the IMF about the Chinese deal.

Intense US pressure and IMF carrots and sticks were apparently enough to get the DRC to back down on Tenke Fungurume and allow the West's flagship resource project to sail off unscathed - perhaps at the cost of the West's image as an honest broker and true friend of the DRC. 

On February 15, 2010, the DRC e-mailed Bloomberg [6]:

Freeport's Congolese unit, Tenke Fungurume Mining Sarl, "has all the evidence" that its contract is legal, the National Assembly's Economic and Finance Commission said in the report e-mailed to Bloomberg News from the capital, Kinshasa. It recommends that the government allow Tenke to expand its mine in order to increase its payments of royalties and taxes. Though the renegotiation was legal, the contract was "badly negotiated" by the government, the commission said.

Tenke Fungurume problem solved! 

So apparently, is the Victor Kasongo problem. 

In a move seemingly designed to curry favor simultaneously with Western mining interests and the IMF, Kasongo, the mining industry hard-charger characterized by Richard Behar [7] as "By all accounts ... a sharp and honest reformer" is gone. 

Also gone is the office he held, all in the name of "efficiency", as Businessweek reported on February 20 [8]:

Victor Kasongo, the vice minister of mines, had his position cut. 

The move reduces the number of ministerial positions in the government to 43 from 54 "for more efficiency," and aims to limit expenditures as Congo tries to qualify for a World Bank and International Monetary Fund debt relief program, a statement accompanying the order said. Kasongo was the public face of the mines' ministry and the man behind the recent review of all of Congo's mining contracts that resulted in the cancellation of a $553 million copper and cobalt project with Canada's First Quantum Minerals.

China's problems are, on the other hand, definitely not solved. 

The IMF's obsession with working out debt owed to the Paris Club creditors has done nothing to address the disposition of $5 billion of DRC debt held by non-Paris Club entities including, to Beijing's horror, vulture funds, the private investment firms and hedge funds that buy the liabilities of poor countries on the brink of debt relief. 

DRC's particular curse is FG Hemisphere, a fund that, for an undisclosed sum, bought up $30 million worth of bad debt contracted by the Mobuto Sesi Seko regime in 1980 with Tito's Yugoslavia on a failed hydropower scheme. Through litigation, FG Hemisphere managed to grow this debt into an award of $100 million. 

By virtue of the Hong Kong presence of a wholly owned subsidiary of China Railways, one of the Chinese partners in Sicomines, FG Hemisphere obtained a favorable judgment in Hong Kong blocking China from paying - or the DRC from receiving - $100 in million signing fees for the copper project until FG's award had been paid. 

As usual, in the Western press there is considerably more handwringing about the damage that the financial derivatives markets would suffer if the activities of vulture funds were curtailed, than there is concern over the economic and developmental travails of the DRC if the payment is delayed. 

And there is no acknowledgement of the IMF's questionable judgment in fixating on $6 billion the DRC owes the Paris Club creditors while neglecting to address the problem of its exposure to $5 billion in liabilities in the hands of non-Paris Club creditors and vulture funds. 

As it deals with the hostility of the West and the IMF and the vagaries of international financial litigation, China also has to deal with the risks in the DRC's volatile domestic politics. 

Gecamines, China's local partner in the Sicomines project, is slowly disintegrating into a morass of corruption, dysfunction and reorganization. A DRC parliamentary commission has alleged that $23 million of the first $50 million installment of the Chinese signing bonus has somehow gone missing. 

Gecamines' chief executive officer Paul Fortin, who supported the China deal over the market-based refinance plan advocated by the World Bank for the DRC minerals sector, resigned in November 2009 after it became apparent that his control was limited and he had no knowledge of the tens of thousands of tonnes of copper allegedly diverted from his factories for private profit. Fortin was replaced by an executive with close ties to President Kabila's inner circle, who embarked on a major reorganization to establish presidential control over the wayward enterprise. 

With the departure of Kasongo and Fortin, the two most credible and capable professional advocates of the China deal have left the scene. 

Going forward, the crucial China dossier is now in the hands of Kabila and China's fortunes are closely linked to Kabila, his "Cinq chantier" or "Five Pillar" civil infrastructure initiatives and advisors that helps him navigate the deadly waters of DRC politics. 

When compared with the West's record of self-serving and destructive interference in the DRC's affairs - and the immense corruption it engendered - China still enjoys a more favorable reputation in the DRC. 

As the former coordinator of the United Nations Group of Experts on the DRC, Jason Stearns, told Asia Times Online:

There are, of course, Congolese skeptics of the Chinese engagement, but others point out the advantages of bartering mines for infrastructure. "You can't put a highway in your Swiss bank account," goes a popular saying in the Congo.

Nevertheless, as China looms larger in African economic life - and contributes its share of bad behavior and economic disruption, it becomes a big political target. 

Hostility to China and its cosy relationship with authoritarian rulers is becoming a staple of opposition parties and open-society organizations in Sub-Saharan Africa. The DRC is no exception. 

A prominent open-society activist wasn't loath to invoke the monstrous colonial reign of King Leopold II of Belgium over the Congo in characterizing the Chinese deal. As the BBC tells us [9]:

"Our worry is that it is almost totally opaque," says Katanga-based lawyer Georges Kapiamba, who eventually obtained a copy [of the contract]. 

"It permits a group of Chinese to get more than the Congolese - it's not a win-win contract." 

Kapiamba says the deal amounts to a licensed plundering of DR Congo's resources similar to that carried out under Leopold.

Kibale's opposition is also ready to play the China card [10]:

Jean-Lucien Mbusa, speaking on behalf of the main opposition, the Movement for the Liberation of the Congo (MLC), said that the deal "forces us to sell off our national heritage to the detriment of several generations".

Most unnerving, a demand to renegotiate the China contract also appeared in a manifesto by Laurence Nkunda, the ferocious Tutsi warlord who rampaged through eastern DRC last year and at one time seemed to threaten the rickety foundations of Kabila's government. 

In February 2010, China received a jolt of unfavorable publicity courtesy of Kabila's ruling party as a parliamentary commission reported on Gecamines' $23 million problem of the missing signing fee. 

Although there was no implication made that China was at fault, the story was combined with circumstantial details of less-than-stellar Chinese performance on unrelated cellular network and agricultural projects in a critical and widely circulated report [11] by the newsletter Africa-Asia Confidential. 

To demonstrate he is not in Beijing's pocket, Kabila let it be known that his office was ready to crack down on potential Chinese profiteering:

The Congolese shareholders say that they are getting tougher in negotiations. Before, they had to "close their eyes" to certain details, such as feasibility studies carried out by the same company that would later implement the project, a practice that led to overestimating of costs. Since November 2009, the quality control assignments of all infrastructure projects within the Sicomines framework have been subject to international tendering.

As the Congolese say, things will be getting tougher in 2010 as the DRC moves towards its presidential election and the international jockeying for influence and advantage in Kinshasa intensifies. China can only hope it can continue to thread the needle and make it to 2014 - the year copper production starts - with its project and political standing largely intact. 

Notes 

1. For Congo's Leader, Middling Reviews NYT, April 4, 2009.

2. Le Congo et ses amis chinois September 2009. 

3. Mineral Wealth of the Congo June 1, 2008. 

4. DR Congo to adapt China deal to appease IMF January 6, 2009. 

5.http://www.cartercenter.org/documents/drc_mining_contracts_113007.pdf

6. Congo Advised to Respect Contract With Freeport February 15, 2010. 

7. Mineral Wealth of the Congo June 1, 2008. 

8. Congo Cuts, Reshuffles Ministry Portfolios for More EfficiencyFebruary 21, 2010. 

9. China's win-win in Africa 

10. China steps up investment in Congo as war in east continues July 15, 2008. 11. Evidence of Grand Corruption Mounts in Beijing's Showcase $6 billion Barter Deal with the Kinshasa Government 

Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy. 

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