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Thursday, 23 April 2009

A view from outside : the mining question

A Reuters perspective on the government's decision to up the stakes in the mining companies :

Zambia's plan to up mining stakes worries investors, Shapi Shacinda, Reuters, Commentary :

Zambia's plans to raise equity stakes in its copper mines could scare away foreign investors already unnerved by the global downturn, and hurt plans to boost the metal's output in Africa's largest copper producer.

The plan was a surprise to copper firms and investors at a time when countries reliant on mining were trying hard to give incentives to attract investment following the collapse of commodity prices hit by the global financial crisis.

Obiageli Ezekwesili, the World Bank vice president for Africa, said the plan would backfire by jeopardising Zambia's wider market reforms, hailed by the West as a model for Africa.

"The populist reaction is to say let's take a stake, but do you want to risk capital in a sector where the private sector can take the risks?" she told Reuters. "This is an industry better left to the private sector to run."

Zambia has been among the African countries hit hardest by the global crisis because of its dependence on copper, which contributes more than 60 percent of export revenues.

The mineral-rich southern African country says it wants to up its stakes in existing and new foreign owned copper mines to 35 percent from between 10 and 20 percent so as to influence decisions, including protection of jobs during the downturn.

The plan has put Zambia in the spotlight, with fears it could be reverting to the failed nationalisation of copper mines in the past, or aping neighbouring Zimbabwe, which has said 51 percent ownership of foreign firms must be locally held.

The move appears to have come as a knee-jerk reaction to the December closure of Luanshya Copper Mines (LCM) units -- the Baluba copper mine and Chambishi Metals Plc -- the country's largest cobalt producer, which led to huge job losses.

The closure unnerved Zambia's government, forcing it to react in the face of demands from unions to save jobs in the Copperbelt region where the government is already unpopular.

"However, neither the government nor ZCCM has the budget or access to finance to make good on this plan," Eurasia group's analyst for Middle East and Africa, Philippe de Pontet said.

"These comments may reflect political posturing and a bit of empty nationalism rather than a clear policy direction."

London-listed Vedanta Resources Plc (VED.L: Quote), Canada's First Quantum Minerals (FM.TO: Quote), Equinox Minerals Ltd (EQN.TO: Quote)(EQN.AX: Quote) and Glencore International AG [GLEN.L] operate in Zambia.

Officials at some of the companies said privately they were concerned by the plan to raise equity, and that it had caused uncertainty as they were unsure how it would work.


POORLY RUN

Zambia's Mines Minister Maxwell Mwale said copper mines such as Luanshya were poorly run and inefficient and had shut down costing many jobs, and were blaming the global downturn.

This was why the government wanted even more control.

"We don't plan any nationalisation of the mines as they will still remain in private hands," Mwale said.

"But all we want is to have a say in decision-making, after learning from what has happened in Luanshya."

Zambia may be forced to re-think its latest move after scrapping in January a windfall tax on copper mines meant to take advantage of the commodities boom after mining firms protested and the metal's price slumped.

The country expects economic growth to fall to 5.0 percent in 2009 from a forecast 5.8 percent expansion last year, due to the global slowdown, which has hit its copper output.

Foreign exchange will shrink, but a big concern is the loss of up to 10,000 jobs and loss of earnings from copper exports, which pay for universities, schools, roads, hospitals, bridges in this poor nation of 12 million.

Zambia's currency, the kwacha, has devalued by nearly 40 percent and the country plans to trim its budget and seek more aid from agencies such as the World Bank to weather the storm.

Zambia nationalised its copper sector in the 1970s, but poor management and lack of fresh capital to develop the mines, led to a near-collapse of the sector before it was privatised again.

It has since flourished. Treasury data shows foreign mine owners have pumped in more than $4 billion in expansions in the last seven years, while output has soared to 569,887 tonnes in 2008 from record lows of 200,000 tonnes in the early 2000s.

Analysts said any move to upset the industry's momentum would see investors leave and output decline.

"The government can't run the mines and this move could have a significant backlash. Donors may reduce their financing," University of Zambia professor of economics Oliver Saasa said. "The government might end up clouding out investors."

11 comments:

  1. I would say that the analysts may be correct, although it remains to be seen if the recent rise in copper prices would assist the government's strategy.

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  2. The govt should just forget about the mining industry. They gave away the family silver on their own accord. Efforts to claw back some leverage have at best been cowardly. Even the usual govt noises about opening a mine in each province is laughable. What exactly will Zambians get from this? Afterall copper miners are shipping out $4bn annually and leaving the treasury with a $50m check. Sometimes I dont know whether to cry or laugh. We are indeed children of a lesser god!

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  3. How can anyone say that 'the government should just forget about the mining industry'?

    The western corporations should just forget about Zambia's mining industry, and the free ride they bribed their way into with the Chiluba MMD governments.

    The western mining companies should just forget about not paying taxes, or believe that they are exempt from paying taxes.

    The easiest way to collect tax,is to drop all taxes on the mines except the mineral royalty tax, raise it to 20%, and just divert every fifth truckload of ore or cathodes leaving the mines or the smelters.

    That would instantly make money available for the government to use on social services.

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  4. MrK there's no use for me to hope that this govt is capable of standing up to these people. If it was it wouldnt have suddenly reversed the new tax regime it had worked out. It's either the govt is bold enough to reclaim its sovereignty or it remains, as it is, defeated. Copper has done nothing for Zambia but spread poverty and complacency. Honestly I am not so excited about the mining industry. I admire Kenya, Tunisia and Ivory Coast who dont have to deal with this curse.

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  5. Frank,

    MrK there's no use for me to hope that this govt is capable of standing up to these people. If it was it wouldnt have suddenly reversed the new tax regime it had worked out.I agree with that. The new finance minister even went so far as to call the windfall tax 'onerous' - who is he representing, the Zambian people or foreign mining interests?

    And that is another reason why we have to revisit the mines. The presence of Zambia's main economic resource in the hands of foreigners directly undermines democracy, and democratic accountability.

    Copper has done nothing for Zambia but spread poverty and complacency.It is not the inanimate object of copper that is the culprit, it are the bribe takers in government. And we certainly can do something about them.

    Copper is not a curse. It is the lifeblood of the country, and there are no excuses for not dealing with that issue.

    Corruption takes to sides to tango - one are the mining companies who hide their profits, and bribe MPs and ministers. The other side are the ministers themselves.

    Take heed from the fate of minister Dora Siliya, because she will not be the last one.

    It is more than time that The Post started to look into the shenanigans in the mining industry.

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  6. Frank,

    Listen, I have had heated exchanges with MrK on this space. While he is very well informed, but sometimes in the name of wanting to be pro-people, or in the name of government intervention strategy - MrK sounds as if he wants Zambia to go back to the stone age. In his world, bikes would be preferred to motor cars, a hoe & jembe to a tractor for working the land, or in a humid and warm Zambian office, you do not need an air conditioner. Of course this is a literal summary.

    You have a point. If Zambians were frank and realistic, everything you are saying is closer to reality. Contrasting that to MrK’s position, which is more closer to a dream. Somehow, MrK has got this dream of building a Zambian welfare state (a la Sweden) from just converting everything to government hands. Hurrah! The magic is done, Zambians would be better off. Never mind the country has no discernible source of funds. Where is the money going to come from?This is a wishful thinking.[A kind of: If wishes were horses, then even beggars would ride].

    I keep on suggesting that - jobs, pay checks are generated by companies. Civil servants are generally only consumers. The services they provide are consumptive, unlike the ones produced by Banks, Insurance Companies, Tourism, etc. Small and large enterprises is what we should encourage if we are interested in creating prosperity for our people. Government agencies do not create wealth even though it is an important link.

    Government revenue, which is needed to build schools, hospitals, or agricultural projects can only come from those who create wealth. Having natural resources in your belly, is not sufficient and is not going to produce anything. Outsider investors have just proved my point. They came from outside Zambia - attracted by Levy’s concessions, to come and dig wealth from our own land. And off they are gone with billions of dollars. If we go the MrK’s way, those minerals in the soil and the massive fertile land will remain untapped. In a fake way (to produce biofuels), Chinese have began grabbing our land. This process will continue until we’ll have nothing left. Does anyone remember the story of a Camel and the Tent Man?

    Put in another way - Zambians were stepping on Emeralds in Chief Nkana’s area until when enterprising Sene Senes came into the picture. Just as until when Canadians, Australians, and others were brought in by Mwanawasa to work earth in Lumwana and else where -- those minerals didn’t create any wealth for us. They lay there for hundreds and hundreds of years. We have to teach our Zambians to know how to create wealth. Nobody is going to have guts to do anything if this thing will be in a general pool. And please don’t take me to Chitala’s Marxism doctrine. We will die in poverty singing that thing.

    We have tried government ownership before. It didn’t work. God bless KK, he gave us a chance with those many parastatals. The managers were no better than civil servants. They didn’t care to work hard because they were guaranteed of their pay at the end of the month. Since we didn’t live up to the expectations, should we go back to that system again? Hell no!

    Now we are where we are - we must forge on. People, including MrK have criticized Chiluba, but yet people forget that he is the one who taught us how to walk in the business world. When Chiluba abolished everything at once, Zambians scampered in all sorts of directions looking for means of survival. But Chiluba got drunk and lost direction. Then we got Levy who was God sent. And guess what - Zambia started growing economically. But although Mwanawasa was clever enough to know how economies grow, due to lack of strong/wide spread political base - in order to buy popularity, he gave out too much concessions. Mwanawasa was on a mission to demonstrate to Zambians that he knew economics' fundamentals. Having realized that he didn’t have to give out that much, he began correcting himself until unfortunately death took him away from us.

    His path is the correct path for us. We mustn’t blink. That said, I am one of those who does not believe in extreme capitalism. But definitely, I am pro-market economics. MrK’s rumblings about market failures and staff - he is just looking for excuses to defrock capitalism. We can discuss that separately. So guys, let us agree that - to go full throttle with Chinese or Americans, are both not good for us. We need to select from each system what is good for us. It should never be an either or scenario. I rest my case. Thank you

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  7. Kaela,

    I keep on suggesting that - jobs, pay checks are generated by companies.

    Actually their paychecks paid out by companies are generated by consumers - people who buy what the company has to sell.

    That means that the neoliberal model of trying to attract FDI to where there is no market will never work, unless you intend to export everything you produce, or try to more efficiently exploit existing demand for food and heating.

    That model is the colonial model in a new jacket - neocolonialism, and that is why it has not worked in developing Zambia's society or economy.

    The only way to do that, is to raise wages. Demand the same minimum wage that these companies pay in their home countries (China and India excepted - they don't have a minimum wage that is enforced). Unionise. Redistribute land and follow through with services for new farmers (infrastructure, extension offices, etc.).

    Now does that sound like the stone age?

    Kaela, I think the problem is that you might be confusing the trappings of modernity with development. Perhaps I'm wrong?


    Civil servants are generally only consumers. The services they provide are consumptive,

    That completely depends on which services they provide. If they are simply are busy with red tape, that is true. If they are providing services that build capacity and infrastructure - as government employed teachers, doctors, police officers, construction workers, then they are actually stimulating the economy by creating social capital (an educated and healthy workforce), provide the security among which commerce can take place, and create the infrastructure that is the lifeblood of any economy.

    And be honest, wouldn't you like Sweden's economy? :)

    unlike the ones produced by Banks, Insurance Companies, Tourism, etc.

    Tourism is not consumptive? They are simply transferring cash from one economy to another - not bad, but they are not actually producing real goods. And tourism can be interrupted at the drop of a hat - poor international relations, terrorist attacks, etc. The food the people in the tourist industry (tourists and employees) eat, still has to be produced by someone, which brings us back to farming.

    As for banks - right now they are free to charge any lending rate they want, which happens to be in double digits. I don't know what their real purpose is, but lending to SMEs at low rates certainly is not it.

    Small and large enterprises is what we should encourage if we are interested in creating prosperity for our people. Government agencies do not create wealth even though it is an important link.

    I think the USDA, the FDA etc in the US are very helpful to business.

    They may not directly create wealth, but from the point of view of opportunity cost (goods not otherwise produced without their services), I would say they save their country billions of dollars.

    Government revenue, which is needed to build schools, hospitals, or agricultural projects can only come from those who create wealth.

    You (as a neoliberal leaning guy) say it are businesses which create wealth, I (as a Social Democratic leaning guy) say it are workers and consumers who generate the profits businesses rely on.

    Neoliberals would attract existing foreign businesses, I would create markets for local businesses and keep the money circulating in the economy over and over. Doing that with money (continuous reinvestment of profits, dividends and interest) is how Warren Buffett became the richest man in the world. It will work for Zambia, where neoliberalism (corporate free trade, deregulation and privatisation) have failed.

    Having natural resources in your belly, is not sufficient and is not going to produce anything.

    If you listen to the MMD, they are not even enough to warrant asset backed loans. But then, if you are in government, but believe government is the problem, what initiatives can you expect from such a government?

    At least, the GRZ should tax the mines 20% of their turnover by just diverting every 5th load of ore or cathodes into government storage facilities. Then sell them themselves, or write cash and loans against their value for low or no interest business loans and create works projects that raise incomes and build infrastructure.

    Or, the GRZ should use the expertise of the fired miners and set up mine management companies to exploit gold for it's own coffers and build up reserves.

    There are so many ways you can benefit from raw materials...

    Outsider investors have just proved my point. They came from outside Zambia - attracted by Levy’s concessions, to come and dig wealth from our own land. And off they are gone with billions of dollars.

    Exactly, leaving Zambia all the poorer.

    Of course, when you give away the store, people will come and take it. Who would pass up a free lunch like that?

    So how much reserves did they leave the GRZ with? Not the $10 billion they took out in pure profits.

    In fact, the mining industry proves my point. You say development came because of the attraction of foreign businesses.

    However, those businesses were much more attracted by the profits they could make, because of world record copper prices - upto $9000 per tonne. When those prices returned to $2000, they shut the mines and left.

    This proves my point, which is that it are consumers (in this case, the consumers of copper) who drive commerce, not businesses. The more they will pay for a good, the more of the good will be produced. It are consumers who drive commerce, not producers.

    In the neoliberal model, the producers always end up producing for markets that no longer exist. Supply Side economics leads to oversupply and periods of massive deflation, as goods clog up the system until they are destroyed. That was what the 1930s and now the 2000s are all about.

    If we go the MrK’s way, those minerals in the soil and the massive fertile land will remain untapped.

    What do we have to show for them now? After we provided record profits to foreign mining companies.

    In fact those minerals would have been better left in the soil, than to provide profits and taxes for western countries.

    In a fake way (to produce biofuels), Chinese have began grabbing our land. This process will continue until we’ll have nothing left.

    You mean like the mines under neoliberal rule?

    And no, I am not a fan of China or Chinese or anyone else's ownership of African land or resources. That belongs to our State and local businesses.

    Obviously there is a need for a government created framework for parastatals. However, that does not mean that parastatals are bad or don't work or can't work. SAUDI-ARAMCO is an example of a 100% Saudi Government owned parastatal. I think they have done pretty well out of them.

    In fact, if you know the economy of Taiwan, you will see that most companies ares state owned, and you will know that none of the Asian Tigers could have become what they are now without parastatals.

    What neoliberals selectively like to think of as 'free market economies' are in fact the product of highly protected, massively state supported corporations.

    The Keiretsu of Japan, the Chaebol of Korea are massively state supported. Their countries are now among the world's most powerful economies - through focusing on production, protecting domestic producers, and making it impossible for any foreign business to set up in their economy.

    And yet, they did not create the lasting, sustainable and selfgenerating economy that Zambia is capable of creating. That is what I want to see for Zambia and Africa. Economies that produce what they consume, where the farmer's tractors, fertilizer, seed, etc. are all locally or nationally produced. Where consumer goods like cell phones are locally produced and assembled. In other words, where the money people spend in consumption, translates into jobs. And of course, where no single company gets so big, that if it fails, it takes down the local or national economy with it.

    And if you raise wages (through land redistribution, works projects, mechanisation of agriculture, etc.), you expand markets and demand for goods and services, which can sustainably lead to more production.

    The key is that we need to start producing concrete goods.

    That means a fair distribution of the means of production, and capacity building by the state (free of charge education and healthcare). Let's close a few ministries, and start hiring those thousands of teachers who remain unemployed while children go without education because their parents cannot afford the fees introduced by the neoliberal governments and IMF.

    I would completely support a reduction in the size of central government, but only to expand services through local government, not as an end in itself, so we can again sit around and wait for the market to step in and provide the services the government now no longer provides. Which will be forever, if they can't see a way to make a profit out of it, which is otherwise known as 'market failure'.

    Create the ability to produce goods while raising wages to create markets for those goods and services, and the economy will develop. No foreign investment required or desired.

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  8. Forget about tourism, and focus on farming, especially in the short run.

    Paul Krugman on the Second Great Depression:

    Paul Krugman on "The Return of Depression Economics?"Paul Krugman, Professor of Economics and International Affairs; 2008 Nobel Prize in Economics

    (Apr 18, 2009 at Princeton University) Part of the 2009 Princeton Colloquium on Public and International Affairs.

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  9. Here is an interesting interview by Greg Palast of Joseph Stiglitz, for the BBC, on the IMF and it's agenda:

    World Bank creating poverty (BBC Newsnight)According to Joseph Stiglitz, the IMF turns a blind eye to big corruption, for political purposes.

    Sort of puts the West's and IMF's policies on Zimbabwe in context.

    Watch this program. :)


    Also interesting:

    The World Bank (WB) & The International Monetary Fund (IMF)

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  10. MrK,
    I have read your comments. I still think that what you propound sounds very nice in theory. But one doubts how this can be successfully implemented in the case of Zambia. From ZIMCO/Indeco days, those who were running these companies, did not transform into successful businessmen with an exception of few. That is because they ran those companies as parastatals. Very much like civil service. It would have been different had these compnies been ran as private ones (with money loaned or sponsored by govt).

    On the other hand, then and now, civil servants are not functioning the way you're describing their functions. If they did, by now we could have developed a class of effective civil service and Zambian business class and therefore wouldn't be needing CEOs from abroad.

    Until that day comes when there will be Zambians who can successfully convert bank loans into running enterprises which can produce goods & services, assisted by a smooth running government support, all what you're proposing is mere 'theories'. In other words, as it is supposed to be - government bodies are not working to complement the private sector. If they did, then what you describe would work.

    Therefore, I still maintain my position on this one (s-defined by you: neoliberal leaning) - where by, you leave room for profit making. Because if you don't there would be no incentives for taking risks and working hard. Unless you are China where the authoritative government issues commands, it can't work in Zambia.

    In Zambia, while some civil servants are working, others are loafing around. And there is no mechanism to reward the hard workers. Add on top of that cancerous corruption. Basically the entire system is corrupt - including the judiciary and law enforcers. How do you succeed in such a system? Marketing system - for at least that minimizes these evils. But in such a marketing system, you've to have competition and price setting as some of the tools to minimize favoritism or unfair distribution of not only goods and services but resources too.

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  11. Kaela,

    MrK,
    I have read your comments. I still think that what you propound sounds very nice in theory. But one doubts how this can be successfully implemented in the case of Zambia. From ZIMCO/Indeco days, those who were running these companies, did not transform into successful businessmen with an exception of few. That is because they ran those companies as parastatals. Very much like civil service. It would have been different had these compnies been ran as private ones (with money loaned or sponsored by govt).


    This is a failure of governance, which comes from a highly centralized government and state. These are remnants of the old one party state, and should not be blamed on the state itself, but on an absence of separation of powers and rules spelled out in the constitution.

    What needs to happen is:

    1) Separation of the powers of state

    There should only be political appointments to the top of the branches of government, and no one else. Right now, all civil servants have to get the green light from the president. I think even government employed teachers have to get the ok from the president.

    2) Professionalisation of the civil service

    Civil servants should be promoted on the basis of merit, and should not all be appointed by the president. This is a remnant of the one party state. Ideally, there should be a strict separation between the politically elected representatives, who set the policy, and the state or permanent business of government, who carry out the policy.

    If that happens, a lot of things become possible. The Zambian private sector can deal directly with the state (civil servants), instead of politicians and their private interests. They can do so in the knowledge that the civil service is not trying to get an angle, trying to procure a bribe, but is simply carrying out the policy of the government of the day.

    3) Legal framework for parastatals.

    Again this ties in with points 1 and 2, the separation of the civil service from politicians. There should never be political appointments to management positions in parastatals. This is the main stumbling block to their success. No cousins, no cadres, just promotions based on merit. Even the ancient Chinese promoted civil servants through civil service exams only.

    4) Subsidiarity

    The decentralization of government and decision making to the lowest level of government (local and municipal councils), instead of keeping decision making powers in the cabinet or ministries.


    This can all be done through the constitution. Right now, the constitution has very little to say about local government, the civil service, etc., however it is very detailed about who can run for president, which shows you the priorities of who wrote it.

    What has not happened in the last 18 years of neoliberal rule, is that the market stepped in to provide service to the same degree as the government has, let alone more efficienty or at a lower price.

    This is why the neoliberal free market theory has to be let go of, the way western governments are letting go of it.

    It is neoliberalism, which was the theory and the experiment, and it has cost Zambia billions of dollars in profits and taxes from the mines alone.

    In fact, you can see in the fact that after privatisation, the government needs to rely on more and more donor aid, the evidence that neoliberalism has failed. It has not lead to prosperity, a broader tax base, a reduction in poverty, or perhaps the most important benchmark for the success of free market economics, a professionalisation of the informal economy.

    Again, it is neoliberalism (free trade, deregulation and privatisation) which is the theory and the experiment, and the experiment has failed disastrously.

    On the running of parastatals, we should learn from the Japanese and Koreans, even the Saudis and SAUDI-ARAMCO.

    And lastly, because a company is set up by the state, it doesn't mean they can't be floated to the stockmarket at some later date, even a predetermined date.

    The real problem is not government versus private sector, but rules versus no rules. The private sector is at least as corrupt as the government, in the absence of strict regulation. We have seen this with Enron, with the present Credit Default Swap derivatives, etc. For that matter, we saw it with the Saving & Loans thrifts, the junkbonds, the corporate raiding and asset stripping of the 1980s, or for that matter the real estate booms of the 1920s and the robber barons before that.

    The difference is regulation and incentives.

    If the civil service had a proper regulatory framework, which not spelled out it's obligations but also protected it and the integrity of it's work, the outcomes would be very different.

    I don't know if you have read this article in today's Post:

    Rural farmers are more vulnerable, says Chituwo
    Written by Christopher Miti in Chipata
    Monday, April 27, 2009 2:53:48 PM

    In it the minister of agriculture starts of very well, with identifying a need for increased processing of tobacco and the money it can make for local farmers. However, he then leaves the actual implementation of this 'plan' to 'foreign investors' and 'the free market'. I quote:

    “We cannot get directly into the selling and buying of tobacco; that is not in the policy and in any case as you very well know, it is a well known fact now that government is not the best to do business because the players in government would say after all nivaboma [it’s for the government] and we really did not get things right, so government’s role is to create this environment, get the private sector flourish and our benefit as government and as citizens is to get the revenue from there so that we are able to provide the services,” said Dr Chituwo.I'm sorry, but in business, taking responsibility means only one thing - that is you take ownership of the outcome. If the plan fails, you fail. If the plan succeeds, you succeed.

    I don't see the government taking responsibility for the outcome at all. If the plan is to get tobacco processed in Zambia to encourage more farmers to grow tobacco, they should be doing whatever it takes for tobacco to be processed in Zambia, not drop the ball half way down the field, and hope someone else will pick it up and carry it across the finish line.

    This is the damage that neoliberal ideology is doing.

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