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Saturday, 17 November 2007

Quote of the week (Prof Oliver Saasa)

We should push more for the re-negotiation of development agreements than mineral loyalties because we can benefit more from the development agreements. The slowness taken by the government in the re-negotiations should be of concern to all of us....Government should give regular updates on the re-negotiation process. We want to know what is happening....We expect to benefit more.....To some extent, the mineral loyalty is based on production; the higher the production the higher the benefits from mineral loyalty.....Within the next four to five years we expect over one million metric tones of copper. That is the expectation from Lumwana mine. Therefore, when we increase the output, we will expect the increase in the loyalties. So we should not be so disappointed with the current amounts of money from mineral loyalties. In fact, mineral loyalties are lower than development agreements, for me I would rather we concentrate on re-negotiating development agreements.

Professor Oliver Saasa [Post 17/11/2007]

Professor Oliver Saasa clearly aiming his artillery on the bigger prize - the mineral agreements. The SCIAF / Christian Aid report seems to have awoken a new level of Zambian consciousness. Let us hope this new found sense of economic patriotism comes with some concrete proposals on how the mining resources should be managed. We need concerned Zambians not just to complain but propose models that would deliver a fair share to our local mining communities and the mining workers, while recognising the crucial role that foreign direct investment has played in reviving our mines. A future and more sustainable mining industry requires a model that all Zambians will accept regardless of the government of the day. This is what will give the foreign investors long term security and greater incentive to invest, not cheap 3% deals made over a bottle of Mosi.

17 comments:

  1. If news outlets are correct, our neighbours to the north, DRC, have given foreign investors two options; renegotiate the contracts or they are terminated. I wish Zambia could have such courage, yet phrase that ultimatum more diplomatically. This whole mining thingy is being made to sound more complicated than it really is, especially from statements made by Nawakwi quoting the so called experts. All we need is a FAIR MARKET VALUE for our minerals, plain and simple. It is not complicated to do a research and find out how much copper deposits cost. How much is the average cost per ton of copper ore in North America, in Asia, in South America, in Australia, and then compare to what we sold our reserves at. If we do our homework and present data to the investors, they would have to have hearts of stone not to listen to our cries, which would later have to turn into demands. One of the biggest problems we have right now is Levy's blind worship of the investors. He thinks they like him because he speaks well of them. Once their business is finished in Zambia, the investors would say, 'Levy who?'. Levy needs to undrestand the game of capitalism before he plays it. Right now, he and his team do not. They are playing a game they do not know how to score. How do you win then?

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  2. Fitty,

    One of the biggest problems we have right now is Levy's blind worship of the investors. He thinks they like him because he speaks well of them. Once their business is finished in Zambia, the investors would say, 'Levy who?'.

    And maybe a few bribes were paid along the way?

    Don't rule out the possibility (probability?) of corruption.

    This whole mining thingy is being made to sound more complicated than it really is, especially from statements made by Nawakwi quoting the so called experts. All we need is a FAIR MARKET VALUE for our minerals, plain and simple.

    And own them, which is they key to being in control. Much of these prospecting concessions should be repealed, and ownership should be placed back into the hands of the state.

    If we do our homework and present data to the investors, they would have to have hearts of stone not to listen to our cries, which would later have to turn into demands.

    Except that is not how things work. Under US law, companies are mandated to maximize profits. If they don't, at best their management gets fired, at worst they get sued and go to jail. They must maximize the profits, which also means they must minimize costs.

    I suggest getting hold of the Bernard Ross book "Negotiation", which can be bought at Amazon.com. Negotiation is not about pleas for sympathy, but about making sure the other side has no options left. It is economic warfare.

    That is why I get so irritated by the phrase 'getting a fair deal'. If you are getting a fair deal for the other side, you haven't done your job and probably got screwed. And as I have pointed out, in the US, it is illegal to make a nice deal with the other side of the negotiations.

    I am saying that the best deal is the one you can just about get away with. That is how the mining companies approached Zambia, by the way. They (with the help of the IMF) saw a deal where they had to pay no taxes, share no profits, had no obligation to put in infrastructure or do any social spending, and were not required to re-invest any of the profits in the country.

    And they took it without thinking twice.

    I would be negotiating with the army at the ready to nationalize the mines. :)

    Levy needs to undrestand the game of capitalism before he plays it. Right now, he and his team do not. They are playing a game they do not know how to score. How do you win then?

    On playing the game of capitalism, I would like to see the government make use of the boom and bust cycle for long term investment purposes. When commodities prices are high, increase the production of copper by opening more mines and make all the cash they can. When prices are low, close those mines and use the cash to buy more mines for when copper (and other mineral) prices go higher again. The state of Zambia would end up being very rich.

    Instead, all the cash is going to foreign mining companies.

    But then, this government doesn't even plan it's fuel supply.

    The problem is extreme short term thinking, and I think the present system is to blame. There is way too much power in the hands of the president and the minister of finance. The only long term thinking seems to come from the UN and it's 'development goals'.

    There should be a commission that is independent of government, and that has power to direct the state's long term investment and development strategies, beyond the 5-year election cycle.

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  3. On paper Zambia has the highest number of foreign investors. I mean it is so easy for a foreigner to walk in Zambia without any money and register as a foreign investor. There were some companies that bought the mines that did not even come with money. They were only armed with a business plan, and they were given the mines. After their bids to own the mines were successful, they were able to get loans from Zambian banks.

    Why not encourage local business people to form a company and get the mines under the same terms and lend them money? The argument at the time was that foreigners brought with them new knowledge and technology.

    If the infusion of foreign cash was tangential to the transfer of knowledge and technology, it would have made sense to lure many of the Zambian engineers living abroad to team up and form companies.

    The biggest problem is that we tend to think foreigners are better people than us, so that even when they are shipping all the profits out of the country, the government the government hides its true feelings behind the facade of head-scratching and grinning.

    There is need for government to be courages and tell those people that inherited the country's family silver that they needed to renegotiate else the government will renationalize the mines.

    That may give the country a bad image, but it is the right thing to do.

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  4. Sorry, I meant to say on paper, Zambia has the highest number of foreign investors in southern Africa, excluding South Africa.

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  5. Nkhula21,

    There is need for government to be courages and tell those people that inherited the country's family silver that they needed to renegotiate else the government will renationalize the mines.

    That may give the country a bad image, but it is the right thing to do.


    Actually it won't even give the country a bad image. It are only the people who have made cushy deals with the mining companies that act scared when it comes to Zambians actually getting paid for their minerals.

    This whole obsession with 'foreign investors' and 'foreign direct investment' comes from the willingness to please the IMF. They made 'FDI' into their mantra, when they wanted to have a 'one policy fits all' for all developing countries. They want the whole world to follow Singapore. Well Singapore had it's own problems, which it solved with it's own solutions, of which FDI was one.

    But for Zambia to go this route is insanity. Everything Zambia has is right there. The massive natural resources should be in the hands of the government and used to invest in infrastructure, agriculture and manufacturing. That is the only way the country is going to move forward.

    And to come back to it, tough renegotiation of the mining agreements will not only not make Zambia look bad, it will make it look good. It will show to the world that it will stand up for it's own interests, instead of being easily manipulated and pushed around.

    Nelson Mandela, Thabo Mbeki, Kenneth Kaunda, these people are respected not because they tried to be 'good boys' to the west. They are respected because when they say something, everyone knows they come from a standpoint of integrity. They have made up their own minds and as such, they speak for all right thinking people. You may disagree with what they say, but there is no question that they are speaking their own mind.

    Too bad there is no impeachment in Zambian law, or people could be at least indicted by parliament for abdicating their duties.

    Why not encourage local business people to form a company and get the mines under the same terms and lend them money?

    That is the model that should have been followed.

    There is this notion that investors 'bring money' - the truth is that they take much more than they bring - which is why they're investors.

    The truth is that local entrepreneurs should be borrowing against the value of the resources they have bought a concession to. Not one big investor, but hundreds of thousands local miners.

    Unless of course the state has a major interest in the mines, and handles it's money in a transparant manner and uses it for investment in infrastructure and agriculture.

    Either model would be better than what is going on now.

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  6. MrK,
    You really understand today's world. What really intrigues me is the fact that our government doesn't get.

    When you talk about Mandela, Mbeki, Kaunda, and if I may include Desmond Tutu, their words carry weight because they do not only speak intelligently, they engage the world in meaningful debate. In short, they are true leaders.

    That is the reason why the international media is always interested in what they have to say. Right now we do not have anyone like that in the hierarchy of our government.

    Then what we have in parliament is a bunch of greed deadpans, including opposition MPs, representing their families as well as their own stomachs. That is what matters, it seems, and not the welfare or the future of the nation.

    Poverty levels have been at 80 percent, with unemployment at 50, if not more in the last ten years. The question is whose interests does our government represent? In a country where people are so poor, how come the economy is growing 5 percent on average per annum? How many jobs does the economy create in a year? How many among those with jobs are able to save?

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  7. And to come back to it, tough renegotiation of the mining agreements will not only not make Zambia look bad, it will make it look good. It will show to the world that it will stand up for it's own interests, instead of being easily manipulated and pushed around.


    Radical approach, sensible approach, but world markets are not kind to such thinking by an African country.

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  8. Anonymous,

    Radical approach, sensible approach, but world markets are not kind to such thinking by an African country.

    Proof??

    Because I am getting sick tired of people telling me what can't be done.

    And I completely detest people who are trying to keep people down and poor by trying to manipulate their minds. To me, that is evil.

    I have been assured that the mining contracts cannot be renegotiated, because the lawyers that created them were too smart, and too well educated, or that it would make the country look bad, and what not. All of it complete nonsense. Because all of a sudden, the DRC, Tanzania, let alone numerous countries in South America, are renegotiating their mining contracts.

    And I have had no apology for that.

    So until an apology is forthcoming, I want to see some well argued proof of why this can't be done.

    The ball is in your court.

    (And by the way, if in some way there was a break in supply of copper from Zambia, world markets would react with higher prices for copper - and that can't be bad for Zambia.)

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  9. MrK,

    I agree with you completely about the scale of the injustice of foreign ownership of the nation's primary source of export production. I also agree that the only real barrier to a truly just solution to the situation is a lack of political will.

    Without resorting to Sakism and concluding that the examples of other nations are necessarily good for Zambia in particular, I do think that the present climate of mineral contract renegotiation throughout the South makes it easier to undertake similar measures at this juncture. It may also be an opportune moment in history in which to forge international organizations which can help ensure long term supply and pricing of mineral resources such as copper and uranium. It is unclear what the long term effect on FDI and lending flows would be, but I do tend to agree that a strong negotiating stance which places a high value on the national resource base would tend to attract the right sort of investor, albeit likely in smaller numbers.

    I should point out that the positive role that FDI has played in the revitalizing of the mining sector is in provision of capital in large quantities in a timely fashion. For example the amount borrowed from various lending institutions by foreign mining firms, rather than raised by sales of stock, appears to be at least equal to the entire Zambian commercial banking sector. Either it would have taken longer, or been done on a smaller scale, or starved other areas of the economy for capital, or resulted in unsustainable borrowing by government, or unsustainable tax burdens on citizens, or a combination of any or all of the above. That said, I agree with you that the level of incentive offered to investors by the IMF and the government was excessive, and someone would have come anyway under stricter agreements because they simply want the copper to meet the world demand.

    There are a few problems associated with the perceived overpricing of a particular resource in world commodity markets, such as the increased viability of previously uneconomic alternative materials, or the inflationary pressure on the domestic sales of items requiring the resource. It does not appear that copper is currently facing undue pressures from such factors however, and I think the price would have to go significantly higher before it began to show ill effect. Regardless, the mining sector is where it is, as is the copper price, and the agreements are what they are. I agree that one of the things they are is renegotiable. We shall see if the current crop of politicians will produce sufficient backbone and pride to get it done.

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  10. Yakima,

    I agree with you completely about the scale of the injustice of foreign ownership of the nation's primary source of export production. I also agree that the only real barrier to a truly just solution to the situation is a lack of political will.

    Without resorting to Sakism and concluding that the examples of other nations are necessarily good for Zambia in particular, I do think that the present climate of mineral contract renegotiation throughout the South makes it easier to undertake similar measures at this juncture. It may also be an opportune moment in history in which to forge international organizations which can help ensure long term supply and pricing of mineral resources such as copper and uranium.


    This is a twofold issue.

    1) There should be action from the AU, SADC and other regional organisations to regulate the trade in commodities. No country should be able to be played against another by mining companies. If they don't adhere to certain standards of behaviour in one country, they shouldn't be able to go to another country.

    2) There should be regional commodities markets. Why doesn't Zambia have it's own futures exchange, when it is exporting up to a quarter of the world's copper? If contracts were traded in Kwatcha, think of what that would do for the local currency. Everyone who wanted to buy copper in Zambia would have to exchange dollars, euros, etc. for kwatchas.

    It is unclear what the long term effect on FDI and lending flows would be, but I do tend to agree that a strong negotiating stance which places a high value on the national resource base would tend to attract the right sort of investor, albeit likely in smaller numbers.

    What I have never understood is what the big investor's alternatives would be. Zambia has massive copper deposits that are also very high grade, and accessible without expensive deep mining, so it should be able to top dollar, no matter what. But if you listen to the ministers in question, the government just had to give 0.6% tax on turnover.

    To me, either the people in question didn't understand the mining industry (doubtful, with Zambia's many engineers and mining experts), or they were bribed. Which may explain why they won't move on anything quickly.

    There has to be a solution to this problem. Maybe an outside commission, or pushing for the Freedom Of Information bill so the minign agreements are made public.

    But there has to be a way out of this impasse. Zambia is losing money every second the mines are not paying everything they should.

    I should point out that the positive role that FDI has played in the revitalizing of the mining sector is in provision of capital in large quantities in a timely fashion. For example the amount borrowed from various lending institutions by foreign mining firms, rather than raised by sales of stock, appears to be at least equal to the entire Zambian commercial banking sector. Either it would have taken longer, or been done on a smaller scale, or starved other areas of the economy for capital, or resulted in unsustainable borrowing by government, or unsustainable tax burdens on citizens, or a combination of any or all of the above.

    I am sure that is so, but it also brings us back to the issue of investment for investment's sake. Without a major benefit to the economy and the people, why bother attracting FDI at all?

    That said, I agree with you that the level of incentive offered to investors by the IMF and the government was excessive, and someone would have come anyway under stricter agreements because they simply want the copper to meet the world demand.

    We should really find out first hand why that was, so it won't be repeated.

    Secondly, we should be getting mineral rights back from all the concessions that were (corruptly) given away by those in government. The Post hinted at this issue.

    (From the most recent prospecting maps, which we have had sight of, it will baffle any Zambian to know that almost the entire country mineral resources for prospecting and/or mining have been given away to a few foreign mining companies. Today, very few prospecting or mining licences are being held by Zambians.)


    There are a few problems associated with the perceived overpricing of a particular resource in world commodity markets, such as the increased viability of previously uneconomic alternative materials, or the inflationary pressure on the domestic sales of items requiring the resource. It does not appear that copper is currently facing undue pressures from such factors however, and I think the price would have to go significantly higher before it began to show ill effect.

    However, I haven't seen a replacement of copper even in that industry yet. And for regular wiring, copper still seems to be the cheapest and most available material. It is the Chinese need for copper that is driving much of the rise in the demand and price.

    Also, did you know that IBM has created computer chips with copper wiring (also see IBM's website)? It conducts electricity much better than the present aluminum wiring - which would be another industrial market for copper. Now if Zambia would attract an IBM factory, so Zambian copper could directly be manufactured into computer chips, and the chips exported...

    At the same time, the answer the price of copper being too high for too long, is to simply increase production.

    Regardless, the mining sector is where it is, as is the copper price, and the agreements are what they are. I agree that one of the things they are is renegotiable. We shall see if the current crop of politicians will produce sufficient backbone and pride to get it done.

    They are renegotiable, especially when they seem to be in contravention of other international agreements Zambia is a signator to, like the OECD guidelines. Or the undue pressure put on the government by the IMF.

    And more than that, they are enforcable. Even within their existing framework, there are stipulations of price participation, which should have kicked in years ago (I believe when the price of copper rose above $2000 or $2700).

    Also, has a mininum wage for miners been addressed - which is another way in which the country could benefit. My rough estimate is that every miner produces $17,50 per hour in profits. That could be reflected in their wages to a greater exent, allowing the government to benefit through PAYE income tax of miner's incomes.

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  11. Just to add, from the same article:

    And in a handful of these foreign companies which hold most of the licences, a few Zambian elite either hold honorary directorships, legal advisory or have been given negligible share options. Perhaps these few Zambians have been asked either to front the foreign mining companies’ local operations or to help them “facilitate” with the government bureaucracy.

    Bought and paid for sounds more accurate.

    They are elected to reprent their constituencies, not some mining companies. Isn't that high treason, or some version of 'high crimes and misdemeanors' (i.e., abuse of office)?

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  12. MrK,

    Not to belabor the point as I think we are in fundamental agreement about the nature of the current situation, but the potential for spikes in price to significantly affect long term worldwide demand is out there over the horizon.

    "At the same time, the answer the price of copper being too high for too long, is to simply increase production. " -MrK

    For producers, yes, however for copper users the response may be to use less. According to the USGS, US copper production was 1.22M tonnes in 2006, worldwide production was on the order of 15.3M tonnes. Zambia's share of that total is actually rather modest, and will push into the realm of 7% when the 1M tonnes/year mark is reached. The key for Zambia is that many countries which produce as much copper use it all domestically and more (China produces 750K/year), so the share of the total export market is much higher than the average, as well as the potential for growth.

    The danger kicks in if copper prices spike to a certain level, then a country like the US (which throws as much copper into landfills each year as they import) may take serious steps to become more self sufficient, with long term effects on worldwide import demand. For example, the electrician wiring our lights yesterday told me he saves all the clipped copper wire ends from his jobs and sells them as a lot each month for as much as US$200. A German toaster manufacturer has discovered that it is cheaper to have customers mail their old or broken toasters back to the factory for disassembly than to pay for new parts, primarily wiring. If these practices become ubiquitous in markets like Europe and North America, then worldwide demand will likely slump in spite of Asian growth.

    Likewise the capacity of other exporting nations, primarily Chile (with over 5M tonnes/year and ten times the reserve base) to ramp up their own production in the face of any increase in demand (or reduction in Zambian supply) makes securing some degree of international cooperation on overall extraction rates crucial if strong negotiating tactics are to have teeth. I like your ideas about solidarity within the AU and SADC, in order to present a united front to extractive companies in general. However I also think it is important to explore connections with other principal copper exporting countries, the most influential of which are on the West Coast of South America.

    I think it is important to discuss this long term potential for changes in the balance of trade because it is one of the arguments which the nay-sayers are likely to employ in attempting to veto the use of strong tactics at the negotiating table. There must be plausible solutions to allay their fears or demonstrate them to be baseless if such attacks are to be successfully deflected or debunked.

    Is the copper price currently anywhere near high enough to prompt immediate widespread changes in consumption patterns? No, I don't think so because demand is growing so quickly and copper is not the primary resource cost in the manufacture of most consumer items. Therefore even large percentage changes in the copper price have only small percentage inflationary effects on the costs of most goods.

    Can transnational mining companies replace Zambian copper supply with increased production in other countries? Yes, but not cheaply, and not on any better terms than they would get from Zambia if agreement had been reached between the nations on a common negotiating position in advance.

    Here's one I am not confident that I can answer: Can the domestic economy withstand closure of some or all of the mines for any appreciable period of time in the event of a deadlock following escalation of negotiating stance?

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  13. Yakima,

    "Here's one I am not confident that I can answer: Can the domestic economy withstand closure of some or all of the mines for any appreciable period of time in the event of a deadlock following escalation of negotiating stance?

    In the short term, the effect of the mines is minimal - thanks to the mining contracts. Also, any effect could be minimized by negotiating mining company by mining company. Pick them off one by one, so to speak.

    In the future, if there was enough diversification, it should be possible to close some or most mines on a long-term basis, just to hold on to the reserves until the price rises again.

    The key is that money from the mines is used to create jobs in agriculture, manufacturing and other economic sectors.

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  14. MrK,
    For some time the economy of Zambia survived without the mines, that was soon after privatization. At the time, government looked to Zambia Revenue Authority and Zesco for the revenue it needed. Donors supplied the rest of the money in order for the budget to balance.

    It probably explains the reason why poverty levels in Zambia are still in the 80s. The economy is not at full speed because of what is happening at the copperbelt. You should remember that Chiluba gave new mine owners tax concessions of up to about 20 years. Other than the fact that there are some Zambians employed by the mines, and that small businesses on the copperbelt are feeding off mining activities, there is no substantive contribution from the mines to the economy.

    Zambia is currently at an inflection point. If you understand the history of the Zamban economy and how we accrued unsutainable foreign debt in the 1970s and 80s, you must be apprehensive about what is happening in the mines as well as the global economy.

    At the time (in the 70s/80s) the benefits of high commodity prices on the world market were undermined by high oil prices. In the preceding years our government was borrowing money for capital projects, which actually made sense given the fact that the country needed infrastructure. Eventually government started using borrowed money to subsidize the high retail price of gas (petrol), and then general consumption.

    Currently the economy is in double jeopardy when it should have had an opportunity to expand rapidly in the wake of near-total foreign debt remission. Government, or is it the economy, is not benefiting from high copper prices because of the bad contracts, and the price of oil is soaring. I pay $35 at the current price to fill up my mid-size sedan in the North East of the United States, considered the most expensive, while Zambians pay more that three times for the same tank. One might argue that not too many Zambians drive, but remember that the price of oil virally affects both the micro macro parts of the economy. In Zambia's case, commodity prices go up while wages remain static.

    In short, if existing economic activities were complimented by mines that substantively contributed to the Zambian economy, GDP growth would probably be above ten percent. In that sense the effect of high crude oil prices would have been cushioned.

    If the economy of Zambia has steadily grown around 5 percent on average in the last seven years or so, and the percentage of poverty levels is still the same, it tells you the economy needed to grow more than 10 percent in order to lower poverty levels. That can only be achieved if that is what government is targeting. One way of doing that is renegotiating the copper mine contracts.

    Friends I would also like to introduce you to the website I edit www.integritynewz.com

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  15. Nkhula21,

    Other than the fact that there are some Zambians employed by the mines, and that small businesses on the copperbelt are feeding off mining activities, there is no substantive contribution from the mines to the economy.

    And I think it comes down to that. When all is said and done, why is FDI supposed to be pursued, when it brings no actual benefit to the economy.

    I haven't heard the government comment on that at all, which in itself is suspicious.

    The more the government drags out even the negotiation on the mineral royalties tax, which is insignificant, the more money the mining companies make that isn't properly taxed.

    There are noises from (for instance) Terje Vigtel, and the rest of the donor community, that something has to be done about both corruption and the mining agreements.

    The donors are the ones pulling the purse strings, so maybe they are the key to getting the government to move.

    Zambia shouldn't be dependent on aid (which come with strings attached), when it has the mines (which would represent independent income).

    Just to lessen the tax burdon on the workers, the mines should at the very least start to pay their taxes as well.

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  16. MrK,
    There is a story on the Post website saying government has started renegotiating the mines. I have not read the details, but my hope is that the interests of the country will come first.

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  17. Nkhula21,

    Check out the blog, maravi.blogspot.com.

    I hate to say it, but this is why The Post should never have gone subscription only. I don't begrudge them anything, but these issues affect everyone.

    They are the only game in town when it comes to detailed reporting. Where is The Times or the Daily Mail - nowhere. AWOL. Not a word, as if this is just the government's business.

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