Post editorial: "Sickening Irresponsibility on mineral royalty tax"

**As with all stories from The Post, you will require an online subscription to access the link**

Today's editorial in The Post newspaper is entitled, "Sickening irresponsibility on mineral royalty tax". It's tone reflects deepening concern that the Minister of Finance is showing little energy in following through on his commitment to renegotiate existing Development Agreements. The Post seems to have been particularly provoked by recent debates in Parliament and the Minister's cancellation of an interview with the paper on the issue (reported on the front page today).

The editorial notes, "During 2006, preceding the general elections finance minister Ng’andu Magande made several loud, but now worthless public announcements that government was going to revise the mineral royalty tax. However, as we have seen from the 2007 budget proposals, there is little to show for it. Magande must learn to walk the talk."

The Post also discusses the role of the IMF in the negotiations. "We know that the 2006 IMF mission at the invitation of government held meetings with Evans Chibiliti, the Secretary to the Treasury and chair of the technical committee examining development agreements and the fiscal regime for the mining sector. What did Chibiliti do? Did he invite all the stakeholders and existing mining houses with development agreements for a discussion? From what we have gathered, no meaningful discussions have taken place to-date either with the mining houses or stakeholders. Yet we know from reading the IMF recommendations on mineral royalty taxes, which report neither the Ministry of Mines nor Cabinet has seen or discussed, that Magande carelessly accepted the IMF recommendations and proposed those he could get away with under the 2007 budget."

As 'For Whom the Windfalls?' reports, we know that this isn't quite right. Although there haven't been any substantive discussions with individual companies about revising agreements, during the IMF mission, the Ministry of Finance attempted to use the IMF's recommendations to pressure the companies, and did indeed invite representatives of some of the mining companies, led by the Chamber of Mines, to a meeting with Ministry officials and the IMF team. At the meeting the IMF's proposals were discussed. As 'For Whom the Windfalls?' revealed, the companies were annoyed, feeling hi-jacked by the meeting. However by the end of it, they were also confident that they had seen off proposals they could not accept. It was in discussion of these meetings with mine management that the minewatchzambia researchers first heard the argument that there might be a revision of the mineral royalties, but with an exemption for existing contract holders, which is, so far, exactly what has happened. Company executives claimed that they convinced the IMF of this position.

The Post claims that although the Cabinet and Ministry of Mines haven't seen the IMF recommendations, The Post has read a copy itself. Minewatcher will approach The Post for its copy of the recommendations, and will put them on this site if they are forwarded. Anyone else with access should feel free to forward the documents.

The Post claims also asks: "And we have to ask; why have parliamentarians not seen the development agreements? Why is government hiding these agreements from Parliament and therefore the public?" We know that members of the Mine Watch Zambia network have distributed copies of 'For Whom the Windfalls?' to a large number of Parliamentarians, and that they should therefore be aware that some of the Development Agreements are available to them and everyone else on this website. The question seems to me to be: why does Government not lodge copies of all the Development Agreements, and the annual reports from each of the companies to the Ministry of Mines in Parliament for inspection by MPs, and online for inspection by all citizens?

KCM and Environmental Council reach amicable settlement

ZANIS, the Zambian Government News Agency, is reporting via Zambian radio stations this morning (I will try to find an internet link) that Konkola Copper Mines (KCM), owned by Anglo-Indian multinational Vedanta Resources have reached an 'amicable settlement' with the Environmental Council of Zambia (ECZ) over its pollution of the Kafue River.

The issue is discussed in detail in the 'For Whom the Windfalls?' report, and was an issue of significant controversy in the country late last year, due to the severity of the poisoning of one of Zambia's main water sources and the perceived failings of Government in general and regulatory authorities such as ECZ in particular to hold companies accountable for illegal activities in terms of environment, labour and health and safety.

The details of the settlement will no doubt emerge in days to come, but the terms being reported in the media seem incredibly generous to the company, especially given that immediately following the spill, ECZ were threatening legal action against the company. KCM has apparently replaced all of the corroded pipes in its pollution control dam, which were responsible for the original spill, and has provided boreholes so that residents in the local townships and villages most immediately affected by the spill can access water without recourse to the river itself.

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Committee on Economic Affairs and Labour pressures Mining Companies

A message below from John Lungu.
"On 28 February 2007, the Clerk of the National Assembly wrote to the Chamber of Mines (the representative body for the mining companies) asking them questions on the adequacy of Zambia's Legal and Policy Framework on Investment. The critical questions asked were:
i) What the national Investment objectives are
ii) What Government responsbilities to foreign investors are
iii) What Government responsibilities to local investors are
iv) What the investors responsibilities to workers are
V) What the investors responsibilities to the communities within which they operate are; and
vi) What the responsibilities of the investors are to the economy at large. The answers the Chamber of Mine will provide to these questions will be very interesting to follow because they will either provide the defence we all await for or will agree with the findings of the report "For Whom the Windfalls?" The CSTNZ and CCJDP in Lusaka should be on the lookout when the General Manager of the Chamber of Mines finally appears before the parliamentary committee.
John Lungu"

Pressure for renegotiation: are DAs unconstitutional?

As noted in the last entry to this blog, revealing corruption in the process of negotiating mining companies' original contracts offers one potential source of pressure on the companies to accept a renegotiation. Still, proving corruption in the Zambian courts has historically proved an extremely drawn out process. So what other sources of pressure are there?

This blog has also previously proposed that research to demonstrate that companies are in breach of the commitments they made in the Development Agreements (DAs) could be another source of pressure.

A third course is proposed in a letter from Nkula Kaoma in The Post today. I will quote it at length since the argument is technical and complex. The letter argues that "Article 114 (3) of the Constitution provides that, “Parliament may make provision under which the President or the Vice President or a minister may by order provide that, on or after the publication of a Bill being a Bill approved by the President that it is proposed to introduce into the National Assembly and providing for the imposition or alteration of taxation, such provisions of the Bill as may be specified in the order shall have the force of law for such period and subject to such conditions as may be prescribed by Parliament:”

...These development agreements... altered the payment of royalties from 3 per cent to 0.6 per cent and that they were signed by the minister and the new mine owners.

Bearing in mind that royalties form part of taxation, were these development agreements presented in the National Assembly by the President, Vice President or Minister as “orders” seeking to alter taxation known as royalties as provided for by Article 114 (3) of the Constitution?

.... If these development agreements were not presented as “orders” in the National Assembly seeking to alter taxation, then they are in breach of the Constitution and any other law (section 9 (2) of the mines and minerals Act) which is inconsistent with the Constitution, that other law shall, to the extent of the inconsistency be void.

As such, these development agreements can be altered by government without any breach so as to impose meaningful taxation in the mining industry for the benefit of the country."

I don't have the legal knowledge to know what value this argument has. What do readers think?

CORRECTION: Oh the irony! World Bank advises Zambia to renegotiate

**Apologies for any confusion caused. The Post has corrected its report today (Friday 30 March), pointing out that Eva Jolly is not, as described below, a senior advisor to the World Bank. She is a Norwegian Government advisor, working on an assignment for the World Bank. Shame. Let's hope the Bank take her arguments seriously. In another story in The Post today, it is suggested that Jolly will meet Finanance Minister Magande on Monday.**

++
The Post reports today that a senior advisor to the World Bank on corruption, Eva Jolly, has advised Zambian parliamentarians that the country should renegotiate its contracts with mining companies.

While the intervention will be welcomed by many in Zambia, they will also probably remember the World Bank’s central role in the design of the privatisation process and the negotiation of the self-same contracts. Anyone needing a refresher would do well to look at the Afronet/RAID report here. As discussed in the ‘For Whom The Windfalls?’ report, to the fury of the mining companies, the Zambian Government has also been using the IMF to increase pressure on the companies for renegotiation.

Minewatchers of a forgiving nature will probably want to ignore the irony of the situation and welcome all repentant sinners into the fold, particularly as the companies now appear to find themselves under attack from every angle, with Government, Parliament, civil society and elements of the EU, IMF and World Bank all backing a renegotiation. Donors appear to have recognised that the privatisation process has returned a pathetically small amount of revenue to the Zambian state, increasing pressure on either donors or the already hard-pressed Zambian workforce and consumers to increase their contributions.

The Post reports that Jolly told members of the African Parliamentary Network Against Corruption (APNAC): "I think this is an interesting question for Zambia because you have contracts in mining industry which require getting tax on results but it is very difficult to calculate what this result is… Probably you don't have specialised people to look into the mining companies. It's much safer for you probably to have loyalties (sic: royalties presumably) than to have taxation on the benefits. Then you can have loyalty (sic) on each tonne of copper being exported. It is then easier to control." Commenting on Zambia's mining contracts, Jolly took a similar line to Patriotic Front MPs in a recent debate on renegotiation of the contracts, proposing that an investigation of elements of corruption in the negotiation of the original contracts should be the key to re-opening talks, "Looking at them, I am very shocked that Zambia is being deprived of rent of its land. I think maybe time has come to renegotiate these contracts. These contracts are depriving you of too much… If you can prove that these contracts were elaborated with corruption within them, they can be cancelled... If you can prove that the negotiators from the Zambian side were paid from the mining industry then you can cancel them… That is the most dramatic way of doing it."

In the same article, The Post notes that APNAC chairperson and high-profile Patriotic Front MP Given Lubinda announced that his organisation would start mobilising resources to deal with issues of the mining agreements.

MPs and business leaders backs renegotiation - but why just 3%?

Last Wednesday, the Parliamentary Committee on Estimates presented its report on the Revision of the Mines and Mineral Development Act. Parliament also voted to take the revisions to a second reading, which will be heard tomorrow, Wednesday 28 March at 1430 (minewatcher will be in the gallery and will report back on this blog - if you are in Lusaka, join me!).

The committee’s report recommended removing the exemption in the draft legislation that leaves current investors outside of forthcoming tax rate hikes for mining companies. The debate on the report featured Finance Minister Magande in a one-man battle against hostile questioning from the Chairman of the Committee and several opposition MPs. Parliamentarians raised many arguments supportive of the critical line developed in ‘For Whom the Windfalls?’. In particular, the focus on just 3% as a new target for mineral royalties was questioned. It was also suggested that the Anti-Corruption Commission be tasked with investigating the process by which Development Agreements were negotiated, and that such an inquiry might provide leverage to re-open the discussion with companies. I imagine that both the report and the transcript of the debate will be available on the Parliament website at some point, but I can’t find them for the moment.

The Post newspaper reported today (as always, you need a subscription to access this link) that Justice minister George Kunda told Parliament, "At the time the development agreements were being negotiated in 2000, the bargaining power of government was very weak, we were more or less desperate and we needed to sale the mines or else they would collapse." The Post also states that he warned that the consequences of breaching the agreements would lead to harsh penalties and that Zambia could be taken for arbitration in London and lose more money. However, Kunda said the development agreements signed provided for renegotiations, which government would embark on. Minewatcher is unclear what clauses of the Development Agreements, published for the first time on this website, that claim refers to, but would be interested in any comments from readers who have legal skills or have studied the agreements in detail.

The same article also quotes several business leaders entering the. Significantly, all argued that Government was within its rights to seek a renegotiation, and that investors should accept an invitation to renegotiate since circumstances have changed (i.e. prices have risen) subsequent to contracting the Development Agreements. Those quoted include Zambia Association of Chambers of Commerce and Industry (ZACCI) executive director Justin Chisulo and Economics Association of Zambia (EAZ) national secretary Chibamba Kanyama. Kanyama also argued, "The current international requirement is that governments and investors in sectors like mining should adhere to the Extractive Industry Transparency Initiative… This requires governments to always show to the public the usage of any such revenues arising from royalties and taxes while at the same time, investors should fully declare their actual contributions to host countries." This type of transparency is a long way off in Zambia at the moment.

Engineering Institute of Zambia (EIZ) chairman Charles Sakanya, University of Zambia (UNZA) School of Mines Professor Imasiku Nyambe and Zambia Association of Manufacturers vice president Oswald Mwewa were also quoted backing renegotiation. Mwewa questioned why Government was repeatedly promoting the figure of three per cent for mineral royalties. "I don't know how government arrived on that," he said. "When you say three per cent is the world average, what are the highest and the lowest?"

President calls for SADC copper cartel

The Post in an article today on a Zambia-Namibia bilateral trade deal makes a very brief mention of a proposal made by Zambian President Levy Mwanawasa for the establishment of a Southern African Development Community (SADC) copper producers' cartel, designed to raise and stabilise the international copper price. "This will help the copper producing countries to strengthen their pricing systems." Mwanawasa said. "We cannot have a situation where non-copper producing countries are setting the prices for us."

It is certainly true that under the current system, based on the London Metals Exchange, Zambia and all other copper producers are severely disadvantaged. The swinging price of copper has been a primary factor in Zambia's underdevelopment. Solving the problem, however, especially without the co-operation of countries that buy copper and constantly seek to drive the price down, presents a significant difficulty.

Primary product cartels have been attempted in the past, including CIPEC, a copper cartel based in Lusaka. This Wikipedia article provides useful background. Perhaps the most successful of all the producer cartels has been OPEC, the oil-producers' cartel. A significant element of OPEC's success, (and by comparison, CIPEC's failure) has been put down to its ability to hold together a sense of political solidarity between diverse producer countries, including Venezuela, Nigeria and Saudi Arabia, which control a large share of the global sources of oil. How a SADC cartel would function then is not clear, since DRC and Zambia together contribute only a relatively small share of the world's copper output. If not included in any new cartel, other copper producers in, for example, Chile and Australia which might well take advantage of any SADC cartel to undercut prices set in the cartel and increase their market share.

More information and comments on where this proposal came from, whether it has any substance, and what its impacts might be, especially from readers more economically-minded than minewatcher are very welcome.

Reader comments: Chile's success - Value of ZCCM-IH

A note below from reader Bert Manders:

Dear Mr. Fraser and Lungu,

Great to find the 'Windfalls' report. First of all my congratulations that you guys got hold of the Development Agreements (DA's) and released them on the web. A very good initiative to look at the windfall issue. The report has a good balance and we must be happy that you did not propose to re-nationalise the mines.
I am happy to accept your invitation to comment, but let me introduce myself. My name is Bert Manders and I worked as a geologist in the 1980's in the Copperbelt and Kansanshi. Since a few years I contribute mining news to a low key periodical for Dutch Expats who have lived in Zambia (Zambia Nieuwsbrief). For the issue which covered the republic's 40th birthday I prepared "Ups & Downs in Zambian Copper Mining". This resulted in a paper that I presented at a NHRZ (History Research Zambia) conference in August 2005 in Lusaka. Then, I also re-visited the mines at Chingola and Kansanshi. Below a few poorly arranged but brief comments on the Windfall report:
WHY DID CHILE SO MUCH BETTER: The Windfall report has stated somewhere that the Zambian mining industry went down because copper prices fell between 1970 and 2000. But how come that is the same period, Chile doubled its output? The prime reason for Zambia's dramatic decline was a lack in political will to invest in the mines and the inability to attract capital and expertise. ZCCM was GRZ's Milk-Cow. So, let the new companies do what they do best: making profits from copper mining and supply tax to GRZ.

PREDICT TAXES: The amount of past and future tax to GRZ should be quantified by all means. Why not ask an accountant or economist with mining experience in Oxford or the Copperbelt to predict the tax income from copper mining for the next five years. Variables like investments, costs, amortisation, carry-overs and production may be easy to find in public sources. Combine this with a variable copper price, and the mining income for GRZ can be modelled. As Dag Haglund in this blog hoped, mining companies may be willing to co-operate on tax predictions. First-Quantum makes good annual reports, but the Swiss, Indians and Chinese may seem to prefer secrecy.
VALUE OF ZCCM-IH: This 85% state company (with a 10 to 20% share in most mines) didn't contribute in the investments, but it should receive hard cash dividends some day. Can anybody predict what income ZCCM-IH will generate in a few years ? Michael Coulson made interesting remarks about the company at http://finance.google.com/finance?q=LUS:ZCCM
TOP LAWYERS: Negotiating the changes in the Development Agreements is healthier on the long term than a government decree. Kaunda's nationalisation and removal of managers in the 70's was not a great success after all. GRZ must find top-quality lawyers and accountants to negotiate on its behalf. Such top specialists should come from outside Zambia, but not be related to IMF or other money lenders. Expensive experts, but the extra tax income later will be worth it.
WHO SHOULD BLOW THE WINDFALL ? I am afraid that the tax will disappear in the GRZ budget and very little will return to the Copperbelt. Involvements by a mining company in the Copperbelt social infra-structure has its risks as well. It will start feeding with a copper spoon finger, followed by loosing the hand and before you know the arm has been consumed (all symbolic of course !). The Kansanshi Foundation (Times of Zambia, March 21) is a good start, but where does it end ? Politicians like Sata will always shout that the mining companies do too little. But do state enterprises like ZESCO and Maamba treat their workers any better?
CHINESE TAKE-AWAYS: What surprises me is not only the behaviour of the Chinese firms in Zambia, but also how soft politicians react. No measures by the government after the explosion and shooting in Chambishi. No measures when Chinese managers at Column Coal insulted the Minister of Southern Province, Mrs Simango. The Windfall report also proves that Zambians in Chinese-operated mines are very poorly paid and treated. On the medium term, the Chinese could very well purchase mines like Konkola, Mopani and Kansanshi for hard cash. After that the Zambian workers will really suffer and can only dream of those good old days at the start of the 21st century.
Bert Manders

Pressuring mining companies via European Investment Bank

++This entry is based on a note sent to MineWatchZambia network members by Peter Sinkamba, Executive Director of Citizens for a Better Environment, Kitwe:p_sinkamba@yahoo.co.uk. Peter's lobbying effort was also reported in The Post yesterday (as always with The Post you need a subscription to use this link) in a story that also noted backing for renegotiation of the Development Agreements from the UN Economic Commission for Africa economic affairs officer Mzwanele Mfunwa. Mfunwa urged government to offer public consultations before entering future mining agreements: "It is important also to communicate with the members of the public because these resources belong to every Zambian."++

Peter writes:
"We wrote to European Parliament in December last year to find out whether it was in support of mining companies in Zambia which were beneficiaries of its funds through the European Investment Bank (EIB), but which companies were frustrating government initiatives to increase revenue through increase of mineral royalty tax. In our letter we expressed concern that mining companies were going contrary to the spirit of the EU country strategy including poverty alleviation strategies such as debt-write off.

We wondered how else government was expected to reduce its dependence on foreign aid and loans if EU supported corporations were going to be in the forefront denying government maximize local revenues from mineral resources at the time mineral prices were unprecedented. We called for direct intervention in the matter by EU parliament. The response we got from EU Parliament sounded positive - that EIB has been directed to ensure corporations that used proceeds from the EU need to adhere to EU poverty alleviation strategies.

Sincerely,
Peter Sinkamba"

Parliamentary Committee Report to be presented tomorrow morning

++This entry is based on a note sent to the MineWatchZambia network by Peter Sinkamba, Executive Director of Citizens for a Better Environment, Kitwe: p_sinkamba@yahoo.co.uk. Peter's lobbying efforts are also reported in The Post newspaper today (as always with links to the Post, you need a subscription to access this). The Post also reports backing for MineWatchZambia's proposals for renegotiation of the Development Agreements from University of Zambia (UNZA) School of Mines Professor Imasiku Nyambe and Economics Association of Zambia (EAZ) national secretary Chibamba Kanyama.++

The Bill to amend the Mines and Mineral Act in Zambia has been tabled in parliament and presently it is at Committee Stage.

Relevant to the network is the Mineral Royalty Tax. According to the Bill, government is proposing to increase from 0.6 to 3% for base metals including copper. The proposal for gemstones and other precious metals is 5% and for other minerals is 2%.

The most frustrating thing is that government has inserted an exclusion clause. According to the draft bill mining companies which, by April 1st 2007, will be in possession of holding development agreements with government to pay less than the proposed figure will not be affected by the amendment. Fundamentally what this exemption implies is that we are just going around in circles. If all of the main existing mines are exempted from the increase then what are going to achieve by the increase in real terms?

The whole of last week our organization was busy lobbying with Copperbelt-based MPs, the Parliamentary Committee on Estimates (which is looking at the Bill), the Attorney General and the Minister of Mines, to on the one hand get the exclusion clause removed from the Bill and on the other hand introduce clauses which will govern appropriation of Royalty payments. We have made suggestions to the above mentioned to the effect that a percentage of Royalty tax need be retained in the mining areas for environmental and socio-economic mitigation. Our proposal is that 80% goes to central treasury, 10% goes towards a fund which will look at minerals development, and 10% is shared between the local councils and traditional councils in the areas where mining is taking place. The response on this aspect was quite favourable from above mentioned stakeholders and an assurance was given by the Attorney General that his office was going trigger the consulation process to integrate our proposal into the Bill. To support our call for deletion of the exclusion clause, we indicated that some NGOs were already pursuing various avenues through which to deal with the companies, so insertion of such a clause would prejudice our strategy.

The Parlimentary Committee will present its report to the full House tomorrow morning (Friday 23 March) at around 9am. I suggest that those concerned follow-up the outcome [MinewatchZambia will attend the report launch and report back on this blog]. I further suggest that our proposal be backed by all those concerned with benefit-sharing issues in the extractive sector, perhaps by way of a petition.
Sincerely,
Peter Sinkamba

Negotiating with Glencore the Bolivian way

As reported in ‘For Whom the Windfalls?’ the Zambian Government is, very hesitantly, approaching a re-negotiation of its contracts with major mining houses. Under current contracts Zambian workers, communities and the Government receive little benefit while the mine owners make massive profits. However, the Government insists that it is negotiating from a position of weakness because it has signed legally binding contracts with the companies, and will be taken to international arbitration if it attempts to impose a solution that the companies are not happy with.

A recent Christian Aid report, ‘A Rich Seam’, compared the finding from ‘For Whom the Windfalls?’ with data from a range of other countries and revealed important similarities between Zambia and Bolivia. The Zambian Government may well be keeping an eye on developments in Latin America then.

In recent weeks, the Bolivian Government has adopted a rather more direct approach to renegotiation of unfair contracts. The company involved is also one of Zambia’s main investors, Glencore. The Swiss-based company is the world’s largest commodity trader and is behind both Zambia’s second biggest copper mine, Mopani Copper Mines (MCM), and major holdings in Bolivia.

Bloomberg reported that on February 9^th, the Bolivian army seized control of Glencore’s Vinto smelter on behalf of the Government. Forbes Magazine then reported that recently elected Bolivian President Evo Morales had announced that the Government would not pay the company back. Morales argued that the original purchase of the plant was illegal, that the company had not adequately invested in the plant’s upkeep and that the contracts should be cancelled because the original purchase price paid by Glencore was unrealistically low. Morales insisted Glencore should instead pay Bolivia for failing to upgrade the smelter's furnaces and other machinery. He said, "If they can document indisputably that they have invested in modernizing the plant, that they spent money on modernization beyond just the purchase price, then we'll have to pay…But if they can't show that investment, they'll have to reimburse us… Not only the Bolivian people but also the international community and the financial experts know of the shady dealings that the Swiss company conducted with Gonzalo Sanchez de Lozada… There should be justice for this swindle."

The Bolivian approach reveals an interesting and little focused-on possibility for Zambian negotiators. If it can be shown that the mining companies have not kept to their end of the contracts they signed, known as Development Agreements, this may allow the Zambian Government to legitimately re-open talks without being accused of breaching contracts and without risking losing a case in international arbitration. ‘For Whom the Windfalls?’ presents a number of examples of the companies breaching the terms of their contracts. More research is badly needed into this issue, however. Most of the evidence required to make the case should be held in annual reports, submitted by the companies to the Department of Mines. Unfortunately these are not currently available for public inspection.

Bloomberg also report that the Government plans to rewrite contracts with Glencore to get a larger slice of the profits from the Colquiri and Porco mines. Mining Vice Minister Luis Alberto Echazu told the agency, “It isn't fitting for the state," and that Glencore's current payments to the government are “very low.” Glencore paid about $30 million to Bolivia last year, while its exports totaled around $600 million. Echazu said those payments should “at least double.”

MCM and LCM pay disputes settled as Govt bullies unions

Two major industrial disputes on the Copperbelt have been settled in the past few days with disappointing outcomes for workers. Reuters report that Mineworkers Union of Zambia (MUZ) representatives at Mopani Copper Mines (MCM) and Luanshya Copper Mines (LCM) have accepted pay offers of 20% and 22% respectively. Mopani management also agreed to cover workers' contributions to a new 30 percent tax on housing allowances.

LCM had initially offered a 16 percent pay rise, MCM 18%. In both cases, the union had been demanding a 40 percent increase and, as reported here, mineworkers downed tools in unofficial strikes to support the demands. Such industrial action is necessarilly unofficial since Zambia's repressive labour laws make 'official' strikes almost impossible. MUZ General Secretary Oswell Munyenyembe told Reuters that the unions agreed to a 20 percent salary rise due to intimidation from the government. Munyenyembe told Reuters, "We have agreed to a 20 percent salary rise because of circumstances beyond us such as the threats by the government to deregister any unions that would cause strikes at the (copper) mines which were issued by the labour minister... we took the threats seriously." He noted that although the miners would be unhappy with the outcome, the unions do not expect any more strikes and will wait wait for negotiations in 2008 to push their claims again.

A comment on some key issues that require our attention when debating current and future Development Agreements

With this blog entry I would first like to commend Professor Lungu and Mr. Fraser on an excellent report which I read with great interest. It has provided me with valuable insights into the social and environmental issues facing the Copperbelt today, covering several topics that I aim to explore further when I begin my PhD field study in Zambia in July. Having read the report and the companion blog, I would in particular like to comment on the following two themes:

The gap between DAs’ content and outcomes with regard to social and environmental services
When the new investors failed to provide social services, the assumption on the Copperbelt was that mining companies had taken on assets without associated social responsibilities (p.16). However, your report indicates that development agreements (DAs) do in fact indicate significant investor responsibilities in these areas. The problem thus appears to be one of *enforcement*, rather than *content* of rules.

Greater transparency with regards to the DAs would clearly have facilitated enforcement. Stakeholders with an interest in the behaviour of mining companies, but without direct involvement in the formulation of the DAs (local communities, NGOs, ECZ to name a few), would then have been able to put pressure on the companies.

An interesting question is thus why the DAs were kept from public scrutiny for so long. Why did the Zambian government not make the DAs public in order to harness the power of civil society to support the government in monitoring the DAs? It would, for example, be interesting to know if withholding the DAs from public scrutiny was a *conscious decision* by the Zambian government. Was this move perhaps an additional incentive for would-be investors (protecting them from wider scrutiny)? Alternatively, did a capacity-constrained Zambian government, knowing that it would face difficulties in monitoring implementation of the DAs, chose to lower its own profile by not making DAs public? Or was the culture of secrecy perhaps something that the mining sector actively solicited? Exploring these questions can help us understand where mining companies, government and civil society should focus their efforts in increasing the transparency of the Zambian mining sector.

With regards to the present debate about DA renegotiation, it is clear that the mining companies have not followed *their* end of the bargain. Sure, due to lacking capacity the government has not enforced these rules (e.g. in relation to provision of social services). However the lack of enforcement capacity should not give the mining companies free reign. If it can be established (ideally through an independent comprehensive review of the more ‘visible’ social and environmental DA clauses) that companies have failed to adhere to their side of the bargain, the Zambian government may be able to push for renegotiation without risking its legitimacy as a government that provides attractive and fair investment conditions.

Transfer pricing and tax avoidance
Another topic I believe needs to be brought into the debate concerns issues of tax avoidance. As the topic of mining companies’ profitability reaches centre stage, we must also look at *how* firms arrive at their reported profits. Granted, the DAs generally allow companies to deduct investments, carry forward losses etc. However there are other ways, not allowed under DAs, whereby mining companies in Zambia may be trimming their tax bill. Chief among these is so called transfer pricing, which occurs where an inter-company transaction is conducted at a price above the market (or ‘arms-length’) rate. For example, the mining company in Zambia may buy inputs from its home-country at a significantly above-market price, thus incurring high costs that enable it to pay fewer taxes. For further information about the issues of tax avoidance, please see the following report by the Tax Justice Network:

http://www.taxjustice.net/cms/upload/pdf/Development_Journal_-_CSR_to_the_Bottom_Line_-_SEP-04.pdf

How can the Zambian people ascertain that such practices are not used to reduce mining companies’ tax payments? Probing companies with regard to their intra-firm transactions may be a sensitive issue. However it should be in a company’s own interest, if it has nothing to hide, to cooperate with such an initiative, as it will lend credibility to its wider stance on the payment of taxes.

It would be interesting to hear some more ‘on-the-ground’ perspectives on the above issues.

Kind regards,
Dan Haglund
Doctoral candidate
Dept. of Economics and International Development, University of Bath
d.haglund@bath.ac.uk

Luanshya miners back to work as management u-turns on sackings

Reuters report that workers at Luanshya Copper Mines (LCM) have ended their six-day strike once management reinstated sacked workers. LCM sacked 1,000 workers for striking ‘illegally’, but continued solidarity action by colleagues forced a management u-turn on the issue, and a re-opening of negotiations on wages. Miners at MCM and LCM are both now back at work, still demanding 40% pay hikes, and expecting management to show greater flexibility from their original offers of 14% and 18% respectively.

Striking legally is almost impossible given Zambia’s current labour laws, so most action is taken informally by workers rather than through the main unions who lead negotiations. The UNDP and ILO also both today called for an increase in Zambia’s minimum wage and reform of antiquated labour legislation. UNDP country representative Aeneas Chuma is quoted in The Post newspaper proposing that minimum wages are pegged to the country’s ‘food basket’. The current Government Central Statistics Office (CSO) food basket sits at K713,507, while the minimum wage is just K268,000. Influential NGO The Jesuit Centre for Theological Reflection (JCTR) contests the basis of the CSO calculations and their focus on just food rather than basic needs, including school fees and clothes. JCTR advocate pegging minimum wages to their own ‘basic needs basket’ which currently sits at 1,543,650.

Company backlash against tax renegotiation

**Nb – Links to articles in The Post are only available to online subscribers – apologies to those without access. I will quote extensively and try to stay the right side of copyright law**

The Post reports today that the Chamber of Mines of Zambia (CMZ) is leading a backlash against widely discussed Government plans to re-negotiate mining companies’ Development Agreements. CMZ is an umbrella for most of the major mining companies, and is a body they chose to use when senior executives and shareholders prefer not to be identified with sensitive comments. The Post reports that, “The Chamber of Mines of Zambia (CMZ) warned that the renegotiation of mining development agreements would erode investor confidence in Zambia.”

The Post quotes CMZ general manager Fred Bantubonse speaking at a tax review workshop last Friday. “If authorities come up with a harsh fiscal regime, the impact may come later than now when investors decide not to invest.” As discussed in ‘For Whom the Windfalls?’, CMZ member companies have previously been in different places on this issue, with some recognising the inevitability of renegotiation, and others threatening legal action to prevent it. In an interview with the report researchers, Bantubonse himself recognised that renegotiation was inevitable and discussed a potential role for the Chamber in easing the process. The Chamber may now be adopting a more hostile position (or it might be journalists trying to whip up a storm).

The intention of the Zambian government to renegotiate the Development Agreements, specifically to claw back a greater tax take from mining companies, has long been trailed. As reported in a previous blog entry, in his recent budget, Finance Minister Magande raised mineral royalties from 0.6% to 3%, company income tax from 25% to 30%, and introduced a 3% import duty and a 15% withholding tax on dividends, interest, royalties and other mining sector transactions. However, these tax changes would only affect future investors, not those already holding contracts. Nonetheless, Magande said that the government would now seek negotiations with those companies “so that there is mutual consent by contracting parties to revise the tax regime to the new rates.” It is unclear to minewatchzambia whether this statement should be taken to imply that existing investors might face new taxes across the broad range of taxes above. It has previously been widely assumed the renegotiation would only cover mineral royalties.

Bantubonse claimed that the current agreements were fairly entered into, and that, “There is no tax holiday in Zambia. What we have is a capital allowance and a carry over losses, where the company cannot pay tax either during the period they are investing and expanding or when they are making losses.” He claimed that by 2005, mining companies had made a cumulative loss of US $85 million against investments of US $1.4 billion, and that this was the reason carry-over losses and capital allowances could be offset against tax. He recognized however, that “the huge profits they are making now are accelerating the liquidation of capital allowances and carry-over taxes so that they start paying taxes earlier than they were supposed to.”

The Post reports that CMZ anticipates that mining firms will contribute US $ 650 million in all taxes this year, US $850 million in 2008 and US $950 million by 2009.

The editorial in the business section of The Post challenges the CMZ argument that the current contracts are fair since they were negotiated when ZambiaWhile recognizing that ambia negotiated from a position of weakness, the Post notes, was in a desperate situation: “Now things have changed. Copper prices have skyrocketed and it is only plausible that we similarly enjoy the benefits. If the similar principle of a win-win situation is allowed to prevail, as it did during the negotiations, then mining firms have a moral obligation to allow for the renegotiation of the development agreements….We know that there is nothing that will compel them to yield to the government’s intentions because the development agreements are legally binding documents anyway. But we are now questioning why all these development agreements can be supreme to the Laws of Zambia. How can this be allowed to happen?…Our sources are now telling us that Article 9 of the development agreements, which makes the fiscal provisions of the mining contracts more superior to the lands Act, is being reviewed so that every fiscal policy in the development agreements is made subordinate to the overall national statutes. This should bring some sanity around.”

This editorial treads a similar line to a previous editorial in The Post business section.

Copperbelt strikes spread

A wave of industrial unrest is sweeping across the Copperbelt. After suffering years of declining working conditions as the copper industry collapsed, workers are demanding above-inflation wage rises to reflect the massive profits now being made by mining companies.

On March 1, the day that workers at Mopani Copper Mines (MCM) returned to work to allow wage negotiations to continue smoothly, their colleagues at Luanshya Copper Mines (LCM) walked out. Despite initially proposing an 80% increase, LCM workers are now demanding a wage hike of 40%. Management is refusing to budge from an initial offer of just 18%.

4,000 LCM workers have now been on strike for four days. The Times of Zambia reports that on the first day of the action, "Some senior members locked themselves in their offices refusing to address the employees who were chanting anti management slogans. Police who surrounded the LCM offices kept vigil for fear of a riot." Despite losing massive revenue as production has ground to a halt, management at LCM have adopted an inflexible position, suggesting that they will not pay striking workers, will not budge in wage negotiations and may take action against their staff. Chief Executive Derrek told The Post, "We are still discussing, trying to find a realistic solution to the problem. But I can't say there are any indications that we shall respond to their demands... In terms of revenue, I cannot say how much we are losing. But I can tell you our production is 65 tonnes of copper per day, and we are losing this."

Mineworkers Union of Zambia (MUZ) President Rayford Mbulo told the Times that with copperprices high and production at LCM at its peak, management should share the windfalls. "Management should not just be issuing threats of dismissing workers but should instead take time to reflect on their action." he said. The lowest paid union worker at LCM gets K850,000 per month, well below the cost of the 'basic needs basket' which measures a minimum income for a typical Zambian family.

The Times also notes that workers at Luanshya Milling and Sinozam Friendship Hospital, which is owned and managed by NFC-Africa as a mine hospital, have also gone on strike in protest at their working conditions.

In all cases, workers are downing tools and walking out in 'wildcat' strikes, rather than waiting for official union and legal processes that might secure a 'legal' strike. As discussed in the 'For Whom the Wondfalls?' report, antiquated labour laws make striking legally in Zambia almost impossible. LCM Chief Executive Derrek Webbstock has warned however, that, "The action taken by the workers is illegal and irresponsible and the law will take full action on them. All those who stay way from work should be aware of the law of no work no pay." MUZ have warned that LCM management should not threaten any of their workers with dismissal for striking for a living wage.

The strikes are also being reported in Bloomberg, Mining Journal Online, and the Chinese News Agency, People's Daily Online, which keeps a closer eye on Zambia than most of the rest of the international media.

Father Henriot calls for windfall tax, says not a radical step

**Please note, links to the Post newspapers site only work for those with an electronic subscription to the paper. Apologies for any inconvenience**

In a comment piece on the leaders page of last Tuesday's Post newspaper (for which I have only just found a weblink, so apologies for the delay), high-profile economic justice campaigner and Jesuit priest Father Peter Henriot called for the Zambian Government to impose a windfall tax on the country's copper mining companies. Citing 'For Whom the Windfalls?' and appealing to Zambians to read the report, Father Henriot argued, “I did a quick Google Search and found plenty of examples of where large and unexpected profits have been legally taxed in order to benefit the people of a country. We certainly are not talking about something very radical or dangerously unsettling in a democratic country like Zambia.” Father Henriot then goes on to cite historical examples of the levying of such taxes in England and the US, and a series of contemporary cases in Mongolia (mining), South Africa (petrochemicals), Tanzania (petrol) and the Dominican Republic (tourism companies and exports). He proposes, “Zambia could call in the IMF to give us some advice on this highly technical matter! Now that suggestion is not made simply in jest! Indeed, the IMF was involved in the discussions with Tanzania and the Dominican Republic.”