Working Effectively in Fragile and Conflict-Affected States: DRC, Rwanda and Burundi
Further written evidence from Global Witness
This briefing provides additional information for the IDSC’s inquiry into "Working Effectively with Conflict-Affected States: DRC, Rwanda and Burundi", following our earlier written evidence of 8/6/11. The first section provides additional background on the UK’s aid to the DRC and on the DRC’s mineral wealth. The second section provides more background on the case of First Quantum and on recent developments connected with the controversial and secretive sale of mines and stakes in mines to offshore-registered companies.
a. Background on UK aid to the DRC
The UK is the second biggest donor nation to the Democratic Republic of Congo, after the United States.  In 2010-11, UK bilateral aid to the DRC came to £133 million.  This is due to steadily increase to £258 million in 2014-15. During the period 2010/11 to 2014/15, according to current plans, the UK will have provided over £900 million in bilateral aid to the DRC, not counting many tens of millions of pounds more in multilateral aid.
According to the data from 2009-10, 38% of the UK’s aid to the DRC went on humanitarian assistance, 36% on governance and 14% on health. 
There are many reasons for aiding the DRC. Since 1996, it has gone through a period of horrific violence, in which millions have died. The worst of the unrest has subsided but serious conflict still riddles the east, while outbreaks of instability have affected several other parts of the country over the past year.
The country is extremely poor but immense – it covers an area two thirds the size of western Europe. Under-five mortality is 199 for every 1,000 births. Over half the population lives on less that $1.25 per day.  The country ranks 168 out of 169 on the Human Development Index.  Yet, with open and responsible management, the DRC’s mineral resources could be used for the good of the country as a whole – rather than mainly serving the interests of the elite.
Here are a few figures to give an idea of the DRC’s mineral wealth. The DRC accounts for about 48% of the world’s cobalt reserves, according to the United States Geological Survey.  According to data from the Kimberley Process Certification Scheme, Congo produced 15% of the world’s rough diamonds in 2010.  Congo claims to hold between 60% and 80% of the world’s tantalum reserves – a rare, strategic mineral prized for its ability to store electric current in devices such as mobile phones, and for its extreme resistance to heat for use in the defence industry. Although the reserves figure cannot be verified, the DRC did account for at least 9% of world output of the metal in 2009. 
Mining accounts for over 70% of the country’s exports and 28% of its GDP. 
b. The role of DFID in the natural resources sector
DFID’s main involvement in the DRC’s natural resources sector is through a project called Promines. Promines is a wide-ranging technical assistance project to the mining sector, financed to the tune of $92 million by the World Bank and DFID, with the World Bank providing $50 million and DFID $42 million.  Before 2015, the donors have planned for a second phase of Promines to start, called Promines 2, which is to receive $80 million in funding,  bringing the total for both phases to over $170 million.
The aim of the project – the first phase of which is to run for a total of five-and-a-half years, ending in December 2015 - is, according to the World Bank, "to increase transparency and accountability in the mining sector so that natural resources will be used for inclusive and sustainable growth". Other aims are to strengthen institutions to manage the minerals sector, to help increase the benefits from artisanal and industrial mining in project areas, and to increase production and revenues from mining.
It is unclear, however, what the main aim of the project is, as different aims have been given front and centre stage at different times. This is problematic – without a clear idea of what the primary aim is, it is easier for the project to get pulled in different directions, and end up the weaker for it.
Out of the first $92 million in funding, $31 million is to be used to improve the management of resource allocation, $28.5 million to improving the authorities’ capacity to manage the sector and $6 million to transparency, with the remainder going on sustainable development areas and management of the project. 
The aims of the project are all laudable. Greater transparency in the mining sector would greatly lower the chances of corruption, as indeed should a greater professionalisation of the mining administration and a more organized approach to artisanal mining.
However, Global Witness believes that there is a high risk of corrupt practices undermining the project. This was evident in the second half of last year, when a questionable deal over a major mine led the World Bank to freeze all new lending to the country (including Promines).  (It should be noted that the aid suspension was on the side of the World Bank, not DFID, but this resulted in the entire Promines project being suspended.)
Now, however, with the first $10 million or so in funding for Promines about to be disbursed, recent secretive sales by Congolese state mining companies again throw doubt over the Congolese government’s commitment to developing the country’s mining sector in a responsible manner. Four large stakes in huge copper concerns – together worth well over $2.6 billion - have been secretly sold off by the state mining firms Gecamines and Sodimico. In one case, a mine was sold off for under one-sixteenth of its audited value. In two cases the direct beneficiaries were offshore-registered companies linked to Dan Gertler, a mining magnate close to President Joseph Kabila. 
The secret sales raise various questions. How is it that mines worth billions of dollars can be sold off in secret, while the government is publicly committed to transparency over its natural resources trade (eg. the Economic Governance Matrix and the Extractive Industries Transparency Initiative)?
What does this mean for Promines? Is it worth going ahead with a project aimed at improving the governance of the mining sector, when such dubious practice is taking place? Of course, any corruption in these cases would benefit the elite and not the many thousands of Congolese employed in mid-ranking and more junior levels in the mining sector – people who could, in theory, benefit from Promines. Nevertheless, if the signal given from the top is that it is business as usual, then it could be that fundamental change will be difficult to achieve. Rather, it becomes likely that others will follow the bad example set by the governing elite. At that point, it seems questionable whether donors could achieve much by pumping tens of millions of dollars of taxpayers’ money into improving the DRC’s governance of its natural resources.
Yes, it would be unrealistic for donors to wait until the DRC’s mining sector was squeaky clean before engaging in serious initiatives but the kind of apparent gross malpractice seen in recent months is of such an order that donors should pause and consider whether a new suspension of the project is not in order. Questions should also be asked of the Congolese government. For example, who were the beneficial owners of companies involved in the deals and at what prices were the various mines and mining stakes sold.
It should be noted that when Promines was last suspended, there were positive results, as this helped put pressure on the Congolese government to pass a May 2011 decree committing it to publish natural resource contracts (see previous Global Witness submission). This demonstrated the positive influence that donors can have when they condition aid on transparency and anti-corruption measures.
Section II. Background on First Quantum and the recent secret sales
The First Quantum case. In August 2009 the Congolese government, citing irregularities, confiscated the Kingamyambo Musonoi Tailings mining enterprise in and around the southeastern town of Kolwezi, in Katanga province. KMT is made up of millions of tonnes of waste from old mining activities – waste that can now be profitably mined using modern technology. KMT was owned 65% by London- and Toronto-listed company First Quantum (via its British Virgin Islands-registered subsidiary Congo Mineral Developments). A further 10% of KMT was owned by the South African state’s Industrial Development Corporation and 7.5% by the World Bank’s International Finance Corporation. The remainder was owned by the Congolese government (5%) and Gecamines (12.5%). 
At the time of the confiscation, First Quantum had invested about $450 million in the KMT plant, on top of the roughly $250 million it had paid to acquire the company owning KMT, Adastra, back in 2006 (KMT was Adastra’s main asset and the chief reason for First Quantum purchasing it). 
On May 21 2010, two more First Quantum mines, including the valuable Frontier mine, were also confiscated and handed to state mining company Sodimico.
On June 30 and July 1, the IMF and the World Bank forgave the DRC $12.3 billion of debt. The World Bank had demanded that the rights to KMT not be sold on as long as the dispute remained unresolved. 
By early August 2010, however, the DRC had announced publicly that it had sold on the rights to KMT to a company called Metalkol, owned 70 percent by Highwind Properties Ltd., a company that – it later came to light – was owned by Dan Gertler, an Israeli billionaire close to President Joseph Kabila. The World Bank was furious. This, combined with other actions by the Congolese government, led the World Bank to freeze all new programmes, including Promines. 
After that, the World Bank and DRC agreed on a framework of actions, mostly to do with transparency. Compliance with this framework – called the Economic Governance Matrix - would be necessary for the aid to be unfrozen. At the end of June 2011, the World Bank agreed for the freeze to end and in mid-July Promines was given the official go-ahead. The first tranche of money under Promines, however, has not yet been released – more paperwork needs to be sorted out, and that usually takes 90 days from the signing of an agreement, which would bring us to mid-October.
In the meantime, FTSE 100 miner ENRC has bought a majority stake in KMT, through a shares purchase in a Gertler-owned company (Camrose, which owns Highwind). 
Scandal has surrounding ENRC’s move, and First Quantum has launched legal action against Highwind and against companies jointly owned by ENRC and interests that are (or at least were until recently) tied to Dan Gertler. 
Since July this year, Bloomberg and other media outlets have revealed new developments: the secret sell-off of mines worth billions of dollars by state mining companies. This raises new questions over how the DRC is managing its mining sector. Here are the nuts and bolts of the case. Some of the wording comes from the news articles referenced in the footnotes.
· In a prospectus issued by Glencore in May, it was revealed that the main state mining company, Gecamines, secretly sold off large stakes in two mines to companies based in the secretive tax haven of the British Virgin Islands and associated with Dan Gertler. The information went unreported until it was spotted by Bloomberg in July this year.
· The assets sold were: 20% in Mutanda and 25% of Kansuki.
· Bloomberg wrote in an article of July 13, 2011: "The net present value, a measure that includes future earnings prospects, of Gertler’s stake in Mutanda alone may be more than $800 million when royalties and other payments are taken into consideration, according to calculations using figures in Glencore’s prospectus. The entire Mutanda project is worth about $3.1 billion and could produce 110,000 tons of copper annually by 2012, the prospectus said."  Bloomberg added: "Neighboring Kansuki has ‘the potential to be a bigger producer’ of minerals, Deutsche Bank AG said in a June 6 report on…Glencore." Glencore owns 40% in Mutanda via a half-owned subsidiary, Samref Congo Sprl. 
· Glencore said in late August 2011 that it wishes to buy up at least some of these shares and ramp up copper production at Mutanda, according to a Dow Jones article. 
· Details of the Gecamines sales have not been officially released.
· In mid-August two more secret sales were revealed. This time the sales involved a 30% stake in the Frontier and Lonshi mines that were confiscated in 2010 from First Quantum. The state-owned mining company selling the stakes, Sodimico, received just $30 million - less than a sixteenth of the stake’s estimated value.
· Bloomberg: "Numis Securities valued Frontier at about $1.6 billion and Lonshi at $400 million in a research note last year, while Oriel Securities in September valued Frontier at $1.4 billion and Lonshi at $250 million."  The buyer was Fortune Ahead, a Hong Kong-listed shell company. 
· Modeste Bahati Lukwebo, the head of the audit board of the National Assembly's economic and financial committee, said Mines Minister Martin Kabwelulu ordered the sale of the 30%, and imposed the $30 million price tag. (Reuters) 
· Sodimico was asked to make a $10 million payment to the Treasury to help finance upcoming elections after the sale.  Mr Lukwebo claimed the funds were being "diverted" and another Congolese MP reportedly said the cash would be used to fund Kabila’s re-election campaign. 
These secret sales are a major development in the DRC. It seems there is a high likelihood of malpractice here. We have mines being sold off in secret, to companies whose ownership is secret. In one case, the immediate beneficiary is an individual known to have a history of close relations with the current president, and with his predecessor, Laurent Kabila. In the other case, the two mines were sold off for a small fraction of their estimated value, and it is claimed that the head of the state mining company was acting under orders from his political superiors.
In such circumstances, allegations that the $10 million was diverted should be taken seriously and looked into. If donors want to be assured that gross corruption is not taking place, they should ensure a full investigation is carried out and all results made public.
The UK government must show it takes apparent malpractice seriously and that, when necessary, it takes action to curb such malpractice or, at the very least, to avoid financing those who are responsible. Similarly, the UK government should hold the DRC and other countries to their commitments over transparency. Such actions on the part of the UK, as a major donor to the DRC, are necessary if UK taxpayers are to be convinced that their money is being spent wisely.
7 September 2011
 OECD Development Aid statistics Online database : http://stats.oecd.org/qwids/#?x=2&y=6&f=3:51,4:1,1:2,5:3,7:1&q=3:51+4:1+1:1,2,5,6,9,21,23,24+5:3+7:1+2:40+6:2004,2005,2006,2007,2008,2009 . The data used here comes from 2009, which is the latest year for which the OECD provides data.
 Information taken from the March 2011 DFID bilateral Aid review technical report consulted on the DFID website: http://www.dfid.gov.uk/Documents/MAR/FINAL_BAR%20TECHNICAL%20REPORT.pdf .
 See DFID website, DR Congo Section last accessed in Mar 2011. http://www.dfid.gov.uk/Where-we-work/Africa-West--Central/Congo-Democratic-Republic/
 UNDP, International Human Development Indicators, http://hdrstats.undp.org/en/countr i es/profiles/COD.html
 UNDP, International Human Development Indicators, http://hdr.undp . org/en/statistics/
 USGS, 2008 Minerals yearbook, Congo ( Kinshasa ), by Thomas R. Yager , http://minerals.usgs.gov/minerals/pubs/country/2008/myb3-2008-cg.pdf
 See Kimberley Process statistical summary table for 2010, https://kimberleyprocessstatistics.org/static/pdfs/AnnualTables/2010GlobalSummary.pdf
 USGS. Mineral Commodity Summaries: Tantalum, 2010 report: http://minerals.usgs.gov/minerals/pubs/commodity/niobium/mcs-2010-tanta.pdf
 Data presented in the Economist Intelligence Unit June 2011. The report shows base metals accounting for 47.6% of exports in 2007 and diamonds for 26.1%.
 World Bank press release: World Bank Approves a Grant of US$50 Million for Growth with Governance in the Mineral Sector Project (PROMINES) in the Democratic Republic of Congo, Press Release No:2011/005/AFR, July 1 2010, http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22636466~pagePK:34370~piPK:34424~theSitePK:4607,00.html
 Promines Powerpoint presentation, February 2010
 Promines Summary, provided to Global Witness March 2010
 Global Witness interviews and e-mail correspondence with aid officials in 2010 and 2011.
 For Gertler’s links to Kabila, see, for example, Jason Stearns’s Congo Siasa blog of June 21 2010 ( http://congosiasa.blogspot.com/2010/06/dan-gertler-at-it-again.html ) : “Dan Gertler : at it again?” The piece says Mr Gertler “ was one of the only westerners to be invited to Kabila's wedding in 2006, and has very close links with Katumba Mwanke , the president's closest financial adviser.” It also prints a photo of Mr Gertler congratulating the President and his bride. See also Sunday Times piece of 6/3/11: “Israeli holds key to Congo riches”, by Danny Fortson. The article says that Dan Gertler and Joseph Kabila became friends soon after Laurent Kabila came to power, having ousted former president Mobutu Sese Seko . Gertler provided Laurent Kabila with $20 million and in 2000 was granted a two-year monopoly on artisanal diamonds, according to the piece.
 Information from the statement of claim of Congo Mineral Developments Ltd vs : (1) Highwind Properties Ltd. (2) Pareas Ltd. (3) Interim Holdings Ltd (4) Blue Narcissus Ltd.
 Interview with source familiar with the affair, 20/1/11
 Interview with donor source familiar with the affair, 9/3/11.
 See ENRC press release of 20/8/11, which announced the purchase: Eurasian Natural Resources Corporation PLC: Acquisition of 50.5% of the Shares of Camrose Resources Limited. Regarding the ownership of Camrose , ENRC said: “The Camrose shares have been purchased from Silvertide Global Limited, Zanette Limited and Cerida Global Limited (' Cerida ') which are held by the Gertler Family Trust (the 'Acquisition').” Up until this point, Dan Gertler’s involvement in the deal had been held secret.
 See First Quantum news release of September 15, 2010: First Quantum Minerals commences legal proceedings against ENRC subsidiaries, http://www.first-quantum.com/i/pdf/NR10-32.pdf
 Bloomberg, Gecamines Sale of Congo Copper Assets May Undermine Offer, by Michael J. Kavanagh and Franz Wild, 13/7/11
 Regarding 40% shareholding, see Glencore website, page on Mutanda mining: http://www.glencore.com/mutanda-mining.php . Bloomberg July 13th article states that this 40% is held via Samref , half-owned by Glencore .
 Dow Jones article published on Fox Business, “ Glencore CEO: Plan to Combine Congo Kansuki , Mutanda Assets”, http://www.foxbusiness.com/markets/2011/08/25/glencore-ceo-plan-to-combine-congo-kansuki-mutanda-assets/
 Bloomberg, Congolese State Miner Sells Stake in Former First Quantum Mines, by Michael J. Kavanagh and Franz wild, 17/8/11
 Reuters, Congo sold mines at fraction of value -MP, docs, by Jonny Hogg, 18/8/11
 Reuters, Congo sold mines at fraction of value -MP, docs, by Jonny Hogg, 18/8/11. This article reports the $30 million price tag, quoting Mr Lukwebo . The August 17 Bloomberg piece also says the mine stakes were sold for $30 million, quoting Sodimico Chief Executive Officer Laurent Lambert Tshisola Kangoa .
 Reuters, Congo sold mines at fraction of value -MP, docs, by Jonny Hogg, 18/8/11
 Reuters, Congo sold mines at fraction of value -MP, docs, by Jonny Hogg, 18/8/11