Published: February 17, 2009
Western donors are putting pressure on the Democratic Republic of Congo (DRC) to renegotiate the terms of the US$9bn minerals-for-infrastructure contract signed with China last year, according to widespread reports in early February. Led by the Paris Club of creditors and the IMF, donors have raised objections to specific provisions in the deal, which has already begun to accumulate new external debt obligations for the cash-strapped DRC as it strives to reach the completion point in the Heavily Indebted Poor Countries (HIPC) initiative.
Signed in January 2008, the China-Congo deal provided for a massive US$6bn of Chinese investment in roads, railways, schools and clinics and a further US$3bn in the rehabilitation of the mining sector, via a joint venture with Congolese state copper miner Gécamines that will develop the large Mashamba and Dikuluwe copper and cobalt mines.
While the deal gave the DRC access to capital on a scale it could not receive anywhere else - and which the IMF says could return mine production to the high levels of the 1980s, helping to boost GDP growth to double digits – it came with a costly caveat. The majority Chinese partners in the Sicomines JV - Sinohydro Corp and China Railway Engineering Corp - have received sovereign guarantees that the Congolese state will underwrite any difference that might emerge between the cost of infrastructure and revenues from the mines.
This aspect of the deal is seen by western donors as making China a privileged creditor, breaching covenants that sit behind potential HIPC debt relief amounting to over US$7bn for the DRC, which is saddled with some US$11bn of external debt stored up from the days of president Mobutu Sese Seko. To obtain debt relief, Kinshasa has specifically committed to ensuring that fresh debts will not further complicate the sustainability of its debt.
“It is not clear which bodies or countries are driving this, but technically, the view from the donors seems correct,” says a representative of Omni Bridgeway, the Dutch distressed debt advisory firm.
Chinese ripples
A Chinese view of the situation was provided by Wu Zexian, China’s ambassador to the DRC. “They [western institutions] are wrong to ask Congo to remove the state guarantee. That is blackmail,” he said, quoted on February 11 by China Digital Times. He described the DRC as “a poor country that needs to develop”, and asked: “Why force the country to modify the clause? We cannot accept that. It’s discriminatory.”
When the Sino-Congolese deal was first struck, China’s appetite for minerals was insatiable, and copper prices hovered at US$10,000 per ton. But by early February the price had fallen to around US$3,000 per ton, far below an assumed break-even copper price of between US$4,500 and $5,500 that underpins the contract. In exchange for its $9bn, China obtained a concession to mine approximately 422,000 tons of cobalt and 10 million tons of copper over a 20-year period, but there are reportedly clauses in the contract – on which much information is still missing – whereby the DRC has guaranteed to repay China if and when the potential value of the mined copper and cobalt falls below a set floor.
“The price has fallen below the reported break-even level, and so a sovereign liability for the DRC under the guarantees has apparently been created, which could represent a breach of the underlying covenants of the HIPC debt forgiveness process,” explains Omni Bridgeway.
The representative adds: “There have been underlying concerns among donors for some time on the effect of soft loans from China to African countries that have received debt forgiveness, but this is the first case where the ramifications have become very clear.”
The HIPC process also stipulates that debt must be fully transparent, contrasting starkly with the DRC’s US$9bn deal and other billions of dollars worth of Chinese loans, investments and aid into Angola and other African markets, all of which have come unfettered by western-style demands for good governance. “There is too much information missing in order to make even a rough calculation of what Congo’s debt would be under the contract,” said one London-based analyst.
“I suspect nobody knows the terms except the bilaterals involved,” added Stuart Culverhouse, chief economist at Exotix.
The HIPC’s completion point - at which stage the DRC is expected to also benefit from additional multilateral, Paris and London Club debt write-offs – was originally scheduled for end-2008. “These issues mean that there will be some serious concern over DRC achieving its HIPC completion point, but if the development community holds back, the country will be in great difficulty,” the analyst said.
For commercial creditors that hold DRC debt, a particular focus has been Gécamines, which has some trade-related debt that is heavily in default. “The outlook is even worse now for investors in Congolese defaulted debt,” said the London analyst.