By Jones K. Kasonso
It is heart-breaking that our politics in Zambia are no longer a platform to solve the critical problems of the country. Our politics have become arid of truth and devoid of substance. Consequently, our elections in recent years have become wantonly meaningless and costly adventures. Our politics as they are being conducted by the current crop of political players, especially those in power and with the opportunity to make a difference, are so apathetic to reason. We urgently need a change either in personnel or methods or both.
Zambia’s current level of poverty in the sub-region is only comparable to war-torn Zaire (DRC) and heavily sanctioned Zimbabwe. Yet our political players focus on tribalism, primitive, childish banter and character assassination as the basis on which they become elected. For example, there is a by-election in Chilanga Constituency, the poverty of the people and how to help them have already taken a backseat. The PF and some UPND members have decided that the main issue is a crime for which the opposition candidate was already acquitted by the courts. This kind of thinking must stop. We are a better country. This is real life, we all know there are skeletons in everybody’s closet and there are no perfect candidates for any party. Elections ought to be about a choice between alternative programs rather than a game of imperfect people making fun of each other. Like what in my mother’s village they called “Bakolwe balasekana ifipato” (monkeys laughing at each other’s backsides).
We need to raise our game. We must accept or reject political players based on their pedigree and plan. Our politics should be about who is best positioned, to help lead the processes and programs to improve the welfare of our people. For example, 60.5% of our people in Zambia including Chilanga Constituency are living below the poverty line. In the sub-region, this level of poverty is only comparable to 63% of the population who live below the poverty line in the war-torn Democratic Republic of Congo. With a GDP per Capita of $4000 so much higher than the DRC’s paltry $800, how can our poverty levels be identical? What is wrong with us? Where are the programs to improve the welfare of our people? We can’t be this heartless my countrymen and women. People are struggling to make ends meet we can’t turn our politics into monkeys laughing at each other’s backsides while poverty and the foreign investor community are quietly fleecing the Republic. To lead the way of issue-based politics, I continue to beat the drum for statecraft that resolves endemic problems.
In this article, I address the structure of the investment portfolio in the mines as an explanatory factor in the financial position of Zambian families. It’s imperative to consider the structure of the investment portfolio in the mines by reviewing the history of investments in mines, the current state of investments in mines, and the best way to resolve the First Quantum Minerals tax bill.
The History of Investments in Mines
Our history as a country is rooted in a prominent company that established industry in our ancestral lands. In the pre-independence era, the economic activities of the private multinational company called the British South Africa Company were a critical historical factor that brought disparate kingdoms of our forefathers into a cohesive interconnected people group and became Northern Rhodesia. For more than seven decades, the investment portfolio of these lucrative industries was private and foreign. Our forefathers were mostly communities of hunter-gatherers while a few were herdsmen who became co-opted as apprentice workers in the industrial mines established in the territories of present-day Zambia by western entrepreneurs. The purpose of the foreign private enterprise is not to improve or develop the country as a whole. It is to maximize economic benefits for its stakeholders. In those days stakeholders were the owners only, and the workers were the second class.
However, as enlightenment increased our fore-bearers started to see that the people who came and established mining industries were in it for themselves. The entrepreneurs were profiting from the copper mines at the expense of the owners of the lands, so our people started to organize themselves into groups such as the mine workers union. Our forefathers saw the difference in economic fortunes between the owner class, and the worker class and they started to fight for better conditions of service. They began to see that access to a better quality of life depended on more indigenous people participating in these lucrative enterprises. It was this awareness and the brutality of the colonial regime that led to the struggle for independence.
In the post-independence era, the government nationalized the copper industries. The investment portfolio became public and less focused on profit and return maximization. For three decades, revenues from the copper mines were used to fund public policy and nation building. The copper mines of Zambia, employed, educated, and empowered the people with a higher quality of life. The revenues from the mines feed the masses, built hospitals, built and operated schools, constructed roads and other infrastructure in the country. It has even been suggested that by funding the liberation movements in the region, the revenues from Zambia’s copper mines gained freedom and independence for the entire region. Therefore, the fortunes of the nation were eternally intertwined with the copper industries ownership, production, and prices. When production increased, and the copper prices went up, the government earned more money and provided more services. Conversely, when copper production and prices went down the revenues decreased and the government’s ability to invest in social economic services diminished. Clearly, Zambia is cash-strapped today in part because, in the first 3 decades of the Republic, the nation used up all its earnings, in addition to contracting external debt to fund consumption of the growing population.
The Current State of Investments in Mines
The current investment portfolio in the mines of Zambia is once again mostly private and foreign. With the current poverty levels in excess of 60% of the population. This state of affairs mirrors the pre-independence era. But how did we go back there again? At the turn of the Third Republic, the new government of Zambia led by Dr. Frederick Chiluba, without properly conducting business research put the nation in overdrive mode to achieve higher poverty levels. They introduced a careless and outdated version of textbook economic liberalization and privatization. This meant merchandising all formerly state-owned enterprises and properties at prices way below their commercial values. Urban poverty and unemployment soared during the first 10 years of the ThirdRepublic. The mines were auctioned to foreign firms at very cheap prices and the nation has not fully recovered ever since. Zambia through ZCCM-IH now holds less than 20% public ownership stake in the copper mine industries. The current administration is already looking to sell this stake to other foreign interests. In almost 3 decades, despite increased demand for copper coupled with high production levels, and soaring prices on global markets, the fortunes of the people of Zambia are totally detached from that of the copper mines. It’s this detachment from the essentialcommodity of economic value in the country that mainly accounts for the advent of a majority poor country at 60.5% living below the poverty line.
Whereas the copper mines are a huge contributor to the GDP, they do not contribute that much to Zambian households serve for a few jobs and a little token in taxes to the government. The rest of the earnings go abroad to foreign owners. This is why the nation is broke. Zambia is back to the old creed and Bemba lamentation: umfweni aya amabunu umukuba onse yalima yatwalila abanababo fwe bena Zambia tulechula [oh hear about the deeds of foreign investors, they have dug out all the copper to go and feed their children leaving us the Zambians in abject poverty]. Clearly, the current makeup of the investment portfolio in the copper mines is a significant contributor to household poverty in Zambia. Where once copper mines employed, educated, and empowered the people there is nothing. Where the revenues from the mines, feed people, built hospitals, built and operated schools, constructed roads, and other infrastructure now there is nothing.
The current investment portfolio in the mines is like an alternative country within a country. The reserves in Forex and gold excluding the current account balances in the past 9 years were as follows:
Sources: World Factbook [CIA]; The Bank of Zambia [BOZ]
The PF government under Mr. Lungu has depleted the reserves at the fastest rate than any other government since the founding of the Republic. For example, in the last two years alone, the net reserves in Forex and gold for the whole country in 2016 and 2017 were $1.419 billion, and $1.508 billion respectively. These are the lowest amounts by far in the last 10 years. Perhaps this should help explain why the current administration wanted to borrow $1.3 billion from the IMF. The PF government in the last two years has been running fiscal deficits averaging $1 billion in the current account balances and is faced with the further dwindling of these reserves by the end of the year.
On the other hand, just one mining conglomerate the First Quantum Minerals’ cash on hand and equivalents in 2016 and 2017 were $1.3 billion and $1.5 billion respectively. We have one company’s net cash inflows at the same level as the entire government of Zambia. This is a company extracting natural resources from beneath our noses. What foolishness is this? It’s not like they brought all this money from their countries. They are making this money in our backyard and yet 60.5 % of our people are living below the poverty line. The fortunes of the nation are eternally connected to the copper industries ownership, production, and prices. I don’t know any person with a degree or any college certificate in my generation who did not have their education funded by the mines directly or indirectly. How can we aspire to educate our children and the current generation of school kids without any contribution from the very commodity that created a platform for the founding of the Republic?
The Best Way to Resolve the First Quantum Tax Bill
Suffice it that our government has woken up to this reality. In recent years, there have been sporadic fights between the mines and the government in the attempt to get more money out of the mines. The moderate increase in mineral royalties from 3 to 6 % is a good example, and the increase in electricity tariffs is another. Some mines have responded in kind by cutting jobs on the pretext of fluctuations in production and copper prices.
However, the greatest showdown is undoubtedly the recent announcement by the Zambia Revenue Authority to the effect that First Quantum Minerals Ltd was owing $7.9 billion for import duties, penalties and interest on consumables and spare parts. The assessment has sent shock waves in the mining investment community worldwide. First Quantum Minerals Ltd has publicly challenged the validity of this assessment. Clearly, a protracted fight in the courts of law can be expected. Some outside observers have received this news with the suspicion that perhaps the tax bill is a scheme by the government to get more revenue from the mines to fix the fiscal deficits and depleted reserves. On the other hand, there is silent but palpable optimism among Zambians at home and abroad. If the assessment is valid it must be recovered and properly used to alleviate widespread poverty in the country. So, the legal battle lines have been drawn.
It’s noteworthy that as at December 31st, 2017, First Quantum Minerals Ltd had total assets of $21.623 billion and total liabilities of $11.495 billion. Therefore, the $7.9 billion tax bill assessment represents 78% of the owners’ capital interest in the company. The implication is that if the Zambia Revenue Authority moves to recover the tax bill amount assessed as valid debt, First Quantum Minerals Ltd is going to have to be placed in liquidation or be taken over by the government. Either course of action would spell doom for the country. First, if the government took over the mines they would collapse if the perpetual loses in all mines under ZCCM-IH is a good indicator of managerial capacity under state ownership. Second, unlike the Post Newspapers that was liquidated to recover taxes greater than the value of the company, First Quantum Minerals has asset values greater than the tax bill. Third, the owners of First Quantum Minerals have tools and avenues at their disposal to defend their financial investment against the government of the Republic of Zambia.
Therefore, assuming the tax bill is valid, the government should work with the nation’s individual largest taxpayer and split the debt into two baskets. The first portion of the debt should be recoverable with a down payment and the balance conciliated into installments over a period. The second portion should be converted into share capital that the government can hold on behalf of the people of Zambia. This share capital should eventually be sold to private citizens. No amounts recoverable should be used to service pre-existing debts or fund “developmental” projects. Rather, targeted investments must be made in grants, and loans to job creators i.e. small-scale producers and manufacturers of consumables that we are importing in the sub-region or from the far east. That will have the effect of reducing imports from abroad, increase the balances in the current account, and create jobs at home. I believe this is the best way to resolve the First Quantum Minerals tax bill.
Thank you for taking your precious time to read this article. Please drop me a comment so I can also learn from your feedback. In the next article, I will compare and rank the economic performance of Zambia against its eight neighboring countries, and present evidence of poor economic management, financial impropriety, and misapplication of resources in statecraft as contributing factors to widespread poverty in Zambian households.
The author is a Zambian, An Author, A Consultant and Accounting Professor in Washington DC and holds Ph.D., CPA, CGMA, MBA, BSc., NATech qualifications.