Barrick Gold in the Democratic Republic of Congo
Barrick Gold in the Democratic Republic of Congo
Introductory Article
Team Leader: Matthew Tai
Analysts: Sebastian Chavez, Valere Gaspard, Kristian Hockett, Hunter Knifton, Olivia Pomajba, Bridget Collrin
Overview
The Democratic Republic of Congo (DRC) has immense potential but remains a risky investment location. Most significantly, the DRC is considered to have among the largest endowments of minerals in Africa, but political, social and economic conditions remain challenging with major hurdles of pervasive poverty, political turmoil, security issues, vast land area and inadequate infrastructure. As a result, the DRC is recognised as one of the most difficult places in which to do business in the world, ranking 182 of 190 countries in the 2018 World Bank Doing Business Report.[1] Therefore, heightened levels of political risk will have mixed implications for various parties including foreign corporations looking to invest in the country and inevitably, the people of DRC.
Political Context
The DRC has been marred by continuous periods of intense conflict and political instability since it gained its independence in 1960, with decades of brutal colonialism laying the foundation for an extremely weak early government that faced civil war, military coup and ethnic strife.[2] Today, the country continues to be a site of armed conflict between various national and rebel groups, particularly along its eastern border. The current president, Joseph Kabila, has been in power since taking over from his father who was assassinated in 2001, and was re-elected in 2006 in the DRC’s first democratic elections since 1960.[3] While the elections were widely regarded by international observers to be fair and free from fraud, and raised hopes that peace and stability would be restored, Kabila’s tenure has been marked by high levels of corruption, increased poverty and violent citizen suppression. [4],[5] Furthermore, subsequent elections in 2011, which resulted in the re-election of Kabila, were fraught with irregularities and fraud, including the allegation that over 1 million votes went missing.[6] The DRC’s constitution limits presidents to a maximum of two consecutive terms in office, though there was much speculation about whether or not Kabila would respect this limit. In fact, Kabila’s second term was set to end in December 2016, but rulings made by the country’s electoral commission and constitutional court, which many believe have been infiltrated by Kabila and his political supporters, delayed the elections by two years and allowed Kabila to stay in power until the next elections are held in December 2018.[7]
Risk to Business
The DRC’s potential to benefit from the industrial sector greatly relies on a positive political climate. However, corruption has plagued the DRC which has impeded the country’s ability to exploit its natural resources as a driver for economic growth.[8] Under Kabila, the DRC is ranked as the 161st most corrupt country out of the 180 countries studied by Transparency International in its Corruption Index.[9] The extreme levels of corruption in the country are particularly relevant for the mining industry, which accounts for 80% of the government’s earnings.[10] The presence of unfair contracts and weak regulatory standards within the mining industry does not bode well for companies who wish to initiate exploration activities in the DRC, and have further disincentivized private investment. Mining rights for profitable deposits are almost always awarded to state-owned enterprises rife with corruption, which then enter into joint ventures with international companies under secretive and obscure agreements that undermine the country’s mining and anti-corruption regulations.[11] Additionally, the government recently enacted legislation under its Mining Code to raise mining taxes and arbitrarily establish certain “strategic minerals”, including gold, for which it will now charge a 10% royalty rate.[12] Furthermore, the prevalence of competing interests in the mining sector makes the DRC extremely unstable. Control over natural resources has fueled rivalries between various ethnic groups, government, rebels, and foreign militias, causing the cost of investment to increase unnecessarily since companies are often forced to hire private security services to ensure the protection of mining sites.[13] For example, there has been an increasing militarization of mining in the DRC, with rebel militias setting up illegal mines (commonly referred to as “artisanal mines”) along the country’s eastern border to fuel their operations.[14]
Ultimately, observers have long documented the corrupt and predatory management of natural resources in the DRC and note systemic inefficiency, inability and unwillingness to fight corruption in the country. The DRC has an abundance of exploitable resources, but without a reliable government authority to stabilize the mining sector, the extent to which the industry can drive economic growth remains uncertain. Thus, mining companies operating or looking to operate in the vastly resource-wealthy DRC must be prepared to deal with an extremely corrupt political system, as well as with the involvement of armed militias in the industry, which combine to create a massively uncertain and unpredictable business panorama.
Economic Overview
The HDI index for Democratic Republic of the Congo (DRC) is 0.457,[15] placing them 176th in the world. The life expectancy in DRC is 60 years, the expected years of schooling is 9.8 years, and the gross national income per capita is $796.[16] All of these rank outside of the top 100 countries in the world. Furthermore, 71% of the country’s population lives below the poverty line.[17]
Nevertheless, DRC’s economy and population has shown some positive trends. Life expectancy has increased by nearly 20 years since 1960 and the economy has grown significantly in recent years.[18] Furthermore, 2016 GDP of DRC was $34.99B, representing a 643% increase over the 20-year low of $4.71B in 1999.[19] With over 80 million hectares of arable land and over 1,100 minerals and precious metals, the DRC has the potential for a robust and sustainable economy if it can overcome it’s political challenges.
Citations
[1] “Doing Business 2018: Reforming to Create Jobs.” The World Bank Group. http://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2018-Full-Report.pdf
[2] ACAPS. “DRC.” Country Profile. Accessed November 9, 2018. https://www.acaps.org/country/drc/country-profile
[3] Central Intelligence Agency (CIA). “Congo, Democratic Republic of.” The World Factbook. Accessed November 9, 2018. https://www.cia.gov/library/publications/the-world-factbook/geos/cg.html
[4] United Nations (UN). “Successful Democratic Republic of Congo Elections Will Mark Beginning, not End, of Long Process of Recovery, Security Council Told.” UN Security Council. July 6, 2006. https://www.un.org/press/en/2006/sc8770.doc.htm
[5] Mukum, John. “What is at stake for the DRC presidential election?” Brookings Institute. August 29, 2018. https://www.brookings.edu/blog/africa-in-focus/2018/08/29/what-is-at-stake-for-the-drc-presidential-election/
[6] Ibid.
[7] Mwabaru, Amedee. “Top Congo court says Kabila would stay in power if election delayed.” Reuters. May 11, 2016. https://www.reuters.com/article/us-congodemocratic-politics-idUSKCN0Y21PL?rpc=401
[8] Bekoe, Dorina and Christina Parajon. “Developing and Managing Congo’s Natural Resources.” United States Institute of Peace (USIP). Accessed November 9, 2018. https://www.usip.org/publications/2007/07/developing-and-managing-congos-natural-resources
[9] Transparency International. “Democratic Republic of the Congo.” Corruption by Country. Accessed November 9, 2018. https://www.transparency.org/country/COD
[10] Schwartz, Michael. “DRC Cobalt: a potential achilles heel of electric vehicles.” Global Risk Insights. October 5, 2018. https://globalriskinsights.com/2018/10/drc-cobalt-a-potential-achilles-heel-of-electric-vehicles/
[11] Caripis, Lisa. “Combatting Corruption in Mining Approvals: assessing the risks in 18 resource-rich countries.” Transparency International. November 2017.
[12] Clowes, William. “Congo Mines Minister Sees Strategic Metals Decision ‘Very Soon’.” Bloomberg. September 14, 2018. https://www.bloomberg.com/news/articles/2018-09-14/congo-mines-minister-sees-strategic-metals-decision-very-soon
[13] Bekoe, Dorina and Christina Parajon.
[14] Orlando, Alissa. “Foreign enterprises address DRC conflict mineral trade.” Global Risk Insights. May 27, 2013. https://globalriskinsights.com/2013/05/foreign-enterprises-address-drc-conflict-mineral-trade/
[15] United Nations Development Programme. “Congo (democratic Republic of the).” Human Development Reports. Accessed November 9, 2018. http://hdr.undp.org/en/countries/profiles/COD
[16] Ibid.
[17] Central Intelligence Agency (CIA).
[18] https://data.worldbank.org/country/congo-dem-rep
[19] Ibid.
