Does Congo mean business with rush of reforms?

KINSHASA (Reuters) - PricewaterhouseCoopers' Congo office was winding down for the weekend one Friday when a call came through from an international mining firm hit with a $10 million tax bill.

"Get someone here for Monday -- we have a meeting with the taxman," pleaded the client before sending a private jet to the capital Kinshasa to rush an adviser to their outpost in the Kolwezi mining district, 1,300 kilometers (800 miles) south.

By the end of the meeting that Monday afternoon, the demand had shrunk to a more digestible $300,000.

"Tax law here leaves a lot of room for interpretation. It can be used to intimidate you," said local PWC partner Benjamin Nzailu.

Such frights are familiar to investors in the Democratic Republic of Congo, the central African country of about 65 million people whose mineral wealth is matched by its reputation as one of the world's toughest business venues.

Only the Central African Republic fared worse in this year's World Bank ranking of the ease of doing business in 183 countries. But the stakes are so much higher in Congo than in its tiny northern neighbor.

Home to the world's biggest reserves of cobalt -- used in batteries, ceramics and dyes -- Congo has gold, silver and diamond mines, and holds some of the world's largest stores of copper, tin and metals such as tungsten, a component of many mobile phones.

Despite news headlines focused on the rebellions that simmer across Congo's east, Europeans, Americans, Asians and others need no convincing of Congo's potential. Their firms have sought to increase their foothold since 2003, the official end of a five-year civil war that sucked in neighboring countries and led to an estimated 5.4 million deaths.

2,000 TAXES

Last year's surge in the price of copper -- which at around $6,800 a ton is double its value a year ago -- bodes well for recent deals such as a $3 billion copper and cobalt mine backed by China's Sinohydro Corp and China Railway Construction Corp.

But widespread corruption -- and business laws in some cases dating back to the 19th-century rule of Belgium's King Leopold II -- mean only a fraction of the peace dividend has been tapped. The social cost is such that 75 percent of Congo's population live on less than a dollar a day.

Inflated tax demands are far from the worst risk. In a review of 61 mining projects, Congo last August stripped Canada's First Quantum Minerals of its permit for a $550 million copper and cobalt project, accusing it of missing production deadlines.

That dispute is now before international arbitration. The fate of another copper and cobalt project, majority-owned by U.S. miner Freeport McMoRan, is still in the balance.

Red tape is a national disease. The World Bank calculates that starting a business in Congo takes about 150 days -- three times the norm for the rest of sub-Saharan Africa and over 10 times the average of developed economies, which is 13 days.

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The local business confederation (FEC) estimates that any company wanting to build a nationwide presence will face 300 basic taxes, a figure which can rise to a total of 2,000 including various local, provincial charges and other levies.

Land disputes are common. One developer's pitch for a planned luxury development in Kinshasa boasts that it will be built on an artificial island in the River Congo -- the location aimed at ensuring there are no historic claims to the land.

Keen to show a new face by June 30, when the country plans festivities to mark its 50th year of independence -- and with one eye on persuading donors to grant debt relief -- President Joseph Kabila has launched an unprecedented drive to revamp business, labor and fiscal law.

The unofficial target is to jump 20 places in the World Bank rankings, putting Congo in contention with frontier economies such as Gabon or Senegal which have enough credibility to have launched Eurobonds to international investors.

"No one can doubt the political will behind this effort. The entire government machine is involved," said Congolese Planning Minister Olivier Kamitatu, the official in charge of the reforms, in an interview.

Congo is due soon to offer assurance to investors by adopting a set of harmonized business laws agreed by 16 Western and Central African states known by its French acronym OHADA.

GROWTH DASH

OHADA in itself is no guarantee of progress: as with European Union directives, many countries drag their heels about turning its initiatives into national law. But investors welcome it as a step toward a more a predictable environment.

"It's a good sign," said Regis de Oliveira of French logistics group Bollore SA. "Everything here is still to do -- water, energy, transport. But the lack of commercial security is a brake. There is no judicial framework."

For Minister Kamitatu, an ex-rebel leader who brought his Alliance for the Renewal of Congo (ARC) into Kabila's coalition, private investment is key to a dash for growth that authorities hope to set in motion before a presidential election in 2011.

"The (2008/9 global economic) crisis sent our growth rate down to two percent. This year I am hoping it will come back to around seven percent and in 2012 I hope we reach double-digits," he said.

But Kamitatu acknowledges Congo's real challenge is to ensure the reforms are implemented on the ground by poorly trained and paid civil servants, local prosecutors and judges who make up the country's one million public sector workers.

Matipa Mumba, coordinator of the committee charged with proposing reforms, said some sections of the civil service are resisting carrying out tax cuts as they see them as a threat to their office's intake and, ultimately, to their own income.

"It scares them because they have budget targets to meet," said Mumba of receipt targets that help shape their salaries.

KICKBACK TEMPTATION

For others, the reform effort is condemned to fail because it does not strike at a Congolese affliction which spread during the three-decade rule of dictator Mobutu Sese Seko and remains rife 13 years after his death: graft.

"In this country you can become a minister with $100,000 worth of assets and leave with a $1 million. No one bats an eyelid," fumed Jean-Lucien Mbusa, vice-president of the National Assembly's economic and finance committee.

"As long as corruption and embezzlement of public funds is not fought tooth and claw, there is no point in having any of these laws," said the opposition deputy, noting that ministers were not obliged to declare their assets when leaving office.

The complaint chimes with perceptions among both ordinary Congolese and business people, who in the latest ranking by Berlin-based graft watchdog Transparency International placed Congo as the 14th most corrupt country out of 180 surveyed.

"Article 15" -- a Mobutu-era joke about a supposed article of the constitution urging Congolese to resort to theft to make ends meet -- still gets a laugh on the streets today, emblazoned as an ironic motto on the hood of one Kinshasa taxi.

Often, the kickbacks needed to grease the wheels of business are temptingly small. Speaking on condition of anonymity, a manager of one import firm said the bribes needed to win import approvals for a $2.5 million equipment order placed by a leading aid agency came to just $60,000 -- barely scratching his margin.

"At the port of Kinshasa, you can pay to have your shipments unloaded first," said one business consultant in the capital, "Or you can wait."

Most businesses profess to want the level playing-field that complying with predictable laws would bring. But for now, few believe the government drive will be enough in itself.

Poupak Bahamin of Canadian law firm Heenan Blaikie, representing the Canadian miner First Quantum, welcomed the reform effort. But she suggested Congo should go further and sign treaties with home countries of investors "to give them comfort that if they go to international arbitration, their rights will be respected."

PricewaterhouseCoopers' Nzailu forecast real progress will be hard without a shake-up of the civil service, conceding: "That would take huge political courage." For now, he said he could only urge entrants to tread carefully.

"Think hard before taking any shortcuts with regulations," he advised. "Take your time tying up a contract -- and make sure there are no holes in it."