Negotiate with Mining Houses: Jobs can be created, taxes raised, forex boosted by relocation of foreign suppliers.

‘Emulate Botswana and De Beers in the London relocation deal’

By Kalima Nkonde

Story Highlights

• It is time massive investments in mining began to stimulate growth in other sectors. The performance of this sector will now be assessed on the basis of growth of linkages with other sectors and impact on the lives of ordinary Zambians ( President Edgar Lungu , August,2018)
• We want jewelry purification, we want development of skills and we want people to participate in the economy so that we have something to show for making holes on the ground ( Botswana’s Minister of Minerals, Energy and Water Resources, Ponatshego Kedikilwe,2011)
• Botswana’s move will shift more than $6 billion of annual rough diamond sales from an international financial Centre to a comparative backwater with a population of 230,000( Reuters, 2013)
• If as a country we fail to derive maximum benefits and value from our mineral resources, which are a diminishing resource, posterity will judge us harshly (Zambia Daily Mail Editorial, August,2018)
• The agreement offered an opportunity to De Beers and Botswana to shape the future of the diamond industry. Together, we will mesh beneficiation into the fabric of the Botswana diamond industry.(De Beers chairman Nicky Oppenheimer,2011)

The current debate in Zambia with regard to the mining industry is focused on Konkola Copper Mines (KCM), although there is still a silent fight going on between government and the rest of mines with regard to the tax regime changes. As Zambians, the bigger debate is by and large the lack of benefits to us from the mining industry since privatisation some 20 years ago. This should not be a partisan issue. It is a fact.

In Zambia, like in other African countries, there has been a growing resource nationalism. This has been building up slowly and the western mining houses need to take note of it and consider adjusting their current business models. The current business models have overwhelmingly benefited them to the detriment of host countries, and if they do not change, there is Chinese competition waiting to seize the opportunities.

In regard to the KCM debacle, there are has been too much focus on the legal aspects of the action taken while forgetting the commercial and the operational aspects. The government is well advised that it takes advantage of being in charge of KCM to carry out an extensive due diligence on the company so as to unearth mining houses unscrupulous practices which have been difficult to know due to their lack of transparency.
The due diligence process on KCM will not only reduce the risks inherent in the action taken by ZCCM- IH, by ensuring that informed decisions are taken, but also help with knowledge of how mining houses operate. Needless to say- to those who are not in the know-that a due diligence investigation is much more than an audit, that some quarters, have been calling for.

If well structured, the due diligence should cover areas such as assets, liabilities, production, financial, administrative, taxation, human resources, environmental, intellectual property, legal, customers, procurement and suppliers of KCM. If done properly, it will provide an helicopter view of the company and the industry in the process provide the basis of informed immediate and future decisions as well as polices. Although KCM has proved to be a “rogue” mining company and not necessarily representative of other mining houses – as shown by its environment practices, fake investment promises and the open boasting of its owner on how it has been cheating Zambians by earning $500million every year “ spending” $25m to acquire KCM,declaring losses year after year – not all its practices may be indicative of other mining houses, at least not to the same degree.

Zambians not benefiting from Mines

The majority of Mining houses have been in Zambia for close to 20 years or more now, and have invested over $13 billion dollars but there is nothing much to show for it apart from the ballooning foreign debt of $17 billion that the country has accumulated. Foreign direct investment (FDI) like that of the mines can have immense benefits to the host country. The FDI benefits include: foreign exchange earnings, job creation, skills transfer, technology transfer, taxation revenue, forward and backward supply chain linkages. These benefits, however, do not come automatically and a host country has to be smart enough by ensuring enforcement of certain policies, for these benefits to accrue to them, like the Chinese government has done over the years.

Zambia has not benefitted much from FDI in all the aforementioned areas and this fact was not lost on President Edgar Lungu in August,2018, when he commissioned the Non-ferrous Africa Corporation (NFCA) South-East Ore Body (SEOB) shaft developed at a cost of US$830 million which extended the mine’s lifespan by nearly 25 years.

“It is of great concern to note that despite showing a positive picture, the mining industry has not stimulated corresponding growth in other sectors. The performance of this sector will now be assessed on the basis of growth of linkages with other sectors and impact on the lives of ordinary Zambians”. President Lungu complained

It is a well-known fact that mines in the 21st Century are not creating direct jobs as they used to do in the 20th Century, because mining technology has advanced in the 21st Century such that most of the tasks that were done by humans are now being done by machines ,reducing the need for workers in certain areas.

The issue of lack of employment from mining operations mainly due to change in technology is one of the burning issues that needs to be looked at. Zambia faces a critical unemployment problem especially among the Youth and it is imperative that as Zambians we start thinking outside the box and come up with non-conventional, but common sense, practical and innovative solutions and initiatives for job creation. This article’s suggestion for a campaign and lobbying for the relocation of captive suppliers of mining houses to Zambia is one such initiative, which nobody has talked about but which has potential benefits in almost all areas alluded to above.

As a nation, we have become too lazy to think in finding solutions and implementing suggested solutions, which is part of the cause of most of our current social, economic, political problems including the current debt crisis. Our people and leaders have no time to read to gain knowledge. We do not seem to realize that the 21st Century is a knowledge based economy and successful nations will be those that focus on knowledge acquisition, utilizing its knowledgeable citizens and ensuring knowledge is implemented in practice.
There is just too much focus by our people on earning a living through the easy way by prayers and corruption rather than by hard work. Personal gain, rather than national interest and common good, is the main motivating factor for those in the ruling party, opposition parties and the Zambian population at large. There is enough blame to go round. We badly need visionaries especially at the helm of leadership on both sides of the aisle to save our country.

Botswana and De beers milestone relocation deal

In view of the fact that about an estimated 95% of supplies for the mines are imported, Zambia should emulate Botswana which negotiated an almost impossible deal with the giant diamond mining house De Beers by its relocation from London to Gaborone, effective 2013 to ensure that the sorting, valuing and sales of diamonds is done in Gaborone after more than 80 years of being done in London thereby facilitating job creation, skills transfer and other multiplier effects for the benefit of Batswana and the economy.

The Botswana government’s example of how to drive a hard bargain with Multinationals when it negotiated a deal with the giant diamond mining house De Beers’ to move from London to Gaborone in 2013 to ensure that the sorting, valuing and sales is done in Botswana after more than 80 years of being done in London, dating back to the 1930s is a good example that Zambia can follow. This action has ensured that more than $5.89 billion in annual rough diamond sales has moved from London to Gaborone because De beers did not only decide to transfer the sales of Botswana diamonds to Gaborone, but also those of South Africa, Namibia and Canada. It took 10 months of negotiations with great resistance from many corners including workers in London, buyers of diamonds, experts but it was done and both parties were happy.

Botswana’s then Minister of Minerals, Energy and Water Resources, Ponatshego Kedikilwe hailed the ten year agreement as a game changer in ensuring that Batswana benefitted more from their mineral resources.

“This has been a good outcome for all, we had no intention of arm twisting. We want jewelry purification, we want development of skills and we want people to participate in the economy so that we have something to show for making holes on the ground”, He said.

De Beers’ chairman Nicky Oppenheimer, commended the agreement as it offered an opportunity to De Beers and Botswana to “shape the future of the diamond industry. Together, we will mesh beneficiation into the fabric of the Botswana diamond industry.”

Reuters, on the other hand, typical of Western negative reporting, said at the time, that the Botswana move, “Will shift more than $6 billion of annual rough diamond sales from an international financial Centre to a comparative backwater with a population of 230,000, in one of the most dramatic examples of a producing country battling successfully to keep value and profits from the raw materials at home.”

Although the Botswana example involves the beneficiation process and value addition, the principle involved, is the same – negotiations with multinationals to facilitate creating employment, making the benefits more tangible for locals of the host country – can apply to the relocation of mines captive foreign suppliers. According to the World Bank research, it takes about 18 months or less to set up a manufacturing facility. It follows that engineering companies, mining component suppliers and others can create thousands jobs, save foreign exchange and increase tax revenue in a very short period of time and the positive impact of the same can be felt within a period of two years and the continuous fight about taxes with the mines can be put to an end.

Captive mining suppliers’ relocation to Zambia

It follows from the above, therefore, that smart countries have found innovative ways of making mining houses to create indirect jobs and other benefits. In the light of the World Bank study of 2016 which estimated that 95% of supplies for the mines are imported, and cognisant of the fact that there is lack of capacity among many local Zambian suppliers in certain areas to meet the mines’ needs, one of the most effective initiative to create jobs is through the supply chain by persuading, negotiating with the Mines to prevail on their captive suppliers to relocate to Zambia.

Mining houses have foreign captive suppliers, whose businesses by definition, are largely dependent on supplying the mines for survival and Mining houses have so much influence on them. Mining houses can easily persuade these suppliers to relocate to Zambia but the Zambian government has to formally engage the mines and negotiate with them. It is a known fact that Mines like Mopani, Non-ferrous Metals and others have clearly indicated that they are in Zambia for the next 25 years and beyond and so it does make sense that their suppliers can easily move to Zambia as they will have assured business for the foreseeable future.

Zambians who were old enough in the 70s and 80s know that the old Zambian mining house, Zambian Consolidated Copper mines(ZCCM) used to purchase a substantial amount of its supplies, spares and components from many manufacturing companies that were located on the Copper belt towns like Kitwe, Mufulira, Luanshya, Chingola and Ndola. This resulted in the creation of many jobs, development of technical skills by Zambians, more tax revenue from these companies and savings on foreign exchange.

Joint ventures with Zambians

The issue of captive suppliers relocating to Zambia is not theory and has been proved by one Mining house- Mopani Copper Mines (MCM) in 2014. One such joint venture supported by MCM was between Shawonga Enterprises Limited of Zambia headed by London Mwafulirwa and ZINPRO Engineering of South Africa which partnered to form ZINPRO Zambia Limited, to specialise in shaft and structural steel rehabilitation works.

ZINPRO Zambia Operations Director, London Mwafulirwa hailed MCM for supporting joint ventures which would benefit the country. MCM Chief Executive Officer Danny Callow was quoted by the media that the Company was encouraging formation of joint venture partnerships between local contractors and internationally-recognized foreign firms wishing to do business with the mining company.

“We have a deliberate policy that encourages foreign manufacturing companies wishing to do business with us to partner with local companies or involve Zambians in their shareholding structures. This, we believe, will help build capacity of local companies, encourage skills transfer and give a competitive edge to the local firms while improving quality and efficiency,” said Mr. Callow.

The ZINPRO Engineering model is a good model to emulate as it is a joint venture between a Zambian company and a foreign supplier of the mines which moves part of its operations near where the client, Mopani Copper Mines is to benefit the country.

Another example of a supplier of mines relocating to Zambia to be near its customer is the Chinese company. Fujian Haian Rubber Company Limited, a tyre manufacturing firm from China which has established its base in Zambia to market its products and services in Africa. Lusaka Times of 6 June, 2019, quoted Eric Lin, company director for the Africa market as saying its company supplies its products to the mining industry in Zambia, Democratic Republic of Congo (DRC), South Africa and Senegal.

“We have established our head office in Zambia, we supply our products to the mining firms, in Copper belt, Solwezi, Kansanshi here in Zambia, we also have a market in DRC, South Africa and Senegal, we hope to expand our market using Zambia as our base,” he said.

It has to be made clear to the Zambian government that we private sector players and entrepreneurs, will not move on an issue that will benefit the Zambian economy on our own or through public speeches persuasion. The private sector including the mine’s main objective is to make maximum profit for their shareholders. This entails among other strategies operating with less workers, sourcing supplies from the cheapest source, paying less taxes within the law and so on and so forth. It is, therefore, incumbent upon government to engage the private sector by negotiating with them to act on issues that they would not otherwise be interested in. Persuading or negotiating with Mining houses to prevail over their captive foreign suppliers to relocate to Zambia is one such issue which is not rocket science.

Why does Zambia negotiate bad deals with foreigners?

As Zambians, we need to accept that we have made very bad deals with the Mines and the Chinese because we are poor negotiators, allegations of corruption notwithstanding, resulting in some of the economic problems we are facing today. We also do not use some of our best brains some of whom are outside the country because of some inferiority complex and petty jealousies by the various political leaders in charge at different times and the obsession with political patronage.

Negotiations are not for every Jim and Jack and so we need to employ the best among us to make deals for our country regardless of political affiliation. The Bureaucrats currently in Government or the President are not the best negotiators for the best deals for the country. Incorporating experienced retired civil servants, private sector players and highly qualified exposed and experienced Zambians in the diaspora can help the country negotiate better deals. In a nutshell, our deals are negotiated by people who are not qualified to do so and who can either be easily bought off once the foreigners dangle a carrot of a few pieces of silver or back off if challenged by more experienced foreigners due to inadequacy in negotiation skills and knowledge. The craze for personal benefit than the country has become part of the Zambian DNA and the foreigners have taken advantage of this and thus the bad deals including the recent loss of the big chunk of our land to so called investors. We have sold our country for a song to foreigners and the Chinese. China, for example, is busy fighting corruption at home as the arrest of the Interpol chief and other High ranking Communist Party officials since 2012 attest because they know it is not good for their economy, but it is busy exporting it to Africa and Zambia under the hypocritical guise of non- interference.

Way forward for Zambia and Mining houses

The fact is, there is only so much Zambia can do in form of taxing the mines, before it starts having negative impacts on them, which will result in a lose-lose situation. It follows, therefore, so many other innovative solutions are required to achieve even better outcomes in terms of benefits to the country apart from directly taxing the mines. This is not to say they have been paying their fair share of taxes thus far. They have not been paying enough taxes due to artificial losses as you cannot make losses for 20 years and still be in business especially if you are a publicly quoted company. Shareholders would have long revolted.

It is common knowledge to anyone who understands Multinationals and the Private sector mind-set that they do not do things or act unless such action will have a positive impact on their bottom line. They need to be incentivised, coerced through legislation and better still lobbied and negotiated with and convinced that the proposal is in both parties’ interests and will result in a win- win situation in the medium to long term.

The so much talked value addition and local supply chain benefits will not happen by themselves or by speeches or glossy policy papers but by government action and engagement and action like the way the Botswana government did. The Zambian Government can offer for example, a reduced royalty tax of say ½% as part of negotiations with the Mining houses, in exchange for Mining houses persuading their captive foreign suppliers to relocate to Zambia with the aim of reducing the percentage of supplies sourced from outside Zambia from say 95% to 50% as a goal. This is likely to have massive tangible and intangible multiplier effects in terms benefits to the economy more than just simply increasing royalty and other taxes which are so sensitive and likely to send wrong market signals. In terms of value addition, one simple action will be to head hunt manufacturers such as Car electric battery manufacturers to come to Zambia using our embassies as we have the raw materials like cobalt, copper and manganese.T he electric car revolution is on the horizon but government is not acting.

In view of all the mining houses’ long term commitment to Zambia being 25 or more years, there is no reason why they cannot persuade their captive suppliers to come near where the production of minerals is taking place. In the event that mining houses resist such a proposal, it should be a red flag that the suppliers may be related companies that they are using for transfer pricing to avoid tax and swindle Zambians by inflating the prices of supplies, capital equipment and creating artificial losses and frivolous VAT refund claims.

As the Zambian government is grappling with the KCM saga, it is hoped that the above suggestion can be the basis of simultaneous negotiations by the Government with the remaining mining houses, with regard to tax regime changes and other issues, so that at the end of the day, a win- win situation is achieved.

The reality is that the current mining houses need Zambia as much as Zambia needs then. They cannot just pack up and go as they have invested too much already- billions of dollars. The threats to divest should be called bluff. It is in both parties’ interests to negotiate better deals which are conspicuous to the public and are reflected in the economic growth, economic statistics of Zambia as well as employment creation and poverty reduction. The Mines should avoid a situation where a future genuinely and incorruptible government takes measures like those taken by Tanzanian President John Magufuli because of the lack of benefits to the host.

The relationship of De beers and the Botswana government should be the gold standard for Zambia and other African countries to follow in their relationship with the Mining houses and the Chinese. Also, for the Chieftainships where minerals are located or who give large chunks of land to foreigners, the Gold standard should be South Africa’s Royal Bafokeng of Rustenburg, near Sun City, whose deals with Platinum Mining Houses has immensely benefited the community as they even have equity stake in Mines.

The writer is a Chartered Accountant by profession, a Private Sector Development expert and an Entrepreneur. He is an independent, non- partisan finance and economic commentator/analyst and a Patriot.