Thursday, December 3, 2009

Banro Teams With Kinshasa To Rob Congo

They won't begin opening the presents until Christmas 2011, but the shareholders of Canadian mining concern Banro received a whopping gift from the government of the Democratic Republic of Congo this year. It was final agreement allowing the company to develop gold mines worth some $13 billion in return for a token royalty of one percent of revenues. The agreement has to go down as one of the worst ever for the DRC, where the bankrupt government of a nation the size of Western Europe can't provide even basic services to its 65 million citizens.

Banro has been granted a 25 year license (with rights to renew for another 25 years) to develop four gold mining concessions on 2600 square kilometers of land along the Twangiza-Namoya gold belt in the South Kivu and Maniema provinces of the DRC. They also have the right to explore on another 3,100 sq km. The company crows that the four properties hold over 11 million ounces of gold, worth over $13 billion at current prices.

The most advanced of the four is Twangiza, a 1,164 sq km concession which Banro has owned under one agreement or another since 1996. The company expects to begin shipping gold from there in the fourth quarter of 2011. The other three concessions, Kanituga, Lagushwa,and Namoya, have been essentially inactive for over a decade.

The agreement with Joseph Kabila's government would be laughable if it weren't such a crime. The company is to pay a one percent royalty on revenues, which, if amortized over the 25 year term at current spot gold prices, will amount to a much-less-than-whopping $5 million per year. That's also assuming the company reports all revenue--a big assumption given the recent estimate by the DRC Senate that 80% of mineral exports from the eastern provinces of the country are never reported.

An additional four percent of net profits (after the company recoups its total investment) are to be funneled through Kinshasa for local development projects. The key term in the latter clause, of course, is "net profits" which will probably amount to zero if the company's accountants are even minimally competent.

What about taxes? Banro will pay none for a good long time. The agreement gives the company a ten-year tax holiday.

The final kicker is that the parastatal mining company Gecamines has no stake in the operation. Banro owns 100% of the equity in the concessions, so if the company decides to flip the deal to another operator, the DRC gets nothing.

So what does the DRC get in return? The company estimates that it has created approximately 1,300 jobs in the DRC in the last three years. It has also funded several schools, hospitals, water projects, and other humanitarian efforts. It is unclear how much of that is funded by royalties or other payments that are required under previous agreements.

I find it astounding that Kinshasa essentially gave away this lucrative mining concession. Many of the other deals I've examined have not been good ones--Freeport's Tenke project and the recent China copper-for-infrastructure deal come to mind--but the Banro concession is far beyond the pale. The company made a great deal for its shareholders at the expense of the people of the Congo. There are two parties to the contract, however, and the other one is the government of the DRC that agreed to it.

Dave Donelson, author of Heart of Diamonds a about in the

Wednesday, December 2, 2009

Sad Flip Side To China-Congo Deal

I've taken a very cautious attitude toward the $6 billion deal between China and the Democratic Republic of Congo. My hesitation to endorse it has been based on the economics of the deal, which calls for Chinese companies to build infrastructure in the DRC in return for large copper concessions. This isn't a gift--the DRC is paying for those projects by not collecting royalties for the copper the Chinese will be mining. The projects will also be completed by Chinese companies, so the profits from the road building, etc., will go not to Congolese companies for further circulation through the DRC economy, either. Those objections aside, however, there is a positive flip side to the structure of the deal.

It actually lies in the way the DRC is paying for the infrastructure projects. Under a normal mining concession, the company, Chinese or otherwise, would pay royalties and fees into the national treasury based on the amount of material the mines produce. They would also pay taxes (albeit usually very small amounts) based on their profits. This cash is a significant source of revenue for the government. It is also a significant temptation.

There is no guarantee that the funds would be used by the DRC government to build roads, hospitals, or schools. There are no assurances that the funds used for military payrolls don't end up in the off-shore bank accounts of corrupt officers. It is almost as likely that the money will go for buying votes in the next election or vacations on the French Riviera for bureaucrats as for training nurses or maintaining roads so farmers can get their goods to market.

In other words, by keeping the Congolese people's share of the mining revenues out of the hands of the government, the deal accomplishes the quite worthwhile goal of rebuilding some of the infrastructure that was destroyed in the war and subsequent on-going conflict. That approach doesn't say much for the ability of the Congolese to govern themselves, but it puts trains back on the tracks.

Dave Donelson, author of Heart of Diamonds a about in the

Tuesday, December 1, 2009

Nitty-Gritty Of Congo - China Reconstruction Deal

One of the more interesting chapters in Paul Collier's thought-provoking work, Wars, Guns, and Votes, discusses the economic effects of armed conflict and the nitty-gritty of post-conflict reconstruction. He talks not about the horrors of rape and the disruption of societal services, but the more mundane but no less disastrous destruction of infrastructure and, perhaps even more importantly, the collapse of industries like construction, which he explains is one of the hardest hit.

Collier points out that while aid agencies rush about setting up conferences on reconciliation and lining up financing for big construction projects in the post-conflict period, they overlook the fact that the civil conflict has most likely decimated the skilled labor force. In a normal economy, the construction industry is a key provider of jobs for unskilled youths who learn from the older workers who have been on the job for a while. When armed conflict disrupts that educational process, the capabilities of the labor force atrophies, creating an impediment to development.

The shortage of skilled labor creates a bottleneck that pushes up construction prices, further undermining government and donor efforts to rebuild the country. Many countries turn to outside contractors like the Chinese to rebuild their infrastructure. As Collier says:

"...the Chinese face no bottlenecks because they routinely bring in absolutely everything, including the entire workforce. But resorting to the Chinese throws out the main short-term benefit from the recovery of the construction sector, which is to generate jobs for young men"
Without those jobs, the young men don't learn the skills necessary to build their country over the long term. The lack of jobs also makes them more inclined to look for employment with rebel groups and armed gangs preying on the civilian population, thus further undermining the possibilities of peace during reconstruction. Collier continues:
"Post-conflict situations need squads of bricklayers, plumbers, welders, and so forth, who set about training young men. Unfortunately, it is too mundane for the development agencies to organize it. We need Bricklayers Without Borders."
Such drawbacks aren't necessarily inherent in development-for-minerals deals with the Chinese like the $6 billion deal the Democratic Republic of Congo is in the process of negotiating. If the deal follows the patterns of other Chinese projects in Africa, however, it is a likely side effect.

That is not to say that there are no advantages to the controversial DRC-China pact. I'll discuss one of the biggest tomorrow.

Dave Donelson, author of Heart of Diamonds a about in the