2005 INVESTMENT CLIMATE STATEMENT - CONGO-KINSHASA

UNCLAS SECTION 01 OF 07 KINSHASA 000148

SIPDIS

SECSTATE PASS TO USTR, EB/IFD/OIR
COMMERCE PASS TO CIMS NTDB WASHDC

E.O. 12958: N/A
TAGS: ECON EINV KTDB PGOV PREL CG OPIC
SUBJECT: 2005 INVESTMENT CLIMATE STATEMENT - CONGO-KINSHASA

REF: SECSTATE 250356


1. Summary: The Congolese Government (GDRC) has completed
over one year of its transition from war to peace with only
limited impact on the investment climate. The inclusion of
former rebel groups in the GDRC has provided a modicum of
political stability. Additionally, IMF and World Bank reform
plans continue to work toward normalizing GDRC regulatory
practices.


2. The Congolese Government (GDRC) continues to manage
macroeconomic conditions well. The exchange rate is
relatively stable and inflation has been below ten percent
for two consecutive years. Money is freely transferable
through several commercial banks. A new investment code,
designed in concert with the World Bank, was promulgated
into law in 2002. This law attempts to ease conditions for
foreign investment and simplify procedural responsibilities.


3. Significant challenges remain. In spite of the above
efforts as well as the passage of an anti-corruption law,
corruption persists as a way of life in business
transactions. These conditions are likely to continue and
perhaps even be exacerbated as political groups seek to
position themselves for elections. Additionally, the DRC
still lacks a functioning legal system and adequate
protection of property rights.


4. This report describes the investment climate in areas of
the country to which transitional government authority has
extended. Investors in parts of the country outside the
authority of the recognized government of the nation can
expect little if any legal recourse in the event of
difficulties. If the GDRC continues to advance in unifying
the country, harmonizing internal services and authorities,
and arrives at elections within the proscribed timeframe of
the peace accords, the investment climate should improve
over the medium term. End summary.

Openness to Foreign Investment
--------------

5. The government is aware that it desperately needs
foreign investment to create jobs and to boost production,
exports and government revenues. To attract foreign
capital, it set up a new office, the National Agency for
Investment Promotion (ANAPI),to facilitate investment by
helping investors overcome bureaucratic hurdles.


6. Congolese laws governing investment, with only a few
exceptions, do not differentiate between foreign and
domestic enterprises. Both are subject to local tax and
labor laws.


7. There are no formal limits on foreign ownership or
screening mechanisms for foreign investment. However, in
some of the sectors currently most attractive to foreign
investors, such as mineral extraction and
telecommunications, investors must compete for exclusive
rights to finite resources, such as mineral deposits or
bandwidth. The process by which permits for
telecommunications are granted in such cases is not
transparent and represents an arbitrary screening process.


8. Since 2003, two positive developments have marginally
improved the investment climate in the Democratic Republic
of Congo. First, the Port of Matadi has almost completed
upgrades to comply with International Shipping and Port
Facility Security guidelines, as mandated by the
International Maritime Organization. This combined with
slightly improved functioning of the "Guichet Unique" - a
one-stop electronic customs and fees payment bureau
developed by the World Bank - allow for greater ease in
transport of goods to the Democratic Republic of Congo.


9. Second, after one year of operation, the Cadastre Minier
(Cami - Mining Concessions Authority) appears to be
functioning reasonably well. Although the authority is not
currently accepting new applications, major international
mining companies have lauded Cami's performance to date.
Decisions appear to have been made fairly and according to
the law.


10. There is no formal discrimination against foreign
investors. All investors in Congo suffer from multiple
audits by various government enforcement agencies seeking
evidence of violation of tax laws or price controls.
Foreigners and Congolese alike suffer the consequences of
nonfunctional judicial institutions. The World Bank and IMF
are currently working with the Congolese government to
reform government services.
Conversion and Transfer Policies
--------------

11. Since May 2001 the Congolese franc has floated freely
and conversion of local currency is unrestricted.
International transfers of funds may take place freely upon
the execution of a declaration through a commercial bank.
The requirement of a declaration can delay a transaction by
several weeks.


12. Although currency restrictions were placed on the
Congolese franc from 1998-2000, the Congolese Central Bank
(BCC) recognized the abject failure of those currency and
capital controls. It is unlikely that controls will be re-
imposed.


13. The Congolese Franc continues to remain largely stable.
Exchange rates on the informal market in the former rebel
controlled areas (Equateur, Kivus and Oriental Provinces)
have largely converged with those of the former government
controlled areas (Kinshasa, Katanga, the Kasais and Bas-
Congo Provinces).


14. The IMF believes the BCC has done an adequate job
managing monetary policy. The BCC was able to release larger
denomination 200 and 500 franc notes during 2003-2004
without experiencing serious bouts of speculation against
the franc or re-igniting an inflationary spiral.

Expropriation and Compensation
--------------

15. During the 1970's, the Mobutu regime either
nationalized Zaire's foreign-owned businesses or required
that ownership be turned over to Zairians. Many foreign
investors, however, maintained a significant role while
taking in Zairian partners. Formal expropriation was not a
significant factor during the last twenty years of Mobutu's
rule.


16. Several American investors pursued expropriation claims
under the U.S.-Zaire Bilateral Investment Treaty following
looting during civil disorder inspired by military mutinies
in 1991 and 1993. (See dispute settlement section below.)


17. Following the overthrow of the Mobutu regime in 1997,
the new government created an "office of ill-gotten goods"
which seized privately held properties on the grounds that
they were illegally obtained under the Mobutu regime, or in
payment for allegedly unpaid taxes. One American investor's
building was seized by this office, but later restored after
Embassy intervention. Some former Mobutu-era officials have
returned to the Congo since 1997 and have recovered some of
their seized properties. In early 1999, several diamond
mining companies, including two owned by Americans, had
their concessions seized by the government and operated by
government officials and soldiers. Both mines were returned
to their American owners.


18. Although the current government is eager to attract
foreign direct investment, the threats of expropriation or
of a disadvantageous "revision" of a contract or concession
are always present.


19. There is no evidence that American investors are
discriminated against with regard to expropriation.
Expropriation has not been an issue in the DRC, although the
generally difficult business climate has led many investors
to abandon their activities. The only sector that has been
particularly at risk for expropriation is mining.

Dispute Settlement
--------------

20. The U.S.-Zaire Bilateral Investment Treaty (BIT)
provides for International Center for Settlement of
Investment Disputes (ICSID) conciliation or binding
arbitration in the case of investment disputes. A number of
U.S. firms pursued BIT expropriation claims against the
government of Zaire for damages resulting from civil
disturbance by military mutinies in 1991 and 1993.


21. Two investors have won settlements from ICSID. In early-
2004, a claimant under the BIT won a settlement from ICSID
but has not yet been able to collect the payment from the
Congolese government. The other investor, who successfully
collected the compensation awarded by ICSID, received the
funds in 1999 only after using the U.S. court system to
claim revenues from the sale of petroleum produced in the
DRC by an American company.


22. On paper, Congo's legal structures are satisfactory and
even attractive to business, but in recent years they were
often inoperative in practice. Real authority has been
diffuse since 1990, with numerous competing networks based
on personalities, public office, or control of security
forces. There is no transparent and responsible hierarchy
for public order; courts are marked by a high degree of
corruption; public administration is not yet reliable; and
both expatriates and nationals are subject to selective
application of a complex legal code. Official channels
still often do not provide direct and transparent recourse
in the event of property seizures, for which legal standing
can rarely be determined. Seizures have been made via the
security services, often supported by questionable decisions
by the court. Foreign enterprises arguably have slightly
more security owing to the presence and intervention of
their diplomatic missions. Many Congolese business
contracts provide for external arbitration, but this is an
expensive and time-consuming option of little value in
resolving routine business problems.


23. The government's structural reform program has resulted
in the creation of a commercial court with jurisdiction over
all commercial disputes. However, this court has yet to
begin functioning due to logistical difficulties.


24. The country is also in the process of joining OHADA
(Organisation pour l'Harmonisation du Droit des Affaires en
Afrique),the African Organization for Business Law
Harmonization. This will be an opportunity for the DRC to
improve its legal standards.

Performance Requirements/Incentives
--------------

25. The new investment code of 2002 aims to remove
constraints and improve conditions for foreign investments
in the DRC. A project or business is considered a foreign
investment if a foreign firm or investor holds a 10 percent
or above equity stake. A foreign investment can be claimed
as a small or medium enterprise if the value of the project
is between USD 10,000 and USD 100,000.


26. The code offers several "de jure" incentives for
investment including customs duties exonerations for capital
equipment and necessary spare parts, exemption from export
taxes on manufactured products, and a one time exemption
from taxes on profits, socioeconomic and infrastructure
investments, real estate and land concessions. Small and
medium enterprises can also claim a tax deduction for
expenses related to employee training programs.


27. Ostensibly, ANAPI coordinates these advantages.
However, "de facto," these benefits are not centrally
administrated or regulated. There exists a host of
regulatory agencies that, regardless of centrally mandated
investment policies, will harass businesses, foreign and
domestic equally, for payments. Furthermore, there are many
old and sometimes contradictory tax and labor laws and
business regulations that remain in the official register
and can be enforced at a bureaucrat's discretion.


28. All projects approved for foreign investment are
subject to the following obligations: implementation within
the agreed timeframe, use of the Congolese system of
bookkeeping, "periodic" authorized government inspection,
employee training and capacity building, "periodic" progress
and development reporting to ANAPI, environmental
protections, and maintenance of international and local
quality norms for goods and services. Furthermore, all
imported equipment and capital goods must arrive and remain
at the agreed investment site for up to five years, unless
the investor renegotiates with ANAPI.


29. If a foreign investment project is found to be in
violation of any of the above obligations or does not begin
operations within one year of its approval by the DRC
government, the investor is obligated to remedy the
situation within 30 days and provide valid explanations for
the infractions. If compliance is not met, the government
can withdraw approval and deny benefits, as well as claim
retroactive payments on taxes and duties for which the
project was previously exempt.


30. In the event of a dispute with a government agency, the
investor is subject to the Congolese civil code and legal
system, with all of the shortcomings explained above. If
the parties fail to reach a mutual agreeable settlement, the
dispute passes to the ICSID under the BIT or to the
settlement regulations of the Paris International Chamber of
Commerce.

Right to Private Ownership and Establishment
--------------

31. In general, public enterprises suffer the same
difficulties as private firms in negotiating the bureaucracy
of the Congo. In addition, they have great difficulty
retaining revenues necessary to maintain infrastructure and
equipment.


32. The Government of the Democratic Republic of Congo
restricts a category of small businesses to Congolese
citizens. This category includes artisanal production
businesses that employ fewer than ten people, public
transportation business having fewer than ten seven-tons
motor vehicles, restaurants with no more three employees and
having a maximum capacity of twenty clients, and hotels with
fewer than ten beds.

Protection of Property Rights
--------------

33. Congo's complex and dysfunctional legal environment is
one of the major obstacles to economic development. The
system is basically non-discriminatory, both in its legal
texts and in its day-to-day operations. However, the
application is frequently arbitrary. Politics, money, and
personal connections are what count in administrative and
judicial processes. This situation will continue until the
creation of an independent court system with well paid and
educated jurists.


34. The protection of intellectual property suffers from
both the dysfunctional judiciary and the low priority
accorded to it by the government. The DRC is not in
compliance with international agreements regarding
intellectual property rights.


35. The Ministry of Industry is connected to the World
Trade Organization through the World Intellectual Property
Organization (WIPO). The DRC is in the process of modifying
its intellectual property rights legislation to comply with
international agreements.

Transparency of the Regulatory System
--------------

36. Congo has not yet been able to provide a well-defined,
stable, and transparent legal or regulatory framework for
the orderly conduct of business and protection of
investment. Bureaucratic procedures are neither transparent
nor efficiently executed. Existing tax, labor, and safety
regulations are not onerous on their own, but impose major
burdens because they can be capriciously applied, and there
are no rapid and impartial adjudication mechanisms for
relief. The formal economy has been dominated by a small
number of large firms that work to secure competitive
advantage by evading government regulation while working to
have it applied to rivals. Both public administration and
businessmen became accustomed to private deals to secure
selective enforcement of regulations.


37. The IMF and World Bank, however, have helped draft new
investment, forestry, mining and labor codes to help
facilitate competition and normalize regulations in key
industries. The IMF is assisting the DRC to overhaul the tax
system and standardize the tax code across all economic
activities. Some progress has been made, but a stable and
transparent system should still be considered a long-term
goal.


38. A significant example of change in the regulatory
environment took place in 2003 with the establishment of
"Guichets Uniques" by the GDRC with World Bank assistance
for one-stop customs clearance in Matadi and for one-stop
investment procedures and business registration in Kinshasa.
The GDRC, with assistance from the World Bank and IMF,
continued to refine the "Guichets Uniques" in 2004. This
helped to streamline customs and fees payments when
importing or exporting goods and when starting new
businesses. Some government services are still trying to
escape incorporation into the system. It is, however, a step
in the right direction.

Capital Markets and Portfolio Investment
--------------

39. Organized capital markets and most credit instruments
typically found on financial markets are virtually non-
existent in Congo. Years of very high inflation until 2002
precluded their development and use. The domestic banking
system provides very little credit, but does not
discriminate against foreign investors. Most foreign
business ventures in Congo are financed privately given the
country's high-risk. Individuals or companies desiring to
procure a loan from any of the international banks in
Kinshasa must surrender, as collateral, property located in
a foreign country with adequate property rights laws.


40. On the other hand, the BCC and the IMF have made
significant reforms of the banking sector. During 2003, the
BCC liquidated all but one insolvent bank. Anti-money
laundering and terrorist finance legislation has been
adopted into law. The IMF is also working with the BCC to
improve accounting standards and develop modern electronic
communications and transfer networks to accelerate and
secure financial transactions.

Political Violence
--------------

41. Congo has suffered for many years bouts of civil unrest
and conflict. Large-scale military looting in 1991 and 1993,
for example, resulted in a significant loss of economic
productive capacity. In addition, widespread looting and
destruction associated with wars in the Congo from 1996-1997
and from 1998-2003 created further major damage to Congolese
economic activity. The new government under President Joseph
Kabila initiated a number of reforms after assuming power in
January 2001, and peace accords which established a
transitional government in mid-2003 provide for direct
elections of a new government in 2005. Nonetheless, military
and police personnel remain poorly paid and trained, and
political tensions in the country remain generally high. The
possibility of new civil unrest and associated looting
therefore continues to exist, as was evidenced in Kinshasa
demonstrations in June, 2004.


42. In June 2003, the Congolese set up a transitional
government to prepare the country for multi-party elections
in 2005. The central government has only limited control
and authority over eastern Congo, and armed skirmishes
continue in parts of Katanga, Orientale, and North and South
Kivu provinces.

Corruption
--------------

43. Zaire became synonymous with corruption under the
Mobutu regime, which made it an integral part of
administration and government. Corruption continues to be a
serious problem in the DRC today. Negotiations and bribery
can be necessary for routine business transactions such as
paying taxes. Transparency International's Corruption
Perceptions Index classified the DRC as 13th from last on a
list of 146 countries in 2004.


44. The Congolese government is aware of the problems posed
by corruption, including its economic impact. It is working
with the World Bank to streamline government procedures and
reduce both red tape and the size of the bureaucracy. A
recent audit of public enterprises initiated by the
Parliament resulted in the suspension of a series of
ministers and directors of parastatals. Additionally, the
Parliament passed an anticorruption law in 2004.

Bilateral Investment Treaties
--------------

45. The United States and the Democratic Republic of Congo
(ex-Zaire) negotiated a Bilateral Investment Treaty (BIT)
that came into force on 28 July 1989. The Treaty guarantees
reciprocal rights and privileges to each country's
investors. The U.S.-Zaire Bilateral Investment Treaty (BIT)
provides for binding third-party arbitration in the event of
an investment expropriation dispute. A number of U.S. firms
pursued (or contemplated pursuing) BIT claims against the
Government of Zaire for damage incurred during civil
disorders inspired by military mutinies in 1991 and 1993.
To date only two cases have been decided, and one plaintiff
collected its award in 1999. The other plaintiff is still
negotiating to receive its award.

OPIC and other Investment Insurance Programs
--------------

46. Congo is a member of the World Bank's Multilateral
Investment Guarantee Agency (MIGA),which offers insurance
to new foreign investments against foreign exchange risk,
expropriation and civil unrest. However, MIGA has resumed
coverage for the DRC with a contract with a mining company
in Katanga province.


47. OPIC is currently accepting applications for political
risk insurance for companies operating in the Democratic
Republic of Congo. It is presently reviewing several
applications submitted in FY 2004 and has granted three
political risk insurance contracts.

Labor
--------------

48. Congo's large urban population provides a ready pool of
available labor, including a significant number of high
school and university graduates, a few from American
universities. Employers cannot, however, take diplomas at
face value. Skilled industrial labor is in short supply and
must often be trained by individual companies.


49. The Government sets minimum wages for all workers in
private enterprise on a regional basis, with the highest
scales applicable in Kinshasa and Lubumbashi. Wages did not
increase in step with the country's rate of inflation during
the economic crises of the 1990s. While numerous employers
pay wages higher than the minimum, the average Congolese
worker has coped with low purchasing power for over a
decade.


50. The World Bank aided the Congolese government in
writing a new labor code in October 2002. This code is in
compliance with the conventions and recommendations of the
International Labor Organization. The Code provides for
tight control of labor practices and regulates recruitment,
contracts, the employment of women and children, and general
working conditions. Strict labor laws can make termination
of employees difficult. The code also provides for equal pay
for equal work without regard to origin, sex, or age.
Furthermore, the new code formally permits women to gain
employment outside of the home without her husband's
permission.


51. Employers must cover medical and accident expenses.
Larger firms are required to have medical staff and
facilities on site, with the requirements increasing with
the number of employees. Mandated medical benefits are a
major cost for most firms. Employers are obligated to pay
family allowances calculated on the number of children, as
well as paid holidays and annual vacations, with the length
of the latter dependent upon the years of service. In
addition, employers must provide daily transportation for
their workers or pay an allowance in areas served by public
transportation. Outside the major cities, large companies
often become involved in providing infrastructure including
roads, schools, and hospitals.


52. Owing to the economic crisis and administrative
corruption, many labor regulations have been only
sporadically enforced in recent years. However, in the case
of large layoffs, labor disputes generally arise, causing
serious bureaucratic difficulties for the employer. The
Ministry of Labor must grant permission for staff
reductions. Furthermore, generous pension and severance
packages are required by the labor code.

Foreign Trade Zones/Free Ports
--------------

53. The Congo does not currently possess any foreign trade
zones or free ports.

Foreign Direct Investment Statistics
--------------

54. ANAPI compiles data on investment commitments from
investors who register with ANAPI. Approximately 70 percent
of all FDI is in the telecommunications sector (included
under "services" below). This following data does not show
actual FDI flows or stocks and should not be considered an
accurate measure of foreign direct investment.

FDI in USD millions

Sector 2003 2004

Services 1,615 1,760
Infrastructure 20 47
Food 9.5 12
Pharmaceuticals 8 14
Beverages/Brewery 0.155 0.1
Agriculture/Forestry 33 57
Manufacturing 80 103
Total 1,922 1,994


55. The Congolese Central Bank also compiles data on current
and effective foreign direct investment. It records FDI of
USD 352.6 million in 2003 and USD 241.6 million in 2004.
These numbers are significantly lower than those of ANAPI
because ANAPI's numbers include projects that have not
commenced. The quality of the Central Bank's data is
undetermined.

MEECE