Eurasian Natural Resources Corp’s purchase of SMKK, a Congolese company that owned rights to copper and cobalt deposits, is just one of a string of questionable deals in the Democratic Republic of Congo highlighted by Kofi Annan’s Africa Progress Panel report.
The $75m deal in the mineral-rich Katanga region goes to the heart of the report’s criticism – namely that the Congolese state lost an estimated $1.36bn in potential revenues between 2010 and 2012 as a result of the alleged undervaluation of the assets.
The sum is equivalent to twice the annual education budget of the country, which ranks at the bottom of the United Nations Human Development Index.
The APP report states that offshore entities including the Fleurette Group – a company linked to Dan Gertler, an Israeli businessman close to President Joseph Kabila – made returns on five deals of $1.63bn on assets purchased for $275.5m if third party commercial valuations are used to determine their true value.
In the case of SMKK, ENRC already owned 50 per cent of the Congolese company via an earlier acquisition on Aim, London’s junior market.
In December 2009, ENRC agreed to pay $25m for a put option – the right to buy an asset at an agreed price – on the remaining 50 per cent stake in SMKK from a company held by the family trust of Mr Gertler.
ENRC also agreed to pay Mr Gertler’s family company an additional $50m when it transferred the shares to ENRC.
However, at the time of the agreement Mr Gertler’s family company did not own the shares. They were held by Gecamines, the Congo-state miner.
In February 2010 Gecamines, agreed to sell its 50 per cent of SMKK to Mr Gertler’s family company for $15m. But, according to a copy of the contract published by the DRC government, ENRC had to first decline to buy the SMKK shares for the Gertler transaction to proceed.
The sale went through.
Months later ENRC exercised its put option and paid Mr Gertler’s family company $50m to acquire those same SMKK shares. The APP report estimates that the Congo government lost $60m in potential revenues.
ENRC says that all acquisitions made since its 2007 initial public offering followed appropriate regulatory and board best practice and “were cleared by a committee of non-executive directors, led by our former executive chairman Mehmet Dalman, alongside the professional advisers whose approvals for these transactions is mandatory”.
A spokesperson for Mr Gertler says: “It is disappointing that the Africa Progress Panel Report 2013 has published basic errors, selective information and repeated the same old, disproved allegations against the Fleurette Group and Mr Dan Gertler.
The Fleurette Group is the biggest taxpayer in the DRC and has generated substantial inward investment, created tens of thousands of jobs and is the country’s largest long-term investor.
“Our actions bring much-needed investment to the DRC and we have knowledge and expertise that we would readily make available to the Africa Progress Panel.”
The APP was originally set up to track international development commitments to Africa but now lobbies on the continent’s broader development issues.
It states that these Congo deals are examples of how some resource-rich African states have failed during the recent commodity boom to maximise the benefits of mineral riches for the benefit of their populations.
Separately it says that transfer pricing – the transactions made by multinational companies between their subsidiaries – costs Africa billions of dollars annually, and argues that many governments have erred in providing excessive tax concessions to attract foreign investment.
It cited figures that showed in Zambia – Africa’s top copper producer – 500,000 workers employed in mining during 2005 and 2009 faced a higher tax burden than the companies they worked for.
The APP calls, among other international measures, for G8 and G20 countries to require full public disclosure of the beneficial ownership of companies; for companies bidding for mining concessions to disclose the names of those who own them or face penalties; and for Canada, China and Australia to support transparency standards in line with those recently adopted by the US and EU.
“We firmly believe that Africa could dramatically improve the lives of its people if they can ensure that they get a fair share of the revenues generated by the extractive industries, and use the revenues to invest in its people, in education, in health, in infrastructure and other things,” Mr Annan told the Financial Times ahead of publication.
Reporting by Christopher Thompson and William Wallis in London and Andrew England in Cape Town
This story has been amended since its original publication to omit an inaccurate detail about a bank’s role.
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