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Sunday, 28 October 2007

Undermining Zambia's development?

A new hard-hitting joint report by Scottish Catholic International Aid Fund (SCIAF), Christian Aid and Action for Southern Africa(ACTSA) has been released today, which argues our government was blackmailed into privatising its nationalised copper industry by the IMF and the World Bank, who threatened to withhold debt relief and other aid, eight years ago. It claims that less than one penny in every pound is going to Zambia, whose health and education programmes are collapsing for lack of resources. One-third of children do not get even basic schooling, and hospitals have to make do with paracetamol tablets for pain relief.

According to the report, major Scottish investors are backing a Vedanta Resources-owned copper mining company which is selling Zambia short whilst generating huge profits from the country’s finite natural resource. It calls on Vedanta and its Scottish investors including Standard Life, HBOS and Dundee-based Alliance Trust, to use their ‘corporate social responsibility’ credentials to help rectify the situation before current contract renegotiations with Zambia are concluded. You can access the hard hitting report here.

Update (28th October) : On a related issue - The Guardian has an article on Zambia's new bid to cash in on copper. It carries this interesting observation:

Just how Zambia signed up to the original privatisation agreement remains, after seven years, something of a mystery. The contracts, which ran to over 20 bulky volumes, were never presented to parliament. At the time the country was run by disgraced former President Frederick Chiluba. Earlier this year, Chiluba, who is now gravely ill, was convicted in a London court of siphoning off tens of millions of pounds. Civil servants allege that MPs received advances on expenses as the vote came to a head, and there is widespread suspicion that government officials benefited greatly from the sale.

Others point the finger at the World Bank and its advisers. Professor John Lungu, a respected academic at Zambia's Copperbelt University, says the World Bank told the government that some of the mines to be sold had just seven years of life in them. Yet the very same mines are still fully functioning and scheduled to operate for at least another 15 years. 'How could so much investment go in with seven years' worth of copper left? It baffles the mind,' Lungu said.
Update (30th October 2007) : Christian Aid and SCIAF are calling for the companies involved not to undermine Zambia’s efforts to tackle poverty and renegotiate their contracts - find out more and take action.

Update (7th December 2008) : Vedanta have now responded to the report. You can read Vedanta's response here, and SCIAF's response to Vedanta can be read here. My thanks to the exceptional Minewatch blog for bringing this to our attention.

55 comments:

  1. Keep in mind that 7 years ago the price of copper and other commodities was very low and mining was therefore uneconomical and the mining agreements were designed more to keep mines open and preserve jobs. Now the situation is different and governments worldwide are renegotiating mining agreements. Also low concentration ores that were uneconomical to mine in the past due to low prices, are now profitable to mine and so the life of mines has been extended.

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  2. Kafue001,

    I agree that the market conditions have changed and have made some mines more viable than others. But what we have here is incorrect assessment of the life of the mine per se. In terms of what is actually there...not whether what is there is valueable or not.

    We must distinguish the natural life of an asset from its market value. Lumwana always had 37 years of life - but its market value was zero before Equinox started mining activities. However, it would be incorrect to state Lumwana had 0 years of life before Equinox!

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  3. Cho,

    I take the life of a mine to be its economic (or profitable) mining life at current metal prices. Even the soil on which your city lies on has some tiny metal content which can be mined over a thousand years, but it is not economical to do so, and therefore has no mining life. As prices rise, a mine which has exhausted its high concentration ores can start mining its low concentration ores because they are now profitable and so the life of the mine is extended.

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  4. Kafuel001,

    Isn't the point here actually that no matter the price of the asset, physical limitations place a limit on what can be extracted and when?

    So Lumwana's mine life will remain 37 years even if the price of copper trebled. The only thing that would change that is NEW TECHNOLOGY, which would allow quicker and safe extraction.

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  5. Cho,

    True if you assume Lumwana has only one category of ore. Mines may have areas with different concentrations of ore, the low concentration ones being more expensive to refine and therefore uneconomical at low metal prices.

    Also, the deeper one digs the higher the mining costs due to say for example, more water removal costs from the mine (for example the Konkola Deep mine), so deep mining may be uneconomical at lower metal prices but economical at higher prices. Therefore Konkola which has exhausted its shallow cheaper ore may extend its mine life by digging deeper, which is more expensive but still profitable at higher metal prices.

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  6. Kafue001,

    So what we have is a complex equation!

    Mining life is a function of physical capacity, types of ores, technology, on-going market price, and other factors.

    This raises more questions than answers and makes it difficult to state definitely what a life of mine is.

    Do you know what methodology the Minerals department use to trade off those factors?

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  7. and there is widespread suspicion that government officials benefited greatly from the sale.

    Let's hear who will defend the mining agreements most loudly.

    This is a total disgrace. The only good news is that very possibly these agreements are illegal.

    There has to be a rigorous renegotiation of the development agreements, but not by the same people who were even remotely involved in their original creation.

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  8. The report authors say KCM is ‘short changing’ Zambia with royalty fees of just 0.6 per cent instead of the 5 to 10 per cent industry average in developing countries. Whilst legal, this rate of royalty implies that, in 2006/07, the Zambian government would have received mineral royalties of only US$6.1 million from KCM, while the company extracted copper ore worth over US$1 billion.

    All I can see is that reading this kind of thing fills me with a quiet rage.

    There must already be laws in existence against such corruption. Including international laws.

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  9. Cho,

    I don't know what methodology the Minerals department uses although I guess it is similar to my conclusions. I just presented my conclusions from my reading of mining situations worldwide.

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  10. "All I can see is that reading this kind of thing fills me with a quiet rage." - MrK

    It is difficult to read this report and not find oneself with all kinds of emotions. I am filled with a unique combination of suspicion, anger, and pity.

    I am suspicious of those that are now blaming Government but were the same people signing agreements. Edith Nawakwi's pitiful statement : " We were told by advisers, who included the International Monetary Fund and the World Banj, that not in my lifetime would the price of copper change. They put production models on the table and told us that the was no copper in Nchanga mine, Mufulira was supposed to have five years life left and all the production models the production models that could be employed were showing that, for the next 20 years, Zambian copper would not make a profit. [Conversely, if we privated] we would be able to access debt relief, and this was a huge carrot in front of us - like waving medicine in front of a dying woman. We had no option [but to go ahead]" Her excuse smacks of incompetence. Production models? Isn't this the woman who was supposed to be educated at Imperial College? Is she telling me, that she does not realise that the World Bank have no experts? Their experts are people who spend five days in a particular country, right a report and leave. We need to get to the bottom of this. And MrK I tell you what, its people like you who can find secrets and expose them. I like what SCIAF are calling for. They want all the documents to come to light. We want to know where are minutes of those meetings that Nawakwi refers to? As my exchange with Kafue001 illustrates the life of an asset is a complex thing and involves many variables. One cannot simply say the price is low therefore the life of the mine is zero! Price in itself is uncertain and economists rarely forecast prices. There must be more to this world bank, Government, IMF negotiations...we need to know...

    I am angry because Zambians have not waken up and are just content to accept the current situation. This is not so much about ownership, its about good governance. Zambians deserve to know the truth.

    I am full of pity because the report clearly points at us. We the Zambians are to blame for our predicament. The evidence is there. ECZ for example has weak capacity. Govenment had weak negotiating position and weak team.
    Look, we cannot even implement proper safety in the mines. We have no sufficient know how to ensure things proceed proceed. The situation is pitiful. Our situation is so bad that we need SCIAF and others to stand up for us. To hold our hands and realise what is wrong.

    Its a shocking report. If you are Zambian and you don't atleast feel these three emotions, then there's clearly something wrong with your patriotism.


    "I don't know what methodology the Minerals department uses although I guess it is similar to my conclusions." - Kafue001

    A methodology that places emphasis on one key variable is most likely flawed. Yes price matters, but there's more to determining the life of an asset as we have explored.

    I assume that like me, you haave now read the report. Its clear that we won't know how such decisions were made and whether the IMF production models just embraced a single variable like you assert.

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  11. And MrK I tell you what, its people like you who can find secrets and expose them.

    Thanks, it is genuinely appreciated, although I have to add, I'm just working the internet and the search engines, and keeping records of interesting statements I happen to come across (like Claire Short's).

    However, the PAC and the donor community have far more power to have records released and researched in a professional manner.

    We should all be supporting them and encourage them to coordinate with eachother.

    I like what SCIAF are calling for. They want all the documents to come to light.

    SCIAF could use a lot of public support. As could the PAC.

    I am full of pity because the report clearly points at us. We the Zambians are to blame for our predicament. The evidence is there. ECZ for example has weak capacity. Govenment had weak negotiating position and weak team.

    I hear what you're saying, it will always sound like an excuse because of the dramatic outcome. At the same time, who were the IMF and World Bank to misinform the Zambian minister in question. And don't they bear a lot of responsibility for the subsequent loss of income to the state and the people?

    And above all of that, I can't help that even with incompetence, there was law breaking, the taking of bribes and the violation of international agreements involved. Were the likes of Equinox's legal departments incompetent too?

    In the US, if someone pays a bribe to one of the negotiating parties, that alone is enough to have a contract declared null and void.

    That would be more than enough leverage to at least rigorously renegotiate the development agreements.

    The problem I can see, is that a lot of the people who benefited from their creation may still be in government, and in fact could be called upon to do the renegotiating.

    What we need is complete openness of what happened, who did it, and a clear government response on how this debacle is not going to be repeated in the future. And no more secret negotiations about things that affect the future of the country. (And why were they secret to begin with? The term 'consciousness of guilt' springs to mind - the government knew they were bad when they were signed.)

    Today there is going to be another article in The Post on Joyce Nonde, on the very subject.

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  12. Hindsight is golden in retrospect. Prior to the current runup in prices, when was the last time copper prices were high? In the early seventies. So for about 30 years the copper price languished. Even Anglo American, the mining giant producing two thirds of Zambia's copper exports, threw in the towel and exited Zambia.

    http://news.bbc.co.uk/2/hi/business/1782684.stm

    So this is the environment that the government negotiators were in when negotiating mining agreements, their priority was preserving existing mining jobs even if it meant lowering mining taxes to attract mining companies to stay or come to Zambia.

    The future possibilty of higher prices seemed very less important in view of 30 years of low prices and the very real imminent possibility of the collapse of the mining industry and the loss of many jobs in Zambia.

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  13. Kafue001,

    You are forgetting that they were forced to privatize by the IMF and World Bank.

    Besides, giving away the mines for a mere fraction of what they produce, let alone what they are worth, makes on business sense whatsoever.

    Preserving jobs cannot be the priority in giving away the nation's wealth.

    However, most tellingly, why do you think they are still defending these agreements, even after prices went through the roof, and even the 'donors' are starting to complain. People have been bribed.

    No, I'm sorry. It was a bad deal then, just as it is a bad deal now. And until we know exactly who negotiated what and why, we don't know what went through the heads of the ministers and negotiators.

    And I sincerely doubt they gave away the mines to preserve jobs.

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  14. Also, Edith Nawakwi stated that the World Bank assured her that prices would stay low permanently. Like you said, hindsight is golden, but that works both ways - they had no business even making a prediction like that.

    Quoting Cho's citation of Edith Nawakwi:

    We were told by advisers, who included the International Monetary Fund and the World Bank, that not in my lifetime would the price of copper change.

    So who was making these predictions? Obviously in the least, they cost the country of Zambia billions of dollars. I don't think a fund manager could make such a mistake and keep his job - so who is going to drag the world bank to court?

    I still think people were bribed to make these deals happen - which would make them illegal. (And one big reason I think so, is all the people who are still defending them.)

    So this is the environment that the government negotiators were in when negotiating mining agreements,

    Even at the time, the price of copper was $1000 per tonne.

    That was still no reason to give away the mines. And why did the WB insist on 'privatisation' in return for debt relief? What was so good about these 'worthless' mines being held by foreign corporations, instead of the Zambian state? And why were these foreign corporations so interested in owning 'worthless' mines, if the World Bank thought prices would never change? Was the World Bank so misinformed, where Vedanta, Equinox and the likes weren't?

    Until everyone comes clean about who did what and why, no one can say that these deals were make honestly.

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  15. Mr. K,

    Why was Zambia forced to privatize the mines by the IMF and World Bank? Because they were losing $1 million dollars a day and they were neglected and in bad condition due to mismanagement and lack of investment.

    http://query.nytimes.com/gst/fullpage.html?res=9B02EFD71738F933A25752C1A9669C8B63&sec=&spon=&pagewanted=1

    So Zambia wants assistance from World Bank/IMF, they need to get rid of their loss making operations if they are not able to properly manage them and run them profitably.

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  16. Why was Zambia forced to privatize the mines by the IMF and World Bank? Because they were losing $1 million dollars a day and they were neglected and in bad condition due to mismanagement and lack of investment.

    So it was just good business sense?

    I don't think so.

    1) If the mines were really losing money, they could have just suspended operations. There is nothing wrong with that, as they could have waited for better times.

    2) The World Bank and IMF always demand privatisation, no matter which country they advise. That is what happened in Russia and South America.

    So Zambia wants assistance from World Bank/IMF, they need to get rid of their loss making operations if they are not able to properly manage them and run them profitably.

    They could do that by suspending operations - in loss making mines only. There was no need to give them away.

    Also, remember all the profitable parastatals that have been 'privatised'. There was no need to throw out the good with the bad.

    No, the WB/IMF have had a philosophy that all state assets must be privatised, no matter whether they are loss making or not. (And of course, it is much easier to sell a profitable mine or company than a true loss making one.) In the process, Zambia lost billions of dollars, and will lose more billions, unless these agreements are renegotiated.

    KCM was not loss making - Vedanta made back what they paid for it within months. So how does that sale have anything to do with low copper prices? Nothing.

    I'll ask you this. Kafue001, what is your view on the renegotiation of the mining contracts? Are you for or against?

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  17. Kafue001,

    Was part of this rationalisation of the Zambian state's assets the underestimation of the size and life of the mines?

    Professor John Lungu, a respected academic at Zambia's Copperbelt University, says the World Bank told the government that some of the mines to be sold had just seven years of life in them. Yet the very same mines are still fully functioning and scheduled to operate for at least another 15 years. 'How could so much investment go in with seven years' worth of copper left? It baffles the mind,' Lungu said.

    Either they were clearvoyant, or they knew the true extent of the mines, and didn't inform the government.

    Which in the least is deceptive. So I wouldn't feel sorry for the mining companies at all.

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  18. Mr. K.,

    It is not simple to just suspend mining operations. Underground water needs to be pumped out to keep mines from flooding and this costs money, miners need to be paid or laid off, there are startup costs to restarting a mine, interest needs to be paid on debt taken out to finance mine operations, shareholders will either want a continuing profit on their investment or a return of their capital through a mine sale.

    You say KCM was not loss making, my reading says otherwise:

    http://journ.ru.ac.za/economics/aej/General/current.html#six

    http://query.nytimes.com/gst/fullpage.html?res=9500E2DD1330F930A35752C0A9649C8B63&sec=&spon=&pagewanted=print

    Vedanta earned back their investment because copper prices were higher when they acquired their mine, but lower when Anglo American owned it. The sale was done because the government did not have the money to buy and run the mines if prices became lower in light of low prices in the previous 30 years.

    I am for renegotiation of contracts if both parties are agreeable to it, however the existing agreements are legally binding. Probably higher rates can apply to new future agreements.

    I already explained in my previous comments that the economic life of a mine depends on current metal prices and mining costs. It is variable.

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  19. Kafue001,

    The mining agreements were drawn up in such a way, that Zambia might never benefit from them.

    This is beyond what is needed to attract investment (even though investment for investment's sake is of course pointless).

    The companies don't have to properly declare their profits, as they can discount against future costs nearly indefinitely. Does that make business sense? No.

    If they would, it would be much easier to implement other issues in the agreements, like the 25% corporate tax, or the 'price participation' clauses, which allow the government to share in the profits if copper rose above a certain price.

    So these agreements are even internally inconsistent.

    No matter what - and I still haven't seen all the data - these contracts are ripe for renegotiation.

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  20. "I already explained in my previous comments that the economic life of a mine depends on current metal prices and mining costs. It is variable" - Kafue001

    I think you have actually forgotten the physical capacity of the mines themselves. The deposits!
    This is what ultimately determines the economic life if you assume the technology is fixed in the short run and you base the decisions on long term prices.

    I have reason to believe the long term price of copper has not changed and this is what the decision was based on. You cannot base long term financial decisions on shor term price flactuations.

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  21. Kafue001,

    Can you prove that it was good business sense that was going through the heads of the individuals who sold the mines, and what do you make of Edith Nawakwi's statement that the IMF and World Bank 'wanted blood'? That doesn't sound like the biggest concern was stemming a half a million dollar per day loss from the mines. (And I would like to see some more detailed breakdown of that financial situation - or just a source.)

    Cho,

    I have reason to believe the long term price of copper has not changed and this is what the decision was based on. You cannot base long term financial decisions on shor term price flactuations.

    I can't precisely predict copper prices, but I can say this about the drivers of demand in the copper market today.

    The big demand is from China (population 1.3 billion), which in order to grow, needs to electrify it's cities. It has a huge initial need for copper wiring, and after that, some residual need for maintenance.

    Then, India (population 1 billion) is to follow.

    Hopefully, the same could be true for Africa as well.

    In the short term, there may be a worldwide economic recession, which may hit prices, however, the underlying economic facts remain. There will be a huge demand for copper from Asia for a very long time to come - which is why we are seeing all the interest from China, as well as the emergence of an Indian corporation like Vedanta.

    So I disagree strongly that the long term price of copper has not changed.

    We are seeing the emergence Third World economies of billions of people, hundreds of millions are turning middle class within the next few years. What is important, is that this story has not ended.

    At the same time, it is important that the government benefits from copper prices now, so the money can be leveraged into other economic sectors and infrastructure.

    The foundation of a healthy economy is a well developed agricultural sector. At the same time, because of it's geographic position, Zambia could play a key role in infrastructure and logistics for the entire Southern and Central African/Atlantic/Indian Ocean region.


    Also, here is some explanation from Edith Nawakwi, who was finance minister at the time:

    http://maravi.blogspot.com/2007/05/from-50-years-mailing-list-venezuela-to.html

    Nawakwi had no choice over mines tax incentives - Magande
    By Bivan Saluseki: Sunday March 19, 2006

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  22. After reading the SCIAF report, I agree with Cho's description of it as "hard-hitting". I wish it was also well-informed and unprejudiced. That remark needs to be substantiated. I shall try to do that under 3 heads.

    1. Mines privatisation.
    2. Mineral reserves.
    3. Renegotiation of agreements.

    1. Mines privatisation.
    It is true that the Zambian government was under great pressure from the World Bank and the IMF. This is fully explained by ZCCM's poor performance, its losses in 1999 of $1 million a day and the acute danger of bankruptcy. Privatisation had been deliberately delayed through Chiluba's action in illegally taking responsibility away from the ZPA and giving it to a specially established committee, to permit manipulation. The Kafue Consortium eventually withdrew its very good offer after concluding that the committee was not serious.

    2. Mineral reserves.
    The explanations given by Kafue 001 (no relation, presumably, to the Consortium!)are correct. Zambia is home to virtually unlimited quantities of copper ore. But ore can only be classed and quantified as 'reserves' when it is estimated to be economic (meaning profitable) to produce. That depends on

    a) Its grade, the costs of physical and chemical recovery, and of transportation to the market.

    b)Its selling price.

    All these aspects are changeable, and price in particular is extremely difficult to forecast. In September 2006 the IMF was predicing that the price of copper would fall from the then current $7,500 per ton to $4,300 in 2007 and $3,500 in 2008. Their 2007 price turned out to be wildly wrong. But that may not continue. Since then sustained record prices have stimulated tremendous new mining development. Zambia's production is expected to triple from 400,000 tons in 2005 to 1.2million tons in 2009. And other copper producers are all boosting development. Huge increases in production are bound to affect the price. And costs and prices together will increase or reduce reserves. For a mineral reserve is not just a physical quantity, but a physical quantity which is commercially producable and saleable.

    3. Investment Agreements.
    I know of no reason to believe that our agreements with mining companies were unduly favourable when negotiatiated. If they had been, Anglo American would not have pulled out. Today a mineral royalty of 0.6% seems extremely generous. But we should remember that ZCCM had for some years been paying no royalty at all. Every Zambian would like to see the agreements renegotiated. But an agreement needs to be honoured. For Zambia to renege on these agreements would destroy our reputation as a country whose legal undertakings can be relied upon. That is - or should be - a crucial consideration. Fortunately the mining companies have seen the pressure the government is being subjected to, and it seems that they are pepared to agree to at least a measure of renegotiation. One must hope that this will be achieved in a spirit, not of anger, but of understanding, with each party appreciating the position of the other.

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  23. murray,

    good to see another intellectual on board. I will comment later. (no relation to the consortium by the way!)

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  24. Murray,

    Your contribution makes interesting reading.

    It’s very important that we focus on the facts as presented in the SCIAF report. In that sense I welcome your contribution. Part of my problem with Kafue001’s analysis, was that while informed from other sources, they do not focus on the substance and evidence as presented in the SCIAF report and references quote therein. That is not necessary a criticism of Kafue001 but rather a call for all of us to examine new facts with an open mind and without priors.

    I would say upfront that as far as the general "mining debate” is concerned, my position tends to differentiate between existing agreements and new agreements. It remains my belief that any new agreements need to come under a new framework than currently exists. In that sense I look forward with anticipation to the proposed Draft Mining Policy which is due to come out towards the end of year, sincerely hoping that Government will fully consult on it.

    On old agreements, my position is that the agreements have been signed and should be honoured, unless these are in effect illegal under international law or indeed Zambian law. I am not a lawyer, and if am honest, I have yet to hear a lawyer speak clearly on this issue.

    The problem is that our system of government is secretive. We won’t know anything until we find out and dig up all the truth. All the reports must be released and laid bare. It is against this background of secrecy that SCIAF have written their report. Understanding that background is crucial in order to assess the robustness of the evidence they have presented.

    Simply put we are all speaking from some degree of ignorance – this ignorance is not for lack of searching for answers, it is simply because government has deliberately withheld critical information from its citizens, by refusing to release all the material that relates to what many now see as the “darkest chapter” in Zambia’s young history. I fully support SCIAF and what they are trying to achieve because it will force light to shine over the current darkeness. We need all the information to be released. Its the least the government and the mines owe Zambians. I wish parliamentarians can start a petition on this.

    On some specifics:

    ”I wish it was also well-informed and unprejudiced.”

    Not sure I share your assessment here. The SCIAF report actually draws on vast amount of research by Alastair Fraser from University of Oxford and Prof Lungu. These two have written the most authoritative report on the mining agreements. I would strongly encourage you to visit their website if you have not done so already and read the many agreements on there here. The SCIAF report was basically a more accessible version of the Mine Watch report, but more focused on KCM. If I have any criticism of the report its the use of Edith Nawakwi as a saint. She was there. How can she now try and switch sides and claim it was all forced upon us? Why has she not released all the minutes and papers she would have kept?.

    ”That depends on

    a) Its grade, the costs of physical and chemical recovery, and of transportation to the market.

    b)Its selling price. “


    Naturally of course price is a factor and indeed are other variables, but the key is actually the reserves and the composition of those reserves.

    As I have said business decisions are not made on short term price fluctuations. If you are mine owner, you look at the fundamentals in 20 – 30 years and then make a decision based on the reserves and how technology may help over those years. You also look at how stable the nation etc. I don’t deny the China influence on demand, but I see that as part of the fundamental shift in the long term given India’s and China’s raising dominance. But nothing as actually changed. 10 years ago we all knew China was rising. I don’t know where people get the idea that China just woke up last year. All the economists round the world have been look at China for a decade now if not more.

    As far as Zambia is concerned, what we need to look at is Edith Nawakwi’s statement. What we had were ministers who failed to analyse the data before them. It was an intellectual failure more than anything else. We came under pressure from young graduates at the IMF and World Bank who spent 1 week in Zambia and flashed a few models on the table and we crumbled.

    The other thing I would say is that we need to look at the detail of the agreements. I am glad SCIAF really pointed out the environmental and safety angles. It must fill all of us with a mixture of rage and sadness to see that the mineral agreements put the signatories outside the remit of the Environmental Council of Zambia. I do not understand how the government can allow something like that to happen.

    Perhaps someone can elighten me just what they must have been thing. Selling mines at lower prices is one thing, but concessions on environmental issues?

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  25. Cho, everyone,

    We need look no further It was blackmail by the IMF and World Bank, plain and simple.

    Read the following highlight from the report:

    In 1999, with the Zambian government still reluctant to privatise ZCCM, ‘major donors withheld some $530 million in aid until the government conceded.’29

    Considering that in 2004, the 'donor' contribution to the government's budget was $600 million (out of a total of $1700 million), it is clear what would have happened.

    From one day to the other, Zambia would have been turned into what Zimbabwe is today. A government with 1/3 of it's budget missing. There would have to have been massive layoffs of civil servants, closing of parastatals, etc.

    I say this in and of itself makes these deals not only immoral but probably illegal.

    It is massive coercion of a small country. It would be the equivalent of putting a gun to someone's head and saying: "sign on the dotted line".

    No court would honour such an agreement.

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  26. 'Blackmail' is a strong word. I see nothing wrong in the World Bank and the IMF threatening to withhold support if the Zambian government continued daily to throw $1 million down the drain AND to ignore the danger of ZCCM's impending bankruptcy. In doing this our international financiers were surely acting in Zambia's best interest.

    As regards Nawakwi, I think we should question her self-exculpatory statement "we were told by advisers, who included the International Monetary Fund and the World bank, that not in my lifetime would the price of copper change". In legal terms that statement is pure 'hearsay'. It is a most unlikely statement for anyone to make. Nor is the supposed source identified. It needs to be substantiated.

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  27. Gentlemen (I presume), thank you for the high quality of the discussion above, it's quite illuminating.

    Although I have read the SCIAF paper and other reports about the sale of our mines.( A Sardanis’s : A venture in Africa, though biased against Chiluba, gives a fascinating insight into the sale of KCM). I do not know enough about High finance or Mining for me to add anything to the above debate, but please allow me to share how I FEEL.

    I have a feeling of numbing anger and despair about these Mining agreements… a rather unwelcome sense of impotence , embarrassment and total disbelief. I knew that they were bad agreements, but I did not know that they were THAT BAD. How could a government be so irresponsible about the handling of the family silver? It looks like we have been ( to use a mining term) truly shafted!.

    “We came under pressure from young graduates at the IMF and World Bank who spent 1 week in Zambia and flashed a few models on the table and we crumbled”. Cho

    Funny line cho, but unfortunately very true, for how does one explain the lack openness on the government’s part. How can government agreements involving the sale of national assets be termed ‘private’? where was the parliamentary scrutiny? How can one explain Nawakwi’s pathetic statement?, My hunch is that there is a lot people from the Chiluba/ Mwanawasa governments who would rather bury their heads in the sand and hope that this just blows over.

    But, should the Zambia people just shake their heads and let it be? I think NOT. Bad deals can be renegotiated, I understand that there is precedent…according to Sardanis 'the Kaunda administration renegotiated export tax in order to advantage of the rising copper price during the Vietnam war'.

    I also think all concerned Zambians, in conjunction with progressive organization should continue to highlight the unjustness of these deals, to put pressure on the companies and remind them of their social and environmental responsibilities….I strongly believe that it is in the Mining companies’ interest to renegotiate the deals, to take the Zambian people’s peacefulness and supposed timidity for granted may turn out to be a grave mistake on their part.

    ReplyDelete
  28. I don't think anyone has quite let this sink in.

    Kafue001, this goes way beyond prudence in lending.

    I will repeat:

    ‘major donors withheld some $530 million in aid until the government conceded.’29

    Withheld. Not 'threatened to withhold', not 'refused to issue new loans'.

    They withheld $530 million, which is basically all the donor aid in the goverment's budget.

    That is blackmail. They were basically waiting for the Zambian state to collapse. In return for staving off the collapse of the Zambian state, Zambia had to give away it's mines.

    That would mean that all the losses to the country, all the losses suffered because the mines are no longer in Zambian hands, must be placed squarely on the shoulders of the IMF and World Bank.

    This must be against so many different international laws, beginning with the OECD guidelines.

    I'll try and dig deeper into this in the coming days and probably months.

    But it is clear where the blame lies. This is what the IMF/WB do, and not out of prudence, but out of ideology. They FORCE countries to privatise.

    ReplyDelete
  29. This is a 10 year chart of copper in dollars (x 1000) per metric tonne.

    Cho, have a long hard look at this chart, and tell me that long term copper prices have not changed.

    By the way on price speculation, check out what many traders consider the bible of speculation, "Reminiscences Of A Stock Operator", by Edwin Lefevre (pen name of the (at times) highly successful speculator Jesse Livermore).

    ReplyDelete
  30. Mr. K, Cho,

    Copper prices are a function of supply and demand. As long as demand is greater than supply, copper prices will remain high. As Murray mentioned there is a lot of supply coming on line, so it remains to be seen whether prices will remain high. I believe that huge and growing demand from China and India will keep prices high for a long time.

    http://www.sciam.com/article.cfm?articleID=000CEA15-3272-13C8-9BFE83414B7FFE87

    Cho - The difference between China now and ten years ago when people were also saying that China is rising is that we are seeing the emergence of a new generation of modern educated Chinese that now have the same productive power and consumer demands of people in developed countries and therefore more demand for copper. The poor communist Chinese generation with low purchasing power is fading away with the passage of time (30 years after Chinese economic reforms is now when the new generation has now left school and started working).

    Mr. K - There was no conspiracy or blackmail from the World Bank/IMF.
    Because the mines were rundown and making losses of $1 million per day (and not half a million dollars as you mention)-see prior New York Times article from my earlier comment, the situation could not continue where govt would in effect subsidize the mines indirectly with World Bank/IMF money (after all there are other many poor countries around the world that could well use the World Bank's money).

    If you look at the oil companies, they have many agreements with developing counties where the companies recoups its capital expenditures first before paying taxes.

    http://news.bbc.co.uk/2/hi/business/1496357.stm

    In Zambia's case they are investing many hundreds of millions of dollars in mining infrastructure (both to replace old infrastructure and for new development)

    http://query.nytimes.com/gst/fullpage.html?res=9D05EEDF1E3EF932A2575BC0A960958260&sec=&spon=&pagewanted=2

    You can't expect investors to give their money away, they expect to recoup their hundreds of millions of dollars invested and make a profit as well. If they cannot, then they will invest it elsewhere where they can.

    Over time as investors recoup their investments and existing stability periods expire, then the country will receive more taxes. Meanwhile keep in mind that mining employs only a small percentage of the workforce, so focus should be made in developing other economic sectors if the majority of Zambians are to benefit from a sustainable economy.

    ReplyDelete
  31. Kafue001,

    Why do you keep defending the mining companies?

    If you look at the oil companies, they have many agreements with developing counties where the companies recoups its capital expenditures first before paying taxes.

    They have recovered their investment years ago.

    Vedanta had a turnoverof 1 billion. If they have the same profitability as Equinox (their profits were 60% of turnover), that would imply that they made $600 million in (gross?) profits this year alone. (That would be a rough estimate, but their profits would be somewhere along those lines.)

    The problem is that effectively their tax holidays last 10 to 15 years, sometimes more.

    Meanwhile keep in mind that mining employs only a small percentage of the workforce, so focus should be made in developing other economic sectors if the majority of Zambians are to benefit from a sustainable economy.

    Do you mean, let's forget about the mines, and let's start searching for Zambia's competitive advantage?

    The problem is that we are going to need the profits from the mines to invest in the other economic sectors - agriculture, manufacturing and of course most of all, infrastructure.

    Of course, the government can renegotiate tax holidays and 'stabilisation periods' (cough) down to zero - if they aren't bought and paid for.

    ReplyDelete
  32. Cho,

    Congratulations, this report just made the newspapers. :)

    ReplyDelete
  33. Mr. K.

    "Why do you keep defending the mining companies? "

    Answer: Look south of the border. A country that ignores property rights will be shunned by investors and we all know what has become of Zimbabwe.

    "Do you mean, let's forget about the mines, and let's start searching for Zambia's competitive advantage?"

    No that is not what I meant. Mining is a capital intensive industry and employs only 1%-2% of the labor force. Zambia can only be prosperous if the majority of its workforce are productive like in the developed countries. So focus on developing sectors such as tourism, money for it can come from other investors, not necessarily from the mines.

    ReplyDelete
  34. "Mining is a capital intensive industry and employs only 1%-2% of the labor force." - Kafue001

    Good point, but that assumes that there's little that can be done with the revenue!

    My view actually is different from what I have read here by everyone. I don't trust Government with people's money - the index on corruption and general poor accountability worries me- but I also don't want to see the mining companies get away with something just because of incompetent ministers. At the same time, I don't want us trapped in the past when much of the resources are actally are untapped. We need investment both local and foreign. Whatever we do must navigate between those points. So I have always thought the starting point should be to have a clear vision on the mining debate. My vision is set out here

    I would be interested to know what ownership model you (and others) think we should be aiming for.

    ReplyDelete
  35. Kafue001,

    Why do you want to turn your back on $4 billion in copper and cobalt exports again?

    No that is not what I meant. Mining is a capital intensive industry and employs only 1%-2% of the labor force.

    So? It also yields $4 billion per year in exports. Equinox stated it's profitability was 60% of turnover.

    Zambia can only be prosperous if the majority of its workforce are productive like in the developed countries.

    And how is that going to happen?

    Or perhaps you would rather borrow from China?

    So focus on developing sectors such as tourism, money for it can come from other investors, not necessarily from the mines.

    Brrrrrbbb.... (Just shaking my head, Lewis Black style.)

    Other investors, not necessarily the mines??

    The money in the mining sector doesn't come from 'investors', it comes from the massive profits that are made, not in the least because of the record high in commodities prices.

    Kafue001, why are you so determined that the mines should not be in Zambian hands?


    Cho,

    I don't trust Government with people's money - the index on corruption and general poor accountability worries me- but I also don't want to see the mining companies get away with something just because of incompetent ministers.

    Well then we need to work toward a position where we start building a justified trust in the government.

    If banks can keep track of their money, so can the government.

    What is simply needed, is the political will to create systems that are continuously monitored and that keep specific individuals accountable for everything that happens to the money.

    And we can create political will, by publicizing corruption. There is no way donors can justify corruption to their own constituencies, and that is serious leverage civil society organisations and ordinary citizens have over the government.

    ReplyDelete
  36. Kafue001,

    I am for renegotiation of contracts if both parties are agreeable to it, however the existing agreements are legally binding. Probably higher rates can apply to new future agreements.

    So you would be against renegotiation if the mining companies didn't want it.

    Now that is a powerful bargaining position if ever I saw one.

    Cho,

    Have you gotten around to Bernie's book yet?

    ReplyDelete
  37. Mrk,

    I think this what the debate should be about. How do we make sure that Zambia reaps the benefits from its resources?
    Yakima helpfully set out 6 or 7 options.

    Separately, I set out my vision of a "human approach" to ownership.

    ReplyDelete
  38. "Probably higher rates can apply to new future agreements." - Kafue001

    Interesting use of language 'probably'.

    ReplyDelete
  39. "I also think all concerned Zambians, in conjunction with progressive organization should continue to highlight the unjustness of these deals, to put pressure on the companies and remind them of their social and environmental responsibilities…" - Pandawe

    Whole heartedly agree with the former, but the latter is Government's job. There's not much we can do force them to obey environmental and social responsibilities if the mineral agreements they have signed has set these aside.

    ReplyDelete
  40. Cho,

    There's not much we can do force them to obey environmental and social responsibilities if the mineral agreements they have signed has set these aside.

    This has been mentioned before, and I don't get that. How can mere business contracts override national law?

    I thought the hierarchy was
    constitution -> parliamentary legislation -> contracts

    How can any judge uphold business agreements when they are against the law of the land?

    ReplyDelete
  41. MrK,

    The "we" there is civil society and loving Zambians. If Government has signed these agreements on behalf of the people, only Government can change them.

    I might be wrong...

    ReplyDelete
  42. Mr. K

    "Why do you want to turn your back on $4 billion in copper and cobalt exports again?"

    Because it is not other people's property. Why not as well go and grab the farms and factories that foreign investors have built in Zambia? They also have a large output. Whenever there is a big pot of money, there will always be other people figuring out ways of getting it.

    Without the rule of law, there would be no investment. Again look south of the border for an example.

    Mr. K
    "So you would be against renegotiation if the mining companies didn't want it."

    Answer: Yes

    Cho said...
    "Probably higher rates can apply to new future agreements." - Kafue001

    Interesting use of language 'probably'.

    Answer: Yes, because I don't know how future legislation will turn out.

    Mr K
    "The money in the mining sector doesn't come from 'investors', it comes from the massive profits that are made, not in the least because of the record high in commodities prices."

    Answer: The profit of an investor's business is his regardless of the reason. Why not give the massive profits of Microsoft to the US govt? Because Microsoft earnings are its own, it does not belong to other people or entities.

    "Zambia can only be prosperous if the majority of its workforce are productive like in the developed countries."

    Mr K-
    And how is that going to happen?

    Look at Asia, countries there with few resources have organized themselves and lifted themselves out of poverty by their boot straps.

    Mr K
    "Kafue001, why are you so determined that the mines should not be in Zambian hands?"

    Your implication with no basis as usual. If Zambia had managed the mines in a proper manner and still owned them, I would be the first one cheering them on. And suppose metal prices collapsed tomorrow, no doubt there would be a lot of people begging the mining companies to stay and preserve jobs regardless whether they are Zambian or not. The rule of law should be observed, otherwise investors would not have bought the loss making mines years ago and thus saving many mining jobs in the process.

    ReplyDelete
  43. Beyond economics, business models and politics, Zambia's development continues to be undermined by a lack of meaningful land reform and transparency in governance as Cho and others have outlined in other discussions.
    The presentation that lead to the Lumwana project was prepared by three graduates, probably withless credentials than most former ZCCM engineers. The guys travelled to Zambia, Lumwana and spent less than 90 days there, yet apart from their geological and economic models they identified vulnerabilities in Zambia's land tenure and taxation policies that have together worked to undo the terribly weak leg of whatever legal or moral case we can ever hope to stand on.
    Since the land on which lumwana stands, falls into to the craft we created between customary and state law - Equinox managed to get us on both ends ( the got the local chief and our President) and now hold title to the land.
    What we need is to reform our land policy, the exploration of Lumwana started way back in 1932 yet who knows where the next potential Lumwana scale discovery will be made? not the chief in the area not the people in the area but only a few guys at the anglo america ,mines ministry or the president. I get sick thinking about this, should not the land in Zambia be vested in the people of Zambia! not in a corrupt President!
    Then perhaps average Zambians will take a keen interest in the exploitation of our national resources.
    Taxation/mining royalties is another pain in my neck, can we please have open, transparent discussions about these matters especially in relation to mine sales, government needs to put this process thru parliament not in some private office.

    ReplyDelete
  44. Kafue 101,
    I have read and looked forward to your posts on this discussion with great interest. I think that your contributions have been both insightful and challenging. However, I find the central premise of your argument rather disturbing.

    Are you saying that a poor country like ours should just accept and bear the consequences of an unfair contracts(signed under duress and threats of economic strangulation by IMF/WB) because doing otherwise will make us another Zimbabwe (as you imply)?

    Are you seriously dismissing our primary source of income(copper exports) as irrelevant to our national development?


    If you are, then please allow me to disagree. We all understand the need to respect and abide to the rule of law; we also know the importance of honouring contracts. But there is such a thing as a bad or IMMORAL contract .A bad or unfair law ( and all independent sources suggest that these particular agreements were tantamount to rape of a poor country) can be challenged or at the least questioned, to state otherwise smacks of fatalism and a neglect of national duty to me.

    Doing NOTHING is not an option that Zambian people can afford to take. No one is advocating Violence ,re-nationalisation or grabbing profits from Mine investors as you suggest. I say let them MAKE and REMIT their profit as the wish… but to ask them to pay a FAIR rate for that privilege seems like a reasonable request to me. WE simply have to push for renegotiation.

    Cho

    “There's not much we can do force them to obey environmental and social responsibilities if the mineral agreements they have signed has set these aside”

    Oh yes we can! For instance, We(civil society) can initiate media campaigns exposing their conduct and practices, and in these day of corporate responsibility, no multinational company wishes to be seen as environmentally or socially exploitative . Can you just imagine what one of those ‘Independent Newspaper’ headlines(sorry to those not in UK) can do with the story of western companies milking billions of dollar without paying reasonable concessions to one of the world's poorest countries?

    ReplyDelete
  45. Pandawe:
    "Are you saying that a poor country like ours should just accept and bear the consequences of an unfair contracts(signed under duress and threats of economic strangulation by IMF/WB) because doing otherwise will make us another Zimbabwe (as you imply)?"

    Answer: There are two issues here -One is a matter of perspective as to whether the agreements are unfair or not. The IMF and World Bank could argue that it made no sense for them to indirectly subsidize the jobs of 40,000 miners with the 500 million dollars of their aid. They could help many more people with $500 million (using a per capita income of $500, that would mean 1,000,000 Zambians through direct aid). So by privatizing, the government did not have to subsidize the miners jobs and are able to help many more Zambians with the money saved. Second is whether the agreements are legal or not. That is a matter for the courts. If they decide they are legal then the rule of law should be observed. To do so otherwise would create more problems down the road as investors may decide to shun Zambia.

    "Are you seriously dismissing our primary source of income(copper exports) as irrelevant to our national development?"

    Answer: No it is not irrelevant. But while copper profits can be used to jumpstart other industries, in the long run the industries themselves need to be profitable to survive. This is why many companies collapsed after privatization many years ago, they were not profitable and could not survive with subsidies. Much better for investors to start and run them and bear the risk of loss. There is much money floating around the world looking for profitable opportunities to invest in (especially from Arab countries) as this example of Dubai investing $230 million in Rwanda shows:

    http://www.zawya.com/Story.cfm/sidZAWYA20071001095008

    I would see the best use of copper money being used to improve the infrastructure and conditions such as health, education and investor friendly policies (including observing the rule of law) where business could thrive.

    So in conclusion, I would argue that patience as the existing agreements expire, higher royalty rates for new agreements and new mines will increase tax revenues in the long run while preserving Zambia's business reputation. In the meantime focus on attracting investors to other sectors of the economy especially the labor intensive ones such as tourism.

    ReplyDelete
  46. Pandawe,

    " Are you saying that a poor country like ours should just accept and bear the consequences of an unfair contracts(signed under duress and threats of economic strangulation by IMF/WB) because doing otherwise will make us another Zimbabwe (as you imply)? Are you seriously dismissing our primary source of income(copper exports) as irrelevant to our national development? "

    Yes he is.


    " Are you saying that a poor country like ours should just accept and bear the consequences of an unfair contracts(signed under duress and threats of economic strangulation by IMF/WB) because doing otherwise will make us another Zimbabwe (as you imply)? "

    Yes he is. And is that an admission by Kafue001, that the meltdown in Zimbabwe was in fact a manufactured one?

    " If you are, then please allow me to disagree. We all understand the need to respect and abide to the rule of law; we also know the importance of honouring contracts. But there is such a thing as a bad or IMMORAL contract . A bad or unfair law ( and all independent sources suggest that these particular agreements were tantamount to rape of a poor country) can be challenged or at the least questioned, to state otherwise smacks of fatalism and a neglect of national duty to me. "

    An appeal to fatalism - why would anyone do that?

    Pandawe, the question you and I ask is, why would anyone make such a tortured argument?

    " Doing NOTHING is not an option that Zambian people can afford to take. No one is advocating Violence ,re-nationalisation or grabbing profits from Mine investors as you suggest. I say let them MAKE and REMIT their profit as the wish… but to ask them to pay a FAIR rate for that privilege seems like a reasonable request to me. WE simply have to push for renegotiation. "

    There are a number of people who want to give away the country's resources for nothing, and we seriously have to wonder why.

    And on top of that, they're not even bad laws, they are bad contracts. The last time I checked contracts are subject to national legislation, not the other way around.

    ReplyDelete
  47. "Yes, because I don't know how future legislation will turn out." - Kafue001

    I think the question I was implicitly asking was - are you in favour of higher rates or not?...

    ReplyDelete
  48. Mr. K

    "Why do you want to turn your back on $4 billion in copper and cobalt exports again?"

    Because it is not other people's property. Why not as well go and grab the farms and factories that foreign investors have built in Zambia? They also have a large output. Whenever there is a big pot of money, there will always be other people figuring out ways of getting it. Without the rule of law, there would be no investment. Again look south of the border for an example.


    But there is plenty of investment in Zimbabwe, regardless of the land reform (which I think you are referring to).

    And why do you refer to land reform as 'grabbing'? We all know the history of land reform in Zimbabwe. Until 1997, there was the 'Willing Buyer, Willing Seller' reform program that was supposed to be partially subsidized by the UK government. The new Labour government then unilaterally decided to stop funding the program, and it was replaced by the 'Fast Track' land reform programme. And let's not forget that land is confiscated by the state all over the world, all the time. In the US, they are talking about the government to take land under "Eminent Domain", for the purpose of infrastructure development. What is so different from taking land for agricultural development? And I think that what the government of Zimbabwe is doing is great - they are taking a hands on approach to developing their agricultural sector.

    It beats waiting for rain, like the neoliberal MMD is doing.

    And let this be clear. No laissez faire capitalist theorist or their organisations have ever developed an economy, let alone left a society with the great institutions they like to take for granted - trade unions, consumer protection agencies, etc.


    Mr. K
    "So you would be against renegotiation if the mining companies didn't want it."

    Answer: Yes


    Enough said.


    Mr K
    "The money in the mining sector doesn't come from 'investors', it comes from the massive profits that are made, not in the least because of the record high in commodities prices."

    Answer: The profit of an investor's business is his regardless of the reason. Why not give the massive profits of Microsoft to the US govt? Because Microsoft earnings are its own, it does not belong to other people or entities.


    Well first of all - Microsoft, unlike the mining companies, actually pays a considerable amount of it's profits to the US government, in taxes. (You can check this out at www.nasdaq.com and search the company info for MSFT.) In fact, Microsoft, in 2007 payed $6.036 billion in income tax.

    Secondly, you are incorrect to state that Microsoft's profits belong to Microsoft, they belong to the shareholders, of which Bill Gates is only one. In fact, many institutions and entities own Microsoft shares, and (at least recently) are receiving regular payouts of Microsoft's profits, called dividends.


    "Zambia can only be prosperous if the majority of its workforce are productive like in the developed countries."

    Mr K-
    And how is that going to happen? Look at Asia, countries there with few resources have organized themselves and lifted themselves out of poverty by their boot straps.


    But why would we hobble Zambia's development by not benefiting from the mines again?

    These Asian countries didn't have a choice. If they had the massive natural resources that Zambia has, they would have been the first to use those for their own national development, not give them away to western corporations. (In fact if Japan had massive natural resources of it's own, it probably wouldn't even have joined WWII - that is how 'unimportant' natural resources were in Asia.)

    They didn't elect to be resource poor. They succeeded in spite of that, not because of it.

    Obviously how the population is going to reap all the benefits of the country is that:

    1) The mining companies pay taxes and (at least) share profits with the state
    2) The state then uses this money to build infrastructure and develop agriculture/manufacturing
    3) The state must monitor it's own resources in a transparant way - banks can do it, so can the state


    Mr K
    "Kafue001, why are you so determined that the mines should not be in Zambian hands?"

    Your implication with no basis as usual. If Zambia had managed the mines in a proper manner and still owned them, I would be the first one cheering them on.


    You mean, if Zambia 'deserved' to own the mines?


    And suppose metal prices collapsed tomorrow, no doubt there would be a lot of people begging the mining companies to stay and preserve jobs regardless whether they are Zambian or not.

    And suppose they don't? Suppose we have another 10 years of copper at $6000 per tonne or more?

    You can't plan on only presuming things might go wrong.

    Besides, if the copper price tomorrow collapsed to nothing, Zambia would barely be worse off than it is today - because of the contracts.

    However, if the state had a major income from the mines, they could actually insulate themselves against price drops on the financial markets - using futures and options. It is more than time that the Zambian government became a major player in the world's copper markets.

    The rule of law should be observed, otherwise investors would not have bought the loss making mines years ago and thus saving many mining jobs in the process.

    1) They didn't 'buy', they were given the mines for next to nothing and
    2) They were obviously looking at different data than what the IMF was presenting to Zambia's finance minister

    Where was the love for the rule of law when these contracts where signed, and the IMF colluded with the mining companies to give the people of Zambia a raw deal? Promising to destroy the government by withholding 1/3 of it's budget from one day to the next?

    You cannot hide behind the rule of law, when we are talking about the future of the country.

    Future generations will not look kindly upon the people who continued the nation's poverty by refusing to stand up for their own rights.

    ReplyDelete
  49. Cho,

    The "we" there is civil society and loving Zambians. If Government has signed these agreements on behalf of the people, only Government can change them. I might be wrong...

    Unless they are against other agreement the government has signed. Or unless they were made under duress, or through illegally paying bribes.

    I also wonder what international organisations like the WTO or the OECD have to say about these agreements.

    So I agree there is the government, but there are also the government's international and regional obligations.

    And haven't we gone a long way from your friend claiming it was impossible to renegotiate contracts, and that these contracts were drawn up by highly educated lawyers and therefore were beyond renegotiation? Anyway...

    I think this what the debate should be about. How do we make sure that Zambia reaps the benefits from its resources? Yakima helpfully set out 6 or 7 options. Separately, I set out my vision of a "human approach" to ownership.

    Cho, here is an idea (in case the government only wants to profit through income tax from foreign investors employees): what is there to stop the government from increasing the minimum wage in the mines to $10,- per hour?

    That would transfer resources pretty quickly. :)

    KCM has about 14,000 employees (for the sake of convenience, I will presume they are all miners). Let's presume they work 300 days per year, and 8 hours per day, which would be 2400 hours per miner per year. KCM had a turnover of $1 billion, and let's presume they have the same profitability as Equinox (60% of turnover) or $600 million gross profits. There would be a total 33.6 million hours per year (14000 miners x 2400 hrs/miner).

    If all those profits were paid out as wages, that would be $17,85 per hour (or $600 million profits / 33.6 million hours worked).

    Is there any law that would stop them from raising the minimum wage in the mining sector only?

    Obviously, these are ballpark figures, but they show the scale of things.

    At least the profits would end up with the miners, and the government would finally have a legitimate excuse to rely on PAYE for benefiting from the mines. Also, the government would not be involved with the running of the mines, and there would be no political oversight, just the basic labour and environmental regulations.

    I guess what I am saying, is that the government's current approach of depending on PAYE to benefit from the mines, would only make sense if they massively increased the minimum wage.

    ReplyDelete
  50. MrK,

    As you know I agree that the minimum wage needs to be enforced and I have previously exchanged views with Murray on this. See the blog here. Mining companies are local monopolies, a minimum wage properly enforced on them may even raise both employment and wages.

    But as you would have read theblog A human approach to the “Mining Debate” you are also aware that minimum wages on their own without adequate legislation on the environment and general safeguards for workers in terms of safety and so forth would be bad. The mining companies would simply pay higher wages and make up the difference through poor safety and greater pollution of the local environment.

    MrK this is why I oppose simple solutions like "higher royalties" or "higher wages" or "higher environmental" taxes. What Zambia needs is a holistic look at the who issue of mining. We need a framework not piece meal solutions.

    Now I just want to say that part of the problem is also that we equate more revenue with development. The two are not the same. If ultimately what we want is development, then we need a framework that delivers the entire package.

    Another point you should note is that higher wages may not even help local communities. Most people who work in these mines emigrate there. They aren't even locals. So higher wages won't help them. We need a framework that rewards the three players : local community, workers and the owners.

    The word is FRAMEWORK.

    ReplyDelete
  51. MrK this is why I oppose simple solutions like "higher royalties" or "higher wages" or "higher environmental" taxes. What Zambia needs is a holistic look at the who issue of mining. We need a framework not piece meal solutions.

    And I'm not saying that this is the solution. I was just wondering whether all the opponents of changing the agreements were against parliament massively raising the minimum wage in the mines as well.

    And whether it would be legal to raise it for one sector of the economy alone.

    Also, the government is determined to only benefit from PAYE, so it would make sense to keep in mind raising the miners incomes to where it is close to most of the profits made by the mines. :)

    I hadn't seen anyone make that argument.

    Another point you should note is that higher wages may not even help local communities. Most people who work in these mines emigrate there. They aren't even locals. So higher wages won't help them.

    Although they would send/take money home. I agree that their cost of living would be spent locally.

    And there is a certain fairness to it - the people who work hard and risk their lifes and health would be the ones compensated first.

    We need a framework that rewards the three players : local community, workers and the owners.

    I wouldn't worry too much about the owners. They can handle their interests all too well.

    Now I just want to say that part of the problem is also that we equate more revenue with development. The two are not the same. If ultimately what we want is development, then we need a framework that delivers the entire package.

    I agree - having said that, it would also take a sufficiently aggressive attitude to renegotiating the mining agreements. Or finding alternatives that will make sure the maximum benefit goes to society and the economy.

    Also, the developments in the DRC are interesting.

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  52. Mr K:
    "Secondly, you are incorrect to state that Microsoft's profits belong to Microsoft, they belong to the shareholders, of which Bill Gates is only one. In fact, many institutions and entities own Microsoft shares, and (at least recently) are receiving regular payouts of Microsoft's profits, called dividends. "

    By Microsoft, I of course mean its shareholders, because all companies have shareholders. What I am saying is that the profits do not belong to other entities besides Microsoft's shareholders. Similarly mining companies also have shareholders and the profits belong to them, not the mining companies per se.

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  53. Cho,

    I have re-read A Human Approach To The Mining Debate.

    What strikes me is that as long as we don't have things in our own hands, we will always run after the facts.

    The mining prices are low, so the mines are sold. The mining prices are high, so now there are greater demands by workers and society.

    These problems wouldn't exist if the state just owned the mines, and leased operations to mining companies whenever the conditions were right.

    That would also imply that the state would create conditions where it's operations are completely transparant.

    The 'oh, we don't have the capacity' excuse is just that - an excuse. The Zambian state doesn't have the capacity to monitor or check environmental and labour standards? I would say they don't have the will - it is a political decision.

    We have to stop trusting the companies, and start trusting the state. I think that is where the problem is. That would imply that the state starts to get serious about corruption - not just prosecutions by the task force, but monitoring payments and income; clearing up the land ownwership issue; starting to devolve powers (of oversight) to parliament and the media; start to empower it's existing institutions like the ERB and other regulations boards.

    I think many of the right laws and institutions are already in place, but what is stifling them is the overbearing power of the presidency and the minister of finance - in appointing officials, in overriding laws, in making agreements without oversight, etc.

    In a labour surplus economy such as that of Zambia, arguments for high wages and guaranteed benefits and social security for all employees, goes against sound market principles. We need to avoid confusion and misrepresenting the employment problem. Pay and conditions are not the issue. People need employment and a regular income to meet their needs. Working conditions and job security depend on the overall performance of the economy and the ability of the firms to pay. When considering demands to prohibit casualisation in Zambia we should not ignore the need for labour market flexibility and employment creation.

    The government could create works projects where most of the profits go to workers salaries. That would both alleviate unemployment, increase incomes of people and stimulate the future production/manufacturing of consumer goods.

    On the issue of infrastructure created by mining companies...

    I think the mining companies will always do that particular spending that only benefits their operations - to them, infrastructure is costs, and the fewer costs they have, the better. If infrastructure is to develop nationwide, the money will have to be directed by the government, to institutions that operate nationwide, such as local government. It seems to me to make much more sense to pay local government from revenues the state collects, and authorize them to develop local infrastructure, taking into account the will of the local people and their needs.

    So again, it seems to me that the case is for more government revenue, not more infrastructure creation by the mining companies. Of course the government can always hire the mining companies to create infrastructure, but it will be from money paid to them first.

    So my framework would be:

    - central government reform
    - empowering local government
    - having the mines pay more than their fair share

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  54. Kafue001,

    By Microsoft, I of course mean its shareholders, because all companies have shareholders. What I am saying is that the profits do not belong to other entities besides Microsoft's shareholders. Similarly mining companies also have shareholders and the profits belong to them, not the mining companies per se.

    Point taken, and I apologize. However, there is no law against the government owning Microsoft shares, or any of the mining companies shares as compensation.

    Although that raises the prospect of the government ensuring they properly declared their profits - something they don't today because of all the exemptions in the mining contracts.

    And government ownership of shares is one big solution.

    What do you make of SAUDI ARAMCO, the now fully state owned oil company.

    Basically, they started off as ARAMCO, with the Saudi government owning 25% of shares. Their government then made use of the massive profits they reaped during the oil crisis of the 1970, and bought up shares until in 1980, they owned 100% of the company and changed the name to SAUDI ARAMCO.

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  55. MrK,

    Actually, there's nothing wrong with your framework. It can also work.

    What it come downs to is which framework would be more "efficient" in delivering development not just higher revenues.

    By efficient, I mean minimises corrupt activities, has better checks and balances and remains responsive to changing circumstances at the local or person level.

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