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Thursday, 26 March 2009

A wake up call (Guest Blog - KBM)

The heated exchange between MPs on one side, and the technocrats – represented by Dr Godwin Beene, on the other over the amendment of Mines and Minerals bill is a wake up call. It is a wake up call in the sense that either - the world wide economic meltdown is driving Zambians to the mountains or else we've been hit by a leadership crisis.

Otherwise how on earth would anyone think of replacing a "good bill" with a "bad one"? The empowerment clauses inserted into the Zambian Act or Acts, have been put there for a purpose. For example, a clause reserving mining rights for industrial minerals to a citizen of Zambia and a citizen-owned company is for the sake of protecting Zambians. Otherwise with Zambians owning a limited amount of resources and capital – there would be no level playing field.

Given an opportunity, foreigners would not hesitate to scramble for resources and crowd out Zambians. And when that happens – once more, Zambians would go back to the days when they were hewers of wood and carriers of water. I am sure socialist --- Michael Manley of Jamaica would be turning in his grave.

When attacked by agile MPs, Dr Beene defended the bill by asserting that – the amendment would not touch "the small scale mining rights". It is as if that's all Zambians are entitled to. Hell no!

Zambians want their full rights and access to the assets and resources at its disposal. Beene went on to argue that – unless the amendments were effected, foreign investments would be hindered. Moreover, where is the evidence that these changes would indeed result in attracting FDIs? No position paper or academic write-up is available to support the contention.

Perhaps this is the time when Zambians can put the experts and learned members of EAZ (Economic Association of Zambia) to good use. After all, EAZ has signed up to act literally as an adviser to Parliament. Days are gone when decisions were based on guess work or the intuition of a leader or politicians. Background information is now needed for making sound decisions – otherwise we cannot compete with those countries using sophisticated information networks.

Zambians thought that late President Levy Mwanawasa (may his soul rest in peace) – showed us the best way out. When threatened by Anglo-American company to pull out of the mines at short notice, he didn't blink. In fact he cursed them to go to hell. And at that point he went ahead to craft a sales package making sure that our rights to resources remained intact. He offered concessions which attracted investments.

Although Levy's package was not perfect, but it got us all the investors we wanted generating a 5-6 percent-point annual growth rate in the process. Not bad! Why can't Rupiah Banda (RB) do the same thing?

There is no where it is written, that Zambia's economic development can only be done by foreigners. In fact it has been demonstrated before – under KK, that Zambians are capable of building Fortune 500 companies. Many ZIMCO group Zambian-run companies met the grade. What's the problem now? Are Zambians less capable now?

This trend of giving up and entrusting economic development into the hands of foreigners – be it donors, is very dangerous. The other day some farmers and some civil society organizations such as CSBF (civil society bio-fuel forum) were fuming about a large chunk of land being given to foreign investors for the development of Jatropha. Earmarking a large piece of land for the sake of foreign-type of development would be an insult to Zambians.

And while we are at it – where are the opposition parties to block these backward initiatives? If they're potential governments in waiting – why can't they come up with alternative strategies and vision to that of MMD? MMD has run out of ideas. Finito!

Unless we do something about this, the survival of our sovereignty is a t risk.

Kaela B Mulenga / Guest Blogger
Columnist & Development Consultant


  1. Well said Kaela! Let me see if I can add some more fuel to this fire.

    Let us suppose a mining company, Alpha, which seeks to repeat the pattern of investment which we have seen in the country of late. They float a company in Canada or Australia or India, find venture capital investors willing to risk $100 million, as long as they are compensated at near usury rates (~%30), otherwise they will immediately pull their money out and put it in another, more profitable "high-risk" venture. What makes it so high risk?

    Some of the factors are really quite justifiable, and won't go away any time soon. We are all reasonably aware of them, transport bottlenecks, volatile fuel/energy prices and supplies, geological survey errors (increasingly rare), global raw material demand spikes and troughs, even the possibility of political nationalization. Real as these factors are, they are not enough to explain the mindset that finds 30% annual return to be a reasonable expectation on the part of venture capitalists.

    The majority of shareholder risk comes from the financing structure of the company, in that after raising $100 million in start-up capital, Alpha performs exploration and secures licenses not for a modest $100 million mining operation, that could never bring the 30% they are selling to their primary customers, for that they require a much much larger facility. To achieve this, they go to the international banking community and raise loans, not at 30%, but still at a slightly inflated (over say a prime Northern country home mortgage) 7% annual interest. Not just a few loans, but 10 times the capital they raised from share capital in loans. This gives them an asset base of $1.1 billion, for which they must generate profits of at least (($1,000m x 0.07 = $70m) + ($100m x 0.30 = $30m) = $100m) a hundred million dollars per year, or an average return on assets of 9.09% per year. The loan interest must be paid first, so essentially the shareholders are looking at whatever comes in above $70m. This means that a 10% decline in overall profits results in a 33.3% decline for shareholders, and 20% decline in overall results in 66.7% decline for shareholders. A decline of more than 30% results in losses for shareholders, as more borrowing is required to meet interest obligations. Thus the financing structure makes the company particularly susceptible to commodity price shocks.

    Now let us imagine another kind of mining company, Beta, that takes a more conservative approach to mining profits. They raise $500 million in sales of stock to various investors interested in stable returns at or above the average for corporate bonds (such as pension funds). They still must borrow, this time $600 million, at the same 7% rate (though the rate is likely to be lower in actuality due to the higher initial state of capitalization), resulting in an annual obligation of $42m instead of $70m. In years where the mine makes $100m in profits, the shareholders receive a ($58m / 500m = 11.6%) return. In years where the mine makes $70m, the break-even point for Alpha, the shareholders receive a ($28m / 500m = 5.6%) return.

    I humbly submit that the assertions that mining is not profitable at current commodity prices does not necessarily have to be the case. This is more about the type and expectations of the current crop of investors than about anything else.

  2. Oh, I suppose I should add a brief description of the corporate income tax implications (import, excise, and mineral royalty taxes would be equal for both Alpha and Beta companies).

    In the $100m profit years, Alpha has gross taxable income of $30m @30% = $9, while Beta has gross taxable income of $58m @30% = $17.4m (note: this is highly simplified, actual taxes, depreciation and adjustments are more complex). In the $70m profit years, Alpha has gross taxable income of $0 @30% = $0 (with any additional losses capable of perpetual "carry-over" until profitable years), while Beta has a gross taxable income of $28m @30% = $ 8.4m.

    It should be noted that payment of these taxes would degrade investor return for Alpha investors to 21% in $100m years, and not at all to 0% in $70m years. It would degrade returns for Beta investors to 8.12% in $100m years, and to 3.92% in $70m years. It is unlikely that investors would actually allow this to happen by choice, especially the Alpha investors, who want their 30% taxes or no taxes. This means that Alpha must achieve a pre-tax return of ~43% in order to pay 30% in taxes and still deliver a 30% return to their investors. This takes the required annual operating profit up to $113m. Tax revenues derived from the increased revenue would amount to ($113m - $70m = $43m; $43m @30% = $12.9m), while investor return would be ($30.1m / $100m = 30.1%). An equivalent profit for Beta would provide gross tax revenue of ($113m - $42m = $71m; $71m @30% = $21.3m), with an investor return of ($49.7 / 500m = 9.94%).

  3. Kaela seems to have the theory right, but ignores the reality on the ground.

    Every Zambian would like to see Zambia's potential and resources being put to productive use by Zambians for Zambians to build Zambia.

    For this wish to come true some strategic investments need to be made by the country.

    Protecting or reserving economic sectors for Zambians is only useful if we invest in empowering Zambians to exploit these sectors. CEEC cannot do it alone and does not have the wherewithal to do it efficiently. DBZ may need to come on board to provide the much needed financing. In addition relevant skills training may also be required to make a success of the effort. There may even be need for mentoring either through extension services or Joint Ventures with partners that have the necessary experiences, marketing knowhow, and contacts to convert the resources into business transactions.

    Keeping our natural resources in cold storage does not help the country at all. If we are unable to support our own people to exploit the resources then we are faced with the option of opening the opportunities to foreign investors. The key point is to arrive at a win win deal with the foreign investors. Opportunities to make money for the investor, and jobs - national wealth - and skills for the country, not to mention taxes and other spin offs. This has to be strategically planned and integrated into the investor program. That is what ZDA is there to do for the country. The second wave of Zambian entrepreneurs will go into similar businesses on the strength of the success of the foreign investments.

    Zambia has always had options when dealing with foreign partners and KK was a good player of this card. He got the Chinese to build Tazara, the Italians to build Indeni, and the Yugolsavs to build Kafue Gorge Power Station. Currently, Zambia seems entrenched with the Western development paradigm such that when the Chinese offered to build Kafue Gorge Lower Power Station for USD750 million we turned our heads the other way. But, when the World Bank made the same offer for USD1.5 billion and even had the cheek to ask us to pay USD6 million towards a feasibility study for the same project, we jumped at the offer like it was a piece of cake. Where is our logic? We seem to be our own biggest enemy because we undermine our own development by seemingly wanting to be neo colonised by our former colonial masters that undermined our development and roped us into sinking debt. We have to learn to play the best deal game for Zambia and bring all the world players into the arena.

    Kaela is right when he questions the role of the opposition in Zambia. It appears that the opposition only focus on taking over Government but do not play any role in ongoing economic development of their country. PF runs the Local Government in Lusaka, but there seems to be no input on their part in making Lusaka a better place to live in. They will no doubt blame their inactivity to the Government of the day, but a bad workman always blames his tools. The easy way out!.

    The economies of Japan and China were largely built on the collaborative efforts of SME's in all sectors of productivity through a Government managed effort. Over 80% of Japanese industry today is still SME.

    To sum up Zambia's dilemma, I would say that at all levels, we do not invest in our future, nor do we invest in our own people. We are too short sighted, self centred, and we leave the future to those that will live in it.


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