Talks, delays and the prospect of unilateral action

The slow pace of talks between the Zambian Government and multinational mining companies to review tax concessions granted to the companies is fueling public and political debate on alternatives.

Zambian opposition politicians, academics and the independent media are evidently losing patience with the absence of progress in discussions that are expected to result in the over-riding of 'stability clauses' written into the Development Agreements signed between Government and companies at privatisation. On November 16 an angry editorial in The Post newspaper was entitled 'Mismanaging our mineral resources'. The article's analysis of the Government's recently announced Medium Term Expenditure Framework (MTEF) will deepen concerns raised by an interview with Finance Minister Magande in a recent BBC radio documentary that the Government is not expecting increases in mineral royalties to kick in until 2010 (or not for another ten years, depending on how you read Magande's comments - see 'comments' after the last blog for a discussion). As The Post reports, "In 2007, royalties were budgeted for at K77.34 billion and projected by end of December 2007 at K72.76 billion. In 2008, royalties have been projected at K72 billion while K79 billion is for 2009 and K86 billion is the projection for 2010. Looking at the MTEF projections, it is obvious that the government is not expecting much more royalties even with the expected re-negotiations with the mining companies."

Expressions of concern about the slow pace of negotiations also emanated from University of Zambia (UNZA) Professor Oliver Saasa who told The Post, “Government should give regular updates on the re-negotiation process. We want to know what is happening.”

Opposition FFD President and former Finance Minister Edith Nawakwi has proposed (and again here) that the Government's negotiating team be wound up and that increased mineral royalties should be unilaterally imposed by passing legislation in Parliament. Nawakwi won support from other opposition figures. UPND Copperbelt Province chairman Joe Kalusa invited the entire cabinet in place at the time of negotiations "to explain to us why they bowed down to the pressure of the International Monetary Fund and the World Bank for us to privatise the mines and later on offer unimaginable incentives to investors.” Kalusa said the government should increase royalties in the same way that domestic and other taxes are raised whenever required. “When government thinks of increasing domestic taxes, I don’t think we are consulted. All we hear is an announcement during the presentation of the budget that some taxes have been revised. Why then should mineral royalties require experts to convene and discuss this whole thing?” Kalusa asked. “Is it because it is mainly the foreign investors involved in this that they want to use the other procedures of adjusting taxes than what government uses on its people?”

University of Zambia development studies lecturer, Dr Francis Chigunta backed the calls, as reported by the Post here."Dr Chigunta suggested that a reasonable amount of pressure be put on government so that a proposal for a change in mineral royalties is presented to Parliament before the current sitting adjourns. “It doesn’t make sense for experts to be engaged for this renegotiation process when we have got a Parliament that makes laws. I totally agree with what Forum for Democracy and Development president Edith Nawakwi said with regard to taking a proposal to Parliament for an increment to royalties,” Dr Chigunta said. “Our country should learn from what other countries such as Chile did for them to get higher mineral royalties.”"

As discussed in the 'For Whom the Windfalls?' report, unilateral action by Government is a clear red line for most of the companies. Even those mine managers who recognised negotiation was inevitable also threatened legal action if the Government attempted to act unilaterally. Doing so would also upset Zambia's donors. While the World Bank and IMF have both recognised the need for a renegotiation of the contracts they facilitated in the first place, imposing change on the companies remains a big no-no. Quite what kind of legal action companies would be able to take in the face of Zambia's sovereign Parliament legislating to override contracts is perhaps unclear - I would welcome comments. Zambia is a member of the World Bank's International Centre for the Settlement of Investment disputes. Other countries, including Bolivia who are currently trying to renegotiate resource extraction contracts in a rather more radical manner than is being proposed in Zambia have left the mechanism.

Privatisation, resistance and party politics

I have an article published in the current edition of British academic journal, African Affairs. 'Of Cabbages and King Cobra: Populist Politics and Zambia's 2006 election' by Miles Larmer and Alastair Fraser can be downloaded free in academic institutions that hold a license for the journal. Otherwise, I am afraid people will have to pay. It is here: http://afraf.oxfordjournals.org/cgi/content/abstract/106/425/611
The article is not all about mining, but it argues that recent relief of 92 percent of Zambia's international debt, along with the renewed profitability of the copper mining industry, have created conditions for the re-emergence of a nationalist-developmental political framework. This, and the political impact of the rise of the Patriotic Front are considered.
I would be interested in people's reactions, criticisms and comments.

Magande to BBC - tax in ten years time!

An excellent 23 minute BBC World Service radio documentary on the Zambian copper mining industry is now available online. It can be downloaded as an MP3 here:
http://downloads.bbc.co.uk/podcasts/worldservice/docarchive/docarchive_20071116-1224.mp3
or listened to directly here:
http://www.bbc.co.uk/worldservice/programmes/documentary_2.shtml

It features interviews with For Whom the Windfalls? co-author Professor John Lungu, former Finance Minister Edith Nawakwi, current Finance Minister N'gandu Magande, IMF Country Director Birgir Arneson, anonymous mineworkers, the Chief Financial Officer of Luanshya Copper Mines and Professor Paul Collier from Oxford University.

Much of it covers territory well-trodden in the report and in this blog, and most of it needs no additional commentary - Maurice Walsh asks the right questions and where the answers get evasive, well, draw your own conclusions. For me, the highlights:

1) Nawakwi discussing the atmosphere surrounding the original negotiation without providing any new evidence of how the negotiations actually proceded:
"Whatever has happened to this country, I think the 1990s were the worst. Zambia was really negotiating these agreements with a gun to our head."

2) Arneson trying unconvincingly to distance the IMF from any responsibility for the negotiations (he wasn't in post when the deals were negotiated):
Arneson: "It is clear that, by the late 1990s, the mining sector in Zambia was in a very, very sorry state. Clearly the authorities felt that they had to provide very generous terms in order to attract the investment. Whether the terms were exactly the right ones, that is of course debatable. There was no provision for example in the Development Agreements that allowed the Government to share in conditions like we have now where copper prices are many fold what they used to be. But I think that is sort of beating a dead horse to belabour that point too much."
Walsh: "But it's worth reflecting on that point because isn't it extraordinary that nobody thought of that at the time."
Arneson: "It would be best practice. It is best practice to put such provisions and we would strongly recommend that the Government puts such provisions into all new development agreements."
Walsh: "You weren't here but the institution you represent advised the Government in one way ten years ago and is suggesting that it does the opposite now. Isn't this the kind of thing that gives the IMF a bad name."
Arneson: "I don't think the IMF was involved in the design of the Development Agreements."
Walsh: "It was very heavily involved with the Zambian Government at the time and was very much pushing the privatisation. In fact the Government would have relied on the IMF for advice."
Arneson: "Well, we certainly supported the privatisation process. There was no alternative. The mines would have closed had they not been privatised."
Walsh: "Granted. But it surely must have occurred to somebody at the time, what if the copper price rises - it seems very straightforward."
Arneson: "What you are saying makes eminent sense and I simply cannot speak for what happened in the late 1990s."

3) Magande making a fairly bizarre argument for delaying re-negotiation.
Walsh: "Under pressure during the (election) campaign, the Government committed itself to renegotiating the deals. But it has taken a year for the Finance Ministry to get a team together to talk to the mining companies... despite the public outcry, the Minister for Finance N'gandu Magande is still councelling patience."
Magande: "Copper investors have been investing in the last three or four years. Investing means now sinking new shafts, buying new equipment, to make sure that they start producing copper. While the price has been going up we have not achieved the production levels that we actually had in the 1980s. So while people might say that the copper price has been going up the production levels have not increased as much as the price. Because the investors are still investing to make the mines productive."
Walsh: "People feel though that you've been too accomodating to the mining companies..."
Magande: "...We have not been lenient to the mines."
Walsh: "But nobody we've spoken to thinks that the mining companies are getting a hard deal. Everybody thinks that they've got a license to print money."
Magande: "Everybody excluding those that know the facts. Out of the mining companies that are now saying they might be able to produce 1 million tonnes of copper by 2010, many of them are the ones that are investing their money, borrowed from outside, or made from other operations outside. When they are investing the money you don't expect that they are making the maximum profit. Maximum profit for most of these companies could be made 10 years from now. That is when we should be saying, look, these people have already recovered their investment, that is when they will be making full profits. That is when we can get worried about that."
Walsh: So your messagge to the people on the Copperbelt is "wait, and your money will arrive, some time in the future?"
Magande: The people on the Copperbelt I am not saying wait, because out of the money that the mines are investing, the mining companies need people to drill the shafts, they need people to put up the shafts, they need people to do all sorts of contracts. So the people on the Copperbelt, they should be involved right now. So the people don't have to wait like Government is waiting."

How should we respond to Magande? Well, firstly a basic factual criticism. Many companies have already recouped their full investments - most mines are already highly profitable.

Secondly, what is this notion of 'maximum profits', and what is the basis of delaying taxation until the mines are achieving it? We know that Vedanta, for one are already making massive profits, if not maximum ones. First Quantum Minerals have just reported third quarter operating profits at Kansanshi Mine in Solwezi are up 19% to $546 million!

But the big conceptual question: what is the link between production levels and taxation? Magande's view appears to me a purely ideological one that puts all faith in a deregulated market to deliver the best outcomes. He seems to believe that taxing companies would lead them to re-invest less of their profits, and thus in the long-term create fewer jobs. The other way of looking at it is that companies will stay in Zambia, and will borrow to cover investments if they expect to benefit in the future, so long as they expect the price to show some stability - taxing will reduce their profits, but have marginal effects on their investment decisions - it is a royalty rate, remember of just 3.0% that is being discussed. Price variations massively outweigh such a consideration in calculating profits. Another way of thinking about it is that 'production' in mining describes the pace of removal of a non-renewable resource from the nation's stock of natural capital - the longer you wait to tax production, the less there is in the end to tax. As Paul Collier puts it: "I think the argument of patience during a commodity boom is actually misplaced. There is no guarantee that copper prices will stay at their present levels. So it may well be now or never. The taxation has to be now.... very clearly in the last few years the big international story has been the world commodity booms. Handling those commodity booms to make sure that history does not repeat itself is the big international development story. If history repeats itself, the biggest opportunity that we've ever had for these countries to transform themselves out of poverty will be missed."

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Debating Undermining Development?

The Post again reported on the new Undermining Development? report on Friday.

The article, “IMF, World Bank pressured govt to privatise mines – Nawakwi” quotes extensively from the interview prepared for the research with former Finance Minister Edith Nawakwi. Nawakwi, who is now leader of the opposition Forum for Democracy and Development told the authors, “We were told by advisers, who included the International Monetary Fund and the World Bank, that not in my life time would the price of copper change. They put production models on the table and told us that there (was) no copper in Nchanga Mine, Mufulira was supposed to have five years life left and all the production models that could be employed were showing 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).”

This article, and the report itself have provoked very interesting discussions on the excellent ‘Zambian economist’ blog, – read particularly the comments at the end of the post. Cho, the blog’s author, criticizes Nawakwi for not resisting more aggressively donor pressures on Zambia, “The 'devil made me do it' has never got anyone off a crime. For indeed it appears that we came under pressure from young graduates at the IMF and World Bank who spent one week in Zambia and flashed a few models on the table and we crumbled.” The discussion raises important questions about the degree of dependence of Zambia on foreign aid donors, the relationship between dependence and ‘post-colonial’ mentalities, the competence of the civil service, and the potential role of corruption in the signing of the Development Agreements. It doesn’t reach many conclusions, but the contributors are asking some interesting questions. Should we say that the World Bank ‘forced’ Zambia to sell the mines? Or is the relationship between donors and aid recipient Governments more complex than that? What is or was the relationship between the World Bank and IMF and particular mining houses? Did they (do they) actively collaborate? Why? Were the Bank and Fund ‘on Zambia’s side’, trying to get the best deal for the country from the sale? Or were they so ideologically committed to the need to sell that their interests and those of the companies co-incided? What difference does Government part-ownership of the mines (through ZCCM-IH) make? And what about the role of the World Bank, whose ‘finance arm’ IFC is also a shareholder in some of the privatised entities? One discussant adds a link to a Post article on a March 2006 exchange in Parliament between current Finance Minister Magande and Nawakwi - “Nawakwi had no choice over mines tax incentives – Magande”. Nawakwi is quoted as saying, "The conditions were near to blackmail. Mining houses demanded blood out of the Zambian people."

I am not sure anyone has really written a convincing account of those negotiations. As a number of commentators in the discussion note, official secrecy about the negotiations and the contracts has hardly been helpful in this field. The same blog includes a lengthy discussion on the original Undermining Development? report with a discussion amongst a range of Zambian economists about how best to move forward. The many points would take too long to summarise. Read it yourself here.

What’s Magande reading?

The Post reports that Finance and National Planning Minister Ng’andu Magande said government had only received K300 billion from mineral royalties and company tax as of August this year. “Questions have been raised as to whether the concessions are still justifiable. We have seen an unprecedented increase in the international metal prices. Therefore, the basis on which these concessions were given no longer exist which is why our renegotiating team is retreating to find the best way in arriving at a status that benefits both the mining companies and the people of Zambia.”

Well, we have heard something similar from Magande before. What would be really appreciated would be an open discussion of the negotiating objectives of the Government’s team. Why not make this a national debate (or join the debate on Minewatch!) about what Zambia should be aiming to get out of copper-mining contracts, rather than simply claiming the team will ‘retreat’ to discuss it themselves?

Lubinda reads Minewatch?

The Post reports that outspoken Patriotic Front MP Given Lubinda, Chairman of the Parliamentary Committee on Economic Affairs and Labour, has asked the government to revise taxation of the mines immediately. Lubinda said recent admissions by Paul Collier, a former director of the Development Research Group at the World Bank, that the development agreements signed by Zambia with copper mining companies were a disgrace should give the government impetus to demand a better deal. Collier’s comments were recently reported by Minewatcher. Given, are you reading? Welcome!

Lubinda complained about an invasion by unscrupulous investors. “Some of these sham investors operate in all other activities than the ones for which they applied investment and immigration permits." He called for the establishment of regulations that stimulate backward and forward linkages between foreign and local enterprises. “There is no reason why the government should give lucrative investment terms to foreign investors than to local investors,” Lubinda said. “This is one of the reasons why foreign investors import overalls that are manufactured locally even by our women in their backyards. It is worth noting that quite a number of the consumer products that we import from China are actually manufactured by small entrepreneurs in the backyards of their homes.” Lubinda said his committee was impressed with the rapid investments being made at Konkola Deep Mining Project in Chingola. “With the new developments, KCM will require additional labour,” he said. “Your committee urges the government to insist that KCM and any other investors who import skills put in place a deliberate programme for locals to take over these positions.”

World Bank reads Undermining Development?

The new Undermining Development? report seems to be reaching the places other reports don’t. In an article titled, 'World Bank endorses revision of mining agreements, on November 2nd, The Post reports that the World Bank fully supports the Zambian government’s efforts to renegotiate the development agreements. New country manager Kapil Kapoor is quoted: “We fully support government’s efforts to revise mining agreements. Zambia should be able to benefit more from high commodity prices and use the earnings to improve other sectors of the economy,” Kapoor said. “This country should take a leaf from Botswana, which has over the last few years utilized its diamond revenues to improve other economic sectors.” The Botswana comparison comes straight from the Undermining Development? report.