IMF anxious about Chambishi economic zone?

The IMF yesterday released a press release reporting the conclusions of its recent staff mission lead by Mr. Francesco Caramazza. Given that the Government has closely followed the IMF’s ‘advice’ on contract renegotiations (see next entry), it is perhaps unsurprising that the statement notes, "The announced changes in the fiscal regime for the mining sector are welcome, as is the government's intention to remove fiscal terms from future development agreements. Zambia's tax system is very competitive in the region.”

At the same time the release includes an interesting warning against giving investors too many rights. “While targeted tax incentives for investment can be appropriate under special circumstances, inefficient use of tax incentives, in particular tax holidays, entail significant costs. Therefore, great care needs to be taken to ensure that such incentives associated with multi-facility economic zones do not erode the tax base over time."

This warning appears to reflect IMF concern about the blossoming Zambia-China relationship, and the investment conditions established for Chinese companies entering the recently announced ‘economic zone’ around Chambishi. The site is already a source of major conflict between workers and communities and the existing Chinese investors such as NFC-A, BGRIMM Explosives and Sinozam Hospital. The IMF's concerns may be quite genuine - after all it wants Zambian revenue streams to increase. At the same time, Western institutions have a number of reasons for fearing increasing Chinese investment and influence in Zambia, not least that it weakens their relative influence over the Government. As Dan Haglund noted in a recent entry, the terms of Chinese investment may also be fungible with other sorts of assistance to the Zambian state (and ruling party?)

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IMF behind exemptions to mineral royalty hike

++Apologies for the length and technical nature of this entry, the original article is very detailed. You will need a subscription to read it in full, so for those without I quote extensively.++

As previously discussed in this blog, The Post newspaper claims to have access to IMF documents on taxation in the mining sector that have heavily influenced the Ministry of Finance’s approach to mineral royalties and the renegotiation of Development Agreements (DAs). Another report today contains further details, as well as naming the documents.

The paper claims the reports were prepared by the IMF Fiscal Affairs Department at the request of Finance Minister and that they are titled, "Fiscal regime for copper mining", November 2005 and "Fiscal arrangements for the mining sector - a further review" August 2006. (I cannot find either document on the IMF’s huge website, though an eager reader might be able to hunt them down, and please forward them. It is surprising what the IMF do paste on the site – there is just do much there that it is hard to find the documents. I have also asked both the IMF mission in Lusaka and The Post to share them, and if successful, will post them here.)

The report makes a number of interesting claims.

1) The Post notes, “the IMF strongly recommended that the government increases the mineral royalty tax from 0.6 per cent to a maximum of three per cent.” The word maximum is worth noting. MPs and others have been asking the Minister of Finance where the widely discussed 3% figure came from and why it cannot be higher. Typically it is suggested that this is towards the lower end of regional and international average royalties, so it would increase revenue but keep Zambia ‘competitive’. Whether you accept this argument depends on why you believe mining firms come to Zambia: to exploit high grade copper deposits or to take advantage of tax incentives? Some regional royalties are as high as 20%. We may now have an answer as to how the 3% figure appears to have been set in stone.

2) The Post also quotes the IMF stating that, "The mission recommends that existing development agreements should be respected and appropriate legal advice taken before any initiative is contemplated that might amount to an invitation to contract parties to revise any terms of their agreements." This explains where the exemption for existing contract holders in recently announced revision of the Mines and Minerals Act comes from. It also contradicts suggestions made by mining executives and reported in ‘For Whom the Windfalls?’ that the IMF changed their position on exemptions following meetings in October 2006. It appears that defending corporate interests was already the preference of the IMF in August, and that they felt renegotiation could only proceed with the agreement of the companies. At the same time, the IMF suggests that, “If revision of terms for existing investors, by mutual agreement, becomes possible, the mission recommends that any revisions should be consistent, as far as possible, with the revised fiscal terms for new projects. In particular, royalty should not exceed three percent of netback value; and additional payments to government should take the form of a proportional tax when a specified rate of return has been achieved.” Thias raises another issue. The Government’s view that the only issue for re-negotiation would be the royalty rate is reported in ‘For Whom the Windfalls?’ What then is the ‘proportional tax’ being discussed here, and does it open up hopes for a more ambitious renegotiation? Again, comments are welcome.

3) Despite its role in demanding the legislation that allowed them to be negotiated, and its defence of their legal inviobility, the IMF implicitly recognises that the existing DAs are unfair, saying no further contracts should be signed under the same terms. The IMF argues that Zambia should wait until “the scope of the agreements has been narrowed, and the revised fiscal terms for new projects can be incorporated…. The Mines and Minerals Act (section 9) should be amended as soon as possible to provide that the minister does not have scope to vary fiscal terms, or exempt royalties, or to include fiscal matters other than fiscal stability in development agreements.” This last section is interesting (at least to historians of the negotiating process). The IMF seems to be suggesting that the problem with the DAs flows not from the original IMF-planned legislation, but from an amendment in 2000. The Post report, “The IMF noted that when the Mines and Minerals Act was enacted in 1995, it provided clear powers for the making of mining agreements. However, the mines minister had no authority to vary fiscal terms other than royalty terms in a development agreement but after enactment of the 2000 amendments to the Mines and Minerals Act, development agreements could override any existing law or regulation.” This is an odd claim given that most of the Development Agreements were negotiated and signed before 2000. Chambishi Metals, NFC, Kansanhi and Chibuluma all signed between 1997 and 1998. KCM (the first time around under Anglo-American) and Mopani signed in March 2000. Minewatcher doesn’t know anything about this amendment. However, it is my understanding that all of the Development Agreements override existing laws and regulations. Information and views from readers would be welcome.

4) The IMF reports also discuss other potential sources of revenue for Zambia – price participation and the ZCCM-IH minority holdings in the mining companies. They note that neither mechanism is as yet performing to the benefit of Zambia and suggest that the financial structure of ZCCM-IH should be reviewed. These are issues that a number of readers have picked up on and suggested are not sufficiently considered in ‘For Whom the Windfalls?’ I would welcome further discussion and clarification of the issue on this site.

5) The mission developed simulation models showing the impact on profits of the three largest mining enterprises in Zambia: KCM, Mopani, and Kansanshi in case of price fluctuations. It found that Kansanshi and KCM would yield the highest returns, with Mopani currently less profitable. The simulations suggested that KCM and Mopani would be vulnerable to sudden falls in price and proposed that the state’s share of the take from mining should be designed to respond to both high and low world copper prices.

6) Finally, The Post also claims, “officials in the Ministry of Mines and some cabinet ministers who were approached, said they never saw any such reports from IMF tabled before them for their consideration.” It seems perfectly possible the Cabinet have not seen the documents. Certainly they have never been shared with Parliament. Obviously someone in the Finance Ministry has seen them, given that they formed the basis of the 2007 budget. Perhaps what is implied is that the report is not openly available for inspection within the Ministry, or that internal procedures were not followed? This is an interesting example of how IMF influence is strong but completely untransparent. Everyone following this issue has known for some time that the Government is hiding behind (sorry, should that be ‘basing its position on’) ‘expert’ recommendations from the IMF. Unless the basis for such recommendations are open for inspection and challenge for Cabinet, Parliament and civil society, the effect of IMF interventions is to close down democratic debate.

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Mopani’s new procurement system worries local suppliers

The Post reports today that Mopani Copper Mines, owned by Swiss mining giant Glencore, has entered into an agreement with a Dutch company Quadrem to manage their procurement procedures.

Kantanshi MP Yamfwa Mukanga said the system would only help create employment and wealth for foreigners. Citizens Forum Copperbelt chairperson Mike Kabuli said Mopani should have engaged a local firm.

As reported in For Whom the Windfalls?, procurement has been a topic of significant controversy on the Copperbelt with mining companies accused of intentionally destroying the systems that operated under ZCCM in order to favour foreign suppliers of goods and services previously sourced locally.

The system will be managed via the internet. Requests for quotations will be issued electronically to suppliers who respond electronically and that orders would be delivered to them via the same system. Prospective suppliers to Mopani will now be required to pay subscription fees to Quadrem in order to register as suppliers. Fees for joining the RFQs (Request For Quotations) system have been pegged at US$3,000 for six months. Suppliers will be billed after receiving five requests. Membership fees range from US$600 for micro suppliers to US$8,000 for very large suppliers.

Mopani management told The Post that they had chosen Quadren due to their "Web Trust Certified which is an independently audited endorsement that information traded via their marketplace is secure and confidential.” Quadrem is well known globally, managing supply chains for international mining houses. They are yet to establish their Zambian operations.

Some comments on the current debate about DA renegotiation

Dear Minewatchers,

I wanted to leave a couple of comments on the recent posts about renegotiation of the development agreements (DAs). First of all, a big thank you to the MineWatchZambia blog for keeping us foreign observers up to date with what’s happening on the ground in Zambia. By making several of the key development agreements available, Professor Lungu and Mr. Fraser have indeed made a key contribution to the debate on state-investor contracts, recognised as fundamental to the end-of-the-day impact that foreign mining companies have on a host-country’s development (for an international discussion of the links between state-investor contracts and development, please see www.iied.org/pubs/pdf/full/16007IIED.pdf)

We should welcome the current attempt to clarify the positions of the mining companies by asking (via the Chamber of Mines) what companies consider to be their rights and responsibilities vis-à-vis the Zambian state and its people (as reported by Professor Lungu on the MWZ blog). In fact, a better understanding of how mining companies perceive the legitimacy of their social and environmental commitments to the Zambian government is necessary if the two parties are ever to meet half-way at the (re)negotiation table. The MWZ blog has noted that the General Manager of the Chamber of Mines will at some point appear before the Parliamentary Committee to respond to these questions on behalf of the mining industry as a whole, which should be interesting. I think a possible concern, however, relates to the internal differences among the mining companies regarding their interpretation of the DAs (as suggested by the For Whom the Windfalls report). This would suggest that explanations need to be sought also at the company level, in addition to the industry level (after all, the companies each have unique – albeit very similar – DAs). To complement public engagement with the mining industry, perhaps further research into the company-specific interpretations of the policy environment may provide useful clues as to how government and other stakeholders can target their efforts at pushing for renegotiation. I aim to explore these issues as part of my doctoral research in Zambia starting in July, any observations of relevance will of course be reported here on the MWZ blog.

My second comment concerns the need to end the culture of secrecy referred to by the For Whom the Windfalls report. Government must realise that making DAs and other reports publicly available can be a way to complement its own capacity for enforcing regulations of mining firms. As the report notes, DAs commit companies to provide certain social services, environmental management plans etc. – conditions which in many cases seem to have been ignored by the companies. It can be argued that these conditions have been ignored because firms have been able to “get away with it”, i.e. because monitoring and enforcement has not been forthcoming. It seems to me that the need to tap non-state efforts at monitoring of local regulation (by making public regulatory contracts) may be of particular importance in the context of Chinese investors: the Chinese foreign policy of non-involvement appears to translate to a stance where regulations are left entirely to the host state – for example if the host state does not ask for an environmental impact assessment, no such assessment will be undertaken. This should be contrasted with the approach of other investors: it is likely that firms financed by the World Bank/IFC, or by Western banks guided by the Equator Principles, face certain pressures external to Zambia’s policy context, requiring them to adhere to basic social, environmental and reporting standards. The recently announced Chinese $800m special economic zone to be established around Chambishi (see for example http://allafrica.com/stories/200702050690.html) points to the need of ensuring that any contracts governing the split of rights and obligations between state and investor are debated openly.

Speaking of the Chinese, Bert Manders has noted in a previous post that it is surprising to see the Zambian government being so soft on general misconduct at Chambishi and the riots and BGRIMM incident in particular. It is indeed unfortunate, but perhaps it is not so surprising – where Chinese investors are state-owned, government’s relationship with these investors become fungible with other China-Zambia agreements relating to aid, trade and other cooperation. Hence the bargaining power of Chambishi mines vis-à-vis the Zambian government is not just that they bring in a certain amount of capital to upgrade the mines, employ a certain number of people etc. Rather it may be seen as being linked to wider Chinese economic and political interests. Any attempts to challenge NFC Africa by strengthening regulation, making contracts public etc, might be seen as jeopardising much more than that one mining investment. If so these attempts can be expected to lead to some opposition from those in government who benefit from Chinese engagement.

Dan Haglund
University of Bath
d.haglund@bath.ac.uk