29th October 2021 - Approximate reading time, 8 minutes.
Mining in the Democratic Republic of Congo: The "Infamous" Sicomines Deal and the Dangers of Chinese Dominance
Due to its immense geographical size, seemingly boundless natural resources and importance from a geo-political perspective, the Democratic Republic of Congo (DRC) holds extraordinary potential on several levels. Located essentially at Africa's center, the DRC ranks as the biggest sub - Saharan country in population and second largest in the continent as a whole. The country enjoys unparalleled mineral resources, including copper, cobalt (DRC is presently the world's preeminent extractor of cobalt), gold, lithium, tin diamonds and considerably more. Of these, copper and lithium are globally classified as strategic metals because of their outsized importance in high-capacity battery production and other cutting-edge technologies. Many of the mentioned minerals are still largely under exploited.
Despite its abundant natural wealth, the country suffers from substandard institutional governance, intractable militant violence, tribal and religious conflicts, poor infrastructure, widespread corruption and insufficient human capacity, seriously hindering socio-economic progress.
Mining is the life blood of the DRC economy, directly accounting for nearly 40 percent of its GDP; not including the substantial impact it has on attendant industries such as chemicals, energy and heavy construction. The country's mining sector is largely controlled by foreign concerns, with Chinese entities predominant. Swiss, Australian and South African miners are also significant participants.
Sino-Congolese relations were initiated in the 1960s, motivated primarily by Chinese Communist Party support for Congo's efforts to remedy the deleterious impact of many decades of Belgian colonial rule and economic imperialism. Chinese influence increased significantly in 2008 when a USD 6.2 billion mining agreement was executed. At the time, the DRC was in desperate need of financing, having just emerged from decades of war and dictatorship. In essence, the arrangement provided mineral rights to Beijing in exchange for major investments in DRC infrastructure. Beijing framed the agreement as a mutually beneficial association, devoid of political conditions, where China gained access to much needed minerals for its core industries and the DRC secured funding to boost a severely weak economy. The venture was named Sino Congolaise des Mines (Sicomines) and afforded the Chinese a majority holding (68 percent).
The Sicomines contract, which has been renegotiated various times since inception, stipulated that a large portion of mining net revenue would be dedicated to investments in the DRC's most critical development projects. State-owned Chinese companies Sinohydro Corp and the China Railway Group Limited were tasked with, among other things, construction of roads, railways and hospitals, all financed by profits generated from the Sicomines joint venture. Specifically, the deal promised USD 3 billion worth of Chinese investments in a copper - cobalt mine and another USD 3 billion was to be directed exclusively towards supporting infrastructure works. Side terms included the building of a USD 600 billion hydro energy plant (known as Busanga), dedicated to providing power for Sicomines operations. The project in total was exempted from the nation's mining code along with most taxation until the entirety of its mining loans were repaid. As a result, the DRC has thus far seen little income from the agreement. Also of note, the contract called for all infrastructure programs to be closed tender.
As of this writing, the Chinese have reportedly disbursed far less than the agreed infrastructure amount (approximately just one third) and, according to the DRC finance ministry, Sicomines has been provided with barely three-quarters of the investment total committed by Beijing back in 2008 (Bloomberg - Congo Reviews $6.2 Billion China Mining Deal as Criticism Grows, 28th September 2021).
A draft analysis of the Sicomines contract from the Extractive Industries Transparency Initiative (EITI) - EITI traces oil and mining revenue streams in over fifty countries - and accessed by several global news agencies describes the 2008 agreement as "unconscionable" and that it needs serious renegotiation. Inside information suggests EITI will formally recommend to the DRC that, at minimum, a secretly signed 2017 amendment accelerating payments to Chinese mining investors while slowing infrastructure investment be cancelled. Of particular importance, the EITI preliminary evaluation stresses that, although the DRC provides the majority of the joint venture's assets (mining deposits) it holds only 32 percent of its shares. Further, a feasibility study commandeered by Beijing "dramatically undervalued" mineral worth. The final report, which concentrates on the most critical elements of the Sicomines deal, is scheduled for release end October or early November. Although the document has no legal consequences, its presumed central conclusions may actually facilitate Congolese efforts to secure more equitable contract terms from Chinese mining investors in future (Reuters - Congo's $6 Billion China Mining Deal 'Unconscionable', says Draft Report. 8th October 2021).
Scrutiny surrounding the above mentioned 2017 amendment also pinpointed a "phantom" private company, Congo Management Sarl, that holds a 15 percent stake in the Busanga / Sicomines hydropower project. Congo Management is directed by Moise Ekanga, who currently serves as a senior member of the committee supervising the Sicomines contract. Ekanga is a close ally of the former DRC president, Josef Kabila, known for an administration that was stained by endemic corruption and human rights abuses.
Beyond the extraordinary financial gain disparity between the Sicomines partners, projections on positive outcomes of the deal were founded on the ill-conceived notion that the organizationally challenged DRC government had the basic competency to consolidate and efficiently manage Chinese project investment streams. Unfortunately, Sicomines was founded solely on financial terms, absent consideration for potential benefits to the Congolese population, scheduling delays, construction setbacks, increased costs due to DRC's feeble infrastructure and (predictable) socio-political instability. Furthermore, the Chinese failed to properly follow best practice protocols. Perhaps the most egregious example of this deficiency is that quality control responsibilities were assigned to the same Chinese corporations (Sinohydro and China Railway Engineering Company) charged with project execution, and this resulted in poorly designed analyses of Sicomines' potential environmental and social impacts (Global Business Reports - The Chinese Power Grab in he DRC. 28th June 2019). All this served to further exacerbate the structural unfairness of an agreement that was glaringly flawed from inception.
Although much of the subject matter relating to Chinese exploitative business practices lies beyond the analytical scope of this short article, it should be said that the Sicomines affair represents just one manifestation of systemic unethical Chinese actions in the DRC and elsewhere in the developing / less developed world. For instance, the Congolese mining sector has long been plagued by scandals involving child labor, environmental damage and considerably more, much of it attributable to a combination of lax management and legal / regulatory circumvention on the part of mineral extraction firms from China (at times facilitated, at least indirectly, by governmental agencies that are reluctant to prosecute Chinese companies due to economic dependency issues).
Chinese cobalt mining activities in the DRC reveal the extent to which social norms and host-nation legal codes are essentially ignored by Beijing. Over half of the world's cobalt production originates from the DRC and a good number of the mineral's extraction operations are run by small-scale "artisanal" miners. Mainly, these are extra-legal groups composed of nefarious individuals who recruit desperately poor young children and women to dig out cobalt in trenches and open-pit mines, working long hours for little pay under seriously dangerous conditions.
Cobalt mining in the DRC is dominated by the Chinese and, in recent years, their activities have been heavily investigated by international relief agencies and a variety of news networks. Although the great majority of China's DRC cobalt mining is large-scale, it is reportedly responsible for nearly all artisanal purchases in the country, direct and indirect. International relief agencies have identified Congo Dongfang Mining (CDM), owned by Chinese multinational Huayou, as the most active illicit cobalt buyer. Although Huayou claims that it no longer accepts cobalt produced by child labor, NGOs familiar with child mining in the DRC are incredulous, indicating that evidence continues to suggest otherwise (Wilson Center - The DRC Mining Industry: Child Labor and Formalization of Small-scale Mining. 1st September 2021, CBS News - Children Mining Cobalt in Democratic Republic of Congo. 5th March 2018).
As has been outlined, the troubling conduct of the Chinese with respect to Sicomines is part of a larger pattern that has come to surface in nearly all developing economies where they hold substantial investments. Not only are we seeing acute contractual inequities, like what was unearthed in the Sicomines deal, but also things such as sovereign loan agreements containing draconian default elements and unorthodox asset seizure and accelerated payment clauses (please refer to our earlier China article below, dated 6th August 2021). Moreover, disregard for environmental regulations, legal procedure and lack of concern with respect to extreme human abuse in the host-country industries they operate in is commonplace. Generally, Western Sino experts believe what has thus far been revealed represents only the tip of the iceberg when it comes to Chinese misbehavior in pioneer and frontier market economies.
WesBruin Capital 29th October 2021