The DRC Challenge: Excess Logging And Conflict Minerals

Via Ventures Africa, some analysis of extractive industry challenges being faced by the DRC:

The Democratic Republic of Congo (DRC) is considered one of sub-Saharan Africa’s poorest countries. Its GDP per capita estimated at $400, one-tenth that of the Republic of Congo. In terms of export dollars, in 2012 the mineral rich DRC stood $1.07 billion (8.7 percent) behind Congo-Brazzaville, its much smaller western neighbour. According to the World Bank, the amount of fiscal revenue generated by the timber and commodities sectors is often not made public.

On 11 December 2009, the International Monetary Fund (IMF) announced that it would deliver special drawing rights (SDRs) of $551.45 million to the DRC under the auspices of the Poverty Reduction and Growth Facility (PRGF). Said John Lipsky, then IMF First Deputy Managing Director and Acting Chair: “The new three-year PRGF arrangement will support the authorities’ implementation of their poverty reduction and growth strategy and economic reform programme. The key priorities are to generate strong economic growth, reduce inflation to single digits, strengthen public financial management, achieve debt sustainability, and accelerate structural reforms.”

Though the DRC had seen six consecutive years of positive economic growth, this was still a welcome boost for the country’s economy. Unfortunately, the situation turned sour in late 2012 when the IMF suspended the final payments of the loan – to the tune of $225 million. In December 2012 it was reported that the African Development Bank (AfDB) stopped the delivery of $87 million in budget support. The IMF and AfDB took these decisions because of the Congolese government’s failure to publish details of the revenue generated from at least six mining projects in 2011. The IMF in particular voiced concerns that mining contracts within the Congo lacked transparency and proper auditing procedures. The EU Parliament, piggybacking several UN Security Council resolutions, introduced a strongly worded declaration in December 2012 that called for the strengthening of legal measures to ensure better traceability of minerals from illegal logging, with an international market control instrument on natural resources.

Today, China is the greatest receiver of transoceanic container ships containing nearly half of all the DRC’s exports. Southeast of the DRC’s second city, Lubumbashi, landlocked Zambia accounts for more than one-fifth of exports while the US and Belgium round out the top four export partners. Specific to timber, France, Portugal, Belgium, The Netherlands and Italy are the largest importers of DRC wood in the European Union (EU).

Timber Logging and Export

Aside from the Amazon in South America, the DRC Basin is the world’s largest tropical rainforest, at present remaining relatively intact as a reserve. The World Wildlife Fund (WWF) estimates its area at 2.02 million square kilometres, spread across eight countries. The Fund also calls it “one of the most important wilderness areas left on Earth”.

The rainforest is home to countless species of flora and fauna. The Wildlife Conservation Society (WCS), which operates around the world, monitors the 62,200 square kilometre Ituri Rainforest in the northeast and the Salonga-Lukenie-Sankuru Forest in the southwest. The former, according to the WCS, is prized for its valuable timber tree species of African mahogany and Iroko, or African Teak. African mahogany, used in plywood and for furniture, has witnessed a population reduction of 20 percent over the past 75 years. Iroko is popular for flooring uses because of its insect-resistant qualities while the legume tree is a popular export for China. In total, 60,000 to 75,000 cubic metres of timber can be found in Kinshasa’s various ports on the Congo River at any given time.

With the increasing influx of political refugees from neighbouring Central African Republic (CAR), the forests are also suffering the indirect consequences of artisanal logging and mining, as well as deforestation. The WWF cites an example of this as what happened in the Virunga National Park, where the demand for wood fuel and charcoal put even greater pressure on the Congo’s forests. The WCS further cautions that the 36,000-square-kilometre Salonga Forest ecosystem looks set to become the logging industry’s next target, while the delicate process of biosequestration (ensuring that the amount of carbon dioxide is kept in a state of flux) becomes yet another challenge here.

An April 2013 report entitled, ‘Logging in the shadows’, published by Global Witness, an international nongovernmental organisation (INGO), highlights the corruption and illegality that has plagued the forest sector in both the DRC and the West African states of Cameroon, Ghana and Liberia. Hundreds of permits granted over the past three years to logging companies have been cause for concern. “Decades of weak laws and government have allowed logging companies in the DRC to exploit its forests with scant regard for the human or environment cost and with little benefit to the country’s development,” said the report.

In late 2012, the Minister of Forests meekly reacted to investigations by the aforementioned organisations by cancelling several permits. He did nothing to stem the flow of operations and exports. Still today the distribution of large numbers of shadow permits is a major issue, akin to a no bid contract that leaves several loopholes, is clouded in secrecy and remains open to interpretation.

Greenpeace’s March 2013 report entitled, ‘Cut it Out: Illegal Logging in the Democratic Republic of Congo (DRC)’, centres on Bandundu province. The province borders the Kinshasa city-province located in the western part of the country and is the site where giant multinationals conduct illegal and excessive logging leading to forest degradation. Some of the culprits include companies owned by the US, Lebanese subsidiaries tied to Hezbollah and even the tiny European principality of Liechtenstein.

Aside from the systematic plundering of the DRC’s natural resources, exercising due diligence remains an important issue. In early March this year, the European Timber Regulation (EUTR) came into being, aimed at reducing the amount of illegal timber entering the European and global supply chain. Said Greenpeace’s March 2013 report: “The absence of credible independent verification systems, the complete lack of transparency and the rampant corruption in DRC will make it very hard – if not impossible – for EUbased timber traders to fulfil the new due diligence requirements.”

The Problem with Diamonds

Global Witness has tried to combat the so-called ‘resource curse’ by investigating the DRC’s ability to avoid conflict and fight corruption directly related to the business of unearthing natural resources. The worldwide organisation has called on companies that have mining contracts in the DRC to exhibit due diligence. This is especially true in North and South Kivu – provinces in the eastern part of the country that border Uganda, Rwanda and Burundi and which account for between 5 and 7 percent of all diamonds mined in the DRC.

Global Witness’s past work brought the term ‘blood diamonds’ or ‘conflict diamonds’ into the mainstream arena, instigating the creation of the Kimberley Process Certification Scheme. The aim of this Scheme is to curb the blood diamond trade, the profits of which are used to finance violent rebel movements. The DRC joined the Scheme in 2003.

In 2010, the DRC produced 20.17 million carats (4,000 kilograms) worth $174.28 million, the last available annual rough diamond survey results. This same year, the country exported nearly 85 percent of its production volume, or 16.96 million carats (3,400 kilograms), priced at $17.33 per carat, equivalent to $294.04 million. In comparison, in 2005, the country exported nearly 33 million carats (6,590 kilograms) to the tune of $895.46 million, an astonishing 99.7 percent of production that year.

Every year since 2005, the diamond export figure has sharply decreased. The prevalence of fake KP certificates being presented to traders that do business in the DRC has led to a decline in trust, which has been pegged as a major contributing factor to this decline.

Like Angola and Sierra Leone, the DRC has not been able to replicate the success across a bevy of economic indicators in Botswana, another country that is mineral rich. Despite the DRC’s real growth rate of 7 percent year-over-over in each of the last three years, the country has failed to establish a path of sustainable development or reduce abject poverty. The continued strength of markets in the southern African countries as well as in Russia, Australia and Canada continues to wrestle market share from the DRC.

From 2007 until the present day, the average carat price has increased 20 to 30 percent, depending on the size of the carat. Diamonds that are between three and four carats in weight have increased nearly 35 percent in value within a five-year period, ensuring that monies from the DRC’s number one export fill the coffers of President Joseph Kabila Kabange and his country.

According to The World Bank, aside from Australia the DRC fetches the lowest price per carat in the world. If the DRC’s prices competed with those in Namibia or Sierra Leone, for example, production figures would be seven to eight times their current levels. This equates to several billion dollars worth of exports rather than a fraction in the hundreds of millions of dollars range.

Looking Ahead

In its outlook for the DRC, the IMF was cautiously optimistic. Said Lipsky: “Strong and sustained economic growth requires implementation of key structural reforms. The authorities will focus on public enterprise reform, improving governance, and streamlining the business regulatory environment.”

Above all, the DRC will need to become more open with respect to the contracting out of its natural resources and sharply reverse its slash-and-burn-like policy of the precious Congo Basin. Furthermore, the DRC must ensure equitable redistribution to all facets of society, which to quote the EU, is “indispensable for the sustainable development of the country”.

This entry was posted on Tuesday, September 24th, 2013 at 11:01 am and is filed under Democratic Republic of Congo.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.