6 September 2017

Congo-Kinshasa: Resource-Rich DRC Losing U.S.$1.3 Billion Every Year in Unpaid Taxes

Photo: David Hecht/IRIN
A wealthy dealer examines rough diamonds in his shop (file photo).

The Democratic Republic of Congo is losing up to $1.3 billion in revenue each year due to a failure by public bodies, tax agencies and the state mining firm Gécamines to remit levies, and the pillage of revenue in suspicious deals.

The DRC tops the list of African countries whose resources are being plundered.

Zimbabwe, Mauritania, Nigeria, Equatorial Guinea, Sudan and Eritrea have also featured in the complex corruption web in the production and sale of commercial crude oil, natural gas and minerals amounting to trillions of dollars in revenue.

Investigations by London-based lobby Global Witness have found more than $750 million of DRC's revenue earned from mining went missing between 2013 and 2015, as the Kinshasa administration struggled with providing public services to the people.

Corruption and mismanagement

Global Witness said the state-owned mining company and tax agencies held back from the Congolese national Treasury $149 million in 2013, $314 million in 2014 and $291 million in 2015.

Corruption and mismanagement of revenue agencies and Gécamines are leaching over a fifth of proceeds from the national budget as President Joseph Kabila clings to power at a time of political unrest, Global Witness notes.

DRC's minerals such as gold and cobalt attract huge investments from foreign firms due to low production costs. The country is Africa's biggest copper producer. It also produces 60 per cent of the world's cobalt.

Global Witness senior campaigner Pete Jones said in report titled Regime Cash Machine that much more of the money from the mining sector needs to reach the Treasury to improve DRC's public spending priorities including education, health, transport and infrastructure.

DRC is wracked by political violence and unrest. A key cause of discontent with President Kabila's regime is the chronic lack of funding of basic services such as schools, hospitals and roads.

Mr Jones said that an analysis of Extractive Industries Transparency Initiative latest data points to the need for transparency and accountability from the mining sector to tax agencies if the DRC is to avoid sliding into conflict and chaos.

"Mining revenues should be helping to lift people out of poverty; instead huge sums are siphoned away from public coffers into unaccountable agencies headed by people with ties to the political elite," he said.

Gécamines financial dealings are a mystery as it does not publish any audited accounts, income, expenditure, debt repayments or whether any profit is paid to the state as the sole shareholder.

"Gécamines is practically a black hole. A black hole where you do not know who is doing what, where the money goes, which deal is underway, under what conditions and so on," said civil society activist Cyrille Kabamba.

Decades of looting

At its peak in the 1980s, Gécamines contributed 43 per cent of DRC's budget revenue, with an annual output of about 500,000 tonnes of copper. It collapsed in the 1990s after decades of looting. In 2010, DRC transformed Gécamines to a commercial operation owned by the state.

The 2017 Resource Governance Index (RGI) has assessed 81 countries in 89 sector-specific areas of 82 per cent of the world's oil producers, 78 per cent gas and a significant portion of minerals including 72 per cent of all copper.

The RGI of Natural Resource Governance Institute (NRGI) of London shows promise in some developing countries but raises the alarm over sovereign wealth funds and citizens' freedom to hold governments to account.

"We believe that natural resources must be used, first and foremost, to foster the economic and social development of countries," said the chairman of NRGI's board of directors, Ernesto Zedillo.

He said effective governance of oil, gas and mining sectors is not an insurmountable challenge as NRGI's index provides many examples of developing countries defying expectations and stereotypes.

Burkina Faso among low-income countries ranks high at 20th overall position in the mining sector. Eritrea exhibits worst resource governance due to a failing grade. Ghana ranks 13th globally in resource governance. The country is preceded by Botswana, Burkina Faso and South Africa.

"Good governance of extractive industries is a fundamental step out of poverty for the 1.8 billion poor citizens living in the 81 countries we assessed," said NRGI chief executive Daniel Kaufmann.

Global Witness analyses of Extractive Industries Transparency Initiative (EITI) latest data reveals over $750 million private mining firms paid to tax agencies and Gécamines from 2013 to 2015 never reached treasury.

Jones said analyses of EITI's latest data anchors need for transparency and accountability from mining sector to tax agencies if Democratic Republic of Congo is to avoid backsliding into conflict and chaos.

"Mining revenues should be helping to lift people out of poverty, but instead huge sums are siphoned away from public purse into unaccountable agencies headed by people with ties to the political elites," he said.

EITI audits after collating money mining firms pay and government receipts.

Poor countries

DRC is one of Africa's biggest countries and also among the poorest. It is ranked 176 out of 188 countries in United Nations Human Development Report with 77 per cent of the population surviving on less than $2 daily.

"Up to $10 billion worth of copper and cobalt is extracted and exported from every year, yet only 6 per cent of this revenue is reaching the national budget," said Regime Cash Machine report of Global Witness.

Foreign mining firms annually pay over $1 billion among others as taxes and royalties in DRC. An obscure law allows agencies to keep part of fines levied leading to fabricated fines in an effort to increase funds that are kept.

State owned mining firms with Gécamines as most important ought to use licences, assets and participate in joint ventures to make money for DRC. Tax agencies annually fail to remit revenues of over $50 million to treasury.

Global Witness Campaign Leader Mr Nat Dyer said DRC's law allows tax agencies to hold back portion of mining revenues for own use and opacity around withheld funds makes the system highly susceptible to corruption.

"The tax agencies are also permitted to issue penalties to mining companies for tax violations and keep a proportion which can be enormous amounts. This encourages "predatory behaviour" and corruption," he said.

DRC's constitution states every Congolese person has the right to enjoy benefits of the country's national wealth, and the state has a duty to redistribute wealth equitably and guarantee the right to development.

"Those are empty words. Years of mismanagement and corruption in Gécamines, with fragmented tax system, means system is open to abuse by political elites seeking to extract cash from mining sector," said Mr Dyer.

Mining sector revenues

DRC shares a copperbelt with Zambia which manages to about capture 88 per cent of mining sector revenues, almost 30 percentage points more than Congo's 2014 performance. Zambia depends on copper as main export.

According to EITI, Gécamines contributed around $15 million in taxes to the government out of $265 million mining income in 2014. It paid about $21.8 million out of the reported revenues of $249.5 million in 2015.

Gécamines in 1980s at peak contributed 43 per cent of DRC's budget revenues with output annual of about 500,000 tonnes of copper. It collapsed in the 1990s after decades of looting by former President Mobutu Sese Seko.

DRC in 2010 transformed Gécamines to a "commercial" operation owned by the state. It is a junior partner in over 20 copper and cobalt projects operated by European and Chinese firms among others.

Copper's price in the global market slumped in 2015 to under $5,000 per ton forcing DRC's government in 2016 to cut budget by 22 per cent affecting spending on severely lacking roads and other basic infrastructure.

Global Witness said copper prices rallied in late 2016 and early 2017 to about $6,000 per ton by July this year. DRC's copper and cobalt output boomed due to a rise of over 20 per cent in the first quarter of 2017.

Cobalt prices rose 70 per cent in first half of 2017 on back of high demand for electric car batteries. Gécamines is saddled with debts of over $1 billion and employees in the past have gone for months without salaries.

RGI covers governance of exploration, production, protecting environment, revenue collection and state enterprises. National budget, sub-national revenue sharing and sovereign wealth funds are key aspects of index.

Resource Governance Index third arm of enabling environment covers voice and accountability, government effectiveness, regulatory quality, rule of law, corruption control, political stability and absence of violence.

Laws

A score of 75 and above is good. It denotes a country has established laws and practices likely to result in extractive resource wealth benefiting the citizens although there may be some costs to society.

The score of 60 to 74 shows a country has strong governance procedures and practices but some areas need improvement. It is reasonably likely extractive resource benefits citizens but there may be costs to society.

A score of 45 to 59 is weak denoting a country has a mix of strong and problematic areas of governance. Results indicate resource extraction can help society but it is likely that the eventual benefits are weak.

The score of 30 to 44 is poor as a country has established some minimal procedures and practices to govern resources but most elements necessary to ensure society benefits are missing.

A score of 30 and below is regarded as failing. It denotes a country has almost no governance framework to ensure resource extraction benefits society. It is highly likely benefits flow only to some companies and elites.

Sixty six countries were found to be weak, poor or failing in their governance of extractive industries. Less than 20 per cent of the 81 countries assessed achieved good or satisfactory overall ratings.

Middle income countries like Colombia, Indonesia, Ghana, Mongolia, Peru, Mexico and Botswana have good or satisfactory overall ratings. Norway has the best governance of natural resources, closely followed by Chile, United Kingdom and Canada in the top-most good performance category.

"Good governance of extractive industries is a fundamental step out of poverty for the 1.8 billion poor citizens living in the 81 countries we assessed in RGI," said NRGI Chief Executive Officer Mr Daniel Kaufmann.

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