10.03.10 Asia Times : China has a Congo copper headache
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
demonstrateprogress 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
Efficiency February
21, 2010.
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.
(Copyright 2010 Asia Times Online (Holdings) Ltd.