DRC: 2006 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 09 KINSHASA 000439

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA
TREASURY FOR LKOHLER
USDOC FOR ITA/SMATHEWS
STATE PASS OPIC FOR ZHAN

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ECON ELAB KTDB OPIC PGOV
CG, Investment
SUBJECT: DRC: 2006 INVESTMENT CLIMATE STATEMENT

REF: 05 STATE 201904


1. Summary: In the almost three years since the Global
and Inclusive Accord was implemented with the
installation of a transitional government, the
Democratic Republic of the Congo (DRC) has done much to
improve the country's investment climate. While there
is still much more to do, the pacification and
reunification of the country has led to greater
political and economic stability that is encouraging
foreign investment in the DRC. This in turn is spurring
the Congolese authorities to normalize DRC regulatory
practices in compliance with international norms. End
summary.

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Background/Context
--------------


2. The DRC has made significant political and economic
advances during its transition. The DRC is now
preparing for elections, following the approval of a new
constitution in a December 2005 national referendum.
This period of relative political and economic stability
has led to steady improvement in the country's
investment climate.


3. The government of the Democratic Republic of the
Congo (GDRC) has capitalized on the country's increased
political stability to maintain and improve the
country's macroeconomic environment. Despite the return
to double-digit inflation at the end of 2004 and the
first half of 2005, overall inflation for 2005 was 21
percent, with little or no inflation during the second
half of the year. At 430 Congo francs (CF) per USD, the
Congo franc was stronger at year-end than had been
projected for 2005 (488 CF/USD),and it remains stable,
with the Congolese franc even appreciating slightly
against the dollar. New Customs and Forestry Codes were
promulgated in 2005 and are now being implemented. The
GDRC is taking steps to reform its public enterprises
and administrative agencies in line with IMF
conditionalities.


4. The implementation of these reforms, however, still
requires additional time, effort, and dedication from
transitional government authorities, who are now
focusing on upcoming legislative, local, and
presidential elections, due to take place in the first
half of 2006. The Congolese justice sector is
extraordinarily weak. The structure of the current
transitional government (a president and four vice
presidents representing different factions) is
inefficient and ineffective, but will end with the
installation of a democratically elected government in

2006. Public enterprises and state revenue-collecting
agencies were apportioned to various groupings in the
transitional government in accordance with the power-
sharing arrangements governing the transition. Many of
these institutions are riddled by corruption involving
the collection and expenditure of funds that should go
into the national treasury.


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


5. The DRC seeks to attract foreign investors in order
to boost production and increase economic growth. To
overcome previous hurdles and to simplify and facilitate
investment, the GDRC has created a one-stop agency
called the National Agency for Investment Promotion
(ANAPI). This agency is using provisions of the new
Investment Code to simplify new investments and to make
the procedure more transparent.


6. Congolese investment regulations, both in the
official Investment Code and in practice at ANAPI, do
not discriminate against foreign investors, except in
some specific cases dealing with labor and related
taxes. For example, under the terms of the U.S.-DRC
Bilateral Investment Treaty (BIT),a U.S. investor must
pay an additional tax on any non-Congolese staff holding

KINSHASA 00000439 002 OF 009


management positions. All businesses in the DRC face
multiple, burdensome, and sometimes fictitious taxation.


7. There are no formal limits or screening mechanisms
imposed upon foreign ownership of businesses in the DRC.
In some sectors, however, foreign investors must compete
for exclusive rights to what are considered finite
resources, such as mineral ores and telecommunications
bandwidth. The granting of permits and licenses in
these lucrative sectors often suffers from
arbitrariness, lack of transparency, and corruption.


8. The World Bank (WB) and the International Maritime
Organization (IMO) have helped the DRC to improve the
movement of goods. With the assistance of the WB, the
GDRC is improving border clearance procedures for
imports and exports by the creation of the "guichet
unique" - a one-stop customs and duties approach.
Security upgrades in compliance with the International
Port Security (ISPS) Code, as required by the IMO and
monitored by the U.S. Coast Guard, have improved the
security at the main maritime ports in the country, in
and around Matadi, but operations remain very
inefficient. A similar project is underway at the
principal overland border post at Kasumbalesa, on the
border with Zambia in the south.


9. GDRC administration of the minerals sector, with the
new Mining Code in place and through the work of the
Mining Registry or "Cadastre Minier" (CAMI),appears to
have improved. The new mining code is being implemented
according to plan, and both longtime and new mining
investors appear to be complying with it. Full and fair
application of the code, however, has yet to be
achieved.


10. All investors in the DRC suffer from multiple
audits by various government enforcement agencies
seeking evidence of violations of tax laws or price
controls. Foreigners and Congolese alike suffer the
consequences of nonfunctional judicial institutions.
Current efforts to reform public administration and the
judiciary should bring improvement.

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Conversion and Transfer Policies
--------------


11. The DRC has adopted a freely floating exchange
policy for its currency to support the liberal economic
policy it began implementing in 2001. The DRC has
lifted restrictions on business transactions throughout
its territory. International transfers of funds take
place freely when transacted through a local commercial
bank. The bank declaration requirement and payments for
international transfers now take less than one week to
complete, on average.


12. The Congolese franc has benefited from the
political and economic advances in the country. It has
remained relatively stable for over three years, and the
currency exchange rate has been virtually harmonized
throughout the country on both the formal and parallel
markets, ending previous de facto separate monetary
zones within the country.


13. The IMF and the WB are assisting the Congolese
Central Bank (BCC) with its monetary and fiscal
policies. The BCC has been successful recently in
controlling inflation. The largest banknote in
circulation currently is the 500 Congo franc note, but
it is expected that larger denominations (1000 Congo
francs and 5000 Congo francs) will be put into
circulation after the new government takes office in mid-

2006. The only currency restriction imposed on
travelers is a USD 10,000 limit on the amount an
individual can carry when entering or leaving the DRC.

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


14. There have been no expropriatory actions in the
recent past. Post is aware of seven existing claims

KINSHASA 00000439 003 OF 009


that date from 1991 to 2002, most of which have been
taken to arbitration (see Dispute Settlement section
below). Arbitration judgments against the GDRC,
however, have not been paid in a timely manner, if at
all. The GDRC has no tendency to discriminate against
U.S. investment, companies, or representatives. There
are no laws forcing local ownership, although
parastatals in the petroleum and mining sectors maintain
minority shares of most foreign-owned projects.

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


15. The U.S.-DRC 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 claims against the GDRC for
damages resulting from civil disturbance by military
mutinies in 1991 and 1993. Two investors have won
settlements from ICSID. In early 2004, a claimant under
the BIT won a settlement from ICSID but has not yet
collected payment from the GDRC. The other investor,
who successfully collected the compensation awarded by
ICSID, received damages in 1999.


16. On paper, the DRC's official policies are
satisfactory and even attractive to business, but in
recent years they have often been inoperative in
practice due to problems with the judicial system.
There is no transparent and responsible hierarchy for
public order; courts are marked by a high degree of
corruption; public administration is not reliable; and
both expatriates and nationals are subject to selective
application of a complex legal code. Official channels
often do not provide direct and transparent recourse in
the event of property seizure, for which legal standing
can rarely be determined. Seizures have been made via
the police and/or military, often supported by
questionable decisions from the courts. Foreign
enterprises may have slightly better security of
ownership due 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 with little value
for resolving routine, day-to-day business problems.


17. The GDRC's structural reform program includes the
creation of a commercial court with jurisdiction over
all commercial disputes. This court, however, has not
yet become operational.

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Performance Requirement and Incentives
--------------


18. The new DRC Investment Code is a simplified and
improved version of its predecessor. Performance
requirements are not included as obstacles to foreign
investors. There are, however, investment conditions
that must be agreed upon with the GDRC. These
conditions are discussed and agreed upon initially with
the DRC investment agency, ANAPI (see para 5),which
assures the same procedure for all qualified foreign
investments. The DRC has shortened this agreement
procedure to approximately 30 days, and has created a
number of incentives to attract foreign investment to
the country. These range from tax breaks to duty
exemptions granted for three to five years, and are
dependent upon the location and type of enterprise, the
number of jobs created, the extent of training and
promotion of local staff, and the export-producing
potential of the operation. The Ministry of Labor
controls expatriate residence and work permits. For
U.S. companies, the BIT assures the right to hire staff
of their choice to fill some management positions, but
the companies agree to pay a special tax on expatriate
salaries.


19. Performance requirements agreed upon initially with
ANAPI include a timeframe for the investment, the use of
Congolese accounting procedures and periodic authorized
GDRC audits, the protection of the environment, periodic

KINSHASA 00000439 004 OF 009


progress reports to ANAPI, and the maintenance of
international and local norms for the provision of goods
and services. The investor must also agree that all
imported equipment and capital will remain in place for
at least five years. There are no discriminatory or
excessively onerous visa, residence or work permit
requirements designed to prevent or discourage
foreigners from investing in the DRC.


20. By the terms of the Investment Code, the GDRC may
require compliance with an investment agreement within
30 days of notification. Continued violations of an
agreement may result in sanctions, including repayment
of benefits received (such as tax exemptions) and
eventual nullification of the agreement.


21. In the case of a dispute between a U.S. investor
and a GDRC agency, the investor is subject to the
Congolese civil code and legal system. If the parties
cannot reach agreement, under the terms of the U.S.-DRC
BIT the dispute is taken to the ICSID or to the Paris-
based International Chamber of Commerce (ICC).


22. GDRC public administration reforms implemented
since 2002 have allowed foreign investors to bid on
government contracts just as domestic investors, with no
discriminatory terms. Foreign firms may even be favored
in the bidding process because they are able more easily
to access and present international insurance funding
guarantees.

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


23. The recently approved DRC Constitution (chapter 2,
articles 34-40) protects private ownership without
discrimination between foreign and domestic investors.
It also protects investments against takeover, unless
the investment conflicts with some overriding public
interest. In this case, there are legal provisions for
equitable and appropriate compensation for the parties
involved.


24. The GDRC has restricted one category of small
businesses to Congolese nationals. This covers
artisanal production sector activities, small public
transport firms, small restaurants, and hotels with
fewer than ten beds.


25. With the sponsorship and technical assistance of
the WB, a tender board now works under the supervision
of the Ministry of Budget. Foreign investors and
private domestic companies may bid on public/government
contracts on an equal basis with interested public
companies. Normally, however, public companies and/or
parastatals do not participate in the bidding process,
due to the financing guarantees required beforehand.

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


26. Despite the new DRC Constitution and attempts to
enforce existing legal provisions, protection of
property rights still depends upon a currently
dysfunctional public administration and judicial system.
Some senior-level officials are making efforts to
restore and improve the legal and administrative
frameworks but the challenge will be to implement these
changes at a practical level.


27. Ownership interest in movable properties (e.g.
equipment, vehicles, etc.) is secured and registered
through the Ministry of the Interior's Office of the
Notary. Real estate property (e.g. buildings and land)
is secured and registered at the Ministry of Land's
Office of the Mortgage Registrar.


28. In principle, intellectual property rights are
legally protected in the DRC. Because of poor-
performing administration and judicial systems, however,
this protection does not always exist in practice. The
country has signed on to a number of international

KINSHASA 00000439 005 OF 009


agreements with organizations such as the World
Intellectual Property Organization (WIPO),and the Paris
Convention for Protection of Intellectual Properties,
which protects trademarks and patents. The DRC is also
a member of the Berne Convention that protects
copyright, artistic works, and literary rights. The
maximum protection that these conventions provide is 20
years for patents and 20 years, renewable, for
trademarks, beginning from the date of registration. If
it is not used within three years, a trademark can be
cancelled. The DRC has not yet signed the WIPO Internet
Treaties.


29. The GDRC's Ministry of Industry and Small/Medium
Enterprises is currently working on IPR-related
legislation in order to comply with all existing
international agreements.

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


30. Implementing a transparent regulatory system is
still a challenge in the DRC. The GDRC is making some
effort to improve the situation. This appears to be a
priority for the GDRC, which has made generally good
decisions and has had appropriate legislation enacted by
the parliament. Implementation and compliance, however,
are still far from securing a complete legal and
regulatory framework for the orderly conduct of business
and the protection of investment.


31. There are no formal or informal provisions by any
private or public structure, in any business-related
environment, used to impede foreign investment.
Problems encountered within the GDRC tend to be
administrative and/or bureaucratic in nature since
reforms and improved laws and regulations are often
poorly or unevenly applied.


32. Proposed laws and regulations are not published in
draft format for public discussion and comments. They
are normally discussed only within the governmental or
administrative entity that drafts them and then again at
the parliament prior to a vote. The Congolese public,
as well as foreign and domestic investors, are not given
adequate opportunity to discuss or comment on these
proposals.


33. The IMF and the WB are working with the GDRC to
bring the country into compliance with international
business norms for accounting, legal, and regulatory
systems. Examples include the recently promulgated
Customs and Forestry Codes, and the creation of a
harmonized procedure manual for a one-stop customs
clearance office (see para 8) soon to be functioning at
the port of Matadi. The GDRC recently announced its
intention to join the Organization for the Harmonization
of Business Law in Africa (OHADA). This will help the
DRC to improve its legal standards.


34. To attract foreign direct investment, the DRC
continues to make efforts to provide a well-defined,
transparent business environment. Foreign investors are
encouraged to contribute their industrial and business
experience to help the GDRC set standards for investment
and production. The GDRC authority on business
standards, the Congolese Office of Control (OCC),
oversees participation by foreign businesses.

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


35. The local capital market in the DRC is in recovery
mode, but it still has a long way to go. Efforts are
being made to reinvigorate financial market and credit
instruments. Economic growth in the DRC since 2002 (6.6
percent GDP growth in 2005) has increased the flow of
money in the finished goods and raw materials market.
Credit markets also are becoming more active, mainly in
the commercial project and medium-term project sectors.
All economic operators, foreign and domestic, have
access to credit markets in the DRC without

KINSHASA 00000439 006 OF 009


discrimination, as long as they can provide credible
guarantees. Foreign investors, though, are more likely
to benefit from this type of credit, since they are able
to provide guarantees and collateral secured by foreign
banks.


36. The commercial banking system has undergone a full
reorganization, although there is still only one bank
branch for each 1.5 million Congolese. The BCC and the
IMF are working together on a program of banking
reforms. Two main objectives are to restore confidence
in the commercial banks and to promote the intermediary
role of the banking system in the DRC. In a country of
nearly 60 million inhabitants, there are only 10
commercial banks and a mere 45,000 bank accounts. Total
assets within the banking system amount to about USD 700
million. Bank credit to the economy amounted to 1.5
percent of GDP while bank deposits were less than five
percent of GDP in 2004.


37. Business practices in the DRC are still at a fairly
rudimentary level. Cross-shareholding and stable
shareholding arrangements are not common in the DRC.
There are occasional complaints about unfair competition
between investors in profitable sectors such as mining
and telecommunication.

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


38. Congo has suffered bouts of civil unrest and conflict
for many years. 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 further damaged Congolese
economic activity. The new government under President Joseph
Kabila initiated a number of reforms after assuming power in
January 2001, and peace accords that established a
transitional government in June 2003 called for the
installation of a democratically elected government by mid

2006.


39. There have been no incidents of politically motivated
damage to projects or installations during the transitional
period. The possibility of political violence exists,
however, during the 2006 run-up to elections and in their
immediate wake. In addition to political demonstrations,
strikes by civil servants and teachers over salary and
benefit issues have occurred and continue to pose a
potential source of social upheaval. Military and police
personnel remain poorly paid and trained. Censuses of civil
servants, teachers, and military are ongoing and will likely
upset those who profit from the existence of "ghost
workers." Central government control over eastern Congo is
still incomplete, with GDRC and MONUC forces working
together against local militia and remaining pockets of
rebel groups.

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


40. U.S. businesses often complain about corruption in
the DRC, noting that it is among their main business
constraints. The Mobutu regime created a culture of
corruption in the DRC during more than 30 years of rule.
This ingrained culture permeated the private, public,
administrative, and business environments and has been
difficult to root out. The DRC was rated as the
thirteenth most corrupt country out of 156 nations on
Transparency International's 2005 Corruption Perception
Index.


41. In principle, there are legal provisions to fight
and sanction corruption. The DRC is a member of the UN
Anti-Corruption Convention and passed its own anti-
corruption law in 2004. Additional legislation includes
the 2004 Money Laundering Act, under which the DRC
cooperates with African and European crime-fighting
organizations. Despite these reform efforts, however,
bribery is still routine in public and private business
transactions, especially in the areas of government

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procurement, dispute settlement, and taxation.


42. Bribery is illegal in the DRC and in principle it
is investigated and prosecuted. The law calls for
imprisonment and fines for both parties to the bribery
no matter the circumstances. Despite numerous
obstacles, enforcement is becoming more successful. At
the end of 2005, a handful of high-level staff from
public and private sector entities were in detention
awaiting trial for criminal acts related to the alleged
fraudulent use of tax credits.

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


43. The United States and the DRC (then-Zaire) signed a
Bilateral Investment Treaty (BIT) in 1984 that entered
into force in 1989. This treaty guarantees reciprocal
rights and privileges to each country's investors. The
BIT provides for binding third-party arbitration in the
event of an investment expropriation dispute.

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OPIC and Other Investment Insurance Programs
--------------


44. The DRC is a member of the World Bank's
Multilateral Investment Guarantee Agency (MIGA),which
offers insurance on new foreign investments to protect
against foreign exchange losses, expropriation, and
civil unrest. Recently, MIGA agreed to provide
insurance to a mining concern in Katanga province. The
GDRC is negotiating now for complete resumption of the
MIGA program, which would allow for investment insurance
in other sectors of the economy. The DRC is also a
member of the African Trade Insurance Agency, which also
provides political risk insurance.


45. The U.S. Overseas Private Investment Corporation
(OPIC),which provides political risk insurance and
project financing to U.S. investors and non-governmental
organizations, ceased operations in the DRC for a time
following the events of 1991. Since the establishment
of the transitional government in June 2003, OPIC has
granted three political risk insurance contracts in
2004, another in 2005, and is currently reviewing
additional applications by American-owned companies. In
March 2006, the DRC signed an accord with OPIC that will
expedite the process of obtaining political risk
insurance and financing.


46. The projected annual rate of exchange for the
purposes of the 2006 DRC national budget is 500 CF/USD.
The average annual rate for 2005, and the current rate
of exchange, is 435 CF/USD. The U.S. Embassy purchases
local Congolese currency at the official rate for
payroll and administrative needs. The exchange rate has
been stable over the second half of 2005, with a slight
appreciation of the Congo franc against the dollar.
This rate, despite the DRC budget projection of 500
CF/USD, can be expected to remain stable for 2006, based
upon current macroeconomic conditions and barring a run-
up in GDRC deficit spending.

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


47. Congo's large urban population provides a ready
pool of available labor, including a significant number
of high school and university graduates, a few of whom
have studied at 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.


48. The GDRC sets regional minimum wages for all
workers in private enterprise, with the highest pay
scales applied in the cities of Kinshasa and Lubumbashi.
Wages have not kept pace with the DRC's rate of
inflation. While most foreign employers pay higher
wages than the official minimum, the average Congolese
worker has had to cope with falling real wages for over

KINSHASA 00000439 008 OF 009


a decade.


49. The country's labor legislation was modified by the
October 2002 Labor Code, which 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. The new code formally permits a
woman to gain employment outside of her home without her
husband's permission.


50. 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 provide family allowances based on the
number of children, as well as paid holidays and annual
vacations, based upon the years of service. 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 assist by providing infrastructure
including roads, schools, and hospitals.


51. Many labor regulations have been only sporadically
enforced in recent years, due to the economic crisis and
administrative corruption. Large layoffs, however,
generally lead to labor disputes that can cause serious
bureaucratic difficulties for the employer. The
Ministry of Labor must grant permission for staff
reductions. Generous pension and severance packages are
required by the labor code.

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


52. The DRC does not take part in any free trade zones
or have any free ports. The DRC is a member of the
Southern African Development Community (SADC) and the
Common Market of Eastern and Southern Africa (COMESA),
but does not yet participate in the COMESA free trade
area.

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Foreign Direct Investments Statistics
--------------


53. Obtaining reliable statistical data on foreign
direct investment (FDI) is still a challenge in the DRC.
There are two available sources -- the BCC and the
National Agency for Investment Promotion (ANAPI).


54. BCC statistics are based on funds reported to the
bank from actual investment projects underway, and are
more accurate than those of ANAPI. These figures,
however, may not capture all FDI flowing in to the DRC,
therefore the quality of the BCC data is undetermined.
Actual FDI amounts are probably slightly higher than the
BCC figures shown here. For the last three years, BCC
has published the following totals:

FDI (in USD million)

2003 2004 2005 (thru 11/05)

Total 352.6 241.6 458.9



55. ANAPI registers data obtained from initial
proposals by potential foreign investors. 2005 data,
while very fragmentary, indicates that the service
sector (mostly telecommunications companies) leads all
investment sectors with 80 percent of the entire
investment portfolio. The following FDI figures do not
reflect actual investment flows or stocks, and they
should not be considered as accurate measures of FDI in
the DRC. Mining sector investment statistics are not
included. The Mining Register of the Ministry of Mines

KINSHASA 00000439 009 OF 009


compiles these figures and reports them to the BCC.

FDI (in USD million)

Sector 2003 2004 2005/June

Services 1,615 1,760 136
Infrastructure 20 47 0
Food 9.5 12 3
Pharmaceuticals 8 14 0
Beverages/Brewery 0.2 0.1 0
Agriculture/Forestry 33 57 19
Manufacturing 80 103 13
-------------- -------------- --------------
Total 1,765.7 1,993.1 171


MEECE