China Outdoes Europeans in Congo

The agreement on developing infrastructure through “resource-backed finance” certainly gives China a lot of influence in a country where Europeans are used to dealing the cards. European countries now look with a certain envy at what China has achieved.
President Joseph Kabila’s political future depends on this Sino-Congolese deal. And, with that, at least a part of the economic future of Congo itself.
The Democratic Republic of Congo has been endowed with tremendous natural resources, but 40 years of mismanagement have brought the country down. The DRC is now one of the poorest countries on earth – even the most basic of infrastructure has succumbed to four decades of neglect.
The announcement in September 2007 that China would take on big infrastructure projects in the DRC, to be paid for with Congo’s immense copper and cobalt reserves, inevitably attracted a lot of attention. But it created also a lot of suspicion: what exactly were the Chinese up to?
The Chinese companies will, for one thing, start work on infrastructural projects in 2008 more or less along the lines of the five priorities Kabila has set: water, electricity, education, health, and transport.
These works will cost more than 9 billion dollars. That is a lot of money, considering that the 2007 government budget was a mere 1.3 billion dollars, most of which was needed just to pay the salaries of government staff. So how will the DRC pay off these Chinese loans?
The basic idea is that Congolese and Chinese state owned enterprises (SOEs) set up a joint venture, Socomin. This mining company will invest 3 billion dollars in mainly new mining areas. The profits of Socomin will be used to repay these mining investments and the investments in the big infrastructural works.
Broad agreement was reached in September last year. It was then fine-tuned through two months of negotiations in Beijing in November and December.
“It took a long time, that’s for sure,” says French-born Paul Fortin, CEO of Gécamines, the Congolese state-owned mining company. “We had to agree on an economic model that stipulates how the Chinese investments will be repaid with the revenue of Socomin. Apart from that, these were normal business negotiations comparable to those I did for the many partnerships of Gécamines with private companies.”
One of the agreements was that over a 15-year period Socomin will raise about ten million tonnes of copper to pay off eventually 12 billion dollars in investments in mining and infrastructure.
The Chinese have hedged their position quite aggressively. The first profits will be used to repay the mining investment, something that is typical of most private joint ventures with Gécamines. The agreement also says that “the Congolese government has to guarantee the safety of the investments, and the repayment of the infrastructural works.” Any disputes would be settled by the arbitration tribunal of the International Chamber of Commerce in Paris, and not through Congolese courts, that have a reputation of being corrupt.
Under the agreement, only one in five workers can be Chinese. In each of the projects half of one percent of the investment must be spent on transfer of technology and on training Congolese staff. One percent has to be spent on social activities in the region, and three percent to cover environmental costs. Ten to 12 percent of the work has to be sub-contracted to Congolese companies.
How all this will work out for the DRC remains to be seen. And, what will be the quality of the work? Is the Congolese government capable of controlling that?
One thing is obvious: this is not the black and white story some wanted to make of it. It is neither a colonial horror story, nor some idealistic investment on the part of China.
China is interested because it needs the natural resources. But Paul Fortin thinks the DRC has a lot to gain too. “Congo doesn’t have to wait for its infrastructure until it has the money. Building starts immediately with the natural resources as guarantee. Except in oil-rich states, I know of no other deal quite like this.”
One well-informed European diplomat who did not wish to be named admitted that “if carried out well, this can be positive for Congo.”
The deal seems like a lifeline for Congolese President Joseph Kabila. After more than a year in power, there’s not a lot he can show to the Congolese people, who have started to criticise him. Something has to begin quickly if he wants to get re-elected in three-and-a-half years.
The Congo-China deal seems a good way to move forward, also because the money does not have to be channelled through a corrupt Congolese bureaucracy. Loans from China’s state-owned Eximbank go directly to the Chinese state-owned enterprises China Railway Engineering Company (CREC) and Sinohydro.
Kabila alluded very clearly to this in a recent speech. “The Chinese banks are prepared to finance our Five Works (water, electricity, education, health, and transport). For the first time in our history, the Congolese will really feel what all that copper, cobalt and nickel is good for.”
The exchange agreement with the Chinese appears to be a satisfactory solution in the short term. A better-run state is still a must though, and a necessary precondition for making good use of (and maintaining) all the new roads, railways, hospitals and schools that are planned.
The Europeans are finding China’s role frustrating. Through their projects, the Chinese gain access to copper and cobalt. “This at a time when we ought to be mindful of long-term provisioning (of commodities to Europe),” a diplomat told MO*. “Would the European development aid community tolerate us operating like the Chinese?”
And that is just one question. There are others. Which other nation is able to take on such gigantic projects as cheaply and quickly as the Chinese? And, which European country still possesses the publicly owned enterprises to undertake such ventures?
If Kabila is now politically dependent on the Chinese, that means that Beijing’s influence in this crucial African country has grown very strong. The Congolese, like many other Africans, have had it with the often paternalistic Europeans telling them how they must behave and how they must improve governance.
To be sure, the government of the DRC is notoriously weak and corrupt. Researchers found that typically a container entering the country in the eastern town Bukavu is ‘attacked’ by 20 different government services, each requiring the right papers – or some kind of payment.
The Congolese state is dysfunctional, and governance problems are one reason why Western countries have been slow to finance the Congolese government after the elections. “We had no choice but to go to the Chinese,” a well-placed source in Congo told MO*.
MO* has now had access to the September agreements. Some details of the agreements are as follows:
- The main agreement was concluded between the Congolese state and three large Chinese state owned enterprises, including China Eximbank which has for years extended large loans to Chinese contractors. The agreement stipulates that these two parties should form a joint venture Socomin (Société Congolaise Minière) incorporated under Congolese law.
- In all 32 percent of that company’s shares are held by the large publicly owned mining company of Katanga province, Gecamines, and 68 percent by the Chinese. Much of the extraction will be from new mines. Nothing is taken away from existing mines, except from a part of Katanga Mining Ltd. owned by the Belgian George Forrest, which will be duly reimbursed.
- In a first phase, Socomin’s revenues will be used to repay mining investments of 3 billion dollars. Gecamines is also given a correcting loan of 100 million dollars, with which the back pay of foreign and Congolese ex-employees, among others, can be paid.
- In a second phase, 66 percent of the net profit will go towards paying off the loans that the Chinese will, by then, have used to pay for the infrastructural works. The other 34 percent is distributed among the shareholders. During those two phases, the joint venture is exempted from all taxation.
- This is followed by a 9-billion dollar list of infrastructural works which two large Chinese publicly owned enterprises will build between them. Sinohydro, a large state-owned company that has furnished the backbone of Chinese hydraulic engineering works and hydroelectric power stations, will build high-voltage power lines and power plants. The company will also repair and expand water supply, and construct 49 distribution centres supplying potable water, 31 hospitals each with 150 beds, 145 health centres each with 50 beds, four large universities, the parliament building, and 20,000 council houses or flats.
- The China Railway Engineering Company (CREC) is a state-owned company that laid two-thirds of the Chinese rail network (no less than 400,000 km), and has 280,000 employees. CREC is tasked with renovating the railway between the ports of Muambe, Matadi and Kinshasa, the railway between Kinshasa, Ilebo, Lubumbashi and Kasumbalesa, and between Lubumbashi, Kindu, Kalemie and the north-east of Congo. In and around Kinshasa, 250 km of roads will be built, including an orbital motorway round the city. Elsewhere too, many new roads are planned.
- In addition, an agreement exists between the Congolese government and the private company Shanghai Pengxin Group Ltd. to develop public infrastructure with “project funding covered by revenue from natural resources.” Shanghai Pengxin has to mobilise 1 billion dollars, 850 million dollars of which is for the mining and infrastructural works, and 150 million dollars as budgetary assistance to the government. It is stipulated in the agreement that the mining has to be on a sufficiently large scale to repay that amount.
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