Oil deal switch is new turn-off for Congo investors

* Investors fear mining, oil contracts will be torn up

* Political risk insurance premiums rising

* Money managers reducing exposure to Congo

By Katrina Manson

KINSHASA, July 15 (Reuters) - Democratic Republic of Congo's move to strip Britain's Tullow Oil Plc (TLW.L) of oil rights has added to concerns over the local business climate that are putting off foreign investment, insurers and fund managers said.

The Central African state handed to new sector entrants two sought-after oil blocks on Lake Albert that had previously been awarded to Tullow, according to documents seen by Reuters in June. [ID:nLDE65N1EV]

The step comes months after Congo cancelled a $700 million project with Vancouver-based miner First Quantum (FM.TO), which has seen separate legal setbacks for other operations there. [ID:nLDE64N04G]

The Canadian government this month delayed a debt relief deal for Congo to highlight its concerns over local governance. [ID:nN01156507]

"It's the sort of thing that gives African nations a bad name," said Stewart Kinloch, chief underwriting officer at risk insurer African Trade Insurance Agency (ATI).

"I think Congo is losing upwards of $100 million in foreign direct investment each year because foreign investors aren't prepared to back the country," he estimated.

"They don't have to pick Congo or Africa -- they can choose Asia or South America."

ATI's Congo risk insurance premium has risen 40 percent since last year as a result of the closure of of First Quantum's KMT copper and cobalt tailings project. Kinloch said the oil move would only add to the uncertainty.

"Any oil company runs a big risk that the next regime will do the same thing to them," he said.

The blocks were awarded to British Virgin Island-registered Caprikat and Foxwhelp, firms owned by Khulubuse Zuma, nephew of South African President Jacob Zuma, who has already announced plans to develop them. [ID:nLDE6611EO].

Congo insists the process was completely fair.

"This type of contract was the object of strong competition between different partners that each wanted to operate the contract and be the partner of government," Information Minister Lambert Mende told Reuters.

"Often there is acrimony on the part of those who lose the market and the first accusation they make about the others is that they are little-known," he added.

FUNDS WITHELD, INVESTMENT HALTED

First Quantum, together with the World Bank's private sector arm, the International Finance Corporation (IFC), has filed international arbitration papers over the loss of its Kolwezi copper tailings project, in which the IFC invested $5.4 million.

The IFC, which has invested $105 million in the country to date in banking, mining and other sectors, said it has since halted all investment in Congo.

South Africa's state-owned development finance institution, International Development Corporation (IDC), is claiming $8 million on its own political risk insurance with ATI for what it has spent on KMT so far, and is witholding another $80 million in funds that had been earmarked for its 10 percent stake.

Congo's business federation FEC wrote to Prime Minister Adolphe Muzito in a June 29 letter seen by Reuters saying security of title in the mining sector was becoming "more and more precarious" and perception of "Congo risk" worsening.

The FEC also said mining projects in the south, east and north of the country are at risk, with potentially devastating results for local people and state coffers.

Jamie Allsopp, fund manager at London-based Insparo Asset Management, which backs risky frontier markets that offer high returns, said his firm's $185 million Africa and Middle East Fund has cut its Congo investment by two thirds since last year.

"There is an accumulated lack of transparency in Congo," Allsopp said. "More uncertainty in Congo in terms of rights of assets leads to less investment in the region, and international arbitration won't be good."

Other investors are scaling back their Congo exposure.

"We're involved there but we're trying to dispose of assets -- basically we're trying to sell assets to bigger mining companies," said Rob Edwards, managing director of metals and mining research at Moscow-based investment bank Renaissance Capital (RNCG.PK).

"There is no doubt that it (risk) has been the biggest issue affecting foreign direct investment into the whole mining sector there," he said. "Even other African countries which surround Congo, view Congo as being a high risk environment."

(Additional reporting by Michael Taylor in London; editing by Daniel Magnowski and Keiron Henderson)