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Wednesday, 20 June 2007

Zambia mines debate : a warning from history....

Sophia Du Pleiss writes in a fairly recent paper on "Institutions and Institutional Change in Zambia".

To strengthen its perceived control over the mining industry, the Government also decided to terminate all contracts for services with the foreign mining companies in 1973. It further decided to redeem all government bonds, despite the penalty of US$55 million. At that stage the Government had to borrow US$ 150 million on the Eurodollar market to finance these transactions, which all took lace under the euphoria that that income of the copper industry would remain at prenationalisation levels.

Expectations that the mines under Government control would provide more revenues to the state proved misplaced. Not only did the cash flow position of the mines deteriorate, but the real copper price fell. Profits were not as high as expected, and must have had serious consequences for financing these loans. The result was that, except for a feeling of pride, the nationalisation offered small potential short-term gains for the Zambian Government, and left indebted.

It could be argued that the extractive nature of the mining companies before independence allowed little income to trickle down to the Zambian economy as such. This, of course, provides no justification for the outright ownership of the copper mines, because taxing the mines the Zambian Government could have received an income to use on development projects in the country. If the government had accepted the suggestion by the United Nations and had fixed taxes at a nominal rate of 50 per cent, for example, it probably would have been the best long-term solution for both the industry and the country. The companies would have remained in control of the management of their properties, which was a very important consideration for obtaining loan finance, and taxes would have been at a level that international investors would have found attractive.

I believe this statement carries an important warning from history in face of increasing pressure for resource nationalism that appears to be sweeping across the continent at the moment.

**Update

According to Dr Kalombo Mwansa [Mines Minister] Zambia is on the verge of having atleast one for each province. It is set for what some are calling an "investment boom" this year. More information here. The time has never been more urgent to get the "correct" framework for leveraging mining profits into the economy.

26 comments:

  1. Expectations that the mines under Government control would provide more revenues to the state proved misplaced. Not only did the cash flow position of the mines deteriorate, but the real copper price fell.

    But those were times of very low copper prices, caused by a world economic slump.

    Simply comparing the outcomes then and now doesn't work.

    Right now, the government should have been owning the mines, getting all the revenues, and locking in the high copper prices, on the futures markets.

    So to say that there was a certain outcome in the seventies or eighties, when the sociopolitical world was completely different from what it is now... Then, there was a cold war - now, China and India are developing on a scale that is unprecedented in human history. And they aren't going to stop. There may be economic pullbacks, but China and India are only going up, in the long run.

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  2. I recently read "Africa the Other Side of the Coin." It's a book by Andrew Sardanis who negotiated the original 51% mine purchases as part of the Mulungushi Reforms.

    He feels that the original purchase was a good thing as part of the Zambianization process after colonialism. Before the reforms they tried everything to get the mines to train and promote Zambians for higher level jobs but it didn't work because the mine operators were racially biased.

    The 1973 deal where the government purchased the remaining shares turned out badly for 4 reasons:
    1) Falling copper prices as MrK says.
    2) Higher gas prices world wide raised production costs.
    3) The deal was corrupt. Zambia paid twice the proper amount. Tiny Roland and a few corrupt politicians became rich. This was a large purchase and drastically cut into Zambia's cash reserves.
    4) Management after the purchase was done corruptly and incompetently. For example, all revenue from the mines went directly into the government and nothing was invested back into the mines. Pay was not on time. Nepotism. etc. etc.

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  3. Is it not absurd that in our quest for privatisation, we have sold Chambishi Mine for instance, to a Chinese state-owned company, NFMC? Is it Ok for the Chinese government to invest in enterprise both at home and abroad? More questions than answers, I suppose.

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  4. I think Sophia's article makes some interesting points. Here are the three I agree with in my own words:)

    1. You need a policy on mining that serves you well, in bad weather and good weather. Yes it makes sense to own the mines now because the copper prices are high, but what happens when the world hits a recession or copper prices tumble? Where will we be then?

    2. I agree with Sophia that respect for property rights are crucial. Full nationalisation may be consistent with our culture (the chiefs have always owned the land and so forth), but it sends the wrong message to people : if you are successful the GOvernment will come and take it away from you. We need to encourage innovation because those things are more important in the LONG TERM.

    3. Full nationalisation does not encourage an atmosphere of collective government. Concentrating resources in the hand of Government may prove a bad thing down the line if a new chap takes over and he happens to be nice. We should always favour private ownership over state ownership as a way of hedging against such things.

    My proposal therefore is that Government should do all it can to encourage private ownership of mines on a lease basis [E.g. the current 25 years] but must set higher taxes. The 50% suggest by the UN is a good start and one we should be assessing.

    For new mines: I favour we adopt a more social investment approach to mining issues coupled with a 50% tax.

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  5. Gershom,

    Is it not absurd that in our quest for privatisation, we have sold Chambishi Mine for instance, to a Chinese state-owned company, NFMC? Is it Ok for the Chinese government to invest in enterprise both at home and abroad? More questions than answers, I suppose.

    The lesson is that no one tells the Chinese what to do. :) And they have nukes.

    Plus, the Chinese government is nationalistic, instead of the nihilists and ideologues of the MMD, who are there only to get their hands on state resources and do whatever the IMF tells them to do.

    This is why it is so embarassing that even the Americans have to tell them not to be such good boys and just give everything away.

    Did you know it was illegal for Zambians to bid on Zambian state assets? The ZPA on several deals explicitly stated only foreign companies could bid on Zambian parastatals.

    Now what does that have to do with capitalism, free markets, development or anything else?

    It is the enactment of neoliberal ideology, which wants to destroy all states worldwide, so only multinational corporations are left. And in the words of Grover Norquist, make the state "small enough to drown in a bathtub". Do I need to add that these are not pleasant people?

    It is about ideology, and has nothing to do with development.

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  6. Error27,

    He feels that the original purchase was a good thing as part of the Zambianization process after colonialism. Before the reforms they tried everything to get the mines to train and promote Zambians for higher level jobs but it didn't work because the mine operators were racially biased.

    And they were afraid for their jobs too. They should have replaced them with Chinese, Indonesians, Filipinos, anyone who had experience mining.

    Bad management practices seem to be a British disease. (And I'm not just referring to "The Office" :) ). It is part of their culture, which seems to revel in aristocratic values, more than mercantile values. Just my opinion, but I think it holds up.

    4) Management after the purchase was done corruptly and incompetently. For example, all revenue from the mines went directly into the government and nothing was invested back into the mines. Pay was not on time. Nepotism. etc. etc.

    There should be very clear guidelines for how government owned enterprises are run. There should be:

    - no political appointments (cousins of..., or jobs that are just ceremonial)
    - no one with a relative in politics or the civil service should be allowed to have management position in a parastatal
    - there should be strict rules about re-investment in the company
    - there should be modern incentive schemes to ensure efficiency and the quality of work (as we discussed in the Donald Trump example)

    In all fairness, communist management methods were not great either. But we can learn from history and experience.

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  7. Cho,

    1. You need a policy on mining that serves you well, in bad weather and good weather. Yes it makes sense to own the mines now because the copper prices are high, but what happens when the world hits a recession or copper prices tumble? Where will we be then?

    These are times of high copper prices, and where are we now? At these good times, the mining agreements ensure that all the profits to go the mining companies.

    I think it is just self evident that even if we owned all the mines, when worldwide demand is low, prices will be low. However, that will always be the case no matter who owns the mines. It does not change the underlying fact that when there are profits to be made, those profits go to the state.

    As a country, we should use the profits from the mines to expand other economic sectors - agriculture would be a good place to start - and build the nation's infrastructure.

    If agriculture became a sector where everyone involved in it was making a good living, that would create a lot of security and take the country's fate away from the ups and downs of the (metals and mineral) commodities prices.

    That is why I suggested we develop agriculture in a way that put 100 hectares into the hand of every farmer. They use half to produce the national staple crop, and use the other half the way they see fit, for similar crops, cash crops, or farm businesses (like dairy, agroforestry, intensive cattle farming, etc.), and they can subcontract these businesses to people without land, their relatives, etc., giving them multiple income streams. While at the same time diversifying Zambia's agricultural output.

    This should create a permanent economic base. Anything else, tourism, manufacturing, logistics, can go on top of that, but there would be long term economic stability.

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  8. While I agree with Cho that full nationalisation looks to be a cure with its own set of symptoms which may prove worse than the disease, I am not yet willing to stop at increased taxes and social investment mechanisms. I would still like to see measures in place which would allow Zambian individuals to reap much more benefit from their working relationship with mining companies than they do presently.

    Perhaps all companies engaged in extraction of non-renewable national resources could be required to offer a minimum amount of stock options to their Zambian employees over time. Options would be granted and allocated gradually over the length of employment, and employees would be able to purchase vested stock valued at the market price at the time the options were granted.

    For example: Equinox agrees to grant to all of their Zambian employees stock options at a rate of 1000 (or X %) shares per year starting at the end of the first full year of employment. The options allocated would become available for purchase after four years at the market price at the time of the grant five years previously. The employee would then have a period of five additional years in which to exercise their option to buy any or all of those 1000 shares at that price before losing it. Once bought, employees must hold on to shares for at least a year before reselling them.

    A worker hired in the first week of July last year would be just about to be allocated options on 1000 shares @$1.31 per share. Those shares are already worth $3.47 each today, and the worker will have from four to nine more years in which to save or borrow the $1310 they need to buy them. After holding them for a year, the worker can then sell some or all of the shares for the going rate, likely several multiples of the grant price for successful companies like Equinox over 6-11 years.

    Since each worker continues to be granted additional options each year, as a company grows over time, so does the inexpensive share potentially owned by the employees. I think this is a way to leverage FDI for mining into opening a path for ordinary miners to earn their way into the middle class.

    Of course if the company does badly and stock values drop, the worker cannot profit from their stock options, but they will not be forced to use any options, so they lose nothing if they just let them expire. The long life and gradual allocation of options should help to smooth out the effects of commodity price fluctuations over the long term.

    Since the stock options are part of the employment compensation package and not the development agreements per se, it could be advanced that legislation requiring option grants by all mining operators does not require renegotiation of existing DAs with the government. Use labour law instead of tax law.

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  9. ”Is it not absurd that in our quest for privatisation, we have sold Chambishi Mine for instance, to a Chinese state-owned company, NFMC? Is it Ok for the Chinese government to invest in enterprise both at home and abroad? More questions than answers, I suppose.” - Gershom

    The fact that it is the Chinese Government not a multinational corporation does not really sway the argument one way or another. I mean most of these multinationals like Equinox or Shell exert more power than Governments.

    If your point instead is that because the Chinese Government are able to do that, then we should be doing – then that is a form of “Sakism”. What works for the Chinese may not work for us. The Chinese can afford to experiment; we cannot afford to get the model for extracting income from the mines wrong. I am not saying the current model is right, simply that we must be cautious in our approach to new solutions – learning the lessons from history.


    ”I think it is just self evident that even if we owned all the mines, when worldwide demand is low, prices will be low. However, that will always be the case no matter who owns the mines. It does not change the underlying fact that when there are profits to be made, those profits go to the state. - MrK

    I think we all agree that the Zambian people should benefit from increased profitability of the mines, whilst accepting that the rewards should also not be totally taken away from the investors. They need an incentive to keep looking for new methods to make our mines profitable, for us and them. Where we disagree is the best mechanism for reaping from such profitability.

    Now with regards to your main point in the above quote, the key issue is that when the copper prices are low the Government does not take any more risk. If the copper is private owned, we just get less taxes. If the copper is in our hands, we have to worry about paying the workers and repaying any finances we have borrowed to invest and so forth. I am uncomfortable with us taking on such risk. I am being a bit greedy here by saying all I want is for Government to profit without the hard work :)

    The other point MrK is that Zambia has actually got a weak institutional framework to take on this responsibility. In Sophia’s words we have a poor culture of allowing feedback and sharing of opinions. The Government does not really listen to the people as much as it should. We need to reform our system of governance before we even think about owning back the Mines. Do you really want the Executive to control the mines under the current constitution and use it to amass more power for itself? The reason the mines underperformed is because we had a Government that was not open to be challenged and thought it had all the answers. The system of governance was not conducive for a profitable system of state ownership. I don’t believe that our institutional framework is yet ready to take on the responsibility of a successful model of state capitalism.

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  10. Yakima,

    A brilliant idea!
    Option 7!!

    An option that really works.

    This is the way forward.
    You previously advanced this in form of Government buying shares. I was skeptical about that, but never advanced as far as seeing other avenues.

    This actually works.

    It is directly empowering workers and elbowing Government out of the way (I am not really always distrustful of Government - I am working for a Government at present :) ).

    I cannot see the mines refusing something like this, because it actually carries incentives for workers to perform and so forth.

    So we are talking essentially now about a suite of measures.

    1. A reasonable tax rate of some sort
    2. Options for Workers - in order to empower them.
    3. Social investment framework - but only to new mines. And there are plenty of new mines coming up.

    see the "update" above.

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  11. I think everyone should read the section on negotiation from George Ross's book (he has another one out now).

    You don't start of compromising. You go in and demand the moon, and whatever you settle on is the maximum deal you could get.

    But to say in advance, we don't want full (or part) ownership, we are going to trust the mining companies to properly declare their income and tax that 'reasonably', we want some 'social investment', and some options for workers...

    This is simply going to lead to Zambia continuing to be ripped off.

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  12. Mrk,

    I'll most certainly try and find this book after your excellent recommendations. Whats the title?

    Now some might say that its not the number of options you carry to the negotiating, its the number of CREDIBLE options. The point is that if full ownership is not a credible position to take to the negotiating table because the other party knows that you just wont go there (i.e. it makes no economic sense - I am not saying it doesn't), then it may be unwise to even carry it with you. It justs clouds your negotiating strategy.

    How do you handle such a view?

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  13. It appears we can also learn not just from history but what has worked for others:

    http://news.scotsman.com/columnists.cfm?id=978222007

    "But Botswana retained one thing that was to see its people through any difficulties; a belief in the rule of law and a commitment, therefore, to property rights.

    It then discovered two things, firstly from mining it was rich in gem-quality diamonds, and secondly if its government followed a prudent financial policy it would have a stable foundation for people to do business and prosper. Since then Botswana achieved one of the most successful economic growth rates in the world, averaging nine per cent annually between 1966-1999".


    It does appear that the Du Pleiss philosophy for what works and doesn't is also shared by the author of the article.

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  14. The titles are:

    Trump Strategies For Real Estate - Billionaire Lessons for the Small Investor, by George H. Ross.

    His new book (which I have ordered but haven't read yet, although it seems (from the title) to be completely about negotiation), is:

    Trump-Style Negotiation: Powerful Strategies and Tactics for Mastering Every Deal by George H. Ross

    On Botswana - the real difference made in Botswana is that money from the mines goes to the state, not just the mining companies. 'Adherence to the rule of law' and 'property rights' do not really set it apart from Zambia, Malawi, Tanzania, etc.

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  15. Mrk,

    Thanks for the titles. Feedback down the line as usual.

    By the way, I am carrying some indepth read into Zambia's economic history BEFORE independence - Any pointers or do you know who might know sources?

    On your point:

    "On Botswana - the real difference made in Botswana is that money from the mines goes to the state, not just the mining companies. 'Adherence to the rule of law' and 'property rights' do not really set it apart from Zambia, Malawi, Tanzania, etc."

    I think we cannot say that with certainty. I certainly agree that money goes to the state in larger bulks but the state has to manage it properly and have a proper frameework in place that encourage enterprise and innovation.

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  16. MrK,

    As an example on my last point.

    Money went in large bulk to the state during the Kaundanian era but what happened?

    Also Nigeria, Central African Republic, Ghana, DRC during Mobutu and others serve as examples that getting a larger share does not necessarily lead to growth!!!

    You need more. Surely that is Du Pleiss's point?

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  17. Cho,

    Money went in large bulk to the state during the Kaundanian era but what happened?

    Some mismanagement, but also: universal education; universal health coverage; the creation of Indeni oil refinery; the creation of all kinds of parastatals; roads.

    In other words, enough went to social and infrastructure spending to make a real difference, including to this day. The MMD government, under Chiluba or Mwanawasa, have not spent a comparable amount on infrastructure, to the point that the nation's economy grinds to a standstill when Indeni is up for repairs. To the point that Indeni is told to hold off much needed maintenance during elections.

    Why doesn't Zambia have Indenis in all provinces? Why no investment in irrigation, which in itself could revitalize agriculture?

    What we also must remember, is that Zambia's economy became troubled during the worldwide economic collapse of the late seventies early eighties. The oil recession of the seventies was out of Zambia's hands, diversification of the economy when oil prices were good wasn't.

    However we must also remember that Kaunda had the apartheid/fascist states breathing down his neck for most of the sixties and seventies, and South Africa didn't become a non-issue until 1994.

    I never talk about the mines alone, even though the hundreds of millions they make would be a real difference to taxation and infrastructure development.

    Yes, we also need the development of local markets, restructuring of government, and land/agrarian reform.

    But that is no reason not to demand that the mines work for the benefit of the people and do so now, even though the rest of the economic and political scene is not yet perfect.

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  18. ”Some mismanagement, but also: universal education; universal health coverage; the creation of Indeni oil refinery; the creation of all kinds of parastatals; roads. “

    I was referring to the viability of the mines themselves :) The money from the mines was not properly handled and sufficiently reinvested in the industry itself. This is why although every area of Zambia is full of minerals and now oil and gas nothing was done to take it forward. Its bad enough we did not diversify away from minerals, but even within the mineral sector we never developed the industry as much we could have. Production continued to fall when it should have been going up. If a 50% tax was put on the mines and left in private hands am sure to this day Zambia would be a world leader – the whole nation from Livingstone up to Kasama would be an oasis of development.

    ”I never talk about the mines alone, even though the hundreds of millions they make would be a real difference to taxation and infrastructure development. Yes, we also need the development of local markets, restructuring of government, and land/agrarian reform. But that is no reason not to demand that the mines work for the benefit of the people and do so now, even though the rest of the economic and political scene is not yet perfect.”

    I definitely agree with you. We need the mines to work to the benefit of our people. And I also think you are right that currently they are not working towards the benefit of the people. $9m per annum is very little to get from such national treasures. The issue is how we make that possible while pursuing broader goals that you have stated like development of local markets, restructuring of Government, land reform etc.

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  19. I was referring to the viability of the mines themselves :) The money from the mines was not properly handled and sufficiently reinvested in the industry itself.

    That is very true. However, if you look at commercial companies, they very often pay out half their profits as dividends, and keep the other 50% to reinvest in the company. (Although some highly successful companies like Microsoft didn't pay dividends for most of it's existence.)

    I don't see a reason why a parastatal couldn't have the same policy. They should have constitutions that are free from political interference.

    There should be a way to professionalise the parastatals, as well as the civil service - through strong legislation.

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  20. I think you are getting to my point :)

    Even if I agreed with you that Government should own the mines, I don't think we are yet in that position. There's a lot of institutional reform to get us to that level.

    But of course I am more naturally inclined to market based solutions compared to you. I think incentives work better than rules and regulations :)

    Hence my strong support for a tax based approach.

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  21. But of course I am more naturally inclined to market based solutions compared to you. I think incentives work better than rules and regulations :)

    Enron. Tyco. Worldcom. $15,000 umbrella stands.

    There always has to be a balance between rules and regulations and incentives. I am a big believer in incentives, especially for employees, contractors, etc. However, that does not infringe upon well written rights and obligations and consequences.

    Just because things were done one way once, doesn't mean they have to be repeated exactly the same way. There are ways to have state ownership of the raw materials, while having private companies perform the basic operations. They don't need to own the minerals they dig up.

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  22. MrK,

    What changes do you think we need to make to the way we govern ourselves before we assume full ownership?

    I am unclear as to how ready you think we are to assuming full command of the mines and run them properly.

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  23. Zambia Konkola miners reject 15 pct pay rise

    Someone should tell them to ask for options, if the company is short on cash for wage increases, it is the perfect time to ask for alternative forms of compensation.

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  24. Yakima,

    My intial thought was, these workers just want to have a nice meal and afford their bills.

    But according to the Mining Weekly, the anonymous KCM official reckons "They are asking for a higher pay rise because the copper prices are high and the company is making profits and not losses,"

    Assuming they can get a deal beyond 15% perhaps they should also be looking at that. They appear to want 40%.

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  25. Cho,

    What changes do you think we need to make to the way we govern ourselves before we assume full ownership?

    None really, because the mines should belong to the state no matter what.

    However, the situation would be better if the mines were overseen by an independent state agency, that is there to closely monitor sales, labour conditions, the environmental impact, etc.

    There should be hard rules on capital retention, dividend payouts, etc. so no politician can syphon off funds, or not re-invest in capital goods, etc. There should also be severe consequences for the company holding out on the state, like not reporting all it's turnover or profits, conceiling extra deposits, etc. Consequences like loss of ownership.

    Of course if the mines were owned by the state outright, there would be no point in the mining companies conceiling deposits, or the size of deposits.

    An ideal would be that a truly politically independent state agency oversaw the sale and payments received of all the minerals. With very strong nad immediate consequences for the companies if they are found to hold out, or overcharge, etc.

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  26. "However, the situation would be better if the mines were overseen by an independent state agency, that is there to closely monitor sales, labour conditions, the environmental impact, etc."

    This model would work, if properly developed and the key here is that it is different from Government ownership.

    This is a company independent of the Government but dependent on the Zambian people.

    The model would require a more detailed formulation, but I would make the following initial conditions:

    1. Each Zambian could be assigned a share in it (am not sure how that would work - may be provincially so they own as a block to avoid intergenerational problems). A bit like the Real Madrid and Barcaleno club where the supporters own the club and vote for the President of the club etc.

    2. This company would basically be an investment arm. So you are not saying no other companies can own mines. So may be we could say for oil - this must certainly be the case and one or two major mines. After that this company needs to compete and look for ways to make cash for the Zambian people.

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