Guy Scott on Boom and Bust on the Copperbelt

Dear MineWatchZambia readers.

Sorry to have been away or so long. I have taken a break from blogging to concentrate on other projects. Nonetheless, I am breaking radio silence today to bring you two bits of news.

The first is that I have posted a powerpoint presentation on Boom and Bust on the Zambian Copperbelt that I have been trawling around British Unversities at my academia website http://oxford.academia.edu/AlastairFraser/Papers#d84853. Comments very welcome.

The second is that I have just read an excellent article on the recent revisions to the Mining Tax regime in The Post by PF General Secretary Guy Scott (it's written in a personal capacity).

While he disagrees (as do I) with the Government's recent moves to cut the Windfall Tax at a time when it's not operating anyway, he offers an interesting speculation on what Government negotiators might have been thinking. I was utterly bemused by their moves before I read this, so I'd be interested to know what others make of it.

"Zambia and recession – part 5 Written by Dr Guy Scott

There are more than 100 countries with higher GDP than Zambia. A hundred years of GDP at Zambia’s current level would roughly equate to the size of President Obama’s first (and it is only his first) stimulus package. Given our tiny quantum of economic clout it can safely be said that Zambia will have no role to play in saving the world from recession. Our job is to look after ourselves, perhaps with a now-and-then concerned glance at our neighbours since we do not want unrest across our borders.

There are several ways in which the recession impinges upon Zambia. But first, how long will this thing last? Ben Bernanke, the Chairman of the US Federal Reserve Bank (the “Fed”), is talking about a turn-around within the current year and recovery in 2010. However, the logic of recovery (which is “bubble” logic not “classical” logic) demands the prior restoration of confidence in the minds of consumers and investors. Even if Bernanke thought, as an economist, that the recession might last for several years he would not loudly say so. Part of the job he has, along with many other people, is to create an expectation of recovery that will hopefully become self-fulfilling. (Actually, if you read his statements carefully, you will discover that a “full” recovery is likely to take more than two or three years; so he is covering his professional reputation). Every responsible owner keeps his or her car insured. This is not because they want it to crash or be stolen; nor is it because they expect it to crash or be stolen; it is because they know that it might just, through no fault of their own, crash or get stolen. They hope for the best; but they insure against the worst. With the recession, our leaders may hope for the best, but they must also plan for the worst. Things may get even worse, and the bad times might last long. Now, can we sustain ourselves through a long night if we have to?

The most obvious indicator of hard times in Zambia is the slump in the world copper price; this is accompanied by layoffs of mineworkers and a slowdown in industries servicing the mines. Hard on the heels of all this we will see a drop in tax revenues, and a virtual cessation of new productive investment once unavoidable pre-slump commitments have been fulfilled. Government (particularly Minister of Finance Situmbeko Musokotwane) has been expressing some joy in the fact that current (slumped) copper prices are nonetheless higher that those that preceded the onset of the copper boom three or four years ago. Against this correct observation, however, must be placed the fact that Zambia’s copper output expansion has involved increasingly expensive and capital-intensive extraction – exploiting more and more low-grade or hard-to-access ore. Furthermore, actual extraction is turning out in several new mines to be significantly below projections. So, many mining operations are not actually viable at current price levels of c. US$3,300 per tonne (versus over US$8000 in the middle of last year). The mining industry will shrink, as it has already started to do, unless prices rise.

The Minister of Finance (and National Planning, note) has brought to Parliament a proposal that the mining industry should be relieved of the Windfall Tax and given 100 per cent capital allowances. The windfall tax is a tax introduced to direct some of the excess earnings created by runaway prices into the pockets of Zambians. It was a feature of last year’s budget, following vocal concern by the opposition and some NGOs that Zambia was not receiving her fair share in the boom. Now the windfall tax does not cut in until prices exceed US$5,500 per tonne so it is of no direct short-term relevance in the present market situation. The same goes for capital allowances. These are allowances deductible from profits for the purpose of computing profits tax; in the absence of profits the allowances are meaningless. Why has government made the tax adjustments outlined in the previous paragraph? The logic is funny; indeed it seems to be a form of bubble logic, designed to create an upbeat future scenario rather than directly affect the present. The deal runs like this: If the government promises that it will make life easier and more profitable for the mining companies in the rosy future when prices have recovered then the companies will soldier on, through the dark night, warmed by visions of earnings beyond the dreams of avarice in the good times to come. So the tax breaks are a kind of trick to build hope and confidence, but who is tricking who?

The big problem that emerged during the copper boom was that government had not foreseen the possibility of such a thing when it negotiated “development agreements” during the very hard times of privatisation around the year 2000. The companies managed to get tax concessions galore against the fact they were making no money with which to pay tax anyway. The companies had the whip hand; government’s negotiators – or “negotiators” – were so relieved at being able to unburden the State of the loss-making mines that they completely overlooked the prospect of boom time. What would happen if copper prices went through the roof? Nobody thought; and no provision was made for Zambia to share fairly in any windfall. It subsequently took a lot of campaigning to get an equitable taxation system into place; and now the Honourable minister is proposing to dismantle most of it.

We are almost back where we started, with the companies calling the shots, backed by the implicit threat of more layoffs and consequent political unrest if government does not wag its tail. And how solid is the deal anyway? Has the mining industry stopped laying off workers? As of the week before last it had not. Indeed it may be the case that the promise of the “goodwill” tax concessions being passed by Parliament and coming into being (if not actual effect) on April 1st has prompted some pre-emptive layoffs. (By this I mean that it will be more difficult, morally speaking, to lay off workers once the govt’s promises are actually passed into law than it is now when they are only proposals). And from the government’s side, how firm is the commitment to maintain a company-favouring tax regime once prices rise again, whenever that may be? Some pundits are saying that the future of electric vehicles and similar low carbon technology will propel copper prices into five figures – even as high as US$30,000 per tonne or nearly ten times the present level in a decade or two. Will there still be no windfall tax; will there still be 100 percent investment write offs? Is there any government, even an MMD one, that would sit back and watch our country being bled dry? It is not easy to negotiate in the dark, without a crystal ball or traditional Chienge-style computer to help you gaze into the future. Sure; but then there are people whose profession is to do exactly that though I doubt they have been utilised. My guess is that our team has not been very steely nerved or imaginative about negotiations. I would have been inclined to leave distant taxation off the table and look at ways of helping mines to keep going during the recession. We used to have in Zambia a Selective Employment Tax which embodied deductions for creating and maintaining jobs. Why not bring back such a thing if your primary worry is job losses? But I wasn’t there so I don’t know all the factors that had to be taken into consideration.

Inadvertently, the weakening of the kwacha against the US dollar has actually acted as a subsidy to the employment of mineworkers (since it now cost less in dollars to pay each of them each month). Perhaps in this case economic nature and her mysterious market workings know better than Zambia’s tax bureaucrats. We will have to take a look at the dance of the currencies next week.

Finally, some housekeeping. The views expressed in these articles are merely my own thinking-aloud as a professional economist; they do not represent official policies of the Patriotic Front. And the email address I gave last week was wrong; it is actually mano@zamtel.zm. Sorry for that."

Thoughts on mining, resource security and 'special' relationships between Zambia and China

Dear Minewatchers,

Alastair was recently asked, at a presentation at Oxford, why China appeared to have a ‘special’ relationship with Zambia, and why China would expend diplomatic efforts on Zambia. He asked me the same question, and I wanted to share with fellow Minewatchers my thoughts on this. Of course, the received wisdom suggests that, over the long run, China’s demand for resources is certainly a key element of China’s Africa strategy, together with access to markets and the forging of diplomatic relations. However looking specifically at the case of Zambia, what evidence is there a) that Zambia plays a key role in Beijing’s resources strategy; and b) that this constitutes a ‘special’ relationship that goes beyond diplomatic relationships with ‘traditional’ foreign powers.

Re the role of Chinese investment in China’s resource strategy, the first thing to look at would of course be whether NFCA exports its copper directly to China. However the way the copper markets typically work is that producers sell their copper “at mine-gate”, meaning that they contract (often on a yearly basis) with copper traders like Republic House, Trafigura, Glencore and others (the exception is KCM which markets some of its finished copper directly to end-user consumers – whether this is a legacy of AA’s operation or a practice that came with Vedanta I’m not clear about). These traders are often based in Switzerland, explaining the UNCTAD stats. The copper traders then sell it on en route to consumers across the world. To my knowledge there is no way of seeing how much of Zambian copper ends up in China.

NFCA has been a bit different – without their own smelter they were initially (since production of copper concentrates began in 2005) exporting pretty much all their ore to South Africa (to the processing facilities of Palabora Mining, majority owned by Rio Tinto). I don’t have the stats here but the Palabora annual reports includes the amount of copper concentrates bought from NFCA and I think the majority of the UNCTAD stats on Zambian concentrates exported to SA is from NFCA. I asked NFCA Deputy CEO Gao about direct supplies to China and he said transaction costs in getting the copper to China are high and that “I would much rather sell the copper and deliver the profit”. However, off-the-record interviews with NFCA staff working in finance and exports/imports suggest that direct sales to China have been increasing, and that by the end of 2007 maybe a third of the final product was going to China. The chief accountant told me that all produce had initially gone to SA because NFCA “wanted to test the market” (note that during the time I was in Zambia talking to ppl, the Chambishi Copper Smelter had not yet come online – to serve NFCA, Lumwana and others – and I don’t know if the marketing of CCS finished copper would be via copper traders or direct).

It thus remains unclear just what role NFCA plays in China’s resource strategy. I think it is safe to say that there is no element of the Angola-model (loans-for-resources) at work in Zambia. However my evidence supports an interpretation of investments such as NFCA as a form of *hedge* in China’s resource security. A long-term consultant for Chinese MOFCOM in Beijing told me (in reference to Chinese oil investments) that global commodity markets are generally well-functioning, suggesting that if resource prices spike due to some severe supply disruptions, then Chinese companies (like NFCA) can sell their copper at higher margins and “deliver the profit” (which could then – in theory – be used to subsidise Chinese copper marketed to domestic industries). However, he argued that although resource security is not a problem under normal circumstance, he could envisage a situation where disruption to global supply (of e.g. oil) becomes such that the markets simply cannot physically supply enough of the resource, and in this case China could then instruct overseas companies to supply directly.

Now, I think that the Chinese leadership is keen on letting market forces run their course in business-as-usual circumstances, being well aware that exposing their industries to market forces is the only way for them to become internationally competitive. I agree with Nina that there is probably little political influence over the day-to-day activities of overseas Chinese SOEs (and institutional reforms decentralizing approval process of overseas investment support this). However, I think that Beijing retains the right to intervene in extreme situations. This is made possible by the control that Chinese political leadership still exercises over its SOEs, mainly through its ability to easily replace managers, control funding etc. Here we should note that there is a difference between SOEs and SOEs: the larger central-level SOEs (there’s about 150-odd “national champions” that have been specifically selected for incentives for going abroad) are considered minister-level SOEs, in the sense that their top bosses have the rank of minister in the political hierarchy. These SOEs do not have western-style boards of directors, but are governed by so called ‘party groups’ comprising senior CCP cadres (up to 9 of them, and always an odd-number) who appoint (senior) managers of the SOE. As discussed on the MWZ blog, it is pretty clear that Beijing foreign policy does not permeate the activities of all and sundry Chinese in Africa, but for the central-government SOEs (such as CNMC, parent of NFCA) I would think this influence is certainly there.

To conclude on the role of Zambia in China’s resource strategy, I think there definitely is a strategic element behind these investments, in particular due to the proximity of the Chambishi SEZ to Katanga in DRC. If the Chinese investment into Katanga’s state-owned mines (Gecamines) goes through as part of the $9bn loans-for-resources deal, companies set up in Chambishi are likely to be used to service these mines. The investment pattern around Chambishi already exhibits this pattern of networked businesses providing control throughout the value chain (Chambishi Foundry producing thing mill balls that goes into NFCA’s crusher/concentrator, Sino-Acid producing the acid for NFCA’s leach plant etc., although they all sell to third parties as well). Whether the PRC strategy is effectively implemented or not is another story, given what appears to be a gap between long-term strategic interests and short-term profit objectives of managers on the ground. As I understand it, Chinese managers suffer from insecure ‘internal property rights’ (they are easily replaceable in unaccountable ways, where funding is politically controlled and can be withdrawn if a manager steps out of the ‘party line’). It is therefore ironic, in my view, that this situation is likely to make these managers *more* short-sighted and to promote behaviour (e.g. cut costs on maintenance etc.) that actually undermine the long-term interests of Beijing foreign policy makers that constitute the ultimate shareholders of NFCA!

Turning then to the question of whether or not China has a ‘special’ relationship with Zambia, we know two things for sure, first that everybody seems to think so, and secondly that there is preciously little hard evidence that this is the case! How might such a relationship manifest itself? In trying to sketch this relationship, one thing that jumps out at me is that there appears to be a good ‘fit’ between how the Chinese are used to doing things and how the Zambian leadership prefers to do things. The Chinese like to negotiate and present economic deals within low-transparency contexts that are political as well as informal, as do Zambians (plenty of ‘courtesy calls’ at which projects are announced with scarce detail). So a key feature of this relationship is its general opacity. This implies that that Chinese dealings are seen with much suspicion, and the truth is probably that there may be some preferential treatment going on, but only at the margins. Supportive of the view that GRZ could not – even if it wanted to – ride roughshod over governance rules and norms in its treatment of Chinese interests is the fact that western donors are still providing about a fifth of the country’s budget! Some examples of favours that are granted might include how Mwanawasa gave the go-ahead for BGRIMM to be re-established before impact assessments had been completed. As an official at ECZ notes “of course when the President makes a statement like that, it constrains how we work”. What else might Chinese interests gain from cultivating a ‘special relationship’? Perhaps a willingness of Zambian leadership to expedite Chinese projects, give quick approvals etc. (e.g. Chambishi SEZ where they started clearing the bush as soon as the project had been name-dropped at FOCAC). As noted above, I don’t think there is much political influence in the day-to-day operations of companies like NFCA post-entry, but I do think that the Chinese government plays a role in brokering the entry of Chinese investors.

Then there is the question of what the GRZ leadership might gain from this relationship, i.e. what incentives might there be to offer the Chinese preferential treatment? I have evidence of senior politicians receiving gifts (TVs etc.) imported by NFCA, and there have been some suggestions that the Chinese have provided party funding for MMD (here unfortunately I have no evidence, if anyone does I’d be pleased to hear it). More obviously the Zambian leadership gets access to funding for visible and popular projects that would not have passed western donors’ pro-poorness hurdles (e.g. Ndola stadium).

In general I think the welcoming of Chinese investment also reflects the attitude of the late Mwanawasa that foreign investment was essential for Zambian economic development. As we know the impacts of FDI on growth and development are highly context-specific and by no means automatic, however a WB person I spoke to suggested that Mwanawasa’s non-economist background may have contributed towards an poor understanding (and consequently uncritical stance) towards the development potential of FDI.

To sum up, I think this relationship does not completely mirror other diplomatic relationships, it appears more informal, with greater involvement of politicians rather than technocrats, but probably not exceedingly ‘special’ in its outcomes (i.e. ongoing and systematic preferential treatment of Chinese). Both parties prefer the same low-accountability ways of engagement, but this need not (necessarily) imply significant departures from the legal/established systems, or that special ‘favours’ are granted. Rather it may simply reflect high transaction costs of accountability: even if you do not have anything to hide, having to explain yourself to critical voices is costly and takes time and effort!

I would be delighted to hear what other people think about this, and if it fits with your own experiences. All comments are most welcome.

Dan Haglund
University of Bath
d.haglund@bath.ac.uk

Bench Marks criticise Copperbelt standards

The Daily Mail reports on a new Bench Marks Foundation (BMF) report that says some mining companies on the Copperbelt are operating with lower standards compared to their parent companies in developed countries.

The Bench Marks Foundation is an independent organisation monitoring corporate performance in the field of corporate social responsibility (CSR).

And Southern African Development Community (SADC) countries including Zambia have been urged to unify mining legislation to avoid some countries becoming pollution havens for unscrupulous mining corporations.

A BMF research report on corporate social responsibility in the Zambian mining industry said there were a number of companies that operated with much lower standards in terms of health, safety and environmental protection than their parent companies were doing in more developed countries.

The report urged companies to apply the same standards of health, safety, pollution prevention as elsewhere in the world.

And the report said that there were serious concerns about the legislative environments within which mining corporations operate throughout SADC region.

The report said in the divide and rule rush for mineral investments some African countries could fall pray to abuse and
exploitation.

It further suggested that SADC Governments must develop the capacity to have control of mineral resources in processing, manufacturing and marketing the minerals that were currently being undertaken beyond national borders.

The report however said Zambia’s mining legislative framework was well structured, comprehensive and thorough, but lacked implementation due to inadequate manpower to enforce various pieces of legislation and to realise the objectives of various departments.

According to BMF, the implementation and monitoring of policies were problematic as a result, serious environmental and social problems existed through out the country.

The report indicated health, safety and labour issues as major threats to the mining environment and presented huge challenges to the industry.

“For the industry to be successful in the long term, it needs to obtain the support of the communities in which it operates,” the report read in part.

The report indicated that sound relationships and cooperation between the different stakeholders including mining companies, civil society, Government and communities were essential for the sustainability of the mining sector in Zambia.

The research on corporate social responsibility and the extractive industry in southern Africa is a research project of the BMF in collaboration with the Peace, Principles and Participation Network covering Zambia, Angola, DRC, Malawi, Mozambique and South Africa.

There is more on the foundation here: http://www.bench-marks.org.za/

So... First Quantum are special after all!

Reuters report today that Mines Minister Mwansa has confirmed that First Quantum is renegotiating its tax regime and that other might follow.

Mines and Mining Development Minister Kalombo Mwansa told Reuters in an interview the government was in advanced talks with Canada's First Quantum Minerals, which has raised serious objections to the new fiscal regime. "There have been discussions between First Quantum and the ministers for justice and finance over the tax issue," Mwansa said.

"We are ready to dialogue to keep mining viable so that they (mining companies) keep expanding and remain profitable." Mwansa said negotiations to cut some taxes would be extended to other mining investors who approach the government over their operational difficulties. "We are open to dialogue if there are problems at individual mines because the taxes were introduced to benefit the government while they (firms) remain viable," Mwansa said.

Peter Hitchens, China and Sata

Here's a strange intersection of old-fashioned China-bashing by a well-known defender of Western imperialism, old and new, and a relatively serious discussion of labour conditions in DRC mines and the impacts of PF campaigning in Zambia. Shows the way in which the Zambian and DRC mine labour situations, which have long been ignored by academics, journalists and politicians, suddenly become more sexy when they bump into with the western pre-occupation du jour. The Chinese mines really aren't that much worse than those owned by other multinationals!

Anyway the long article is in the (British) Daily Mail.

Election fever puts wind up FQM management

This story in today's Post made me laugh.

KANSANSHI Mining Plc has banned its workers from conducting political campaigns for the presidential election on the mine site.

In a memo addressed to Kansanshi Mine and First Quantum Mining Operations (FQMO) mining division workers on Monday, Kansanshi general manager Russell Alley said no worker would be permitted to use company resources for political campaigns.

"The election campaign is bound to be very active in the run- up to the election date, the First Quantum Minerals Group policy is for us as a company to remain non-partisan," Alley stated. "However, staff are free to exercise their right to affiliate with or support a candidate of their choice but not be permitted to do this or influence others on the mine site."

Alley warned of serious action against any worker found to be breaching the outlined guidelines of the company regarding the presidential election.

Alley urged workers to maintain peace and harmony during the campaign period and on the actual day of voting.

But sources at the mine said management had been prompted to ban political campaigns because most workers are campaigning for opposition political parties.

They said the workers at Kansanshi Mine and FQMO had complained that the MMD government was more concerned on protecting the welfare of expatriate workers and the mine than protecting its own people.

Sata focuses on labour ights

The story pasted below, from the Daily Mail this morning suggests that, having been a key driver of the state's focus on mines safety and taxation after the last election, opposition leader Michael Sata will focus this time round on terms and conditions. Without an alliance with the smaller opposition parties, particulally the UPND, it seems relatively unlikely Sata will improve significantly on his showing in 2006, but his ability to highlight popular concerns and pressure the ruling party is already proven. With an update to Zambia's ancient and oppressive labour legislation constantly promised and never delivered, this could be an important intervention.

PF's positions on two major policy issues appear confused however. How will they align themselves on the proposed return to a one-industry, one-union rule? Joyce Nonde of the threatened FFTUZ is one of the few civil society leaders to explicitly back PF. But the issue is divisive on the Copperbelt. Secondly, what is the PF position on mine taxes. Sata's staunchest supporters, Given Lubinda and Guy Scott have led the charge against the companies in Parliament threatening to lead mass action against companies refusing to pay. And yet, just as a political open goal has opened up in the middle of the campaign, with the companies openly resisting the new regime, PF suddenly seems to have gone quiet. Sata decided some months ago that the appropriate line of attack against the MMD was the means by which the taxes were imposed unilaterally. That left a gap between the most senior PF politicians. Can they close it and speak with one voice?

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Sata counsels mine owners
By MUKULA MUKULA

PATROTIC Front (PF) president Michael Sata has urged mine owners on the Copperbelt to improve conditions of service for their workers.

Mr Sata also said mine owners owing suppliers should settle the debts.

He was addressing Kitwe residents at Freedom Park.
Mr Sata is one of the presidential candidates in the October 30 election.

He said if elected, he would introduce laws that would bring dignity to workers, especially those working in the mines.

Mr Sata alleged that miners on the Copperbelt were suffering because the privatisation of mines was not done well.

He said he would pursue those who allegedly mishandled the privatisation of the mines under President Chiluba.

Mr Sata alleged that he was in the MMD long enough to know the people who mishandled the privatisation process.

“We shall change the laws to suit our environment and to suit the international employment act. Any job that can be done by Zambians should not be for expatriates,” he said.

Mr Sata said he had no intention of chasing away any investor as he would welcome those who respect Zambia’s labour laws.

Mr Sata said if PF forms government, he would ensure that every chiefdom and township had a secondary school while those run by the missionaries would receive 100 per cent funding.

He said pensioners and retirees would promptly receive their dues in his government.

Lumwana fancies can hold old DA

More on that gradual climbdown from the Zambian state... Reuters seem to be acting as a mouthpiece for more and more assertive companies. They report that Equinox Minerals expects its existing agreement with the Zambian government will shield it from higher taxes being implemented in the country.

Speaking to analysts and investors in Toronto, CEO Craig Williams said that Equinox's 2005 development agreement, which includes lower taxes, has so far been respected and he expects that will continue. "There's no guarantees here, but we do believe our development agreement has strength," he said, but added: "There might be some room for compromise on both sides."

Blackmont Capital analyst George Topping said Lumwana is still a strong asset, even if Equinox ends up being taxed to the full extent of the new laws. "I think they will have to pay more tax. Whether they'll have to pay the full extent, I'm not sure," he said.

Williams also said he does not expect next month's presidential election in Zambia will be an issue for the mine.

Lumwana is now expected to start production in December, after a fire at the site's processing plant delayed its original startup date of August.

Full production should be reached in May or June 2009 at an average 172,000 tonnes of copper a year for the first six years of the mine's 37-year life.

Equinox also expects to eventually produce uranium from the mine and use it as a cost offset. It envisions building its own treatment facility, which could be running in six years, and would save the cost of transporting metal to other smelters.

The company has often been rumored as a takeover target, with likely suitors including First Quantum Minerals (FM.TO: Quote, Profile, Research, Stock Buzz), which holds just over 16 percent of Equinox.

Blackmont's Topping said he still sees it as a target, adding that any buyer would likely wait until after next month's presidential election and the finalization of the new tax regime.

That Miningbeat blog in full - KCM/FQ/ZCCM/ZCI

CLARIFICATION - THIS ARTICLE HAD BEEN PASTED TO THE SITE WHERE I FOUND IT FROM Minesite. You need a password to view the site but it is free. The original was written by Michael Coulson.

http://www.minesite.com/nc/minews/singlenews/article/interesting-goings-on-at-zambian-consolidated-copper-mines/80.html?tx_ttnews[swords]=Coulson&cHash=72e9436e2c

There is so much information and, let's admit it, unsourced speculation in this article I thought it worth reproducing the whole thing particularly as it doesn't seem to be possible to comment on the original where it was posted....

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Interesting Goings-On At Zambian Consolidated Copper Mines

There have been some significant developments down in Zambia in the wake of Minesite’s earlier story that the Zambian government might be prepared to reconsider the new levels of mining tax that it’s imposing, if the government’s own 87 per cent owned Zambian Consolidated Copper Mines (ZCCM) started to receive meaningful dividends from its Copperbelt joint ventures. A particular emphasis was laid on the Kansanshi project.

We now understand that First Quantum, the Canadian miner which operates Kansanshi, has entered into discussions with ZCCM about the payment of dividends from ZCCM’s accumulated but undistributed share of Kansanshi’s profits. These, after taking account of ZCCM’s share of Kansanshi development and capital spending, are believed to be well north of US$100 million and rising fast. The problem that has arisen for ZCCM is that when the Zambian copper industry was restructured in the early part of the decade, the joint venture agreements between the new foreign operators, ZCCM, and the government did not address the payment of dividends to the minority shareholder, ZCCM. Some operations, such as Mopani and Konkola, have occasionally paid dividends, but as the copper price has stayed high the profits flowing to the foreign operators have risen sharply, far outpacing any dividends flowing to ZCCM.

In November of last year ZCCM’s then chief executive, Joseph Chikolwa, addressing a conference in London, revealed that he believed that ZCCM’s net asset value was around US$1 billion or US$11 per share. This figure derives from a valuation done for the company by, we believe, Rothschild. ZCCM is mainly traded in Paris where it is priced in Euros. The US$11 figure was then equivalent to around €8.00 per share (the current price is around Euros €2.50; in October 2007 the share price reached Euros €6.40). Those who know both ZCCM and First Quantum generally consider that Kansanshi is the most valuable and profitable of the current Copperbelt mines.

However, in the last week or so, an intriguing transaction has been proposed in India concerning Vedanta’s Konkola copper operation. The Anglo-Indian group now owns a 79 per cent stake in Konkola following the controversial acquisition of ZCI’s 28.4 per cent holding. Following the recently announced re-structuring of the Vedanta group, Sterlite Industries India (SII), 60 per cent owned by Vedanta, is to acquire Vedanta’s 79 per cent stake in Konkola, in exchange for 364 million Sterlite shares. Currently Sterlite shares trade in Bombay at Rs505 (US$11.20), but as part of the Vedanta restructuring SII is getting rid of its stake in Madras Aluminium (MALCO) so, with the issue of new shares to Vedanta as well, SII’s residual value will have to be adjusted.

The Indian broking firm, Emkay Shares, has calculated a residual per share value for SII, once all the restructuring has been completed, of Rs355. MacQuarie suggests a slightly lower figure. This translates into a value for the Konkola asset of Rs355 times 364 million new SII shares, or Rs129 billion. Since that value is for 79 per cent of Konkola, it follows that if a similar value is attributed to ZCCM’s residual 21 per cent stake, the residual stake would be worth Rs34 billion, or €530 million, or €5.88 per ZCCM share.

It’s worth pointing out in passing how these figures compare with Vedanta’s US$213 million take-out price for ZCI’s 28.4 per cent stake in Konkola. In today’s circumstances ZCI’s holding would have been worth around US$990 million! It’s little wonder that ZCI fought so long and hard, if unsuccessfully, to get its’ stake valued on a current market basis, rather than on the 2003 copper price basis that was used.

Getting back to ZCCM, if it was interested in selling its Konkola stake the price would have to reflect current copper prices, as SII stake clearly does. But of course Konkola is not considered the jewel in ZCCM’s crown. That honour undoubtedly falls to Kansanshi. Last quarter ZCCM’s share of Kansanshi’s after tax profits was US$31million, or US$124 million annualised. If one applies the earnings multiple which operator and majority Kansanshi shareholder, First Quantum, currently sells on in the Canadian market - around five times - then ZCCM’s Kansanshi stake is worth US$620m, or €440 million, or €4.90 per share.

So we already have ZCCM, using reasonable market assessed values, with a net asset value of €10.78, against a current share price on the Paris Marche Libre of €2.50, and we have not yet ascribed a value to ZCCM’s holdings in Konkola North, Mufulira/Nkana or any of the other Copperbelt interests, such as Chambishi, Chibuluma and Luanshya, not mention its stakes in Ndola Lime, Maamba Collieries, Copperbelt Energy, Equinox Minerals and Albidon.

So what is ZCCM itself up to in order to try and encourage a higher market value for its shares, and what problems does it face in achieving this? The first thing to say is that ZCCM’s management was only vaguely aware that its shares traded in Paris and did not have up-to-date information on price movements there. This is because the Government has 87 per cent of the company and private shareholders are largely unknown as their holdings are mainly in nominee names. ZCCM shares are also listed in London and ZCCM pays fees to Cazenove to maintain that listing, but don’t hold your breath whilst the switchboard locates the responsible Caz executive! ZCCM is considering what to do about its London listing and whether its Paris trading facility can be expanded, but since it has not filed accounts for 2006, 2007 or 2008 (year to June)it may have difficulty in achieving anything in the near future.

The accounts for both 2006 and 2007 have been prepared but we understand that there is a problem between ZCCM’s board and the company’s auditors regarding certain balance sheet asset valuations. The 2006 accounts are promised in a few weeks, not a new promise unfortunately. Following the publishing of the 2007 accounts it would be possible for ZCCM shares to be elevated to the next rung of Paris trading where there would be continuous session trading rather than the unreliable and quixotic daily call over on the Marche Libre. Whilst the market in ZCCM shares would remain thin in the circumstances of continuous trading, it would, nonetheless, be reasonable to expect daily volume to rise from a few thousand shares at best via the present calling-over facility, to around 50,000, which would be equivalent to around 100 per cent turnover of the minority stake annually.

Another issue that remains unresolved is the level of ZCCM’s debt, which stands at around US$500 million. This all relates to its past role as the operator and owner of Zambia’s copper mines. Whilst this figure appears on the face of it to be an enormous burden to ZCCM in its present reduced circumstances, it needs to be borne in mind that the debt is almost entirely attributable to the Zambian government, and it carries neither repayment date nor interest rate. There are some at ZCCM who believe that since the Zambian government has had most of its foreign debt forgiven by the international community, the Government in turn should cancel ZCCM’s debt. This the government refuses to do, but it has intimated to the company that it would consider converting the debt into preferred capital, which would carry a right to convert into new ZCCM equity. Some of this new equity could then be sold to local and foreign investors to raise cash for the government. ZCCM’s proposals on this have been with the government for over a year now and an early resolution of the issue seems unlikely!

The company has been talking to a group of French investors, the first time it has ever acknowledged the existence of its 13 per cent largely private investor minority. Whilst these discussions have been wide ranging they have laid particular emphasis on matters of investor relations and communications, where ZCCM is very weak. The company has engaged a South African IR firm to do an audit of ZCCM’s current IR practices, such as they are, and make recommendations. This is not the first time that an IR audit has been performed and it is unlikely that the South Africans will come up with anything that is not pretty clear already to the French ginger group.

Whilst is also pretty clear is that ZCCM is being right royally shafted by its foreign partners on the issue of dividends from the Copperbelt mines, the company unfortunately lacks aggressive and motivated management, which doesn’t help. For many years now its staff have acted as administrators dealing with issues, such as pensions, relating to its historic position as operator of the Copperbelt mines. ZCCM is anxious to develop its role as an investment holding company and to manage its current assets. Therefore the imperative now is for ZCCM to strengthen its management in order to fulfil these ambitions.

At the same time the Zambian government is prone to drag its feet and has recently said that it has no intention of selling a share of its 87 per cent holding, even though locals have suggested that this would reinvigorate its practically dormant local quote on the Lusaka Stock Exchange. This refusal, which goes against previous government policy to realise value from the ZCCM stake at the right time, also creates problems with regard to the debt issue and the proposed preferred share swap and subsequent sale.

There is clearly considerable and uncaptured value in ZCCM, but the company lacks good investment banking advice, if that’s not an oxymoron in today’s world! Publishing the 2006 and 2007 accounts is a minimum requirement for starting the revival process; a regular flow of dividends in respect of ZCCM’s minority Copperbelt holdings and action on the debt issue would also materially help. At the moment ZCCM gives the lie to those who believe that the time has come to make ‘shedloads’ of money investing in African companies.

Magande pretending not to negotiate

I will write a more detailed blog on last weekend's MineWatchZambia conference in due course. The conference is already making waves in Zambia.

The Post reports a debate between Professor John Lungu of Copperbelt University and Finance Minister N'gandu Magande. Lungu claimed in a paper prepared for the conference and posted on this site, that the decision on the exact shape of the mines tax regime and whether to completely cancel the development agreements (DAs) would only be reviewed after next month’s presidential elections.

Magande responded that the government had not deferred the collection of taxes, claiming that government was "still collecting the 25 per cent windfall tax from the mining companies in line with the new mining fiscal regime." In defiance of media reports reviewed in this blog over the last week he is reported as saying, “Deferring the tax…what do you mean? We are still collecting. It is not correct to report that the government had deferred the collection of the windfall tax.”

That position would be defensible 1) if it were true that they were still collecting (I don't have evidence beyond what's in this blog but that seems unlikely) and perhaps more importantly 2) if it weren't that the legislation put through Parliament mandated quite different rates to those being applied. 25% is clearly a concession made to the companies, initially in a letter to First Quantum, previously reported in this blog, and possibly now extended to all companies. Unless the LME price for copper has been averaging below $6,614/tonne (it hasn't - see below), this rate is simply not in line with the new legislation.

The Post also notes that Magande is directly contradicting claims by Secretary to the Treasury Evans Chibiliti a couple of weeks ago that only two out of the eleven mining companies had paid windfall taxes. Chibliti added that those who had paid had done so unwillingly, as they insist on further negotiations on the new tax regime with the government. Similarly the Economics Association of Zambia (EAZ) recently predicted that the government may only collect around US $200 million from the mines owing to the low compliance levels exhibited by the non-payment of windfall taxes.

Clearly there are negotiations ongoing over a retreat from the originally-announced regime. In the legislation passed by Zambia's sovereign parliament there are three reference prices for the rate at which the windfall tax will apply mandating rates of 25%, 50% and 75%. These are a monthly average price on the London Metal Exchange of:
5512 US dollars per metric tonne results in windfall taxation of 25% on income above the trigger price.
6614 US dollars per metric tonne results in windfall taxation of 50% of income above the second trigger price.
7716 US dollars per metric tonne results in windfall taxation of 75% of income above the third trigger price.

(The original legislation is here). Copper is currently trading at around the 7000 $/tonne mark. This is as low as it has been since the legislation was in place. Prices here and here suggest that the rates applied should have varied through this period between 75% and 50%.

So where are we at? Lungu argues in his paper, “Having taken a unilateral decision, it was expected that the mining companies would take legal action. This has not happened yet. The mining companies are only waiting for the time when the government will invite them for negotiations... While some companies have paid the taxes, others are still waiting to see if the government can open up to negotiate. This time, however, the government has an upper hand. They have demonstrated to the mining companies that they are able to take decisions. This however does not seem to be the ending. The situation will become clearer after October 30th 2008, when a new government comes into power whether headed by Mr Rupiah Banda or Mr Sata (Michael). At that point, we shall know whether either of them will honour their promises.”

Well, the negotiations have already started. According to who? The companies themselves.

World Mining Exploration News reports that First Quantum Minerals expects Zambia will agree to a compromise on its new mining tax regime in coming months. “We expect to reach a result that everybody is quite happy with,” President Clive Newall told a mining conference sponsored by RBC Capital Markets. Newall is reported as saying that the recent death of Zambia’s president is expected to delay slightly a new tax agreement. In deirect contradiction of Magande, the paper reports, "In the meantime, the Zambian tax authorities have suspended collecting the new higher taxes."

The Miningbeat blog reports a potential explanation - the Zambian government might be prepared to reconsider the new levels of mining tax that it’s imposing, if the government’s own 87 per cent owned Zambian Consolidated Copper Mines (ZCCM) started to receive meaningful dividends from its Copperbelt joint ventures. I will post much more on this fascinating and very detailed blog in my next message. All we can know for now is that a lot more transparency about any talks would be very welcome.

Companies cheating on tax, EAZ lobbies to withdraw windfall tax

A masively significant report in The Post on Tuesday - reproduced in full below. I would suggest reading this alongside the presentations from Profs Saasa and Lungu and Dr Miles Larmer for the MineWatchZambia conference. One comment from me for the moment. It is hard to accept the argument, which I think I detect below, that because the companies are not complying with the law, the law should be changed. I will try to get and paste a copy of the EAZ's original evidence.

++

GOVERNMENT will only collect US$200 million of the projected US$415 million from mineral taxes owing to low compliance levels among mining companies, the Economics Association of Zambia (EAZ) has predicted.

And EAZ has proposed a replacement of windfall tax for mining companies with either the variable profits tax or revenue-based tax regime.

According to a presentation made to the parliamentary committee on estimates last week, EAZ stated that the government would only collect about US $200 million from mine taxes this year, claiming that only Kansanshi Mines Plc had paid windfall taxes.

“ZRA reports that it has collected about K325 billion (about US$95 million) so far this year. This would be about half the rate anticipated in the budget – that is, government would collect about US$200 million, instead of the targeted US$415 million,” EAZ predicted. “The main reason appears to be non-payment of windfall tax, with only one company, Kansanshi, having paid windfall tax so far. The non-payment appears to be due to complaints by the companies about the new tax regime.”

EAZ however, emphasised that the government should ensure mining companies pay the revised taxes promptly and in full.

Secretary to the Treasury Evans Chibiliti last week told a parliamentary committee on estimates that only two out of the 13 mining companies in the country had paid windfall taxes. Chibiliti disclosed that the two companies who had paid windfall taxes amounting to K109.5 billion, did so under protest, meaning they (companies) could seek legal redress that could result in restoration of their privileged rights enshrined under the defunct Mining Development Agreements.

Most mining companies are said to have had cash flow problems emanating from high production costs. There is however a 100 per cent compliance from all mining companies in payment of other taxes relating to mineral royalties (charged at three per cent) and company tax (30 per cent).

During the second quarter of 2008, a total of K255.6 billion was paid in mining taxes of which windfall taxes stood at K109.5 billion, company tax at K105.1 billion and mineral royalties’ contribution stood at K41 billion.

And EAZ has proposed the replacement of the windfall tax introduced last April with a variable profits tax which would consider the cost structures of companies or the revenue-based tax regime.

“It is reasonably clear that the windfall tax, as presented in the 2008 budget, is likely to result in much higher tax rates than those intended and will deter new investment,” according to EAZ. “Government should seek to replace it as soon as possible by either the variable profits tax which would consider the cost structures of companies or structure the revenue based tax regime in such a way that the windfall tax will only apply from a price level which takes into consideration the cost structures of companies.

“The windfall tax should also be a flat rate. Thus the government should in the meantime re-examine the issues of tax deductibility, as well as the price thresholds and tax bands in the current legislation. In return, the mining companies should pay the revised taxes promptly and in full.”

EAZ stated that there was need to strengthen and accelerate the capacity of Zambia Revenue Authority (ZRA) to review the profitability of mining companies in the country.

It however, emphasised the need for the government to expedite its plans to join Extractive Industries Transparency Initiative (EITI), which commits mineral-rich countries to disclose earnings from natural resources.

“Much of the difficulty and, indeed, suspicion surrounding mining company representations reflects concerns that they are exaggerating their costs and thereby reducing the potential tax take if taxes are based largely on profits.” stated EAZ. “We understand that ZRA is in the process of building up its capacity to review mining company tax returns critically, and would strongly encourage that this be accelerated.

In addition, we believe that Government should seek independent audits where necessary. “The EITI, as an internationally supported mechanism, appears to have started to help countries such as Nigeria to address issues of transfer pricing in their extractive industries. The initiative is at an early stage in Zambia, and should be pursued with vigour.”

EAZ also urged the government to re-evaluate the impact of new mining tax on further investments, arguing that the association of local economists was also concerned that the new mining fiscal regime does not provide the stability and predictability needed to sustain investments in the sector.

“While we support the intention of the new tax regime, we are concerned that it does not yet provide the stability and predictability needed to sustain investment in the mining sector,” it stated.

“Therefore, the government should review the impact of the new regime on new investment, especially on greenfield investments, like Lumwana, but also on those being carried out by existing mines.”

Chiefs and Mining

Another story in The Post today hints at the increasing role of chiefs in asserting local people's needs and perspectives in relation to new mines.

Chief Chisunka fears dishonesty in mines ministry

CHIEF Chisunka of Mansa has expressed disappointment with the Ministry of Mines over its delay in issuing Zamanita a licence to mine manganese in his chiefdom.

In an interview, chief Chisunka said he was under pressure from his subjects on the issue of a licence for Zamanita because it gave them a ray of hope for employment opportunities.

He complained that he discussed with the mines minister, Dr Kalombo Mwansa, area member of parliament Besa Chimbaka and Zamanita director Diego Cassilli and was assured by Dr Mwansa that he would soon get back to him on the issue.

"Unfortunately, Kalombo Mwansa has not gotten back to me. I have a lot of respect for that man, but I am disappointed with him," chief Chisuka said.

"People are coming to me to ask what is happening about the issue because when I discussed with the minister, I assured my people that Zamanita will at least offer them some employment."

Chief Chisunka accused the Ministry of Mines of being crooked and having a preferred Chinese investor whom they wanted to issue a licence for mining manganese.
He said people in his chiefdom would resist any form of crookedness aimed at imposing an investor whom they did not want at the expense of Zamanita who already had the equipment as well as land for mining purposes.

Chief Chisunka urged Dr Mwansa to come out clean and explain why his ministry did not want to give a licence to Zamanita.

"We hear that they want to combine the land for Zamanita and Alpha another firm that has got a prospective mining licence to some Chinese investors," said chief Chisunka.
Mwansa when contacted responded: "I have no comment because the matter has not been decided yet".

MineWatchZambia Conference Papers Available Online

The first Mine Watch Zambia conference starts on Friday. There is a link on the front page of the minewatchzambia.com website, or you can go direct from here to a new section which contains a number of the papers and presentations. More will follow. I would invite readers who can't make it to discuss the conference or any of the individual papers on this site. I'll blog on the conference once it's happened.

New investments?

Another one picked up from Cho, who asks whether the announcement of massive new Chinese investments in Luapula and Northern Province is the real deal (huge news if so), or whether the timing of the announcement has more to do with impending elections on October 30th, and the MMD's desire to recover vital territory from PF.

One week to first MineWatchZambia conference

The agenda is posted below. Please do feel free to publicise this event to all of your networks and contacts. You can register to attend at:
http://www.politics.ox.ac.uk/research/conferences/

Mine Watch Zambia Conference
Politics, economy, society, ecology and investment in Zambia

Fri 19 - Sat 20 September 2008

Seminar Room G - Department of Politics and International Relations, Manor Road, Oxford Convened by Alastair Fraser: alastair.fraser@politics.ox.ac.uk/ www.minewatchzambia.com

FRIDAY 19 SEPTEMBER

10:30am Registration

11:00am PANEL 1: INTRODUCTION – LOCAL IMPACTS, GLOBAL RELEVANCE

Professor John Lungu: Economics and Management, Copperbelt University: The politics of reforming Zambia’s mining tax regime

Chair: Alastair Fraser, Politics and International Relations, Oxford

12:30pm Lunch

13:30pm PANEL 2: THE MINING BOOM IN HISTORICAL CONTEXT

Dr Miles Larmer, History, University of Sheffield: The Political Economy of Two Copperbelt Mining Booms

Tomas Frederiksen, Environment and Development, University of Manchester:The Spatial Politics of Mining on the Zambian Copperbelt 1900-2008

Chair: Dr Jan-Bart Gewald, History, Africa Studies Centre, University of Leiden

15:00pm Coffee

15:15pm PANEL 3: THE MINING BOOM IN SOCIAL AND CULTURAL CONTEXT

Dr Marja Hinfelaar, National Archives of Zambia: “Where Mammon Reigns": The Roman Catholic Church's response to industrialization in Northern Rhodesia's Copperbelt, 1930s-1960s

Rohit Negi, Geography, Ohio State University: ‘We are the implementers of development’: Chiefs, Capital, and Politics in Solwezi

Chair: Dr Tom Young, African Politics, SOAS

16:45pm- 18:15pm PANEL 4: INTERNATIONAL CAMPAIGNS AND GRASSROOTS RESISTANCE

Abi Dymond, Policy Officer, SCIAF: The impact of local and global NGO campaigns on Zambian Government mining policy

Simon Chase, Policy Officer, ACTSA: Vedanta/KCM: The responses of a multinational to popular and international campaigns

Rozemarijn Apotheker, International Development, University of Amsterdam: Mineworker perspectives on Corporate Social Responsibility and the tax debate

Leonie Ratty, Development Studies, SOAS: Mineworkers, Democracy and the rise of populism in Zambia

Chair: Professor James Scarritt, Political Science, University of Colorado at Boulder

18:30pm Conference Dinner , The High Table, Eastgate Hotel, High Street

SATURDAY 20 SEPTEMBER

9:15am CHINA IN ZAMBIA 1: ATTRACTING AND REGULATING INVESTMENT

Professor Ching Kwan Lee, Sociology, University of California, Los Angeles: Out of Precariousness: Politics of Casualization in Chinese Enclaves in Zambia and Tanzania

Dan Haglund, Economics and International Development, University of Bath: Regulating FDI in weak African states: a case study of Chinese copper mining in Zambia

Dr Peter Kragelund, Trade and Development, Danish Institute for International Studies Knocking on a wide open door. Chinese investment in Zambia, and responses to it

Chair: Dr Lyn Shumaker, History of Science, Technology and Medicine, University of Manchester

11:00am Coffee

11:15am CHINA IN ZAMBIA 2: LABOUR AND CASUALISATION

Jonathan Elliot, Independent Filmmaker, Elliot Productions: A short video on conditions inside Chambishi plant and the mining tax debate

Janie Whitlock, African Studies, University of Oxford:Digging for Prosperity: Mining and Labour practices in Chambishi, Zambia

Andrew Brooks, Geography, Royal Holloway, University of London: Chinese Capital Investment, Labour Relations and the Production of Meaning at Zambia-China Mulungushi Textiles

Chair: Dr Adrienne LeBas, Politics, University of Oxford

12:45am Lunch

13:45pm CHINA IN ZAMBIA 3: MANAGING TRADE

Jacqeline Musiitwa, Central Michigan University: An evaluation of the China-Zambia economic and trade cooperation zone

Colin Groshong, Comparative Government, University of Oxford: The local politics of the new trade co-operation zone

Hugo Knoppert, Cultural Anthropology and Development Sociology, University of Leiden: From ‘Made in China’ to Sold in Zambia: The influx of Chinese products in Zambia

Chair: Dr Nic Cheeseman, Politics, University of Oxford

15:15pm Coffee

15:30pm CONCLUSION: AFTER LEVY - MINING IN ZAMBIA’S POLITICAL ECONOMY

Alastair Fraser, Politics and International Relations, University of Oxford Back to the future? Mining, planning, populism and development strategy

Professor Oliver Saasa, International Economic Relations, Premier Consult Ltd Managing the boom: impacts on state and national developmental strategy

Chair: Professor Jeremy Gould, Development Studies, University of Helsinki 17:00 Ends

REGISTRATION: Participants will be asked to contribute £25 to cover catering costs. (students/unwaged £15) Register online at: http://www.politics.ox.ac.uk/research/conferences. Unfortunately no support is available for travel or accommodation costs of participants. More information on both is overleaf.

Video link on tax regime

Another steal from Cho. I've been on holiday and he's been keeping up for all of us... http://zambian-economist.blogspot.com/2008/09/undermining-zambia-revisted.html

Windfall tax in tatters?

Cho writes compellingly on his Zambian Economist blog about ongoing negotiations in the implementation of the windfall taxes. It looks like absolute chaos! I reproduce the whole thing here to save myself time:

"The Daily Mail reports on the puzzling world of the new fiscal regime. The long running saga between the state and the mining companies continues, with the latest announcement that the government has deferred the collection of the 25% windfall tax from mining companies until the discussions which have commenced between the two parties are completed. A negotiable fiscal regime, now that must be a first! Well may be not a first, after all this is how the MFEZs have been implemented - through negotiations, just like good-old-now-discreted-DAs ( no public inquiry into how those were signed yet). Perhaps now is the time for the government to level with the Zambian people and reveal just how they arrived at the new tax thresholds? When is this government going to release the report from "foreign mining experts" they hired to advise us on the fiscal regime, at great cost to the tax payer ? (its been one u-turn after the next, ever since this regime was implemented - see here & here). Excerpt:
Mr Chibiliti said only two mining companies had so far paid the 25 per cent windfall tax out of the total number of mining companies operating in Zambia. “The mining companies made presentations to the late President Mwanawasa on the windfall tax and he asked Minister of Finance and National Planning Ng’andu Magande to review it so we have deferred the windfall tax until a proper assessment is done by the Zambia Revenue Authority,” he said.

Mr Chibiliti, however, said the deferring of the windfall did not mean that Government had cancelled what the mining companies owed the State. He said ZRA would treat mining companies that have not yet paid the tax as defaulters until a comprehensive report was compiled by ZRA. “The mining companies have cited failure to pay windfall tax to high production costs and as Government we are mindful of the impact the high production costs have had on the growth of the mines. This is the reason we have engaged them into dialogue,” Mr Chibiliti said.

He said the three thresholds at which Government had calculated the collection of windfall tax had increased three times than earlier expected thereby causing difficulties to the growth of the mine sector in the country."

Zambia's President Mwanawasa is dead

Numerous international news sources (including the BBC here) have confirmed that Zambian President Levy Patrick Mwanawasa has died in a French hospital following prolonged convalescence from a stroke.

The news will inevitably lead to speculation about Zambia's political future and the likely impact on mining, including tax negotiations and labour legislation making its way through Parliament. We can say a few things with certainty.

1 - The constitution mandates a Presidential election within 90 days - in other words by mid-November. This will result in a completely new set of Ministers and quite likely some shifts in policy.
2 - The Patriotic Front, extremely strong in the last elections in 2006, particularly amongst mineworkers on the Copperbelt, were scheduled to hold their first ever party congress in the next few weeks. This was likely to have been an extremely rumbustuous affair.
3 - In anticipation of Mwanawasa's passing the ruling MMD and all major opposition parties (the Patriotic Front, UPND, FDD and UNIP) have been subject to increased politicking as potential candidates have jockeyed for position over the last month or so and rumours of new parties, splits, coalitions and alliances have circulated. The most significant, I think, is today's suggestion in The Post of a potential PF-UPND alliance. Given the last election results, any such configuration would likely prove tough to beat. A potential electoral transfer of power between parties would be the first since Zambia's return to multi-party politics in 1991 and would test the country's democratic institutions and culture.

In the light of point 3, it will be very interesting to see if party congresses and the election happen to the timetable above. It will also be interesting to see whether the ruling MMD's undoubted moves towards PF positions since the last election (imposing new mines taxes and starting to do something on environment, labour, sourcing and immigration) have done anything to either neutralise these issues in the election, or to weaken PF's appeal in urban settings. For the moment, everything is in the air.

An article I co-wrote with Miles Larmer on the last elections is available to download at:
http://afraf.oxfordjournals.org/cgi/content/abstract/106/425/611

Prof Lungu attacks growth without development in Solwezi

This article in The Post this morning. I have posted further details on the meeting rationale, agenda and participants below the message, and will post up a final report on it when it is ready. It's wonderful to see such pro-active minewatching going on from Zambian civil society. Surely this is precisely the kind of pressure needed to ensure the 'New Copperbelt' turns out better than the old one.

'Zambia's growth lacks development'
By Mulimbi Mulaliki in Solwezi

Zambia is experiencing growth without development, Copperbelt University (CBU) lecturer in the School of Business Professor John Lungu has disclosed.

Presenting a paper dubbed ‘The old Copperbelt and the new Solwezi Copperbelt’ at a round table mine watch discussion jointly organised by Caritas-Solwezi and German Technical assistance to Zambia (GTZ), Prof Lungu said growth must be accompanied by development.
Prof Lungu said the old Copperbelt’s development was led by developmentalist corporations such as Anglo American Corporation (AAC) who obtained licences to mine copper in the whole area.

“The situation was helped by the fact that the companies had a long-term perspective of copper mining. Guided by this view, they invested in both the social and economic sectors,” Prof Lungu said.

He said the corporations invested in the social sectors, education, health centres, hospitals, recreation centres and housing for miners and they also provided food rations and maintained roads and water infrastructure in the townships.

“They provided training for the miners recognising that skilled people were rare apprentice; they transformed an area of bush to modern towns and paid taxes to the state,” he said.

Prof Lungu added that communities were given access to mine facilities such as sports facilities and also sponsored sports - football, rugby, tennis and swimming.

“What is taking place currently is that the country is experiencing growth without development. I have not seen any basic change, access to shelter, health and education, these services are still lacking,” he said.

Prof Lungu explained that this model failed because of falling copper prices on the international markets leading to lower revenue.
“This led the country into heavy borrowing and entangling itself in the debt trap because of low forex earnings and borrowing led to debt crisis of 1980s,” he said.

Prof Lungu said the development agreements signed between the government and mining companies were illegal as they were above the Constitution.

“These agreements were just done in State House and our National Assembly had no power to legislate. The agreement can’t be above the Constitution,” he said. “These agreements have been accorded special status. They are protected from alteration for periods ranging from 15 to 20 years from the time they were signed. They established the terms under which mines were sold.”

Prof Lungu urged the civil society to capture government from powerful business organisations who were currently controlling the running of the economy.

He said despite the government reforming the laws in the mining sector, there were concerns on how it would handle the additional revenue.

“What does it do for the new Copperbelt especially Solwezi where Kansanshi has no obligation for social service provision? Should government handle Lumwana the same way as other companies? Should the government end at reforming the tax regime? What of other aspects of development agreements?” asked Prof Lungu.

He suggested that the government should adopt a differentiated approach to the mining companies depending on their corporate social responsibility policies and reward companies that were socially responsible.

“The new Copperbelt must avoid some pitfalls of the Old Copperbelt. Diversify the economy of the province, take government to task on how they are using money realised from these mining companies,” said Prof Lungu.

++

Round Table on “Mining Watch” Workshop by CSPR in Conjunction with Caritas Solwezi and GTZ

Solwezi has become synonymous with the new Copper Boom in Zambia. Kansanshi and Lumwana mines have poured billions of investment dollars into the district, resulting in far-reaching social, economic, and environmental impacts in an area in which such impacts were minimal just three years ago. As a seemingly endless influx of investors and job seekers arrives in Solwezi, economic growth is evident. There is, however, little sign of the pro-poor development that such growth has the potential to create.

Within this context, civil society and scholarly researchers have turned their attention to the impacts of the mining sector in the Northwestern Province. Relevant findings and recommendations including a pilot assessment by CSPR and an academic study by CK Haanyembe have recently become available. Caritas Solwezi is on the threshold of a multi-year project aimed at strengthening the voice of impacted communities.

The upcoming one-day workshop “Mining Watch” will gather key actors (30 participants) from the angles of civil society, research, government, traditional leadership, the private sector, and the media in order to meet the following three

Workshop Objectives:
· to facilitate the dissemination of available research findings (by CSPR, C.K. Haanyembe, Prof. Lungu)
· to strengthen the network and synergies between key CSOs pro-active in “mining watch”
· to enrich ongoing and future mine watch work (research and pro-poor advocacy) through dialogue, feedback and inputs by all speakers and participants

Date: Tue. 12th August 2008

Venue: The Boma Conference Hall, Solwezi

Morning sessions will emphasize recent findings, conclusions, and recommendations. The afternoon sessions will focus on upcoming research initiatives and advocacy activities.

Agenda: Round Table: Northwestern Mining Watch, Tuesday, 12.8.2008
8:30 hours: Registration
9:00 hours: Welcoming Remarks (Mr. K. Kakunta, CSPR)
Opening remarks (Bishop)
Official Opening (PS) Introduction (CARITAS Solwezi)
9:30 hours: CSPR NWPPMT; Pilot Assessment on the Impact of Mining on living conditions and livelihoods of the poor in Solwezi and Kasempa Districts (Mr John Kinuna)
10:00 hours: Cheelo Kingsley Haanyembe; “Behind the economic figures: Large-Scale Mining and Rural Poverty Reduction in Zambia - the Case of Kansanshi Mine in Solwezi”
10:30 Plenary Discussion
11:00 hours: Teak Break
11:30 hours: Prof. John Lungu; "Old Copperbelt vs. New Solwezi Copperbelt"
12:00 hours: Chief Mumena: Experiences with Lumwana (TBC)
12:30 hours: Plenary Discussion
13:00 hours: Lunch Break
14:00 hours: Caritas Solwezi; "ZEIP - Zambia Extractive Industries Project"
14:30 hours: CSPR: upcoming assessment on “Mining and Food Security”
15:00 hours: Final Plenary Discussion: the way forward
16:00 hours: Closing

Participants:
CSPR: NWPPMT (five members, Provincial Coordinator), Saul Banda (Secretariat, LSK),
Rt. Rev. Dr. Alick Banda, Bishop
Caritas Solwezi: Mr. P. Phiri, Mr. F. Nabanda, Mr. J. Weber; Michek Kaonda, Diocose Ndola, Paul Macek, Peter Sufeli, Felix Ngose, CRS, Sam Mulufuluta, Edmond Kamangozi, Caritas Zambia,
Albert Chifita, DC Solwezi,
Cheelo Kingsley Haanyembe (Researcher, Provincial Planning Department),
n.n., District Agriculture Coordinating Committee, Municipal Council,
Prof. John Lungu (CBU),
Chenga Kaputo, n.n., GTZ LSK, Andreas Kahler, DED
Brenda Tambatamba, n.n., Lumwana Mine, Richard Zyambo, Kansanshi Mining,
ZCTU, Ian R Mkandawire, MUZ?, ACC,
Community members from Solwezi-Mushitala or Kafukuma,
SNV,
Senior Chief Mumena
Media member

Has Zambia blinked first in tax battle?

It looks like crunch time (again!) in the drawn out battle over mine taxes, but contradictory reports are emerging. The Post reports that Zambia Revenue Authority (ZRA) has collected about K255.6 billion in mine taxes on account of all mining companies in the country complying with the new fiscal regime. This is roughly what was expected. Sources have been telling me that even KCM, which made a big political show of accepting the new tax regime, are trying to renegotiate in the background. Nonetheless, no company has thus far been willing to launch legal action or to refuse to pay. The political opposition Patriotic Front promised mass action against any company that took such steps. After initial grumbles it looked like the companies were going to slowly adjust to political realities, accepting that even with the new regime they remained massively profitable, and take the new taxes on the chin.

Nonetheless, First Quantum, which has been the most truculent company in terms of threatening legal action, hiring lawyers and claiming to hold legal advice on the enforceability of their Development Agreements is now making claims that they hold a letter from ZRA suggesting the state may be offering a compromise, capping windfall tax rates that apply to the company at 25% as an interim measure while negotiations continue. A 25% rate would be much lower than what the companies, including First Quantum, have already started paying as a result of legislation passed by Zambia's sovereign parliament. This sets windfall taxes at 50% or 75% depending on the price of copper. First Quantum claims the letter instructs that the Company "will with immediate effect be required to pay windfall tax on a provisional basis at a flat rate of 25% at any price above the first trigger price for both copper and cobalt". The Company's accounts for the period ended June 30, 2008 reflect tax liabilities consistent with the legislation passed by parliament, although a payment of windfall tax made on July 14, 2008 in respect of the June quarter was calculated using a capped 25% windfall tax rate.

What authority ZRA has to offer individuated short-term exemptions to the law is not clear to me. The company reports, "Currently, the Company, along with other mining companies operating in Zambia with similar agreements, is engaged in discussions with the GRZ to find an alternative solution to arbitration or litigation. The timing and outcome of these discussions is uncertain." The company put out a detailed notice yesterday which is available on the First Quantum website. A webcast of the related press conference is here.

First Quantum's negotiating strategy has long been to threaten but not launch international arbitration or legal action over Zambia's new mining legislation, which overrides the 'stability clauses' in the companies' Development Agreement. These promised investors long-term tax exemptions. Just yesterday, key state negotiators of the corrupt privatisation process were jailed with hard labour for their part in the sales which are widely regrarded to have been profoundly unfair to Zambia's interests. Most of the companies have not pushed too hard on this issue as a) the corrupt process of the original negotiations is widely known, b) most companies have failed to live up to even the incredibly lenient terms of these original contracts.

Nonetheless, First Quantum's press release ups the ante in its claims on the enforceability of its Development Agreement. “The Company has, following the recent tax changes, obtained legal advice on its rights under the Development Agreements. This advice has confirmed that the Company has rights of recovery for any taxes which are levied in excess of those permitted under the Development Agreements... In the light of the detailed advice received, the Company has assessed there to be a high probability of recovery from the GRZ (Government of the Republic of Zambia) of certain payments made in respect of these taxes.” The company estimates it has thus 'overpaid' and is owed $67m as at end-June.

First Quantum posted a healthy increase in interim profit despite the new tax regime. Net profit for the interim period nearly doubled to $390m from $201m a year before. Its tax expense ballooned to $233bn from $77m over the same period, admittedly off a higher production base.

Mining MX claim 'the market' sees the letter from ZRA and the legal advice the company has received as positive developments. This may help us to understand what is going on. Is the companies' constant ebullience about its chances of avoiding the tax regime designed to artificially inflate a controversial and troubled companies' share price? As reported in previous blogs, First Quantum has a record of extremely optimistic, maybe naive, interpretations of what is going on politically in Zambia.

The Post gives a sense of the degree to which the new regime is already bringing new revenues into state coffers. ZRA commissioner general Chriticles Mwansa told journalists yesterday during the end of second quarter media press briefing that the biggest contribution from mining taxes came in from windfall tax which stood at K109.5 billion. Mwansa explained that the mineral royalty in the review period stood at K70.54 billion of which, K6.39 billion, K29.67 billion and K34.48 billion were collected in April, May and June respectively. He said the mineral royalty paid so far in the last two months under the new mining fiscal regime had averaged K25.75 billion per month compared to an average of K5.2 billion per month that the mines used to contribute to the treasury in 2007.

"However, other tax returns such as provisional company income tax returns, windfall tax return were due on 30 June 2008," Mwansa said. "To this effect, in July 2008, a total of K255.6 billion was paid in mining taxes of which windfall tax stood at K109.5 billion, company income tax was K105.1 billion and mineral royalty contribution was K41.0 billion."

Asked whether there were some mining companies that were still resisting the new mining fiscal regime, Mwansa said: "The mine have, by and large, complied with the new regime. They have met with us; they have met with government to indicate the effect of that regime. We intend to continue meeting them to make further clarification should there be failure on their part mines to understand other details involved, but I must say that mine is to implement the law. If the law demands that the mines pay, then I go and effect."

How seriously we should take that final statement depends on First Quantum's ability to demonstrate that the state is already compromising. Some of the media houses carrying the story claim to have seen the letter from ZRA. I have not and it is not on the companies' website. If anyone has a copy, do forward it and I'll post on the site. Reading the whole thing, not just First Quantum's favourite quotes, could be very interesting.

Tax, production and profits - what is the relationship?

The Post reports that Finance minister Ng’andu Magande has said the government is likely to net the projected US $415 million (about K1.3 trillion) extra income from mining taxes as copper prices remain bullish on international markets. In other words, the new tax regime does not seem to have decimated production, investment and jobs as the critics suggested it might. Companies that had threatened legal action all now appear to be paying up. Presumably they will say we haven't waited long enough to make an assessment and no doubt there's something in that.

Some mining companies recently made their initial payment of windfall taxes to the government, with Kansanshi Mines, owned by First Quantum, one of the companies that had threatened rebellion, declaring a disbursement of US $30 million (approximately K101.2 billion), almost 10 per cent of the projected annual income from the mines this year.

“There is a formula that government came up with in calculating the windfall tax and looking at the current prices of the metal, the Ministry of Finance and National Planning is optimistic that the projected US $415 million in additional revenue from the mines will be collected at the end of the year,” Magande said in an interview. “I am very hopeful that we will get there because we are remaining with a few months before the end of the year.”

The government this year came up with a new tax regime in the national budget, with a projected US $415 million (approximately K1.3 trillion) in additional revenue to the treasury in 2008. “As long as mining companies continue producing, they will be obligated to pay the new taxes to the government,” said Mines and Minerals Minister Dr Mwansa.

Nonetheless, the news came in the same week that Zambia's biggest mining company reported a fall in profits that it linked to the new tax regime. The Post noted that Vedanta Resources Plc has announced a decline in profits at Konkola Copper Mines (KCM). First quarter earnings before interest, taxes, depreciation and amortisation declined to US$71.1 million compared with US$106.2 million gained in the corresponding period last year. "The decrease in profitability was primarily due to higher costs and higher royalties," Vedanta Resources stated. "Operating costs remained under pressure due to higher manpower costs, higher energy prices and lower production."

Vedanta stated that mine output from the Zambian mines was around 21,000 tonnes, marginally higher than the corresponding period last year and significantly higher than the immediately preceding quarter.

The estimates in terms of the expected additional revenue from new mining taxes is significantly higher compared to what the government has been collecting from the mines through taxes. In 2006, government collected slightly over K35 billion from mineral taxes when other copper rich countries like Chile gained around US $1.7 billion (approximately K6.3 trillion, half of Zambia's national budget) as tax contributions from its 17 largest privately held mines in just one quarter of 2006.

Meanwhile KCM continue to face criticism from local politicians that they do not do enough to support local communities around the mine. The Post cover criticism from local town clerk of Chingola township, Charles Sambondu: “About 60 per cent of Zambia’s copper comes from Chingola but there is really nothing to show on the ground. People compare with the days of Zambia Consolidated Copper Mines ZCCM when they used to take care of water supply, street lighting and all; in my view, the criticism is justified.”

In better news, The Post also reports that KCM is improving its environmental management practices. Company spokesman told the paper that the company remains on target to massively increase production by 2010, as the Konkola Deep projest and the new Chingola Smelter come online. “All these are indications that this country will meet the 2010 target of producing one million tonnes of copper and KCM will produce half of that projection,” he said.

The Chingola smelter which is expected to produce about 300,000 tonnes of finished copper. The new smelter is being built with Finnish-invented Outokumpu flash smelting technology would be able to capture about 95 per cent of sulphur dioxide thereby releasing little into the atmosphere.

CEP Environment programme seeks extension

The Post reports that Zambia Consolidated Copper Mines – Investment Holdings (ZCCM-IH) has requested the government to extend the Copperbelt Environmental Project (CEP).

The CEP project was supposed to have come to an end this month.

In an interview, ZCCM-IH chief executive director, William Musama confirmed the request for an extension of the project to 2010.

He explained that this was to enable the company exhaust the money for the project.
The government borrowed from World Bank and Nordic Development Bank to finance historical mining environment liabilities arising from past mining operations.

Musama further said the environmental concerns were still of great concern hence the need to extend the project.

“The levels of lead pollution are still of great concern and the period was also too short to address all environmental issues,” he said

Musama however said even the money from the donors was not enough to address all concerns of lead pollution.

He said the approval of the extension would enable them implement a number of projects in former mining towns aimed at mitigating the impact of lead especially in Kabwe and Copperbelt towns.

Musama disclosed that the government had already started the process to extend the CEP project.

Mopani Mines ordered to pay K59 m for miner’s death

The Daily Mail reports that the Lusaka High Court has ordered Mopani Copper Mines to pay K59 million with interest as damages in the case of a whistleman who was found dead underground at Nkana Mine in 2002.

Supreme Court Judge Timothy Kabalata, who sat as High Court Judge, awarded Ms Florence Mulenga damages and costs after he found that the deceased died as a result of negligence by the mining company.

Ms Mulenga sued Mopani Copper Mines as administrator of the estate of the late Emmanuel Chanda who was found dead.

According to evidence in court, Mr Chanda, who was 34, was found lying unconscious inside a Granby car while he was working on a train at 2,370 feet level and was pronounced dead on arrival at Wusakile Mine Hospital.

The mine authorities, on their part, denied liability and alleged that the deceased’s cause of death was unknown and could only be speculated.

An inspector of mines who investigated the accident failed to make a conclusion on the cause of death, saying he could not find any reason.

Chief inspector of mines at the mines safety department, Mr Lumamba, said the report was inconclusive and assigned another inspector, Mr Coin Siakacoma, whose report was questioned by the mine.

An inquest by the Kitwe Magistrates Court was conducted and its findings were that the measurements of the trolley line fell far below the requirements of the law and this resulted into Mr Chanda coming into contact with the trolley line.

The report said this was negligence on the part of the employer who failed to live up to the standard of measurement required by the law and that the accident would not have occurred if the line had been constructed according to the requirements of the law.

A medical doctor at Kitwe Central Hospital, Saidmeraton Abdi, found that Mr Chanda died due to electric shock.

In defence, Mopani Copper Mines authorities said they were not liable because the cause of the accident was not known.

In arriving at his judgment, Justice Kabalata noted that the mine officials would have amended their defence after the report by Dr Abdi to give an explanation of how Mr Chanda came into contact with the live wire that led to his death.

He said it was clear from the evidence that it was the duty of mine authorities to provide other protective measures and failure to do this made them liable for the accident.

The said failure by mine authorities to comply with regulations 192 (1) and 192 (4) (b) and 1003 (1) and the failure to give an account of the accident made the mine liable for the death of Mr Chanda.

What role for chiefs?

Cho's Zambian Economist blog has an interesting discussion on the potential role of traditional authorities in the mining sector, following recommendations from the Commonwealth Parliamentarians Assocation that chiefs be more involved in the licensing process. Choo also posts a very useful history of chieftancies in general.

The Times of Zambia run the original story.

Nigerian Parliamentarian, Hycienth Nyakuma, who was in the CPA delegation which toured Konkola Copper Mines (KCM), Mopani Copper Mines (MCM) and the mines in Chambishi, said it was important to put in place legislation for traditional rulers to have authority when giving investors mining rights in areas that fell under their jurisdiction. The team had parliamentarians from South Africa, England, Malawi, Mozambique, Nigeria and Zambia. CPA chairman, Mninwa Mahlangu, said in Solwezi that the multi-million dollar Lumwana project in North-Western Province has proved that Africa can look after itself. Mr Mahlangu, of South Africa, said yesterday after the tour of Lumwana that the mine gave African spirit because it involved many countries.

"The mine has given a stake to African countries; this gives African spirit and flavour and it shows that as Africans we can look after ourselves." He said he was impressed that while big companies tended to bring own workforce, Lumwana Mining Company had created a database of the local people who were given top priority for jobs.

Wildcat strikes at KCM

Further evidence of the chaotic nature of labour relations in Zambia's copper mines. It seems barely a single pay round can proceed without a wildcat strike, police intervention and a round of contested sackingsof rank and file workers operating beyond the control of trade union leaders. The latest trouble has been at Vedanta Resources' Konkola Copper Mines, the largest of all Zambia's mining companies, and the pacesetter for all other pay settlements. Negotiations seem finally to have concluded with the two mining unions with management enforcing a15% deal after a wildcat strike and protests sufficiently serious to close the plant temporarily and lead to the deployment of riot police as workers refused to trust their own union representatives, let alone management.

In another demonstration of the reliance of the companies on the physical force of the Zambian state to maintain order, Miners were temporarily excluded from the plant and their gate passes confiscated. Police officers then picked a number of workers up from their homes at midnight. They were taken to the plant, where they were interrogated.

Africa News reported that although the strike is now over, 12 workers have since been fired.
The Post reports that the status of those workers remains a sticking point for the union and is under discussion with the company. This story includes the greatest details of the complex final settlement.
Afrol News The Daily Mail and the The Times of Zambia cover the same story

MINE Workers Union of Zambia (MUZ) general secretary Oswell Munyenyembe told The Post: “We must protect our members. We do not know whether any one of the workers was charged before any dismissals were issued. One has to be charged first before being dismissed.”

KCM spokesperson Sam Equamo claimed the workers were disciplined because they disrupted operations without giving chance to their union leaders to brief them on what had been negotiated with KCM management. The workers themselves described their treatment as a serious violation of their human rights and urged the government to intervene.

Local Trust Funds

Sorry for some delays in posting recently. Here's an interesting article from The Post covering both the proposal for local trust funds and a discussion on licensing delays - I assume that is what the reference to giving companies a year to comply is to.

DEPUTY mines minister Maxwell Mwale has said the government will soon establish trust funds that will make mining companies contribute funds towards the sustainability of local communities.

And the ministry of mines has granted a grace period of one year for the implementation of the new mines and minerals development Act that came into effect on 1 April 2008 in order to allow stakeholders to comply with new requirements.

Mwale said the trust funds would be controlled and managed by the communities themselves.

"We are in the process of establishing community trust funds where mining companies will contribute towards the sustainability of the communities in which the mines operate from and these trust funds will be administered by the communities themselves," he said.
Mwale also said the government was currently improving laboratory facilities at the Mines Safety Department (MSD) in order to enhance efficiency and higher standards.

And director of mines in the Ministry of Mines Gerhad Kangamba stated that the new Act became law on April 1, 2008 but the government granted a transition period of one year from April 2008 to March 2009.

"During the transition period all holders of mining rights and non-mining rights and firms operating mineral analysis, geological or mining consultancies are expected to fully comply with the requirements of the new law," Kangamba stated. "And all holders of renewed licences that do not conform to the Act should resubmit fresh applications to comply with the new law by 1 April, 2009."

Amongst other provisions, the new Act would require that all holders of gemstone licences, mining licences and mineral processing licences obtain annual operating permits from the MSD, meaning that an entity could not operate even if it has a mining licence.

Also all mining rights for industrial minerals shall only be granted to citizens of Zambia and citizen-owned companies.

Other requirements would be that all small scale mining licences, including gemstone and prospecting permits shall only be granted to Zambian citizens and citizen-owned companies.

It is expected that all mining and non-mining rights granted under the repealed Act of 1995 shall cease to be valid by April 2009.

Chinese 'push factors' and the EITI in Zambia

Dear readers,

I wanted to add some comments on some recent MWZ postings.

FIRST POINT – Chinese government involvement with SOEs and individuals in Zambia

My first point is regarding Chinese investment in Zambia, and the question of support from the Chinese government. In the blog from 24 May 2008, Alastair asks the question of which push factors are at play behind Chinese investment into Zambia, citing an article by Richard Behar in Fastcopany.com where the author cites interviews with two Chinese brothers who claim that ‘if we invest a certain amount abroad, we can qualify for a zero-interest loan’. I just returned from China where I have tried to get to the bottom of this ‘state-financing’ question through interviews with representatives of the Chinese Ministry of Commerce, CITIC Group (one of the large state-owned banks). I’ve also spoken to a private entrepreneur I was lucky to meet in Kitwe last year when he was there to try to buy copper ore to export to China. All these people have been very clear that no, private companies cannot get below-market (preferential) loans.

Also, it seems that the only Chinese banks that provide below market financing or investment guarantees for overseas projects are what people refer to as the Chinese ‘policy banks’, of which there are three: Exim Bank, China Development Bank, and the Rural Development Bank. The latter two have historically been focused on providing credit to domestic projects (although CDB is now looking to start funding projects abroad), leaving Exim Bank as the main policy bank to provide concessional financing for overseas projects. It thus seems that we should be cautious in assessing the Chinese government’s role in financing/subsidising private ventures abroad, in the sense that with exception of Exim Bank, other Chinese banks, albeit state-owned, do not provide below-market financing. And with regards to private investors, interviews here in China suggests that this ‘push factor’ is completely absent.

Regarding political protection and support given by Chinese diplomats, again, I think that dynamic does exist with the SOEs (am less sure about the privateers). My interviewees say that yes, if there is a conflict, the company may go to the Chinese Embassy, to ask the Ambassador to speak to relevant government officials. Whether this happens more (or in a different way) compared to the way e.g. the French oil company Elf Aquitaine in DRC would ask the French Ambassador for help in discussing sensitive issues with government is open to question. However, we can probably safely say that any state-owned company is likely to make *more* use of this diplomatic channel of influence.

Moving away from the Chinese state for a moment and just looking at the relationships between SOE-employees and ‘private’ Chinese e.g. in Zambia, I have personally been interested in whether the two groups interact much, whether the SOE representatives may somehow broker relationships or support the smaller guys, and whether there are emerging networks of overseas Chinese in countries such as Zambia. My friend the copper traders noted that, yes, the Chinese in Zambia do know each other, congregate at Chinese restaurants in Kitwe and so on, but he emphasised that they (in his experience) do not talk much about business. The main reason he gave was that Chinese private entrepreneurs in Zambia are generally in direct competition with each other, and this cut-throat competition (which comes out very strongly as well when visiting mainland China) means that business contacts/connections are generally not what the talk about. They may, however, talk to each other about administrative stuff, how to go about getting a business visa extension, who has a vehicle for sale, and share some experiences in working with Zambians. Finally, he also said that now, following the new fiscal regime which places a 15% tax on the export of copper ore, most Chinese ore traders (and there used to be, according to him, “so many” of them) have gone home – apparently his profit margin was only about 10%, so this business is no longer profitable.

SECOND POINT – EITI and the potential for a ‘local development fund’

Regarding the EITI discussed in the blog dated 25 of May, where a Daily Mail article is cited in which Minister Mwanza talks about GRZ having asked the World Bank to do a scoping study. I wanted to clarify something: this scoping report was carried out during the fall of 2007, partly by WB staff and partly by a researcher at the Copperbelt University. According to the latter, mining companies were in general very positive towards it, something which also comes out in the scoping report... The GRZ told the WB in early 2008 that they had agreed to make the report public, but I have not seen anything in the press about ‘launching’ this report to a wider public. Still, the WB told me that this document is now public, so here it is (have tried to upload it with this blog posting).

Regarding the possibility of earmarking some of the taxes for local development, the idea of establishing a ‘Local Development Fund’ was on the agenda throughout the second half of 2007, and several mining companies frequently told me that such a set up would be seen as something the GRZ could ‘give back’ to the mining companies (who had argued that ‘yes we are very willing to renegotiate, but that it should be a two-way process’). Mining companies, through a CoM submission on the 2007 budget, even proposed a structure: 60% to central government, 20% to local government, and 20% directly allocated to community development. However I don’t know what the GRZ’s response was, or what the current status is, though I suspect that the conversation has halted on the back of adversarial relations.

THIRD POINT – Labour standards and contractors

Finally, I wanted to add my two cents to the criticisms of NFC Africa’s labour standards, for instance raised in Mr Behar’s Fastcompany.com article linked to on this blog. To maintain perspective, let us not forget that even if NFC Africa pays the lowest salaries of the big mining houses, it is not the case that people on K4-800k per month do not exist at KCM or MCM! There are contractors, for example Mpelembe Drilling and Prosec, who are very active at KCM and MCM but who pay their workers similar wages to what NFC Africa pays. When I was in Zambia in the fall of 2007, about half of the 16,000 people working on MCM’s premises were contractors, so in absolute terms the number of people with unacceptably poor conditions of service may be greater at KCM and MCM compared to NFC Africa! This does of course not absolve anybody from failing to provide descent working conditions, but I think it does put the singling-out of the Chinese into perspective.

One might think that companies would see it in their interest to ensure contractor workers are adequately paid, as strikes over terms and conditions might affect the companies operations… However, those who favour this argument should bear in mind that the threat of disruption due to work stoppage is not so great when a mining operation is in development, as mining managers have scope to accelerate/re-shuffle development activities if these stop for a while due to industrial action. When the mine is in production, however, it is a different story, as any work stoppage then has direct implications for profits. However, and conveniently for mining companies, contractors are mainly used during the development non-core phase, which can explain why they see little value in forcing higher standards upon their contractors (and thus higher costs upon themselves).

Personally I think a big reason for why the Chinese might be more exploitative of Zambian workers relates to the time preferences of Chinese investors. When an investor (big or small) comes to Zambia, if they are there for the short-term, they will not be averse to sowing seeds of future discontent. And there seems to be very high turnover of the smaller Chinese moms-and-pops traders on the Copperbelt, as well as for NFC Africa. At the latter firm, company managers are generally there for a three-year period before going back to China, with a Zambian employee complaining that he is constantly “having to train a new Chinese manager”.
Any alternative takes on this would be welcome! Thanks for a great blog.

Dan Haglund
University of Bath
dan.haglund@gmail.com EITI%20Scoping%20Report%20-%20November%202007-1.doc

State is talking to FQM and Equinox

The UK Guardian reports comments from Mines Minister Kalomo Mwansa suggesting that the government will 'discuss' new mining taxes with two mines. Whether these are negotiations on the regime is unclear. But why else would they talk? Mwansa says the two have asked for an 'explanation' on how the new windfall and variable profit taxes would be levied.

"There are a few concerns on how these taxes will be implemented and we will dialogue with two mining companies that want an explanation as they fear the taxes will affect their profits," Mwansa said. Mwansa did not say whether the government would have to waive some of the taxes.

We seem to be going round and round in circles here, with te same issues being clarified and re-clarified. Is it the applicability of both taxes simultaneously (answer: no), or the deductibility of these taxes (answer: no), that seem to me to have one word answers that have already been established. Am I being thick here? Can anyone explain, or s this just diplomatic language?

First Quantum union busting at Kansanshi

Reuters report that Kansanshi Mining has won a court order preventing its workers from going on strike. The union accuses the company of encouraging employees to leave the union. Hardly shrewd PR given what First Quantum thinks it wants from the Zambian state and local sensitivties to any resistance.
Workers at Kansanshiwent on strike in 2007 after a similar dispute.This time, management has obtained an injunction to restrain workers from striking, Goodwell Kaluba, general secretary of the National Union of Mining and Allied Workers (Numaw) told The Times."We had almost concluded negotiations for salary increment before the situation just became complicated."A senior mining industry source close to the negotiations said the union, which represents 368 workers at Kansanshi mine, one of Zambia's biggest copper producers, was asking for a 17.5 percent pay rise, which management rejected."There appears to be some problems in the negotiations and things don't look good at the moment. The management does not seem keen to offer what the union has been asking for, while the union has refused to sign what the management is offering them," the source said. Kaluba said the Numaw had instructed its lawyers to obtain a counter injunction to stop management from influencing employees to leave the union."Management has been trying to influence workers to leave the union and we have asked our lawyers to stop that through an injunction," he said said.According to Reuters, In April, Msiska told the state-run news agency, Zanis, that management had offered 15.8 percent while the union was demanding 29 percent pay rise.

Did Zambia buckle or resist IMF pressure on tax?

Cho is using his Zambian Economist blog to push the idea that the tax clarification from the Government last week was 1) a climbdown, and 2) a result of pressure from the IMF.

He quotes from the latest IMF Staff Assessessment, and claims that the text makes clear there has been a disagreement between the Government and IMF. It certainly does that, but I read it slightly differently from Cho. The text does tell us that the IMF wanted much more from Zambia,and didn't get it. But that does not answer the question of whether both windfall and profit taxes were ever advertised as operating simultaneously, and thus whether the clarification that they won't represents a climb-down. The IMF statement reads:

"The new fiscal regime for mining increases the average effective tax rate from a level that was significantly below that in other mining countries. When the international price of copper is at around the historical average, the windfall tax will not apply, and the average effective tax rate would be comparable to that in other countries. When the price of copper is well above the historical average, specifically, above $2.50 per pound, the windfall tax will come into effect and rise progressively with the price of copper. Staff cautioned that while progressivity is desirable, the marginal effective tax rate is very high at very high prices. Staff noted that it could be lowered by making the windfall tax, like royalties, deductible for the purpose of calculating taxable profits. Staff further suggested that, instead of the price-based windfall tax, a more appropriate way of capturing a larger share of the rents when prices are abnormally high would be through a progressive profit-based variable tax that would take into consideration the different cost structures across mines. The authorities argued, however, that they consider the windfall tax a more effective way to capture a sizable share of the rent when prices are exceptionally high and that current income tax provisions do not allow taxpayers to deduct other tax payments."

So what evidence have we got? Well, have a look back to this blog entry from May 22 and take the link through to the transcript of Equinox's teleconference : http://www.minewatchzambia.com/2008/05/six-fold-increase-in-revenues-as.html.

Now this is technical, but my reading of that discussion (pages 5, 8, 10 again) is that it was already understood that the two taxes would not apply simultaneously, but that Equinox still held out hopes about deductibility. Read it that way and the IMF note suggests the IMF tried to come in to support Equinox's interpretation but the authoritities refused.

I'll post this on Cho's site and see if someone can clarify.

What's going on in Chambishi?

A colleague told me recently that a ridiculously large number of PhD applications were coming in to our University, all wanting to study the same topic - China in Africa. The topic, and the Zambian case, are historically under-researched but are suddenly wildly fashionable. If, heaven forbid, I was starting a PhD now the Muti-Facility Economic Zone at Chambishi might well interest me. It is allegedly going to house massive investments and loads of new companies, and yet nobody seems to know anything concrete about it yet.

The Times of Zambia reports that Zambia Congress of Trade Unions (ZCTU) acting secretary general, Ian Mkandawire commends the new projects being put up by the Chinese were welcome because they would create employment opportunities for Zambians. At the same time, Mkandawire implored the Government to speed up the amendment of the Factory Act in order for cases of violation of labour laws by employers to be effectively addressed. He noted that currently it was difficult to deal with cases of employers in factories flouting labour laws because of the absence of effective legislation.

The Parliamentary Committee for Economic Affairs and Labour has been studying the zone. The Times reports very positive noises from committee member and Mulobezi MP, Michael Mabenga who said Chinese investment would bring new jobs for locals, and that Government had made bold economic decisions that had set the stage for the revival and development of the mining and agriculture sectors.

However, committee chairperson, Given Lubinda said that Multi Facility Economic Zone (MFEZ) had raised a lot of expectations and fears which Parliament needed to correct. Mr Lubinda asked managers of five companies speaking to the committee that the committee needed much more detail on what investments they were planning before it could consider giving incentives to such investors.

Zambia China- Economic and Trade Corporation Zone (ZCCCZ) manager planning and investment promotion development Wang Xin said it was difficult to state the specific enterprises. Mr Xin said that MFEZ would be attracting companies in earth moving equipment and construction among other companies.The committee refused to hold a meeting with Non-Ferrous Mining Company of Africa (NFCA) management because the company general manager Tao Xinghu and his deputy Zan Baosen were out of the country.

The Lusaka Times reports similar concerns expressed by Copperbelt Permanent Secretary Jennipher Musonda who said the needed much more information on the Chambishi Multi Facility Economic Zone (M-phase project), if the local people were to understand what the project was all about.

Bluff-calling continues over new taxes

The phoney war over Zambia's new tax regime rumbles on with both Government and companies using a 'Euromoney Investment Conference' in Lusaka and the 'Copperbelt Show' to button-hole journalists and rehearse their favourite arguments. The discussion is getting heavy coverage in international business media, particularly in relation to claims that the new regime has led to the pull-out of investment in major projects. The claim is of course difficult to substantiate since we can't know what woud have happened without the taxes. ZCCM-IH has responded that foreign companies were penalised because they failed to pay dividends through ZCCM-IH's minority shareholdings, and that if they now feel the regime is insufficiently profitable, ZCCM-IH will happily buy them out. The companies appear to have won i) 'clarification' on the operation of profit and windfall taxes, which will not both operate at the same time as each other. I am not convinced the legislation ever made it appear that they would. This is spelled out nonetheless in a letter of intent to the IMF. ii) A concession from the Government on VAT on imported mining equipment for new projects. There are various loopholes associated with such schemes that were widely understood to be abused under the previous regime, and the state will have to be careful they aren't re-opening them.

While all but two companies have accepted the nex tax regime and started paying at the prescribed rates, two companies: First Quantum and Equinox continue to hold out for some sort of special concessions. If they really want to prove their rebel credentials, this month they will have to make two choices: to shut up and get on with life under the new regime, paying the ZRA new profit taxes, or to refuse and to take some sort of international legal action.




Typical of the coverage is Reuters (there are versions of the same stories on Dow Jones and Bloomberg)
which reports comments from Chisanga Chekwe-Puta, the Zambia country manager for Canadian miner First Quantum Minerals FQ.TO, who claims that Mopani Copper Mines (MCM) in which First Quantum has a 16 percent stake, had suspended construction of a mining shaft after authorities introduced new taxes. "Mopani has suspended construction of another shaft which could have employed 2,000 people." Chekwe-Puta also claimed investments at First Quantum's Bwana Mkubwa's copper processing facility unit and a new project at Kashime mine had been suspended.

Reuters also report Joseph Chikolwa, the chief executive officer of the state-run ZCCM-IH, who defended the new taxes, saying the copper mines had not been paying their dividends to the government before the new taxes were introduced. "We never received any dividends from the mines . . . so when the copper price is so high, why should you be complaining? We are not trying to chase away investors but we are trying to share the cake," Chikolwa said.

The Post report that Chikolwa says ZCCM-IH will be more than willing to buy shares from companies that want to pull out of Zambia because of the new tax regime: "I am likening the mining companies to farmers who complain when it rains and again complain when it doesn't rain. At the moment, no one expects the mining companies to pack up and go because they have made investments of up to US $3 billion in the sector. The business model that was developed for the mining sector did not work. The mining sector has not paid any dividend to the government through ZCCM-IH, so government's decision to revise mining taxes was in the best interest of Zambians."

The Daily Mail reports that Government has suspended Value Added Tax (VAT) on equipment imported by mining companies that have not yet started production. Minister of Finance and National Planning, Ng'andu Magande told the Daily Mail. "We have deferred the payment of VAT on new equipment until these mines start making money."

Xinhua reports that the Zambian government has assured that the mining windfall tax and the variable profit tax will not apply at the same time in order to preserve the nation's attractiveness in the sector. Minister of Finance and National Planning Ng'andu Magande made the promise in a letter of intent to the International Monetary Fund (IMF) managing director Dominique Strauss-Kahn: "in implementing the new fiscal regime, the government will be mindful of the need to preserve Zambia's attractiveness for investment in mining. To this end, the windfall tax and the variable profit tax will not apply at the same time."

The Post reports that Mines and minerals development deputy minister in charge of Large-scale operations Maxwell Mwale has advised the companies, "There should be no economic sabotage by mining companies because of the new tax that government has put in place for the benefit of citizens," Mwale said. "It is not important for mining companies to be guided by greed. All the government wants is to get a fair return on its mineral resources as prices of copper remain high on the international market. We don't expect arm twisting tactics from the mines."


In a story in The Post, the mine companies encourage some sort of 'race to the bottom', suggesting that DRC now presents a more favourable investment location than Zambia, and that taxes and regulation should be reduced to bring in more investment. No doubt they are telling the Congolese the same story.

In the meantime, an old story gets regurgitated: the Daily Mail reports that quarterly meetings between the state and the Chamber of Mines will begin soon. The Chamber has recently elected a new president, Nathan Chishimba, who is sending out warm words about partnership between the state and private sector, and co-operation to improve the listing of mine firms on the local stock market. Mr Chishimba said the establishment of an index market for the mining companies could only be achieved when a good number of companies were listed on the Lusaka Stock Exchange (LuSE). He said there were not enough mining companies that were listed on LuSE to determine indexing of the sector. However, he was optimistic that in future, indexing of mining or any other sector on LuSE would be achieved. “Lets not look at the mining companies alone as being the major players on LuSE, there are other companies in agriculture, finance and other sectors that are blue chip companies for an index market,” he said. Mr Chishimba said listing mining companies on the LuSE was dependent on the shareholders that held shares in various companies on the international stock exchanges.

First MineWatchZambia conference - Sept 19-20, Oxford

Mine Watch Zambia Conference:

Politics, economy, society, ecology and investment in Zambia

Friday 19 and Saturday 20 September, 2008

University of Oxford, UK

Speakers already confirmed include

Professor Oliver Saasa, International Economic Relations, University of Zambia

Professor John Lungu, Economics and Management, Copperbelt University, Zambia

Professor Jeremy Gould, Development Studies, University of Helsinki

Dr Nicholas Cheeseman, Politics and African Studies, Oxford University

Dr Jan-Bart Gewald, History, University of Leiden

Dr Marja Hinfelaar, National Archives of Zambia

Dr Miles Larmer, History, Sheffield University

Elva Bora, PhD candidate, Economics, SOAS

Andrew Brooks, PhD candidate, Royal Holloway

Namukale Chintu, MSc student, SAID Business School, Oxford University

Alastair Fraser, PhD candidate, International Relations, Oxford University

Tomas Friederikson, PhD candidate, History, Manchester University

Dan Haglund, PhD candidate, Economics and Management, Bath University

Rohit Negi, PhD candidate, Geography, Ohio State University

Frida Wallin, MSc candidate, Economics, Uppsala University

Janie Whitlock, MSc student, African Studies, Oxford University

Objectives

This inter-disciplinary conference aims to bring together senior Zambianist scholars, a group of young researchers currently engaged in primary research in Zambia and all those interested in the country.

Contemporary Zambian political economy has been largely ignored by the academy for a decade. The excitement of the ‘dual transition’ to democracy and free market economics in 1991 led to a flurry of articles and books on the political economy of reform. Once the economy continued its long-running decline and popular political forces retreated, Zambia appeared to lose its appeal. For the last decade the country attracted contemporary social science research almost exclusively on aid, the impacts of HIV-AIDS and occasional elections. Historical researchers have continued their work, and have remained well-networked, through newsletters and email circulars organised by the Network for Historical Research in Zambia, as well a series of conferences in Zambia and Europe.

However, economic and political developments in the country over the last five years have sparked a new wave of contemporary research, much of it being carried out by young scholars early in their academic careers. This research is particularly focused on:

- The privatisation of Zambia’s copper mines, through the negotiation of secret ‘Development Agreements’ between the Government and mine multinationals.

- The role of international financial institutions and aid donors in the privatisation process and subsequent reforms of the regulatory and tax frameworks.

- Increases in investment, productivity and profit since privatisation and the roles of privatisation and a boom in global commodity prices in these developments.

- The impacts of Zambia’s new boom on the wider national economy, government revenue, urban social conditions, labour relations and the environment.

- The increasing involvement of non-traditional (largely Indian and Chinese) investors, creditors and donors in mining and other commercial and industrial sectors.

- Company approaches to labour relations and laws, popular and regulatory pressure for corporate social responsibility and the ‘empowerment’ agenda.

- The unilateral revision of tax structures by the state in 2008. Reactions of the companies and investors to these changes.

- Reactions of the Zambian population, trade unions, NGOs, Churches and politicians to social and political change on the Copperbelt and the country more widely.

Background

One of the first publications reviewing the impact of privatisation of the copper mines (For Whom the Windfalls?, Fraser and Lungu, 2007), the linked publication of previously secret ‘Development Agreements’ between the Government and mining companies, and a ‘blog’ www.minewatchzambia.com sparked a number of the presenters at the workshop to contact the conference organiser. An informal network developed into an email list, as young and experienced scholars shared with each other their research objectives and provided practical advice on research in Zambia. This workshop will be the first physical meeting of many of those involved and presents an exciting opportunity to create new relationships, research connections and debates. The existing participants in this putative new network are excited about the possibility of meeting others, thus far unknown to them, working on linked research. If the workshop is successful, Fraser and Larmer propose to prepare an edited volume for publication based initially on the papers presented.

Publicity and Registration

This notice will be circulated on a range of email list-serves and websites. You are invited to forward this information as widely as possible.

Those interested in presenting papers at the conference are asked to email alastair.fraser@politics.ox.ac.uk with a title and abstract.

Deadline: July 18 2008.

Participation in the conference will be limited by the space available. Those interested in participating without presenting a paper are also invited to register their interest at the same email address. Places will be allocated on a first come, first served basis.

Funding and Costs

• The organisers have applied for funding to bring leading Zambian and European scholars to the conference, making possible an exchange between two generations of Zambianists. Their participation will likely only be possible if we are able to secure this funding, but the conference will go ahead either way.
• It is unlikely that we will be able to provide transport costs for other participants.
• We hope to make the conference free to attend and may be able to provide a contribution to accommodation for those speaking. However in the absence of funding there may be a small fee of around £20.
• Participants with ideas about potential sources of financial support for the conference are invited to contact the organisers.

Diversification, industrialisation, technology

Two pieces in today's Post, one reporting comments from British High Commissioner Alistair Harrison, the other an editorial on the same subject: diversification of the Zambian economy.

Harrison commented, "the boom in mineral prices is likely to continue, but higher commodity prices cannot last forever; hence, government should seriously embark on economic diversification on the Copperbelt to sectors such as agriculture."

Copperbelt minister Mwansa Mbulakulima replied: "We are on course with diversification and soon this region will be able to balance food production and mining but we cannot just abandon mining."

President Mwanawasa agreed: "A few years ago when the price of copper was very bad, government stressed that it was necessary to encourage other sectors like agriculture so that livelihoods that had been lost in mining can be replaced by some in agriculture and we should not lose sight of this important goal even when copper prices are high."

So, we're all agreed then? Zambia needs more than just a mining sector. OK, but the question it seems to me is 'diversification' (a word implying the growth of a range of industries) into what sectors? Harrison and Mwanawasa seem obsessed with food production. Hmm. Another primary commodity. Why? Well food is advocated on two grounds i) for the self-sufficient survival of households left out of the formal sector, ii) for export to the major rich country markets, principally in Europe. Until there is a formal sector base of waged employees, earning decent wages, the domestic market for Zambian agricultural will be seriously limited.

Is that really a model of 'development'? Export-based mining, plus export-based agriculture to take advantage of globalisation. And for the vast numbers left out of the labour force for these export industries - peasant agriculture, probably with quite a lot of aid industry and government funded primary health and education provision to keep the peasants alive.

James Ferguson's brilliant 'Expectations of Modernity' argued that the historical attraction of the Copperbelt for the many Zambians who have moved there has been the idea of breaking away from rural life, from the toil of agricultural production, from the insecurity that results from relying on nature's whims. The region, one of the first and the fastest in Africa to urbanise and industrialise, when 'booming' as now, has represented something radically better than the poverty that pervades much of Zambia, indeed Africa. At times, the opportunities offered have supported aspirations and dreams of achieving for mass populations the same levels of consumption enjoyed in the West. Older Copperbelt residents won't tire of stories of the 'good old days' that Ferguson discusses if you ask them.

Is there a way from agriculture back to that dream? Or are Zambians being told that the benefits of mining itself, and the industries that might grow around mining, will always accrue to a minority and to foreigners?

What seems to me missing in this vision is a discussion of industrialisation, of moving up the value chain to see Zambia competing to manufacture complex goods? After all, donors, especially the World Bank and DFID have been pushing this diversification = agriculture line for decades. They have traditionally argued the fiscal impacts of mining and the political choice of Zambian Governments to protect the sector (and its politically powerful urban workers) have frustrated agriculture. Structural adjustment was precisely designed to redress this 'imbalance'. Well, it wasn't a huge success! The Post's editorial picks up similar questions. I will quote it here at length but it's well worth reading the whole of the original.

"There is no need to pretend, as Copperbelt minister Mwansa Mbulakulima is trying to do, that we are on course with diversification. We are not on course with diversification on the Copperbelt – we are very far away from even making a good start. There is no reason that being mineral-rich should result in an inability to farm or nurture a dynamic industrial structure. In fact, a developed mining sector like Zambia's could easily be the motor for a fast-growing economy. A large mining sector has resulted in a concentration of population on the Copperbelt. This population, if it were well paid, would have the potential to generate an increased demand for various agricultural and industrial products. The sophistication of the industry would also generate skills that could be used in the other industries. Furthermore, demand for industrial equipment would produce a large enough demand to justify local assembly and later manufacture of industrial equipment."

But why hasn't this happened in the past? The Post argues, mining "has never been used as the integrating force in the economy. There are many reasons for this gross omission. First, the mining industry has always been treated as an external part of the economy. Second, the dominant position of large international firms in the industry re-enforced the alienation of the industry from the rest of the economy. Consequently, the large mining corporations were left to fashion and determine the country's mining policy. In turn, this re-enforced the view on the part of the government - both colonial and post-colonial - that the industry was only good as a foreign exchange milk cow."

The lesson picked up from colonialists in the 1920s onwwards was: "only mine copper, cobalt, lead and zinc; procure inputs from external suppliers; only export ingots and wire-bars without moving into semi-fabrication; consistently undermine the power of the ministry and by all means never let yourselves be integrated with the rest of the economy. On the part of the government, the mining industry has always been treated as a special one to an extent that most Zambians, including policy-makers, are ignorant about it. The mystique associated with the mining industry turned into a sacred cow. ‘Touch me not,’ became the industry's clarion call. It was certainly the goose that laid the golden egg."

The editorial concludes that the strategies of multinational mining houses have not benifited Zambia: "There is no effort to adapt to our country’s environment nor is there any incentive toward scientific and technological development because research and the choice of technologies is carried out in the transnational’s home country. So-called technological transfer is reduced to a very fragmentally apprenticeship to employ technologies that are alien to our country’s national realities and therefore precluding all possibility of adapting or producing them. Therefore, the results are almost nil because modern technology makes it possible to fragment more complex production processes into a number of more elementary phases. This, of course, makes it possible to carry out the greater part of the process with unskilled labour whose training requirements are reduced to a few specific operations.

However, in such vast international operations, the transnationals are obliged to divulge a certain amount of technological know-how. But then the strategy is to limit and control the process. Restrictive trade measures taking the form of technological contracts that forbid the export of products manufactured with a given technology are one of the mechanisms that the transnationals use to implement this strategy.

The features of the alleged transfer of technology attempting to copy the consumerist pattern of the parent company in the midst of our country’s unemployment, social inequality and extreme poverty, are clearly inadequate for the needs of our backward country. Far from being directed toward solving social problems, they contribute to the individual consumption of the higher-income minority.

So, the heart of the problem of diversification lies in the measures that we as a nation wish and are able to take at a given moment, in the political orientation and the nature of our economic development, and thus, in the resolute attitude of our leaders to struggle for the adoption of fundamental measures to meet the interests of our people."

Absolutely wonderful stuff. Well done The Post!

Govt clarifies mines taxes - companies irritated at World Bank

An article in the Canadian publication, the National Post, suggests the Zambian Government has provided additional clarification on how its revised mines taxes will work. Presumably this refers to the 'practice note from the Zambian Revenue Authority' that some companies claimed to be waiting anxiously for, as reported in last week's blog. The article claims that the clarification is 'bad news for the companies' and also suggests that the companies believe the World Bank is heavily involved in the negotiations, and is politically supportive of the government, against the companies' interests.

The artice claims that First Quantum is still prepared to turn to international arbitration if discussions with the government and the World Bank do not go well. It quotes TD Newcrest's Greg Barnes: "We believe that the World Bank has been encouraging the Zambian government to increase its revenues from the mining sector via increased taxes and royalties," he wrote. He cut his target on First Quantum to $85.00 from $100.00 and maintained a "hold" rating.

Barnes' argues that the government has not been clear on whether Equinox Minerals 'greeenfield' development at Lumwana would be exempt from the new taxes. I think it has and the answer is no. But maybe he knows about some background negotiations that I don't.

How to spend and monitor mine revenues?

There have been a number of ideas aired about how the increased revenue from mine taxes should be distributed. Should they simply go into national government coffers as with all other revenue, for the state to spend strategically on the development of the whole nation? Should a certain percentage be set aside for local authorities, perhaps even traditional authorities (a position advocated by the influential campaigner Peter Sinkamba at Citizens for a Better Environment? Should a certain percentage be spent on government facilities in mine areas (a position put forward by some of the companies, presumably hopeful of securing 'social peace' in a tense region?)

The Daily Mail reports comments from Mines Minister Kalombo Mwansa that Government has requested the World Bank to carry out a scoping study on whether Zambia should join and implement the Extractive Industries Transparency Initiative (EITI). “The EITI commits a country to publish all payments made to Government by extractive companies,” Dr Mwansa said. There is a paper here from the Director of Budgets at the Ministry of Finance and National Planning on this subject. And the background to a conference on the subject held in December and organised by Southern Africa Resource Watch here, here and here.

Meanwhile, The Post report that Nkana PF member of parliament Mwenya Musenge has said the government should immediately establish a mining communities development fund to benefit residents of mine areas.

In an interview in Lusaka on Friday, Musenge said people who lived in mining communities were seeing the benefits that investors in the mining companies were getting but that little or nothing accrued to them.

He said this in reference to the Zambia Revenue Authority (ZRA) having collected K29.7 billion mineral royalties from the major players in the mining sector.

Musenge warned that should government fail to establish the fund, people living in mining communities would have no option but to start agitating for it.

“Many countries in the world have a development fund that benefits communities that live in mine areas. If we do not establish this fund in Zambia, even the mine developments that we are talking about like in North Western Province and Southern Province will not amount to anything,” he said.

“There’s so much excitement for North Western Province but many years down the line, once the investors have made their profits and when there is no more mining to talk about, we’ll just be lamenting like we are doing for the Copperbelt.”

Musenge proposed that the government should retain at least 40 per cent of the profits from the mines to benefit mining communities and cities.

“This money could be shared between the local authority for that particular town and communities surrounding the mine,” said Musenge.

FFTUZ / ZCTU join forces to press for changes to new labour laws

The Post report that the Federation of Free Trade Unions of Zambia (FFTUZ) and the Zambia Congress of Trade Unions (ZCTU) have agreed to work together in pushing the government on the labour law reform process.

The two unions met yesterday at Pre-Cem Motel Lusaka to discuss with their members on how to proceed in the law reform process after failing to agree with the government over some clauses in the amendment bill.

The labour movement and the government have differed over some clauses in the proposed labour bill with the unions accusing the government of taking the bill to parliament before it was agreed upon by all the stakeholders.

The labour movement is now calling for the withdrawal of the bill for further consultation.

FFTUZ president, Joyce Nonde said it was not democratic for the government to try and impose a law on the workers. "Yes we know they are in power and they are using their numbers in parliament, but that is not the way laws are formulated. So we still expect them to come back to the round table and reason with us, not the way they have done it," she said.

Nonde said the FFTUZ had realised the need for unity within the labour movement, saying that workers had the same problems. And ZCTU president Leonard Hikaumba hoped that the government would listen to the workers, saying there was no need to keep quarrelling as it affected production.

China in Zambia

An great piece of journalism from Richard Behar here. It helps explain the 'push' factors driving Chinese investment in Zambia - a real gap in the dominant literature on the subject. For me it raises an interesting question - whether the image of 'state-led' investment is quite right, or whether the dynamic is more about Chinese individuals, and individual firms, making their way to Zambia and enjoying some financial support from the Chinese state, and possibly, political and economic protection from Chinese diplomats / the Zambian state. I've pulled out one juicy quote:

"most of the value of Zambian copper is unlocked only after it reaches China. Zambian politicians have dreamed for years about using their copper to create a light-industrial sector before they run out of the mineral -- most of which is likely to be gone by 2025 -- but there's still no coherent strategy to make it happen. Meanwhile, Chinese entrepreneurs are using fat bank accounts, vast credit supply, and, in some cases, government-funded incentives to buy up exploration and mining rights, just as they have with timber licenses and concessions in Mozambique. As a result, Zambia and, more particularly, ordinary Zambians are seeing very little benefit. While copper prices have quintupled since 2001, more than 70% of locals still live below the poverty line."

I am not sure about a couple of facts in the article (I don't think there were any fatalities in the shooting at Chambishi, and I don't think copper will runout in 2025), but the basic argument is very interesting.

Two companies still resisting new taxes

The Lusaka Times reports that Zambia is on course to collect the $415 million the state projected from new mining taxes in 2008. Zambia Revenue Authority (ZRA) commissioner-general Chriticles Mwansa said in a statement mining companies had complied with the new tax law and paid the mineral royalties at 3 percent. Mwansa said mining companies paid the tax authority $8.4 million in May compared with the $1.4 million that they used to pay per month before the introduction of the new taxes. That's a six fold increase in revenues to the state.

“I am confident that the targeted $415 million will be collected. The compliance levels so far by the mining companies are very encouraging, hence we are extremely hopeful that the government will meet the target. The first payments for mineral royalty were due on May 14, 2008 following the introduction of new taxes but the bulk of the revenue will be paid in June when the first returns and payments for company income tax and other taxes are due,” Mwansa said.

Mwansa's comments somewhat contradicted earlier reported commments from Emmanuel Ngulube, permanent secretary in the Ministry of Finance, who said on Monday that power outages would affect mine production, reducing projected income for the state in 2008. On the other hand, Finance Minister Ng’andu Magande said on Wednesday Zambia was on course to achieve a targeted 1.0 million tonnes of refined copper in three years and that the revenues predicted would be collected. Well, it's all reading as breezily good news so far, including Magande's comment, also reported in The Guardian (UK), that "all but two foreign mining firms in mineral-rich Zambia had agreed to pay the increased taxes, after initial threats of litigation in international courts." Indeed, the Government-sponsored Times of Zambia concludes in its editorial "Contrary to the sentiments of some sceptics in some circles both within and out side Zambia, mining houses operating in the country are showing themselves to be true partners with the people of Zambia."

.... HANG ON.... Does it make me a horrbile sceptic if I say, 'all but two?' It has been a significant achievement of skilful politics by the Zambian Government, opposition parties and civil society to resist the World Bank and IMF's love of 'property rights' and 'stable investment environments', and to refuse the blackmail of a 'negotiated solution' and get most of the mining companies this far. But there aren't that many mining companies in Zambia. Two not paying is still pretty serious.

So, which two? (From media noise, I am guessing Equinox and First Quantum). This transcript of a phone conference between First Quantum management and journalists on May 14 this year suggests the company is not yet paying all the taxes, and is considering legal action. Company President Clive Newall initially states,

"The Company, along with other miners in the region, have entered into development agreements with the Government of Zambia, which unequivocally provide for stability in the regulatory environment and with rights of international arbitration in the event of a dispute. Currently the Company, along with other miners, is seeking mediation with GRZ but, if necessary, will exercise its rights on its development agreement. The industry is also right now awaiting a practice note from the Zambian Revenue Authority, which will hopefully provide some clarity on how these taxes may apply, because I think most of you are probably aware there’s lots of different interpretations on how these taxes are to be applied. Hopefully this practice note will at least to allow us to see what we’re dealing with, which is not the case at the moment."

It's looks from that comment, issued 4 days before First Quantum was supposed to pay up on its taxes due, as other companies evidently have, that the firm is trying to buy time and is non-compliant. If that were the case, as far as I am concerned, the question is, what does the state propose to do about this illegal non-payment? The Guardian quotes Magande commenting, "I think everybody now wants to move on except for two companies that are still asking some questions. We now want them to provide us with their accounts because we feel everyone is making profits as a result of high copper prices."

However, further into the teleconference transcript (page 4) there is a discussion with institutional investors about how First Quantum calcuated its taxes in May. Here it appears the company paid the new mineral royalty and corporate tax rates, but feels the windfall and profit taxes are unclear. After more discussion on page 5 it seems pretty clear the company does have an understanding of how those taxes would apply. There's more on page 8 and page 10. In none of these cases does the specific nature of the 'confusion' First Quantum are suffering from become clear. The journalists and management seem, in each case, to reach agreement on the nature of each tax. Some clarity comes eventually on page 13 where Newall says, "The big question marks still, Kerry, on are deductibility of these new taxes. That’s what we don’t... And it makes a huge difference." The other big question is of course what, legally and politically, the company plans to do. This comes out on page 10:

"Onno Rutten, UBS Securities:
Okay, and that then begs the question your statement that you’re willing to challenge this according to your stated rights of the stability agreement. Are you going to include as well you actually believe your stability agreement is the legal document?

Clive Newall, President:
We have advice that that is true. We of course are taking more advice from our legal advisors on how better to deal with this, i.e. whether to pay the tax and recover it through the stability agreement or not pay the tax and handle it another way. We have yet to decide which way to go."

I guess we'll all find out soon.

Does Mwansa protest too much?

The Post reports that Mines Minister Dr Kalombo Mwansa has said the government's relationship with the mining companies in the country has remained cordial despite the new mining taxes.

The government introduced new mining fiscal regime which came into effect on April 1 this year.

The move resulted in increased mineral royalty to three per cent from 0.6 per cent, while corporate tax on mines rose to 30 per cent from 25 per cent.

The government also introduced a 15 per cent variable profit tax on taxable income above eight per cent and a minimum of 25 per cent windfall profit tax.

The move led to an outcry from mining companies operating in the country which congregated through the Chamber of Mines of Zambia, a cartel of mining companies operating in the country, to denounce the new tax regime.

The mining companies insisted that, by implementing the new mining fiscal regime, the government had abrogated the development agreements that it signed with them.
But Dr Mwansa insisted that the government had clarified with the mining companies and that the new mining taxes were not meant to stifle growth of the sector in the country.

"We still have a cordial relationship with them. Nothing has change. I think they have understood that our reasons to increase the taxes were not meant to hurt them but that we only wanted to get a fair return for our mining sector," said Dr Mwansa. "In fact, we should have been meeting them through their chamber Chamber of Mines of Zambia when we were on the Copperbelt last week for our quarterly meeting but we postponed but we should be meeting them very soon."