DRC stares at $3.7b loss in skewed mining deals
Monday May 24 2021
Democratic Republic of Congo leader Félix Tshisekedi is seeking a review of some mining contracts with foreign companies as a lobby warns that the country will potentially lose at least $3.7 billion in skewed mining and oil deals with controversial Israeli billionaire Dan Gertler.
Kinshasa has already lost out on nearly $2 billion in revenue by selling mining and oil assets to Mr Gertler, according to a coalition of Congolese and international organisations, which has urged the government to review the deals.
Companies owned by Mr Gertler, who is under US sanctions for alleged corruption in Congo, stand to gain $1.76 billion in the next 20 years from copper and cobalt projects in the country, said the lobby, Congo Is Not For Sale.
Mr Gertler, a close friend of former Congolese president Joseph Kabila, denies any wrongdoing. He has never been charged with a crime.
“The coalition calls on Congolese authorities to end their silence on this matter and take urgent measures to ensure that Congo’s mineral wealth benefits the DRC Treasury and its people,” the group said in a report.
The lobby wants President Tshisekedi to “take the bold step of ordering a thorough and credible investigation into all mining deals involving Mr Gertler”.
“The Congolese government cannot ignore the haemorrhage of billions of dollars from its coffers when it desperately needs the funds to rebuild its economy and pull its citizens out of poverty,” said the group’s spokesperson Jean Claude Mputu.
According to a financial investigation by the group, DRC lost $1.95 billion in revenues between 2003 and 2021. A further $1.76 billion in future royalty payments to Gertler’s companies will have been paid by 2039.
Congo is the world’s largest source of cobalt and Africa’s biggest copper producer. Mr Gertler’s companies own royalty streams from three of the world’s biggest cobalt projects run by Glencore Plc and Eurasian Resources Group Sarl, which could soon produce more than 70,000 tonnes of cobalt a year – about half of total global output in 2019. They are also significant copper producers.
Mr Gertler’s companies took over the royalties from state-owned miner Gecamines in a series of transactions over a decade, some of which are being scrutinised by activists and foreign regulators from the US, UK and Switzerland.
The lobby’s report builds on calculations published in 2013 by former UN Secretary-General the late Kofi Annan-led Africa Progress Panel, which alleged that Congo lost out on $1.36 billion through the under-pricing of mining assets bought by companies linked to Mr Gertler.
Mr Gertler’s spokesman denied the deals for the royalties were mis-priced and, in reference to his most recent royalty transaction in 2017 involving a tailings project, said the valuation was done “in line with industry standards.”
“At that time, there was no certainty at all any royalty would even be paid,” the spokesman said.
Mr Gertler announced last year he would allow Congolese citizens to invest in the royalty stream from the copper and cobalt project, known as Metalkol. The Congo Is Not For Sale coalition has also criticised that proposal.
Mr Gertler’s companies also control oil and gold permits in northeastern Congo that were not part of the coalition’s calculations. The sanctions against Gertler have complicated the development of those projects.
Rights to royalties
Randgold Resources Ltd, which is now part of Barrick Gold Corp, ended its participation in the gold exploration project after the US sanctions.
Mr Gertler’s oil permits, which cover Lake Albert along the Ugandan border, are up for renewal in June, and the Tshisekedi administration has been trying to transfer the permits to another operator for almost two years. Total SE signed a deal last month to invest $5.1 billion to pump the Ugandan side of the reserve.
In October 2020, Gécamines published a contract showing that it had sold the rights to royalties from Metalkol to Mr Gertler’s company Multree in June 2017, for $55 million. Mr Gertler is due to earn royalties at 2.5 percent of net revenues, the report shows.
In 2010, state-owned mining company Sodimico got back the copper permits in Sakania, in the southern tip of Katanga Province, after a dispute with First Quantum Minerals. Sodimico sold a 70 per cent stake in a joint venture holding those permits to Fortune Ahead, a company affiliated to Mr Gertler. He sold the firm back to government for $80 million, occasioning DRC a loss of $20 million, the group says.
Mr Gertler has been a key player in DRC mining sector, benefiting from his “intermediary skills,” in the country’s business deals, over his close relationship with former president Kabila, who stepped down in 2019, after 18 years at the helm.
The mining sector is critical to the Congolese economy, representing 55 per cent of the government’s total revenue in 2017, 99 per cent of total exports, and a quarter of total employment.
According to the group, Mr Gertler will keep collecting royalties in DRC for years to come because of secretive contracts signed between 2011 and 2017.
The Congo is Not for Sale lobby wrote to Mr Gertler on April 2, 2021 with the main findings of their research and requested him to comment, provide clarifications and/or provide additional information. He did not respond.
Corruption allegations have followed Mr Gertler for years. In May 2013, when the Annan-led team revealed that Gertler’s deals for five prized copper and cobalt concessions had resulted in a loss of $1.36 billion to DRC, Mr Gertler criticised the report for “basic errors” in its calculations.
“Rather than causing a loss, DRC has benefited from the various transactions through favourable terms of new joint ventures,” said a statement from his company, Fleurette.
According to the US Treasury Department, Mr Gertler secretively acquired mining or oil licences from the DRC government or state-owned mining companies at knockdown prices before selling them on to international partners, or even back to the government, for incredible profits.
“He also acquired rights to royalty payments, normally paid to the state and its companies, under dubious circumstances,” the report says, adding that Mr Gertler’s biggest deals involved giants Glencore and Eurasian Resources Group.
Glencore and ERG have asserted that they were not involved in any corruption or wrongdoing.
In the final days of the Trump administration in January 2021, US authorities suspended the sanctions against Gertler, but after civil society groups called for the measures to be rolled back, the new Joe Biden administration revoked the licence a few weeks after taking office, on the grounds that Gertler had indeed engaged in “extensive public corruption.”
“The revenue that Congo is losing could be used to build schools, pay teachers, provide basic healthcare or pave more roads, but instead it is lining the pockets of a private businessman,” said Jean Claude Mputu. “President Tshisekedi’s government can step in to halt the future losses and reverse this colossal loss.”
President Tshisekedi has heeded this call. In his quest to revive the country’s battered economy, President Tshisekedi has instituted measures to reverse some of the deals he says were badly negotiated. Recently, while touring Lualaba Province, he conceded that mineral resources in the country were not benefiting Congolese people, but foreigners. He indicated that he would renegotiate some of the contracts.
“It is time for the country to reassess its contracts with the miners to seal win-win partnerships,” he said at Kolwezi in southern Congo, the world’s capital of cobalt.
“Some of our compatriots badly negotiated mining contracts. Worse, the little that goes to the state, they put it in their own pockets,” he said without naming names, but obviously referring to the Kabila regime.
“The [foreign] investors have stolen too much. They are getting richer and richer while the Congolese continue to languish in misery,” he added.
But the president is not yet seeking a revision of the Mining Code promulgated in 2018 by president Kabila and considered by almost all Congolese a good law. Among other changes, the new Mining Code reduced exploitation licences from 30 years to 25 and made exploration licences renewable only once. The state’s non-dilutable equity stake increased from five percent to 10 percent and increases by five percent on each renewal of a mining licence. Further, a 10 percent share capital stake is to be held by Congolese private citizens for creating a mining company and tax benefits are to be extended to mining companies’ subcontractors only if they are controlled by Congolese shareholders.
President Tshisekedi’s message targeted Lubumbashi (Haut-Katanga Province) and Kolwezi (Lualaba Province), Congo’s two regions that hold 60 percent of the world’s cobalt reserves and 10 percent of the world’s copper.
Observers say that the Congolese leader intends to reduce the stranglehold of the Chinese in the mines, even though his officials deny that there is a particular nationality targeted.
Three-quarters of the 40 companies operating mines in the two regions are Chinese-run.
Before the president’s announcement, debate was rife about a possible renegotiation of mining contracts, which agitated Chinese and American officials.
Peter Pham, an analyst of US-Africa relations greeted the announcement with a “Bravo!” while Zhu Jing, the Chinese ambassador to Kinshasa, tweeted: “The DRC and Africa should not be the battlefield of the powers. Let us be vigilant to those who cry out to them, fight and seek to create hostility. “
On his tour of Kolwezi, President Tshisekedi visited the Chinese mining company Sicomines and the Kamoto Copper Company, a branch of Glencore. In Kolwezi, he assured the investors that “the DRC attaches great importance to relations with China,” even as his administration continued investigations into contracts awarded to Chinese miners.
“It should be understood whether the Sino-Congolese contract was based on a realistic estimate of reserves and whether the almost total tax exemption enjoyed by Sicomines is well justified,” read the terms of reference of the probe being carried out by the Extractive Industries Transparency Initiative with the support of the government.
Tshisekedi’s trip to the south seemed to have been inspired by lobbies who have cited corruption, rights violations and money laundering in the mining sector and the overall question of who exactly is benefiting from the extractives sector.
“The most important point to look at is the level of debt repayment. To see how the project is helping to repay the debt. The second point is in terms of production, which is very low today, compared to what is provided for in the contract. The third point is the question of jobs. How many jobs were planned for the Congolese and how many jobs were actually created?” said Emmanuel Umpula, member of the NGO AfreWatch, in a statement to journalists.
In his years in power, Joseph Kabila had to negotiate contracts with Chinese firms in a partnership that consisted a barter trade of minerals with construction of roads, hospitals and other infrastructure. Some $2.74 billion has been disbursed by the Chinese, mostly in the form of infrastructure investments.
In the early 2000s, when Gécamines was on the verge of bankruptcy, several foreign companies signed partnerships with the DRC. Today, Congolese question these partnerships, saying they form just a fraction of what the firms get out of the country.
“They are totally unbalanced in the sharing of mining revenues. This partnership led to a huge loss of $2 billion for DRC,” said Albert Yuma, chair of the board of Gecamines.
But, according to Prime Minister Sama Lukonde, the current government still hopes “to take use of $2 billion of the $3 billion in Chinese loans to build infrastructure.”
Can Tshisekedi clean up mining?
Having spent much of his life in Belgium, Tshisekedi may be an unlikely architect of a corruption crackdown. The son of revered opposition leader Étienne Tshisekedi, he is controversially deemed to have beaten opposition leader Martin Fayulu and Kabila pick Emmanuel Ramazani Shadary in a 2018 election marred by allegations of fraud. Even after his victory, he was forced to do business with Kabila and his powerful political allies.
Jean Pierre Okenda, a Congolese lawyer and senior analyst at Brussels-based advocacy group Resource Matters, says that Tshisekedi’s victories could give impetus to reform efforts.
“We expect progress now as, finally, the political deal between him and the former president is completely cancelled,” says Okenda.
Despite the promise of change, uncertainty looms. In February, President Tshisekedi appointed the head of Gécamines, Sama Lukonde, Prime Minister. Rights groups fear the advent of a new generation of cronyism.
“It is a game-changer. But the question is: will the game-change benefit the state or the citizens of Congo?” asks Okenda.
The move by Felix Tshisekedi brings back memories of the efforts by former Tanzanian leader the late John Magufuli who, in 2017, instituted drastic changes in the mining sector through Parliament to protect the country’s natural resources and the employment opportunities for its citizens.
By Allan Olingo, Patrick Ilunga and Bloomberg