Flashback: IMF, World Bank pressured govt to privatise mines – Nawakwi
By Chiwoyu Sinyangwe and Chibaula Silwamba
Friday November 02, 2007
FORMER finance minister Edith Nawakwi has revealed that the IMF and the World Bank pressured the Zambian government to privatise the mines on the pretext that copper prices would not increase in 20 years.
According to a report by Action for Southern Africa (ACTSA), Christian Aid, and Scotland’s Aid Agency entitled, “Undermining development, Copper mining in Zambia” dated October 2007, Nawakwi – who is Forum for Democracy and Development president – admitted that the International Monetary Fund (IMF) and the World Bank told the Zambian government that copper prices would never increase, hence they should privatise the mines.
“We were told by advisers, who included the International Monetary Fund and the World Bank, that not in my life time would the price of copper change. They put production models on the table and told us that there (was) no copper in Nchanga Mine, Mufulira was supposed to have five years life left and all the production models that could be employed were showing that for the next 20 years, Zambian copper would not make a profit,
” the report quoted Nawakwi as having told its author in an interview on July 26, 2007.
“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).”
According to the report, Nawakwi stated that one of the arguments in favour of privatisation was that it would save the government money by relieving them from propping up an enterprise losing up to US $1 million a day. The report further revealed that in 1999, the donors withheld aid to Zambia until the government agreed to privatise the mines.
“Privatisation of ZCCM (Zambia Consolidated Copper Mines) was a condition repeatedly attached to several loans from both these institutions (IMF and World Bank) and was a pre-condition for Zambia to qualify for debt relief through the Highly Indebted Poor Countries (HIPC) initiative. In 1999, with the Zambian government still reluctant to privatise ZCCM, major donors withheld some US $530 million in aid until the government conceded,” the report revealed.
“ZCCM’s assets were split into seven sections and sold to various investors, though the company was able to retain shares in some of the units – including in KCM (Konkola Copper Mine) – through the creation of a holding company called ZCCM-IH (Zambia Consolidated Copper Mines Investment Holding).”
According to the report, the negotiators argued that increased investment by the new mine owners would generate significant profits that would be channelled back to the Zambian government through taxation and dividends.
“Although this has happened to some extent, evidence from a variety of reports suggests that the amount of revenue transferred to the Zambian government by new mining companies is relatively small compared to the revenues transferred to governments in other resource-rich countries,” the report read. “For example, according to Christian Aid’s Rich Seam report, Botswana’s largest diamond mining company Debswana pays at least 70 per cent of its profits to the government through revenue transfers of different sorts, including dividends.”
On financial benefits from the development agreements with the mines, the report points to the fact that Vedanta’s annual report does not detail the amount of net profit that KCM makes in various financial years or how much was paid to the Zambian government in various forms of revenue transfers.
“Given the lack of information available, the figures cited below are approximate. We firmly believe that Zambia was placed under considerable pressure, which weakened its bargaining position, leaving it unable to replicate models that had been successfully applied elsewhere,”
read the report.
The report indicated that in the financial year 2006/07, KCM would have paid in excess of US $6.1 million despite the company extracting ore that generated revenues in excess of US $1 billion.
It also stated that it was not clear whether the mining companies had paid “even these low rates of royalties”. The report also highlighted the practice of price participation that evidenced Zambia’s weak negotiating position.
“Price participation constitutes a separate contract in its own right. We’ve been unable to obtain a copy of the contract, but a ZCCM official told us that, if the price of copper at the London Metal Exchange exceeds a specific benchmark (US $2,700 -2,800 per tonne) then government through ZCCM-IH starts to claim back a certain percentage (in KCM’s case, 25 per cent) of the difference between the benchmark price and the current price,” read the report.
“According to the same official, ZCCM-IH rarely receives the full percentage as “there are conditions (attached) and a cap on the amount that ZCCM can receive from KCM in one year (roughly US $16 – 19 million). In our view the net result of these clauses is that the Zambian government is unable to derive what would normally be considered its rightful or normal rewards from the extraction of the country’s key natural resource.
“One would expect that the Zambian government/ZCCM to benefit from these profits through its shareholding in KCM. However, sources suggest that KCM has distributed only four percent of its net profit to shareholders in form of dividends for the financial year 2007.”
Recommendations that were made
- The authors of the report recommended an end to the culture of secrecy that surrounded the mining industry.
- It recommended that development agreements should be published.
- “The mining companies should pay the Zambian government a larger share of the difference between the actual copper price and the trigger copper price in the price participation scheme, and also pay value added tax at local business rates,” the report recommended.
- “Develop the political will and institutional capacity to effectively enforce existing labour, safety and environmental legislation, update national pollution laws in line with the latest World health Organisation guidelines, and to ensure that companies agree to include these standards in their environmental management plans as part on the renegotiations process.”
- They also recommended that the Zambian government revisit the development agreements from the perspective of the Zambian people rather than that of the companies.
- They also recommended that mining companies approach the renegotiation exercise, not as an opportunity to pursue their own interests, rather to revise the government’s share of revenue upwards for the long-term benefits of both parties.