Several days ago, the Paris Club of lenders announced that it would cancel all of the debts the Congolese government owed them - $7,35 billion. This follows the cancellation of $12 billion in debts by the IMF in July. Altogether, these cancellations have freed up around $520 million in the Congolese annual budget that had been used for debt servicing, almost ten per cent of the current budget.
Debt cancellation is a thorny issue. It's incredibly difficult to oppose the cancellation of the odious debt that had mostly been accumulated under Mobutu - why should the current government pay for the sins of a past dictator? It shouldn't.
On the other hand, if there is leverage to be had on the Congolese government, it is probably to be found here. The World Bank, the IMF and the African Development Bank account for a large majority of the financial support provided to the Congolese government, which makes up for half of the country's budget. There is a deep ingrained reluctance within the bureaucracies of these organizations to use grants and loans to leverage security sector reforms, decentralization or to tackle impunity. There was some pressure, especially from the Canadian government, earlier this year to use the $12 billion IMF debt relief package to push for governance reforms, although this was somewhat cynically tied to the squabble over First Quantum (a Canadian mining company) mining rights (was this really this most shocking issue to be confronting Kinshasa over?) In the end, however, donors decided that the the criteria had been met under the Highly Indebted Poor Country (HIPC) initiative and that debt relief should be granted. Critics complained that the HIPC criteria were very narrow and looked mostly at financial matters - inflation rates, reforms in the financial regulations and procedures, fiscal performance, etc. - to the exclusion of political and human rights concerns.
Which it why it wasn't surprising to have some heavyweights again balk over granting the $7 billion Paris Club debt relief. Charles Michel, the Belgian minister for development, had said that debt relief should be postponed until next year due to poor economic governance. In the end, however, apparently, other considerations won over and relief was granted.
Which leaves two questions:
Why don't donors, who constantly wring their hands and complain about their lack of leverage to push for reforms in Kinshasa, use their financial weight in the World Bank and IMF as leverage? Perhaps debt relief is not the right forum, but what about all the other loans?
When leverage is considered, why is it almost only over "economic governance," in other words when Kinshasa begins canceling mining contracts and refused to improve the investment climate?
Sunday, November 21, 2010
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8 comments:
Hi Jason,
We agree on the point that Mobutu's debt should not be a burden on current politics. We also agree that relief could and should be used as leverage for improving those politics. Where we disagree is the focus of that leverage: you regret it's only about economic governance - 'canceling mining contracts, refusing to improve the investment climate'. To my mind, there haven't been enough voices for economic governance conditionality tied to the debt relief.
We are cancelling billions and billions of debt, but between 2008 and 2010, the government will have contracted for almost 10 billion of new mining debts. The China contract is well known - 6 billion, 6% interest rate, no oversight on how much ore gets out, a clause that grants them extra deposits if the debt hasn't been paid back, no taxes until then. Who knows what the '1 billion' South-Korea contract will look like: how much will be loans, i.e. debt, how much will be equity? For the state budget, which debt relief claims to clean up, this means an enormous lack of income. The only fresh cash that comes in are signing bonuses (and perhaps royalties for Gecamines), which haven't been very traceable so far, except when they're eaten by vulture funds. Instead, there's a massive debt, to be paid in minerals, with interest.
Now, the FQM - ENRC debacle goes beyond this. We know closing FQM means a loss of about 90 million in profit tax alone for 2010 (Frontier), and probably about 250-350 million of it by 2015, when capex has been written off for KMT. This is regardless of the other taxes (redevances, customs, dividends, new concentrates tax, etc). The debt relief 'frees up 520 million', only once, and only hypothetically because those millions weren't paid for anyway. The closing of FQM on the contrary means losing about 400 million yearly, in real cash. But the worst is yet to come. If the Canadian company wins the suit against Highwinds in the BVI, the state (not just ENRC, and not just Gecamines) risks a new debt of 2.5 billion, according to the Metalkol contract. Unlike the Chinese, those billions of debt won't bring a single road, school or hospital in return. Add the two arbitrations against DRC/GCM in Paris and Washington, the dispute over the Albert Lake. For every billion we cancel, we get half a billion back in new debt.
I don't understand why this hasn't lead to more advocacy from civil society to stop the debt cycle, beyond the definitely biased and therefore ugly campaign of one northern American government. Because bad economic governance is not just about some privates getting slammed in a dirty way - with other private companies benefiting from it, btw. As Howland from the UNJHRO would say, bad economic governance is also about the violation of article 2 of the Covenant on Economic, Social and Cultural Rights, according to which states have to use the maximum of available resources for the furthering of education, food, housing, health care. So yes, a focus on economic governance would be desirable, not only because it tries to prevent a new cycle of debt the HIPC program was set up for, but also because it is a condition for realizing the rights you are referring to.
Elisabeth
Elisabeth,
You write that the cancellation of the FQM contract results in a loss of about 400 million yearly for the state.
My question to you is: what is this figure worth in comparison to the profits that FQM was going to make over the period of the investment?
Kongo
Hello Kongo,
Let's try and estimate who gets what. For lack of data the estimates will necessarily be wrong and simplified, but it's an interesting exercise nonetheless.
The profit tax is 30% of the profit, so the profit before tax = tax x 100/30.
It's pretty easy to calculate for Frontier, where FQM owns 100% of the titles.
Profit before tax = 90M*10/3 = 300M. This figure is after deduction of a 2% redevance on sales paid to the state, as well as the provincial taxes on concentrates and transport. If I extrapolate the 2009 figures, I estimate the first would have been around 8 million, the second about 15 million, the third about 12.5 million.
Profit after tax = 300M - 90M = 210M. If Frontier decides to grant dividends, 5% of them go to the state - another 10.5 million in this scenario.
So for Frontier, we'd have 90M + 46M = 136M in taxes to the state, and about 200M in profit for First Quantum. I've made abstraction of other taxes, so the state would get more than that. I've also made abstraction of techniques companies use to minimize their tax base and therefore pay less taxes (transfer pricing, thin capitalization, etc), so the company also gets more. But for a remote undiscovered deposit in Sakania territory, I think the state got a fair share.
For KMT it's more complicated, because FQM didn't own 100% of the shares: there was also Gecamines, the State, the IFC and the IDC. So the private partner has to share the profits with the other partners.
The joint venture KMT expected to pay 300M in profit tax in 2015 (and that for the following 15 years). This means that profit before tax is 1B. I don't know how much the 2% redevance would have been nor the additional 1% royalty to GCM they were apparently willing to concede, so this would have been substantially more than Frontier (esp because the net sales would be higher because the product would have been metal, not concentrates (tb checked). At the same time, as they wouldn't export concentrates, they wouldn't pay that tax. In any event, difficult to stick on the combination of these taxes, but definitely something substantial to add to the 300M.
Anyhow, profit after tax = 700M. According to the contract, 17.5% of dividends go to GCM and state. So that means 122.5M for the state parties. In sum, you'd have 577.5M for the private parties FQM, IFC and IDC, and 300 + 122.5M = 422.5M for the state and Gecamines (excluding a bunch of other taxes).
Now, the caveat (amongst many) with the second estimation is that there's probably a lot of other profits for FQM that are more hidden. In theory, the joint venture with GCM and state has a negative impact for the private actor, because it has to share the dividends with these state parties. In practice however, this very element also encourages the private actor to make sure that profits are made not at the level of the Joint Venture, but at the level of one or more mother- or sister companies. This is probably the irony of Gecamines arguing for a bigger share in the Joint Venture: to my mind, it induces profit flight out of the country. As I don't know all the agreements with sub-contractors KMT has signed, and because production hadn't started, it's much more difficult to calculate real profits and taxes. It requires further research, which we are carrying out. If I have some results, I will let you know.
Hmm, I'm not sure this analysis helped clarify anything. It probably only helped to show the matters are complicated, and that a better understanding about this kind of issues is needed...
Elisabeth
It requires further research, which we are carrying out.
Who are you carrying out this research?
You is the Carter Center in collaboration with the Columbia Business School. The goal is to understand (and make understandable) how the market and the government carry out their mining activities and to see who benefits and who loses.
Thank you Elizabeth for the details, I had an idea but the numbers you've laid give us a better sense of things. FQM lost their contract to a Zuma relative right? Do you guys have info on that contract? I was wondering if Kabila is not re-elected in 2011(It would take a miracle I must say), so whomever will replace him would have to revise the nature of those contracts? I don't see why they shouldn't reconsider it especially KMT's contract. I would love to know more about your research, I think it could be very valuable.
Hello,
FQM did not lose its contract to Zuma relatives. It lost it to the Highwinds Group, in which Dan Gertler has a stake. The latter is not a first-timer - he's been a key player in the Kasai diamond industry for years. London-listed major ENRC acquired a 50.5% stake in the Highwinds Group parent company Camrose in August.
That said, a Zuma relative is involved in a strikingly similar adventure further North, regarding two Lake Albert oil blocks. The 'FQM' in that story is Tullow Oil (which was already disputing the blocks with Divine), the 'Highwinds Group' is Foxwhelp and Caprikat. Zuma's nephew represents the latter, including publically: http://af.reuters.com/article/energyOilNews/idAFLDE6AO1RZ20101125.
Thanks again for clarifying things....I would very much like to know more about your research, we are actually putting a document that shows how ineffective the "5 chantiers" of Kabila has been. If I may can we converse via email? I would like to get your feedback on a couple things regarding big baller's contract. chrisenga@gmail.com
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