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Congo, DRC: Decentralisation to increase transport and taxation costs in Katanga

2015-09-10 Protection Group International Ltd Congo, DRC: Decentralisation to increase transport and taxation costs in Katanga

Congolese authorities have split the mineral-rich province of Katanga into four new provinces, in a move regarded as an effort to weaken Katanga’s pro-business governor Moise Katumbi ahead of elections in 2016. Decentralisation will likely result in increased transportation costs for mining companies, while it also elevates the risk of double taxation in the province. Efforts to challenge Katumbi will also increase political tensions in the lead up to the 2016 election, raising the risk of violent protests in Lubumbashi and other mining areas in Katanga over the coming months.   

The division of Katanga in late June came as part of a wider decentralisation drive throughout the Democratic Republic of Congo (DRC), which saw the country’s 11 provinces increased to 26. Katanga, which produces nearly all of the DRC’s copper and cobalt, now comprises Tanganyika, Upper Lomami, Upper Katanga and Lualaba provinces. Each province will inaugurate new governors following elections on 6 October, after Katumbi’s mandate expired on 1 July. The DRC is the world’s largest producer of cobalt and the mining sector accounts for around one fifth of the state budget.

The legal basis for decentralisation was included in the 2006 constitution, but the government had failed to implement reforms until early 2015. Renewed interest in the move comes amid failed efforts in January 2015 by President Joseph Kabila to amend the constitution to allow him to stand for a third term in the 2016 election, as well as the rising popularity of Katumbi. This context has triggered rumours that the decentralisation drive is an attempt to replace disloyal governors with Kabila’s allies, providing further opportunities to amend the constitution before 2016. Katumbi, who is popular with both mining companies and the local population, had campaigned against Kabila’s constitutional amendments in January. Moreover, Katumbi’s growing popularity has been seen as a direct threat to Kabila, who is widely suspected of planning further attempts to remain in power.

Despite the political undertones, some government officials have framed the redrawing of provincial lines as a development initiative, with the potential to reduce costs for mining companies in Katanga, including Baar, Glencore and Freeport McMoRan. In particular, there are suggestions that decentralisation will spur upgrades to roads and power lines, as well as the development of rail routes linking Lualaba to Angola and Zambia. Power shortages are seen as a particular constraint on mining companies in the province, who face estimated daily shortages of between 600 to 1,500 MW. 

Funding deficiencies, however, mean such infrastructure developments remain unlikely in the short term. Despite huge mineral wealth, much of Katanga’s mining revenues are absorbed by the central government, which reallocated just 6 percent of what it owed to the province in 2014. There is no indication that Katanga’s budget will increase following the decentralisation process and there are some concerns that the newly created provinces could face severe economic difficulties. A 2010 World Bank report found that Haut Katanga and Lualaba would not be viable without significant increases in financing. 

In the absence of increased provincial revenues, there are fears among mining companies that they will be forced to pay taxes to both local and central authorities. Double taxation has long been considered as a potential means of increasing Katanga’s income. Former governor Katumbi had campaigned against the taxes and any increases in royalty payments, stating that this would deter foreign investment in the province. However, Katumbi’s departure and the redrawing of the provinces may provide the impetus to introduce the controversial regulations.

Decentralisation poses an additional threat of an increase in transportation taxes across Katanga. Companies crossing the full length of the main mining highway from Kolwezi to the Zambian border will now have to cross through two provinces, instead of one. This will provide both provinces - Haut Katanga and Lualaba - with opportunities to levy road taxes on mining trucks crossing their territory. Transportation costs for miners are already extremely high, and expected increases could dent the profitability of operations in the area. It costs around USD 1,300 to cross the Kasumbalesa border post into the DRC and travel 190 km through Katanga. This compares to just USD 1,000 to drive a truck from Johannesburg, South Africa, 2,000 km to the Congolese border.

In addition to the potential introduction of increased taxes, the newly formed provinces are likely to witness increasing political tensions in the lead up to the 2016 polls. There are few indications that Kabila will willingly step down in 2016 and should Katumbi choose to stand, this will almost certainly result in mass protests throughout his Katanga stronghold. Previous anti-Kabila demonstrations in Kinshasa in January resulted in a strong police presence and repeated outbreaks of violence, which left at least 40 people dead. Heavy clashes and confrontations with security personnel will be a feature of any further demonstrations over the coming months, elevating the risk of violence to bystanders. Close allies of Katumbi, cited by Reuters, have said he is likely to declare his intention to run in the election in September 2015. Any announcement that he will do so should be closely monitored as it will likely spark pro-Katumbi rallies and a strong government response throughout Katanga.   

 

Protection Group International Ltd

Congo, DRC: Decentralisation to increase transport and taxation costs in Katanga - Protection Group International Ltd
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