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Friday, 1 June 2007

More "Equinox" salt for that wound?

Mineweb reports on a "Uranium star masquerading as copper dotcom". Yes folks, "uranium's biggest secret may be a Zambian copper miner with big reserves of uranium effectively mined for free". Here is a short extract from the article:

"Equinox aims to produce an annualised 200,000 tons of copper a year by this time next year. Current price levels for the stock suggest a long-term copper price assumption of around $1.65 a pound, just more than half the current spot copper price. The sweet part of this story is that Equinox's uranium resource is essentially for free. The figures start with Equinox owning around 20m pounds of uranium, sitting within its Zambian copper ore bodies.

The uranium leg of the operation could be in business by 2010 for a capital cost of around $200m, and a fair-guess operating cost of less than $20 a pound. Using current spot uranium prices of around $125 a pound, and annual Equinox production of 1.5m pounds or uranium, "Equinox Uranium Corporation" would generate cash flows of some $150m a year.

Uranium producers such as Cameco and Energy Resources Australia trade on actual cash flow multiples of ten times and more. A couple of multiplications, and it can be argued that Equinox's entire market capitalisation of C$1.8bn can be justified on its potential uranium production. For those investors still bullish on copper, Equinox's projected annualised production of that metal would produce cash flow of close to $1bn over 12 months, given current spot copper prices.

The story is quite different to a good number of "hopeful glow-in-the-dark uranium developers", and takes on further promise considering that Zambia's copper belt comprises a huge brown fields copper rehabilitation site. Mining and civil infrastructure is already in place for a number of copper producers, a story enhanced in its own right by substantial re-developments underway across the border on the contiguous Democratic Republic of the Congo copper belt."

63 comments:

  1. This again goes to show that the government should never have let go of the mines.

    It also shows that it is time to take at least some of them back.

    Uranium is a strategic mineral. This involves matters of sovereignty and that puts it way beyond just another commodity.

    There is no way that the mines can remain in foreign hands - it directly affects the country's sovereignty.

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  2. I have been discussing with some people on the ground on this. Apparently this is not practical. Neither is any form of legislation - e.g. my proposal of social investment set out here.

    The mine agreements are valid for 25 years. After that the land reverts back to Government. Its a long wait.

    The only choice we have is gentle persuation, although a friend has intimated that perhaps indirect taxation could be a way of forward. Here is what he said:

    "I figure there is no law we can pass to force them to invest in infrastructure development. These developmental agreements where written by top class harvard and oxford lawyers who were paid a percentage of the sale price of the mines. We can only try and negotiate with them for better conditions.

    Then again, if they dispute our demands, there is nothing we can do.We can introduce indirect taxes such as:-

    1. Increase in tax on heavy fuels produced at Indeni (which are used by the mines)

    2. Increase in electricity taxes for commerial use in the CB (by taxing CEC more)

    3. Increase in road transport taxes for movement of ore (transport charges go up).

    4. Increase customs clearance fees for mining inputs and exports at agent level.

    These indirect taxes will not be levied directly to DA holders but impact on their running costs through increased charges by service and supply providers.

    e.g. it costs R24,000 to ship 28 tons of copper from Kitwe to Durban. If we introduce a vehicle licencing cost for transporters of say K1 million per ton, we could earn K28 million at weigh bridges for every load of copper exported. The transporter would charge this to the mining company as part of the transport cost as follows:-

    R24,000 + (K28million/ 551.727) R50,749.74 <=> R74,749.74 would
    ultimately become the shipping cost of Copper Exports from Zambia to Durban.

    @ about US$7000 a ton, 28 tons yeilds US$196,000 and Zambia would earn US$7,177.012 from the same or 3.66%!

    Apply this thinking to the other mining inputs and we should walk away with a good 10% in total, if not more!"



    I am not fully persuaded by the "indirect tax" rule for distributive justice reasons...but it does seem our choices are limited.

    Perhaps its about time we started looking forward? Zambia has so many minerals, oil, gas, uranium deposits...and new copper in the North...as I speak the Chinese are scoping a new mine in Luapula....
    In addition, we have other types of non-mining related investments...

    Perhaps our effort should be on how to make sure the mistakes are not repeated? I would like Government to take forward the idea discussed on the blog reference for ALL NEW investment....

    I am currently doing more research, but I hope to draft a policy paper and share it with interested colleagues as a first step towards starting the engagement.

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  3. When your friend is done with this appeals to authority line of arguing ("These developmental agreements where written by top class harvard and oxford lawyers who were paid a percentage of the sale price of the mines. We can only try and negotiate with them for better conditions.") we can start getting realistic. It is like listening to Mark O'Donnell trying to spout his twisted logic for letting Zambia be gangbanged by international corporations.

    First of all, these agreements are not the alpha and omega of legislation.

    1) There is the constitution. How constitutional are these agreements, when it is made very clear that land and mines are held in trust by the president, on behalf of the people of Zambia. They are not his, and therefore they are not his to give away. You or I may not like the fact that the president has this much power, but there it is - but it is not unaccountable power.

    2) A willing government can stop these companies from operating, by closing them down (sending in the police or the army), until they...

    a) enforce every single labour law
    b) enforce every single standard on emissions and environmental legislation
    c) can account for every cent of their profits

    3) There is such a thing as a windfall tax. Look at how many of these mining companies are falling over themselves to start paying a windfall tax, in my opinion, just to avoid more drastic measures like nationalisation. Joint share ownership can be negotiated, like in Botswana, so a third or half of the profits go to the state.

    4) They agreed to a royalty tax. Obviously, the ridiculously low amount of 0.6% is not acceptable, but this lame MMD government can only think of raising it to the international average of 3%. Raise it to 60%, which is the profit margin they have on their turnover. Start there, and negotiate from that point, if at all. And let's not forget, the per tonne price of copper when these deals were signed, was under $1,000. It peaked last year at around $8,600, before backing off to around $6,000 per tonne. Considering that $2,000 was a huge increase in price at the time, the state should own everything over that.

    You tell your friend this. No one is going to stand up for you, unless you stand up for yourself. Oxfam isn't going to bail you out.

    The real price of timidity, of cowardice in the face of these agreements, is the children who die from preventable diseases, because they are so poor that they cannot afford antibiotics. Or clean water. Or a governemnt that does not have enough money to keep the roads in shape, so people don't die on them.

    That is the price of cowardice. You tell your friend that.



    Cho,

    Perhaps its about time we started looking forward? Zambia has so many minerals, oil, gas, uranium deposits...and new copper in the North...as I speak the Chinese are scoping a new mine in Luapula.... In addition, we have other types of non-mining related investments...

    It is obvious that any future deals should have some serious government ownership. I think there should be a law that the state should receive (at least) 50% of the profits of all future mining developments.


    I am not fully persuaded by the "indirect tax" rule for distributive justice reasons...but it does seem our choices are limited.

    The example mentioned is interesting, but how can they only charge this road tax to mining companies? 10% is something, but it isn't 50% or more.

    Instead of taking this timid attitude, we should be looking toward Venezuela and Bolivia. They are nationalizing left and right, so to speak, and they are doing so in America's backyard. We could have a milder version of that, and if they can get away with it, so can we.

    Certainly the Russian government is very aggressive in getting it's way.

    Look at it this way. This is the people's money. If the Zambian state does not fight for the people's rights, no one else in this world will. The Zambian people have one government, and if this government is more concerned about the rights of multinational corporations, the people have no champion at all.

    It should be very clear, that there is a direct and causal link between the poverty experienced by the people, the lack of investment in infrastructure, and the fact that all the profits and too much of the costs of the mines is going straight out the door.

    So 10%? Who is going to be satisfied with 10%? Who would choose 10% over 100%?

    Maybe future governments should be constitutionally bound to maximize profits. :)

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  4. After 43 years of independence, free education and experience at being manipulated by the donors and foreign investors in Africa, it is disappointing to see that the African has not learnt anything. We are as ignorant as we were in 1964 when we thought we had secured freedom from oppression. Whilst we may have managed to remove the colonialists’ form administering our national affairs and replaced them with our own kith and kin, we have failed to see that colonial domination still exists but more at the economic level as opposed to the administration level. As a result our endeavour for freedom has not benefited the African in a way as was anticipated. The African still lives below the poverty line and depends on handouts for survival, yet Africa is a land full of mineral and agricultural wealth. Africa has the potential to generate more wealth for its people than the other continents can garner. Yet we fail, as Africans, to turn our natural resources into meaningful development for our people. Our approach to development seems to always fail because we tend to adopt extreme and unsustainable ideas.

    Take for instance this topic about taxing the mines in Zambia. Don’t Zambians know that abrogating agreements costs money? Money is what Zambia does not have and yet Mr. K is quick to pull the plug on foreign investment which will ultimately see the Zambian people wallow in more poverty than that being experienced today. Abrogating business agreements cost Zambia US$200,000,000 in 1970 and still we think that this is a sustainable way forward. The US$200,000,000 could have been put to good use developing the welfare of the Zambian people but it was used to settle international debts as a result of mismanagement. Abrogating the development agreements is mismanagement! Whether in a sovereign state or not, an agreement is an agreement and it is bound by international law. Zambia can not afford to live in economic isolation like Zimbabwe and the war torn countries of Africa. Even the copper the Zambians value so much (since it topped US$6000) as their own is useless to them without the dollar that foreigners are prepared to pay for it. These buyers are the same kith and kin of the owners of the mines who Mr. K proposes we abrogate legal contracts with.

    Then there is the idea of forced government ownership of strategic industries like the mines in Zambia. Once again Mr. K proposes that nationalization is the key to economic independence and yet he clearly forgets that nationalization is responsible for the demise of the mining sector in Zambia. Nationalization yielded mismanagement at corporate level and inefficiency which brought the Zambian people to abject poverty. It was for this reason that the people of Zambia voted out KK and replaced him with a bunch of thieves. Can’t Zambians see that their entire economy is smaller and has a much lower investment capacity than the smallest of mining investors in the country? Mining investors are getting 2-3% below prime whilst the Zambian government is failing to even secure a decent financial facility. How is the government going to develop more efficient US$1billion smelters and processing plants for each of the operations when it does not even have money to educate its people and provide decent health care? Who is going to lend money to the Zambian government for mining technology development after it has abrogated agreements and nationalized industries?

    It is normal for any country to develop its private sector merely because this sector is the engine of growth that churns the taxes required to provide sustainable human standards of living for the citizens of the country in question. With this in mind, it will not be surprising when the donor community pull the plug on the 33% that they fund the Zambian budget with when the government of the day abrogates development agreements and nationalizes the mines because this act is counter objective to the development of their private sector. Furthermore, because the Zambian government has very high running costs (education, health care, infrastructure development, etc...) which will inhibit funding for the much needed further development of these ventures, these mines will gradually dilapidate over 5 years or until prices of copper drop to sub US$2000 levels and the next will government comes in and privatizes them all over again!

    How many times must the Zambian people keep rewriting the same exam? At what point will they realize that parastatals are not as efficient as private companies and that the international market is dominated by extremely efficient private companies? How will a Zambian government owned business compete with the very efficient developed world private sector and expect to sustain itself whilst having to spend huge amounts of money (more than the mines currently make in distributable profits) to fund unprofitable ventures such as free education, free health care and free road networks?

    The Zambian government needs US$10,000,000,000 a year just to break even in the delivery of sustainable and quality free education, free health care, infrastructure development and national housing. To deliver the kind of development that Zambians expect, the government needs no less than US$20,000,000,000 per year!

    Zambians need to stop dreaming and start putting their education to work so that they can ‘sustainably’ earn US$20 billion in taxes without killing the goose that lays the copper egg!

    Cowardice is fear of taking the long road to developing the Zambian economy to a level where it is able to sustainably develop the lives of its people. Cowardice is taking the short cut that Mr. K has proposed which will lead to short lived success and consequential further economic destruction.

    As an international economic consultant from Harvard University, I totally agree with Cho’s friend!

    The developed world utilizes both non-tariff barriers and indirect taxes in order to assure that the benefits of a particular business activity trickle down to the masses. The indirect tax options as proposed by Cho’s friend will force the mining companies to bring the developmental agreements back to the table for discussion without having to bear the cost and consequences of abrogating these legally binding contracts.

    Africa needs more business thinkers who can develop sustainable capitalist solutions to the countries needs as opposed to socialist/communist solutions which are inefficient and unsustainable.

    Mr. K would do good to study the business thinking as exhibited by the Asian, Lebanese and Chinese community in Zambia who have continued to make strides in wealth creation despite all the harsh laws and fluctuating economic conditions in the country over the last 43 years. These people have the ability to adapt and alter their business activities in order to maintain similar or increased income, within the framework of the law. Hence, they are the largest local borrowers in Zambia simply because they pay their debts, do not abrogate agreements and continue to invest in their businesses, whilst creating wealth which pushes them up the food chain.

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  5. I wonder if there is not a Third Way available to the Zambian government, other than steps towards nationalization of mine resources to an extent which would abrogate existing agreements and thereby alienate the FDI and donor communities, or resigning ourselves to the limited return from mineral wealth available from tariff and taxation regimes.

    In cases such as the Equinox Lumwana project, where current information indicates that asymmetry favored the risk taken by the private company to a degree that the existing contract raises questions over nationalization and/or windfall taxes, would it be unreasonable for the government to take advantage of recent improvements in credit rating and borrowing capacity to obtain a minority stake in this publicly traded company in the same manner that any other investor might do so? In such cases profit distributions to shareholders and/or stock price appreciation should allow for relatively rapid loan abatement, and leave an existing investment capable of reaping mine profits in a manner consistent with current contracts and laws.

    In what way would such a government borrowing exercise be different from that involved in building a hydroelectric plant, railroad or toll bridge? Would not such equity holdings facilitate better terms on future loans (if offered as collateral) as well as supplement tax receipts for governmental operations in development and service delivery?

    I don't like the prospect of following in Zimbabwe's footsteps any more than I relish watching the vast majority of mining revenues leaving the country for the next twenty five years checked only by FDI unfriendly tariffs and selective taxation. Perhaps I simply want there to be a Third Way so much that I am mistakenly engaging in wishful thinking, however it seems a better avenue for effort than choosing between two better tested but bleak alternatives.

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  6. Mr. K, lawlessness is the last thing we need in Zambia. Your suggestions make a lot of political sense, but absolutely no business sense at all. You do not have to have a legal academic background to understand the grave consequences of breaking a legal agreement. I must hasten to mention that I, too, like Cho's friend's ideas. It is amazing to note that most Zambian lamenters have their eyes fixcated on the net profit, without any regard for the value in hundred of millions of dollars Equinox is actually pumping in the regional economy through their capital expenditure. Isn't the fact that thousands of Zambians will start earning a decent wage worth mentioning, not to mention the goods and services Equinox will purchase from local industries. Zambians, before Equinox makes $0.01, the whole NW region or is it Zambia as a whole is alive, is that not a benefit beyond net profit? Agriculture and tourism to just mention a couple of industries will also be awakened. Folks, you need to zoom out and see the bigger picture here. If Zambia is so attracted to get 50% of the profits, would she be willing to bear 50% of loss in a bad year? Believe it or not, metal prices are cyclic and Equinox is bound to make loses over the time of their investment in Zambia. Granted, what is in it for Zambia as a whole is not as high as we would have hoped for, but we have entrusted our politicians to make decisions on our behalf. If anyone needs to be taken to task about this issue, it's the ministries of mines and legal affairs, not the foreign investors. We do not pay investors to represent our interests. Most corporations have public relations and loss prevention departments who do listen to their neighbours and sometimes, act accordingly. The local people in NW province have a lot more power than their realize. Not only can they lobby for a lot more benefits from what is going on in their region, the locals may even have the power to shut the mines down if it was in their best interest. I believe such a course of action would be retrogressive, but 'we the people' have more power to legally get more benefit from copper than we realize.

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  7. What a reactions. First of all 'anonymous', you do not know my background. I will keep it that way, because these discussions are about the facts, not about appeals to authority or rank. :)

    Secondly, using forceful means to renegotiate business contracts, especially when they are so clearly outrageous, does not amount to 'anarchy'. If you don't think that makes sense on it's face, but need international examples of people who have done this before you, I suggest you check out the Russian government's recent dealings with BP, or the Korean and Japanese government's dealings with companies that displeased them when they were setting up their Chaebol and Keiretsu. Or look at the real heroes, the presidents of Venezuela and Bolivia.

    Thirdly, businesses doing business in Zambia had better understand that when they make deals, they had better be to the benefit of both sides of the agreement. I cannot imagine giving away the mines, having these companies pay no substantial taxes and not demanding that they hire local suppliers, looked reasonable or beneficial to either side of the negotiation table. If you think the IMF does not use force to enforce discipline, you have not been paying attention to it's history or it's practices. It is time that the Zambian government stood up for the interest and the future of the Zambian people in the same way, and with the same vigour. The mines were sold under extreme duress from the World Bank and IMF. In many courts, that would make these contracts either illegal or very close to it.

    Fourth, renegotiating without the presence of the threat of force (like nationalisation or massive taxation) is not renegotiating at all. If you think it is, you should have absolutely nothing to do with the renegotiation process, or for that matter, government.

    On the scraps that fall of Equinox's table, also known as their expenditure in the local community. This is very little and again, if you are satisfied with very little, you have no business being anywhere near the negotiating table. Nearly 100% of the profits made disappear from the country. If you think that is acceptable, good day to you.

    However, you must understand that there is a direct connection between the fact that the government isn't paid the profits from the mines, and the fact that they depend on 'donor aid'. Or do not invest in infrastructure. Or do not support universal access to education or healthcare.

    Zambia is missing out on $1600 million in profits from copper and cobalt sales. It is receiving $800 million of highly conditional donor money (from the 2004 budget).

    If you think this is a good deal, you should be nowhere near the negotiation table. You also forfeit any rights of complaining about poverty, bad roads, poor service delivery or anything else that is caused by a lack of money invested in the country.

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  8. Yakima,

    Good to hear from you.

    " ... would it be unreasonable for the government to take advantage of recent improvements in credit rating and borrowing capacity to obtain a minority stake in this publicly traded company in the same manner that any other investor might do so? "

    Unless the IMF/World Bank again object to government ownership of anything. :)

    But really, if the government would own half of the shares, that would be a start. It would still leave it to the government not to be bamboozled about how much profits Equinox actually makes, but at least they have some kind of legal obligation to their international shareholders. Of course, with Equinox being the same company that somehow failed to mention huge uranium deposits in their copper mine stake... Why wouldn't we trust them again?

    No really, the real solution to this problem is government ownership of all minerals over a certain deposit size. That is the only way that no more 'surprise' deposits being found can be avoided.

    And let's face it, this uranium find in a copper mine is all the evidence needed that we cannot trust the mining companies. Nor should we. This is a dog eat dog business, and if we act like boy scouts, we are the only ones who are going to get hurt.

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  9. Here is an interesting article on contract renegotiations.

    The 'appeal to authority' argument of 'you no have legal academic background' (in what - accounting, contract law, etc?) only highlights that the writer has no experience with business, practical or otherwise.

    Unfortunately, this is the argument you hear all too often (especially from what are called 'authoritarian personalities'). You can shrug it off most of the time, but when it exists among people in government, the entire nation suffers.

    Anyway, contract renegotiation is an entire business/legal specialisation. Perhaps their diplomas say they majored in 'anarchy', but I doubt it.

    However, I am of course talking about much more than contract renegotiation, but how businesses (and individuals) get there. The pressure used by the Korean government under general Park on companies in their industrial parks were - cutting off electricity or water, pulling loans, and then of course there is the tax audit, but we also have labour laws and environmental laws to work with.

    And why am I forced to argue that there is even such a thing as contract renegotiation? Anyway...

    I an add one more thing. Contracts are usually renegotiated when there are major changes in the basic terms of the contracts - like when a player is elevated to a higher league, or a copper mining company... finds a huge uranium deposit?

    Pretty much everyone, including in the MMD now agree that these contracts are ripe for renegotiation. So who is talking about anarchy?

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  10. Cho's friend5 June 2007 21:12

    I think Mr. K needs to get real. The contracts his low cost website refers to are nothing compared to the DA's developed by top class legal practitioners. The web site referred to by Mr. K is for employees who wish to renegotiate their packages or small scale service contracts. When you deal with big multinational organizations, contracts are written almost full proof! This is why the lawyers charge so much to write them.

    The mining companies in Zambia have clearly stated that they will not entertain any changes to the DA's without legal action being taken. No matter what hope you may posses (which is all you’ve got really), the DA's are binding and infringing them will cost us hundreds of millions of United States Dollars, economic instability, lack of credit and sanctions. We can force changes though your radical propositions but we must be ready to absorb the cost of these actions and not go running to CCJP and Oxfam for another debt write-off whilst Zambians suffer further.

    Is this what you want for Zambia? A repeat of history over and over again? At this rate, when are we ever going to start developing the country? Is the only way to develop Zambia through infringing agreements because times are good? And when times turn bad, what next? Reduce the royalty back to 0.6% or less and give tax free incentives so that 100,000 people remain in employment? Is this an efficient management style that will bring about sustainable development?

    If the copper price was below US$2000, you would be more concerned with developing the agro sector instead of ignoring it and trying to find ways to loot the mining companies’ pockets! Therefore, it is prudent to come up with taxes that will benefit the country without having to infringe legally binding contracts. This is modern management! This style of management will see the mining companies’ willingness to bring the DA’s back on to the negotiation table.

    What Mr. K proposes is a repeat of mismanagement as executed by both the KK and FTJ governments. I agree with the consultant that we Africans have not learnt anything since securing independence. We fail to build wealth on our own and when others do it on our land, we want a share of what we never even worked for!

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  11. I will attempt to stretch the truth and look at it from whatever the bright side there may ever be to Mr. K's suggestions; What a great nationalist he is, since sliced bread or Kaunda, whichever came first.

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  12. Cho,

    Troll alert.

    This individual gives his name as 'Cho's friend'. Is this really the guy you talked to? Because I seriously doubt it.

    He wrote:
    " contracts are written almost full proof "

    Do you mean 'fool proof'? Or under the influence? Which development agreement in particular did you think was written 'full proof'?

    Here are some of them, and I don't intend to respond to you further unless you read them.

    http://www.minewatchzambia.com/agreements.html


    Miss 'anonymous' passive-aggressive continued to write:

    I will attempt to stretch the truth and look at it from whatever the bright side there may ever be to Mr. K's suggestions; What a great nationalist he is, since sliced bread or Kaunda, whichever came first.

    When you have something intelligent to say, don't hesitate.

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  13. "This individual gives his name as 'Cho's friend'. Is this really the guy you talked to? Because I seriously doubt it". - Mrk

    Yes am here sir!!
    I can comfirm that it is my friend.
    I was wondering when he was going to defend his ideas.

    My silence is not silence at all...
    I am mulling over Yakima's suggestion of a potential third way. At the moment I am stuck on whether our prefered long term model is to own public floated companies on which we are just share holders and can always be bought out by a Russian or indeed future Chinese billionaire (word has it there are many under way as the Chinese learn the virtues of capitalism - depending on what you read).

    I think am looking for a fourth way - but don't know what it is:)

    At the moment, I am just happy that we are able to engage in a mini "national debate" over these important issues - we are moving beyond the Post Newspaper rants and national assemby attacks into meaningful dialogue. All the points I have read from everyone so far appear well founded to me :)

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  14. Cho,

    I will take your word for it that the poster is your friend.

    Cho's Friend,

    I think Mr. K needs to get real.

    I know you need to get informed.

    The contracts his low cost website refers to are nothing compared to the DA's developed by top class legal practitioners.

    Again, the appeal to authority argument. 'his low cost website'? That isn't my website.

    The mining companies in Zambia have clearly stated that they will not entertain any changes to the DA's without legal action being taken.


    On the Windfall Tax proposed by Andrew Sardanis, and confirmed by Jonas Shakafuswa.

    Zambia to introduce windfall tax
    http://english.people.com.cn/200705/08/eng20070508_372936.html

    Does anyone remember the government toadies who cried high and low that there could never be a windfall tax, because the DAs precluded the mines from paying ANY taxes? Even though it turned out they agreed to pay royalty tax, which is a tax on turnover?

    And on the subject of contract renegotiation, as you put so much stock in the opinion of individuals with an academic background in the law, here is the opion of World Bank adviser and one time judge Eva Jolly:

    SENIOR advisor to the World Bank on corruption Eva Jolly yesterday said she was very shocked to see Zambia being deprived of rent from its land through the mining contracts. And Jolly said time was up for Zambia to renegotiate the mining contracts.

    ...

    Jolly said she was very shocked with Zambia's mining contracts. "Looking at them, I am very shocked that Zambia is being deprived of rent of its land. I think maybe time has come to renegotiate these contracts. These contracts are depriving you of too much," she said. She said Zambia had several arguments to take forward over the issue. "If you can prove that these contracts were elaborated with corruption within them, they can be cancelled... If you can prove that the negotiators from the Zambian side were paid from the mining industry then you can cancel them," she said. "That is the most dramatic way of doing it."

    Source: http://maravi.blogspot.com/2007/03/world-bank-official-urges-govt-to.html

    This is all a matter of record, so please let's have no more 'appeal to authority' pleas. History is full of examples of highly educated people making silly mistakes. So let's get past this undue respect for education and official titles, and examine issues on a point by point basis.

    Here is another source who admits that renegotiation of development agreements is possible - Ng'andu Magande, Zambia's finance minister.

    ‘Be cautious when re-negotiating mine development agreements’
    By Business Reporter

    THE re-negotiations of the development agreements between the Government and the mining companies should be done cautiously and diplomatically to instill investor confidence in the economy.
    Zambia Association of Chambers of Commerce and Industry (ZACCI) spokesperson and chief executive officer, Justin Chisulo, said Zambia was still developing and needed to attract more investors to achieve rapid growth.


    ...

    Professor of International Economic Relations and Premier Consult managing consultant, Oliver Saasa, ... was of the view that the Government should look at various ways in which to address this issue.
    “I do not believe there should be a link between the re-negotiation or the mineral loyalty tax and the possibility of applying windfall profits,” he said.


    Source: http://www.times.co.zm/news/viewnews.cgi?category=12&id=1179218281


    And lastly, on these contracts being so water tight because of the lawyers involved were 'top notch'...

    Magande said the government, in embarking on the negotiations, had discovered some "technicalities" were involved and said some multilateral financial institutions and bilateral donors had offered to help Zambia prepare for the talks.

    Source: http://www.miningweekly.co.za/article.php?a_id=109232

    Obviously, not everyone, including 'multilateral financial institutions and bilateral donors' believe that these agreements are so airtight that they cannot be renegotiated.

    Personally, I think that when these agreements and how they came about are closely scrutinized, quite a lot of corruption and bad faith will come to light.

    But that's just my opinion for now. :)

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  15. MrK,

    I think the point I would make is that the World Bank supports Zambia's move towards renegotiation.
    http://www.znbc.co.zm/media/news/viewnews.cgi?category=10&id=1181150616

    But not nationalisation - they are very skeptical of this new rise of "state capitalism" in Zambia - Government wanting airlines and banks and so forth.

    The question of course is what the appropriate credible threat that should be on the table to get a better negotiating deal? Some people may repossession is not credible because the Zambia now is different from the Zambia that pursued Kandanian socialism. The mines know we have too much too lose to initiate a repossession. We just about to issue sovereign debt bonds.

    I am still searching for the 4th way :)

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  16. Mr. K,
    Did you notice that the grounds on which you support renegotiation, which are surprise finding of Uranium and surprisingly high copper prices are vastly different from the position Eva Jolly (World Bank) has taken? Proving that these agreements were not made in good faith, even if in deed they were not, would be a costly daunting task. We are better off taking the windfall tax approach and/or simply use good PR and ask for a bigger share. As it stands now, we have no legal basis whatsoever to initiate nullifying the agreements.

    ReplyDelete
  17. "I am still searching for the 4th way :)" -Cho

    While I am not entirely convinced that the 3rd way is an unattractive option (at least with regard to the Lumwana project) for recapture of mine revenues in the face of existing DAs, I appreciate your search for a 4th way to balance the need to attract capital for new projects without repetition of the mistakes (or corruption, as alleged) of the past.

    So I have been trying to think out of the box, and have been asking myself, what could motivate international mining companies to want to return a greater share of revenues to exporting countries/governments? This made me think of OPEC, and the fact that member nations are able to garner a higher average price per barrel for exports than the worldwide averages through control over 40% of supply. Comparison of these two charts of global copper exports and imports shows that most of the top exporters are also among the top importers, and are actually net importers:
    http://www.nationmaster.com/red/pie/eco_wor_tra_exp_cop-economy-world-trade-exports-copper&int=-1
    http://www.nationmaster.com/red/pie/eco_wor_tra_imp_cop-economy-world-trade-imports-copper

    If Zambia could form a coalition with just a few key countries, say Chile, Peru, and Indonesia, they could exert leverage over 25% of the world market for copper. An Organisation of Copper Exporting Countries (OCEC) could require that copper produced in their territory be sold with, "Due regard ... given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of [copper] to consuming nations; and a fair return on their capital to those investing in the [copper] industry." -OPEC Statute Article 2C
    http://www.opec.org/library/opec%20statute/pdf/os.pdf

    By collectively enacting policies which reduce price fluctuations and ensure higher overall prices for member countries, OCEC would be in an excellent position to trade willing DA renegotiation on the part of miners for guarantees of price stability at or above current valuations for the future. The essense of this 4th way concept would be to overcome objections to a larger government slice of the pie, by growing the pie itself.

    I will leave it to you to figure out why it won't work, and start hunting for a 5th way now :)

    ReplyDelete
  18. Cho,

    I think the point I would make is that the World Bank supports Zambia's move towards renegotiation.

    In other words, even the World Bank agrees that renegotiation is possible, unlike your friend.


    The question of course is what the appropriate credible threat that should be on the table to get a better negotiating deal?

    A threat of nationalisation is automatically credible, because of the examples of Venezuela and Bolivia.

    Obviously, the World Bank and IMF don't support nationalisation. :)

    That would be part of the point. You don't threaten people with things they like.

    And threatening nationalisation is something that can be beneficial for both sides. If the government threatens for instance the Equinox managing director with the nationalisation of Equinox mine, that is something the managing director can take back into his boardroom, and say to his shareholders - "we need to renegotiate the development agreements, because if we don't, our assets will be nationalised". So taking threats off the table, really means that the individual in question's heart is not in it, and has no business negotiating anything. And that is the feeling you usually get when you hear the MMD defending these horrendous agreements, which facilitate so much of the poverty that exists in Zambia.

    However, if their policies lead to widespread election of popularist politicians who start nationalising their industries left and right, that would will make the IMF and World Bank think twice. And that is what we call leverage.

    This is the potential leverage that the Zambian state has - if it has any intestinal fortitude at all, which is of course missing from this MMD government:

    - Change in circumstances, namely the massive appreciation of the price of copper; the surprise find of uranium deposits among the copper and cobalt deposits
    - Constitutionality of these agreements
    - Likely corruption in attaining these contracts, the awarding of contracts, etc.
    - National interest; namely the issues of sovereignty and of the public interest
    - Market falsification of having foreign companies pay no taxes versus the massive taxation on Zambian businesses

    Leverage would be the application or threat of application, of:

    - Strict enforcement of labour, environmental (emisions, pollution) and even fiscal law (fiscal audits for the benefit of the exact interpretation of the royalty tax), shutting these companies down physically until they comply *or are ready to renegotiate these development agreements*
    - Imposition of a massive windfall tax, on the order of their profit margin, unless they *are ready to renegotiate these development agreements*
    - Forced nationalisation
    - Withdrawing the title deed to their land


    Some people may repossession is not credible because the Zambia now is different from the Zambia that pursued Kandanian socialism.

    Then these people don't know what they are talking about, because they have never heard of Michael Chilufya Sata (more leverage). Who might well be the next president of Zambia, if the constitution and electoral process are reformed to include runoff elections.

    Besides, state ownership, especially of key industries, is not socialist at all. In fact, most mineral resources in the world today are owned by the state. The oil in Saudi Arabia is state owned, as is the company that exploits it, SAUDI ARAMCO. Are the Saudi *royals* socialists? Or just smart enough to know that without control of the oil, they are nothing?

    I am still searching for the 4th way :)

    The constitution could specify that the only assets to be state owned would be the mineral/fossile fuel deposites. That would limit the temptation for future governments to nationalise all industries. (It would of course also get around 'surprise' discoveries of massive uranium deposits among copper deposits.)

    Right now, the President holds the land for the people of Zambia. The same should be true for mineral deposits (except it could be held by a state agency instead of the president), and any and all sales or projects should be subject to review and debate by parliament and the civil service.

    ReplyDelete
  19. Mr.K,

    You wrote 'And threatening nationalisation is something that can be beneficial for both sides.' If Zambia used threatening as medicine to get what she wants,the side effects are that the international community would render Zambia a higher investment risk area. That would mean little to no investment capital and the little that gets there has much higher interest rates. The second thing we need to considert is that if renegotiation yielded nothing and both parties held their positions firmly, Equinox can pull out. If that happens, Equinox board members and shareholders would readily move on to bigger and better things, on top of being already sucessful and it is the poor Zambians that would have no jobs. Equinox does not need Zambia, Zambia needs Equinox. That is a fact. If Equinox pulled out, that would be the end of mining in Zambia as we know it. It would not be a smooth transition into government ownership at all. All major equipment supply agreements would come to a stand still because the party with who they signed multi-year contracts has been kicked out by Zambia, who obviously does not respect contracts. Mr. K, we may have everything in place but if Michelin refused to supply us with tyres, NW province goes back to being a village it has always been, and worse. Threatening is a savage tactic. We are more civilized than that as Zambians. No, Chavez is not a 21st century role model of civilization.

    ReplyDelete
  20. The cost...

    In connection with the termination of the Xstrata Support Agreement, LionOre will pay to Xstrata today the termination payment of Cdn$305.0 million as required by the terms of that agreement.

    Gets worse if done using underhand methods, especially in the long run.

    More on the story; http://new.marketwire.com/2.0/release.do?id=740086

    ReplyDelete
  21. You wrote 'And threatening nationalisation is something that can be beneficial for both sides.' If Zambia used threatening as medicine to get what she wants,the side effects are that the international community would render Zambia a higher investment risk area.

    No it wouldn't. Everyone understands that a massive appreciation in the price of copper changes everything.

    ReplyDelete
  22. That would mean little to no investment capital and the little that gets there has much higher interest rates.

    Again, no it wouldn't. Zambia's interest rates have nothing to do with investment risk.

    The second thing we need to considert is that if renegotiation yielded nothing and both parties held their positions firmly, Equinox can pull out.

    Great. In fact, negotiations should take place with a Chinese, Indian, Philippino, Taiwanese, or Congolese company waiting in the wings.

    Look, negotiation isn't your thing. You keep coming up with excuses why there should be no negotiations on these horrible 'development agreements'.

    It may not have occurred to you, but these companies never thought that these agreements would be honoured in the case of massive increases in the price of copper. However, they must have seemed great to their financiers, which allowed them to get their investment.

    Stop running your economy like a bunch of boy scouts, and start standing up for the rights and interests of the people and the country.

    If Equinox pulled out, that would be the end of mining in Zambia as we know it.

    Right, because there are no other mining companies in the world.

    And the mines are inherently valueless.

    Mr. K, we may have everything in place but if Michelin refused to supply us with tyres, NW province goes back to being a village it has always been, and worse.

    I'm sorry, but are you serious? Has northwestern province at any time been a village.

    Or better, how much did Equinox pay you?

    ReplyDelete
  23. I'm sorry. Maybe I'm reacting too much, and this is a trolling attempt. However, I'll pretend that this is a serious post for a minute. I will also presume that you are pro MMD and their policies.

    Threatening is a savage tactic.

    Another unsubstantiated claim. You mean a tactic used by savages? Or do you mean that threating is savage? What do you think negotiations are, a tea party? Maybe that is why your results are garbage. Maybe that is why you are embarassed by the Americans, when they have to hold you back and not give everything away so quickly.

    Tell that to Stanley Fischer, who, before joining the Bank of Israel, routinely threatened countries with economic meltdowns if they did not toe the IMF line and applied SAP as their policies.

    I don't know what you are on about, and you don't exactly liven up your posts with examples either.

    ReplyDelete
  24. Mr. K,
    It is a well known Aristotlean logic that if a business is located in an 'unstable location' as Zambia would become more of, the financing that goes with it is sub prime. How can you really disagree with such a well known fact? No, we do not need to have the unproven international businesses of the Chinese and Indians when the proven record of Equonox is available. Zambia is not for trial and error. We have to go with the option that has proven to work. As a Zambian, my portion of minerals will not be treated with such recklessness as you have suggested and I shall proudly stand against you, Sata and all your followers. No, I have nothing to do with Equonox at all, just a basic appreciation of the law, economics and order, all of which you are so much against. Come on anarchists, we are going to meet you head on. We all have equal interest in Zambia's growth. So, do not obstruct us as we bring some semblance of order and civilization to our motherland. You and Kaunda had your time, now it is ours. By the way, I do not have to be an MMD sympathiser to see that some of their policies are right on.

    ReplyDelete
  25. Prove to me that you know anything about anything at all.

    ReplyDelete
  26. Cho's friend/anonymous,

    I would love to have a discussion about the facts, but this isn't going anywhere.

    It is impossible to have a discussion based on assertions and appeals to authority.

    Prove anything, and we can talk.

    You keep making assertions that are very easily disproven, and you are wasting my time having me prove them for you. I have shown you that renegotiation is not impossible, and then you just drop the subject. Sorry, but I don't have time for time wasters.

    Cho,

    I really think you should get better advice. :)

    I will conclude this argument with stating that renegotiation of the DA's is not impossible (which should have been obvious in the first place, but which was the unsubstantiated assertion your friend started out with), that it is widely seen as acceptable (by Eva Jolly, Ng'andu Magande and others), and that of course it is long overdue (they shouldn't have been signed in the first place). In fact, it is very odd to hear someone argue the immutability of the DA's, when high ranking members of the MMD are getting ready to renegotiate these very agreements. (Which of course in itself proves that they are renegotiable.)

    I am not above finding proof for what is already known, but evidence has to come from both sides of the discussion.

    Anything else is for your friend to prove or disprove. Throwing terms around like 'Aristotlean logic' or 'sub prime' is intended to make him look intelligent, but they are not relevant to our discussion. If I want to listen to unsubstantiated assertions, I will buy the collected works of Ann Coulter. :>

    But if anyone wants to continue this thread on the mine deals, especially on their details, I am all ears.

    ReplyDelete
  27. Mr. K,
    The point you keep missing is that Zambia has better options to consider than renegotiation. It is a waste of resources and especially goodwill. Your opinion is to the contrary. No specific words were used with the sole purpose of showing intelligence. If intelligence was somehow detected on your end, then I will not protest against that compliment; thank you. Just remember, notwithstanding your passion, our positions on the subject matter may be diametrically opposite, but our respective percent ownership and interest in the subject resources are equal.

    ReplyDelete
  28. i knew of one classmate at secondary school that was dumb but able to pass the exams. this guy was coming from the low communities where i was coming from.

    this fella was not clever at all but just mastered the art of passing exams by memorising and not understanding.

    on the issue of the mines where our so econmists not able to see what the other economic friends where seeing in zambia? they thought they where being clever by selling obsolete mines"stupid"indeed,the other guys where seeing 10years ahead and our economists where seeing the next meal or donot funding for the next budget.

    well you conned the conner,so who is smilling now! who is clever now?

    most of the guys are educated ignorant chaps.economists,engineers,name it. what good is there education to our country when it cant be used its intentions.you are masters of passing exams only nothing more.

    that explains why undeducated zambians can run a better business.

    ReplyDelete
  29. All,

    This is not a 4th or 5th way...but I am wondering whether the problem is the use of "anonymous" tag for those unwilling to reveal themselves for perfectly justiable reasons. It might help the dialogue if while specifying "anonymous" - a location or some other code word is included e.g. Anonymous (USA)or Anonymous [Harvard] or what my friend did [Cho's Friend] etc....

    I am finding it difficult to track comments. And I think so is Mrk :)

    For example, one might observe that the last two comments are by two totally different people.

    But may be its just me :)

    MrK,

    Cho's Friend is different from one of the two Anonymous . He does not seek philosophical foundations when he speaks - although I wished he would sometimes lol!!

    On political positioning....
    My own position is that national issues transcend party lines. Although I accept that ideologies are inherently partisan, we must strive to remain neutral in our search for answers....

    ReplyDelete
  30. Cho,

    My own position is that national issues transcend party lines. Although I accept that ideologies are inherently partisan, we must strive to remain neutral in our search for answers....

    It is when ideology also occurs along party lines that discussion of parties becomes relevant.

    Right now, the large parties in Zambia are indistinguishable, because they are all neoliberal (free markets, foreign direct investment, etc.). The MMD, UPND, even the PF are that way. UNIP wasn't, but they barely exist now.

    This is why the voters find it so hard to distinguish between them, and why regional loyalties become more important - people hope that the party from their part of the country will prioritize their part of the country when they come to power. Which is a very dangerous development.

    What is needed, is a party that puts Zambia's economic interests first, instead of this neoliberal theology, that the markets will take care of everything.

    Neoliberalism's touching stones were West Berlin in 1945 (the freeing of it's markets), and Singapore in 1955 (Lee Kwan Yew's policy prescriptions for that city state, at that time).

    This is where their emphasis on absence of government restrictions (Berlin) and foreign direct investment and manufacturing (Singapore) come from.

    The problem is that policy prescriptions should be tailored to the economy in question - as they were in Berlin and Singapore. Instead, the IMF and World Bank demand that these prescriptions are followed by every economy they deal with - with disastrous results.

    Because they are not transparant or democratically accountable, they are free to make these mistakes over and over and over. The only constraint on them is when their personal corruption becomes unpalatable even to their own employees (in the case of Wolfowitz).

    What Zambia needs, are prescriptions that are tailored to it's own economy, at this time in history.

    Now the only waiting is for a party that will make that happen. The next elections are in 2011.

    ReplyDelete
  31. (USA)

    Mr. K,
    You wrote;'What Zambia needs, are prescriptions that are tailored to it's own economy, at this time in history.' Could you please give a general example of this tailored prescription and how it would work better than the status quo? My second question is; Isn't the indistinguishability of economic ideology among major political parties in Zambia a hunanimous agreement that a free market economy is the way to go?

    ReplyDelete
  32. Anonymous USA,

    Mr. K,
    You wrote;'What Zambia needs, are prescriptions that are tailored to it's own economy, at this time in history.' Could you please give a general example of this tailored prescription and how it would work better than the status quo?


    What Zambia needs are:

    1) Land/agrarian reform
    2) Economic reform
    3) Government reform

    What I mean by that are the following:

    1) Land Reform

    Every farmer has access to 100 hectares and machinery (owned individually or collectively). No one with that much land, if cultivated, is poor. For example, the present price of a tonne of maize is $200,-. One hectare can (easily) yield 2 tonnes of maize. If 50 hectares of land are under maize, that is (50 x 2) 100 tonnes of maize. At $200,- per tonne, that is $20,000 per harvest. If the farmer pays half of that in costs, he is left with $10,000.

    Also, the farmer can rent out pieces of the other 50 hectares, to his relatives or anyone else can set up small, labour intensive farm businesses, like raising poultry, vanilla (high return, but labour intensive), dairy cattle, etc. If the farmer receives nothing more than 20% of their profits, this would not be an exploitative relationship (like sharecropping). It would be a mutually beneficial relationship.

    It would also revolutionize Zambian agriculture and the economy. It would need considerable investment in infrastructure, but once established any investment would be returned many times over. And, all these individuals would now be paying (a moderate amount of) taxes, so the state benefits even more.

    Organic farming and permaculture techniques should be encouraged, and agriculture should turn away from agribusiness and chemical inputs, and toward an approach that involves people, which this represents. The people, nature and everything else would benefit.

    2) Economic Reform

    Zambia's economic lifeblood is the mines. Obviously, most or all of the profits from the mines should go to the state, which can then use those to invest in infrastructure, pay for services (through local government, see below) and lower taxes drastically, while keeping the same level of income.

    Right now, I estimate that Zambia is missing out on $1.6 billion in profits from the mines. Even though it receives $800 million in donor money, that doesn't compare and of course, donor money comes with strings attached. This massive reliance on donor money of course also has a massive and oppressive effect on government and politics, putting the donor interests before the interest of the electorate, as we see again and again during elections. This would not happen if the Zambian government's income came from the mines and taxation only.

    At the same time, the Zambian economy must receive the remaining $1.4 billion that are the mining company's costs. In other words, foreign companies in Zambia must stimulate the economy by using Zambian suppliers and services only.

    The combined effects of having the country's economic lifeblood owned by foreign corporations, and having the state rely so heavily on donor money, go directly to undermine the country's sovereignty. They undermine democracy itself. What if some rogue American government or British government decided to invade Zambia to 'secure' it's uranium deposits and stop them from falling into the hands of 'terrorists'? And before anyone says that this is science fiction, think of how unimaginable it is that Zambian nationals have been detained at Guantanomo Bay. Unimaginable, only 10 years ago. We cannot foresee the unforeseeable, but we can apply common sense, and common sense says that the country's national resources must belong to the most stable entity around, which is the state, not some foreign corporation.

    We cannot determine our own destiny, and have our economy and sovereignty outsourced, at the same time.

    3) Government Reform

    We must switch to a system of local government, that is responsive to the needs of people where they live. It is the only way to develop the entire country, instead of just the capital.

    To do this, we must spend half of national revenues (about $550 million) at the local government level.

    Local government must be responsible for: education, healthcare, policing/security, public utilities and administration.

    If we had 350 local government units, covering 30,000 people each, they would all receive $1.25 million per year, allowing them to spend $250,000 on each on education, healthcare, public utilities and administration.

    What we have now, is a typical system of *30* or so ministries. This is why government is so poor. Most developed countries have 10-12 ministries. In Zambia, the Ministry of Local Government receives more money than all the local government units combined. That is where the problem lies.

    The implications of massively underfunding local government are:

    - overuse of taxes, levies and charges by councils
    - lack of resources for local issues, like roads, schools, hospitals
    - lack of democracy, because government takes place in the capital
    - no development of local resources
    - lack of job and other opportunities outside of the capital
    - petty corruption and lack of motivation of council employees

    At the same time, all government income and expenditures should be monitored, so that corruption can be limited and isn't shifted from the Central Government to Local Government.

    I would suggest that all payments are made by the ZRA, that they would pay local councils directly from national revenues, and then pay central government. The ZRA would monitor all local government expenditures by having all local government coucil leaders fax/mail receipts for all their expenditures. Installing such a system would not be that expensive, and it would save the Zambian taxpayer hundreds of millions of dollars per year. All 350 local government units would be linked by the internet through a satellite connection (instead of cable, which would be much more expensive to install). Projected costs for 350 councils would be:

    20 computers per council, at $1000 per computer = 350 x 20 x $1000 = $7 million
    Local Area Network (office network) at $300 = 350 x $300 = $105,000
    2 satellites (one for backup) = 2 x $10 million = $20 million
    Total: $27,105,000

    In other words, this would be well within the budgetary possibilities of the present state/government.

    The benefits would be enormous - the opportunity for corruption would truly be limited once (local) government councils would have to account for everything they spend and receive. If anyone remembers, recently *$250 million* of government money was found spent idling in domestic bank accounts. Once the government is accountable for every dollar it spends, this kind of corruption/inefficiency would be unheard of.

    Lastly, what direct funding of local government by the ZRA would do, was take the provision of basic services out of the grubby hands of national politicians. People have the right to attend decent schools and hospitals, no matter who is at State House, and especially, no matter who they as a constituency voted for. When this government came into office, the first thing that came to mind was to reward those who voted for them, and to punish those who did not. This cannot be what democracy is about, because it a direct assault on the free expression of the will of the people. Instead of transparancy and accountability, the Zambian people receive the arbitrary praise or punishment by the egomaniacs who happen to be elected into office. This is simply not acceptable. This is why development should be made possible by decentralizing the budgets, not just the duties. Something this President has specifically stated would not happen. Why? Because decentralizing the budget would limit his power. The result is unfunded mandates, passing for decentralization.

    Real democracy is local democracy. Central government should only be responsible for

    - national defense
    - international policy
    - economic policy
    - national standards in education, the environment and consumer protection (through permanent state agencies, rather than ministries)

    To determine these policies, parliament should have much more responsibility. And the civil service should have much more indepence. In other words, the power KK concentrated in the presidency should be redistributed to where it belongs - parliament, the civil service, local government and the civil society organisations. There should be a system of checks and balances. This would lead to a weaker President, but better governance.


    My second question is; Isn't the indistinguishability of economic ideology among major political parties in Zambia a hunanimous agreement that a free market economy is the way to go?

    I would say that privatisation is the dismal failure of politics. :) Basically, they are there to be in power, not to do something with that power. That is why all these parties are interchangable, way beyond their economic policies. Their manifestos talk a lot, without saying anything. They are 'to do' lists, which are intended to have everyone vote for them - they do not reflect real policies, which are set by the IMF and World Bank. When a major figure from one party sees his ascendance to the top place blocked, he simply leaves and starts another party - with the exact same IMF pleasing policies. Mazoka left the MMD. Sakota left the UPND.

    The $800 million of donor money in the budget is far more important to them than the will of the people, and that is a major problem.

    What is needed is a New UNIP (like New Labour), that has the heart and soul of Old UNIP, but that has updated it's policy prescriptions to embrace the positive sides of enterprise - small enterprise, not corporate enterprise.

    Look at the million tuntembas, in a country of a mere 11 million people. That should tell any politician all he or she needs to know about the entrepreneurial spirit of the Zambian people. That is what has to be catered to, not the old corporations.

    We need an economy where everyone participates in the economic life of the country. Think of it this way - we need to create an economy where 90% of the population is 'middle class'. Where everyone owns either: a home; a piece of land; a car; a skilled job or profession.

    That is what we need to achieve. Because right now, 70% of the population is living on less than $1,- per day.

    ReplyDelete
  33. (USA)

    You do have some points Mr. K I must say. I must agree with you that Zambia needs to broaden the middle class, though I think 90% is an unrealistic number. How many decades are we talking to achieve that? It appears a lot of Zambians have some good ideas and good intentions concerning our country, but it seems we have unrealistic expectations. Turning an economy in a presidential term or two? Speaking of unrealistic expectations, for Zambian agric to function the communal way you described, it would require a lot of capital expenditure from the government, which we do not have. Well, the government itself does not even have the capital to revitalize the mines. The little available capital out there is mostly in private hands who obviously would want a return on their investment and not simply pump money into Zambia so that people can simply live off of. That's where the problem is.

    ReplyDelete
  34. MrK,

    I think I have a pretty good understanding of your first two plans, for agriculture and mining reforms, but I have some questions and suggestions on the government reform section. I find your methodology for decentralisation to be persuasively straightforward and egalitarian:

    "Local government must be responsible for: education, healthcare, policing/security, public utilities and administration. If we had 350 local government units, covering 30,000 people each, they would all receive $1.25 million per year, allowing them to spend $250,000 on each" -MrK.

    I suggest ensuring flexibility for budget percentages and joint ventures with other local governments. Then it becomes possible to, for example, build an expensive pediatric hospital in one area, but get financial support from neighboring areas in exchange for the increased services. Watershed projects and electrical grids would also greatly benefit from shared jurisdiction.

    "To do this, we must spend half of national revenues (about $550 million) at the local government level." -MrK

    How strict is that 50/50 split? What percentage of national revenues is the current government spending on the five areas to be handed off to local authority? What percentage of current revenues are derived from public utilities and how would they be divided?

    ReplyDelete
  35. Anonymous USA,

    Just mull it over again and let my points sink in.

    Take a couple of days and think about it.

    ReplyDelete
  36. anonymous usa firstly use a name that will be unique to you add more life to your postings.

    your comments are very precise and in the situation we are as zambia we need a start point. if your suggestions have chinks in them then we start to correct them as we move on. we are so pessimitic kind of people,scared to taste new adventures.

    we have a great political minds among us and that explians the non economical thoughts.

    my truck was damaged in an accident,obviously not insured comprehensively and not saving for a moment like this.i started fixing it slowly as finances came in slowly. when almost finished i got a call from an old customer needing service,i agreed.they paid me down payment used this same money to finish off the truck,got diesel on credit and did the job. paid off my debts with the balance.

    imagine if i had the thoughts of not able to do the job it would have taken longer. we need to calculate risks and advantages.

    On agriculture i think the right way is to have mealie meal to be sold at the right price. profitable to the farmers and more taxes for the government. what we have is encouraging lazyness and massive breeding because life is cheap.

    ReplyDelete
  37. "what we have is encouraging lazyness and massive breeding because life is cheap". - Arthur

    I think I'll introduce a feature called "quote of the month" - this is good straight talking..lol!

    Now I gree with the "massive" breeding although I think that is because larger families are some sort of insurance for old age!

    ReplyDelete
  38. (USA)

    I'll think about using a different name in a short while. So far, I'm loving this one, suggested by Cho. If my understanding is correct, it seems Mr. K is against agro-business and he prefers some form of agro-philanthropy. Somewhat the way we had run the mines for some three decades. That is, whether or not a profit is made was not the idea, but as long as people were going to work and getting a pay check at the month end, the mines fulfilled their purpose. There was no need to run economically and compete internationally. That was the kind of agriculture Mr. K suggests. If China, Cuba and Venezuela are willing to help us do that, let's go for it. They seem to be great examples Mr. K keeps refering to. It seems very interesting how Mr. K suggests putting a lot more power on local governments. It is almost exactly the way the US runs. Schools, hospitals, roads are mostly built and run by cities, counties, states and before a certain aspect of 'social US life' commands federal interference, it has to be an interstate road, research center like CDC, airforce base. The interesting aspect to this whole story is that the kind of decentralization Mr. K speaks of does not go hand in hand with his model of agriculture or mining anywhere on earth. It's either a nation is so decentralized that two states can actually compete against one another economically or the economy is so 'communal' and decisions are made at the national capital city for the good of all. The MMD's economic model made so much sense on paper that we authorized them to implement it, but the outcome has so far been a little less than we bargained for. May be it's just me, but Mr. K's does not even meet that standar on paper. One wonders how worse it would be in reality. Are the ideas of 'Heaven on Earth' really what we need in Zambia? So, if we had a communal economy as a nation, can we still compete on the international level or share everything with Zimbabwe, Congo, etc for the good of the region? Can we live communally at the micro level yet still compete at the macro-level?

    ReplyDelete
  39. Yakima,

    I suggest ensuring flexibility for budget percentages and joint ventures with other local governments. Then it becomes possible to, for example, build an expensive pediatric hospital in one area, but get financial support from neighboring areas in exchange for the increased services. Watershed projects and electrical grids would also greatly benefit from shared jurisdiction.

    For instance, a city like Lusaka could have one or two big councils, to make use of economies of scale, because of the proximity and infrastructure that is there.

    There could also be ordinary hospitals/clinics in ordinary councils, with one council having a more extensive hospital, the cost of which could be shared by surrounding councils.

    Major infrastructure would remain the domain of the central state or the provinces.

    What I would envision, is a powerful council leader, who is held in check both by monitoring of council expenditures, and through 4 year elections. There should be early elections in the case of fraud or pervasive incompetence.

    How strict is that 50/50 split? What percentage of national revenues is the current government spending on the five areas to be handed off to local authority? What percentage of current revenues are derived from public utilities and how would they be divided?

    Not that strict, but once agreed upon it should be fixed through the constitution.

    How much the state is currently spending on (for instance) education is a guess. I think a lot of the money gets stuck at the ministerial level, which is why I became enthusiastic about local government in the first place.

    There was a link to the 2004 budget on http://wwww.zambia.co.zm/budget2004, but that page is gone now, I have it saved.

    It doesn't give a breakdown of money spent by ministry (or how much of it goes to actual schools and teachers).

    The 2004 government expenditure broke down like this:

    personal emoluments 23% ($398.4 million)
    constitutional and statutory 20% ($351.8 million)
    recurrent department charges 8% ($131.0 million)
    grants and other payments 6% ($112.0 million)
    poverty reduction programmes 6% ($108.7 million)
    capital 37% ($633.2 million)

    Income:

    Tax revenue: $944.4 million
    Not-tax revenue: $35.2 million
    Exceptional Revenue $16.7 million
    Domestic Financing $105.1 million
    Foreign Financing $633.7 million



    Breakdown of tax income (in billions of kwatcha):


    Corporation Tax 382.6
    Pay As You Earn 1,428.7
    Other Income Taxes 229.0
    Mineral Royalty Tax 4.0

    Total in Direct Taxes 2,044.3


    Domestic taxes (in millions of US dollars)

    Corporation Tax 79.7
    Pay As You Earn 297.6
    Other Direct Taxes 48.5
    Excise Taxes 130.8
    Domestic VAT 127.9
    Trade Taxes 259.9
    Non-Tax Revenue 35.2
    Exceptional Revenue 16.7
    Domestic Financing 105.1

    Total $1,101.5m

    Unfortunately, I have not been able to find a breakdown by ministry. If you come across it, please post it here, because I think that would ultimately be very interesting.

    From this, it can be clearly seen that PAYE is the biggest contributor to the government's revenue, when it comes to direct taxation. Royalty tax was a paltry 4 billion kwatcha. It is also clear that the corporations are not paying their way at all.

    No wonder that economist Lloyd Sichilongo is talking about tax reform.



    I did find the budget for the Ministry of Science, Technology and Vocational Training, which amounts to about $23 million (at 4000 Kwacha per dollar):

    Code Department

    2006 Estimate ZMK

    01 Headquarters and Grant to Institutions 20.711,317,793
    02 Department of Human Resources and Administration 7,208,335,469
    04 Department of Vocational Education and Training 20,703,599,540
    06 Department of Science and Technology 1,999,494,912
    10 Department of Planning and Development 43,688,888,944
    Total for the Ministry 94,311,636,659

    http://www.mstvt.gov.zm/documentation-reports.html


    I also came across this list of cabinet members - 22. The 9 provincial ministries don't seem to be represented in the cabinet.

    http://www.statehouse.gov.zm/index.php?option=com_content&
    task=view&id=93&Itemid=62

    ReplyDelete
  40. (USA)
    As you Zambians look for second, third, fourth plans, I have plan zero. Zero option plan. I'm getting an impression that all the foreign investors are bringing to our country are problems. Let's get to the root of the problem; chase all them foreign investor (Chinese included!!). That way, we will not need to waste time reforming this and that.. All the money made locally will be spent locally. What corruption? Chiluba and gang will be incarcerated shortly (no pun intended on Chiluba's height). Toss a one ngwee coin three times between HH and Sata in 2011 and we'll have a popular president with a 50%+1 of coin toss victories. Problems solved. Next problem? Global warming? I should have a fool proof solution in a week. Tentatively I'm leaning towards chasing all fossil fuel companies to mars...ok I guess to the moon since it's closer.

    ReplyDelete
  41. Just to review for a moment, there have been several concepts put forward for plans to deal with the "salt for that [mining revenue] wound".

    Plan 1: Targeted tax increases imposed on mining company purchases of heavy fuels, electricity, road transport, and customs clearance. It is suggested that this could recapture 10% of mining revenue.

    Plan 2: Demand drastic renegotiation of existing mine development agreements and nationalize the facilities of any company which refuses to comply. It is suggested that this could recapture up to 100% of mining revenue.

    Plan 3: Use government borrowing capacity to purchase equity stock in targeted mining corporations. It is suggested that this could recapture the % between stock performance and interest costs.

    Plan 4: Enter into an organization with other copper exporting countries, similar to OPEC in structure, using cartel control over supply to stabilise prices at high demand levels. It is suggested that this could provide incentive for renegotiation by increasing the value of the asset under dispute.

    "As you Zambians look for second, third, fourth plans, I have plan zero. Zero option plan. I'm getting an impression that all the foreign investors are bringing to our country are problems." -anon(USA)

    I'm going to assume from your tone that you are not actually in favor of plan zero, but are instead implying that plan one is the only one which will not alienate FDI. I could also infer that you either believe that FDI brings with it no problems, or that problems should not be anticipated, but I suspect that you don't really mean that.

    I am not convinced that plan one is terribly FDI-friendly, at least not for potential investors, and selective taxation may have been a move anticipated and excluded in existing DAs. The example given for tax on road transport seeks to recapture 3.66% of mine revenue by tripling the load/km costs for exporters. Higher energy and fuel costs will be accompanied by increased customs duties on inputs and exports. As threats go, it's not bad.

    The implication is that "indirect" taxes can be made to act as "direct" taxes, through selective increases and/or enforcement of fees for existing general services. I don't really like this as a precident for taxation of FDI. Investment of any kind depends on the predictability of costs and perception of risks, and transparent regulatory systems have a soothing effect on confidence.

    Plan one has some potential tactical uses, but may be incompatible with long term strategies to optimize growth and development. I am not yet convinced that any one of the other three plans are optimal either, so I'm on lookout for areas of synthesis and new angles on the problem.

    ReplyDelete
  42. "Plan one has some potential tactical uses, but may be incompatible with long term strategies to optimize growth and development. I am not yet convinced that any one of the other three plans are optimal either, so I'm on lookout for areas of synthesis and new angles on the problem" - Yakima

    Don't forget my 5 & 6 please!

    Plan 5: A modification to the Country and Planning Act to give greater development control powers to local authority as a way of leveragin investment into schools and other things. This would cover expansion of existing mining activities beyond a certain threshold and apply to all new activities. More on this here. I don't agree with my friend that this not possible.

    Plan 6: Involves a mild form of Plan 2 - rather than force them, our negotiating line simply needs to look at "non-financial" return e.g. the transfer of knowledge and other technological capacities. These are just as beneficial as money.


    "What I would envision, is a powerful council leader, who is held in check both by monitoring of council expenditures, and through 4 year elections. There should be early elections in the case of fraud or pervasive incompetence." - Mrk

    Now is the time to remind of you not to leave my Participatory Budgeting idea behind :) . PB is the only way forward on how to ensure real local responsibility one you have set the budgets along the lines you propose. And also don't forget the role of chiefs. Chiefs are crucial to ensure we use the existing system and tie culture and development together. This warrants a lot more thought than has begin given to it by academics back home.

    ReplyDelete
  43. Cho,

    I agree that participatory budgeting should play a serious role in budgeting. However, to create harmonisation across the country in the levels of services offered, all councils should have these 4 or 5 basic obligations. Beyond that, it would be a very good thing to have the people involved in the rest of the budget allocation.

    But it all starts with local government having the money to do things, and that should come from half of national revenues.

    ReplyDelete
  44. Yakima,

    I found the following budget for one ministry, the Ministry of Science, Technology and Vocational Training, which receives $23 million or K94.3 billion.

    Code, Department
    2006 Estimate ZMK

    01 Headquarters and Grant to Institutions 20.711,317,793
    02 Department of Human Resources and Administration 7,208,335,469
    04 Department of Vocational Education and Training 20,703,599,540
    06 Department of Science and Technology 1,999,494,912
    10 Department of Planning and Development 43,688,888,944
    Total for the Ministry 94,311,636,659

    or in percentages...

    01 Headquarters and Grant to Institutions 21.96
    02 Department of Human Resources and Administration 07.64
    04 Department of Vocational Education and Training 21.95
    06 Department of Science and Technology 02.12
    10 Department of Planning and Development 46.32

    Total for the Ministry 100.00


    So in other words, at the Ministry of Science, Technology and Vocational Training, 2.12% and 21.95% of the budget goes the departments of science/technology and vocational training, respectively. The same amount that is spent on the headquarters and grants to institutions.

    This is what I mean with not putting all the money in the ministries. There are too many distractions, and the money should be spent where people live, at the local government level.

    And I am not implying corruption, just taking issue with the mentality that is created when money is spent at ministerial level.

    46% or nearly half of the entire budget, is going to the department of planning, which does the following:

    Department of Planning and Development
    The Department is responsible for the planning, monitoring, evaluating and reviewing ministerial policies, plans and programmes. In addition, the Department is also responsible for managing information technology system and provide data on operations of the Ministry for Planning, decision making and information dissemination. Department has three sections; Projects, Monitoring and Evaluation and Data and Information Systems Management. The functions of the Department are:

    * Coordinating the formulation of policies, monitoring and appraising government policies and advising as necessary on the implication of the various sectoral policies;
    * Co-ordinating the development of Strategic and Work Plans for the Ministry;
    * Developing and maintaining a sector Management Information System which will support the policy analysis, performance assessment, decision making and provide information to the stakeholders;
    * Co-ordinating the implementation of sectoral investment programmes;
    * Managing the provision of common technical services (audio visuals, printing and technical maintenance);
    * Co-ordinating the maintenance and rehabilitation works of both physical structures and equipment in the institutions of the ministry;
    * Co-ordinating the establishment of new institutions;
    * Coordinating the preparation of Ministry budgets


    Notice that all the planning and development this department does, is for the ministry itself. In other words, apart from the 21.96% that is spent on the headquarters, and grants to institutions, most of the money is spent on the ministry itself, not on providing technical or vocational training around the country.

    Now imagine if this money went to technical colleges in all the nine provinces.

    And this is just a minor ministry. I am sure that when all is said and done, most of the money spent at ministerial level is wasted.

    ReplyDelete
  45. (USA)

    Yakima,your assumptions were correct. Plan zero would not be the best option for Zambia, but it would show many that we are worse off without investors, as bad as the development agreements are. In my order of preference, I'd vote for plans 1,3,6,4,5,0,2. As you pointed out, being able to predict and control costs is good for business establishments, but, as much as most businesses do not like increasing their spending in a manner that does not increase their revenue, plan 1 is something that I'd guess happens routinely in the west, where most of these investors come from. I see a lot of such initiatives just about everywhere I look. They'd say in order to build a new school, hospital and water treatment plant in Washington County to cater for the increased population mostly due to Mexicans crossing the boarder, every item sold at Riverview and Westside Malls will have a price increase of 0.5% for the next 5,10,15 years. There are some disadvantages to plan 1 as well, but it may just be the best among all the 'bad' options we have.

    ReplyDelete
  46. MrK,

    Thanks for the budget breakdown, I suspect that many of this Ministry's functions could be more effectively managed at the local level. In hunting for more specific data I came across this pdf of the ministry budgets for 2005 and 2006:
    http://www.mstvt.gov.zm/pdf/budget%202006.pdf

    My reading of the situation is that things in this ministry may not be as bad as you fear. For example, out of the total budget of KW$94, 311,636,657 there are project-specific donor contributions of KW$56,844,400,000 (60.2%).

    A combined total allocation of KW$58,058,000,000 (61.5%) goes to fulfilling the provisions of the Technical Education, Vocational and Entrepreneurship Training (TEVET) Act. At least 27 training institutes and colleges are given direct budget support by name, and funds are allocated toward the construction of at least four others.
    http://www.teveta.org.zm/

    Out of the Department of Development and Planning budget total of KW$38.67B, significant allocations are made toward TEVET programmes. New construction gets KW$6.5B, Procurement of Training Materials and Equipment gets $KW2B, and Implementation of TEVET Fund (World Bank/NDF) gets $KW24B budgeted. Those three together account for $KW32.5B, or 84% of the total departmental budget.

    I still agree with you that local government has a role to play in the delivery of education and training, however separating out the functions which would improve under decentralization appears complex.

    ReplyDelete
  47. Cho - "Don't forget my 5 & 6 please!"

    My apologies for the oversight! Both plans are intriguing, and I think Plan 6 may be adaptable enough to gain inclusion in all other plans to some degree. However, caution should be used in determining the negotiating value of intangible assets such as knowledge. For example one would not want to give a company credit for teaching its workers to simply do their job, but if the company were to sponsor employees to pursue additional education or training (such as might qualify them for a promotion within the company or to a small scale startup) then I could see that as an offset against its potential taxes.

    For Plan 5 you mentioned that, "The model that is needed is similar to the framework that the UK has adopted under Section 106 of the Town and Planning Country Act (1995)." Would you expound more on how such a framework might look in the Zambian context? Do you envision that the provisions will only apply to new/expanded investment, or should there be attempts to achieve retroactive parity over time?

    How compatible is the Plan 5 framework with the local government provisions of Plan 2(c) as decribed by MrK? Would region specific income from S106 provisions on investment upset the income parity budget division of Plan 2(c)? If so, should that be remedied or are there advantages to local variation based on investment density?

    ReplyDelete
  48. am reading this interesting blogg soon to be overwhelmed by massive interest from olover,i hope mr economists you have focusted on this.

    now to back to equinox.i only have simple solutions that dont need complications before you even start,most of what is being put forward never leaves the drawing table.

    why not increase salaries for miners,more taxes and spending power?

    why not educate local suppliers not to be fraudulent and introduce a law of accessing local products.

    we have been spending in zambia for the past half a century and no results.

    the problem is not lacking but sustaining.

    we give fertilisers to farmers but they cant sustain themselves for next season.

    we invest in education but where will the graduates go.

    we invest in chip readable driving licences but no chip readers.

    do we even know whats going on or we are revising for our MBAs?

    ReplyDelete
  49. Yakima,

    My reading of the situation is that things in this ministry may not be as bad as you fear.

    And I didn't say that they were corrupt, or that they are the worst managed ministry around. Just to make that clear. :)

    For example, out of the total budget of KW$94, 311,636,657 there are project-specific donor contributions of KW$56,844,400,000 (60.2%).

    I'm sure the donors will be pleased to know that. :) Or maybe they do not care what happens to their money. (And why is a Zambian ministry funded by donor money?)

    I am just taking issue with all the money that is spent at the ministerial level.

    Notice that all the development and planning activities are about the ministry itself.

    And that is my point. If development is going to take place where people live, money has to be spent where they live, and local government is the way to do it.

    ReplyDelete
  50. Mrk,

    You ask, "why is a Zambian ministry funded by donor money?"

    In most cases this is probably the result of compromises between donors and the government. Most donors won't give money to the central government directly to use as it sees fit. Instead they try to maximize their return in terms of "guilt mitigation" per dollar (I am treating "guilt" as if it were a long lasting toxic pollutant rather than in a legal judgement sense). For most donors this is primarily media-driven, as politicians and citizens in rich countries react to dramatic or tragic revelations in high definition colour.

    The donor picks one thing they can talk about in the media, in this case "vocational training", raises funds (and subtracts some for themselves), and then grants the money to the GRZ on the condition that it all be spent on one programme such as TEVET. Other donors see a chance to benefit in the media from insisting that they also receive the TEVET brandname for their own pet projects. Soon the programme is an octopus with tentacles in several types of service delivery and a large budget.

    The existing TEVET funding formula could however be used to finance training programs which are delivered under the direction of local governments. Existing institutions should not experience funding shock due to a change in regulatory jurisidiction over some of their functions from central to local. National programmes, such as testing and accredidation, could be easily exempted from changes.

    "If development is going to take place where people live, money has to be spent where they live, and local government is the way to do it." -MrK

    Good point. In this case as local government increases its capacity to deliver service, either by transfer from central government or development of new providers, TEVET Fund structure could automatically transfer a proportional budget share from central to local jurisdiction.

    Arthur makes some good points too, which reminds me that corporations dislike being associated with tragic media stories almost as much as donors crave it. It is certainly a tragedy that the wages for miners aren't linked to the commodity price of the amount they produce. If the miners themselves were earning more, we would not have to worry as much about DAs with the government.

    Perhaps Plan 7 should be to pressure mining companies to include commodity futures in employee pay in proportion to mine output. Then as outputs are realized and sold on markets, miners benefit as much as stockholders.

    ReplyDelete
  51. Yakima,

    In most cases this is probably the result of compromises between donors and the government. Most donors won't give money to the central government directly to use as it sees fit.

    They are mitigating the guilt of their corporations taking billions of US dollars from mines. Not that they ever say so much to their constituencies.

    But I get your point. I would add that it is regrettable that all their money doesn't come from the mines and revenues. :)

    And thank you very much for the explanation of the TEVET project. I guesst that is what happens when NGOs have more money than the government.

    ReplyDelete
  52. “However, to create harmonisation across the country in the levels of services offered, all councils should have these 4 or 5 basic obligations”MrK

    I agree that benchmarks could be set on minimum levels of provision, and then anything beyond that could be done to local prioritisation. For example Government could say each district must at least have 1 primary school, 1 secondary and 1 hospital. But then it would be upto the local people to decide whether they would like 1 more hospital or 1 more secondary school if the budget allowed. They may even decide that extra money should go into a “micro-credit” scheme to support entrepreneurs instead of being spent on services! PB is about prioritisation and defining what development you would like to see, and then using people power to monitor progress. This is why I like it. Government’s role is simply to define national benchmarks, provision of strategic infrastructure where coordination failures (or weak incentives) prevents viable solution and fighting deeper levels of power to reduce inequality.
    I am naturally against equal division of money. A better way is to ensure that money in the first round is allocated based on tax shares and then Government adjusts the money to reflect minimum threshold expenses. But this could be controversial!

    ”For example one would not want to give a company credit for teaching its workers to simply do their job, but if the company were to sponsor employees to pursue additional education or training (such as might qualify them for a promotion within the company or to a small scale startup) then I could see that as an offset against its potential taxes” . – Yakima

    It’s a difficult one because skills have to be specific enough for the firm at hand, but also ensure that they are of use in the long term. I think the key for me here is technological diffusion. Its not just training the employees, its ensuring knowledge and practices are truly passed on, even within a narrow field.

    ”Would you expound more on how such a framework might look in the Zambian context? Do you envision that the provisions will only apply to new/expanded investment, or should there be attempts to achieve retroactive parity over time?”

    The new blog on housing has some more elaboration on this.
    I think it would just apply to new or expanded investment. The basic idea is that if a new investment is proposed. The Local Authority would sit down with the new investment and assess what the impact on population and general local economic will likely to be. These areas are likely to include housing - since new investment may come with additional employees who may raise the cost of housing in the local area, and put further pressure on the housing supply. So you can ask them to build low cost houses for local as a compensation or at a minimum build new houses for themselves, hence increasing housing supply. The other area would be schools. The new workers would need to send kids to school. Why not ask them to fund the school. On transport its straightforward and I know Lumwana and Equinox have entered into agreements. What I would like to see Government formalise these and demand thresholds are put in place. So investors have certainty over the process, and local people are also equally reassured.

    ”How compatible is the Plan 5 framework with the local government provisions of Plan 2(c) as decribed by MrK?” - Yakima

    – on housing and schools I see the local Government taking forward the negotiations and Government simply acting as an enabler. On roads, the Roads Development Agency are quite strong, so may be for “strategic networks” they would require this from the investors like they have partially done with Lumwana http://allafrica.com/stories/200706060590.html

    However for non strategic roads, the local authority should take that forward and negotiate the appropriate deals. The mechanism assumes a devolved approach to the issues and would presumably work in parallel to MrK’s method. The two approaches are compatible but perhaps have different rationales. Mine is about “internalising” the effects of different and ensuring local buy-in which the current process is lacking. Its also about removing the incentives to renege in the future like the RSA shops which came after liberalisation have done. The MRK is very much about governance and efficient ways to deliver development. Although mine also has a development angle as I have argued on the blog on housing.

    “now to back to equinox.i only have simple solutions that dont need complications before you even start,most of what is being put forward never leaves the drawing table.

    why not increase salaries for miners,more taxes and spending power?

    why not educate local suppliers not to be fraudulent and introduce a law of accessing local products”.
    - Arthur

    You are absolutely right. Point well made.
    At the end of the day people simply want straightforward things : jobs, education and ensuring that local products are used.

    This is why I think it’s not about x% of money we get from investors, its about the best way to deliver these things. If we can find a way we can tie investors to contribute towards these goals then we would have done well even if we don’t get enough money in our coffers!!

    It’s not about money it’s actually about development. You are absolutely right.
    And I think that is what I am trying to get at with plan 5 and 6.

    ReplyDelete
  53. Cho,

    I am naturally against equal division of money. A better way is to ensure that money in the first round is allocated based on tax shares and then Government adjusts the money to reflect minimum threshold expenses. But this could be controversial!

    I don't want central government to have anything to do with the running of the councils, or their dispension of money.

    I would like to see the ZRA pay a constitutionally determined percentage of national revenues directly to each and every council.

    Also, I would like to see councils that are so small, that tribalism or regionalism have no opportunity to determine the delivery of services. 30,000 people each, 350 nationwide.

    And having the central government have nothing to do with the dispensastion of natioanal revenues to local government, also prevents situations where development can be withheld from a region because they did not vote for the winning presidential candidate or party. (As was seen after the last election.)

    ReplyDelete
  54. Mrk,

    I agree with you that independent local governments can dramatically improve development and resource delivery. While I sympathize with your reasons for wanting local authority to be evenly distributed by population, I feel I have to stipulate that local jurisdiction requires a stable geographic context in which to effectively operate over time.

    For example, Cho's conception of local authority contracting with investors for provision of local services won't work without guarantees that the location of one specific investment will be under the long term regulation of one specific local authority. So at some point, either local government divisions will encompass more or less than 30,000 persons, or new divisions will have to be created in localities previously administered by one or more other divisions. Frequent redistricting can be an open door for gerrymandering and other corrupt practices which are difficult to legally substantiate.

    I would suggest flexibility on # of persons in the first place, in order to focus on geographic divisions which will maintain validity for collective planning over time. Examples of such policies include division along watershed boundaries, traditional boundaries, and transport or electrification corridors/grids. The advantages of having regulatory control over activity within an entire watershed over the long term may easily outweigh the disadvantages of servicing a slightly higher population or smaller taxbase than other districts.

    I like the idea of mandatory minimum contributions from the national revenue to individual local divisions, however I would like to see mechanisms in place which address additional funds to the poorest Zambians through local rather than national organs. That won't happen without the tools to augment minimum funding for selected divisions, in order to address problems of uneven population migration and growth, persistent poverty, substandard infrastructure, disaster relief or all four.

    I prefer models where much of the additional funding divisions need comes from core collective enterprises which orient on value-addition to common local resource exports, a sort of Micro-ParaStatal (MPS). Each MPS is subject to control either directly by, or by designation of, local division councils, and is owned by the collective population of the division. Increases in MPS asset values, revenue streams and steady employment can then provide the collateral basis for housing revolving funds, local enterprise loans, and other stable and transparent investment vehicles.

    Such an approach would facilitate directing aid and FDI social investment into locally owned and operated, ongoing enterprises with the capacity to absorb capital flow from external sources and transform it into locally owned equity. For example, an MPS which operates a non-profit revolving savings-and-loan fund for local housing projects, could channel the capital for "social investment" required from FDI, or otherwise exchanged for "guilt mitigation" by aid donors, into financing local ownership of new housing units.

    That would eliminate the current problem of, for example, mining companies owning and controlling access to housing, hospitals and schools built under existing "social investment" contract clauses. I prefer that they at most own the reduced-interest refinancing of the non-profit local housing authority loan/lease agreement for homeowners ;)

    Note for Mining Contract Negotiators: If the housing/school/clinic you build is situated such that it is only of value and proximity for employment within a mining facility which has a projected working lifespan of less than a single human lifetime, and will thereafter in all likelihood be declared an environmental clean-up zone for the duration of at least one following generation, then it does not count as "social investment"!

    ReplyDelete
  55. https://www.blogger.com/comment.g?blogID=2705183461541363969&postID=6721253259034753741


    Yakima,

    So at some point, either local government divisions will encompass more or less than 30,000 persons, or new divisions will have to be created in localities previously administered by one or more other divisions.

    My example of 350 councils for 30,000 people each, is just a reflection of the present population size of 12 million people. If 30 years from now the population of Zambia would be 24 million, council size would be 60,000 people, distributed over the same 350 councils.

    There could also be a (constitutional) requirement that with the provision that the agreements made by the original council were legal and ethical, they should be honoured by any future council.

    I would suggest flexibility on # of persons in the first place, in order to focus on geographic divisions which will maintain validity for collective planning over time.

    But that opens the door to individual councils having to receive money on a per citizen basis, which can lead to misrepresentation of how many people actually live in the council at any given point. And then you have to define who counts as an inhabitant of a particular council, which would have to take into account migrants from other councils, etc.

    The state paying every council on the basis of the number of people registered in any council or counted during a census would take any kind of corruption out of the hands of local government on this issue.

    I would like to see an exception for major urban centers, where it would make sense to have more people per council, because proximity and existing infrastructure make service delivery more efficient that way. So for instance Lusaka could have Super Councils of 150,000 people each, which instead of receiving $1 million for ever 30,000 people, would receive $5 million or 150,000 people.

    I agree that my proposal is less specific about allocation of money on a per person basis, but I think in it's more consistent and objective, and prevents any temptation on behalf of the council to inflate it's number of residents. The way for instance now the number of employees at a particular ministry is inflated to receive extra income. Instead of ghost employees, there would be ghost residents.

    I like the idea of mandatory minimum contributions from the national revenue to individual local divisions, however I would like to see mechanisms in place which address additional funds to the poorest Zambians through local rather than national organs. That won't happen without the tools to augment minimum funding for selected divisions, in order to address problems of uneven population migration and growth, persistent poverty, substandard infrastructure, disaster relief or all four.

    On the other hand, if a specific council has a lot of influx of migrants, that most likely is because they are more economically successful (maybe they attracted more business). Which means they could make up the difference by raising local taxes a little - while not entire depending on taxes, levies, charges, etc. as they do now.

    In cases of an emergency (like people fleeing an area because of a disaster), the state could make up the difference, but that would have to be on a temporary basis, with clear sunset clauses and renewal dates.

    That would eliminate the current problem of, for example, mining companies owning and controlling access to housing, hospitals and schools built under existing "social investment" contract clauses. I prefer that they at most own the reduced-interest refinancing of the non-profit local housing authority loan/lease agreement for homeowners ;)

    I would much prefer these companies just to pay a lot in tax and profit sharing. That way, the allocation of funds would be in the hands of the people's representatives, instead of individual businesses.

    They will always first and foremost make services availble in a way that is beneficial to their own employees, not the local population. It also gives them way too much power locally - over hospitals, schools, where roads are built, etc.

    And why would there be a need for social investment by companies, if they already pay their share of taxes and profits? And what happens to this infrastructure when the companies decide to relocate?

    Councils should have a continuous source of income through their share of national revenues, and whatever they can negotiate from companies operating within their areas.

    I think this is the single best way to actually have local investment and development, on a nationwide basis, that is consistent and sustainable.

    Most of this money would be spent locally, which means it would go to stimulate the local economy. Together with the local availability of services, it would slow urbanisation, and increase local opportunities further.

    The nation's objective should be simple and threefold:
    Funds for this revitalisation would be made possible through

    1) Local Government

    Limiting the size of central government. Right now Zambia has about 31 ministries (22 of which are represented at cabinet level, the other 9 being provincial ministries).

    2) The Mines

    The state should receive the maximum benefits from the mines. This could mean constitutionally decreed complete state ownership of all mineral resources. Or, minimum ownership and profitsharing with the existing mining companies, like in Botswana. (Although I don't think the Botswanan government's agreements go far enough, they are much preferrable over the present situation.)


    3) Land Reform

    Getting 100 hectares into the hands of every farmer, complete with tractorisation and the use of sustainble agricultural practices (permaculture, organic farming). Irrigation should also be a priority, with Zambia having access to 10% of Africa's fresh water resource, but over 90% of agriculture still depending on rainfall. Also on farm rainwater catchment systems should be used instead of depending on depletable aquifers.

    Getting these three things right would completely transform the Zambian economy.

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  56. “I would like to see the ZRA pay a constitutionally determined percentage of national revenues directly to each and every council.

    Also, I would like to see councils that are so small, that tribalism or regionalism have no opportunity to determine the delivery of services. 30,000 people each, 350 nationwide.”
    - MrK


    This is a useful clarification.
    I had assumed that you were seeking decentralisation within existing geographical boundaries. Your model avoids the complications I raised, although it raises some issues about geographical boundaries over time – also raised by Yakima.

    My concern here is primarily the need to ensure that “administrative” mechanism of allocating the national pot does not get in the way of natural city or town development – and the many advantages that brings to national development. It would be undesirable for example to have an homogenous city of 60,000 treated as two separate administrative units, possibly leading to divergent priorities within it. Any administrative mechanism has to work with natural spatial dynamics. What do you propose to avoid these kinds of problems?

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  57. MrK,

    I understand your concern over misleading population counts in assigning resources from central to local governments. The problem with frequent geographic redistricting is that it grants too much power to the individuals who draw the lines.

    In the case of a group of three districts which grow in combined population from 90,000 to 180,000 persons and require redistricting to assure 60,000 persons per district. If two districts are strong supporters of one party, and the third district supports another, then the lines can be redrawn so that all three have a narrow majority for the first party. Or, closely contested districts can be captured for the party of line drawers by solidifying opposition support in a district already firmly in the opposing camp and replacing them with loyal voters to tip the close race.

    When people relocate across district lines, they will be aware that they are entering a different jurisdiction. When the line itself moves, existing businesses and homeowners must bear additional costs and uncertainties, especially on land sub-leased from local land boards and/or financed through local housing or enterprise funds.

    On another note, you asked, "why would there be a need for social investment by companies, if they already pay their share of taxes and profits?" -MrK

    One simple answer is because it sounds better to stakeholders. Investors are repulsed by the idea of buying into companies that pay high taxes, but "social investment" oozes with attractive overtones of responsibility. Government likes it too, because then they have a few big price ticket projects to point at whenever the subject of fair return on FDI operations is raised. Government spokesmen quickly learn their lines: "Unfair you say? But how could that be when our responsible foreign friends have agreed to maintain this lovely hospital or school for their own employees, for as long as they choose to stay in the country? You see now how you were mistaken, of course the FDI agreements are fair. Feel free to photograph the hospital . . ." and so on.

    Witness this performance by Mines and Minerals Development Minister, Dr. Kalombo Mwansa:
    http://allafrica.com/stories/200706140044.html

    Cho's Plan5 proposal for directing corporate contributions designated as social investments towards locally controlled programmes looks capable of recapturing some of what is being lost. Perhaps more importantly, it will distribute funding directly to the people and areas most impacted by FDI.

    The most expensive item on Dr Mwansa's list was, "About $750,000 had been set aside for mending community roads and construction of the access road from the mine to the airport." -Times I wonder whose long term priority is being served by connecting the airport to a facility which produces large holes in the ground. If the company was going to need such a road in order to do business anyway, should it really count as social investment?

    While I do not doubt that the items mentioned are not the only "social investment" projects being funded by FDI, the ones on the list add up to around $2.2M, or less than 1/500th of Equinox's one year projected cash flow from the Lumwana project alone.

    ReplyDelete
  58. "why would there be a need for social investment by companies, if they already pay their share of taxes and profits?" - Mrk

    Yes as Yakima explains there several reasons for this:

    1 Ensuring the "externality" is internalised. So in a roads its quite clear that if a mine passes trucks on a given strech of the road it should contribute to maintaing the road. Indeed Quantum and Equonox have recognised this.

    2. The second is that it reduces the chances of reneging. What we want is to "sink" investment in the area. The greater the fixed costs of investment the less chance for them to pack up and go! But you need to get it right - not too much that they never start, but enough that they become part of the local community.

    3. Social investment helps with technological and other types of diffusion. These ventures increases the possibility of matching local firms with FDI...

    4. As Yakima says it makes FDI more acceptable to the people.

    And there are plenty of other reasons am sure.

    For me Dr Mwansa and others are headed in the right direction. What is missing is a coherent framework. Something that is clear and more certain.

    For one thing we need to establish "triggers". What triggers social investment - is it the level of capital? Is it the nature of the investment? So does it apply to certain sectors etc.

    I wish I could just whisper in Dr Mwansa's here and say "look here, a framework is what we need bwana"....

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  59. 2. The second is that it reduces the chances of reneging. What we want is to "sink" investment in the area. The greater the fixed costs of investment the less chance for them to pack up and go! But you need to get it right - not too much that they never start, but enough that they become part of the local community.

    There are much better ways to ensure the continued presence and performance of a company.

    For instance, there could be benchmark payments when certain production goals are achieved.

    And of course, how many companies would walk away from these major deposits?

    Also, I would always advocate incentives to stay over disincentives to leave. It helps improve their enthusiasm for the job as well.

    And there are different ways of linking pay to performance too. I like Donald Trump's method.

    What he does is agree a single figure up front, with the only obligation that the company performs it's project up to agreed standards. Everything they don't spend they can keep. This gives them the incentive to do their job for as little money as possible, while still being required to meet specific (minimum) standards. He also links their payment to completing the project before a specific date.

    This gives managers the incentive to be timely and frugal with their funds.

    I am sure the performing companies and managers will quickly make themselves known, and at relatively little cost.

    Out of The Apprentice tv series, several individuals came out with books, but the one most informational, is the one by George (Ross), who actually started out as a business contract lawyer.

    (Trump Strategies for Real Estate - Billionaire lessons for the small investor, by George H. Ross, with Andrew James McLean.)

    Here is an excerpt (Chapter: Trump Building Projects)

    Create Incentives for being early rather than having penalties for being late

    There are usually delays in any construction that are unforeseen. However, if a contractor knows that if he finishes before a certain date he gets a bonus, so if there is a delay, he will figure out how to work around it. Maybe they'll put in overtime, or maybe they'll make every effort to get the job done early.
    Instead of getting into an argument with a contractor, such as, "You said you were going to complete this building in December, and now it's January and you're nowhere near completion. You agreed that you would pay a penalty for every day you're past December except for delays for causes beyond your control. I'm going to insist on the penalty." With that scenario, all that happens is that the contractor comes up with a list of all the things beyond his control that caused delays. So at best, you end up in a dispute with the contractor, which ultimately has to be resolved by negotiation or litigation.
    The contractor is unhappy knowing his profit is diminished or wiped out entirely. So you would be dealing with an unhappy contractor contrasted with a happy contractor who has an opportunity to make an even greater profit by finishing early. By far the worst thing that can happen is that a contractor walks off the job. In addition to the inevitable delay, the costs incurred in hiring someone new can be astronomical. Any "savior" knows you're in a bind and will charge a premium to bail you out. You will be told it how much more it will cost to correct the work done by the departing contractor. Try to keep your contractor and all subcontractors working on the job if it's at all possible. If, however, you find that you hired a bad apple, line up a suitable replacement before the need arises.
    If a contractor gives Donald Trump a bid for $100,000, Trump may say "no way, but I will give you $60,000", and they argue back and forth over the amount, and may ultimately agree on $70,000. Then Trump will say, "I'll tell you what I'll do, if you complete the work early, I'll give you an additional $500 for every day you finish before the 90 days we agreed on. But the maximum I'll pay you is $85,000."
    Initially the guy wanted $100,000, agreed to $70,000, but now has a chance to earn $85,000. He will work his tail off to earn as much of the extra $15,000 as he can.

    END QUOTE

    All I'm trying to say is that there are a lot of ways to give people positive incentives, instead of negative ones.

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  60. Mrk,

    I agree with you that "There are much better ways to ensure the continued presence and performance of a company" .
    However, remember that in the mechanism I advocate the incentive to stay is just one of many reasons for adopting it. The system does not specifically aim to do that. If they stayed, it would simply be a byproduct.
    The aim of the system is to leverage funding into other areas not directly linked to FDI.

    If the exam question is how we can make "continued presence", I agree with you that there are better ways. And the Donaldo tramp example you give seems sound. Am not actually to what extent Government has been exploring that wider question following the pull out of South African companies in recent years.

    ReplyDelete
  61. Donaldo tramp

    Heehee. You don't have to like Donald Trump (when it comes deep down to it, I don't like him either), to learn from his example.

    Plus George Ross has over half a century of experience on the law and real estate behind him. Which doesn't mean that every thing he says is taken at face value, but his experience is deeper than many.

    The chapter on negotiation is great too, and should have been required reading for everyone negotiation on behalf of the government.

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  62. Donaldo tramp....lol!!
    I desperately trying to concel my distate for the man..

    He has a new book with some other chap called "Why we want you to be rich" or something like that.

    The new negotiations will be led by LPM. May be you could forward him a copy of the Trump book?

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  63. I don't think that the books written about Donald Trump are that great. However, I make an exception for George Ross, because of his multi-decade history of practicing business and real estate law, and because he is actually willing to part with his secrets.

    ReplyDelete

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