Cablegate: Prc Engagement in the Drc

DE RUEHKI #0426/01 1341554
R 131554Z MAY 08




E.O. 12958: N/A
SUBJECT: PRC Engagement in the DRC

REF: A. STATE 41697
B. 06 KINSHASA 1731
C. 07 KINSHASA 1133

1. (SBU) Summary: The story of Chinese (PRC) involvement in the
Democratic Republic of Congo (DRC), dating to the 1970's when the
DRC was barely into its second decade as an independent nation, is
long and complex. Since the early 2000's, China has ramped up its
presence and exchanges with the DRC, mostly on the basis of trade in
the Congo's natural resource sector. What was earlier an informal,
somewhat disorganized collection of Chinese businesses, most
operating in the Katanga Province of southern DRC, has begun to be
formalized over the past year, beginning with a large, multi-billion
dollar agreement between three large Chinese parastatals and the
GDRC, signed in September 2007. In early 2008 some of the
agreement's details were made public and it was confirmed that this
is an exchange of millions of tons of copper and cobalt for
infrastructure projects, to be carried out by Chinese firms. Many
other Chinese investments and projects are being considered or are
already in the works, including road building, hydroelectric
installations, a deepwater port, and huge bio-diesel plantations.
There are obvious benefits and drawbacks to all of these activities,
but it is difficult at this time, due mainly to the lack of
transparency surrounding these potential deals, to determine whether
the results for the DRC will be net positive or negative. There is
little or no coordination/cooperation between the U.S. and China
missions in the DRC, and future bilateral actions will need to be
examined on a case-by-case, sector-by-sector basis. End summary.

The DRC: A History of Chinese Involvement

2. (SBU) This is a response to STATE 41697 (ref A). Chinese
involvement in the DRC dates to the Mobutu era (1965-97), when
large, highly visible projects were the rule. The Stade des Martyrs
(Martyrs Stadium) project (which is now in such disrepair that FIFA
refused to schedule soccer games there unless the DRC made repairs
to the tune of USD three million by end April 2008; this was not
achieved), the Palais du Peuple (the Parliament Building) and other
infrastructural projects including hospitals were all completed
during the 1970's, 1980's, and early 1990's. Following the economic
collapse of the early 1990's and the subsequent conflicts that have
wracked the Congo, Chinese presence was less visible and funding
seemed to dry up. All this has changed now that the DRC is emerging
from over a decade of war and worldwide demand for commodities,
especially metals including copper and cobalt, has skyrocketed along
with the prices for those metals. The DRC and China signed a
declaration establishing a "strategic partnership" during the
Beijing Summit Forum on China-Africa Cooperation in November 2006.
Even before this signing, the state-owned China National Overseas
Engineering Company (COVEC) loaned the DRC copper and cobalt mining
parastatal, GECAMINES, USD 60 million to reopen a copper mine in
Katanga Province. At about the same time, the Chinese government
loaned the GDRC USD 32 million to fund a mobile phone network in
support of the Congo China Telecom company, a cellular service
provider (ref B).

China/DRC Trade: Growing by Leaps and Bounds

3. (SBU) DRC exports to China doubled between 2003 and 2004, while
Congolese imports from China increased by more than 50 percent in
each of the three years following the establishment of a
transitional government in 2003. 2007 saw sustained levels of
exports, mostly mineral ores, that attained nearly USD three billion
for the year. Imports from China nearly doubled between 2006 and
2007 to over USD four billion, meaning that a country with a budget
of barely more than USD two billion had a nearly USD one billion
trade surplus with China. Preliminary figures for 2008 show no
decline in this trend, with January figures indicating a nearly 50
percent increase in exports to China and a nearly 100 percent
increase in imports from China over the same month in 2007. At this
rate, the DRC may post a USD three billion trade surplus with China
alone, rivaling the level of the national budget for the year. As
in the days of King Leopold (1876 - 1909), much of the Congo's
natural resource wealth is leaving the country, while the population
still has relatively little purchasing power to buy the products,
even cheap ones, that it needs or wants.

Initially Small, Scattered Mining Operations

KINSHASA 00000426 002 OF 005


4. (SBU) Much of the Chinese business in the DRC was, until
recently, of an informal and ad-hoc nature. In the copper belt area
of the DRC's Katanga Province, small Chinese-owned operations bought
copper and cobalt ore that had been scraped together virtually by
hand and concentrated to the extent possible before being shipped in
"big bags," flexible sacks with a handle capable of holding around
one ton each and transported on trucks carrying 20 of them at a time
to ports in Dar es Salaam or Durban for onward shipment to China.
China, although it has significant reserves of cobalt itself, became
the world's leading producer of cobalt metal, much of it sourced
from Katangan mines that were being picked over by thousands of
Congolese artisanal miners, some of them underage and all of them
poorly equipped, working in dangerous conditions and earning a
pittance. (Note: The DRC is estimated to have about a third of the
world's known cobalt reserves. End note.)

Katumbi Lowers the Boom

5. (SBU) Much of this trade came to an abrupt halt in early 2007
following the elections of late 2006, when the new governor of
Katanga Province, Moise Katumbi, decreed that all exports of raw,
concentrated but unprocessed ores were prohibited. This edict put a
temporary halt to most of the illegal, and even some of the legal,
exports of copper and cobalt ore that had been occurring unchecked
since the early 2000s. Total Chinese exports from the DRC dropped
by more than a quarter during the first half of 2007, and did not
begin to recover their previous level until midway through the year.

China Steps up with Larger Projects, More Money
--------------------------------------------- --

6. (SBU) Coincidentally, official Chinese investment in the DRC,
with an eye toward regaining the metal ore exports needed to support
the booming Chinese economy, began in earnest in mid-2007. In
August 2007, a delegation of Chinese businesses, including the ExIm
Bank of China, the China Railway Engineering Corporation (CREC), and
SINOHYDRO signed an agreement ("protocole d'accord") with the
Congolese Minister of Infrastructure, Public Works and
Reconstruction, Pierre Lumbi. The agreement makes reference to
cooperation agreements dating to 2001, during a period when the DRC
was perhaps at its lowest ebb. The agreement is seven pages long
and includes two annexes that lay out the modalities of payment for
infrastructural projects to be completed by Chinese companies,
basically a swap of over eight million tons of copper, over 200,000
tons of cobalt, and 372.3 tons of gold (source "to be found") worth
USD 3 billion for a package of railway, roads and buildings
(hospitals, health centers, universities and houses) estimated to
cost over USD six billion dollars.

Details of the Agreement

7. (SBU) A joint venture company, 32 percent Congolese and 68
percent Chinese, would be financed by the output of the mining
concessions specified in the agreement, most of them, except for the
gold mines, located in Katanga Province. The agreement gives the
joint venture company all standard investment advantages set by the
DRC investment and mining codes, as well as a nearly complete
exoneration of taxes, duties and customs on all imports and exports.
The company is free to name its suppliers and to hire whomever they
choose "both inside and outside the country." All DRC dividends
from the company are to be used to pay back the initial costs,
unless they are paid off "in-kind," (i.e. by more natural
resources.) The term of the agreement is 30 years. The agreement
was signed on September 17, 2007 (ref C), and included an additional
USD two billion for additional China-DRC joint ventures in the
mining sector. A virtually identical deal was signed in October
with the China Development Bank.

8. (SBU) Paul Fortin, the expatriate head of DRC state copper and
cobalt mining parastatal, GECAMINES, spent over a month in China at
the end of 2007 negotiating some of the fine print. In January, it
was announced that a deal had been signed and that the joint venture
company, SICOMINES, would be backed by rights to two mining
concessions with estimated reserves of 10 million tons of copper and
2 million tons of cobalt. At current market prices, these reserves
are worth approximately USD 83 billion and USD 435 billion,
respectively. One estimate is that ultimately the Chinese will earn

KINSHASA 00000426 003 OF 005

a profit of over USD 40 billion after the initial investment is paid
back. As of April 2008, there is little to show from this agreement
as details continue to be ironed out. An announcement in mid-April
stated that USD 700 million would be released this year to fund some
of the infrastructural projects listed in the agreement. One is the
construction, or re-construction since the road already exists, of
the 60 miles of highway between Lubumbashi, the capital city of
Katanga Province, and Kasumbalesa, the major land border crossing
between the DRC and Zambia. This is not only the largest
import/export crossing point in the DRC after the Matadi Port, which
supplies the megalopolis of Kinshasa; it is also the point through
which the vast bulk of the copper and cobalt due to be produced
eventually will have to pass.

And That's Not All...

9. (SBU) There are other Chinese investments and projects in the
works and being proposed. The China National Machinery, Equipment
and Export Corporation (CEMEC) has already agreed to a USD 75
million loan for chrome and nickel mine in the Kasai provinces of
central DRC, not far from the provincial capitals of Kananga and
Mbuji Mayi (ref B). Kasai Occidental and its neighbor to the east,
Kasai Oriental, site of the state diamond mining parastatal, MIBA,
are isolated and underserved partly due to the decrepit condition of
the rail line that passes through them from the Congo River north
and west of the Kasais, down to the copper belt south and east of
them. What was once daily service bringing goods both down from
Kinshasa and up from Lubumbashi is now a maybe once-a-week train
that makes irregular deliveries of basic good such as fuel and corn
meal that can cost twice as much as in the rest of the country, when
available. Despite the fact that the highly touted Inga-Shaba line,
which delivers power from the Inga hydroelectric installations of
Bas Congo to the mines of Katanga Province and points south (Zambia,
Zimbabwe and South Africa), the Kasais are virtually without power
other than local generators since the transmission line was never
branched for them. (See ref D for more information on the Inga
hydroelectricity project).

10. (SBU) China has expressed interest in possibly expanding Inga
and working with the MIBA diamond mines. It has even floated the
possibility of creating a deepwater port at Banana, the DRC's
Atlantic Ocean port that currently cannot handle the large,
ocean-going cargo ships that dock at Pointe Noire, a few hundred
miles up the coast in the Republic of the Congo. During the January
2008 visit of Chinese Foreign Minister Yang to the DRC, Yang
announced a preferential loan agreement worth USD 33.6 million,
financed by the ExIm Bank of China, to create a fiber optic trunk in
the DRC, built by the China International Telecommunication
Construction Corporation.

Fuel for China: Bio-Diesel, Oil, and Uranium?

11. (SBU) It has been widely reported, though unsubstantiated, that
a Chinese company, ZTE International, is considering investing USD
one billion in order to create a three million hectares (11,500
square miles, an area the size of a square with 100 mile-long sides)
of oil palm plantations in the Equateur, Bandundu, Orientale and
Kasai Occidental provinces to produce bio-diesel. (Note: The DRC has
millions of hectares of existing oil palm plantations dating back to
pre-independence days, but many of them are no longer producing due
to age and lack of maintenance. End note.) China has shown little
interest in DRC petroleum since its production (25,000 barrels/day)
pales in comparison (well less than 10 percent) with that of
Nigeria, Angola, Sudan, Equatorial Guinea, Gabon and the Republic of
the Congo, but this could increase as more western companies begin
onshore exploration here. Finally, it is well-known that China is
interested in uranium for its nuclear plants and that someday the
DRC may open up its uranium mines again. (Note: Uranium mining in
the DRC is currently prohibited by a President Kabila decree,
occasioned by earlier security concerns and lack of effective border
control. End note.)

The "Pros" of Chinese Engagement

12. (SBU) Official, above-board Chinese investment and activity in
the DRC directly addresses the country's most urgent needs, as
expressed by President Kabila in his 2006 inaugural address, better
known as the "Cinq Chantiers" (five pillars of reconstruction)
speech: infrastructure; employment creation; housing, water and

KINSHASA 00000426 004 OF 005

electricity; health; and education. While the details are still
fuzzy in some cases, and the numbers may be off a bit, we do know
that some 2000 miles of railway linking Katanga and Bas Congo
provinces, 2000 miles of roadway linking Orientale and Katanga
provinces, 31 hospitals, 145 health centers, two large universities
and 5,000 government housing units are pledged. A Chinese company
is already working on the Matadi to Kinshasa road, ironically under
a World Bank funded program. Another Chinese company is next door
to the DRC already, rehabilitating the Benguela, Angola to Dilolo,
DRC rail line that will open up an alternate route westward to the
Atlantic Ocean for Congolese mining exports.

13. (SBU) In each of the China-DRC joint ventures revealed during
the past year, much of the attention is paid to the infrastructure
and job creation necessitated by the project rather than the actual
outputs (e.g. chrome and nickel in the Kasais.) Reliable water and
electricity for processing plants, adequate roads to handle incoming
equipment/materials and outgoing production, and upgraded health,
education and housing for workers and their families are all right
out of the "cinq chantiers" playbook. (Note: this type of
cradle-to-grave coverage of employees, especially in the Katanga
Province copperbelt, was the norm for tens of thousands of employees
of Congolese companies such as GECAMINES. End note.)

The "Cons" of Chinese Engagement

14. (SBU) Based upon past experience and from observing current
Chinese business practices in neighboring countries (Angola and
Zambia in particular), the DRC is likely aware of the obvious
negatives: less local job creation and procurement than expected,
less cost-savings than promised, and poorer quality (and
dependability) of the infrastructure left behind. The DRC may
perhaps be unaware of, or not care about, other more subtle
drawbacks. These include the opening up of areas through road
building that may increase illegal logging, exacerbate destruction
of rainforest habitat, and provide opportunities for unscrupulous
bushmeat hunters. Certainly the idea of creating entirely new
plantations by first cutting down existing forest cover should give
the GDRC authorities pause. Surprisingly, GDRC authorities appear
to have overlooked the fact that they were in the midst of a
controversial mining contract review of over 60 joint venture deals
dating back to the late 90s when they signed the September agreement
with the Chinese. It was the DRC's inability to know for sure what
they were giving away in those contracts, and then finding out that
they had made bad deals, that necessitated the review. This time,
perhaps, the participation of GECAMINES CEO Paul Fortin has assuaged
those fears.

Formal IMF Program Imperiled by Chinese Loans

15. (SBU) The IMF has been told by GDRC authorities that the DRC
2008 budget of USD 3.4 billion includes a USD 250 million "signing
bonus" of unearmarked Chinese funding that will be paid to the GDRC
sometime in the second half of 2008. IMF officials, unconvinced of
the supposed "concessional" nature of some of these billions of
dollars of Chinese loans, are asking that the terms of the loans be
made known, and renegotiated if necessary, in order to requalify the
DRC for a new Poverty Reduction and Growth Facility program (PRGF).
Without this new PRGF, the DRC will not be able to achieve the debt
forgiveness, estimated at over USD 10 billion, that it so
desperately needs from the Paris Club through the Heavily Indebted
Poor Country (HIPC) initiative. If the DRC can address IMF
concerns, get the quarter million dollars from the Chinese,
renegotiate a PRGF and achieve HIPC completion point before end
2008, it will have avoided, perhaps, the biggest potential negative
of this latest Chinese engagement in the DRC.

16. (SBU) Comment. Other than the IMF issue regarding the
concessionality of the Chinese loans, it is difficult to predict
whether the DRC stands to ultimately win or lose from its dealings
with China. If much-needed infrastructure projects begin soon and
provide some local employment and contracts for Congolese suppliers,
nobody would claim that this was a bad thing. President Kabila has
been in office for nearly a year and a half, with not much to show
in the way of progress on his "cinq chantiers." As with the two
Inga hydroelectric plants and plans for an Inga III and possibly a
"Grand Inga" project, the costs of just rehabilitating existing
infrastructure in the DRC, no less building new, are staggering and
beyond the means of any one bilateral or multilateral donor. At
present, there is virtually no contact between the U.S. and China

KINSHASA 00000426 005 OF 005

missions in the DRC, although China has apparently decided to at
least attend some of the donors' group meetings held in Kinshasa.
Any bilateral cooperation or coordination with the Chinese in the
DRC would best be done on either a case-by-case or a
sector-by-sector basis. End comment.


© Scoop Media

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