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Mining: Scenarios for Growth Report No. 43402-ZR Report No. 43402-ZR Democratic Republic of Congo Growth with Governance in the Mining Sector Public Disclosure Authorized May 2008 Oil/Gas, Mining and Chemicals Department AFCC2 Africa Region Democratic Republic of Congo Democratic Public Disclosure Authorized Growth with Governance in the Mining Sector with Governance Growth Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized MPW Ministry of Public Works MSR Ministry of Scientific Research OCC Congolese Control Office OFIDA Office of Customs and Duties OKIMO Office of Mines of Kilomoto ONATRA National Transportation Office PNC National Congolese Police PPP Public Private Partnership ROSC Report on Observance of Standards and Codes SAESSCAM Assistance Office for Artisanal and Small-Scale Miners SAKIMA Gold Company of Kivu and Maniema SNCC National Railways Company SNEL National Electricity Company SODIMICO Industrial and Mining Company of Congo SOMINKI Kivu Mining Company SOE State-Owned Enterprise TSX Toronto Stock Exchange UN United Nations UNICEF United Nations Fund for Children USAID United States Agency for International Development USGS United States Geological Survey WBG World Bank Group Authorship and Acknowledgements This report was prepared by senior staff of the World Bank, including Craig Andrews, Principal Mining Specialist, Boubacar Bocoum, Senior Mining Specialist, and Delphin Tshimena, Mining Consultant. The kind assistance of Mr. Markus Wagner, German Federal Institute for Geosciences and Natural Resources and Mr. Ulrich Daldrup, University of Aachen is gratefully acknowledged. The sections pertaining to Congo mineral endowment and resources have been prepared by Dr. Pierre Goossens, mining consultant. The study team would also like to thank all of the Congolese government officials, private sector representatives, representatives of international organizations and members of civil society organizations for their assistance and information during the preparation of the study. iii Table of Contents Preface............................................................................................................................1 Executive Summary.......................................................................................................4 1. Mining: Scenarios for Growth .................................................................................9 Mining Growth and Poverty Reduction.....................................................................9 Macro Growth Scenarios .........................................................................................11 Description of the Mining Sector.............................................................................13 2. Enabling Environment, Supervision and Good Governance ..................................17 The Enabling Environment......................................................................................17 Taxation of the Mining Sector .................................................................................19 Special Issues in the Mining Tax Regime................................................................21 Effective Administration of the Mining Sector .......................................................22 Other Principles of Governance of the Mining Sector.............................................29 Government Supervisory Institutions and Capacity Issues .....................................37 3. Large-Scale Mining Role of the Parastatals, Private Companies, and Infrastructure.....................................................................40 Role of Parastatals....................................................................................................40 Role of Private Sector Mining Companies ..............................................................43 Mining Contracts .....................................................................................................45 Role of Infrastructure...............................................................................................51 4. Artisanal and Small-Scale Miners ..........................................................................56 Description of Artisanal Mining Activities..............................................................56 Issues and Constraints..............................................................................................57 5. Social and Environmental Aspects .........................................................................63 Providing Social Services to Local Communities ...................................................63 Company Relations with the Community................................................................64 Environmental Liabilities.........................................................................................66 6. Comprehensive Plan to Achieve Growth with Governance in the DRC Mining Sector .................................................................................................68 Increase Fiscal Receipts...........................................................................................68 Improve the Enabling Environment for New Investment........................................69 Strengthen Government Institutions and Build Capacity ........................................72 Maximize the Contribution of DRC’s Mineral Assets and Endowment .................74 Improve Conditions for Artisanal and Small-scale Mining.....................................75 Address Environmental and Social Issues ...............................................................77 Annex 1: Long Term Commodity Prices.....................................................................89 Annex 2: Evaluation of DRC Mineral Resources........................................................94 Annex 3: The Mining Contracts ................................................................................132 Annex 4: Mineral Rights Issued by CAMI................................................................137 Annex 5: Major Related Road Projects Financed by the Bank and/or other Agencies ................................................................................................140 iv Preface This study examines the mining sector’s potential to contribute to economic growth with governance in the Democratic Republic of Congo. In the past, mining has been the main engine of the Congo economy. But the revenues and other benefit streams generated by the sector over the years have not been used in a wise or sustainable fashion, largely due to key problems with sector governance. During the past ten years of civil war and conflict, flagship industrial mining declined substantially, and informal and artisanal mining expanded significantly. Now that peace has returned to most of the country and a new democratically elected Government is in place, the potential for the mining sector to contribute to economic growth is excellent. However, achieving growth with governance depends on three principal internal and external factors. The first of these, international commodity prices, is largely out of the Government’s control. The second factor, political stability, is clearly critical to growth of the sector; however, a detailed discussion of this factor is outside the scope of this study. The third factor, rent-seeking culture, is at the heart of the challenge that the Government must overcome to ensure sustained sector growth with good governance. World commodity prices. Prices of major non-ferrous metals, gold, and diamonds – DRC’s principal mineral export commodities – are set on international markets. For the past three years, there has been an extraordinary increase in the prices of these commodities, driven principally by high consumption (in the case of non-ferrous metals) in China, India, and other countries and, in the case of gold and diamonds, by strong retail demand. For instance, in 2003 the price of copper, to take the example of one commodity, was around US$1.00 per pound (US$2,200 per metric tonne). The current (May 2007) copper metal price is US$3.30 per pound (US$7,200 per metric tonne). However, prices of mineral commodities are highly cyclical, and predictions of future prices vary enormously. Some observers would suggest that a fundamental shift has occurred in consumption patterns for mineral commodities, which will result in higher prices for the foreseeable future.1 Others suggest that the present boom in commodity prices is in mid-cycle. Source: World Bank, “Outlook for Metals Prices,” September 2006, based on projections by Commodity Research Unit. 1 An excellent analysis of the interplay between the fundamental drivers of commodity prices, such as interest and currency exchange rates, consumption , and production balances, and the growing importance of demand for base and precious metals in emerging economies is by Dr. Martin Murenbeeld, www.dundeewealtheconomics.com. 1 This report adopts the conservative view that the current high prices should decline over the coming years, though when this will occur is impossible to predict and the decline will be possibly not to the low levels of the early part of this decade. The probable future decline and fluctuation of commodity prices has several implications for the mining sector in DRC. First, the amount of investment funding available for minerals exploration and investment falls or rises in tandem with the commodity prices. During the first quarter of 2008 there has already been a significant fall-off
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