KCM and Resource Nationalism Risk in Zambia, Part II [column]

In my last column, I explored some of the political history of statist economic policies toward foreign investors in the mining sector, a conversation which has been prompted by the recent calls for more government “action” on the Konkola Copper Mine (KCM).

KCM is currently majority owned by Vedanta Resources Plc, and its unpopular shareholder Anil Agarwal.

When a peculiar activist group known as “Foil Vedanta” began attacking the company late last year, in Zambia they found an eager and captive audience, who for many decades have been led to believe that the mining business is inherently unfair. These populist sentiments came from many sources – including both the UNIP-led one-party state of Kenneth Kaunda, as well as the MMD government late President Levy Mwanawasa.

Resource Nationalism Under the PF

Now, since the fall of 2011 when the Patriotic Front (PF) government was elected, some market analysts fear that the pendulum is swinging back toward interventions and expropriations, which history has shown will result in decreasing production, slower growth, and a shrinking tax revenue base.

One of the first negative moves made by the PF financial team was a 100% increase in royalty tax, doubling it from 3% to 6%, making Zambia the second highest in the world after Russia. Very few countries charge royalty tax, and if they do it is calculated after taking into account costs. Our royalty tax is based on turnover, so when KCM wanted to do some cost cutting in view of the ever dropping copper prices, the CEO was unceremoniously bundled out of the country.

The PF appear to be walking head first into the same situation created by Mwanawasa’s haphazard mismanagement when Anglo American gave up on operations and sold its shareholding in KCM – which of course led to the heavily discounted transaction to Vedanta.

Perhaps the mood of the new party was best expressed by the Finance Minister Alexander Chikwanda in his budget speech to Parliament on 11 October 2013: “Sir, the fraudulent reporting in the mines shall not be tolerated as we need to increase our income from the latter… ”

What a disappointing statement emanating from a minister. In all fairness, if someone comes across fraudulent activities, the right thing to do is prosecute, otherwise keep quiet. It is uncouth to accuse someone solely on the basis of superstitions rather than evidence. Simply, it is not the modern way of resolving economic problems.

Activists Add Fuel to the Fire

The arrival of the report by the Foil Vedanta group in February 2014 just made matters worse. By the way, the organisation Foil Vedanta does not feature the participation of many (if any) Zambians, but declares its goal to destroy the company, and allegedly this would be in Zambia’s interests? Describing itself as “a network of grassroots activists from a variety of struggles in Britain and worldwide,” their website is quite non-transparent, listing no board of directors, no office or mailing address, no charter or operational documents. Some critics have described the group as a front for one of Agarwal’s competitors, set up by a London public relations firm, but I have no confirmation on that rumour.

I personally read the 35-page report and concluded that it was nothing but a sensational report that had little or no facts. Most notably, the report relied on hearsay from all sorts of people and presented the rumours as the gospel truth. No surprise when Kaunda was quoted in the same report accusing the Zambian mines of “gushing out profits.”

With regard to the video, I’m of the opinion that if the video were a true account, then it could only have been made as a ruse to goad us into taking an irresponsible action. Nationalisation, expropriation. It was gratifying for once to see the government take a sensible position when they refused to give into calls from the street to nationalise. It is also important to note whilst other parties and interested groups played populist, because they leap upon any opportunity to attack the PF, the National Restoration Party (NAREP) responsibly stood firm and supported the government stance.

What was also amazing was the opinion of a professor at a business school in the Copperbelt on the subject of nationalisation. The professor was in support of nationalisation, but at the same time cautioned us to be aware of the international community. From what parallel universe such a skewed perspective is possible from an educated man, I cannot imagine.

Expectations have been pretty low for this government, and they’ve displayed statist tendencies in the past with the re-nationalisation of Zamtel, the stripping of railroad licenses, and the gradual takeover of more parastatal companies. But on KCM, so far, the PF have been relatively pro-investor rights.

The Way Forward

The fact that nationalisation would be disastrous and the fact that our populist politics are often more driven by emotion than evidence does not mean that everything is OK with mining in Zambia. In a country as poor as ours, of course everything is not OK.

But we must not worship false idols. Most people believe the income derived from mining activities will to a large extent act as a panacea to most of our problems in our country. This is a terrible misconception.

We simply do not understand the role that mining plays in our economy. Contrary to most beliefs the mining sector only forms 13% of our gross national product – we are an agricultural nation when it comes to jobs and self-sufficiency. But the mining sector provides 80% of our foreign exchange through mineral exports. The mines also accounted 82% of our foreign direct investment received in our country.

As such, the mining sector is the proverbial ‘goose that lays the golden egg,’ but it looks like we want to kill the goose by implementing short-sighted government actions as aforementioned in this article. Actions that have contributed to the drying up of foreign direct investment by mines and slowed mine output in our country. In the case of KCM, production has actually fallen in 2014 resulting in a loss of $86m. All these factors have imparted negatively on the strength of the kwacha. And when business confidence is at its lowest ebb in our country, there is no hope of the kwacha ever improving under the current regime.

The major player in our economy is Agriculture. Agriculture related activities occupy 60% of our GNP (economy) and most of our people derive their income from it. The other 30% is in service industries and constructionmanufacturing. Let us therefore focus and direct our energies in resolving problems in the big areas of our economy i.e. Agriculture and energy

The way forward is for the government to immediately reverse all the unstable fiscal policies from the time of Mwanawasa’s rule and up to date. Promote cordial relationship with the business community now. And we should also abide to growth oriented market principles which most successful countries have adopted. The government should also remove the structural imbalances in agriculture and energy by letting market forces take a commanding role.

To do otherwise and not correct policy mistakes is to succumb to “poetic justice” as prophesised in the remarks made by the former MMD Minister Katele Kalumba on welcoming the PF in office in 2011. Katele said: “President Sata has come into office to finish the work that President Kaunda left.”

That, indeed, would be very bad for all Zambians.

Source : Zambia Reports

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