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Financial Times: Concession to history: when miners in Congo must look beyond the bottom line

EXTRACT: The problems companies could face in Katanga bear comparison with those of multinationals such as Shell in the Nigerian Delta. There, local groups have mounted sabotage campaigns and kidnapped foreign workers in a bid to force the companies to spend more of their revenue in the oil-producing region.For years, corrupt government officials looted the profits they received, meaning little of the oil wealth is seen in the Delta. The foreign groups then became the targets of local communities’ ire.


By Andrew England

Published: August 21 2006 03:00 | Last updated: August 21 2006 03:00

Standing on a hilltop in a remote corner of the Democratic Republic of Congo, a manager with Phelps Dodge, the US mining group, stoops to pick up a piece of rock. On one side he points to a greenish colour – copper; on other side it is soot-black – cobalt.

“It’s everywhere. We will carry out exploration in all conceivable directions,” says Jeffrey Best, now standing and looking out across the Tenke Fungurume concession in which Phelps Dodge plans to invest hundreds of millions of dollars in the next few years. “We drive through hills worth billions of dollars.”

The 1,500sq km concession is dotted with such hills, patches of which glisten green in the sunlight, proof of the region’s rich copper resources. Phelps Dodge has described Tenke Fungurume as “the largest and highest-grade undeveloped copper/cobalt pro­ject in the world today”.

The US group has a 57.75 per cent stake in the project and Tenke Fungurume Mining (TFM), a Phelps Dodge subsidiary, will be the operator. It is one of 30 joint ventures involving Gecamines, the state-owned mining company, and private sector groups investing in Congo’s south-eastern province of Katanga, home to some of the world’s last known undeveloped copper/cobalt resources.

Few mines are yet operational but if they all went on line Katanga could be producing 800,000-1m tonnes of copper annually in 10-15 years, experts estimate, as well as tens of thousands of tonnes of cobalt.

By the end of 2008, Phelps Dodge hopes to be producing 100,000 tonnes of copper and 8,800 tonnes of cobalt annually; within 5-10 years, copper production could rise to 400,000, levels that could be sustained for 20 years or more, officials say.

In theory, the influx of investment – forecast to be $500m (£265m, €390m) this year and about $800m in 2007 – should be positive news for Congo, an indication that the shattered country could finally be moving forward after years of dictatorship and two civil wars in the past decade.

If an election process passes smoothly – counting continues afterlast month’s multi-party vote, the country’s first in more than 40 years – the floodgates may open. Already companies from the US, Australia, South Africa, Canada and China have interests in Katanga, including First Quantum, BHP Billiton, OM Group and China’s Covec.

“If you want to stay in the copper business, sooner or later you have to come here; there’s not much copper known today in terms of resources,” says Claude Polet, managing director of TFM. “If we don’t do it, others will.”

Yet rather than being welcomed, the joint ventures have drawn criticism from Congolese activists and advocacy groups. Critics do not deny the need for outside investment but complain that few, if any, of the partnerships were granted through open tenders. This lack of transparency is exacerbated by concerns about corruption, the possibility of tax evasion and the feeling the contracts are too favourable to the private companies. In Tenke Fungurume, the largest concession, Gecamines has only a 17.5 per cent stake.

Critics also worry that not all the miners operating in Katanga are reputable groups listed on world markets. Some are smaller companies trying to become big players; others are described as “cowboys”.

Historically, mining contributed 25 per cent of Congo’s gross domestic product. But the sector has been in tatters for more than a decade following the collapse in the early 1990s of Gecamines, which had a monopoly on Katanga’s wealth. Once the company produced more than 470,000 tonnes of copper per annum but its assets were looted under the dictatorship of Mobutu Sese Seko and its infrastructure collapsed. Now bankrupt, with debts of $1.6bn, Gecamines produced 14,000 tonnes of copper last year and a paltry 600 tonnes of cobalt. It is currently being restructured under a World Bank programme and a team of experts has been brought in to turn it into a viable entity.

“We were expecting that after Mobutu we could exploit the resources and rebuild our economy, but now all the resources have gone for 30 or 50 years,” says Hubert Tshiswaka Masoka, head of ACIDH, a Congolese human rights group, referring to the private sector contracts. “People are not against foreign companies but are against the way the foreign companies came in.”

The difficulty for mining companies – even the most reputable groups – is that they find themselves operating in an environment in which Gecamines once filled the void left by the absence of an effective state. That vacuum still exists.

As a TFM vehicle drives along a dirt track, it passes the mud-brick houses of impoverished villagers living inside the concession. A woman carrying goods on her head points in the direction of the vehicle and rubs her fingers together, using the global sign-language for money.

When Gecamines was fully operational it employed up to 30,000 – about twice Phelps Dodge’s global workforce – and also provided health clinics, schools and roads, as well as contracts for local businesses.

Even today, in its bankrupt state and after 12,000 redundancies, the company has a salary bill of $4.5m per month and monthly expenses of $100,000-$150,000 for hospitals and $100,000 for schools. Not surprisingly, many Congolese are nostalgic.

Some of the recently arrived mining companies are building schools and health clinics, realising they cannot rely on the government to develop the region. However, they say they can only be a catalyst for development and that it will be up to others, either non-profit organisations or the state, to sustain social projects.

“We do run the risk of being viewed as a substitute for the government and there’s a lot of challenges managing the expectations of local communities,” says Bill Turner, chief executive officer of Anvil Mining, an Australian company operating in Katanga. “That’s why the way of operating has to change. People need to get pay packets and spend their money on things they have some ownership of.”

Anvil has bitter experience of the challenging environment. In 2004, there was a rebel uprising in the town of Kilwa, near one of the company’s mines. The army, ill-disciplined and rarely paid, commandeered Anvil vehicles and attacked the insurgents, an offensive that reportedly left up to 70 people dead. Anvil, which was widely criticised, denied being complicit in the army’s action.

In a statement it said: “The DRC military requested access to Anvil’s air services and vehicles to facilitate troop movements in response to the rebel activity.” It added: “Anvil had no option but to agree to the request, made by the military of the lawful government of DRC.”

In its concession, TFM helps pay the salaries of some 160 mining police and will allocate 0.3 per cent of net revenue to social development programmes. Last year, Anvil spent $600,000 on social projects, compared with $3.5m on exploration; this year these figures will rise to about $3m and $7m respectively, Mr Turner says.

It can be difficult to please, however. “We have small issues all the time,” Mr Turner says. “We build a school for someone and the next village says: ‘Why have we not got a school?’ ”

Under Congo’s new constitution, 40 per cent of a province’s revenue should be returned to the region. Mining companies should pay 30 per cent corporate tax, a 2 per cent royalty on net sales and 1 per cent tax on exports. But the fiscal systems needed to divvy up revenues have yet to be worked out, and with corruption rife there are no guarantees it would be effectively used and not siphoned into private bank accounts.

The problems companies could face in Katanga bear comparison with those of multinationals such as Shell in the Nigerian Delta. There, local groups have mounted sabotage campaigns and kidnapped foreign workers in a bid to force the companies to spend more of their revenue in the oil-producing region.For years, corrupt government officials looted the profits they received, meaning little of the oil wealth is seen in the Delta. The foreign groups then became the targets of local communities’ ire.

Nobody is yet suggesting that Katanga will follow a similar path but companies are aware of the risks. A Katangan business lawyer critical of many of the foreign contracts describes the situation as a potentialvolcano, saying that every truck of copper and cobalt would remind people of the wealth leaving their country.

“There’s always a risk,” says one foreign mining official. “If we do not handle it properly, maybe in 10 years we could have similar problems.”

Moise Katumbi, a Katangan businessman standing in the elections, warns that local communities will “chase” out those deemed not to be doing enough social development. “There are some good investors, 10 to 15 per cent,” he says. “The rest are crooks.”

Paul Fortin, a Canadian mining lawyer who was appointed Gecamines’ managing director on December 31 as part of the World Bank’s programme to restructure the company, says he plans to review all the joint ventures to address the public concerns.

Most of the partnerships were signed after a transitional government, which included former rebel leaders and corrupt businessmen, took office in June 2003. The appointment of a new head of Gecamines under the bank’s programme was delayed for 18 months, prompting allegations that this was a deliberate move by politicians who wanted to dish out contracts in the absence of accountability.

Audits commissioned by the bank have since revealed legal anomalies in some of the contracts. But Mr Fortin says he will only renegotiate on the basis of mutual consent. “I would rather have a bad deal than tear it apart, because if it’s a bad deal, people will pay taxes, they’ll provide employment, they bring capital to the country, the roads will be built,” he says. “I will try to improve them; if I can’t, I can’t.”

Meanwhile, donors including the UK’s Department for International Development and the US Agency for International Development are looking at ways to set up a mechanism, such as a trust fund, to ensure the province does reap some of the rewards.

Some companies, including Anvil, have sought the help of Pact, a non-governmental organisation, in running their social programmes.

“The fundamental problem is there’s no government, no rule of law. It means the companies have to take on roles they would not do in any other country, dealing with transparency and corruption, seeing the police are trained and not committing human rights abuses,” says Richard Culp Robinson, Pact’s country representative.

“The more reputable companies need to work together to leverage more influence in Kinshasa to reduce corruption and increase transparency.”

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