The world's biggest opportunity or an institutional sinkhole?
Consultants are paid to be more negative than bankers. Which might explain the difference in opinion between Frontier Advisory's [CEO] Martyn Davies and Standard Bank's [China CEO] Craig Bond when talking about the Democractic Republic of Congo (DRC). “Any mining engineer or geologist that's been there says that if they'd known about the place 20 years ago they would have gone in and staked their claim,” says Bond. But Davies takes a different tact, “The DRC is an institutional sinkhole, [The President of the DRC, Joseph] Kabila is more the president of Kinshasa [DRC's capital] than the country as a whole.”
Nevertheless, what both men agree upon is that the DRC is an underdeveloped country with an amazing amount of mineral wealth beneath the surface, and in the words of Bond, “China is the only powerhouse that has the means and the balls to go in there.”
China's first large foray hit a snag right out of the gate though. In exchange for preferential mining rights over 6.8 million tons of copper and 420,000 tons of cobalt, the Chinese government offered the DRC, a USD 9.5 billion low-interest loan along with an agreement to build 8500km of roads and 3200km of rails, 30 hospitals, more than 100 health centers and two universities, as well as “countless” primary and secondary schools. Though the deal at first ran against the ire of the IMF, which had previously arranged debt forgiveness for the Congo, most analysts couldn't imagine a better deal for the country. The debt would be paid off purely through the profits of a newly founded USD 3 billion mining joint venture between the Congolese and Chinese states, and the JV would in turn begin the slow process of rebuilding the mining infrastructure. Legally Congolese citizens must make up 80% of the workforce on all projects.
Since then though, the financial crisis has come, and mineral prices have crashed, making it questionable whether the deal, as structured, can be repaid by the Congolese government. “On the ground, sentiment towards China has definitely soured of late due to China delaying/cancelling projects and some poor business practices by Chinese entrepreneurs,” says Bond. “My sense is that the relationship is still strong, and if China makes the right investments in the years ahead, then any ill will that has been created will be easily resolved.”
Bond openly refers to the area as a “really difficult operating environment,” but is optimistic that things are improving. Standard Bank has two universal banking centers, one in Kinshasa in the west, and one in the southern region where much of the mining is taking place. These two areas are the most peaceful parts of the country, with the northern and eastern borders still seeing occasional guerrilla battles, and central Congo suffering from disease and starvation. Between 2003, when the civil war officially ended, and 2008 the country averaged 45,000 deaths per month, half of which were children younger than five. The Congo is third to last on the human development index, only beaten by its northern neighbors Central African Republic, and Sierra Leone, also recovering from Civil War - though Zimbabwe has not provided information needed by compilers of the index since 2005.
More than anything, the country needs the infrastructure to get food and health supplies to its people. But its annual budget is only USD 1.3 billion, less than one seventh of the amount of money China is giving it to build, what amounts to a rather small amount of infrastructure for a country the size of Western Europe. The Congo is only spending USD 15 a person on health coverage, less than half of what is needed to pay for basics like immunizations and malaria-fighting mosquito nets. It has nowhere near the resources to build over 100 new clinics. “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,” said Kabila in a recent speech.
But with prices falling, and continuing violence in the east of the country, it is in no way certain that the deal will turn out optimal for the Chinese. Many privately run Chinese firms in the Congo have gone out of business as the commodities boom ended, and there have been reports of Chinese citizens even being murdered. “I think a place like the DRC is pretty high risk, but China has gotten into even more difficult places,” says Bond. “Angola was just an absolute nightmare when the Chinese went in, but they have prospered there.
“But if you look at all the countries with [good governments and good Chinese relations], like Tanzania, Uganda and the DRC, we see all these schools going up, we see new airports, we see new railway lines going to markets so farmers can bring their crops. And these are all being built by Chinese contractors.”
