Low Commodity Prices and the Law: Rescuing DRC Mining Code Reforms

En Français

Low commodity prices are posing a challenge for legal reform of the mining sector in the Democratic Republic of Congo (DRC).
 
Following pressure from industry, and faced with dropping prices and mine closures, Minister of Mining Martin Kabwelulu recently announced that the government is dropping plans to reform the existing 2002 Mining Code. While the statement was apparently meant to bring clarity to a process that has been in limbo since the submission of draft legislation to the National Assembly in March 2015, ambiguity persists with mixed signals coming from different quarters of the government. The legal reform, in the works since 2012, has been a priority for various stakeholders, with the government aiming to increase revenues through reform of fiscal elements and civil society looking to increase the transparency and local development impact of the mining sector.
 
Given the continuing confusion around the future of reform of the Mining Code and the significance of the sector, it is important to evaluate the impact of any government decision to shelve the legal reform. It is also important to explore what, if any, options remain available to rescue the legal reform process.
 
Stabilization and the problem with waiting for higher prices
 
It is tempting to think that reforms should be set aside for now—with mining projects already under pressure from low prices—and be revisited when prices rebound. Given the 2002 code’s approach to guaranteeing fiscal and legal stability (i.e., stabilization) however, there is reason to critically evaluate such a position.
 
In effect the 2002 code (Article 276) provides that any legal reform, including fiscal, only becomes applicable to existing projects ten years after the adoption of a new code in order to maintain a level of stability attractive to investors. (N.B.: The government position in the current draft mining code legislation was that at least one key element—changes to royalties—should apply immediately; but this position was not accepted by companies.)
 
So even if the government waits until prices go up, any fiscal reform adopted at that time would only become applicable to existing projects ten years later—and no one can know what prices, and hence the impact on government revenues, will be at a point so far into the future. In fact, the 2002 code’s approach to stabilization, with a stabilization period triggered by the change in law rather than the date of contract/license signing, is quite unusual (see these studies at the regional and international levels), and the DRC should revisit this approach in any reform of the code. The current approach significantly handicaps the government in crafting economic policy because, with this constraint, fiscal changes are basically made blindly, without any knowledge of the context in which they will eventually apply.
 
Compromise is possible on fiscal issues
 
Even though the stabilization provision mentioned above complicates the DRC’s situation, it is clear that the current challenges faced by the mining sector clearly impact the appetite of governments and companies for fiscal reform. Nevertheless, there is reason to believe that even in this context a compromise on fiscal issues in the DRC’s mining code is possible.
 
A core government objective in revisiting the mining code has always been to reform the fiscal regime in the government’s favor. This came from a feeling, shared by many in the DRC, that it was time to revisit the intentionally “pro-investor” fiscal regime put in place in 2002, when the country was emerging from major conflict and seeking to attract international companies. Criticism of the code grew when fiscal revenue remained relatively low even during a period of high commodity prices and production. Pro-reform sentiment was echoed at the international level, with the IMF calling the existing code “overly generous” as recently as last October.
 
Having discussed the situation with different stakeholders in DRC, we at NRGI are currently conducting an independent analysis of the fiscal elements in the 2002 Mining Code and the draft revised version submitted to the National Assembly. This analysis uses financial modeling and assesses the overall fiscal regime (rather than focusing on just one fiscal instrument such as royalties) and compares the DRC with other similarly situated countries (based on factors such as geology, business environment and operational costs). When the analysis is complete, we aim to share it with various stakeholders in the hopes of helping to unblock the fiscal impasse currently holding up mining code reforms.
 
Our preliminary findings indicate that there are potential compromises that could, at a minimum, be of interest to all parties concerned. We found that the existing 2002 code is one of the most generous for investors among our sample of copper- and gold-producing countries. In contrast, the draft revised mining code would result in a very significant increase of the effective tax rate, placing the DRC’s rate amongst the highest of the countries studied, potentially above even Chile, a leading copper producer with a significantly more favorable investment environment than the DRC. We found this without even taking into account the excess profits tax included in the proposed reforms, which if implemented as currently drafted would in certain price scenarios take the tax rates significantly higher. At the same time the draft mining code includes positive steps such as stronger measures against thin capitalization and transfer pricing (see here for an explanation of these concepts and fiscal regime design), and more alignment with the general tax code.
 
While our analysis indicates that the government’s fiscal proposal in the draft revision likely pushes too far on the effective tax rate, particularly given talk of fiscal changes by neighboring governments to attract investors, it also indicates an opportunity for compromises that could potentially still improve the government’s fiscal position vis-à-vis the current code while also being realistic for companies.
 
One key shortcoming of the current code is its lack of progressivity. Progressive tax regimes increase the government percentage of revenues in high-profit scenarios, something that many in DRC felt was missing when prices were high. While mineral prices are low now, analysts including those at the World Bank, expect prices to rise in the future. However, the DRC’s current tax regime is not well equipped to take advantage of rising prices (i.e., it is not progressive). We estimate that making some changes to the current regime will allow the DRC to benefit from higher prices in the future without imposing a heavy burden on companies now. This is particularly important given the current code’s approach to stabilization. Such a progressive feature though should be differently formulated than the currently proposed excess profits tax. Finally, in order to get companies on board, the government should concurrently make some commitments to progress on rationalizing “para-fiscal” payments (e.g., provincial taxes on concentrate and transport) and increasing access to electricity, both of which clearly impact company financials.
 
Don’t miss an opportunity to support transparency, accountability and local development
 
In considering potential next steps on the mining code, it is easy to forget that the legal reform addresses more than just the fiscal issues that have dominated the narrative since industry started lobbying against the draft code. Shelving the mining code reform would result in a missed opportunity also on many other issues about which Congolese stakeholders, particularly civil society and local community groups, care deeply. Notably, outside of the fiscal reforms, the draft code contains provisions on:

• increasing transparency and accountability of companies and government by encoding into law good practices such as publication of contracts, disclosure of ultimate beneficial owners of mining projects and transparency of government mining revenues
• using competitive bidding (to increase value generated) when allocating mining assets previously developed by the state
• establishing a stronger framework for contributions by mining companies to local development projects

The provisions included in the draft code are not perfect and Congolese civil society had on multiple occasions provided suggestions for improvements. Nevertheless including the above issues and others unrelated to fiscal controversies was an important step in bringing the DRC closer to international norms of good governance and were generally agreed to by the various stakeholders.
 
Next steps for rescuing mining code reform
 
In light of the current confusion around the mining code and in order to avoid missing an opportunity to improve mining sector governance, the DRC government should reconsider its approach to the mining code. While the economic conditions for the mining sector are admittedly difficult at present, it is still possible for the government and industry to reach a compromise position that works in the current economic context and puts the DRC on stronger footing for the future, both from a fiscal perspective and with respect to other elements such as transparency, accountability and local development.
 
In order to do so, the government should re-engage with stakeholders such as industry and civil society in order to quickly reach a compromise and present this revised approach to the National Assembly in its next session starting in March. Alternatively, the National Assembly, where the legislation on the mining code reform formally remains, should raise the issue and invite the various stakeholders to express their positions so as to set the stage for constructive engagement on these issues of national importance for the DRC.
 
Amir Shafaie is a senior legal analyst at the Natural Resource Governance Institute (NRGI). Jean-Pierre Okenda is NRGI’s DRC country manager. David Manley is an economic analyst at NRGI.