NewsCentral Africa'You've got to be endlessly optimistic to operate here': Doing business in the Democratic Republic of Congo

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Posted on Thursday, 11 January 2018 16:49

'You've got to be endlessly optimistic to operate here': Doing business in the Democratic Republic of Congo

By William Clowes in Kinshasa

Gwenn Dubourthoumieu for JAThe Africa Report talks to members of the DRC business community to find out what changes they would like to see to diversify the economy and improve the operating environment for companies large and small, and which barriers to business they would like to see the government remove

Doing business in the Democratic Republic of Congo (DRC) has always thrown up its fair share of difficulties, but the past couple of years have been especially challenging. “You’ve got to be endlessly optimistic to operate here,” says a factory owner. “Otherwise, you won’t last a minute.”

An economic crisis triggered by a slump in commodity prices saw gross domestic product growth crash to 2.2% in 2016 after averaging nearly 8% between 2010 and 2015. Copper prices have rallied this year, while cobalt – the DRC dominates global production of this increasingly coveted metal – has soared, but the fundamentals remain ominous. The Congolese franc has lost more than 40% of its value against the United States dollar since late 2015 and inflation so far this year has exceeded 43%, decimating the purchasing power of the population and companies. The impact has reverberated around the economy. According to Hervé Otschudi, an economics professor in Kinshasa, by mid-2017 a quarter of the banking sector’s loan book was non-performing, the rate of non-performing loans having almost doubled in 18 months.

Business must contend with ever greater political instability on top of the unpromising economic conditions. President Joseph Kabila refused to quit at the end of his second term in December 2016, and many argue that he is willing to go to almost any lengths to change or ignore the constitution to remain in power.

In its 2018 Doing Business report, the World Bank ranked the DRC as 182nd out of 190 countries. While it is a middling performer in terms of the ease of setting up a new business, for example, it is at the bottom of the global ranking for getting access to electricity and paying taxes (see graphic).

To find out what it is like in the trenches of commercial competition, The Africa Report assured its interviewees anonymity so that they could speak without fear of retribution.  What is it that really gives sleepless nights to those ballsy, or foolhardy, enough to do business in the DRC? It is impossible to pose this question to anyone involved without unleashing a torrent of complaints about the fiscal regime, not the content of the tax code per se but its unfathomable and opportunistic application.

‘lack of consistency’

An owner of a financial services provider explains: “There’s a complete lack of consistency in its implementation. All our competitors have different perceptions of the tax law. We paid PwC and EY for opinions, and both were different. We contacted the Direction Générale des Impôts [DGI, a tax agency] about value-added tax (VAT), and the boss said: ‘This is my opinion, but if I’m replaced tomorrow it may no longer be valid.’ We also know from experience that the DGI’s regional hubs in, say, Goma and Lubumbashi may have different opinions to Kinshasa.”

The uncertainty incentivises harassment, a problem exacerbated by tax departments being given annual targets for revenue collection and by agents being entitled to a cut of any fines brought in. The problem is so pervasive that in October prime minister Bruno Tshibala sent a letter to his cabinet informing them that he was suspending impromptu tax visits for four months. “As a chief finance officer, you spend 80% of your time looking at your tax assessment rather than your balance sheet,” says one ­financial director. “Everything is up for negotiation,” explains a business owner.

There was a big public debate about telecommunications companies and the tax they pay in the middle of 2017 after the government hired local firm Business Company Consulting (BCC) to examine companies’ tax payments. BCC said that because firms are allowed to report their own call and SMS statistics, they were under-declaring their revenue by $61m per month, representing a loss to the treasury of $17.6m each month. The telecoms providers denied those claims and said that the consultants used incorrect models and made miscalculations.  

In the crucial mining sector, the introduction of a new legal framework in 2002 was supposed to provide fiscal predictability. The mining fraternity, however, argues that it has not been reliably implemented. “The government doesn’t even know what’s in the mining code,” says a mining executive. New charges unforeseen by the law – often tariffs added at the provincial level – are tacked onto bills, and the mandated taxes are not straightforward either. “How can you maximise income tax if you’re a tax agency?” asks one miner. “You deny valid expenses and don’t let companies deduct them. It makes a huge difference.”

It is VAT, however, that really works the mining sector into a lather. In September, DRC’s main business federation revealed that the state owes mining companies more than $1.2bn in reimbursements for taxes and duties; non-reimbursed VAT accounts for about $900m.

The diplomatically minded refer to the withheld money as “forced borrowing” by a cash-strapped state. But one mining executive is more forthright: “The government is stealing from us.”

Earlier this year the government finalised the drafting of new mining legislation, which it had shelved in 2015 due to low commodity prices, and sent it to parliament. If the draft law is adopted, income tax, royalties and the state’s free stake will increase, while stability clauses will shorten (see page 76).

The industry is nervous. For some, such as Mark Bristow, the garrulous Randgold boss, the revised code would murder the sector by making most new mining projects unviable. Others are more circumspect but worry that the industry has been insufficiently consulted.

Meanwhile, once a company has battled the tax authorities, it must negotiate the sky-high costs of doing business in this vast, dysfunctional and poorly connected country. As one business owner says: “Legal costs are expensive. Banks are expensive and offer a very poor service. They are slow, make mistakes, and you must negotiate your transfer fees. They try to get away with up to 1% on an international transfer.”

legal costs, energy costs

The logistical demands on mining and manufacturing firms – importing and then trucking or barging material and equipment – are also heavy. “There were lots of surprises,” the factory owner said. “For example, we buy a tonne of coal from Richards Bay in South Africa for $85 to $90, but have paid $180 to $200 by the time it arrives at our site.”

A major constraint on economic growth is the lack of electricity and, subsequently, the elevated cost of energy. The DRC’s installed power-generating capacity is about 2,500MW but, following decades of underinvestment and mismanagement, much of that is not currently available. Demand from copper and cobalt miners in the south-east is thought to exceed supply by more than 700MW, forcing companies to resort to pricey alternatives – importing electricity from Zambia or running diesel generators – or scaling back production targets. As a mining executive says: “The government is shooting itself in the foot. Power supply should be top of the list in terms of strategic initiatives. We will never have an industrial revolution in Congo without it. They need to think beyond natural resources and the mines to when all this shit runs out.”

A manufacturer despairs: “You can count the number of proper factories in Congo on your fingers.”

A further worry for Congo’s more ethically upright business operators is the reputational risk associated with the country. Damaging scandals have been commonplace. The authorities in the United States fined hedge fund Och-Ziff more than $400m in 2017 for funnelling bribes to Congolese politicians via the controversial Israeli investor Dan Gertler.

Cement and beer

“Congo is perceived as a crooks’ haven, so lots of mining companies don’t want to come here,” says a local financial professional. “Do you want to go to a shareholder meeting and say you work in the same country as Glencore, Gertler and Gécamines?”

While a lack of technical nous on the part of the government irritates investors – “officials always make the right noises but there’s always a complete lack of specifics”, says one – some departments are at least trying to remove some of the barriers to business. One manufacturer commended the government for offering VAT exemptions and reduced tariffs to businesses that can prove they are helping to build up the local value chain.

Last year, partly due to the influx of cheap booze from Angola, Heineken’s Congolese subsidiary closed two of its six factories and took an asset-­impairment charge of €286m ($337m). Another manufacturer told The Africa Report that he welcomes the recent decision by the trade minister Jean-Lucien Bussa to ban the import of basic goods, including cement and beer, from DRC’s neighbours.

“That was a big win for us because Angola was dumping stuff at the border searching for dollars,” he says. He adds that he is unsure whether Bussa will extend the measure when it expires. “He has a hard choice: support local manufacturers or make goods cheaper for a poor population.” All too often, however, one gets the impression that Congolese decision makers are not acting in the interests of either group. 

This article came from the December/January 2018 print edition of The Africa Report



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