CORRUPTION AND MISMANAGEMENT CONTINUE TO UNDERMINE

C O N F I D E N T I A L SECTION 01 OF 02 KINSHASA 000967 SIPDIS E.O. 12958: DECL: 10/23/2019 TAGS: EINV EMIN ETRD PGOV PREL CG SUBJECT: CORRUPTION AND MISMANAGEMENT CONTINUE TO UNDERMINE DRC'S MINING SECTOR Classified By: Ambassador William J. Garvelink for reasons 1.4 (b) and (d). ¶1. (C) Summary: Corruption and mismanagement continue to be endemic problems plaguing DRC's mining industry, as highlighted by a September 29 GDRC Senate report on the loss of up to 450 million in mining sector revenues due to alleged fraud and mismanagement. The report was issued at approximately the same time that Gecamines Director Paul Fortin resigned his position over frustration with corruption and mismanagement within the parastatal and the largest U.S. investor in DRC, Freeport McMoRan's subsidiary Tenke Fungurume Mining (TFM) had three employees charged, though later acquitted, over a visa fraud scheme. Perhaps of greatest concern for major investors in the sector is the never-ending mining contract review, which has been characterized by numerous delays and a lack of transparency. Corruption's ripple effects may cause the GDRC to extract greater concessions from the mining companies, which will discourage foreign direct investment in the sector. End Summary. LOST REVENUES -------------- ¶2. (SBU) On September 29, the GDRC Senate issued a scathing report revealing that widespread fraud, poor governance and mismanagement cost the government between USD 361-450 million in revenues from the mining sector in 2008. The report stated that in the eastern provinces, eighty percent of the minerals extracted were being traded illegally. Gold smuggling in particular was costing the state hundreds of millions of dollars in lost revenues. According to the report, the receipts from the Treasury from the exploitation of gold amounted to only USD 34,107 in 2007 and did not exceed USD 20,777 in 2008, whereas total Congolese gold exports alone could be worth more than USD 1 billion per year. LACK OF REFORM WITHIN GECAMINES -------------- ¶3. (SBU) One day after the Senate issued its report, on September 30, the Canadian head of the DRC parastatal copper and cobalt mining firm Gecamines, Paul Fortin, resigned from his position after a four-year stint. Fortin publicly stated that he resigned as a result of frustration with the widespread mismanagement and fraud in Gecamines and a lack of reform within the company. He handed over management responsibility to his deputy, Calixte Mukasa, who is acting as interim head of Gecamines. Fortin had originally been brought in to head Gecamines under a World Bank contract intended to reform Gecamines, which is highly indebted. Fortin's resignation was neither a surprise nor will it likely have an impact on either Gecamines' role or position in the mining sector, as Fortin had largely become a figure head in the organization, with Mukasa wielding the real power. TFM CONTINUES TO FACE CHALLENGES -------------- ¶4. (SBU) Tenke Fungurume Mining (TFM),a joint venture between the American company Freeport-McMoRan Copper & Gold (57 percent equity),Lundin Mining (24.75 percent) and Gecamines (17.5 percent),is currently investing USD 1.8 billion in southern Katanga province to exploit one of the world's largest undeveloped copper and cobalt deposits. The project is expected to reach full capacity at 250 million pounds of copper and 18 million pounds of cobalt in the second half of 2009. TFM represents the largest U.S. Qsecond half of 2009. TFM represents the largest U.S. investment in the DRC and the single largest foreign investment in the mining sector. ¶5. (SBU) In August 2009, one Belgian and two Congolese employees of TFM were charged by the GDRC with embezzlement for establishing a parallel system for issuance of resident visas and work permits for expatriate workers. Francois Saidi, the head of immigration in Katanga province, was also charged. They were subsequently held for 5-to-6 weeks in Kinshasa's Makala prison. TFM eventually paid the GDRC USD 16 million in fees and settlements related to the case. Freeport McMoRan Vice President for Business Development Mark Mollison recently informed the CDA that during closing arguments at their September trial, one state attorney demanded that TFM pay USD 300 million in fines and penalties, while a second state attorney demanded more. On October 9, KINSHASA 00000967 002 OF 002 the three employees were acquitted on the embezzlement charges, according to Court of Appeals Clerk Francois Mukangala. However, the court sentenced Saidi to five years imprisonment on the same charges. ¶6. (SBU) At the same time, TFM continues to renegotiate its contract with the GDRC as part of the GDRC's review of 61 mining contracts. The contract review process, launched by the GDRC in 2007, was aimed at reviewing mining sector contracts entered into with the GDRC prior to 2002 that may have been negotiated in less-than-transparent circumstances. The process has been characterized by numerous delays, a lack of transparency, and conflicting communication with the companies. ¶7. (C) On September 24, Mollison told the CDA that TFM attended a "long week" of meetings hosted by the Ministry of Mines and Minerals on September 14-18. He said that the GDRC and TFM agreed on five or six issues, but did not agree on others and that TFM requested clarification of those issues. Mollison noted that the GDRC regarded the current mining concession contract as illegal on a number of grounds. First of all, on the signature page of the contract, the names of the Ministers of Mines, Portfolio and Planning and the Gecamines Director were not typewritten below the signatures, so the contract was not valid. A second issue was whether the current mining contract permitted amendments. Mollison said that in 2002, the MOM gave TFM nine months to switch to the new convention code and that TFM decided to keep their pre-existing convention. As a result, according to Mollison, the Minister of Mines warned that if "TFM decided to keep the convention, then they could not amend it." TFM subsequently sought legal advice and the GDRC gave the go ahead to negotiate amendments. ¶8. (C) The most important bone of contention between the GDRC and TFM is over the percent of equity each party has in the current contract. Mollison indicated that the GDRC currently possesses only 17.5 percent equity and that it is seeking 45 percent equity. He added that the GDRC wants to restructure the management of the TFM concession, and wants pseudo-royalties and accelerated payments from TFM. Mollison declared that TFM cannot give the GDRC additional equity in the concession and that if the GDRC wanted to buy it, they would need to offer a fair price. The GDRC initially gave TFM until October 12 to finalize negotiations, though this date has been extended and negotiations continue. After this date, the GDRC has threatened to cancel the contract. (Note: TFM told EconCouns that the GDRC will neither cancel the contract outright or shut-down TFM's operations given the size of the investment and importance to DRC's economy. End Note). ¶9. (SBU) Comment: Unfortunately, corruption and mismanagement will continue to hamper the DRC mining industry. As the GDRC is losing revenue from both widespread fraud/smuggling and lower international prices for minerals following the global financial crisis, it may seek greater concessions from mining contracts or a greater amount of taxes from mineral products. For example, the GDRC Deputy Minister of Mines Victor Kasongo warned Reuters on October 8 that some 25 mining contracts involving "second-tier" copper, diamond and gold assets could be scrapped if companies failed Qdiamond and gold assets could be scrapped if companies failed to present results of feasibility studies by a December 2009 deadline. Measures like this, combined with the seemingly endless contract review process, may dampen foreign direct investment in the mining sector, despite the DRC's enormous resource wealth. End Comment. GARVELINK