By Greg Mills
Last week, the Zambian government applied to place Konkola Copper Mines, the country’s largest private employer, into provisional liquidation. Is this a sign that an increasingly desperate government, starved of resources to pay the salaries of a burgeoning civil service and of cash to meet the international debt it has rung up in record time, is thinking of nationalising the mines? After all, Zambia has been here before — and with devastating consequences the last time around.
Four-fifths owned by Indian commodity tycoon Anil Agarwal’s Vedanta and the remainder by the government-controlled Zambia Consolidated Copper Mines Investment Holdings (ZCCM-IH), Konkola Copper Mines (KCM) is Zambia’s largest PAYE provider with more than 13,000 workers at its mines at Nchanga and Konkola.
It has invested more than $3-billion into these facilities since its acquisition of a majority share after Anglo American’s withdrawal from the project in 2002, including sinking a deep shaft in the Chililabombwe ore body in 2006, commissioning a new smelter in 2008 and opening three new concentrators between 2010 and 2012.
Whereas KCM’s lack of productivity had made it one of the biggest contributors of the daily $1-million loss of the mines before ZCCM’s privatisation in 2000, now it contributes usually about one-fifth of Zambia’s 800,000-ton annual copper production.
This means that the only likely rescuers are the Chinese. But the question is, at what cost?
In explaining the liquidation application, President Edgar Lungu’s government cited breaches of KCM’s operating licence and its financial position. But there may be more sinister motives related to Zambia’s precarious debt situation.
In 2005, Zambia’s debt had largely been forgiven. Today, however, the country is once more in it up to its eyeballs, and the government has no plan to stop spending. External debt, at the end of 2018, has increased to $10.1-billion, of which about $3-billion was in Eurobonds, $1.8-billion multilateral and $2.9-billion from China (mainly Exim bank). Since then Zambia has announced a further $1-billion from the Chinese, while there are other ongoing contracts which are committed, but not yet disbursed.
As external debt payments ramp up to be larger more-often-than-not to inflows, Zambia’s foreign exchange reserves have declined since 2017. External debt service is up by 90% in 2019. There is no way out, apparently, from these debt challenges without an IMF programme or another credit line, or both. This explains why the kwacha has recently broken through the psychological K13-$1 margin for the first time since 2015, making it the world’s second-worst performing currency in 2019.
There are other negative events. The seasonal drought promises a poor yield for farmers, while Kariba Lake has dwindled to 2014/15 levels, in part because of low rainfall and in part because of the irresponsible use of new turbines by both Zimbabwe and Zambia, which promises power cuts and productivity losses.
An IMF deal is currently unlikely. The Zambian government kicked out the IMF representative Alfredo Baldini in 2018, and there’s no good way to negotiate without a resident representative in place. Moreover, the IMF is unlikely to change its view that the government of Zambia needs to stop spending and borrowing, especially from the Chinese, which they won’t do. A pandered-to and fully-stuffed civil service, and rents from infrastructure projects are politically indispensable, at least for the ruling party.
Zambia is at the bottom of the hole now, but the ruling elite is keen to keep digging, despite regular promises that they won’t take on any more debt.
This means that the only likely rescuers are the Chinese. But the question is, at what cost?
It’s hard to read the president’s end game, if there is one.
The most benign explanation for this action is of an honest if a cack-handed attempt to try to recoup the money owed by Vedanta, a notoriously slow payer, including on the $103-million price-participation award made to ZCCM-IH against KCM by UK arbitrators two years ago.
Yet, while the Zambian government laments that KCM hasn’t met its production targets, it doesn’t admit to changing the tax rules over the years such that it will have made it more and more difficult for KCM to finance whatever was required to improve performance, such as the withheld VAT or the increase in mining royalties.
Equally, a rise in electricity tariffs hit KCM particularly hard, with its huge power demand on pumping no less than 350 million litres of water a day, which doesn’t produce any copper. Trimming labour costs is made more difficult in an environment where cash flow is weak and workers are entitled to three months’ pay for each year of service.
While the fast-changing tax and tariff policy environment demanded by a cash-hungry government have not made it easy to run a profitable mine, the greatest irony is that between the government and ZCCM-IH they have three representatives on each of the ex-ZCCM/state mines. They get the detailed financials every quarter, and are perfectly placed to review the budgets and other programmes.
Now the government is essentially suing itself in liquidating KCM, just as it has done by threatening other mining companies with audits in the wake this liquidation application.
More threateningly, however, through the liquidation, Lungu could be trying to force Vedanta’s hand — and those of other mining companies — overpayment of a new, non-refundable sales tax and any other scheme that it might dream up.
Vedanta, and KCM, with a record of environmental problems and faltering production, is the softest target for such a move among the big miners. The liquidation application came shortly after Vedanta reported an annual loss of $165-million, blamed on import taxes on concentrate from the Congo and the weakening of the kwacha.
Yet there are considerable costs to such an extortion tactic by government, even if it stops short of nationalisation. Though it may briefly oil the wheels, it can only bring further long-term misery. There is the cost to employment in the Copperbelt, already politically indisposed to Lungu. This comes on the back of Glencore’s announcement that it will close two shafts at its Nkana mine in Kitwe, threatening 2,000 jobs. The consequences are unpredictable; the place could just blow up.
And there is the downstream cost to the business, in Zambia and the region. There is a lot of money in circulation between the mines and their creditors. KCM owes nearly $120-million to mostly South African suppliers, for instance. The costs of Lungu’s policy lurch are not thus confined to Zambia.
Whether these relatively benign goals — retrieve the money, and/or use Vedanta as an example to the other miners — lie behind Lungu’s liquidation move will be determined by the nature and pace of the resolution. If Vedanta and the government quickly settle through the payment of money owed, a fresh price sharing agreement, and the dropping of the $180-million VAT reimbursement claim, Lungu’s strategy to squeeze more cash out of KCM would be clear and successful, if somewhat high risk.
There is, of course, the cost to governance — and of establishing the wrong incentives for government policy — if a solution is cobbled together. This “success” could encourage a fresh attempt to extort from other mines, including through raising electricity tariffs.
There may be another, more extreme Lungu motive, however. He may be trying to access a large chunk of cash through a re-sale of KCM’s assets.
There is already scuttlebutt about Chinese and Russian suitors and Lebanese middle-men. This is sending the markets, and those institutions which hold KCM paper, into a bit of a spin. Moody’s immediately downgraded Zambia’s credit rating last week, citing pressures impairing the government’s ability to service its debt. With $3-billion invested, KCM is an enticing swap for debt, or at least a means of currying favour and buying time.
In this scenario, Lungu’s targeting of the mines would be indicative of the direction he wants to take Zambia, away from the West, and its governance norms, and towards China, seen as relatively unregulated, governance laissez-faire and diplomatically on-side. But there is little evidence that the Chinese are more likely to forgive the scale of Zambia’s debt and turn a blind eye to the spendthrift habits of Lungu’s PF government, at least without assurances of payback.
The problem with the PF’s approach to government is that eventually, to paraphrase Margaret Thatcher, they will run out of someone else’s money.
Thus a recovery strategy should be less about from where Lusaka will source its next loan or tax bonanza than how they will grow the pie, diversify away from mining, improve productivity, ease logistical constraints and reduce government red-tape and overheads.
Instead, without such policy debate, KCM’s plight is a marker for Zambia’s future path, which if unchecked, is as depressing as the likely solutions.
The IMF will set terms which the Zambians won’t like, so there is unlikely to be a deal, but they will find a way to keep going, in part through extortion, and in part through further borrowing.
Repression will likely increase as fast as joblessness. The next election in 2021 might offer prospects for change, but by then Zambia will be in so deep that changing the political and economic trajectory will be much more difficult. Just look at Zimbabwe. DM
Dr Mills heads the Johannesburg-based Brenthurst Foundation.
Source:Daily Maverick
The Brenthurst Foundation are the pay masters of Hakainde Hichilema and do not the interests of Zambia or Zambians.
Ba Mills, don’t contradict yourself. The bottom of a hole is only reached when you stop digging and not before stopping! If you were truly objective, some of your writings should surely have been in support of Zambia …
You just have to disagree with him and give your own opinion of what you think of this whole situation. Are you the one that takes the money to HH, to make that stupid claim???
‘It has invested more than $3-billion into these facilities since its acquisition of a majority share after Anglo American’s withdrawal from the project in 2002, including sinking a deep shaft in the Chililabombwe ore body in 2006, commissioning a new smelter in 2008 and opening three new concentrators between 2010 and 2012’.
Then they decide to be importing concentrates from Congo instead of investing more in the actual mining at Nchanga and Konkola….because they thought it would be cheaper, but then incur losses purportedly because of tax. Even Spax has stopped importing concentrates; he now mines the black mountain. Vendata is not part of the country’s solution to the economic problems, but a part of the problem, because of greed.
This bad for HH now…
UPND need to tame their cadre that Mills or KCM saga will shift from PF to UPND’s living room.
UPND has to fight so hard to stay away from KCM as they keep doing to GBM.
Remember Agawal has publicly said he is ready to fund PF at any moment they agree to sit at table.
SAD TO HAVE SUCH IGNORANT PEOPLE COMMENTING AND MAKING ACCUSATIONS !!!!!!!!!!!!!!!!!!!!! GOOGLE BRENTHURST AND FIND OUT WHAT THEY DO. YOU HH/UPND OBSESSED BRAINDEAD ZOMBIE
Excellent analysis. But of course the PF horde wont accept objective criticism or advice until its too late.
Nsimbi is very right this Greg Mills thinks he knows the bottom of the hole. A hole has no bottom unless its been abandoned: each day that you dig gives you its new bottom. Mills and Brenthurst are anti-Chinese and are always trying to smell Communism in every African venture.
KCM is not a mine that should be stuttering. It sits on the largest copper ore body in Africa and by now it should have been smoothly at full capacity
What a loser this Greg fimo fimo from the Brenthurst Foundation is. Leave us alone.
We know who BRENTHURST is and what you are saying is no surprise.You can never be objective about Zambia currently!!!!!zambians please dig deep and you will learn who these guys are.
You cant trust anybody in this game…LAZY LUNGU himself was very careless to appoint that delegation of corrupt entities I mean he could have picked the best in the world to do this because its not taxpayers paying the liquidator but he listened again to his corrupt and dull advisers like Kaizer a former lab assistant …Vultures are cycling trying to see what pans out. Brenthurst are spindoctors for the Oppenheimer family, it was established by Jonathan Oppenheimer son of Billionaire Nick Oppenheimer.
Another Con Man speaking for his fellow con Man. Who does not know that you are an employee of Vedanta?? Please shut you mouth and Sleep.
The reason the politicians in power have continued digging is because they believe there is gold at the bottom of the hole. Why do you think every other politician wants to dig the same hole even deeper?
For me the problem isn’t digging the hole, but were the soil goes, and what it is used for once it’s dug out of the hole.
Vedanta, owns 20% of Anglo America. Clearly this Oped from Greg Mills has come from the voice of Anil Agarwal though the article is quick to avoid including his name. What’s interesting is that Anglo is secretly happy about these events because Agarwal borrowed in the form of convertible stocks to pay for the 20% stake in Anglo American. The Bond notes are due in 2020 and Anil does not have the asset KCM to help leverage the transaction. Meaning Anglo will buy back it’s shares and be rid of him at board level. For now they will play along as his mouth piece.
The Brenthurst Foundation is a Johannesburg-based think-tank established by the Oppenheimer family in 2004 to support the Brenthurst Initiative in seeking ways to fund African development and to organize conferences on African competitiveness
Ubufi kunasha ko limo limo ba mwinmushi
These Brenthurst free Massons are Akainde stalwarts. What nonsense.
Akainde knows we dont want him. He’s desperate.
As usual white South Africa knows it all…
They know that your PF has only one investor in mind and its the Chinks who play by no one’s rules …pollution to them is just a word …Kafue River will turn red when they come and they will ship in the prisoners from China.
Wel they claim to be running a loss therefore no tax due – how would you solve it? I read Bloomberg and FT not this Maverick kanthu of South Africans bleating ati “Zimbabwe, look, just like Zimbabwe!” They would probably still argue that Apartheid is the best system for progress in Africa
Apart from one or two comments, the rest show the lack of substance in our people, and why we are having this “conversation” in the first place
We need to now ask the board members on KCM, what they did with their detailed reports, and what they made of them and the action they took to all the board allowances they were enjoying.
…GRZ board members
for all the board allowances they were enjoying
Very honest perspective from both sides. I know cadres are busy cheering for the takeover of KCM, but many have no idea of the implications. The Chinese and Russians might come to lungu’s aid But his lack of self control with money will be his down fall. All the vultures around him are desperate for more cash. I hope he reads this article
Ati think tank to enhance Africa’s competitiveness..you are so naive Jay jay.Brenthurst is funding OPOSITION parties in Africa to oust governements they dont like especially in mining countries so that they can control these governmets.They employed Obasanjo of Nigeria to influence African heads of state as per their agenda.Why do you think Obasanjo came to visit Zambia when HH was in detention??
If some one sponsors regime change which brings improvement in the lives of the citizens, what is wrong with that? Tekwikala bwino kanshi tufwaya as long as it is done legitimately through lobbying and education.
I am far from naive my friend …that was just a copy and paste from Wikipedia …read my other posts, everyone has an agenda Lazy Lungu is trying to save his skin, Oppenheimer family want in as well its their back yard…its all connected read carefully what this saying carefully and meticulously circumventing around issues. Anyway in Africa our leaders always let us down even here from the onsite one can see the mistakes in implementation are clear for everyone to see….Botswana dealt with Oppenheimer family and they all got a win-win deal but us we are cursed with corrupt entities like Lungu who can not do the right thing from the word go.
All this nonsense started with one Fredrick Chiluba.
@14Nzelu, NO SIR, ALL THIS NONSENSE STARTED WITH OUR POOR MANAGEMENT OF THE MINES DUE TO POLITICAL INTERFERENCE DURING KK’s TIME COUPLED WITH MANIPULATION FROM WESTERN POWERS. Chiluba was just an agent doing the inevitable! IN FACT OVER KCM, MWANAWASA BEARS MORE BLAME FOR GIVING AWAY A MINE AT US$25 Million WHICH WAS WORKING OK BUT LACKED ONLY WORKIG CAPITAL and for that matter to an Indian crook!!
For Zambians the time for blame games is over………lungu and pf messed up, we know.
Now is the the time for very Zambian to support GRZ and for grz to embrace constructive input from all suitably qualified Zambians……we can do this thing.
The usual bone heads slagging off Greg mills …….bone heads with tunnel vision and no perception of world current affaires.
FYI that is the perception from the majority of the world to this take over……it has been done when the economy is in ICU. What do you think the world thinks ??
The best we can say is …..we know GRZ messed up but now is a time for all Zambians to act as one and support GRZ and lungu.
Lungu should let a consortium that includes opposition leaders run KCM for Zambians , that way he can say they the opppsition just talk and failed to deliver if things go south with KCM …..
Greg Mills another devil in white clothes.
Anglo-American please be quiet,Zambians don’t want you and they don’t want HH for God’sake.
I wonder that this beast known as Brenthurst foundations (Anglo-American pioneers) can even write this stupid article.
GOD ALMIGHTY PLEASE HELP AFRICA .
Now I know the quack who writes rubbish for the so called Africa Confidential
I think anything anti Oppenheimers is blocked by Lusaka Times. LT may even be passing on information about bloggers to the Oppenheimers. They have blocked my posts before so I keep switching my identity
Any African wanting Economic Freedom knows the Oppenheimers are his enemy number one. Using their wealth which they obtained from apartheid they buy everything including the South African revolution of the 90s because they knew they would lose everything if the blacks launched an all out war. They even bought a private terminal at OR Tambo Airport. The result of a civil war in Apartheid SA would have been similar to the Bolshevik revolution or the removal of the Shah in Iran.
If LT wanted to block you identity/name is not the first thing they would use they would go for IP address…as for Oppenheimers they have their agenda to protect their interest and family wealth…we Africans take everything for granted even selling our broadcaster to the Chinks now even Mandarin will be taught our children …we are literally giving our future to a foreign power. Google, Bloomberg, CNN can’t even set up in China.
AT LEAST THIS IS A BALANCED ANALYSIS AS IT IS A TWO WAY .WE NEED TO DIVERSIFY OUR ECONOMY OTHER WISE THE RED TAPE WILL ALWAYS BE ON OUR HEAD
SECONDLY I AGREE THEIR IS AN ECONOMICAL INDICATOR THAT IS LEADING TO THE LIQUIDATION OF KCM .
IN A NORMAL SITUATION WHERE NO DEALS WERE DONE UNDER THE CARPET THE PROCESS COULD HAVE STARTED SOME TIME BACK GENUINELY TO SAVE OUR COUNTRY FROM COLLAPSING . UKULYAMO MUMA INVESTORS KWALICILA HENCE SELLING OUR BIRTH RIGHTS.NO POLITICS INVOLED WE WILL LEAVE OUR CHILDREN IN POVERTY
LESA TWAFWENI
PF are too laidback they lack vision and leadership to diversify.
Why did we remove MMD from power. They had made the economy into tip top.
Reading that analysis made me sick. It is nothing but stupid, ingratiating it pay masters. Stop celebrating mediocrity with stupid analysis. When Vendetta were buying the mine for a song, they laughed the loudest at Zambia. Now, we are returning the laughter. Hahahaha. Stupid *****s!!
Ba$tard Anil didn’t have $25 million when bought that mine…look at how much he is worth today its stated in the article…you are laughing with empty stomach Amos and Kaizer are looking after your interests.
Greg Mills? The moment I read that name I realised that it spells trouble for Trib.al Hacks. I mean who likes Vedanta and Argawal? The moment anyone says anything in their favour, especially if it is Greg Mills, just count 50% of the votes off Trib.al Hacks in 2021.
And the chap, Greg Mills that is, does not even know what he is writing about or what his Lungu is thinking about, just see how many ifs and other uncertainities are contained in the article. But without shame he is all over trying to reach a conclusion, really laughable if I can quote Gay Jay trib.al.
Ooops, I now think that Greg Mills must be a trib.al, what else can he be? He even loojs like Trib.al Hacks …. kikikikikiki …. “laughable”!!!
This story is as absurd as it gets. This Mills seems to have misplaced thoughts about the Zambia situation. He is also blinded by the greedy to continue exploiting the resources of African countries with impunity. The writer is so blatantly biased that even the dumbest can see through his scheme. Shame.
Openheimer, Illuminati, Anglo consortium and what not can be.
Back to Sobriety, IS THERE ANY TRUTH IN WHAT THE ARTICLE OUTLINES? If there is can we address those issues and FIND THE SOLUTIONS to our problems!!!!