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«Document of The World Bank FOR OFFICIAL USE ONLY Democratic Republic of Congo Growth with Governance In the Mining Sector Draft, 16 October 2007 ...»

-- [ Page 1 ] --

Report No. ____________

Document of

The World Bank

FOR OFFICIAL USE ONLY

Democratic Republic of Congo

Growth with Governance

In the Mining Sector

Draft, 16 October 2007

Oil/Gas, Mining and Chemicals Department

AFCC2

Africa Region

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed

without World Bank authorization.

Dates Calendar Year, unless otherwise specified Weights and Measures metric, unless otherwise specified Exchange Rate Franc Congolese 500 = US$ 1 Abbreviations ANR National Security Agency ASX Australia Stock Exchange BCC Congo Central Bank BGR German Federal Institute for Geosciences & Natural Resources CAFOD Charitable Organization UK CAMI Mining Title Registry and Cadastre Service CEEC Diamond and Precious Metals Evaluation Centre CODELCO Chile National Copper Company COPIREP Steering Committee for Reform of Public Enterprises CTC Certified Trade Chain CTCPM Technical Unit for Mining Coordination and Planning DFID Department for International Development DGI Directorate General of Taxes DGRAD Directorate General of Dominal and Assises Taxes DRC Democratic Republic of Congo EIA Environmental Impact Assessment EITI Extractive Industries Transparency Initiative EMAK Miners Exploitation Association of Katanga EMP Environmental Management Plan FARDC Armed Forces of Democratic Republic of Congo GDRC Government of the Democratic Republic of Congo GÉCAMINES Générale de Carrières et des Mines GTL / STL Groupement de Terrils de Lubumbashi IMF International Monetary Fund KCC Kamoto Copper Company KMT Kingamiambo Musonoi Tailings KOV Kamoto East, Olivera and Virgule KP Kimberley Process MIBA Compagnie Miniere de Bakwanga MOF Ministry of Finance MOM Ministry of Mines MOP Ministry of Planning MOPORT Ministry of Portfolio MPW Ministry of Public Works MSR Ministry of Scientific Research OCC Congolese Control Office Office of Customs and Duties OFIDA OKIMO Office of Mines of Kilomoto ONATRA National Transportation Office PNC National Congolese Police PPP Public Private Partnership ROSC Report on Observance of Standards and Codes SAESSCAM Assistance Office for Artisanal and Small Scale Miners SAKIMA Gold Company of Kivu and Maniema SNCC National Railways Company SNEL National Electricity Company SODIMICO Industrial and Mining Company of Congo SOMINKI Kivu Mining Company SOE State Owned Enterprise TSX Toronto Stock Exchange UN United Nations UNICEF United Nations Fund for Children USAID United States Agency for International Development USGS United States Geological Survey WBG World Bank Group

–  –  –

Annexes

1. Long-Term Commodity Price Outlook

2. Evaluation of DRC’s Mineral Resources

3. Minerals Legislation and Mining Taxation

4. Partnership Agreements

5. Mining Rights Granted by CAMI

6. Report on artisanal mining

7. Report of the BGR

8. Road Infrastructure Programs

–  –  –

This study examines the mining sector’s potential to contribute to economic growth with governance in the Democratic Republic of Congo. In the past, mining has been the main engine of the Congo economy. But the revenues and other benefit streams generated by the sector over the years have not been used in a wise or sustainable fashion, largely due to key problems with sector governance. During the past ten years of civil war and conflict, flagship industrial mining declined substantially, and informal and artisanal mining expanded significantly. Now that peace has returned to most of the country and a new democratically elected Government is in place, the potential for the mining sector to contribute to economic growth is excellent. However, achieving growth with governance depends on three principal internal and external factors. The first of these, international commodity prices, is largely out of the Government’s control. The second factor, political stability, is clearly critical to growth of the sector; however, a detailed discussion of this factor is outside the scope of this study. The third factor, rent-seeking culture, is at the heart of the challenge that the Government must overcome to ensure sustained sector growth with good governance.

World commodity prices. Prices of major non-ferrous metals, gold, and diamonds – DRC’s principal mineral export commodities – are set on international markets. For the past three years there has been an extraordinary increase in the prices of these commodities, driven principally by high consumption (in the case of non-ferrous metals) in China, India and other countries and, in the case of gold and diamonds, by strong retail demand. For instance, in 2003 the price of copper, to take the example of one commodity, was around US$1.00 per pound (US$2,200 per metric tonne). The current (May 2007) copper metal price is US$3.30 per pound (US$7,200 per metric tonne). However, prices of mineral commodities are highly cyclical, and predictions of future prices vary enormously. Some observers would suggest that a fundamental shift has occurred in consumption patterns for mineral commodities, which will result in higher prices for the foreseeable future. Others suggest that the present boom in commodity prices is in mid-cycle. This report adopts the conservative view that the current high prices should decline over the coming years, though possibly not to the low levels of the early part of this decade.





Source: World Bank, “Outlook for Metals Prices,” September 2006, based on projections from Commodity Research Unit.

The probable future decline and fluctuation of commodity prices has several implications for the mining sector in DRC. First, as commodity prices fall, so too does the amount of investment funding available for minerals exploration and investment. Second, producing companies will generate lower revenues, and the government will have a consequent decline in fiscal receipts. Third, companies will face pressure to maximize their economies of scale, generally by increasing through-put in order to meet fixed costs. At the same time, because of lower sales revenues, companies will be forced to reduce operating costs, often by cutting staff and social services. Fourth, lower commodity prices will have a direct effect on the artisanal producers of mineral commodities whose day-to-day dependence on the amounts earned in the mines renders them highly vulnerable to fluctuations. For example, artisanal producers of coltan were severely impacted by the rapid decline in the price of this commodity (used in cell phones) early in this decade.

Security and political dynamics. Like all post-conflict states, DRC must now rebuild political and administrative systems that were destroyed or severely degraded over the past 10 years.

Following the transition period, as mandated in the Sun City accords of 2002, a new government, headed by President Joseph Kabila, was elected at end 2006. However, the political process is extremely fragile, and the new Government has been slow to establish itself. DRC does not have a long history of democratic rule, and officials have much to learn about the art of governing. As administrative systems are rebuilt, therefore, attention must be paid to logistics, personnel, information systems, standards of governance, and responsiveness to the needs of the governed.

It is outside of the purview of this study to examine in detail the dynamics of the political evolution in DRC. However, an open and legitimate political process is a prerequisite for stability and a smoothly functioning administrative system. Such a process is critical for the mining sector, which must attract large amounts of investment capital from local and foreign sources in order to develop and produce mineral resources. It is also critical for the fair and equitable distribution of benefits arising from the sector. The Government faces an enormous challenge of fulfilling the twin mandates of decentralization of powers to the provinces and retrocession of mining taxes. Another major challenge is the need to establish government hegemony over areas of the country that have been governed by warlords, and to rid the artisanal mining areas of predatory militias. However, replacing the militias with equally predatory detachments of the national army will not improve the well-being of the artisans or contribute to sustainable production.

Culture of rent seeking. Throughout its modern history, the people of the Congo have been exploited by slave traders, King Leopold of Belgium, mining companies in colonial times, and, most of all, the kleptocracy of the Mobutu years. Taking inspiration from this history and leadership, a culture of rent seeking, corruption, and impunity are deeply engrained in DRC. Rent seeking takes many forms, including offers or solicitations of bribes and illicit payments to or by government officials; fraudulent declarations to the tax authorities;

embezzlement of state funds; conflicts of interest of officials who have an ownership stake in companies doing business with the government; inappropriate use of position to influence government decisions; and others. The pervasive culture of corruption exists at every echelon of Congolese politics and government administrative services. For those lowest in the hierarchy, such as a customs official who has not been paid for months, taking a bribe is a matter of survival. For more senior members of the hierarchy, vast sums are said to find their way to offshore bank accounts or property investments in South Africa, Europe, or elsewhere.

The new Government recognizes this malaise and is committed to “… the struggle against political impunity and immorality which are unfortunately deeply rooted in the political soil of Congo,” 1 To address these concerns, in February 2007, the Congolese parliament adopted a Governance Contract, which enumerates the measures the Government will take over the next four years to improve “participation, transparency, responsibility, respect for the primacy of law, efficiency and equity.” With reference to the mining sector, the Governance Contract makes specific reference to the effective implementation of the Extractive Industries Transparency Initiative (EITI), in which DRC has participated since March 2005. However, there remain many challenges and much significant work to be done to improve governance in general and the mining sector specifically. It is important to improve governance not only in the moral sense but also in terms of ensuring an efficient, well-functioning, and internationally competitive mining industry. The extra costs of a bribe to a customs official or gift of stock to a senior government official may be tolerable in the short term, when prices of commodities are high, but in the longer term, when prices come down, these costs will represent a significant competitive disadvantage to the DRC mining sector.

Inauguration address of President Joseph Kabila, December 6, 2006.

–  –  –

The Democratic Republic of Congo (DRC) is endowed with exceptional mineral resources, and exploitation of these resources holds great promise for jump-starting economic development, as has happened in other countries. For instance, DRC’s mining sector could, within ten years, contribute 20-25 percent of GDP and one-third of total tax receipts.

However, in the past the DRC has been unable to harness its mineral wealth for economic development, due largely to corrupt management and political interference in the parastatal mining companies, and to inappropriate policies that limited private sector investment.

Following the fall of the Mobutu government and the period of civil war, the transitional government has taken some important steps to stimulate development of the sector, including restructuring the parastatals and allowing private sector investment. The most significant step in this direction was the passage in 2002 of a new Mine Law and regulations. This action, together with current high commodity prices, has resulted in a renewal of investment in exploration and exploitation activities. This will not result in a positive economic outcome or improved well-being of the Congolese, however, because the administration of the sector is dysfunctional – handicapped by insufficient institutional capacity, continuing political instability, corruption, and fundamental deficiencies in governance. The Government, with the assistance of donors, private sector companies, and civil society, must undertake a coherent and systematic series of actions to address these issues.

This report proposes such a strategic and comprehensive program, to be carried out over the next five years. The overall objective of the program is to increase the contribution of large and small-scale mining to economic development by addressing key deficiencies in the sector.

Its specific objectives and goals include:

Increasing mining fiscal receipts in the short term, by (i) conducting audits of • companies and government agencies; (ii) centralizing tax collection and reporting functions within a special cell and a “transitory account” in the Ministry of Finance;

and (iii) recruiting an internationally respected firm to build the capacity of the Government to improve tax collection. In addition, the central and provincial governments must address the special issues posed by the constitutionally mandated retrocession of revenues to the provinces.

Improving the enabling environment, by addressing certain gaps in the mining • legislation relative to small-scale mining permits, community consultation, and environmental protection. There is also a need for a sliding-scale royalty on minerals production, and for a special fee levied on the transfer of mineral rights.



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