DRC MINING SECTOR - THE MAJOR ISSUES

C O N F I D E N T I A L SECTION 01 OF 04 KINSHASA 000425

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/11/2017
TAGS: EMIN EINV ETRD ECIN CG
SUBJECT: DRC MINING SECTOR - THE MAJOR ISSUES

REF: A. 06 KINSHASA 1758

B. 06 KINSHASA 1082

C. KINSHASA 346

D. 06 KINSHASA 1234

E. 06 KINSHASA 1590

Classified By: EconOff W. Brafman for reasons 1.4 b/d.


1. (SBU) Summary. The mining sector has traditionally been
the key driver of the DRC's economy, but it will need
substantial reform before it can realize its full potential.
Key issues facing the sector include: 1) ensuring the
transparency and fairness of existing and future mining
contracts; 2) improving controls over the export of natural
resources; and 3) assuring that extractive industry profits
result in socio-economic benefits to the Congolese people,
including thousands of artisanal miners. Few reform plans
have yet been formulated or executed. End summary.


2. (U) Reform of the extractive industries' sector is among
the governance priorities of the newly-installed government.
Prime Minister Gizenga's February 2007 governance contract,
annexed to his government program, outlines in detail several
proposed reform actions. EconOff's discussions with GDRC
officials, the private sector, other diplomatic missions and
NGOs indicate growing support for several of the proposals.

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Review of Mining Contracts
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3. (C) Transparency of mining contracts is integral to mining
sector reform. Public and private discussions of this topic
center on the idea that many Pre-Transition, and perhaps some
Transition, contracts were overly generous to foreign mining
interests and failed to comply with legal obligations, and
should therefore be reviewed. Prime Minister Gizenga's
governance contract specifically addresses this topic,
stating that mining sector reform must include an analysis of
existing partnerships, and renegotiation of agreements as
necessary. Newly-installed Minister of Mines Martin Kabwelulu
announced March 19 that all agreements with Gecamines should
be reviewed because many companies are failing to meet their
obligations, such as ceding five percent of the concessions'
shares to the GDRC. Other GDRC officials concur privately
that the DRC's mining contracts should be reformed.
Newly-installed Minister of Defense Chikez Diemu (a former
Katanga Vice Governor),for example, acknowledged to EconOff
that some contracts should be reviewed, although he did not
say which ones.


4. (C) National Assembly Vice President Christopher
Lutundula, chair of the Transitional Government parliamentary
commission, commonly known as the "Lutundula Commission,"
proposes forming an independent commission with
quasi-judicial powers to examine existing contracts as well
as all future agreements (reftel A). No other concrete
proposals have yet publicly emerged, although the Vice
Minister of Mines told EconOff March 19 that the Ministry
intends to launch a review of mining contracts, possibly in
cooperation with an international organization. The Vice
Minister also said parliamentary review would be ill-advised
because it would take too long and be too politicized.


5. (SBU) International and local NGOs, as well as some
Congolese media, have taken the more extreme view that all
contracts signed before and during the transition period are
disadvantageous to the DRC. Congolese and international NGOs
have been vocal in their opposition to joint venture
agreements signed with Gecamines, the DRC's copper/cobalt
mining parastatal. For example, on March 13, a consortium of
international NGOs (including the U.K.'s RAID - Rights and
Accountability in Development, and the Netherlands-based
Fatal Transactions) released a statement calling for the GDRC
to renegotiate or annul joint-venture agreements that
Gecamines entered into under the Transitional Government with
American company Phelps Dodge and with companies associated
with Israeli Dan Gertler (Nikanor) and Belgian George Forrest
(Katanga Mining).


6. (SBU) The DRC National Assembly, the UN and the World Bank
(WB) have reviewed and reported on this topic, each with a
different focus. The Lutundula Commission reviewed 60
pre-Transition contracts and although its report was never
officially released, it was leaked and widely disseminated.
The Commission concluded that many contracts were entered

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into without transparency or without following legal
procedures. The UN's Group of Experts (GoE) on the Illegal
Exploitation of Natural Resources has focused on the link
with arms trafficking and has reported in more detail on
pre-Transition deals. For example, the GoE stated in its
October 2002 report that former President Laurent Kabila
ceded numerous concessions to foreigners in exchange for
military support, with no consideration for long-term
benefits to the GDRC, and without transparently following
rights' conveyance procedures.


7. (SBU) The World Bank (WB) in 2006 commissioned financial
and legal reviews of contracts with Gecamines, although it
has declined to make those reports public. A WB mining
sector expert told EmbOffs the reviews indicate "contracts
did not hugely deviate from international business
practices," although he noted some did omit important terms,
such as methods of accounting for revenues. However, it is
not clear whether this is the WB's official position.

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Control over Natural Resources
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8. (SBU) Another issue key to sector reform is the need to
improve control over the natural resources themselves. The
smuggling of millions of dollars worth of resources out of
the DRC each year, well-documented by Emboffs and
international organizations such as the UN Group of Experts
and British NGO Global Witness, results primarily from
inadequate border control (on land, water and via air) and
the illegal involvement of security services. The
dysfunctional and corrupt customs system is a major
facilitator of illegal exports. Until recently, exporters
routinely paid customs officials to under-declare the
truckloads of copper and cobalt ore they shipped into Zambia
via Kasumbalesa, a major customs post in Katanga. In some
regions, such as along the DRC-Ugandan border in Ituri
District, a gap of several miles exists between the physical
border and the customs offices, resulting in an unmonitored
export zone (reftel B) that permits the smuggling of
resources such as timber and gold.


9. (SBU) The illicit involvement of militia not under
government control and of the DRC's security services in the
extractive industries sector also weakens state control over
natural resources. National police, mine police, military
and agents of other security services are often integral
links in the illegal export chain. Often the security agents
are present in the mines themselves, sometimes acting as
traders, as EconOff saw in a Katanga province copper
concession, and sometimes demanding payment for access to a
mine (reftel D),such as in gold mines in Equateur province.
Security services are also much in evidence at customs
borders, demanding payments in exchange for permitting
export.

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Ensuring Social Benefit
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10. (U) Although extractive industries, particularly in the
diamond and petroleum sectors, generate at least two-thirds
of official export revenue, the general population in the DRC
does not realize significant social or economic benefit from
this income. This failure is, ironically, also very evident
in areas of major extractive industry activity. For example,
EconOffs have seen striking poverty in the DRC in Mbuji-Mayi,
Eastern Kasai province, home to the DRC's diamond mining
parastatal, and Moanda, Bas-Congo province, DRC-operations
base for French company Perenco, which manages the only
functioning in-country petroleum concessions. Many
provincial and local leaders, such as former Eastern Kasai
governor Dominique Kanku and current Katangan Governor Moise
Katumbi, have repeatedly called for the national government
to retrocede revenues it does manage to collect and to invest
in key sectors such as health care and education.

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Artisanal Mining
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11. (U) NGOs Global Witness and Pact Congo estimate that one
million or more artisanal miners work in DRC mining sectors,
most notably in gold, diamonds, copper and cobalt, and that
up to twenty percent of the DRC population may indirectly

KINSHASA 00000425 003 OF 004


rely on artisanal and small scale mining. Artisanal mining
often creates serious human rights, environmental,
educational, health and labor problems. A Nikanor official
described artisanal mining communities as areas of "complete
social breakdown"; other mining sector experts with whom
EconOff has spoken offer similar descriptions. In its study
of a gold mining community in Ituri, for example, Pact
reported serious health problems, an absence of alternative
employment, rampant prostitution and other indicators of
economic and social instability.


12. (SBU) Artisanal mining can be a disincentive to mining
companies to invest and operate in the DRC, because the
presence of these miners on concessions creates financial,
security and legal risks. For example, Australian company
Anvil Mining holds mining rights to a Katanga province copper
concession that thousands of artisanal miners occupy. In
2005, artisanal miners protested Anvil's attempts to remove
them from its site, resulting in three deaths (reftel E). In
February 2007, Anvil managers told EconOff the company is
losing thousands of dollars per week due to artisanals'
thefts from the same concession.

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What Has Been Done
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13. (SBU) Although a good deal of discussion is focused on
mining sector reform, little action has yet been taken. The
WB is positioning itself to have a key role in reform
efforts, having indicated its interest in doing so since at
least 2005. It is nearing the end of a three-month mining
sector review, lead by its chief Washington-based mining
specialist. The WB designed the study to determine how to
target and prioritize its funding in this area, with an eye
toward reform-oriented measures.


14. (C) The most notable recent efforts have been in Katanga
province, part of a region that is the DRC's primary source
of copper, cobalt and zinc. On March 6, the recently-elected
Katanga governor Moise Katumbi halted the export of
unprocessed ore from the province (reftel C),and
subsequently made the ban permanent. Another visible effort
is a USAID-initiated Katanga program, the purpose of which is
to link the private sector, the GDRC, NGOs and civil society
to jointly develop priorities and plans for social
development and to provide education on relevant human rights
standards in mining regions. USAID is analyzing the
feasibility of expanding the program into other provinces.
The Extractive Industries Transparency Initiative (EITI),a
British-launched effort, has not yet been put into practice
in the DRC, despite the efforts of the U.K. Mission to push
it forward.


15. (SBU) Several actors interested in mining sector reform
are promoting the development of new certification or
traceability regimes, similar in concept to the Kimberley
Process. The UN Group of Experts and the Belgian and German
Missions to the DRC are among those supporting the
establishment of such regimes; the German Government, for
example, advocates creating a coltan tracing process.
(Comment: Diplomats at the U.K. and Canadian DRC missions
have told EconOff they do not believe such schemes are
feasible in the DRC and do not support their development.
Even the well-established and internationally-supported
Kimberley Process has had significant implementation and
enforcement problems in the DRC. End comment.) Moreover,
mining companies operating in DRC, such as AngloGold Ashanti,
have expressed only lukewarm interest, in part because of
questions about financial and administrative feasibility. The
Vice Minister of Mines told EconOff that although he does not
oppose such ideas, the GDRC lacks resources to implement them.


16. (SBU) The UN, Belgian and Canadian Missions are planning
seminars on mining sector reform, following one the Belgians
held in Louvain, Belgium in January. The Canadian seminar
will likely focus on corporate social responsibility. The UN
has not yet selected a specific topic; a UN officer
responsible for organizing the seminar told EconOff the UN
recognizes the symbolic importance of a high-level meeting to
emphasize its continued support for sector reform. The
Belgians are holding a conference on April 11 and 12 in
Lubumbashi on the feasibility of developing new minerals
certification and traceability regimes. The Germans are
interested in organizing a similar symposium.


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Comment
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17. (C) The DRC needs to focus on relatively
easy-to-implement, low-cost, technologically simple reforms
that have widespread donor support. The government should
focus on improving border control and reforming the customs
system. Such efforts, if successful, will increase state
revenues and publicly demonstrate that the GDRC is serious
about controlling its natural resources. Simultaneously, the
GDRC should decide on a transparent and date-limited contract
review process, so that it can resolve any outstanding
contractual issues. Certification and traceability regimes,
nice ideas at first blush, do not appear feasible. Complete
sector reform in the short term is unrealistic, but some
measurable progress is within reach, particularly if domestic
and international support is maintained. End comment.
MEECE