A controversial mining code and newly delineated borders to the country’s provinces create cause for concern while updates from the banking sector offer some conciliation.
By Lindsay Davis
Just months after announcing its entry into the DRC, TSX-listed First Cobalt withdrew its exploration activities from the country, announcing that instead it would focus on its cobalt prospects in Canada. Citing a deteriorated investment climate, the company’s CEO, Trent Mell, elaborated on the company’s reason for the quick departure in a statement to Quartz: “With the signals we’re getting, why would we invest our scarce dollars in a country that may not respect our investment rights?”
Poor governance and widespread corruption contribute to making the DRC one of the world’s most challenging business environments, with the country falling to 48th out of 53 on the World Bank Group’s 2017 Doing Business Report’s rating of African economies. The regulatory framework does little to offer any consolation, and close to 50,000 small taxes make conducting due diligence nothing short of a nightmare.
Countless nuances in the system make tasks like accounting a dizzying feat, and although on paper there have been attempts at improving the environment through various compliances with internationally recognized standards such as the Organization for the Harmonization of Business Law in Africa (OHADA) principles, the challenge remains effective implementation on the ground. Yves Madre, partner for Deloitte DRC, explained that while the DRC’s adoption of the OHADA in 2012 was influential in Deloitte’s decision to enter the country, gaps remain: “OHADA regulation is highly inspired by French law, which is separate from the common law in DRC. Furthermore, the mining sector is very influenced by the Anglo-Saxon world as well as common law,” he said. “For instance, when it comes to mining, there is OHADA law when dealing with subcontractors but also the specific mining provisions to follow as well, so the common mining law and the OHADA law define a subcontractor in different ways, which can certainly trigger confusion.”
Some examples of the difficulties companies might encounter include keeping their records in the official language, which is French, or maintaining a six-column trial balance for each account. Human resources are another area to create cause for consternation. “On a technical level, unfortunately there has not been sufficient education and training in DRC in recent years, subsequently; many job opportunities that should be occupied by Congolese nationals become expatriate jobs,” said Stephanie Jacobs, managing director of TIAfrica, a firm which assists companies with compliancy. “Some investors find it very challenging to respect the permitted ratio of expatriates to nationals for this reason. Obtaining the required skills whilst maintaining the stipulated local labour compliment in your workforce is, therefore, very difficult to attain,” she said.
“Investors need to find an administration expert to help them,” advised Xavier “Jack” de Longueville, regional director for Africa of Robinson International, soon to be the only ISO certified lab for exportation in DRC. “We have subcontracted some of our human resource and government relation services to a specialized company. They help service companies like Robinson International so that we can concentrate on our business without being inundated by administration.”
While the task of doing business in such an intimidating environment may be daunting, there is always opportunity in adversity and several companies like TIAfrica have sprung up that offer unique services aimed at helping investors.
Ultimately, institutional reforms geared towards supporting a solid macroeconomic strategy will be critical to creating a sustainable business environment for all sectors to flourish. “We need to support the capacity of smaller companies to supply consumables and other items into the mining sector to promote a healthier industry overall,” said Miles Naude, general manager of MMG, which acquired the Kinsevere mine in DRC in 2012. “It is not the job for the mining industry to do grassroots development of these industries, however, discussion needs to happen between the private sector and the government to change the regulatory framework to the benefit of all the different industries.”
While broad, systemic changes may be profoundly needed, as the most significant sector in the economy the laws that govern the mining industry are also of vital importance and the DRC has at long last reached the brink of introducing changes to its existing mining code. Furthermore, the realities of the break up of the country’s provinces for the mining sector are still not fully understood, while the banking sector has made some strides in offering modernized financial services.
New Provinces Bring New Layers of Uncertainty
In 2015, the DRC’s 11 provinces became 26, and Katanga was carved into four new regions including Haut-Katanga, Lualaba, Tanganyika and Haut-Lomami. The strategy behind this approach is theoretically sound, as Rawbank’s regional manager of Greater Katanga Benoît de Carbonnieres points out: “When controlling a small territory compared to a large territory, more time can be dedicated to each area which will generate modernization and the development of infrastructure meaning the break-up of the provinces will be more beneficial in the long-term.”
While decentralization could benefit the country’s long-term development, the full, direct implications of the newly delineated borders for the mining community still remain to be determined. Already there have been some political tensions between the two key mining jurisdictions, Haut-Katanga and Lualaba, despite claims from both governors that the relationship between their respective capitals, Lubumbashi and Kolwezi, is an amicable one. In April 2017, Minister Kabwelulu sent a letter to leading mining companies including Glencore and Ivanhoe with instructions to relocate their offices from Haut-Katanga to Lualaba where their assets are based. The motive for the letter stems from the battle for revenue between the respective provinces because, while the mines may be based in Lualaba, the taxes and royalties are still paid to Haut-Katanga where the companies have their administrative headquarters. “Going forward, it appears now that Lualaba will begin to take the lion’s share of tax revenue because many of the operations are based there,” explained Lysa Munkeni, managing partner of ACF Conseil, a Congolese financial advisory firm. “There is also a double-counting situation because often the tax authorities in both jurisdictions will try their luck and attempt to collect tax from both the headquarters in Lubumbashi and the operation in Lualaba,” she said.
In fact, when examining the former Katanga region, the bulk of mining assets are located in what is now Lualaba. However, companies ranging from major producers to service providers and banks have traditionally concentrated their regional headquarters in Lubumbashi — a fact which may soon change. “The separation of the provinces has not yet had an impact in terms of bureaucracy, but slowly we are beginning to experience changes. If we do begin to see shifts in bureaucracy between the independent regions, we might have to move some resources to these areas,” confirmed Jonathan De Witte, regional manager for Comexas Africa.
Rumors have been circulating that that the region’s significant annual event, DRC Mining Week, may also relocate to Kolwezi in coming years and a flurry of activity in the construction of hotels and related infrastructure suggest that the town is indeed gearing up to meet the task of hosting new investors. History shows that it is not uncommon in the country for different mining hubs to emerge and collapse with the rise and fall of different mines, evidenced by ghost towns like Manono, Likasi, or even Kolwezi itself where the remnants of the past are apparent in dilapidated buildings that hint at formerly better days. While Lubumbashi is now a vibrant and bustling community marked by several luxury hotels and restaurants to cater to the many visiting investors, it will be interesting to see whether in the years to come the city falls back into a sleepy administrative town and Kolwezi takes its place as the country’s mining capital.
Investors Warn New Mining Code Could Upset 15 Years of Prosperity
The DRC introduced its current mining code in 2002 with the objective of attracting investors, an initiative that was largely considered successful given the subsequent growth of the industry since then. However, amid complaints from the government that it has not seen enough tax revenue from the industry, the country is now revisiting its Mining Code — a move that has been met with much trepidation and fierce opposition by the community of international mining companies with long-term vested interests in the country. “We need to strongly caution our country decision makers to look at the real challenges to be addressed, which are preventing our mining industry to create and distribute wealth to all stakeholders more effectively: Poor infrastructure, energy deficit, and lack of good governance,” said Louis Watum, managing director of Ivanhoe Mines DRC operations. “The current mining code clauses which helped attract much needed investment in the country over the past 15 years should not be tampered with, instead the government should build sufficient institutional capacity to manage the implementation of the current mining code more effectively.”
Current proposed changes to the law include increasing the corporate tax from 30% to 35%, and doubles the state’s free share to 10%, in addition to introducing a profit-windfall tax. The new law would reduce the period during which contract stability is guaranteed to five years from 10 years, and royalties on base metals like copper and cobalt are set to increase from 2% to 3.5%. Furthermore, metals classified as “strategic” could see rates increase to as high as 5%. This new “strategic” classification would allow the Congolese government “the flexibility to face unforeseen developments in the international market if the international economic situation demands it,” according to a transcript of Minister Kabwelulu’s statement in early January 2018 to the Senate. The law was recently passed by the Upper House, and has has only to be signed by President Kabila. A decision is expected as early as February, and the President will receive top executives from Glencore, Randgold and others seeking to persuade him to use his discretionary power to veto the law.
The strategic classification bears particular relevance on metals like cobalt or tantalum given the worldwide drive towards the electrification of vehicles and lithium ion batteries. As the country contains a significant proportion of the global cobalt supply, perhaps it should come as no surprise that the government has begun to take a hardline approach on its taxation policy. If the fundamentals of cobalt supply and demand remain in their current state, the DRC government is well positioned at the bargaining table.
Bankers in the DRC: Driving Innovation
The banking sector in DRC certainly faces an uphill battle. A recent study found that the uptake of banking services in the country hovers at around 8-10%, while the average in sub-Saharan Africa is upwards of 25%. This fact is largely thought to be underpinned by residual mistrust in the banking system after the hyperinflation crisis the country experienced from the late 1980s into the 1990s, which saw rates as high as 23773% in 1994. While nowhere near that high today, inflation remains a problem in DRC. The low commodity prices from recent years and ongoing political turmoil have done little to help its already hurting economy where there is low confidence in the Congolese franc, which fell by 22% against the dollar in 2017. To address a growing government deficit and battle further depreciation of the nation’s currency, the Central Bank of Congo (BCC) has maintained tight austerity measures and insists that mining companies repatriate 40% of their export earnings.
Notwithstanding adverse fiscal circumstances, the banking sector in DRC has made strides in recent years, due in large part to the efforts of locally-focused banks such as BCDC, TMB, and Rawbank. Many large banks with stronger international credentials such as Citibank and Standard Bank cater solely to corporate clients, and in fact do not offer commercial services. Yet, the introduction of new retail services such as mobile banking like TMB’s Pepele Mobile is creating a stronger financial sector that will also directly benefit the mining community. “Our plan with Pepele Mobile was both to provide a digital solution that meets the needs of the digital market, and also to find a way to support the digitalization of B2B transactions,” explained Yannick Mbiya Ngandu, regional manager of TMB. “Our expectation is that the migration of economic activity to digital platforms will increase transparency and support access to finance for companies, in particular SMEs who all too often suffer from a lack of access to finance due to poor availability of quantitative data.”
Supporting the SME sector is of critical importance to the developing the capacity of local value chains. “There is a law (not yet in force) regarding the subcontractors in DRC that wants to boost local SMEs to participate in the mining sector,” elaborated Michael Demey, regional manager of the Katanga area for BCDC. “The ongoing discussion on the revision of the mining code also emphasizes on that local content.” Local players like BCDC, which was founded in 1909 and as such is the oldest bank in the DRC, offer an array of training, advisory, and financial services to local contractors in this vein. However, these local banks have the capacity to also service international investors and the wider mining community. While large banks can provide greater access to the capital needed for large-scale mining operations, local played arguably offer a distinct advantage through their knowledge of the country’s local financial framework as well as foreign exchange regulations. “Through close follow-up on the transactions related to import and export, we protect the interest of our client and by doing so, the interest of the bank,” added Demey.
Despite the many challenges that the DRC presents to the international investor, an innovative local finance sector continues to provide a strong system of support that will be crucial going forward as the country navigates an unclear future