KCM and Resource Nationalism Risk in Zambia [analysis]

Recently events surrounding the Konkola Copper Mine (KCM) have dominated headlines in our country. This all came to a crescendo when a video appeared on YouTube of the mine’s majority owner, Anil Agarwal of Vedanta, seemingly mocking us over the sale of the mine at a fraction of its true value. The frosty relationship between government and mine owners that exists today casts a smouldering resentment that has far reaching consequences for Zambia’s economy and the nation’s appeal to foreign investors. A way forward must be found to break this impasse, otherwise, there are significant risks that will be felt far beyond the Copperbelt.

Zambia has a long history of resource nationalism risk, as it is a trend played out repeatedly in our politics.

Background

According to an ICCM report, Zambia used to produce 15% of the global production of copper in early 1970s. Then, during the reign of Kenneth Kaunda’s one-party state economic policy, there was a dramatic fall in output to such an extent we could only supply 2% of world output by the 1990s. After the demise of KK, the first 10 years we saw austerity measures instituted by the new Movement for Multiparty Democracy (MMD) government. This involved wholesale privatisation of the mines (including KCM, among others) and other industries, which were believed to be more successful to generate tax revenue if run as private businesses instead of mismanaged parastatals. This privatisation programme was responsible for a dramatic improvement in copper production to reach levels not seen since the boom days of the 1970s. The economy as a whole was once more put on a firm footing.

In 2008, the late President Levy Mwanawasa didn’t share the vision put forward by the founding fathers of MMD. Thanks to the departure of the 79 bigwigs over the third term debacle in MMD with regard to Chiluba, the late Mwanawasa was able to deviate from previous economic policy that had brought improvement to the economy. He begun an anti-business crusade in 2008 and cancelled all development agreements entered into by the new mine owners. He introduced a common collective agreement that applied to all mines. The new policies were not welcomed by investors particularly the owners of old mines Mopani and KCM who were most aersely affected.

In addition, Mwanawasa introduced a windfall tax and increased royalty tax by more than 3000%. When increasing royalty taxes, he confirmed in an interview on ZNBC that he saw this ridiculous percentage of .03% when reviewing agreements and decided there and then that royalty tax should increase. At one point, Mwanawasa admitted making the decision without receiving any counsel from his economic and financial team.

It is important to note here that any tax based on turnover is a bad tax. This brought a lot of consternation by our mining investors they just couldn’t believe that Zambia was changing the goal posts – asking to share with them in the good times, but not to suffer alongside in the bad times. Later on, the windfall tax was subsequently withdrawn as it was found untenable.

Send In the Auditors

In 2008, the government through the Zambian Revenue Authority (ZRA) engaged an audit taskforce team to investigate the tax affairs of the mining companies. Mopani was singled out because of the huge size of operations and a high cost structure. The audit team comprised of Grant Thornton and Econy Poyry, an international audit firm. The latter gave up after the initial visit and transferred full audit responsibility to the Zambian-managed firm Grant Thorton.

As expected in such audits, inconsistencies in the books are dug up. Most can be alluded to the size of the operation and other factors such as poor accounting records. What is important, however, were the concluding remarks of the auditors: “Due to lack of documentation disclosed and cooperation from the company, we have been unable to verify any monetary effects due to lack of information.”

The audit went on to declare “the time frame and budget on this audit did not support such a vast job.” In short the report was incomplete.

A meeting was held with all interested officials in government, mine owners and auditors. The meeting resolved that the report was incomplete and releasing it would not be in anybody’s interest. As it happened an independent paper that digs deeper decided to publish the report. The negative perception of mine operations was now cast in stone in the public’s view and this spread to all mining companies in our country. As such, in Zambia there continues to be a persistent belief that mining is fundamental unfair to citizens – even though the position is not always backed by evidence.

In my next installment, we’ll continue by taking a look at the hostile posture taken by the Patriotic Front (PF) toward mining, and how this plays out toward the wider economy.

Source : Zambia Reports

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