Scott threatens to lead demos if companies take legal action on tax

Mine representatives, who seeem constantly to underestimate the seriousness of the political situation that confronts them in Zambia were faced yesterday with the threat from Patriotic Front General Secretary Guy Scott that if they take legal action against the mine tax reforms he will personally lead demonstrations against the companies, with the threat of closing down their operations. Scott and his party leader Michael Sata have excellent track records of organising the rising tide of popular protests and demonstrations Zambia has seen over the last few years, and both are very widely admired on the Copperbelt where their party dominates.

Scott made his threat in a Parliamentary Committe when Chamber of Mines council member Jeremy Allen claimed that the mining companies are doing a lot for Zambia and should therefore be given time to discuss the proposed tax regime with experts.

The Post reports that Scott also offered the mine owners a dose of reality - pointing out that the new taxes will inevitably pass through parliament without any amendments since all opposition parties support them. “The mines don’t have any representative in parliament and all the 150 MPs, the government and just ordinary citizens of Zambia are all for the idea that taxes should be increased,” Scott said.

Allen, who is also general manager for First Quantum Mineral Resources, appearing before a parliamentary extended committee on estimates yesterday that, “If government says it wants to take so much from the mining companies through high taxes, then we can also decide to stop developing the industry and this will not be a good thing to do because what we need is a win-win situation,” Allen said. “It’s not that we don’t want to pay taxes but what we are saying is that the tax should be well structured.”

That's a very amusing claim 'it's not that we don't want to pay taxes', and a ridiculously hollow threat. While the companies continue to make huge profits, as they will after the new taxes are imposed, they will continue developing the mines.

Earlier, Chamber of Mines general manager Frederick Bantubonse accepted that the Government was sovereign, and has the right to make its own laws. “We appreciate the need for the government to get more money from minerals. The Zambian government is entitled to formulating its own laws,” Bantubonse said. He continued to plead for negotiations.

Scott, however, rejected his request. “The government heard the voices of people who wanted a fair share of resources. It is now time for the mines to pay taxes like others have been doing,” Scott said. “This is the time for the government to make hay while the sun shines when there is still a boom in copper prices on the international market.”

After a heated debate, expanded committee chairperson Geoffrey Beene advised the mining companies to reorganize themselves and come up with actual proposals on what percentage increase they needed for the taxes. Beene said the mines should come up with proposals by tomorrow, giving parliamentarians only today to make consultations on the matter for presentation in parliament next week. A little further detail on the hearing is provided by the Times of Zambia, which points out that Beene's offer, for the committee to reconvene tomorrow is unusual and reflects the urgency of the discussion: the house does not usually sit at the weekend.

The Times editorial offers some mild-mannered thoughts on the situatio, while the editorial of The Post, entitled 'Give to Caesar what belongs to Caesar' launches an assault on the companies, taking an historical view of the mines as inheritors of Cecil Rhodes British South Africa Company and accusing them of acting with colonial arrogance. "They shouldn’t think it’s impossible to nationalise the mines again. It is being done all over Latin America today. The Russians are re-nationalising. It can be done here. If this government can’t do it, another willing government can be put in place to do it."

It endorses wage strikes by Zambian workers, and Scott's threat to demonstrate in support of the Government.
"We agree with Guy Scott that this is the time for the mines to pay taxes like others have been doing. And if they don’t, they are headed for a serious showdown with our people and they may risk getting their operations paralysed by protests. They may not be able to ship a single tonne of copper to the ports on roads and rail networks built with our taxes."... "Whatever we get from them will only come after a grueling fight, a relentless struggle. And it doesn’t matter whether it is the government seeking an increment in taxes or workers asking for increased wages – it has to be accompanied by a relentless struggle."

Jeremy Allen doesn't get off lightly. "Allen says “what we need is a win-win situation”. This is not true. They were reaping gigantic profits but not even one day did Allen and his friends see it fit to invoke this “win-win” idea and come up with a formula to share the windfall profits. If anything, they kept silent as if nothing good was going their way. And today Allen wants to tell us that he wants a win-win situation. This is an affront on our intelligence. This is not a country of 11 million fools."

"At least unlike these characters of today, Cecil Rhodes built a rail for the transportation of his minerals. These are just sucking the blood of the sufferer like vampires – from the poor Zambian businessman and worker taxes are collected to maintain roads and other infrastructure for the transportation of these exploiters’ minerals. Allen can’t see all this, he is blinded by profits." This point is well backed-up nby another story in the Post today, revealing that mine management at Kansanshi and Lumwana have refused to commit to using rail links proposed to ship copper from the 'new copperbelt', preferring to continue relying on road haulage, and thus the Governments' willingness to continually repair roads being damaged by constant movement of heavy copper cathodes and concentrates.

The editorial points out that mine taxes actually go to support the infrastructure and society on which the companies themselves are dependent. "Those who are not interested in that type of government should go to Congo – but even there it won’t be long because our brothers and sisters in that country are trying everything possible to bring sanity to the exploitation of their mineral resources and it won’t be long before they start doing what we are trying to do. It is clear that the day of reckoning for the mining companies in this country is at hand."

I have nothing to add except hear, hear. Well said Guy Scott. Well said The Post.

IMF end of mission release steps back a bit

Cho's New Zambia blog has posted the IMF end of mission report on Zambia. If not a whole hearted endorsement (what did you expect...) it is a bit more careful than the statements from mission members I reported the other day. Instead of expressing a preference for negotiation, it notes.

"The proposed fiscal regime for the mining sector is expected to generate substantial additional government revenue. In implementing the new regime, particular care needs to be taken to maintain Zambia's attractiveness as a destination for mining investment."

Chinese seek to re-assure local labour

The state owned Times of Zambia reports that the Chinese government has assured Zambians that the majority of jobs at the Chambishi Copper Smelter (CCS) currently under construction will be given to Zambians.

Chinese deputy minister of commerce, Gao Hucheng, also explained that Chinese workers that were on site were technical staff employed to help in the initial stages and will leave after completion of works. Mr Gao, who made the assurance when he visited CCS on Tuesday, said about 1,500 jobs would be created and the majority would be offered to Zambians.

The story reveals something of the odd relationship of NFC-A, the Zambian state and the local population, with the Chinese clearly expecting the Zambian state to politically broker its presence locally, rather than engaging directly as a company with its community. The Minister called on the Zambian Government to ensure meetings were frequently held where stakeholders would be briefed about the progress of the project and be made to fully understand its functions. And Mr Mbulakulima concurred with Mr Gao saying the Zambian Government has always been advocating the same meetings where he said some problems could be resolved. Mr Mbulakulima said there was need for dialogue where the Zambians would understand the concept of the project. He also called for the need to have a system to look at safety and other social responsibilities.

Reflecting the degree of anxiety about the hiring of Chinese labour, and the political sensitivities of the issue, the papers' editorial seeks to re-assure residents of Chambishi, Kitwe and Kalulushi and urges that this clarification "should put to rest speculation that the foreigners at the construction site will take up most of the positions once the project is completed."

Zambia copper mine power tariffs up 35 pct

Reuters report that copper mines have agreed a 35 percent power tariff increase effective January this year, and authorities have warned of possible power cuts to the mines due to a power generator fault. "All the mines have accepted the proposal to raise tariffs by 35 percent and we are just waiting for ZESCO Ltd to sign the agreement. The increase will be with effect from January 1 this year," Copperbelt Energy Company (CEC) chairman Hanson Sindowe told Reuters in an interview on Wednesday. CEC buys power from state power utility ZESCO and distributes it to the mines.

The government also announced last week that it and the mining companies would share costs to construct the hydro-electric Kafue Gorge Lower power project, which is estimated to cost around $1 billion and generate 750 megawatts (MW) of power. New IMF funding is also likely to be directed towards energy

ZESCO spokeswoman Monica Chisela separately told Reuters that a broken-down generator at Kafue Gorge had been repaired. "The machine (generator) has now been repaired and re-commissioned. However, we are still in a power deficit situation and rationing of power will continue because we are unable to secure additional imports from anywhere to meet the power demand".

Companies fluff last chance in Parliament

The Lusaka Times report that mining firms are still adamant about paying the new taxes proposed by government but that their complaints have been rebuffed by MPs who will release a final report on Tuesday.

"The Chamber of Mines has strongly argued that the new tax regime will undermine operations and sustainability of the mining industry. Chamber of Mines General Manager, Frederick Bantubonse, made these remarks when his delegation appeared before the parliamentary estimates committee in Lusaka. The mining investors have proposed an urgent meeting with government to review the levels of taxation before effecting the new tax. Mr. Bantubonse and his team argued that the tax regime agreed upon through constructive dialogue will serve the interests of Zambians and the mining industry.

However, committee members led by Lusaka Central Patriotic Front Member of Parliament, Guy Scott critised the investors' delegation whom they accused of having returned to the committee in a very aggressive and confrontational manner. The committee members were concerned that the mining investors had not made any proposals on the levels of taxation on their second return to the committee.

This prompted committee Chairperson, Godfrey Beene to direct the delegation to go back and consolidate their proposals on the tax regime to be resubmitted by Saturday. The committte is expected to table its report on the proposed tax regime next Tuesday. The mining firms that were represented include Konkola Copper Mines (KCM), First Quantum Minerals and Chambeshi NFC among others."

What on earth is the IMF signalling?

The International Monetary Fund (IMF), an institution in deep trouble, struggles to justify its role in a world where more and more borrowing countries reject its mandate and offers of lending. It typically argues, in the last resort, that it's most valuable contribution is to 'signal' to the international investment and donor communities, and to national governments, what it thinks of the 'policy environment' in member countries. But what is the IMF signalling to Zambia?

Following the January 30 2008 release of Zambia's 2007 IMF 'Article IV' Consultation document, a team of eight IMF board members have recently visited the country to assess economic progress since the Fund, the World Bank and other western financiers cancelled Zambia’s debt in 2006. After the group reported their findings, the headline in the Lusaka Times today is 'IMF backs new Govt mining taxes' and the report claims they backed Zambia’s plans to raise mining taxes but warned that critical power shortages will curtail investments in new projects. State media, in the form of the Times of Zambia provide a comically propagandistic read on the meetings. The Times reports that IMF board members said Zambia was one of the showcases in terms of economic performance, that the country was on the right economic path and all it needed to do was to address a few challenges on the way to ensure continued success.

However, the story is a little more subtle than the reports suggest, Greek delegate Miranda Xafa, an alternate IMF executive director, welcomed moves to raise mining taxes. “The taxes previously were extraordinarily low, not just within Africa but also globally, and we so believe there is room to increase the taxes,” she told reporters. However, she then added, “But of course that is up to the government and the foreign investors to negotiate the taxes.” Throughout the Article IV document, the IMF insisted that mine taxes will be 'negotiated', which, remember, is what the Government said it was planning (the document also reveals that the IMF was providing 'technical assistance' to the Zambian state to consider its mining taxes - DFID recently reported they were one of two donors proviing TA to the negotiating team - is this confirmation that the IMF was the other, or was the a broader review, not just the mining one?). But why should we still be talking about negotiations? The Government has now laid out what the taxes involve and has introduced legislation to ensure new revenues are collected from April 1, unilaterally announcing the cancellation of negotiations. So, why would the IMF mention negotiations if not to support companies pushing the Government to backtrack?

At the same time, like other donors, the IMF seems to accept that the Government will act, whatever the donors' and companies' preferences. In the Article IV document, the IMF noted only that, "No major tax policy initiatives are expected in the 2008 budget as efforts are currently focused on renegotiating development agreements with the mining companies." (p. 12) The document included conservative assumptions about what might be achieved through these negotiations, expecting little extra tax income to the state. Now, however, Xafa noted, “We would note two important challenges … the first being how to manage the macro impact of large foreign exchange inflow.. You certainly do not want to get into a boom (and) bust cycle that others have found themselves in, in that while the boom and bust lasts, they try to spend it all at once and while commodity prices fall, they slow down in possible recession.”

Xafa also warned that Zambia should not be “too ambitious” with new mining projects because it did not have the capacity to supply power to new projects. “I understand there are investors waiting to come in with mining projects but there is not enough energy right now to service these new requests,” she said. “So, I think, before we can talk about plans to expand production, it is important to remove these bottlenecks.”

Zambia has suffered outages that have hit output at mines, and is looking at ways to shore up waning capacity. It announced plans this month to spend $1 billion to build a new 750 megawatt plant. The Fund said Zambia has made strides in growing its economy but needs to handle commodity price windfalls prudently and develop infrastructure to avert a possible recession.

The Times report shows Mwanawasa pitching to the IMF for an infrastructure loan to back new energy needs for the expansion of mining. "Many African economies, such as mine, have responded well to the reforms. To go further, however, their economies need infrastructure, which costs much more," he said. Western NGOs and bilateral aid donors have driven a significant shift away from infrastructure funding over the last decade and many African Governments, including Zambia, have been frustrated by the exclusive focus on social sector provision without any concern for productive investment. Recent power cuts and load shedding across Southern Africa have highlighted the massive dangers of neglecting infrastructure for national economies dependent on mining.

Mwanawasa said, the available concession funding could not meet the demand and wondered whether countries should give up the opportunities to expand the economies because of that."Are there no other possible solutions to prevent reckless borrowing associated with non-concessionary borrowing? The IMF should help us answer that," he said. Mwanawasa said the Zambian economy had greatly improved and it was being boosted by the export of minerals and non-metal goods, resulting in the quadrupling of export earnings while the national reserve was now more than U.S.$1billion. He was, however, quick to mention that development was a shifting target with never-ending challenges. Currently, the most significant one was to expand the economy and ensure that development trickled down to the poor. The President said it was for that reason that the Government introduced a new tax regime for the mining sector. He assured that no mining company would get less than what they projected to get at the inception of their investments. To prevent frustration of economic growth, he said, the Government had singled out energy as one of the hurdles and it would invest in new generation capacity as well as efficient management of the existing ones.

Questioning the Constitutionality of Development Agreements

There is an excellent article by Fackson Banda in The Post last Wednesday questioning whether the Development Agreements are legally binding under the Zambian Constitution. I somehow missed it, so am thankful it was picked up on by the Maravi blog. I suggest reading it there because Mr K's comment at the bottom picks up a relevant clause from the Constitution not discussed in the article. I am sure this is not the last word on the legal status of the Development Agreements, but it is a real vindication for me of the approach of posting the Agreements on this site. I have always hoped that publishing the documents, which were kept secret by the Government and companies, and were never open for inspection by the public before being handed to me by a patriotic Zambian, would have some impact on the debate and would lead to precisely this kind of legal interpretation by others more capable of it than the original researchers.

Will mine taxes affect investment?

The Chamber of Mines made some pretty extreme arguments at the recent parliamentary hearing on Zambia's new tax regime, suggesting increasing taxes on mines multinationals would lead to cuts in investment, job losses and indeed a recession in Zambia. That strikes me as profoundly unlikely. Any company struggling to source investment for mining in Zambia will probably find itself bought out by a firm with more capital and an ability to exploit high copper prices. The mines remember have been upping production at incredible rates in an effort to get as much copper out of the ground as quickly as possible while the price is high. Relatively conservative tax increases are most unlikely to make any difference to that. The government is betting that, with copper prices as high as they are (and remember most of the new taxes vary according to the price of copper), there are huge profits to be made in Zambia even with increased taxes, and thus that the companies will be able to draw in new capital to cover any profits now unavailable for re-investment as a result of the new taxes.

So, what evidence do we have so far from the companies about their investment decisions?

• Well, ZNBC report that the Konlkola Copper Mines (KCM) smelter almost ready and new operations will start in the next two months. The Smelter which is Africa's largest has been constructed at a cost of K320 million. KCM Smelter Projects Construction Co-ordinator, Kennedy Mwandamina told ZNBC in an interview that 90 percent of the work on the infrastructure has so far been completed. Meanwhile works on the Konkola Deep Mining Project (KDMP) which is expected to increase copper production at KCM by five million tones a year is also progressing well. KDMP 'package A' manager Billy Sakala told ZNBC that much progress has been made on both surface and under ground works that include development of infrastructure such as ventilation shafts and crusher systems. The Konkola deep project is scheduled for completion in 2010 and is expected to extend the life of Konkola Mine by at least 22 years.
• South Africa's Business Day reports that mining investment company African Rainbow Minerals (ARM) planned to raise funds shortly to advance promising projects in Africa. First results from drilling around the Konkola copper project in Zambia were "exciting". These projects would need "quite a lot of money", according to a company representative who was confident of their ability to raise the investment.
• The Post reported yesterday that Luanshya Copper Mines (LCM) is to invest between US $15 million and US $20 million in the Mashiba Open Pit mine project. LCM chief operations officer James Bethel said once the project was approved by ENYA Shareholdings, one of the major shareholders in LCM, operations at Mashiba mine would commence either at the end of 2008 or early 2009. Bethel said Mashiba mine had 18 million tonnes of copper materials and its lifespan was between four to five years. The mine will not be as big as the Muliashi open pit mine which is also under construction. LCM has acquired Muliashi mine which is expected to provide between 350 and 400 jobs to Luanshya residents once in full operation. An interesting aside on this story is that the Post also reports that LCM has faced protests from unemployed local youths seeking work at the firm, who are unhappy with the companies' hiring practices. The company responded by claiming the problem resulted from itis desire to move away from heavily criticised processes of casualisation. LCM's public relations officer Ruth Mulenga said at the moment, the company had stopped employing casual workers in line with government's policy.
  

• The Post reported yesterday that Mopani Copper Mines (MCM) has said the new mining fiscal regime will not halt the company’s intention to invest in development of the lower Kafue Gorge Hydro-power project with Copperbelt Energy Corporation. MCM chief service officer Passmore Hamukoma said the mining giant was committed to its earlier pledge to develop the power project which was expected to gobble about US $1 billion. “Nothing has changed,” Hamukoma said in an interview. “This is not a project that involves us (MCM) alone…there are other stakeholders in the consortium like CEC. So as far as we are concerned, the project is still active and nothing has changed.”
• In the same story, the Post also quoted First Quantum Minerals (FQM) country manager Chisanga Puta-Chekwe said expansion programmes for its Bwana Mkubwa mine might be restructured leading possibly to a loss of 600 jobs. Puta-Chekwe. “For example, plans to build a roaster at Bwana would have to be reviewed, leading possibly to a loss of 600 jobs.”

I will try to keep an eye on this last story.Does it tell us more about weaknesses in FQM's business model, the Zambian taz regime, or the political shenanigans of FQM trying to pressure the Government to reverse the reforms? My money is on the last of these explanations. I suspect the Government won't move, and the project will go ahead - because it will still be highly profitable.

Standard Chartered Assess Budget

The Zambian Economist blog today posts the response of Standard Chartered Bank to the budget and the annoucnement of the revised mining code.

In search of a copper windfall

In recent years, Zambia has enjoyed new-found macroeconomic stability, with GDP growth of around 6% and inflation in single digits - courtesy - initially at least - of the sharp appreciation in the ZMK, but also improved economic management. Gains in metals prices globally have been beneficial for Zambia, leading to increased activity on the copper-belt and a significant rise in FDI. Despite this, the perception that Zambia was not extracting as much as it could from its copper endowments has been widespread. Although copper makes up over 60% of the country's exports, its contribution to government revenue was negligible. The reasons were mainly historical. Following the exit of the largest foreign mining investor, Anglo American, in 2002 (low copper prices as well as the prohibitive costs of developing the Konkola Deep project were blamed), Zambia was forced to seek new investors. At a time of copper price weakness, several development agreements were negotiated with new investors, which typically offered tax concessions, including the setting of mining royalties at 0.6%. According to IMF data, in 2007, total tax revenue from the mining sector was equivalent to only 1.5% of GDP - a low ratio in comparison with other resource-rich countries .

With the dramatic recent rise in copper prices, the issue has become politically charged, with Zambia's populist opposition leading calls for a revision of these agreements. That Zambia needs to create more fiscal resources for spending on infrastructure in order to drive future growth and diversification is a given. Net inflows of donor support - on which the country had traditionally been reliant - were unlikely to be scaled up beyond 5-6% of GDP over the medium term. With a future decline in donor flows more probable, and Zambia's entire macroeconomic adjustment premised on a reduction in domestic borrowing, the country faced few options other than to revisit the mining sector. It had long been encouraged by the World Bank and the IMF, as well as other bilateral donors, to do so.

Unsurprisingly then, the theme of this year's Budget ('Unlocking Resources for Economic Empowerment and Wealth Creation') was to revise the fiscal regime for the resource sector, in order to achieve greater consistency with international standards. Under the new proposal, effective 1 April 2008, the corporate tax rate for mines will be set at 30%, mining royalties on base metals are to be set at 3% of gross value (up from 0.6%), and withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors in the mining sector will be set at a rate of 15%. While many of these measures, especially the increase of royalties had largely been anticipated (having been the subject of previous negotiations), an additional element - the setting of a windfall tax on base metal revenues - appears to have taken mining companies by surprise. Under the budget proposals, a windfall tax, to be triggered at different price levels for different base metals will be introduced. For copper, a price between USD 2.50 - USD 3.00/lb, will attract a windfall tax of 25% from April; between USD 3.00 and 3.50, 50%, and 75% for prices above USD 3.50/lb. At the time of writing, copper prices are around the USD 3.60 level, sufficient to trigger the maximum windfall penalty, generating an additional level of controversy around the proposed changes.

Mining companies have been critical of the revised plans, claiming that they were not fully consulted (especially the proposed treatment of 'windfall profits'), and that any move to a new regime would infringe the legally-binding original agreements. While some mining companies hope to re negotiate with the government, others have threatened legal action. Many have claimed that the promise of a 15-20 year tax holiday was the reason they had invested in Zambia to begin with, and that the promise of preferential tax treatment was key to their ability to raise the financing. Zambia's Chamber of Mines has since argued that the country's ability to attract future FDI has been compromised.

For its part, the government has in recent weeks sent mixed signals on its willingness to negotiate, at times adopting the view that it did not need to seek tax-payers' agreement on the changes. Much rests on the question of whether the development agreements are legally binding, and following the expected approval of the Budget by parliament, some form of international arbitration looks increasingly probable. Ultimately however, it is the government that decides which companies it chooses to licence. With mining corporates already having heavily invested (both Zambia's FDI and trade data is testament to this), the authorities appear to be taking the view that significant withdrawal by mining companies is unlikely. Also, in contrast to the years immediately after privatisation, when the sector was dominated by a single large investor, there has recently been a relative proliferation of private sector investor interest. The authorities are now in a much stronger position to negotiate revised deals, especially since bilateral and multilateral donors are backing revisiting initial agreements. But the most compelling reason for the government to stand firm is the increasingly vocal call by both the political opposition and civil society, to ensure a 'fairer' deal is struck. So what are the likely economic effects?

Zambia's balance of payments looks relatively healthy. Despite booming export prices, imports have risen faster, reflecting increased investment in the mining sector. The current account is in deficit, the result of a substantial deficit in the income account (meaning that Zambia pays more to foreign investors than it earns on its income from abroad). However, this deficit has been easily financed by FDI flows. Even if new FDI flows are now put at risk, it is likely that the deficit on Zambia's income account will improve, providing some offset. Overall, there are few grounds for believing that the macro-economy is vulnerable. Although private sector external debt has been rising (again, reflecting the intensity of new investment in plants and machinery), at USD 980.7mn, in comparison to metals exports of USD 3.4bn annually, export cover is not problematic. The new fiscal regime - if adopted - will reduce mining profitability, but the structure of the tax changes (apart from royalties at 3%, profits are taxed) suggests that most companies can still be profitable. Zambia's low level of external debt in the wake of debt relief (USD 1,054.5mn at the end of 2007) also compares favourably with FX reserves of USD 1,080.2mn, equivalent to 3.6 months of import cover. Moreover, despite booming metals prices, it is Zambia's non-mining, non-traditional exports that have been growing fastest (albeit off a low base). Although many have questioned the benefits of the recent copper boom, Zambia has come a long way since 2002. Its economy is now more resilient to potential shocks.

Ministry of Mines to be restructured

This from The Lusaka Times today. It suggests the Government has had difficulty accessing accurate information from the mining companies and that for the new system to operate effectively, it needs to tackle questions of data and statistics. Dysfunctional environmental and mines safety systems may also get a much-needed overhaul.
The government intends to restructure the Ministry of Mines this year. Mines Minister, Kalombo Mwansa said this will be done to respond to the needs of the mining industry. Dr. Mwansa said his office will carry forward the work started in 2007. He said last year, the Ministry completed the performance audit of the Ministry as a first step to updating the strategic plan and restructuring process. Dr. Mwansa said the restructuring of the ministry will see the creation of a planning and information department to collect and analyse statistics about the mining industry. And Dr. Mwansa also announced that government has proposed a K200 million in this years budget to forumlate a policy on safety, health and environment so as to address safety in the mines.

Metorex CEO still hopes to negotiate

Even after legislation has been introduced in Parliament, the mining companies are still hoping to avoid Zambia's new tax regime. Mining MX carries an interview with Charles Needha, CEO of Metorex, owners of the Chibuluma mine.

Needham said the government had taken every revenue stream generated by the mines and raised it, which would double Metorex’s tax rate to about 40%. “We looked at the affect of what they are proposing on our tax rate and it more than doubles it, which is unacceptable to us,” Needham said. Metorex will not close its Chibuluma copper mine if the new regime is implemented. Metorex signed its 15-year development agreement, with a tax stabilisation clause, in 1997 when copper prices were far less favourable than today. “We are protected by international law,” he said. A senior foreign mining executive told Miningmx in Zambia earlier in February that international arbitration was an option if the government pressed ahead with the fiscal changes. Metorex believes the government is open to negotiation on the rates and together with other mining companies in Zambia will offer to pay a variable tax rate at various copper prices and suggest that companies would like to see money from those taxes flowing into communities around the mines. “The mining industry in general opposes what’s happening. The government understands there are development agreements that protect a lot of companies… and if this were implemented there are a number of new operations that will not come on line,” Needham said. “This process is not good for the nation or for the people, but we believe through negotiations, this will be adjusted.”

Zambia Media Forum Statement on Mining Taxes

PRESS STATEMENT
FOR IMMEDIATE RELEASE
FEBRUARY 16, 2008
ZAMBIA MEDIA FORUM RALLIES BEHIND GRZ DECISION
TO REVISE MINING TAX REGIME

The Zambia Media Forum, an online community of about sixty-eight (68) Zambian media practitioners and friends of the media resident in and out of Zambia, strongly supports the decision by the Government of the Republic of Zambia (GRZ) to raise the rates of tax and royalty paid by the mines. We consider the issuance of this statement our civic duty as Zambian citizens. We believe that there has never been so opportune a moment to express ourselves on a public affair of epic proportion.

As media practitioners and friends of the media, we cherish our professional autonomy. It is this conviction in our autonomy that compels us to freely express our civic responsibility to the greater polity of the Republic of Zambia. In making this statement, we affirm our professional independence. We also affirm our commitment to ensuring that Zambians embrace an ethos of civic activism by constructively engaging not only their elected representatives but also transnational corporations with business concerns in our country.

As such, our statement reflects our professional commitment to the kind of investigative media work that delves deep into the operations of such corporations to ensure that they are accountable to the Zambian citizenry as much as they are to their shareholders. It is in this context that we hope our statement will be construed: a commitment to democratic outspokenness and a civic revulsion against any undemocratic tendencies displayed by foreign investors.

Public participation in negotiations
We start by decrying the lack of public participation and debate in the processes leading up to the signing of the Development Agreements that have become such a bone of contention between the mining investors and the Government of the Republic of Zambia. While we understand that the government of the day may have been eager to show the general population that it was doing something about reviving the mines, we are averse to the general lack of transparency and accountability in the processes of negotiation with the mining investors. It is evident, from our independent analyses of the Agreements, that the investors knew precisely what they wanted from the negotiations.

We note, however, that the government prefaced the Agreements with the need to derive “maximum benefit” for the Zambian people from the mining operations. This is evident, for example, in the Development Agreement signed on the 11th of September 1998 between the Government and Chambishi Metals Plc. In the words of the Agreement: “GRZ wishes to ensure that the rehabilitation, development and continued operation of the facilities will secure the maximum benefit for, and adequately contribute to the advancement and the social and economic welfare of, the people of Zambia, including the people in the vicinity of the facilities in a manner consistent with their needs and the protection of the environment and secure an appropriate return on investment commensurate with the risks involved to the company and its legitimate commercial expectations” (our emphasis).

It is clear to us that, while the companies have been generally profitable, the people of Zambia have not derived any appreciable social and economic benefit from the mining operations. Even worse, going by some of the environmental disasters reported, the companies have not engaged in the best of environmental protection practices. We are not surprised by this, for the mining companies seem to have negotiated themselves into a comfortable position with regard to environmental issues. For example, the Agreement cited above enjoins upon GRZ not to take any action against them in the event of breaking environmental laws. To be fair, the Agreement provides for an “Environmental Plan”, to be agreed upon between the two parties, but there does not appear to be much commitment to this on the part of the mining companies. In effect, the Zambia government loses any claim to national sovereignty in determining questions of environmental protection relating to the mining companies for a period of fifteen years. If left unchecked, the Development Agreements might degenerate into “Underdevelopment Agreements”.

The legality of the Development Agreements
This brings us to our next area of concern, namely the legality of the Development Agreements. While most of us on the Zambia Media Forum are not lawyers, we have sufficient legal know-how to know that the Agreements virtually render Parliamentary oversight redundant for the duration of fifteen years. How else can one explain the fact that the tax regime negotiated requires that the government makes no laws to disadvantage the companies in any way? Take, for example, the section in the Agreement which enjoins upon the government not to raise any corporate income tax or withholding tax rates, or otherwise amend the VAT and corporate tax regime applicable to the companies from those effective on the date of agreement. The Agreement goes on to forbid the government to “impose new taxes or fiscal imposts on the conduct of Normal Operations”.

Clearly, these provisions raise fundamental questions about both the constitutionality of such provisions and the possible usurpation of Parliamentary oversight role. As media practitioners, we would be interested to know how such legal and constitutional issues will be resolved. While these questions may be resolved in any number of ways, we find it appalling that the country suddenly finds itself in a situation of legislative numbness relating to the Development Agreements.

The morality of the Development Agreements
The third area of concern, then, relates to the morality of the Development Agreements. We have already noted that the majority of Zambian citizens do not seem to have benefited much from the mining investments. At the same time, we believe that the companies have been making reasonable profits. We are unable to estimate the exact return on investment, but we can ascertain it from the fact that prices for copper and other minerals has generally improved in the global marketplace. We take pleasure in the fact that Her Majesty’s Government, the World Bank and the United Nations have come out in full support of the Republic of Zambia. This should alert the mining investors to the fact that there are moral questions to be addressed here, which include the need for the country to be truly sovereign in its policy and legislative decisions. Another moral issue has to do with the immense public support that has emerged in the wake of the government’s hike of the tax regime. This is unprecedented in Zambian history and it means that the force of public opinion might weigh heavily on the shoulders of the shareholders of these mining concerns. As such, any legal action, while it may be seen as justifiable by the companies concerned, will have to contend with the weight of national and international negative public opinion ignited by what seems to be the companies’ intransigence and recalcitrance in accepting the new tax regime.

A proposal for conflict resolution
We want to conclude by suggesting a three-phased mechanism of conflict resolution. The first stage should centre on constructive engagement. This should be underpinned by the principle of openness on both the government’s and miners’ sides. There is a lot at stake here, not least the need to know by the Zambian citizenry. It is partly the secrecy surrounding such negotiations that has landed the country into this situation of possible unconstitutionality. We support constructive engagement because we believe it might yield better results and prompt a genuine healing of divisions between the government and the mine owners.

We know that the country needs foreign investors. We know that foreign investors look for countries with stable investment policies and legislation, comfortable in the knowledge that things will not alter at the whims of politicians. We know that this particular situation might be viewed as nothing but political intervention. But we would caution the investors against assuming such an attitude to the situation. It is clear that the government has been under pressure to revise the tax regime upwards in keeping with the needs of the Zambian people, something that is explicitly recognised by the Development Agreements themselves. A negotiated resolution of the conflict is obviously desirable, but it must secure much more than what Zambians are currently getting out of the mining investments.

The second phase, assuming the first one fails, should be legal. This is less desirable, but preferable in the event that the mining companies insist on the unjust provisions of the Development Agreements. We have raised very important points about how the Agreements seem to subvert national sovereignty in matters of law. Any interpretation of the Agreements must, we believe, consider the totality of the Zambian political experience. We know that legal interpretations might want to be so reductionist as to give effect to the narrow intentions of the contracting parties, but intentions can be deceptive. In this particular case, the intentions of our Zambian negotiators, while generally noble, cannot be said to have reflected what the majority of Zambians intended for their mineral wealth, namely material sustenance and freedom to choose.
The third phase must be centred on citizen involvement in the processes of contraction, especially when future generations of Zambians are bound to ask questions of the decisions taken on their behalf. This citizen involvement is structured at different levels: Parliament, civil society, the media, etc. These are important pillars of democratic participation in, accountability for and ownership of development processes.

As media practitioners and friends of the media, we seek answers to questions, as much as we proffer possible explanations. In this statement, we have attempted to set out what we consider to be the key issues, namely the historical circumstances in which the mining agreements were signed, their implications for the entire policy and legislative architecture of the country and the moral questions they raise. We prompt our fellow media workers to analyse these discussions with an even finer comb, including investigating the claims of the mining investors about their profitability, among other things. Our civic duty, as Zambian citizens privileged to be media professionals, is hereby affirmed.
Ends

Notes for editors:
The Zambia Media Forum, hosted at The-Zambia-Media-Forum@googlegroups.com, is a voluntary online community composed of media practitioners resident within and without Zambia It seeks to promote the value of professional fellow-feeling among media workers across different media and communication practices – journalism, public relations, community media, etc.
This Press Statement is issued, in no specific order, by:
Professor Fackson Banda (South Africa)
Alphonsius Hamachila
Daniel Maimbo
Douglas Hampande
Brian Yuyi (South Africa)
Austin Mbozi
Justine Mwiinga
Mwelwa Muleya
Mickie Mumba
Makomani Mutemwa
Kunda Mwila
Joseph Munsanje
Stanslous Chewe
Cephas Moonga
Lawrence Michelo
Marjory Chonya
Mulenga Chomba
Wilcliff Sakala
Chishimba Milongo
Innocent Mwape
Raphael Phiri
Webster Malido
Isaac Chipampe
Muna Sikaulu
Kelvin Shimo
Nigel Mulenga
Liversage Mulinda
Allan Ndambasha
Muntanga Sibalwa
Herbert Macha (Mozambique)
James Simasiku
Mildred Chama
Clayson Hamasaka
Zarina Geloo
Etambuyu Gundersen (Norway)
Mulawa Mulawa
Sipo Kapumba
Brian Lingela
Bornwell Mwewa
Mwape Mwenya
For any further details about the process leading up to the preparation of this Press
Statement, contact:
Professor Fackson Banda
SAB LTD-UNESCO Chair of Media and Democracy
School of Journalism and Media Studies
Rhodes University
Africa Media Matrix Building
Upper Prince Alfred Street
PO BOX 94
Grahamstown 6140
SOUTH AFRICA
Tel: + 27 (0) 46 603 7156
Fax: + 27 (0) 46 603 7101
Mobile: +27 (0) 78 208 7529
e-mail: f.banda@ru.ac.za

KK, HH, many others back Zambian Government

Local and international commentators are coming out in floods over the last week to support the Zambian Government in its battle with international mining companies. Amongst others Zambia's first President and 'father of the nation' Kenneth Kaunda (KK), and opposition UPND leader Hakainde Hichilema (HH) both backed the Government, condemned the companies and suggested that, if anything, the mine taxes came too little and were too late.

• The Post report comments by Dr Kaunda criticising mining companies for their resistance and demands for negotiation: "What do you dialogue about? This is a just what every government anywhere and everywhere does. Why can't they be reasonable and sensible? I think what government has asked is something that I could not have asked. I could have asked them to pay more," Dr Kaunda said. "What do you negotiate about? The government must just put its foot down and tell them that this is what we have decided and this is it... period.... I do not understand how some people thought about Africa... because it is not just about Zambia. We welcome the investors in Africa and Zambia, but they must understand that this is the property through which we want to get funding for our education, health, rural development, agriculture, communications, roads rehabilitation and other social services," he said. "Just on the eve of our independence, we paid BSA (the British South Africa company) three million pounds to get back our mineral rights as they were still in the hands of the foreigners. And that was done for the good of both the foreign investors and Zambians. It is justice and fair play on both sides."

• The Post reports that opposition party UPND president HH claimed that Zambia has lost $2 billion dollars (K8 trillion) as a result of delayed taxation on the mines. “The MMD was so slow in affecting a higher tax regime and because of those delays the country has lost $2 billion dollars,” Hichilema said. “If taxes were effected at the right time, we would have accrued K8 trillion ($2 billion).” He said the right time to have introduced the new tax regime was in 2005 when the copper prices went up. He also said the increment of mining taxation from 31.7 per cent to 47 per cent was not sufficient. “Taxation on the mines should be around 50 per cent if we are to generate proper revenue, the current increment is still low,” Hichilema said. “The direct and indirect tax on the mines should be able to generate $1 billion (K4 trillion) per annum if it was pegged at 50 per cent.” Hichilema said if the government aimed at getting $1 billion per annum, the revenue would translate into 30 per cent of the annual budget. “Imagine raising 30 per cent of the budget just from one sector. This is more than the total donor funds that we get per year,” he said. Hichilema said the new tax regime should be in place by the end of March and that once implemented, revenue must be applied prudently.
• In a long profile of eminent Zambian economist Gilbert Mudenda, The Post also reports the academic's insistsence that the mining companies must accept the new situation: "what the mining companies are doing is dishonesty. The understanding is that you make your money and you should be protected but if you get windfall gains, you also need to be willing to share. If you stand by the law, then the other people will also begin to take unilateral decisions. In the budget of last year, there was an announcement that there will be negotiations. Those negotiations didn’t take place because some of the mining companies refused saying ‘no, look at the agreement, we are not here to discuss, go and talk to our shareholders. Now, that is actually being rude because how do you get shareholders of a company to a meeting? The people who are running the mines are running on behalf of the shareholders. So you have to negotiate with them and then they can go to their shareholders. So there has been an unwillingness on their part because they believe that they have these agreements on their side and they can go to court.”
• The Times of Zambia also report that Caritas-Zambia economic justice programme officer, Edmond Kangamungazi said the new tax measures would ensure that Zambians shared in the mining sector successes.Mr Kangamungazi said that it was, however, cardinal that the Government refocused on responsible spending of the proceeds from the taxes."With the above issue in mind we demand that our Government proceeds to act with integrity, and without fear and favour to secure an equitable resolution that ensures the well-being of the people. "In addition, Caritas-Zambia recommend that the Government refocuses on responsible spending of the increased revenue on mining-related issues such as environment protection, infrastructure development, etc," he said. He urged the Government that in all future development agreements which would affect the nation, the civil society and other interest groups should be consulted. "Government must ensure that the process and outcomes of all such negotiations are transparent and accessible to the general public in order to enhance the confidence of the people to whom the Government owes the ultimate responsibility," he said.
• The Post also reports comments from Scottish Catholic International Aid Funds (SCIAF) policy analyst Abi Dymond who noted, "Zambia must be careful because the threat by the mines to go for arbitration can be a negotiating ploy aimed at reaching a negotiated settlement on a toned down version of the tax regime with the Zambian government,” Dymond stated. She stated that changing tax regimes and introducing new taxes was by no means a unique phenomenon to Zambia. “In 2005, for example, the UK government increased the North Sea oil supplement that oil companies had to pay from 10 per cent to 20 per cent in recognition of the high windfall profits that these companies were making. South Africa has also recently introduced mineral royalties for the first time,” stated Dymond. “Another example is Bolivia, which introduced a series of far-reaching and comprehensive reforms which included the following measures in its hydrocarbon sector, that 50 per cent of the proceeds of sales to go to the Bolivian government and an additional 10 per cent of the proceeds to be split between the company and the state and these measures meant that the Bolivian government now takes around a 60 per cent share of the wealth generated by the oil and gas sector compared with the 25 per cent share they were receiving in 2004.”
  
• The same Post report notes comments from Copperbelt University lecturer Professor John Lungu who said the mines should not resist the new taxes because the new measures would only apply to the surplus profits and not the actual normal profits. And Prof Lungu said there was no reason why the government should continue borrowing when money could be raised locally through putting in place tax measures that were in line with international trends. “The investments that the government has pumped into the mines through tax exemptions since the privatisation era is equivalent to the investment that the mines have put in and this decision is commendable because the mines should not resist because it is not the profits that will be taxed but the surplus above factors of production,” said Prof Lungu. In an editorial in its Business Section, The Post newspaper also backed Lungu's comments.

ZCI supports Rothschild's valuation of its KCM shares

This report in The Post yesterday. I reproduce it in full as the issues are complex and I have little to add.

ZAMBIA Copper Investments (ZCI) has supported Rothschild’s valuation of its 28.4 per cent shares in Konkola Copper Mines (KCM), saying it correctly employed the discounted cash flow (DCF) method in determining the option price.

And the board of the ZCI is undertaking an assessment of Zambia Competition Commission (ZCC)’s statement that Vedanta Resources Plc could not buy additional shares in KCM without its authorisation.

In a statement posted on its website after minority shareholders claimed that Rothschild’s valuation of ZCI’s shares meant Vedanta Resources Plc would increase its stake in KCM at a very low price, ZCI stated that the industry standard for valuing producing mining assets was through the use of the discounted cash flow method.

“Rothschild has correctly employed the DCF method in determining the option price. Under the Call Option Deed, ZCI has no legal basis to challenge Rothschild’s valuation,” stated ZCI. “Vedanta now has the right to acquire ZCI’s interest at the Option exercise price and it must make this decision as soon as reasonably practicable after the Option Exercise Price was made known.”

Vedanta Resources Plc’s bid to acquire the 28.4 per cent shares owned by ZCI landed into trouble following its rejection by ZCI shareholders who feel cheated by the “undervalued” offer price of US $213.85 million.

The move faced further trouble from the Competition Commission which said Vedanta needs authorisation before increasing its stake in KCM through its Call-Option Deed with ZCI.

Vedanta currently holds a Call-Option Deed on the 28.4 per cent of KCM still owned by ZCI whereby they agreed that the latter, upon exit, would offer its 28.4 per cent shares in KCM to the former.

On January 17, 2008, independent investment bank N M Rothschild & Sons Limited, pursuant to their appointment by Vedanta and ZCI to establish the price at which Vedanta shall have the option to acquire ZCI's 28.42 per cent interest in KCM submitted their report.

Rothschild, who assessed the value as it stood in August 2005, came up with the figure of US$213.85 million for the 28.4 per cent, thus evaluating 100 per cent of KCM at US$750 million.

Vedanta has the right to accept or refuse to go on with the call, but ZCI cannot refuse to sell. As a result, Vedanta now has a reasonable period within which to accept or reject the valuation price as determined by the bank.

However, from the figure that Rothschild came up with, Vedanta seems to have struck another bargain and may not hesitate to go ahead with the purchase.

According to a submission by Jean-Luc Chaillan, the trouble is that ZCI shareholders feel the shares have been undervalued and Vedanta will buy the shares very cheaply as it did to the 51 per cent shares in KCM, as latest independent evaluations for KCM shares are far more than that of Rothschild.

Vedanta bought 51 per cent of KCM stock in November 2004 for a mere US$48 million. Back then, this sale came under fire from a cross section of Zambian industrialists, unions, political parties and the media, and was described as an outrageous pillaging of Zambian resources.

All the evaluations conducted by various financial audit agencies are way above the Rothschild figure.

For instance, Morgan Stanley & Company International, in a survey about Vedanta dated December 15, 2005, evaluated the 51 per cent of KCM at US$1.321 billion, which makes KCM worth US$2.590 billion, far above the US$750 million proposed by Rothschild.

Other subsequent assessments are even higher.

When the Rothschild evaluation came out, financial analysts Lehman Brothers, immediately concluded that it was a bargain on the part of KCM because KCM was worth at least twice the suggested amount.

The Zambian government could not give its position on the matter, as mines deputy minister Maxwell Mwale said the Zambia Consolidated Copper Mines Investment Holdings (ZCCM-IH) which holds some shares in KCM on behalf of the government could comment on the matter.

However, ZCCM-IH general manager Joseph Chikolwa, who could have given government’s position on the matter, was reportedly out of the country to comment.

KCM is owned 51 per cent by Indian Vedanta; 28.4 per cent by ZCI, a legal entity from Bermuda; and 20.6 per cent ZCCM-IH (88 per cent of which is owned by the Zambian government).

ZCI shareholders also argue on dividends that did not accrue to them.

In the statement recently released on its website, ZCI stated that it had in fact received dividends on its shares subsequent to the exercise of the Call Option, although these have not – in the view of ZCI’s board – reflected the levels of free cash flow as determined in accordance with the Shareholders Agreement.

ZCI’s representatives on the board of KCM have strenuously argued for the distribution of higher dividends.

“Our considered view of our legal position is that we have no right to force a further or higher distribution of KCM’s reserves,” ZCI stated. “Rothschild had to value KCM as it perceived KCM’s assets at the Exercise Notice date, August 12, 2005. Rothschild had to ignore any information available after August 2005.

ZCI’s technical consultants made strong representations before the process began to ensure that IMCL considered the right data. IMCL appear to have had some difficulty in compiling the necessary technical data for the DCF model, since little information was available from August 2005.”

ZCI’s share price is the only available market valuation of ZCI and hence of ZCI’s share in KCM, since it is ZCI’s only non-financial asset.

As announced on 7 November 2005, ZCI and Vedanta originally attempted to agree on a list of documentation which would have enabled Rothschild to conduct a “desktop” valuation without the need for a full technical review of the assets.

ZCI and Vedanta were unable to agree on the list of documents, since ZCI felt that Vedanta wanted to include documentation which gave a very pessimistic view of the value of the assets.

Thereafter, terms of reference were agreed instructing Rothschild, with its mining consultants IMCL, to conduct a full technical review of the assets.

“During negotiations on Rothschild’s terms of reference it became apparent that the parties disagreed about the relevant date for the valuation,” ZCI stated.

“ZCI believed that the valuation should be conducted on an up-to-date basis, as at the date of Rothschild’s report, whereas Vedanta believed that the valuation should have been conducted as at the Exercise Notice date.

“The issue of the valuation date was particularly important as copper prices, and analysts’ price forecasts, rose significantly over the period in question.

“The parties then entered a lengthy arbitration process, under the terms of the Call-Option Deed, which was not concluded until July 2007.

“The conclusion of the arbitrator was announced on 25 June 2007. The arbitrator held that the valuation should be carried out as at the Exercise Notice date (i.e. 12 August 2005). There are no grounds for ZCI to appeal that decision.”

ZCI further stated that it remains bound by the terms of the Call-Option Deed, adding: “The Zambia Competition Commission has, however, asserted jurisdiction over the transfer of the shares and stated that its permission is required before completion of the sale can occur. The Board of ZCI is examining this presently.”

ZCC said the execution of the Call-Option Deed between Vedanta and ZCI was subject to authorisation.

ZCC wrote to the two parties advising them of the legal requirements of seeking authorisation from the commission before they could effect the transaction, according to the laws of Zambia.

Section 8 subsection (1) of Cap 417 of the Laws of Zambia states that: “Any persons who in the absence of authority from the commission whether as a principal or agent and whether by himself or his agent, participates in a merger between two or more independent enterprises engaged in manufacturing or distributing substantially similar goods or providing substantially similar services;

a takeover or one or more such enterprises by another enterprise, or by a person who controls another such enterprise shall be guilty of an offence and shall be liable, upon conviction, to a fine not exceeding K10 million or imprisonment not exceeding five years or both.”

Subsection (2) of the same section further states that: “No merger or takeover made in contravention of subsection (1) shall have any legal effect and no rights or obligations imposed on the participating parties by any agreement in respect of the merger or takeover shall be legally enforceable.”

Vedanta Resources Plc has since engaged Lusaka Lawyer Eric Silwamba to start legal proceedings against those objecting its plans to acquire additional shares in KCM.

It is yet to give its position on the matter as a press query had been sent last week.

Mining Companies' strategy unravels as state forges ahead with reforms, threatens audit

Multinational mining companies in Zambia are being forced to face up to the weakeness of their position in attempts to resist a new mining tax regime. In spite of legal threats from the companies, the Zambian state is forging ahead, introducing to Parliament legislation that will establish higher taxes on companies that have had everything their way for almost a decade of privatisation, low taxes and minimal regulation.

Last week the companies thought their threats of legal action and an international media campaign were bearing fruit when President Levy Mwanawasa proposed that they bring their complaints to the Finance and Mining Ministers. In the last few days, these hopes have been dashed as the President clarified that the companies were only being invited to justify their hyperbolic claims made to a Parliamentary committee, rather than to negotiate on the new rules. The companies' hostile response to reform proposals may also have backfired more profoundly. Not only have they brought numerous international and Zambian political, intellectual and civil society big-hitters out to condemn them, the companies will also have been rocked by an announcement from the Finance Minister that they should prepare their accounts for inspection from the moment they began operations in Zambia. The companies have long been suspected of having abused loopholes in the existing regulations - for example on VAT reclaims and on rolled-over losses. This new announcement may thus be designed to make a point to the companies: behave, or the state could make your lives very difficult. It also raises an issue I've wondered out loud about on minewatchzambia before. Have the companies ever made the quarterly submissions they are required by their Development Agreements to do? If they had, the state should already have this information.

The Times of Zambia reports today that Finance Minister Magande yesterday presented three bills for amendments, including the Income Tax Bill which seeks to introduce a variable profit tax for the mining sector, a graduated windfall tax for the mining of base metals and precious metals and also introduce a reference price for determining the values for the windfall tax. The mining sector would also have a reduction in capital expenditure deductions from 100 per cent to 25 per cent per year. The three bills passed first reading.

Meanwhile the Daily Mail reports on the demand from Magande that the companies prepare income and expenditure accounts since their establishment to help resolve the misunderstandings on the new mining tax regime. Mr Magande said the firms must state their profits from the time mining incentives were given and show how they would incur losses once the new tax regime is effected on April 1, 2008. In an illustration of the degree to which the Zambian state enjoys massive popular as well as civil society support on the issues, the Mail also reports that last week, hundreds of people on the Copperbelt demonstrated in favour of the new taxes. When did you last hear of a protest in favour of higher taxes!

The companies attempted to read the comments last week from the Zambian President that the companies should explain their recent claims in Parliament as an invitation to renegotiate. For example, The Times of Zambia reported that First Quantum Minerals and Konkola Copper Mines (KCM) welcomed President Mwanawasa's call for dialogue over the new tax regime for the mining industry. First Quantum representative Mr Puta-Chekwe said the mines wanted to renegotiate the Development Agreements (DAs) in good faith. However, the Government have repeatedly been clear that the point of any such meeting would not be to renegotiate the Development Agreements.

If any doubt remained, today's Times of Zambia should settle the matter. It reports a statement released in Lusaka by chief analyst for public relations and Press, David Kombe. Kombe said the point President Mwanawasa made was that the Government was ready to listen to the complaints by mining companies who had alleged that the rate of taxation had been pegged at 76 per cent or 95 per cent, which would scare away potential investors to Zambia. "The point the President made was that the Government will listen to their complaint on this alleged error," the statement said. The statement stated that the President said that rather than engage in uncoordinated arguments with the investors' representatives, they should send in advance their submissions in which they identified how this "error" arose, and if there was no such error, they would be wasting everybody's time requesting for the meeting. "He (Dr Mwanawasa) made it clear that the Government was merely getting for the people of Zambia a fair share from the value of their mineral resources." At 47 per cent tax it was leaving a substantial return on the investment of the investors. This level of taxes was now neither the highest nor the lowest in the world. To that extent, therefore, this level of taxation was not negotiable," Mr Kombe said. "The President notes that recently the investors' representatives actually appeared before a Parliamentary Committee to put their case forward and throughout they did not show any such error for the Government's assessment of the rate of mining taxation."

First Quantum Minerals and Vedanta Resources have taken their campaign into the international media, with Reuters, South Africa's Mail and Guardian, and The International Herald Tribune all running stories on the issue. The IHT reported on 15 February that First Quantum executives make clear that decisions about legal cases in the mining sector will not be made by local managers but by shareholders in the major mining companies. Chisanga Puta-Chekwe, country manager for the Canadian company siad that if the tax hikes go through, his company would be under heavy pressure from shareholders to take the government to court. "We're not eager to go to arbitration, but at the same time I think it's inevitable if the development agreements are breached," he said. Puta-Chekwe said, however, that Mwanawasa's offer of a meeting "We do understand the political reasons for this," he said, adding that his company was "open to negotiations" with the Zambian government.

The Mail and Guardian on 18 Feb quoted CP Baid, director of operations for Vedanta's Konkola Copper Mines saying that the new tax regime could destabilise long-term expansion and recapitalisation plans in the sector. “The new tax regime is detrimental and jeopardises the ability to generate surpluses and raise funds for infusion towards growth and extension of our mine’s life. It is contrary to … the fundamental requirement for sustainable development and growth of the copper mining industry, which had passed through a decline phase and is now in the phase of recovery,” Baid said.

Nonetheless, the campaign appear to be having little impact with either international opinion or the Zambian Government. The same Mail and Guardian report noted Government frustrattion with the companies, including a claim that in October last year the Zambian government called on mining companies to renegotiate existing development agreements, but, said Mines and Mineral Development Minister Kalombo Mwansa, “none of the mines were willing to renegotiate because they never responded to our correspondence, which is why the government decided to go ahead with the new tax regime and put in place a new regulatory framework”.

Competition Commission consider ZCI share sale

A story in today’s Post confirms that Zambia Competition Commission (ZCC) has received an application from the parties involved for an authorisation to transfer shares from ZCI to Vedanta (see previous entries mentioning ZCI, especially 17 Jan 2008, for much more information on this issue). Competition Commission director of mergers and acquisition Thula Kaira said it was mandatory for the two companies to seek ZCC authorisation to carry out such a large transaction. He added that a thorough independent assessment was yet to be carried out to ascertain the suitability of the transaction: “At the moment it is too early to say we have allowed the transaction or not but since they have applied, an independent assessment team will need to study the proposal before we can make a decision.”

ZCI, which is listed on the Johannesburg Stock Exchange, issued a statement: “Vedanta has accepted the bank’s valuation of our 24.8 per cent stake in KCM that is valued at US $ 213.15 million and the call option process has accordingly being finalised and in terms of the provisions of the call option deed. Vedanta has indicated that it intends to effect payment of the valuation price to ZCI by no later than 20 February 2008, where after ZCI would instruct KCM to effect transfer of the shares to Vedanta… It will also determine the nature of such amended focus, or whether a portion of the ZCI’s assets be distributed to shareholders by way of dividend or share buy-back and thereafter continue business as an investment or operating entity should the assets remaining after distribution/buy-back allow for a viable business case,” stated ZCI.

If the transaction goes ahead without blocking action from the Competition Commission or Zambian Government, which has previously expressed its opposition to Vedanta taking such a large share of the company, Vedanta will take a 75.8 per cent shares of Zambia’s largest copper mines. ZCI stated that it would soon present shareholders with their proposals for the future of the company that would determine whether the company should wind up operations and its assets distributed to shareholders, or whether it should continue as an investment or operating entity. When ZCI was established it included a mechanism, the Copperbelt Development Foundation, to compensate former employees and promote development for local residents and communities. The organization appears to have done almost nothing during the years of its existence. Some difficult questions face the Zambian Government, Anglo America, Vedanta, and the international aid donors that were involved in establishing CDF as a sweetener on the Anglo-American’s pull-out from the Zambian mining sector.

Vedanta will claim ZCI shares

This on Mining Weekly today. It's bound to generate plenty of angry messages from ZCI shareholders. I wonder if the timing was designed to co-incide with the bigger storm over tax, and I don't know if that's too conspiratorial.

ZCI said on Thursday that Vedanta Resources had accepted the independent investment bank’s valuation of the 28,4% of Konkola Copper Mines shares held by ZCI, valued at $213,15-million, and that the call option process was, accordingly, finalised.

In terms of the provisions of the call option deed, Vedanta has indicated that it intended to effect payment of the valuation price to ZCI by no later than February 20, where after ZCI would instruct KCM to effect transfer of the shares to Vedanta.

The dispute arose over a call option that determine that the 28,4% of KCM held by ZCI was to be valued as at the date on which the call option was exercised by Vedanta, which was August 12, 2005. The long-running dispute ended in arbitration last June, when a “material difference of opinion” arose.

ZCI said that it would shortly present shareholders with their proposals for the future of the company, which would determine whether the company should be wounded up and its assets distributed to shareholders, or whether it should continue as an investment or operating vehicle.

It would also determine the nature of such amended focus, or whether a portion of the ZCI’s assets be distributed to shareholders by way of dividend or share buy-back and thereafter continue business as an investment or operating vehicle, should the assets remaining after distribution/buy-back allow for a viable business case.

President invites companies to discuss concerns

The Times of Zambia report that President Mwanawasa has invited mining companies opposed to the proposed tax reforms to meet with Finance Minister Magande and Mines Minister Mwansa. "We are a listening Government, instead of them shouting on the hill I invite them to seek audience with the Finance and Mines ministers and they should be prepared... We are at 31 per cent, let the mining firms show that we are wrong when we say that our taxes are low. These people are coming from countries where taxes are high." He said he was happy that the people who put him in power had welcomed the move by the Government to increase the tax and that his interest was for the people of Zambia who were more important.

Reuters also report the invitation and that Mwanawasa said foreign managers at the vast copper and cobalt mines received huge salaries, while denying Zambians jobs in higher management positions. "They might be happy now with the salaries they are getting, (but) what of the majority Zambians? Is it wrong for Zambians to ask for more so that we can improve the living conditions for all Zambians?"

In The Post Lands minister Bradford Machila advises mining companies not to use development agreements to escape the proposed tax regime on the mines. As minewatchzambia has pointed out, he also noted, “Some mine investors have not been honouring their part of the development agreements that have to do with health and safety, environment, labour and immigration,” Machila said. “The mining companies have been getting away with non-compliance to those aspects of the development agreements.” He said in the event that the government was dragged to court over breach of the development agreements, it would be forced to defend its position.

Parliament, UN, UK back Zambia in mining dispute

The Post reports that the Parliamentary Select Committee appointed to consider the 2008 budget, and which recently heard the mining companies attack the Government's proposed tax reforms, has dismissed the companies' objections.

The select committee stated in its final report, "your committee strongly urges the government to relentlessly pursue the matter until the Zambian people get what is rightfully theirs from their natural resources... Noting that the exploitation of the country’s mineral resources should primarily benefit Zambians, which has not been the case in the past, we strongly support the proposed new fiscal regime in the sector as it is in the interest of the country.... The statement that the new tax regime proposes an effective tax rate of 79 per cent is also misleading. In fact, your Committee understands and agrees with the government that the effective tax rate will be around 47 per cent.”

The Governmnt also won important backing from high-profile donors, with UN resident coordinator Aeneas Chuma saying “The government has the sovereign responsibility to raise and mobilise resources aimed at helping it plan the development of this country and make investment coming in the country better, necessary to uplifting the welfare of the people... And a lot of partners feel that the government has done enough research to establish that there is enough space for the government to collect a fair amount of revenue not just from the mining sector but also all sectors including the citizens of the country… and that is its legitimate function of the government.... We feel that there is still an opportunity for the mining sector to realise a reasonable rate of return on their investment even after the new fiscal regime and also enough space for the government to get fair amount of revenue from the (mining) sector.”

Meanwhile, British High Commissioner to Zambia Alistair Harrison described the decision by the government to increase tax in the mining sector as “a noble move.” He said the British government fully supported the reforms especially because they would enhance the government’s efforts in alleviating poverty. “We support the government in its quest to get a fairer deal out of the mines. These are the resources meant to benefit the citizens,” High Commissioner Harrison said. “It is a good move the government has made and I think the position of the British government has been made clear.”

Well, certainly, it's now clearer than it was last week when, as minewatchzambia reported last Thursday, DFID Zambia made a statement to the Daily Mail confirming that the British Government is one of the two co-operating partners who provided financial assistance to the Zambian Government to obtain its own independent technical and legal advise on renegotiating Zambia’s mining development agreements. However at that time, DFID also stated it would wait for further clarification of the precise nature of the new regime before responding to it.

Perhaps the evidence offered by Government spokespeople to the Parliamentary committee was all the information the UK required. Or perhaps, as I've been arguing over the past few weeks, this process is more political than legal or technical. The support Government has been securing from across the Zambian political, intellectual and social spectrums, particularly the intervention by opposition leader Michael Sata, make it increasingly impossible for the Government to back down or to water down their proposals through negotiation with the companies. The fact that, a few months ago, imposing a unilateral solution was a red line donors said the Government should not cross, and now they are coming in behind precisely such a proposal suggests how effective the political mobilisation of Zambians has been in strengthening the Government's hand and how effective a partnership between the state, civil society and opposition political voices can be.

Thousands round the world read minewatchzambia

To break the pattern of news reports and opinion I just thought I'd let people know how minewatchzambia is doing. I have a free 'statcounter' service that lets me know how may people have accessed the site each day since I started writing fourteen months ago. And as the battle over the mines heats up, I can tell you that:
- Today was the single biggest day in minewatch history! About 200 people looked at the site.
- So far just in January and February this year almost exactly 1,000 different people have looked at the site.
- Many of them come back every day to see what's changed.
- Only about 11% of readers today were in Zambia. Other countries that have shares of the readership - Britain (18%), Canada (17%), Mauritius (15%), US (12%), South Africa (8%), Germany (4%), UAE (3%), Kenya (2%), with France, Norway, Switzerland, the Netherlands and Botswana all chipping in. I don't know if that's to do with where shareholders in the mines live (certainly stories about ZCI lead to explosions of interest from angry French shareholders). Alternatively the spread could easily be an effect of where the educated Zambian diaspora end up.

Anyway, it amused me. If anything, it increased my frustration we don't get more comment and discussion on the site. Come on people, join in! And to think, I haven't even managed to get paid to do this, or to get any advertising etc. etc... damn! Any ideas people have about how to spread the news would of course be very welcome. Cheers folks and thanks to those of you who continue to offer ideas and encouragement!

Alastair