Wednesday, August 3, 2011

Guest Post: Let's Argue About the China-Congo Contract

By Tony Busselen
Brussels

The debate about the cooperation agreement between Congo and China at the Brussels symposium on the 27th of May, 2011 was very instructive.


This agreement is not about charity or aid; it is a form of economic cooperation on a capitalist basis, in that investors make a country pay for the risks they take. Congo will pay with minerals, the market defines the price of the minerals and the Chinese companies involved come to Congo to make profits.

As a leftist, it is not my spontaneous idea of economic cooperation. But I try to understand this situation. I've lived in Kinshasa for a year and I have been studying the country since the 90’s. Colonialism and neo-colonialism have imposed enormous challenges on the Congolese people and confront the Congolese leaders with hard dilemmas: which choices should they make to go forward?



For me it is clear that since the fall of the Mobutu dictatorship, there is a strong tendency among Congolese leaders to advance in an autonomous way and to get rid of the paternalistic tutelage of the old colonial and neo-colonial masters. The cooperation convention between Congo and China is one of the key dossiers in this perspective. The main question here is: will this contract be a real step forward for the Congolese people or will it make them suffer for another generation?

It is astonishing to see how much hostility this deal has provoked among people who see no problem in Western economic and political cooperation with Africa that until now left the African people with no real benefit.

Professor Marysse is certainly one of the few Belgian scholars who have thoroughly studied the Zairian and later the Congolese economy. He knows how deep the economy of this country has fallen under the neocolonial dictatorship of Mobutu. I understand and respect his anxiety for the future of the DRC. But some of his arguments [ed. summarized in this article] make me wonder if these feelings do not push him into exaggeration on different aspects of the Congo-China agreement.

For example: Professor Marysse compares the guaranteed rate of return of 19% of the Congo-China agreement with the annual profits of the colonial enterprises under Belgian colonialism between 1906 and 1960, which according to Marysse stood at an average 6%. For this figure of 6% he referred to a study by Frans Buelens (Congo, 1885-1960, een financieel economische geschiedenis, EPO 2007) who studied the profits of colonial enterprises.

I recalled much higher profit figures in Bruelens, and so I checked Buelens again.

In Buelens' book the figure of 6% only appears as an average for all the sectors for the sole year 1960, the critical and crisis year of Congo's independence. For the mining sector, he gives much higher profit figures, year after year.

I summarize one of his conclusions: “One inevitably comes to the conclusion that the mining sector had the biggest returns of all economic sectors [emphasis added]. In the top year 1951 the mining sector obtained a return of 49%, compared to returns of more than 20% in other sectors. Agriculture (plantations), banking and insurance and construction in particular made spectacular profits. But the mining sector obtained a return of 63.4% in the year 1937, after the thirties' crisis. The global list of figures leaves us with a spectacular impression: the Congolese enterprises were among the most profitable in the world.” (Buelens, pp. 584-585)

So, it is my view that, Professor Marysse should compare apples with apples and, in this case, compare the results of the mining sector under colonialism (an average of 27,7% for the 39 years between 1922 and 1960 according to the calculations below)/2 with the (guaranteed) rate of return of 19% put forward in the Congo-China agreement.

It would even be more telling and accurate to compare with other contemporary agreements. For example, let us examine a document on the Kolwezi Tailings Project (KTP)/1, dated March 30, 2006 and published by the mining company Adastra Minerals, formerly known as American Mineral Fields. Adastra then held 8.6% of the shares of KTP, the rest was in the hands of First Quantum. (p. 39)

On page 8 of the document Adastra guarantees a profit of 29.2%. In the financed case the document predicts even a return of 40.4% for the Adastra shareholders in KTP.

Another example: Professor Marysse compares the value of minerals promised in the contract with the investment. According to his calculations, the Chinese parties obtain minerals for a value of between 34 billion and 83 billion dollar, according to the benchmark price, whereas they invest 6 billion dollars. But I do not grasp why the professor doesn’t speak about the costs of production? It must cost a lot to produce 400.000 tons of copper for 20 years.

What is more: 32% of the shares of the Sicomines Joint Venure remain in the hands of the Congolese, which means that they'll receive 32% of the benefits. One has to consider also that the real value of the 3 billion dollar investment in infrastructure will be much higher for the Congolese people, since this infrastructure can contribute to the relaunch of Congo's economy and the creation of wealth for the Congolese people.

Moreover, let’s compare the investment versus output of the Chinese contract with that of the above-mentioned Kolwezi Tailings Project of Fist Quantum. On page 8 of the mentioned document we read that the KTP is about a "Mineral reserve of 112.8 million tons at 1.49% copper" and that the investment in KTP is 305 million dollars.

1,4% of 112,8 million tons makes 1,6 million tons copper. This means that First Quantum and Adastra would invest 305 million dollars to obtain 1,6 million tons of copper. This is an investment equal 1/20 of the Chinese investment to obtain 1/6th of the quantity of the Chinese contract! In other words: the Chinese invest $600 per ton of copper where First Quantum and Adastra would invest $190 per ton of copper!

No wonder, the Congolese government demanded to renegotiate the First Quantum contract after the famous review of the mining contracts (the famous ‘revisitation des contrats miniers”). And it canceled the contract when First Quantum refused any negotiation.

I fully understand why my friend Martin Kibungi was so angry about the accusation that Congolese authorities are not competent and have lousy negotiation skills. Martin is a civil society activist, but professionally he works in the government's Planning Department and each year he contributes to draw up the famous PRSP (Poverty Reduction Strategy Paper). So he is well aware of the pressure that is coming out of institutions such as the IMF or the World Bank. And he knows that the Congolese authorities’ biggest problem is that they are in a weak negotiating position, the problem is not their skills or lack of competence.

The real problem in the mining sector is that the mostly Western mining companies are not willing to cooperate and start production in Congo. The map accompanying this text shows this very clearly. The gray areas are the territories where the companies have exploration licenses, the very few dark spots are the exploitation licenses.

This map tells a lot of the problem the Congolese government is confronted with. The mining companies are taking hostage two thirds of the immense territory of the DRC. Will they ever start producing there? Only when it is in their interest and profit. The Congolese people are supposed to accept this reality and wait. The decision to start producing is taken abroad in a far away country, by boards of companies with budgets higher than the Congolese state budget, and they can pay lawyers and specialists to impose their will on the DRC.

And we saw the judicial and media war First Quantum waged against the DRC’s government since this government canceled the contract with First Quantum: with the help of the Canadian Government the Firm succeed to postpone the cancellation of the debt of the DRC for 6 months. And many Western media repeat blindly that the contract was canceled “because First Quantum refused to pay bribery to Congolese officials”.

At the conference in Brussels someone complained to me about the intervention of Paul Fortin at the symposium. Mr Fortin was charged by the World Bank to run Congo's state-owned mining company Gécamines between 2005 and 2009. At the conference, he disappointed attendees by providing only a general statement that the Sicomines contracts would continue to evolve, like a marriage or a symphony. The person who approached me thought Fortin's intervention was cynical.

I personally regret his intervention was much too short, but Fortin had a very important message. He said that the mining operations are on Congolese territory, so Congo had to sign an agreement first but afterwards there will be a lot of changes and perhaps improvements to this agreement. Is this cynical? According to Fortin it is the Chinese who are in a weak position: they have already started their construction works, but production of copper will begin at the earliest in 2014, this is in three years time. What if Congo's political landscape changes in the mean time? What if the opposition leader Etienne Tshisekedi wins the next elections and breaks the agreement, as he has promised to do? Will China invade Congo with its army, as the West has done when its economic interests are challenged?

But above all, Fortin put his finger on the real challenge the Congolese government tried to solve when signing the contract: the government want its mining production to take off, it wants to break the attitude of the global mining 'community' which sees Congo as its own private strategic reserve. And yes, Kinshasa has made a lot of concessions. But without the Congo-China agreement and without the mining contract review (the famous "revisitation"), many projects still would lie idle and the Congolese state would have even less mining revenues than it has now. So, Fortin says that the music of renegotiation must go on, not only for the Chinese agreement but also for other contracts.

Finally, the advocates of development theory will argue that it is not good to count on the mining sector to develop a country and that everything should begin from agriculture. My sympathy goes to father Kabila, who as the first post-Mobutu president made the first plan for the reconstruction of Congo without the interference of IMF, World Bank and the West. This plan was written by the brand new government members, appointed by president Kabila in June 1997, three months later their plan for the next three years was there.

For the first time in Congo's history, the Congolese themselves had planned for the reconstruction and economic development. This plan surely had weaknesses and could easily be criticized. But its merits were that it put the agricultural sector as the priority on the forefront. But did this plan receive support from abroad? It did not. Instead many in the West described Laurent Kabila as a dictator and an obstacle for progress.

And honestly, when Kabila was assassinated in 2001, I was ashamed to be Belgian, because in the Belgian media the assassination was applauded, like in January 1961 after the assassination of Patrice Lumumba. When Joseph Kabila took over as President in 2001, he learned his lesson, and looked for other ways to go forward and yet stay alive. Professor Marysse showed a graphic that proves how the reconstruction indeed began in 2001 and that growth took off again and continues to improve. It is not a spectacular improvement, but it is an improvement. So why all this hostility and sarcasm against the Congolese government and the Congo-China agreement?

Let’s study more to put the agreement with China into context and compare it with other contracts with Western societies; let’s follow how these agreements will evolve. Let’s listen to all of the Congolese people, not only to the opposition. And let’s support the Congolese people in the way they want to go forward, which might be different from the recipes of the West.

Tony Busselen

Member of the Congo group of intal (www.intal.be) and author of “Une histoire populaire du Congo”, Aden May 2010.

1/The original document has disappeared on the internet. But the same figures can be found in this document on page 27, Table 1.8.
2/Annual Rate of Return Calculations by Author:

1922 13
1923 43.9
1924 29.5
1925 41
1926 27.1
1927 26.7
1928 23.2
1929 33.5
1930 28.5
1931 2.8
1932 -5.8
1933 0.6
1934 4
1935 25.7
1936 39.7
1937 63.4
1938 28.7
1939 42.5
1940 39.4
1941 20.8
1942 19.1
1943 19.5
1944 20.5
1945 26.1
1946 31.5
1947 19.9
1948 23.8
1949 20.8
1950 40
1951 49
1952 43.8
1953 36.2
1954 35

19 comments:

  1. One of much needed open-minded views. I am impressed with how he compares with various variables, not just from one's own political persuasion. It is easy to criticize, but the one with perspectives of all angles seems lacking in most of what I see.

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  2. I just wonder how much leverage does DR Congo have? Mainstream media criticized this deal as if DR Congo was left no choice but to bow down to Chinese demand. Isn't the Congolese government in the driver's seat?

    wei

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  3. It looked to me as though the main demand that Congo bowed to was the IMF's, and that took a personal visit from DSK to Kinshasa.

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  4. On a white sheet you can write anything you want...

    For roughly a decade, I try to follow the daily news on Congo, and on the Chinese contract, I remember some other facts.
    It's one of those non-transparent "Lunch With The President" deals like the ones who are common in Nigeria and Angola, done by "Kabila's parallel government" (Jeune Afrique).

    I am not surprised by Mr. Bussels position because he is a true believer in everything China does and I do remember that he wrote a eulogy (which included a euphoric piece from the Kinshasa “Le Potentiel” newspaper) in his party newspaper "Solidair".
    This at a time when even nothing about the terms of the deal was announced. It is only under pressure from national and international politicians, interest groups and NGOs that they are gradually elucidated. For example, Global Witness, published this week the full text of an important addendum on their website.

    Most of Bussels ideas are correct but all are begging for a lot more elaboration, but here is not the place.
    Indeed, it seems to me that he rightfuly made a digit error correction of Marysse.
    So I also forgive Bussels that he pushes all of the decline of Congo in the shoes of Motubu ("les sept glorieuses" were not under Kabila), while eg the exploitation figures for Gecamines fel to less dan 10 or even 5 % of those under Mobutu under Kabila, father and son.
    But may I ask you to read the summary of the study of Marysse.
    http://users.polisci.wisc.edu/schatzberg/ps362/Marysse2009.pdf
    Or if that's too much, than just the few pages of conclusions (p 389-392).
    The title of the study is: "Win-win or unequal exchange?
    The case of the Sino-Congolese
    cooperation agreements ".
    His conclusion is that it is an unequal exchange.
    Can someone show me what argument there became invalid because of Mr. Bussels arguments?

    Bussels rightfullly critize neocolonial and imperialist practices of "the West",
    but he forgets to mention that the same "West" does everything to keep Kabila afloat.

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  5. Part II
    More than half of the annual state budget comes from the West (UK's largest bilateral donor), it pays the electoral operations, the UN troops into the East have taken over all state functions, included literally putting out fires, and with the U.S. on head, all kind of the Western military do, for the umpteenth time, try to transform the Congolese army into an army. And that is not easy when eg this Monday a colonel was arrested when he was smuggling 30 tons of cassiterite across the border ...

    Again, for China it is business as usual. It restores the roads and railways built by "the Belgians" for towing away the raw materials and it is a member of the coordination meeting of donors in Congo.
    It goes without saying that these old sharks don’t like the new kid on the block, but more and more you see the attitude of "if you can not beat them join them" and so a lot of Chinese/Western joint ventures are created.

    A reader's reaction requires who is in the driver's seat ...
    The contract speaks for itself: if a Western company wants to be active in China that’s OK, but through a JV in which China is holding the majority!
    In the contract there are sanctions foreseen if the Congo does not comply with the deal but there are none for if China fails to honour the deal.
    Interesting detail for "The Real Story": the Chinese ambassador in Kinshasa said that the guarantee was no problem, because the Congolese state could eventually back pay with farmland!
    It applies to quantities of raw materials that Gecamines had not even available. It was obliged to buy 25% of the copper reserves from Katanga Mining. And this to the satisfaction of Georges Forrest, of whom a portion of his assets were nationalized. But he took that with a big smile because he was assured it was the Congolese state that took all risks.
    In Congo, China and the West work hand in hand to privatize the state enterprises.
    Again, I’m not surprised and Tony Bussels gives the reason: there is a 40% return to be achieved!

    It is a hoax that the main problem is that Western companies have no interest in commodities exploitation in Congo. They are the biggest individual taxpayers, but a senate inquiry notes that the majority of mining revenues of the state disappears by corruption. Big scandal, but the next day it is business as usual for everyone.
    Is that different with the Chinese contract? Please have a look at the vaudeville of the finally paid "entrance fee" and how now, when Glencore made her IPO on the stock exchange of HK, it appears that once again two branches of Gécamines have gone up in smoke. Nothing seen or heard, but Dan Gertler is looking around the corner and the elections are not far away, and the West may well pay for its organization, but in some circles there is a need to have some money so that Kabila would be re-elected ....
    Paul Fortin said in Le Soir of March 2, 2008 that Gecamines had offers from everywhere.
    As a simple mind I ask myself; why did the Congolese government not offer an open tender?
    ”Le Potentiel” may sometimes sound euphoric, but unlike Bussels “Solidair” it remains open to legitimate questions:
    http://www.congoforum.be/fr/nieuwsdetail.asp?subitem=1&newsid=147561&Actualiteit=selected
    dan

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  6. @dan,

    If you could provide the source of the following statement, I will be appreciated:

    'Interesting detail for "The Real Story": the Chinese ambassador in Kinshasa said that the guarantee was no problem, because the Congolese state could eventually back pay with farmland!'

    wei

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  7. @ Wei

    Sure
    Colette Braeckman in Le mOnde Diplomatique septembre 2009
    It's in French but you can put it in Google Translate...

    Monsieur Wu Zexian, ambassadeur de Pékin à Kinshasa, ancien de l’Ecole nationale d’administration (ENA), n’hésite pas à se lancer dans la bagarre : « Nous n’avons demandé qu’une seule garantie : que l’Etat, au cas où les gisements existants ne permettraient pas de tenir les engagements, nous autorise à réaliser de nouvelles prospections, nous explique-t-il dans un français parfait. Les risques seraient pris par la banque d’Etat China Exim Bank, et par elle seule... »
    Et d’ajouter, laissant peut-être entrevoir son jeu : « De toute façon, même si les mines ne suffisent pas, le Congo a d’autres ressources à proposer dans ces accords de troc, de la terre par exemple... »
    Selon lui, la garantie de l’Etat, présentée comme un nouvel endettement, n’interviendrait donc qu’en troisième position.

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  8. @Dan,

    Thanks,

    wei

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  9. @Dan,

    After reading the whole article, I don't think the Chinese ambassador mean farmland, it could be the right to use land for industrial purpose for certain period, which is a common practice in China. The whole article can be found here:
    http://www.monde-diplomatique.fr/2009/09/BRAECKMAN/18100

    @Professor,

    Any idea whether IMF and DRC had reached deal to cancel its 7b euro debt? Thanks,

    wei

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  10. @Wei
    Voted on July 1th, 2010, announced the text day

    And no, I don't think so.
    First: at my knowledge there is no plan for an SEZ in Congo
    And secondly: Mrs Braeckman did add a curcial phrase: "Et d’ajouter, laissant peut-être entrevoir son jeu : "
    French is not my mothertongue but I can assure you that my French is good.
    In English it means something like:
    "He added, leaving perhaps a glimpse of his game:"
    But anyway, does it make any difference?

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  11. Yesterday's Economist had an article reveal the secrecy deal between Angola and China's "China International Fund" company. I looks like the darkest secrecy in these deals that have been kept:

    China International Fund
    The Queensway syndicate and the Africa trade
    http://www.economist.com/node/21525847

    wei

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  12. How many nations other than China have the luxury of excess capital reserves to exploit virgin-like world markets? Probably a few like the Norwegians, Saudis and Germans but none with the financial might of the Chinese.

    Europeans had their run for a few centuries and now it's the Chinese whom are poised to exploit Africa for the next century.

    Africans can't get their acts together to counter Chinese economic warfare domination throughout Africa. Result will be that within 50 years over 500 million Chinese living in and controlling all of sub-Sahara African assets. Lingua france in Africa going to be Catonese.

    Muammar Gaddafi had some good ideas. Trouble is he didn't know how to play the game.

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  13. Professor Marysse is certainly one of the few Belgian scholars who have thoroughly studied the Zairian and later the Congolese economy. He knows how deep the economy of this country has fallen under the neocolonial dictatorship of Mobutu. I understand and respect his anxiety for the future of the DRC. But some of his arguments [ed. summarized in this article] make me wonder if these feelings do not push him into exaggeration on different aspects of the Congo-China agreement.

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  14. This comment has been removed by the author.

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  15. I heard about the agreement between those countries. They should deal with any issues or arguments to avoid conflicts.

    green light laser

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  16. I am trying to find out some details of the mining contract discussed here, particularly whether or not it is a China Eximbank concessional loan as presented in Professor Brautigam's Dragon's Gift (p. 143).

    Perhaps someone has some information on this?

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  17. This is not a China Eximbank concessional ("foreign aid") loan. China Eximbank's concessional ("foreign aid") loans are all made at a low, fixed interest rate. This deal is financed by several different mechanisms, including, I believe, a zero-interest loan from the shareholding companies, and policy bank loans. But none of these are made at the low, fixed interest rate and grace period that characterize the concessional ("foreign aid") loan program operated as one of China Eximbank's many loan instruments.

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  18. Thanks for the article. It gives me lot of information for the final thesis I'm writing at the moment.

    But due to language barriers, I have a question: If you speak of concessional loans, you do mean the ones qualified as ODA (with a granting element of at least 25%), right?

    Thanks,
    Stefan

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  19. China doesn't use the same ODA definition used by the OECD (the grant element of 25%). But in practice, their concessional "foreign aid" loans do have at least a 25% grant element. The OECD also requires that a loan be concessional "in nature" i.e. that it be subsidized in some way by the government. In today's interest rate climate, where real interest rates are close to zero, that subsidy element is important in distinguishing official development assistance from other kinds of loans.

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