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Monday, 15 December 2008

A Lumwana MFEZ?

The mysterious world of Zambian MFEZs continues. I must have missed the annoucement that Lumwana is now a MFEZ. This article notes that the"establishment of a MFEZ at Lumwana Mine in North-Western Province was progressing well". I had read that Solwezi was declared an MFEZ. Lumwana , Solwezi....same thing, no? Well, no because according to Mr Mutati all that remains is the "need for Lumwana Mining Company to apply formally to the Government for incentives". If I was cynic, I would say these MFEZs are now beginning to sound like a ploy for the mining companies to simply avoid taxes (especially at this critical time for them). Perhaps now is the time to ask : Is it the GRZ's policy to turn all of Zambia into an MFEZ?

I shall not bore the reader on my worries regarding the MFEZ model. But the interested reader may want to check a number of related posts :
A Zambian Shenzhen or just another DA?
Is "export led growth" overrated?
Is Export Led Growth Passé?


  1. MFEZ tax exemptions are for a limited number of years for the companies, not for perpetuity.

  2. Kafue,

    How does this differ from the Development Agreements which were so roundly criticized by so many for so long as insufficient to provide adequate return from the last round of mining concessions?

    Forgive me, but I feel that it is insufficient to simply say that the exemptions are for a limited number of years, and that Zambia will be able to profit in the long term once exemptions expire. This is simply because mines are finite, and the time it takes to fully exploit them is getting shorter and shorter as technology improves. Therefore there is a significant difference in absolute total return to taxpayers for a mine with a working lifespan of 25 years between an exemption that lasts for 5 years and one that lasts for 10 years. This is not tax deferment, it is tax forgiveness. The usual excuse is job creation, but then agreements are signed which do not in any way guarantee jobs in adverse market conditions, as we are seeing now.

    Now if they were exemptions to build smelters and factories and workshops to churn out finished goods made from copper and associated alloys, facilities which could be producing long beyond the lifespan of any one mine (or all of them, as an element copper is almost infinitely recyclable/recoverable out of alloys), then I could see the argument. I fail to understand the point of allowing companies to export finite resources tax free simply because they are not as profitable as they have been in the past and failed to adequately finance their operations so as to weather market shocks. What purpose does the export of copper ore serve other than to generate income for Zambians (and large holes in the ground beside mountains of potentially toxic tailings)? Otherwise it seems better to leave it in the ground until everyone else has dug theirs up. At least then the next generation will have something to look forward to.

  3. Yakima,

    We don't know yet what the tax exemptions apply to, since the article does not provide detail. So it is premature to say that we will be losing tax revenue from mining.

    The closest info I can see from the articles are:

    "We are looking for a cocktail of companies that will add value to our raw materials to use the Chambishi zone."

    "Mr Mutati also disclosed that the establishment of a MFEZ at Lumwana Mine in North-Western Province was progressing well.
    The minister said infrastructure development at the site was currently being worked on.
    He said about 15 companies from various industries had shown interest to set up operations at the site."

    I speculate maybe the smelting operations at Lumwana from Lumwana mining company may be covered.

    These MFEZs are very important because other countries such as Ghana and Mauritius have established them, so Zambia is competing for business with them.

  4. Kafue,

    "These MFEZs are very important because other countries such as Ghana and Mauritius have established them, so Zambia is competing for business with them."

    I am sure you wrote this very fast!

  5. Kafue,

    Brevity is not my strong suit, so I will not try for it, nor blame you for choosing not to take the extra time. I like your second post much better than the first, at least now you sound like the questions are actually important. In your first post, which prompted my tone in response, you appeared to me to be dismissive of Cho's concern over sudden announcement of apparent extension of the range and scope of MFEZ's without any sort of prior public scrutiny or comment.

    I have been following Cho's blog for years now, and I am certain that when he said, "I must have missed the annoucement..," that he was being sarcastic. In my experience this is simply not the sort of thing that escapes Cho's sources and filters. Anything involving the Lumwana Mine and Solwezi MFEZ has been of particular interest and accorded special attention since the early planning stages of both projects. I can recall scrutinizing Equinox documents with the same critical eye then as I view biodiesel development partners now. If I recall correctly, a large portion of Equinox eggs are in the Lumwana basket, and they are hardly a dominant player in international mining circles. They require a fair shake and consistent improvements in power and transport infrastructure to maintain long term competitiveness, however they are hardly in a position to write off their investment in Lumwana entirely so if they require further concessions surely they can articulate their reasons why. I suspect that they have, and it is merely common practice within government and the press that has prevented it from becoming common knowledge prior to now.

    I have no doubt that capitalism and market economics has been good to you personally, and I suspect that you have earned yourself a degree of economic freedom as a result of your talent and expertise. I think you may be assuming things about my position which I do not intend, so I will take this opportunity to clarify. I am a capitalist. That is how I make my living. I wake up to market reports every day, because they affect my bottom line. I have diversified interests, both financial and philosophical. I believe that Zambia and her people are fully capable of "passing the peloton" of world economics within a few generations, if the human and natural resource base is properly leveraged in a way which is superior to her competitors. My objections to what I interpret as the tone of your comments has nothing whatsoever to do with a lack of belief in markets, entrepreneurs or self-interested economic actors at any scale.

    My worry is that you are too pessimistic, and feel that Zambia's role is only to follow rather than lead. I see a very different picture, if I tilt the lens from the perspective of an entrepreneur. I think that Zambia represents enormous unrealized gains, untapped markets, and enviable stability amidst diversity. Circumstances which make that realization and tapping of these markets difficult only highlights the opportunity for exclusivity, which to me helps explain why many who are willing to accept the perceived risks of investment from abroad are also interested in securing whatever anti-competitive concessions from government that they can. Unfortunately, for unscrupulous actors, the fact that engaging in corruption to achieve their ends will in itself help sour the international perception of the Zambian market and discourage other entrants is bonus, not disincentive.

    One of the things I talk about a lot is "potential for fraud" by persons of authority over shared resources, which is a key component for corruption in both the public and private sectors. I think if you re-read my comment and Cho's original article, you will find that he does not make assertions of tax exemptions in perpetuity, nor do I claim that tax revenue from mines will be lost as a result of this MFEZ (though I do point out how they could be lost). We don't know, and I feel we should have been told, which is why we are asking somewhat pointedly. Cho manages to point out many things in a brief span, based on a lexicon of his own prior public statements, which is part of what makes him a good blogger. Here's a few that I can pick out:

    1. There is a history in Zambia of the public finding out about development agreements involving tax breaks to corporations (usually headquartered in other countries) only after government officials have already signed and declare all subsequent governments (or generations) bound by it. It can be argued that this applies equally to the colonial period, raising questions of the ability of the constitution to deliver democracy.

    2. No exception to the historical pattern, there has been no prior public scrutiny nor comment on the terms of the now announced Lumwana MFEZ, already well in progress, and negotiations apparently underway with a dozen companies.

    3. Mr. Mutati claims that the only remaining barrier to establishment of the MFEZ is a formal application from Lumwana MC, to request incentives for itself. Absolutely no mention whatsoever is made of concessions or requirements made of these companies, the only one of which is named is Lumwana MC.

    4. Potential for fraud is more likely to be exercised when the individuals involved are under greater stress, and the rapid decline in copper prices in conjunction with the global credit contraction is a source of stress for both the public and private sectors in Zambia right now. Lack of prior public disclosure of the terms of negotiations is widely cited as a contributing factor to the relatively high level of quid pro quo and other corrupt activities in African development agreements.

    5. Why should development oriented tax breaks be so geographically oriented? Why should there be one tax regime for certain companies in a certain part of the country, rather than for those in a certain market sector, or even all companies in the entire nation? Is there a plan at work, and if so, what are the likely long term outcomes? How does that compare to modeled alternatives?

    Which brings me back to clarification of my own comment. I think that if incentives are provided for investments which will continue to pay off after mining revenue is a thing of the past, then I am amenable to the argument in favour. For example, I would have no difficulty supporting tax breaks, exemptions, deferments or potentially even subsidies for retooling factories. I would even consider requiring companies to avail themselves of partially subsidized retooling on a regular basis, since it not only makes it more likely that the factories will be kept open when others in the same global market sector close, but also allows Zambian workers to gain experience with the most advanced technology. Likewise incentives for corporate investment in training such as you have described in Brazil are something I can support. I think it only makes sense.

    Then I run headlong into Zambian government development policy, and things stop making as much sense. There's lots of talk about free markets and privatization, but quite a lot of companies then insist that they will only set up shop if given special treatment. Lots of building roads and power connections to recently constructed facilities, but when I have looked at fast growing places over the last decade like Dubai (with domestic capital derived from petroleum) or Ireland (with foreign capital derived from EU taxes), I have seen lots of roads and power lines seemingly built to nowhere, with the factories turning up after to take advantage of the existence of relatively cheap power and transport. This was done within the context of national level business and investment incentives including highly favourable tax regimes that nevertheless placed strong emphasis on physical infrastructure improvements in advance of private capital influx. In my opinion, if Zambia cannot leverage copper and other resources into sufficient infrastructure investment, then tax breaks will be insufficient to attract multi-generational investment by globalized capital markets.

  6. Yakima,
    "Why should development oriented tax breaks be so geographically oriented? "

    Probably because the part of the MFEZ that is export oriented needs to be fenced off and secured for customs purposes and it is easier to position customs employees at fewer locations than all over the country.

    "In my opinion, if Zambia cannot leverage copper and other resources into sufficient infrastructure investment, then tax breaks will be insufficient to attract multi-generational investment by globalized capital markets."

    I think that foreign governments can also lend money for infrastructure development for MFEZs as in this case:

    I agree that Development Agreements should be created through the proper legal procedures whatever they are, I am no legal expert.

    Regarding developing Zambia's economy, I view it as similar to constructing a prefabricated house. There are plug in modules that are needed and installed to create the house such as foundation, walls, roof, etc.

    Similarly for business to develop, we need infrastructure, rule of law, efficient government, good products to sell, skilled and experienced workforce, etc. These requirements are universal all over the world, and there is nothing "uniquely Zambian" about them. So the focus should be on getting these "modules" installed through the usual way rather than through cross subsidies which could result in a TAZARA type of situation:

  7. Kafue,

    Thank you for those excellent references and your views. I suspect that you are correct that customs arrangements and costs are a limiting factor on the use of MFEZ policies and approaches. I still wonder however about the details on costs and benefits, and how they might compare to something more national in scope, such as in the Irish case. Certainly they have also had their problems getting manufacturing companies to stay in operation there rather than moving on once tax breaks expire, or even sooner as in the case with textile companies like Fruit of the Loom starting as early as year 2000 under bankruptcy protections, and continuing even after it was bought by Berkshire Hathaway Inc in 2002. I suspect that if the factories themselves had had better facilities and training programs, then BHI might not have been quite so wooed by cheap labour costs elsewhere, though it is particularly hard to make that case in consumer textiles. I don't think that the best strategy for retaining investment going forward for Zambia is to perpetually offer the lowest labour costs, so I am hoping to offer something better.

    I agree that "uniquely Zambian" does not have to look like something from Mars. If we think of nations as if they were related species rather than members of the same species, then the differences between them can be viewed more as adaptation to a local biosphere than as universal competition. I guess what I mean is that all beetles have pretty much the same requirements for life, and roughly the same basic tools to obtain them, but beetles are nonetheless incredibly varied once the standard design is optimized for a given location. I think that Zambian transport hurdles are a good example of where the standard MFEZ design will require adaptation in order to foster long term growth. At the very least I would like to see transparency in the process, so that if it does go wrong, we may have a chance of understanding how and why.

    On a somewhat related note sparked by your prefabricated home analogy, one such initiative, the Arial Home design is showing promise as a viable approach with lower costs than previous attempts, though transport is still a barrier, localized small-scale modular manufacturing as well as assembly has helped to reduce that somewhat. They claim to be able to achieve costs as low as US$17/occupant/year over the lifetime of the structure, however the upfront costs are still beyond the credit capacity of most Zambian families.

  8. Mozambique has apparently just unveiled a new alternative flat tax for small businesses earning less than 2.5 million meticais (around US$100K) who would rather avoid the bureaucratic overhead of compliance with income, business and VAT. The government is projecting that over 50,000 businesses will avail themselves of the new system, many of them currently operating in the informal sector, and bring in over US$2M in new revenues. It will be interesting to see if they are right.

  9. Yakima,

    "In my opinion, if Zambia cannot leverage copper and other resources into sufficient infrastructure investment, then tax breaks will be insufficient to attract multi-generational investment by globalized capital markets."

    Very profound indeed.

    I would probably go further and add that given a choice BETWEEN infrastructure and tax breaks, best to go for infrastructure. This certain seems to be the message from all "development experts" at the moment. See What matters for growth?.

    Bring it down closer to home - in agriculture....that also appears to be the message..see the blog Zambian agriculture, income diversification & rural poverty... where FSRP (them again!) appear to draw similar conclusions...

  10. Cho,

    Those are highly relevant links to papers and previous discussions, thanks! I had actually been reviewing the FSRP piece recently anyhow, but the ICGD panel report is one I had missed. It does indeed seem like a capsule summary of subjects you have been leading discussion on for quite some time, and quite useful in that respect. Without detracting from the "complex web" of the whole, I plucked out this tidbit on the false dichotomy between growth and green for isolated attention:

    "• Grow first and deal with the environment later is a bad strategy
    • It is very expensive
    – Long-lived assets are created that need to be replaced
    • Housing and other construction
    • Industrial assets
    – Biases structural evolution of the economy
    – Location decisions are inappropriate
    • Adverse effects are greatest in lower income groups –so it is adverse with respect to equity and inclusiveness
    • Energy subsidies are large and very widespread –cost in terms of foregone public investment high and rising with energy prices
    – Adverse positioning with respect to global warming
    • While politically difficult, the energy subsidies should be eliminated as rapidly as possible. "

    [I know, I have Zesco caught in my head like some horribly catchy bit of "elevator music" and it keeps leaking out.]

    I think this also applies to water and soil quality degradation or improvement from agricultural development. The poorest farmers, with the least ability to access new land, are the ones whose legacy is most at risk. Subsidies for short term yield increases at the expense of long term farm health are also sapping funds for public investment in sustainable diversification of agriculture in general, and deterring private sector innovation and potential for import substitution stemming from market forces rather than protectionism.

    Investments are simply better than subsidies. If a one time investment in a treadle pump will increase a farmer's yields by 30%, it should be easy to accept 15% of his/her harvests over time to pay it off. Waiting for these farmers to save up for the full cost of pumps while subsidizing their fertilizer to increase the yield on the smaller amount of land they can irrigate by bucket seems less than optimal usage of limited funds. Earthworm casings are not high powered fertilizer (typically they rate as 5/5/5), which means they are unlikely to be sufficient on their own and should be mixed with substances which provide individual nutrients in higher concentration depending on plant species. This is not a disadvantage for the majority of Zambian farmers, because you cannot overuse worm casings, you cannot poison a plant with them no matter how much you add (though you could conceivably suffocate it if you packed the soil too tightly), you cannot harm the health of soil microbes at all, and are likely to help.

    Bone meal or guano are very high in phosphorus, and guano is also usually rich in trace elements. The seed cake left over from vegetable oil production from plants like soy, flax, sunflower, cotton and canola acts like a slow release chemical fertilizer, and can help increase the economic viability of oil pressing operations (I don't know if the poisonous nature of jatropha seed cake is a barrier to its use in this way, good question for Prof. Sinkala). Dolomitic limestone should be sought out where possible because it contains nearly equal concentrations of calcium and magnesium carbonates, and calcium sulphate (gypsum) is useful as well to maintain sulphur traces. Here's an example of a proven recipe:

    4 parts seed meal
    1/4 part ordinary agricultural lime, best finely ground
    1/4 part gypsum (or double the agricultural lime)
    1/2 part dolomitic lime
    Plus, for best results:
    1 part bone meal, rock phosphate or high-phosphate guano
    1/2 to 1 part kelp meal (or 1 part basalt dust)

    Other than the kelp (and there should be plenty of basalt around volcanic formations), all of these inputs ought to be readily available from Zambian sources, and combined with worm casings, have the potential to vastly reduce the need for imported fertilizer without sacrificing the higher yields they bring. In fact, because of the domestic nature of the ingredients, and the simplicity of scaling up manufacture, there is good reason to believe that such an approach would result in fertilizer production in all provinces, reducing dependence on central distribution and reliance on the transport network to meet planting schedules.

    I agree with you on the choice between infrastructure spending by government and tax breaks, if I must be constrained to either/or, however as you may suspect, I prefer to try for both, in hopes that win/win dynamics will generate greater overall rates of investment in both infrastructure and productive use of it. This is one of the main benefits of the ICIF structure as I see it, it essentially says, "we won't lower your taxes, in fact we will raise them, spend as much of it as possible on tangible infrastructure improvements, which will not only increase your profit potential, but we will also give you ownership over half of it which you can leverage in a variety of mutually beneficial ways down the line."

    It is to be hoped that the result of this policy is to produce an amount of new and/or improved infrastructure in public hands which is equivalent to the amount projected from public investment alone (without private sector incentives), with an additional amount equal to or greater than that which private sector investors would have built to support their own activities in the absence of public investment and utilizing the savings from tax breaks to somewhat offset the costs. Of course it is untested, and must be adapted and tailored to the infrastructure and financial needs of individual market sectors (an overhead cost, but one which stakeholders ought to be interested in covering, if the prospects continue to look promising theoretically), but if it works it could cut decades off achievement of development benchmarks.

  11. Cho and All,

    It seems that Aiyipianni is employing a somewhat clever form of SPAM, whereby they have taken an ordinary passage (plagiarized no doubt) on an unrelated subject, and simply scattered links to various sites claiming to be online games, but more likely to be attack sites. I DO NOT RECOMMEND FOLLOWING ANY OF THEIR LINKS.

    The next comment in the thread is also just MORE SPAM, and should probably be likewise ignored. Happy New Year!

  12. Yakima,
    Thanks. I have now deleted the messages.
    Happy New Year!!!

  13. Yakima,

    Earthworm casings are not high powered fertilizer (typically they rate as 5/5/5),

    Their low NPK number is misleading. Their nutrients are readily absorbed by the plant, and because of their low numbers they also don't burn plant roots, not even seedlings. Plus, worm castings invariable come with worm eggs or mature worms in them, which then continue to create fertilizer for the plant to use. And lastly, they can be made into a tea, which can be poured onto the plant and used for watering the soil. I have raised at least one huge houseplant with nothing but worm castings and worm tea. The same with fermented beets, which provide pretty much all the nutrients a plant needs in the growing stage and are not only organic fertilizer, but vegan fertilizer (no animal waste involved at all, just plant matter).

    I wonder how much blood and bones of cattle in Southern Province are wasted, when they could be dried and bagged and used as prime sources for Nitrogen (blood) and Phosphorus (bone).

    Also, there plants, specifically legumes, which fixate nitrogen from the air in their roots as tiny white balls of free fertilizer. In crop rotation, it is practice to first grow a nitrogen fixing plant like legumes, and then plant a nitrogen using crop like maize after it. Plus maize has deeper roots, which act like a natural plow. For heavier soils, big rooted crops like potatoes are usually planted first, which also loosen up the soil. And clay soil can be prepared by spreading and mixing in lots of compost, and a little sand.

    There are several plants that do grow well in clay soil, and can be used to add organic matter to the soil without composting.

  14. MrK,

    Lots of good info there, thanks! I think that for gardening or nursery applications you are absolutely correct about worm casings, however for commercial application to already depleted farmland in a rural Zambian context, additional fertilizer inputs may be necessary at least initially to maintain reasonable yields while transitioning to sustainable methods.

    I have been reading up on the experiences of individual farmers in various climates, and for small farms the organic options appear to be clearly superior. I would personally love to see Zambia become the first nation on earth to certify all exported foodstuffs as organic, though I also think 100% is currently out of reach. I think of the branding advantage it would give Zambian companies in the most lucrative segment of the ag markets, and it makes me drool. One basic difficulty for most organic farms is that they share watersheds with non-organic farms, and pesticides, herbicides and petroleum products leech in along with groundwater. Zambia is already at the top of all the local watersheds, so a national organic policy could carry a lot of weight with consumers in the segment.

    Without digressing too far into the ecological implications of human diet, let me say that I respect vegans very much. There are many where I live, (and I have even dated a few ;) however I have some concerns about the long term effects of their strategy if universally applied. For example, after spending time with members of the Sioux Nations, I now go out of my way to eat buffalo meat in the few local establishments which serve it (and pay more for it than beef). The buffalo were all but exterminated, not for meat, not for hides, but to make way for "amber waves of grain". There's no way that humans are going to remove all the farms in the Dakotas, Nebraska, Kansas and Oklahoma just to restore the buffalo to its former glory. If no humans eat them, how long before we decide we don't need them taking up space and eating those precious plants? Ditto elk, deer, caribou, moose, etc. If the big herbivores go, so does the excuse for reintroducing wolves or maintaining cougars and coyotes. Treating animals like cogs in some sort of agribusiness machine is both morally questionable and environmentally unsustainable, but even Hindus will use leather and bone from a dead cow. The concept of "vegan" fertilizer as distinct from organic fertilizer in general may be overly hostile toward animals.

    Crop rotation is critical, even if a farmer is not trying for organic certification, and no-till practices will dramatically reduce soil compaction and eventually improve both moisture retention and nutrient delivery to plants. Not doing business with the likes of Monsanto or ADM also appears to be the best option, especially for small rural farms. Better to contribute a portion of each harvest to a community seed bank, so that in most years seed for crops appropriate to the climate and soil will be available on demand (and at virtually no cost), but you have to start with seeds that don't have "suicide genes" built in that prevent the next generation from germinating. Shortage of seed year after year for the nation's staple crops simply doesn't make sense, unless someone has found a way to make money off of seed shortages even if they have to create one themselves, and so they have.


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