Fahamu (Oxford)

4 December 2009

Zambia: Riches to Rags

opinion

It's the Cinderella story told in reverse; a tale of riches to rags. Once upon a time, following decolonisation, Zambia was perceived as Africa's progress icon. Classified as late as 1979, as a middle-income country by the World Bank, GDP per capita was on par with Portugal, chased the heels of Spain and Turkey, and left African economic powerhouses like Egypt in the wake of its dust.

The dust was coppery, the backbone of Zambia's monolithically derived wealth, primarily mined from the region known as the Copperbelt, composed of major mining towns including Ndola, Kitwe, Chingola, Mufulira and Luanshya, and further north, the Congo's Katangan deposit - Zambia's genetic twin.

The ever-fertile copperbelt yielded an average of 700 000 tons per annum, declining in the early 1970s following the oil crisis of 1973 and the slump in global copper prices in 1975. Wages decreased as food prices increased by 650 per cent, coinciding with the 'Volcker Shock' - when the US Federal Reserve raised interest rates to shift the economic crisis to developing regions. Consequently, in an attempt to ensure adequate salaries, subsidies, pension schemes and state services, the Zambian state accepted extended loan facilities from multilateral and bilateral donors on the advice of the World Bank and IMF.

Within a few years, external debt skyrocketed from US$814 million to US$3,2 billion in the 1970s, doubling to US$6.9 billion in the 1980s, draining 83 per cent of every dollar earned through exports. In May 1987, faced with a nation at the edge of itself, Zambia's lifetime leader Kenneth Kaunda declared that just 10 per cent of export earnings should be diverted to debt servicing. He initiated NERP, the New Economic Recovery Programme, aiming to diversify the economy, reduce dependence on dollar-purchased imports and ensure growth through redistribution. GDP grew at 6.7 per cent, with agriculture and manufacturing growing by 21 per cent and 15 per cent. But Zambia's strengthening economy appeared to halt the flow of development finance from South to North, threatening to catalyse a dangerous trend. By July 1989, the Paris club (country donors) demanded immediate repayment of debt, if World Bank and IMF reforms were not implemented, and debt servicing resumed.

In that same month, Zambia kneeled, re-engaging the Bank. By this time, the Movement for Multiparty Democracy (MMD) led by trade unionist Frederick Chiluba succeeded in removing Kaunda, after 27 years of lone-ranger rule. By this time, copper production had dropped to an all time low of 250 000 tons.

Chiluba's 1991 manifesto committed itself to the 'adjustment' policies of the bank, specifically privatisation. From 1994-97, 244 of 275 copper mines were sold at artificially depreciated prices by the Zambia Privatisation Agency (ZPA); five Wall Street bankers with salaries financed by the United States Agency for International Development micromanaged the process. The World Bank labelled the privatisation process as the most successful in Sub-Saharan Africa, crediting the foreign private sector controlled ZPA with limited government intervention as the key

But the crown jewel, the Zambia Consolidated Copper Mines, was privatised under the direct watch of the World Bank and IMF, with the aid of bankers Rothschilds and Son, and London law firm Clifford Chance, following Zambia's qualification for the Heavily Indebted Poor Countries (HIPC) initiative in 1996. Initially, the 'Kafue' Consortium - composed of the Commonwealth Development Corporation (formerly titled the Colonial Corporation), Noranda (Canada), Phelps Dodge (USA) and AngloVaal Mining Ltd (SA), representing mining multinationals - offered US$131 million in addition to a welcome investment package of US$1.1 billion.

Chiluba refused, stating that ZCCM 'should not be sold for a song.' He shifted the responsibility of privatisation from the ZPA - mandated to handle the transaction - to Francis Kaunda, the executive director of ZCCM from 1973-1991. Under Kaunda's watch, Anglo-American, operating in Zambia since 1928, emerged the winner, exercising its pre-emptive rights by purchasing 65 per cent of the Konkola Copper Mines (KCM) via Zambia Copper Investments (ZCI) at a cash price of US$90 million, with promised investment of just US$300 million.

According to Peter Sinkamba of the NGO Citizens for a Better Environment, Anglo used their position on the board of ZCCM to sabotage negotiations with the Kafue Consortium. One example was the separation of the Mufulira smelter from the Nkana mine package, rendering the bid incomplete and unattractive to potential buyers. PriceWaterHouseCoopers criticised Anglo's position and preferential treatment; mining corporations such as Chambishi Metals descried Anglo's tax exemptions, extending to safety, labour, health and environmental protection; they demanded similar treatment such as lower corporate tax rates, matching Anglo's 25 per cent.

Anglo's package included a bundle of mines such as Nkana and Nchanga, producing over 50 per cent of Zambia's copper, and ZCCM's glory - the Konkola mine. Previously, Paris Club donors refused to release US$530 million balance of payments until the sale of Nkana and Nchanga mines.

Two years after acquiring KCM for 'a song', Anglo sold the mine. 'The coming of Anglo to Konkola Deep was like a sinking man clasping at a serpent...not that Anglo is a serpent,' said Anderson Mazoka, former Anglo's head in Zambia.

Martin Potts, an analyst with London-based brokers Williams de Broe stated, 'Given Anglo's past history in Zambia, it's questionable whether they took the interest out of economic motivations, or if it was simply history and ego.'

Anglo's move, as Abel Mkandawire then-chairman of Zambia's Chamber of Commerce would later state, 'was as good as closing Zambia.'

In October 2004, UK-based corporation Vedanta Resources acquired 51 per cent of shares in 'the world's largest mine' for US$48 million cash. In the three-month period that followed, the company registered profits of US$26 million from the Konkola Copper Mines, Zambia's largest employer following the state. A call option secretly negotiated in 2004 also allowed the company to exercise the right to purchase ZCI's 28.4 per cent shares, effectively granting Vedanta a 79.4 per cent monopoly. The stock, purchased for US$213 million, was described by the director of South African-based investment company Southern Charter Wealth Management Bruce Barclay as, 'Control of KCM has fallen into the hands of foreign investors and thereby ensures the current loss of millions if not billions of US dollars in value to Zambia, her citizens and ZCI Ltd shareholders.'

The Zambian government aided in the process, by removing the Competition Commission to enable Vedanta to become the majority shareholder. The sale, stated Southern Charter, amounted to 'robbing Zambia of control of its most prized copper deposits for at least thirty years to come.'

But the roots of Zambia's diseased political economy, indebted to 30 per cent of GDP, dependent on similar figures for strategic rents (foreign aid), is rooted in its failure to diversify the country's political economy following 'flag independence' Instead the state continued along economic colonialism, rendering the country an export-oriented 'rentier' state dependent on multinationals for externally supplied income from liquidated finite resources.

Zambia itself was colonised in the late 1980s by the British South Africa Company (BSAC), a multinational formed by Cecil Rhodes, the corporate-magnate who proceeded to 'conquer' much of Southern African through royal charters granted by the British 'Crown'. By 1920, major concessions had been secured by Rhode's agents like Frank Lochner, the namesake of the Lochner Concessions. The latter provided Rhodes with all mineral rights in North-Western Rhodesia. BSAC's desire to control Zambia's copper-cobalt belt was so ardent that the company refused to hand over mineral rights on independence in 1964, ceding only when the Zambia government threatened to expel the company.

Come privatisation, and two critical pieces of legislation - the 1995 Investment Act, and the Mines and Minerals Act - were created to ensure that resource revenues, derived chiefly from taxes such as royalties (mineral taxes) and corporate taxes, were significantly eroded. More than a decade after privatisation, Zambian MPs, relevant ministries and even tax administrations and unions have yet to get a glimpse of the secretive development agreements, splitting ZCCM into seven units.

According to an official in the Department of Mining, 'The private sector wanted concessions...so in the Mining Act you find provisions for these concessions.'

The legislation deliberately manufactured vacuums that shifted articulation to individual development agreements, such as reducing royalties to 0.6 per cent as opposed to the 3 per cent established. Provisions granted to multinationals included stability periods extending for up to 20 years, rendering multinationals exempt from legislation implemented by parliament and other national and legal alterations; the right to carry over losses throughout the stability periods; 100 per cent foreign currency retention, remittance and provision for capital investment deductions; zero withholding tax; and various other fiscal and para-fiscal exemptions ranging from customs duty to environmental pollution and penalties; pension schemes, and contracting of casual workers - accounting for 45 per cent of the workforce, amongst others.

Stated former finance Minister Edith Nawakwi, 'We were told by advisers, who included the International Monetary Fund and the World Bank that...for the next 20 years, Zambian copper would not make a profit. [Conversely, if we privatised] we would be able to access debt relief, and this was a huge carrot in front of us - like waving medicine in front of a dying woman. We had no option [but to go ahead].'

Paris Club donors refused US$530 million in funds until such time as major mines were in the hands of 'foreign investors.' This remains in keeping with the World Bank's Strategy for African Mining, 'The overall drive of the Bank and donors should be directed at reducing country "risk" for the investors. Investors require competitive terms and conditions, and iron clad assurances that the rules of the game will not changes...'.

One decade later, and Zambia was locked out of the commodity boom that evidenced multinationals cashing in on copper, when price averages broke the commodity ceiling, increasing from US$2800 per tonne (2004), to US$9000 per tonne (2008). Zambia's revenue actually decreased, by 50 per cent from 1.4 per cent (2003) to 0.7 per cent (2004), despite copper exports doubling (2005-2006), totaling US$2.78 billion.

Yet mining corporations remitted just US$1.5 million in royalties (2005), with the World Bank's International Finance Corporation admitting that the cumulative value of exemptions resulted in corporations effectively paying a tax rate of zero. Thanks to the World Bank-led privatisation, and IMF-imposed 'tax competition' policy, forcing developing countries to compete in lowering tax rates, Zambia soon became the seventh lowest tax region in the world. This is in spite of the fact that resource-exploitation remains location-specific.

'Popular incentives such as tax holidays, serve only to detract value from those investments that would likely be made in any case', revealed global consulting firm McKinsey (2004).

Vedanta's KCM for example owed the government just US$6.1 million in royalties, from revenues of US$1 billion (2006-2007), yet according to the estimates in KCM's own records, 50 per cent of the company's tax contribution to the government is drawn from employee contribution via PAYE or 'pay as you earn'.

Of course, Zambians subsidise multinationals in more ways than one, such as by accessing water through pre-paid meters, while corporations remit several thousand per annum only for water licenses. An average of 13-28 cubic metres per second is used by copper mines. Other resources such as timber, fertile land and rivers are part of cheapened concessions. In addition, multinationals are not bound by environmental regulations such as recommended levels of sulphur dioxide emissions. In Zambia, corporations are largely self-regulated, emitting 25 times acceptable levels. Companies adhere to an Environmental Management Plan, which takes precedence over national law, with no penalties for violation save for letters of warning and on the spot fines of £17 (2006). The World Bank's Copperbelt Environmental Project described the Environmental Council of Zambia as, 'very weak....existing regulations are seldom enforced...'.

'The regulatory dispositions for the mining sector are currently so weak that they do not deter polluters...Identification and monitoring of environmental risks resulting from mining activities is often inadequate.'

Ecologically, though cultivated fertile land accounts for just 6 per cent of a total 48 per cent land mass, it contributes 20 per cent to GDP, employing 60-80 per cent of Zambians in the formal and informal sector. But the government has yet to factor in economic valuation of ecosystem services. Even Zambia's national treasure, the Kafue National Park - the second largest in the world, hosting one of the planet's greatest wildlife reserves, is jeopardised via the pollution emitted in the Kafue River, flowing through the Park adjacent to the Copperbelt. In 2006, KCM leeched massive quantities of acidic and toxic affluent into the river, caused by what the ECZ described as 'gross negligence.' Kafue is a major tributary to the Zambezi and one of Zambia's main arteries.

It is a negligence that extends to the socio-economic policies of multinationals and the Zambian state. The Mines Safety Department is purely a reactive institution, chiefly inspecting mines after accidents, while the Mines Safety and Explosive Regulations Act had yet to be implemented, due to a lack of skilled personnel one decade after being drawn up. Prior to privatisation, the ZCCM sustained not only the nation through exports accounting for 80 per cent of earnings, but the Copperbelt province via subsidised housing, food, education, hospitals and clinics, pension schemes courtesy of Zambia's 'cradle to grave' policy

These days, casual workers remain at the mercy of multinationals, unable to access pension schemes, while both permanent and casual workers are exposed to lethal and unsafe working conditions, in addition to a minimum wage that has yet to increase on par with 'basic needs', such as food, housing, water and sanitation.

These days, over 75 per cent of Zambia's population lives below the poverty line, with life expectancy pegged at 35 years - equivalent to that of a British person living in the 1840s. The country is ranked 163 of 179 nations by the UN's Human Development Index (HDI). But though Zambia provides the most brutal and clearest articulation of Africa's 'resource curse' - nakedly characterised by dependence on resource rents, enclave industries built on selective democracy between multinationals and states, and distorted tax bases, the leitmotif of deindustrialisation and demodernisation, is not particular to Zambia but Africa itself. This 'slipping backwards' represents nothing more than former resource colonies that were politically liberated, but remained economically chained.

Khadija Sharife is a journalist and a visiting scholar at the Centre for Civil Society (CCS) based in South Africa.

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