Zambians haven’t benefitted from $8bn copper exports

Zambia is Africa’s top copper producer and it is in the midst of a spectacular boom. The scale of international investment – a reported $6bn – means Zambia will soon ‘overtake’ Australia and Indonesia to become the world’s fifth largest copper producer.

But the tax revenue to build schools, train and employ teachers, sink boreholes and buy medicine has simply not materialised. Wealth from Zambian copper has not trickled down – 64% of the population live on less than $2 per day according to the United Nations. Infant mortality is high – 69 per 1,000 births, life expectancy low – just 49.

The country’s copper has for too long not brought the much needed financial resources. Weak tax laws mean little revenue is collected. And mining companies were given controversial license agreements under the former President Rupiah Banda’s administration according to a recent World Bank study.

Could this be about to change? 

In a visit last week to London the new president Michael Sata, 75, laid down a gauntlet. Addressing a meeting of businessmen during the Commonwealth Economic Conference (CEC) at Mansion House, the former trade unionist said his countrymen were being short changed.

’We are not getting enough from our mineral resources,’ he told the packed conference as he sought what he called ‘good’ investors from London, Canada and Australia.

Profits go overseas

There is no question that this change is desperately needed. Zambia is a stable country and has been for decades. Its copper should be pulling the country’s people out of the grasps of poverty. But its performance on any measure is comparatively miserable.

The World Bank study expressed concerns that despite Zambia featuring in the ‘top quadrant’ of resource-dependent countries, it ‘still belongs to a group of economies with very low levels of capital accumulation.’

The Zambian Economist, a not for profit organisation describes the level of revenues collected from the mining companies under existing contracts as ‘pitiful’ and ‘unlikely to improve the lives of Zambians’, in its report Debunking the government’s case for low mining taxation in Zambia. The report emphasised the dichotomy under the recent Banda administration: Zambians remained stuck in a poverty rut, while mining companies grew hugely profitable and invested the money abroad.

Unlike other countries weak Zambian laws allow foreign investors to transfer all their profits abroad to overseas banks without any ceiling or restrictions.

This has had a significant impact on earned state revenues. Zambia earned a meagre $50m from mining royalty revenues in 2009 from a combined revenue receipt bill of $5bn. Even when non-mining taxation such as company taxes and PAYE are included the government only recovered $270m, according to the Zambian Economist’s report. This is less than 5%. This terrible imbalance had been reached under the Banda government, which under heavy lobbying from foreign mining companies had reduced the taxes on mining including scrapping a windfall tax.

It has prompted local NGOs such as Civil Society for Poverty Reduction (CSPR) and donors such as the World Bank to urge the government to raise its game and pass laws that would benefit the country, not just the mining companies.

Transforming economies

Contrast Zambia with Botswana which, according to the Zambian Economist’s report has profited nicely from its diamond fields.

World Bank figures show that the country, which is mostly desert, transformed itself from one of the poorest southern African countries to a middle-income country with a per capita GDP of $16,300 in 2011. In Zambia it is just $985.

Likewise, Angola, after years of bitter civil war, is now surpassing Zambia in revenue earnings from its oil and diamond reserves. This is down to new ‘pro-poor’ laws claims the World Bank study.

These laws require mining firms in Angola to employ a large number of Angolans both at exploration and completion stage to deliberately reduce unemployment. Again not the case in Zambia.

Angola also ensures the country gains a sizeable share of its mining resources. Extractive firms in Angola have to fund 100% of any venture despite ultimately owning only a 40% stake in the mineral project (diamonds or oil) – the larger stake remains in the hands of Endiama, the Angolan state enterprise.

Admittedly, mine firms in Angola pay a lower tax rate until their capital expenditure outlay is recovered, but even this can amount to only 80% of initial revenues because of stringent profit sharing agreements laid down by the Angolan state.

It is hardly surprising then that the World Bank observes that, ‘Angola is growing at a faster pace than Zambia’. For the people of Angola it means massive infrastructure development as a result of these revenues.

The roads, the schools, the medical clinics being built all remain a pipedream in Zambia. 

The World Bank study recommends that in order to reverse the trend ‘Zambia needs to capture a larger share of the resource rents (money from mines) and invest the money in the nation’s productivity.’

The previous Banda administration always defended the mining giants in the face of calls for higher taxes during boom times. The response was that it would be ‘irresponsible for (the Banda) government to collect a few dollars from the companies and kill the goose that lays the golden egg’.

Banda’s support for the mining companies and condemnation for local critics in fact compelled the opposition to suggest that he seemingly cared for big Chinese business – one of the big investors in the country – more than he did for his own people.

Chola Mukanga, founder of the Zambian Economist, described Banda’s policy of low taxes as a way of encouraging investors as ‘demonstrably intellectually bankrupt.’

Challenged to act

And now the new government has been challenged by the supporters of higher mining taxes, who maintain that there is no reason to keep taxes low to attract investment.

Economists, such as Professor Oliver Saasa, a Zambian Professor of International Economics, suggest that the government should not only introduce a better tax regime but also ensure mining companies do not engage in profit transfers.

President Sata’s young administration has tried to take a number of radical measures to turn the tide in favour of the state.

For instance, Sata has toyed with suspending issuing mining licenses until laws are passed to help Zambia capture more money from mines in future.

He has also ruled that all copper exports be receipted through the Central Bank of Zambia so the government knows exactly how much mining companies earn and so build a fair profit sharing scheme.

There are still giant hurdles to get over. Today, Zambia’s internal revenue authority, the ZRA clearly lacks the ability to determine how much a mining company has earned in profits. And under agreements made by the Banda government companies have an incentive to increase their costs and limit their official profits as then they can avoid paying any taxes to the government. And there is little Zambians can do about it.

And not all in the government seem to agree that taxes should be increased. Zambia’s Deputy Finance Minister Miles Sampa stated this week that the reasons investors in mining and other sectors should favour Zambia is because: ‘We boast of a free market economy with very little prohibitive industry regulation and we have virtually no exchange controls. You can repatriate a hundred percent of your dividends from Zambia as a business and our labour costs are low.’

There is some good news. The sector is the largest employers outside the public service creating 40,000 jobs, 20,000 of which have been created since 2009. And there is more investment on the horizon.

Canada’s First Quantum has said it may spend US$1.9bn on its Trident and Kansanshi mines in Zambia after losing the Kolwezi copper project in Congo in a 2009 rights battle with the government.

Vale’s joint venture with African Rainbow Minerals Ltd. will invest $1bn in Zambia’s Konkola North project, while Vedanta’s Konkola Copper Mines Unit plans to spend approximately US$1bn over the next two years.

London-listed Glencore International has also announced plans to invest $500m in its Zambian Mopani operation.

 Where did the money go? Privatising Zambia’s mines

Zambia’s copper mines were privatised at the insistence of the International Monetary Fund and World Bank in 2000.

The sale contracts, which ran to over 20 bulky volumes, were never presented to parliament. At the time, Zambia was run by Frederick Chiluba, its second president. Before his death last year, Chiluba faced a large number of corruption charges but was acquitted of most of them. A London High Court found Chiluba guilty of stealing $46m of taxpayers money.

There were many other allegations of corruption around the privatisation vote.

Lifting a child out of poverty

This large scale investment means Zambia is now on track to export about two million tons of copper annually by 2015. Mining revenues are expected to top $8.4bn this year. But the question is: will this intense activity make any tangible difference to the many Zambian families barely managing to feed their children. To find cash to invest in building schools, sinking bore holes or supplying drugs to hospitals, Zambia requires radical action.

The process has started.

When presenting the budget in Lusaka last November, Alexander Chikwanda, the finance minister, announced that mineral royalties had been revised upwards to 6%. This is double what had been previously predicted and is now approaching the regional average.

There has been talk about ‘going the Angolan way’. This would mean the Zambian government increasing state shareholding to at least 35% in the mining companies up from the 20% it currently holds through the state-owned ZCCM-IH.

There is a long way to go before Zambia’s resource wealth benefits the poor more than the rich foreign owners. It is now up to the new government. The question is: will Sata’s administration be able to impose a new settlement that goes some way to improving life for ordinary Zambians?

Anthony Mukwita is deputy managing director of the Zambia Daily Mail based in Lusaka . He is currently on a World Bank funded secondment to The Bureau of Investigative Journalism.

Concerns over London-listed miner ENRC’s Congo deals

A need for greater scrutiny of UK mining deals in the Democratic Republic of Congo (DRC) was highlighted on Tuesday by campaigners questioning the use of opaque off-shore companies to buy some of the country’s most valuable assets.

Concerns about mining deals in the DRC have mounted over the past six months as the resource-rich country has attracted more and more investment, much of it from the UK.

The latest company to come under the spotlight is FTSE 100 mining giant ENRC. Global Witness, an organisation focusing on extractive industries, released a memo to shareholders in ENRC, highlighting a series of opaque deals made by the company in the DRC, which the NGO believes may be enriching corrupt officials.

The report was published to coincide with the company’s annual general meeting in London.

The latest concerns raised by Global Witness follow similar questions asked last month about other deals in the DRC involving commodity trader Glencore.

The DRC is one of the poorest countries in the world, with an average per-capita income of just 80 cents a day. Last year the UN ranked it at the very bottom of its development index. Yet it has extraordinarily rich natural resources, including vast reserves of copper, cobalt and coltan, as well as gold, diamonds and oil.

But these resources are gradually being sold off to foreign companies. Campaigners claim this is often at a vast loss to the desperately poor country.

The concern is that the opaque nature of the deals could be hiding payments to corrupt Congolese officials
In yesterday’s memo, Global Witness details how in five deals between 2009 and 2011, state-owned miner Gécamines sold off copper and cobalt-mining assets worth billions of dollars with no public tender process. Independent valuations obtained by Global Witness suggest that these assets have been sold for a fraction of their market value.

 

The assets were bought by offshore companies, many of which are believed to be linked to Dan Gertler, an Israeli businessman who is a pivotal figure in the Congolese mining sector and a close friend of the president.

The concern is that the opaque nature of the deals could be hiding payments to corrupt Congolese officials as well as masking the sell-off of the country’s natural resources for far less than they are worth.

‘The offshore shell companies associated with Mr Gertler and paid by ENRC are obscure entities which have been registered in secrecy jurisdictions and have therefore not declared their full list of beneficiaries,’ said the NGO. ‘Global Witness believes that these offshore structures could allow corrupt Congolese officials to benefit from these deals. If this is correct, ENRC may have poured money into corrupt transactions.’

ENRC said it has a ‘zero-tolerance policy to bribery and corruption’.

The Global Witness report details how ENRC then bought the assets from these shell companies at significantly higher prices, just months after they had been sold by the state.

In at least two cases, ENRC even appears to have lent the offshore companies the money to buy the assets in advance, ‘instead of doing business directly with the Congolese government’, Global Witness says.

In two other cases, the assets that ENRC eventually acquired had been controversially confiscated from other companies by the state miner, Gécamines, or the Congolese government. Earlier this year, ENRC paid $1.25bn to settle a very public dispute with those companies, including Canadian-listed miner First Quantum Minerals, and an investment company owned by the World Bank.

‘Zero tolerance’

Scandal over this deal and allegations of corruption in Kazakh subsidiaries led to the very public departure of two senior board members last year, and the company set up an anti-corruption committee. It revealed in its annual report that it ‘regularly liaises’ with the UK’s Serious Fraud Office, including over its deals in the DRC.

The company carried out an internal review last year which had led to new governance structures, and had introduced measures such as a whistleblower hotline and new investigation procedures, it said. ’In bringing significant and much needed investment to the DRC, ENRC has fully complied with regulations and disclosure obligations,’ ENRC said in a statement.

‘ENRC has at all times strived to uphold the highest standards expected of an international mining company listed on the London Stock Exchange,’ the company added.

Dan Gertler’s spokesman said the allegations were ‘old and unsubstantiated’. His holding company Fleurette ‘has no duty of disclosure’, he said, but he offered to undergo a full audit to prove that ‘the only beneficiaries are the Gertler Family Trust for the family members of Dan Gertler’. He said Global Witness had rejected the offer of the audit – a claim the NGO refutes.

These deals have taken place despite growing international pressure on the DRC to improve transparency in its mining sector. In 2009, the IMF made such transparency a condition for approving a $551m loan to the DRC – yet it has paid at least three instalments of this loan.

The UK is planning to spend £790m on aid to the DRC over the next four years, including £27m towards an initiative that aims to foster transparency in the mining sector, which was launched last October.

Last month, an opposition activist, Willy Vangu, held a meeting in London attended by MPs on the international development select committee, in which he urged the UK government to suspend aid to to the Congo’s government until there was increased transparency in the mining sector.

‘Billions of dollars are leaving the DRC through corruption and secret deals, selling assets without proper tenders,’ he told the Bureau.

Pauline Latham MP referred to the Congo’s incredible natural resources. She told the meeting: ‘We wouldn’t need to put funds into the DRC if those natural resources were being used correctly.’

Eric Joyce MP, who last year published a list of 59 offshore companies that had been involved in deals in the DRC, said assets sold at knock-down prices could be funnelling billions of pounds out of the country. He estimated that up to $5.5bn could have been lost in this way.

Written by Alice Ross of TBIJ.

For more on this story, click here.

Educating one million girls to tackle poverty

Britain will help up to a million of the poorest girls in the world go to school, the Deputy Prime Minister announced today.

The Girls Education Challenge is a new project that will call on NGOs, charities and the private sector to find better ways of getting girls into school in the poorest countries in Africa and Asia which the UK has identified as a priority, including Bangladesh, South Sudan and Nigeria.

The projects will help provide:

  • 650,000 girls with a full six years of primary education or
  • Up to a million girls with a junior secondary education for three years.

Deputy Prime Minister Nick Clegg said:

“Women and girls continue to bear the brunt of poverty. Investing in them early on and giving them an education not only radically alters their lives but has a massive knock on effect benefitting their families and communities. Girls who have been to school are likely to do significantly better financially, socially and be far healthier.

“The action we are taking is ambitious and something of which Britain should be enormously proud. It will help to lift hundreds of thousands of girls out of poverty so that they can fulfil their potential.”

International Development Secretary Andrew Mitchell said:

“Educating girls tackles the root causes of poverty. Research shows that providing girls with an extra year of schooling can increase their wages by up to 20 per cent, while also lowering birth rates, which can have a profound economic impact.

“These initiatives will also have positive impacts on future generations. They will mean girls are more likely to go on to help their sisters and younger girls in the community to follow their example – go to school and widen their choices,  to get married later, for example, and to earn their own income.”

The Girls Education Challenge will be a competitive process that encourages organisations to set up schemes targeting marginalised girls of primary and lower secondary age. Non-government organisations – including businesses and charities – are being asked to put forward ideas to get girls into good quality education and there will be a focus on working with new organisations and partners – to try new approaches where traditional approaches have not been successful.  The British Government will then back the best of these.

In order to receive continued funding, the organisations will have to demonstrate measurable improvements in the quality of education and increased numbers of girls going to school. Only programmes which can demonstrate the most cost-effective ways of working will receive backing.

The programmes will also have to show  that they will get more marginalised girls into school. It is likely that some of the activities which are supported will ensure that facilities at school – for example separate latrines and “safe spaces” for girls – are provided. The types of initiative are those that provide a combination of support to girls and young women: scholarships which not only pay for school fees but ensure girls are able to buy their own uniform, travel safely to school and support them to find work once they leave school.

Girls who are educated are more likely to:

  • marry later – a girl who has attended secondary school is less likely to marry during her adolescent years
  • have fewer children – on average a woman’s fertility rate drops by one birth for every four years of additional schooling
  • get immunisation and other health treatments for themselves and their babies
  • avoid HIV – a study shows girls with secondary education are three times less likely to be HIV positive
  • find employment and earn more – an extra year of schooling sees wages increase 10 to 20 percent

The International Development Secretary Andrew Mitchell will give more details at the UN General Assembly this week.

This new support is in addition to the Coalition Government’s commitment to support 9 million children from developing countries in primary and 2 million in secondary education by 2015.

Zimbabwe’s Diamond Dilemma: Is the Country’s Way Forward 100% Ethical?

A Raw Diamond from ZimbabweZimbabwe’s economic downturn has been one of the most noticeable and prominent of the last decade. One of Africa’s recovered economies in the late 1980s, the nation has since fallen victim to a series of mismanaged policies and destructive economic ideas. With the United States dollar as its official currency and major food shortages, international investment in the country is almost nil.

But opposition politicians – those representing Zimbabwe’s Movement for Democratic Change – have suggested that diamond mining could represent Zimbabwe’s road out of poverty and economic mismanagement. It’s been heralded as a potential way for the country’s economy to expand by over $2 billion, although it’s come under some major scrutiny from human rights groups.

Blood diamonds have a lengthy history in Africa. The sale of raw diamonds has been used to fund numerous conflicts and pay for extensive human rights abuses, the most obvious of which occurred in Angola just over twenty years ago. But with the Kimberley Diamond Trading Agreement largely followed and welcomed in Africa, many believe that diamonds could help kick-start the economy.

Zimbabwe has its own history of diamond smuggling. An event in 2008 at the Marange diamond mine saw over eighty labourers killed by the country’s military and an attempted coverup arranged. Overseas investors and international diamond firms – themselves no stranger to unethical diamond trading – have called for greater security before foreign companies invest in diamond mines and processing plants in the country.

There’s also the problem of Zimbabwe’s labour market – a population that’s been largely starved of the skills that neighbouring South Africa has made publicly available. Investors have suggested that with the right degree of oversight, security, and the right labour situation, ethical diamond mining could become Zimbabwe’s path out of poverty and political mismanagement.