Find us on Google+

Tuesday, 7 June 2011

Who will help the Zambians?

Khadija Sharife asks in this striking assessment on the failure of the Zambian people to reap meaningful revenues from copper.  Despite the apparent 'success' of the privatisation of the copper industry, the true picture remains that of a helpless people facing an extraordinary league of corrupt politicians and predatory multinationals, which has seen national assets sold 'for a song' and persistent tax dodging .

During the 1970s, Zambia was one of the world's leading copper producers, extracting over 700,000 tonnes per annum. These days, Zambia leads the ranks as a top copper producer at more than 800,000 tonnes (2010). Much of the success has been credited to the privatisation of the copper industry. It has been almost two decades since Zambia's ailing copper industry, beset by low commodity prices and skyrocketing debt, was privatised. The process was described by the New York Times in 1996 as, 'Westerniz[ing] the economy with a combination of help and arm-twisting from the World Bank and the International Monetary Fund, the lead lenders for the $6.3 billion in external debt the country is carrying.'

The article went on to describe how, 'All exchange controls, tariff barriers and food subsidies have been dropped in the shock-treatment switch-over to rampant capitalism... Virtually everything the state owned is for sale, from the national concrete industry to corner grocery stores to antique steam trains to leases on camps in the national parks.' Within two years, over 140 entities had been sold, eventually expanding to 282 entities.

The World Bank credited the privatisation of Zambia as the most successful in the region largely due to the 'limited interference' of the government. The article further noted, crucially, the process through which the 'crown jewel', the Zambia Consolidated Copper Mines (ZCCM) was auctioned. 'The privatization agency has five Wall Street investment bankers on staff, their salaries paid by the United States Agency for International Development. The copper deal is so big that the World Bank brought in the investment bank N. M. Rothschild & Sons and the London law firm Clifford Chance as consultants.'

The ZCCM was split into seven units and cumulatively sold for just US$627 million, accompanied, according to Professor Mpanda, by bribes. Until 2006, the 'development agreements' privatising Zambian copper were accorded a legal confidential status equivalent to the Zambian constitution. Even relevant ministries and members of parliament were not allowed access until a copy of the agreements were leaked: the agreement disclosed that multinationals were exempt from most of ZCCM liabilities. The Investment Law and the Mines and Minerals Law of 1995 created a 3 per cent royalty fee that companies evaded (demanding and achieving a 0.6 per cent royalty structure instead). But this in itself is vastly differed from royalties rates in other copper-producing countries: 5-14 per cent in Chile and 5-10 per cent in developing countries all over the world.

According to an official in the Department of Mining, 'The private sector wanted concessions ... so in the Mining Act you find provisions for these concessions.' The legislation deliberately included vacuums that shifted articulation to individual development agreements. Royalties were reduced to 0.6 per cent as opposed to the 3 per cent established. Provisions granted to multinationals included stability periods extending for up to 20 years, rendering multinationals exempt from legislation implemented by parliament and other national and legal alterations; the right to carry over losses throughout the 'stability periods'; 100 per cent foreign currency retention, remittance and provision for capital investment deductions; zero withholding tax; and various other fiscal and para-fiscal exemptions ranging from customs duty to environmental pollution and penalties; pension schemes, and contracting of casual workers - accounting for 45 per cent of the workforce, amongst others.

Companies were exempt from paying pensions to employees, from many laws (including environmental pollution, etc). Stated former finance minister Edith Nawakwi: 'We were told by advisers, who included the International Monetary Fund and the World Bank that ... for the next 20 years, Zambian copper would not make a profit. [Conversely, if we privatised] we would be able to access debt relief, and this was a huge carrot in front of us - like waving medicine in front of a dying woman. We had no option [but to go ahead].'

The first consortium to approach the ZPA (Zambia Privatisation Agency) was the 'Kafue' consortium, composed of the Commonwealth Development Corporation - Noranda, Phelps and Anglo-Vaal Mining Ltd (USA) offering US$131 million in addition to an investment package of US$1.1 billion. Zambian president Frederick Chiluba refused, claiming ZCCM should not be 'sold for a song'. After transferring the responsibility of privatisation to the former executive director of ZCCM (1973-91), Anglo-American, present in Zambia since the early 1930s, emerged the winner and exercised the company's pre-emptive rights by purchasing 65 per cent of the Konkola Copper Mines (KCM) - Zambia's best untapped reserve - via Zambia Copper Investments (ZCI) at a cash price of US$90 million, with promised investment of just US$300 million.

Peter Sinkamba of NGO groups Citizens for a Better Environment claimed that Anglo used their position on the board of ZCCM to sabotage negotiations with the Kafue consortium. 'Anglo's package included a bundle of mines such as Nkana and Nchanga, producing over 50 per cent of Zambia's copper, and ZCCM's glory - the Konkola mine. Previously, Paris Club donors refused to release US$530 million balance of payments until the sale of Nkana and Nchanga mines. Two years after acquiring KCM for 'a song', Anglo sold the mine.'

'The coming of Anglo to Konkola Deep was like a sinking man clasping at a serpent ... not that Anglo is a serpent,' said Anderson Mazoka, former Anglo head in Zambia. 'Prior, the Mineworkers' Union of Zambia, previously holding a representative position on the board via head Ernest Mutale was removed and no longer privy to the bidding process. The move by Anglo to acquire the mine was allegedly to lock up resources in Zambia, given Konkola's status as the largest copper mine in Zambia. Anglo's move was described by Abel Mkandawire then-chairman of Zambia's Chamber of Commerce, [as] "as good as closing Zambia".'

In 2004, UK-based corporation Vedanta Resources acquired 51 per cent of shares in KCM, known as the largest copper mine in the world, for $48 million cash. In the three-month period that followed, the company registered profits of $26 million from KCM. A call option secretly negotiated in 2004 also allowed the company to exercise the right to purchase ZCI's 28.4 per cent shares, effectively granting Vedanta a 79.4 per cent monopoly. The Zambian government aided in the process, by removing the Competition Commission (ZCC) to enable Vedanta to become the majority shareholder. According to MP Given Lubinda, 'The decision government took to invoke section 3 of the Competition and Fair Trading declared the ZCC totally irrelevant in the governance of Zambia which is really sad.' The World Bank's IFC (International Finance Corporation) reported that, thanks to corporate incentives, effective tax rate for mining companies was 'effectively zero'.

Despite being the world's copper powerhouse, Zambia is now one of the world's 25 poorest nations. Though copper provides about 80 per cent of foreign exchange earnings, mining employs just 10 per cent of salaried workers, contributes just 2.2 per cent of revenue to the government's tax agency (ZRA - Zambia Revenue Authority) and 9.7 per cent to GDP (gross domestic product). The drastic increase in price was primarily due to China's increased copper needs, rising to US$10,000 per tonne. The bulk of copper in Zambia is exported to Switzerland - on paper, that is.

Glencore International AG, based in Baar, Switzerland (the world's leading secrecy jurisdiction), controls over 50 per cent of the world's global copper market. In Zambia, the company owns Mopani Copper Mines encompassing mining sites of Mufulira and Nkana, one of the main producers of copper and cobalt in Zambia. MCM, incorporated under Zambian law, is owned by the British Virgin Islands-based company called Carlisa Investments Corporations (73.1 per cent), which itself is owned by the Bermuda-based Glencore Finance Ltd (81.2 per cent), which is a fully owned by Glencore Switzerland. First Quantum constitutes an owner alongside Glencore indirectly via Skyblue Enterprise Incorporated (18.8 per cent), 100 per cent owned by First Quantum Minerals Limited; the company also directly owns 16.9 per cent of MCM. The ZCCM owns 10 per cent.

According to French advocacy attorneys Sherpa, in 2000 Mopani signed a 'development agreement' with the Zambian government obtaining a royalty rate of 0.6 per cent, corporate tax of 25 per cent, exemptions on customs duty and a 'stability period' of 20 years written as a legal clause. Mopani, however, like many others mining copper in Zambia, reports no profits and is therefore able to diminish taxes owed. In 2008, the ZRA contacted two Norwegian accounting firms (Grant Thornton and Econ Poyry) to conduct an audit on mining companies. MCM was amongst the mines. The report included in-depth analysis of documents made available as well as interviews with company executives in 2009.

Sherpa discloses the various means used by MCM to avoid taxation, noted by the firms:

'Overestimates of operating costs:

Comparative analysis reveals that Mopani's costs are much higher than those of comparable mining companies operating in Zambia. Mopani's operating costs in 2007 stood at $804.91 million, a full $381.21 million higher than the auditing team's previsions. No single factor appears capable of justifying such a discrepancy, since Mopani's activities had gone on normally between 2005 and 200[figure missing], without significant change or development. Production didn't go up, and actually remained relatively steady.

'Underestimates of production volumes:

Extensive revenue analysis revealed cobalt extraction rates twice inferior to other producers of the same area - a difference deemed unlikely by the auditors and which indicates that some of the ore extracted by Mopani could remain undeclared.

'Transfer pricing manipulation and breach of the Arm's Length principle:

The company's production is sold, both locally and internationally, via its main buyer Glencore International AG, who also happens to be Mopani's parent company. After careful revenue analysis, it appears that the sales from Mopani to Glencore fail to comply with the OECD "Arm's Length" principle: minerals are sold to Glencore under conditions that would not apply to a third-party buyer... According to the audit, Mopani seems to prefer selling its production to Glencore whenever prices are at their lowest, something a buyer, not a seller, would be likely to do.'

The findings of the report came to light only after it was leaked to the public. In the past, Christian Aid has highlighted the vast difference in pricing between copper exports to Switzerland and the drastically increased price that Switzerland (chiefly via Glencore) receives when exporting almost identical copper products. The group claims that the total value received in 2008 would have been six times higher than it was, adding $11.4 billion to Zambia's GDP which in that year totalled $14.3 billion. Further, the organisation notes that while half of Zambia's copper exports were earmarked for Switzerland (2008) as they left the country's customs, Swiss import data claims it never arrived, prompting Christian Aid to inquire about who actually receives these goods.

This is, of course, a common script for Africa: the bulk of the illicit flight (estimated by Global Financial Integrity at 60 per cent) is often siphoned not by rogue regimes but instead by corporations through 'underpricing, overpricing, misinvoicing and making completely fake transactions, often between subsidiaries of the same multinational company, bank transfers to offshore accounts from high street banks offering offshore accounts, and companies formed offshore to keep property out of the sight of the tax collectors. According to a survey assessing the economic practices of 476 multinational corporations, 80 per cent acknowledge that transfer pricing remains central to their tax strategy. And another study into the largest quoted companies in the Netherlands, France and the UK, notes that 99 per cent of those for which information was uncovered operate through secrecy jurisdictions.

As previously mentioned, tax havens play a considerable role in Africa. The ZCI (involved in the Vedanta case) was Bermudan registered. Vedanta Resources, known as Zambia's largest copper producer (and allegedly largest employer following the government), is majority-owned (53.29 per cent) and controlled by Anil Agarwal and family through a trust (Volcan Investments Ltd incorporated in the Bahamas), which owns the Mauritian-based TwinStar Holding Ltd, as well as four different financial companies operating from the UK's tax haven island of Jersey.

Other mining companies include First Quantum (Kansanshi Holdings Limited, owns the Kansanshi mine, allegedly the world's eight-largest mine. Kansanshi Mining PLC owns 80 per cent; ZCCM owns 20 per cent). Though Kansanshi Mining PLC is incorporated in Zambia, the finance arm (Kansanshi Holdings Ltd - 100 per cent owned) is incorporated in Ireland, another tax haven. Metorex, a copper/cobalt company, owns assets in Zambia as well as neighbouring DRC (Democratic Republic of Congo); the company owns 85 per cent of Chibuluma Mines plc, a subsidiary company, and holds another subsidiary company called Copper Resources Corporation (100 per cent owned) based in the British Virgin Islands, another tax haven.

The audit revealed that Glencore, the purchaser determined the prices that copper from Mopani was to be sold, with some copper sold under an 'old' contract to the LME. While the copper from Mopani was grade + 1, Glencore consistently purchased it at below market value.

Tax Information Exchange Agreements (TIEAs) are being signed between host/home and 'tax haven' jurisdiction. But these TIEAs require probing authorities to present the identities of people under examination, the information that is sought, the tax purposes for which the data is being sought, proof that the information is held in the jurisdiction etc - all of which legally prevents any 'fishing', and all of which is deliberately concealed by the laws of the secrecy jurisdiction. This was unpacked by the Unilever v. Kenya tax authorities case (Unilever Kenya Ltd v. Commissioners of Income Tax 2003), evidencing that while tax authorities may document mispricing, the lack of mandatory multilateral corporate country-by-country reporting renders transfer mispricing - as articulated in the Mopani scandal, incidents that cannot be proved.

Tax competition, such as the lowering of royalty rates, is often proposed by the IMF and World Bank as the primary means of attracting foreign investment to developing countries. But as global consulting firm McKinsey reveals, 'Popular incentives such as tax holidays, serve only to detract value from those investments that would likely be made in any case' (2004).

Bank Watch estimates that Vedanta via KCM remitted just 0.6 per cent of royalties to the government instead of the usual 5-10 per cent developing countries should receive. As such, Vedanta remitted just US$6.1 million from KCM despite the company extracting ore valued at US$1 billion, raking in over US$310 million in 2007 - the equivalent of the Zambian health budget. In addition to the fact that allegedly 50 per cent of taxes remitted to the government were derived from PAYE (pay as you earn), sub-contracted labourers are paid just £37 per month instead of £150 they require for a living wage.

In April 2008, the last year of the five-year commodity boom, when copper hit US$9,000 per tonne, then-Zambian president Levy Mwanawasa exclaimed that Zambia must no longer accept the pennies from copper mines. And though prices increased, Zambia's revenue actually decreased, by 50 per cent from 1.4 per cent (2003) to 0.7 per cent (2004). The government introduced a 25 per cent windfall tax, raised mineral royalties to 3 per cent and corporate tax to 30 per cent.

But soon after, mining houses engaged in intensive lobbying. Current Zambian President Rupiah Banda claims that the windfall tax will not be implemented again. In fact, soon after introduction, it was scrapped. The government has since agreed to a new 10-year tax stabilisation regime. According to an article in the Guardian dated May 2011 (quoting Andreas Missbach, managing director of Berne Declaration, a Swiss-based NGO), Glencore continues to pay just 0.6 per cent in royalties. As Mines Minister Maxwell Mwale stated in December 2008, mining companies asked the government 'to help them survive a commodities downturn' by removing inconvenient and costly taxes.

And yet, after this considerable charity has been provided to the world's richest companies, the question remains: who will help the Zambians?

Incentive for Mining

Mining companies have additional incentives as follows:

- Period of carry forward of mining losses has been extended from 5 to 10 years
- Withholding tax on interest, rent, consultancy, royalties and dividends is only 15 per cent
- The restriction of offsetting losses against profits, which is limited to 20 per cent for mines with a common owner, has been removed so that 100 per cent of the losses can be offset
- Duty-free importation of capital equipment and utility vehicles
- Input tax claim for five years on pre-production expenditure for exploration companies in the mining sector
- Zero rate on mining products for export.


  1. This is an absolute disgrace. We need to spread the word more in western media so we can pressure western governments to do more about this. Although, if only it were that simple....

  2. The small thieves are in jail. The big ones are in Government....

  3. Hi Ruth,

    The small thieves are in jail. The big ones are in Government....

    The small thieves are in jail, the middling thieves are in State House, but the big thieves are in Switzerland. :)

    In fact the CEO of Mopani's owner Glencore AG, Marc Rich, has been convicted for sanctions busting, illegal arms trading, and tax evasion.
    He was pardoned by Bill Clinton. How is that for big? :)

  4. Seriously, I wouldn't immediately advocate nationalisation, but should most definitely be a last option when transnational corporations engage in tax evasion, like Glencore does.

    The government should not simply stand by and watch hundreds of millions of dollars leave the country.

    When they do, there should be remedies, and they should go to jail for a long time.

    However, there is no reason why future mines would not be surveyed, mined and have ore processed by 100% state owned enterprises.

    What Zambia really needs, is a constitution that separates the powers of state - the legislative, judiciary and executive. It should also separate the party in government from the government, the and the elected government (president, ministers) from the state (civil service, parastastals).

    There should also be oversight in contracts, budgeting and other major decisions from parliament.

    Ultimately however, what is needed is an African continent wide agreement that raw materials can only be sold to the state at cost, and can only be sold by the state at international market prices.

    That would eliminate 99% of all wars in Africa.

  5. MrK, you are been very unfair on Marc Rich. Granted he went on the run because of tax evasion in the USA. However be informed that Marc Rich exited Glencore in 1994. He sold it for about $600m to a number of his managers. Glencore bought the Zambian copper assets (Mopani)in 1998; four years after Marc had already left. The CEO of Glencore is Ivan Glassenberg a Johannesburg born South African. He is now worth $10bn after Glencore went public.

  6. Frank,

    You're sort of right and sort of wrong about Glencore ownership. However, saying I have been 'very unfair' to Marc Rich is pushing the envelope. :)

    Quoting wikipedia:

    In 1993 and 1994, after failing to control the zinc market, losing $172 million and nearly bankrupting the company, Rich was forced[13][11] to sell his majority share in Marc Rich & Co. AG back to the company.[14] The enterprise, renamed Glencore, is now owned and run by Marc Rich's secretive inner-circle of "lieutenants", including founding Glencore CEO Willy Strothotte and present CEO Ivan Glasenberg.

    From the Reuters article, The Biggest Company You Never Heard Of.

    On Marc Rich's involvement, and whether I have been unfair to Marc Rich:


    Glencore likes to promote from within and build a kind of closed, self-sustaining network of senior traders, a culture encouraged by the company's founder Marc Rich. Not that Glencore likes to mention Rich, a figure so notorious that he's not even mentioned in the official history on Glencore's website.

    Rich escaped Nazi Europe as a seven year old, and grew up in the United States. He launched the trading group which would become Glencore under his own name in 1974.

    Rich was a sensation in commodity circles -- he is credited by some with the invention of the spot market for crude oil -- but by 1983 U.S. authorities had charged him with evading taxes and selling oil to Iran during the 1979-81 hostage crisis and Rich fled to Switzerland where he lived as a fugitive for 17 years.

    Rich has always insisted he did nothing illegal and he was officially pardoned by Bill Clinton on the President's last day in the White House in January 2001. Among those who lobbied on his behalf were Israeli political heavyweights Ehud Barak and Shimon Peres, according to "The King of Oil", a book about Rich by journalist Daniel Ammann. In the book -- written after interviews with Rich - the trader admits supplying oil to apartheid South Africa, bribing officials in countries such as Nigeria and assisting Mossad, Israel's intelligence agency. In the time of the Shah, Rich says, he engineered a deal for a secret pipeline through which Iran could pump oil to Israel.

    "(Rich) was faster and more aggressive than his competitors," Ammann told Reuters last year. "He was able to recognize trends and seize opportunities before other traders. And he went where others feared to tread -- geographically and morally. Trust and loyalty are very important to him. In many deals he wouldn't rely on contracts but on the idea that 'my word is my bond'."

    Living as a fugitive put a strain on Rich, but according to Ammann, it was a business blunder in 1992 that paved the way for the power struggle that ended his connection with the trading house he had founded. Rich spent more than $1 billion trying in vain to control the zinc market. His bid failed and with $172 million in losses, the firm was close to collapse. Rich was ultimately forced to sell out to his management and hand over control to a former metals trader, the German Willy Strothotte.

    The forced sale, in 1994, netted Rich a reported $480 million. He picked up an extra $120 million when the firm was revalued and he learned its new owners had broken their side of the deal by secretly selling on around 20 percent of the stock. Fifteen years ago, then, his majority stake in the company translated into about $600 million. Today the company is worth $60 billion, according to Liberum Capital.

  7. Under "ACTIVIST RISKS", the article mentions Zambia:

    "Trading companies like Glencore are notoriously opaque, even by the standards of an opaque sector like natural resources. They deal with a part of the chain that is particularly prone to mismanagement, corruption and diversion," Hayman says. "Hopefully listing will bring more transparency and allow greater scrutiny of its operations, which is good news."

    In one example, officials in Zambia believe pollution from Glencore's Mopani mines is causing acid rain and health problems in an area where 5 million people live. The Environmental Council of Zambia has said it is looking into "a number of complaints" regarding pollution from Mopani, but has not penalized the company for any wrongdoing.

    "Smelting operations release sulphur dioxide and other pollutants which have severely affected residents with various skin, eye and respiratory diseases. Because of mining waste Mufulira has acidic and poisoned water," Mufulira town clerk Charles Mwandila told Reuters in an interview.

    Mopani says it has already significantly improved environmental performance since privatization, and is following a clear and agreed plan to make further progress. "Investment to improve environmental performance has already amounted to some $300 million with another $150 million of investment planned."

    Not mentioning that these $450 million are the Zambian people's to begin with, and that they are used to clean up the mess Glencore/Mopani created.

    The Zambian mines are better off in the hands of the state.

  8. This comment has been removed by the author.

  9. This comment has been removed by the author.

  10. Again, on whether I have been 'very unfair' to Marc Rich - from Business Week:

    The Rich Boys - An ultra-secretive network rules independent oil trading. Its mentor: Marc Rich

    Rich's companies pleaded guilty to some charges and paid about $200 million in fines, penalties, and taxes, but the case remained open until the pardon. "Rich's philosophy is that no law applies to him," says Morris "Sandy" Weinberg Jr., the former U.S. prosecutor who pursued and indicted Rich in 1983.

    Over the years, Rich has mentored scores of traders. Although the 70-year-old is past his peak in the business, according to industry experts, his protégés are thriving. "You could call it the University of Marc Rich," says a Senate investigator. As Alaskan and North Sea oil production declines, new supplies increasingly come from some of the most corrupt or politically unstable places on earth, such as Equatorial Guinea and Sudan. These are the new frontiers where major U.S. oil companies fear to tread because of sanctions, embargoes, and antibribery and anti-terrorism laws. But it's where these traders, many like characters out of the James Bond flick Goldfinger, make good money, especially when oil tops $60 a barrel.

    This is no good advert for the concept of unregulated 'free trade' markets. Why would Zambia be on Marc Rich's (and his 'proteges') list of countries where they can rob and steal like in the Sudan, DRC, etc, if it were not for the 'hands off' attitude taken by the MMD?

    It is a license to steal, and that is exactly what happened and is still happening, irrespective of the government knowing about it.

  11. Mrk; please I have indicated in my previous post that I know that Marc Rich had been on the run from America on tax evasion charges and that he was pardoned by Bill Clinton shortly before he left office in 2000. My point of departure with you is your misdirected and continous attacks on him with regard to Mopani and Zambia. He has nothing to do with it. He sold the company in 1994 to his management team or 'Marc Rich boys' as you would like to call them for $600m. Rather than wasting time on Marc Rich's history, I would rather Zambians concern themselves with what measures to institute so that Zambians get a proper share from their resources. What we should be asking ourselves is whether institutions like the Zambia Revenue Authority are fit for purpose. Does ZRA have qualified personnel to deal with the auditing of mine accounts? Do we have an inspectorate division at the Mines Ministry that tracks mine production figures and watches what goes out of the country? Who buys Zambian copper and at what price? Does the sale price approximate to the prevailing quoted copper prices on the international market? This is what we should concern ourselves with instead of Marc Rich's childhood and his criminal past. The dude moved on from Glencore in 1994. The Glencore guys fleecing Zambia are mainly a bunch of South Africans from Joburg! They are doing this because they find it easy! The responsibility is on Zambians to seal the loopholes! Solutions, Solutions and Solutions that should be our main focus!


All contributors should follow the basic principles of a productive dialogue: communicate their perspective, ask, comment, respond,and share information and knowledge, but do all this with a positive approach.

This is a friendly website. However, if you feel compelled to comment 'anonymously', you are strongly encouraged to state your location / adopt a unique nick name so that other commentators/readers do not confuse your comments with other individuals also commenting anonymously.