KATANGA'S ECONOMIC WOES

UNCLAS SECTION 01 OF 02 KINSHASA 000399 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EMIN EINV PGOV PREL CG SUBJECT: KATANGA'S ECONOMIC WOES ¶1. (SBU) Summary: The DRC's resource-rich Katanga province has been particularly hard hit by lower prices and demand for key minerals. Government officials and private economic operators shared a common message with Economic Counselor during a visit to the province the week of April 13: the economy is struggling as the mining sector has contracted. Customs receipts are down by more than 50 percent since the beginning of the global economic crisis, while over 200,000 jobs have been directly lost, with the total number of job losses much higher. While most agree that economic diversification, with an emphasis on the agricultural sector, is necessary, extremely limited infrastructure and a cultural and economic environment strongly linked to mining remain constraints. The one bright spot in the currently bleak economic environment is Freeport-McMoRan's $1.7 billion Tenke Fungurume (TFM) copper/cobalt mining concession, which started copper production in March. End Summary. LOST JOBS . . . -------------- ¶2. (SBU) Provincial government officials highlighted to EconCouns the significant impact of the global economic crisis on Katanga's economy. A significant contraction of the mining sector, including the closure of many smaller operators, has resulted in both job losses and lower revenues. Governor Moise Katumbi, for example, noted that 200,000 Katangans had lost their jobs directly as a result of the contraction of the mining sector, with several hundred thousand more affected due to the indirect impact of lower demand for minerals. (Note: Press has noted job losses in Katanaga's mining sector in the range of 200,000 to 400,000, with many of these artisanal diggers. End Note) Only four or five of the larger mining companies have remained, with some of these (e.g., Anvil) operating well below capacity. Katumbi noted his strong support for TFM and that, if it were up to him, TFM's still unresolved contract renegotiation would have been long ago concluded. ¶3. (SBU) Katumbi stated that diversification of the province's economic base, with a specific focus on agricultural production, remained key to both stabilizing the economy and promoting food security. To this end, the Provincial government had begun educating and informing the local population about agricultural production over a year ago. A symposium bringing together government officials and business representatives looking at economic diversification was held at the Provincial Assembly the week of April 13. Katumbi also noted that extensive flooding in various points throughout the provinces had significantly impacted agricultural production. He requested USG support, though acknowledged that the GDRC had not issued a disaster declaration. (Note: Post has not received any formal request for assistance from the provincial or federal government to assist with flooding in Katanga province. End note.) . . .AND LOWER REVENUES -------------- ¶3. (SBU) Lower purchasing power among the local population and decreased mining operations have significantly impacted the province's trade. Heavily dependent on imports of basic staples as well as equipment for the mining sector, the drop in both imports and exports serves as a good indicator of the struggling economy. Provincial officials from the DRC's Customs authority (OFIDA, Office des Douanes et Accises, in French) told EconCouns that revenues from customs were currently half of levels before the impact of global economic crisis. According to OFIDA's Provincial Director, customs receipts had been $23 million per month in November 2008, dropping to $12 million in December 2008 and $10 million for the months of January, February and March 2009. EconCouns was provided similar data during a visit to the key DRC-Zambian border post of Kasumbalesa: prior to the economic downturn, approximately 250 trucks per day entered the DRC with imported goods from Zambia, while the current number had dropped to 99 trucks per day. The local market established on the Zambian side of the border, where Congolese purchase basic food items such as eggs, bread, and vegetables, was a testament to the province's dependence on imported goods. At the same time, the large number of cars for sale stuck on the Congolese side of the border highlighted the lack of purchasing power among the local Congolese population. ¶4. (SBU) OFIDA officials stated they are working to modernize customs operations and improve revenue collections. OFIDA's Provincial Director noted, for example, he was supportive of the efforts of CTC to modernize and reform OFIDA and improve revenue collections (Note: Customs and Tax Consultancy, CTC, is U.S.-incorporated company that signed an agreement with the GDRC in September 2008 to modernize and reform OFIDA. CTC representatives KINSHASA 00000399 002 OF 002 have told Econoffs that many in OFIDA have been resistant to their efforts to reform the agency. End Note). OFIDA is also working with TFM to create a dedicated lane to expedite and facilitate TFM's goods associated with their investment. Kasumbalesa OFIDA officials placed the blame of contraband, a significant problem, squarely on the police and military. Specifically, a local OFIDA official told EconCouns that the police and military permitted trucks to enter the DRC illegally at night at several easy nearby crossings to avoid paying import duties in exchange for bribes. In response, the OFIDA official has personally dug several large trenches, shown with great pride to EconCouns, in these passageways to impede trucks from illegally crossing. OFIDA has also begun construction on a new customs post, located several kilometers in from the border. With funding from the French government, the site includes several new buildings for OFIDA and other revenue collection agencies, and a weigh station. However, Kasumbalesa OFIDA officials lamented that they did not have sufficient funds to complete the project: $10 million was needed to finish access control, including a perimeter fence and road. NOT JUST MINING IMPACTED -------------- ¶5. (SBU) Meetings with private economic operators highlighted the impact of the mining sector's contraction on broader commercial activities in the province. The Lubumbashi branch of Trust Merchant Bank, for example, noted a drop by 85% in its business portfolio. Likewise, a local manufacturer and distributor of a range of consumer products, Hyper-Psaro Group, stated business was down by more than 50 percent from 2008. Hyper-Psaro's GM stated that limited purchasing power and contraband were significant factors impacting their current operations. TFM-A BRIGHT SPOT -------------- ¶6. (SBU) Freeport-McMoRan's $1.7 billion Tenke Fungurume (TFM) copper/cobalt mine is one of the few positive developments in Katanga's difficult economic landscape. A site visit by EconCouns highlighted the significant scope of TFM's operations, both in the commercial and social sectors. TFM began copper production in March 2009 and plans to begin exports the week of April 20, 2009. Company officials told EconCouns that they contributed approximately $100 million in various taxes to the GDRC in 2008. TFM is currently producing copper at approximately 50 percent of capacity, which, at full capacity, should eventually total 250 million lbs of copper annually. The cobalt operation will be completed shortly. In addition to TFM's commercial operations, they have active social programs, including in the areas of microenterprise development and health, implemented in conjunction with an international NGO. They have also partnered with the government to support upgrades to the local infrastructure, including roads, railways and power. TFM's local reputation remains highly positive, with local government officials, business representatives, and several average Congolese all noting to EconCouns the positive role of the company in the province. The lingering issue for TFM remains the still pending finalization of its contract renegotiation with the GDRC. ¶7. (SBU) Comment: The fall in demand and prices for key minerals has highlighted the dependence of Katanga, and the DRC more generally, on the mining sector for jobs and revenue. There is a strong recognition of the need for greater economic diversification in the province, particularly in increased investment in agriculture. However, limited infrastructure and a local population culturally and economically linked to mining remain challenges for the immediate development of the agricultural sector. While Governor Katumbi, a businessman himself, is clearly supportive of international companies such as Freeport and has made strides to create a more business-friendly environment in the province, much of the province's bureaucracy and revenues remain controlled by the central government in Kinshasa, many of whose leading officials are themselves from Katanga. The still pending finalization of TFM's contract renegotiations is another example of Kinshasa's reach into the province. The long delays and lack of transparency in finalizing the mining contract review of such major investors as TFM has dampened investor confidence during a period when the GDRC should be doing everything in its power to attract and facilitate investment. GARVELINK