Zambian Economist

China recently donated military and medical equipment to the Zambian defence forces to help improve operations of the country’s military hospitals. The donation was US$8 million. China's ambassador to Zambia Zhou Yuxiao says the equipment would be delivered in three phases over three years. 11 Chinese doctors are already working at defence hospitals "providing expertise".

This seems to be just a repeat of the deal we read about in May 2012, which is now being reported by the Times of Zambia as a "new deal". Last year Defence Minister Geoffrey Mwamba went to Beijing where he signed a "US$8m military aid agreement for the rehabilitation of the Ndola and Maina Soko Military hospitals".

Chinese aid to military hospitals sounds good in theory, until you begin to see a pattern of deeper China - Zambia military cooperation or colonisation, depending on your view of China.

In April 2012, the Government bought eight K-8P jets for Zambia Air Force (ZAF) from China. The ZAF Commander at the time Eric Chimese said the jets would "enhance the military wing’s ability to monitor the stability of the country". Additional orders were also made for helicopters and other police and military gear.

In May 2013 the Zambian Watchdog revealed that Government had borrowed US$20 million from China to resume "making bombs, bullets and gunpowder at a military location in Serenje district". It quoted Defence Deputy Minister Davis Mwila during his tour to Brazil who said that the government is "recapitalising Mupepetwe, an ammunition manufacturing facility located in Serenje District.’

Beijing's military foray into Zambia and other African countries continues unabated. None of this comes as a surprise because it’s well established that the relationship between economic help and military intervention is inseparable. It is illogical to expect nations that invest billions in other nations, not to back up that investment with some guarantee of security cooperation.

China's growing economic integration in Zambia is bound to be accompanied by greater military intervention as it seeks to guarantee its "investment". I have always said this is the most worrying aspect of China's reach in Zambia, and we ignore it our peril.

There was a very worrying story in June 2013 about illegal ivory, Chinese diplomats and rouge military officials. Tourism Minister Sylvia Masebo revealed on ZNBC that there was a diplomatic ring currently involved in exporting illegal ivory to China. Apparently these diplomats (believed to be Chinese) were intercepted at KK International in May 2013. When caught they pleaded "diplomatic immunity".

Some of the media sources suggested at the time that Zambia security officials discovered elephant tusks in two suitcases belong to a certain Army General on his way to China. He was allowed proceed to China but the ivory contraband was given to the Military Adviser to the Army Commander by the Chinese Military Attache to Zambia so that he delivers the items to an unknown recipient in China.

Both stories died quickly. No one knows what became of Masebo's revelations. But such stories heightens the need for greater scrutiny of Zambia-China military relationship. There is need for greater parliamentary scrutiny. Otherwise we may end up being colonised from within!

AUTHOR

Chola Mukanga | Economist

Government has decided to work out a policy that will give additional fiscal incentives (tax exemptions) to companies that support sports in the country. Sports Minister Chishimba Kambwili recently said that companies are sacrificing a lot to contribute money and even material support into sports and there was need to encourage them to continue doing so.

What Mr Kambwili is proposing can be argued for any sector of the economy. So one has to be clear about two questions : a) Is this the right approach to support sports development in the country (and other sectors), and, b) should sports take financial priority over other areas of development (e.g. tourism, agriculture)?

The use of fiscal incentives may not be without costs! What is important is to consider the counterfactual (the 'do nothing' world). What would happen if the tax breaks and concessions are not made? Would Zambia get the investment in sports anyway? That is certainly possible if one believes there are credible alternatives to encouraging investment in many sectors divorced from the large tax breaks. I have previously suggested that what we should focus on is to develop a bureaucratic hands-off approach across all sectors, the freedom to invest across sectors, and promote contestable markets (with import competition, and privately financed infrastructure being two of the key factors).

If the tax incentives genuinely stimulate new 'additional' investment in sports then it is clearly a good idea. But if all that happens is that investors switch from already tax paying activities in one sector to non-tax paying activities in sports sector then the tax exemptions become simply another form of indirect subsidy that reduces tax revenue elsewhere in the economy.

So before this policy is implemented GRZ need to show the projection of investment that would be stimulated. How many jobs would be created and where? What is the additional tax revenue that would generate? We can then decide on the balance whether such incentives are worth pursuing and at what level. At present it, at best it appears to be all guess work. At worst, this may simply be a product of high level lobbying by someone who wants to invest in sports with minimal cost to his/her business.

AUTHOR

Chola Mukanga | Economist

GRZ recently signed US$155million loan agreements with the World Bank to help ZESCO Limited facilitate the Lusaka Transmission and Distribution Rehabilitation project ($105m) and for the water Resource Development Project ($50m).

The ZESCO project aims at increasing the capacity and improving reliability of electricity transmission and distribution in Lusaka. Finance Minister Alexander Chikwanda and the World Bank signed the agreement recently. The project involves rehabilitation of the 132 KV and the 88KV transmission network in Lusaka area and the rehabilitation of the 33 KV and 11KV distribution network in Lusaka area.

The US$50m loan would support the implementation of an integrated framework for development and management of water resources in the country by the ministry of Mines, Energy and Water Development. This would include construction of small dams to help moderate damage from drought. It is hoped that the loan proceeds will go toward building and repairing about 100 small dams that will benefit more than 1 million people in rural areas over the next 10 years.

According to the World Bank, without the investments, changing rainfall patterns amid global warming could cost Zambia $4.3 billion over 10 years and keep 300,000 citizens below the poverty line. The World Bank says, “mitigating the impact of droughts and floods through development of a sound infrastructure platform to secure the productive use of water resources is central to continued economic development...Less that 5 percent of Zambia’s arable land is irrigated".

This latest loan agreements of US$155m come in a month that Zambia has looked to borrow more than US$250m in a syndicated loan as GRZ struggles to find new sources of finance following irresponsible spending on wages and an ever expanding bureaucracy. The Government has also been negotiating with the mining companies to reduce their taxes following threats of closures - as global commodity prices tightens.

The World Bank is very irresponsible. It should be lending money to countries which have a publicly accepted Debt Management Legal Framework in place. I thought they were interested in good governance. Lending money, even for good causes, without a proper legal framework for the people to hold Government to account is quite foolish to say the least. The hypocrisy of these multilateral institutions never cease to amaze.

AUTHOR

Chola Mukanga | Economist

President Sata yesterday pardoned 500 prisoners serving sentences for various offences to mark the commemoration of Zambia’s 49 years of independence. The pardoned prisoners are from various prisons in all the 10 provinces of the country.

This now brings to nearly 4,500 the number of prisoners PF has released on the streets! The releases have been usually on Africa Freedom day or independence day. In 2013 alone President Michael Sata has set free 1115 prisoners countrywide, with 615 pardoned earlier this year.

On its first independence day in power 2011, the Sata government freed people who were allegedly imprisoned "over minor wildlife-related offences". In Mr Sata's words, "as we celebrate 47 years of our independence, I have extended a gesture of goodwill to these people by pardoning a total of 673 prisoners, majority of whom were jailed over these minor wildlife-related cases".

In June 2012, we had another amnesty of 2,318 prisoners as part of the Africa Freedom Day celebrations. According to government this significant gesture was a response to appalling conditions in prisons and is in line with the PF's manifesto of turning the prisons into correctional service facilities. It was also part of Government's commitment to "finding lasting solutions to the persistent problems of congestion in our prisons. We need to have conditions that foster humane treatment in tandem with international standards”.

The 2012 independence day saw President Sata release anotherprisoner amnesty to 260 people as part of the celebrations. Apparently the move was "meant to decongest prison facilities in the country".

The driving reason for these large amnesties appears to be appalling prison conditions. No one can certainly argue with that. Prison overcrowding in the country is appalling - currently estimated at 209%. Very little prison capacity has been delivered since the colonial era. But whatever one thinks of the prison conditions, amnesties not a lasting solution to that problem.

For one thing amnesties in other countries have not sustainably reduced prison populations. Indeed in most cases it has led to increases in crime. At the time when the country has less than 3,000 police officers, releasing people onto our streets who have not been adequately punished is not the solution to improving law and order.

There's of course also the important question of justice. What is our conception of justice as a people? Some may rightly ask, if someone commits acts of violence against someone and is sentenced for 10 years, and then the victim hears the man only served 4 years because of the presidential amnesty, would the victim be happy? Absolutely no! The point is that the presidential pardon though legal has huge ramifications and these need further debate.

Amnesties will not solve our prison problem which are largely due to an imbalance between supply of prison infrastructure and demand of it. The demand is not only due to crime levels, but also because we produce many laws that we don't need; have fewer court and judicial capacity which has led to high remand levels which currently stand at 35%. We need to get remand down!

1 in 3 prisoners are presumed innocent and being held on remand. If we can reduce on that through more efficient court processes we can reduce on remand. There are people on remand who should not be incarcerated and with proper policies ought not to be on remand if the system can be made more efficient. The priority therefore should not be on amnesties but on bringing remand down.

Also we need to row back on custodial sentences. There many custodial sentences which are churned out for minor offences like stealing a cob of maize, petty thieving and bouncing cheques has not helped. Its clearly much more effective to impose monetary fines. And where the offender cannot pay, community based sentences should be explored.

These ideas of course have "retributive justice" problems. The punishment clearly has to fit the crime and therefore government needs a better criteria for how certain offences are defined as crimes against the state, and also as custodial rather than monetary penalties or civil offences.

The Human Rights Commission has also helpfully noted the need for a serious look at the "rehabilitation agenda". In has previous observed that "The Commission is greatly concerned that today, Zambian prisons still echo the times when such facilities were viewed as places of punishment instead of being centres for rehabilitation of offenders who would later be integrated back into society after serving their respective sentences". What they have in mind are initiatives like one donor funded projects which is helping prisoners get back to school.

But amnesties as currently practised by this administration have other problems. The criteria is not clear! One day it is wildlife offences. Next it is corruption offences (as was the case in June 2012). We surely need more lasting solutions to the prison population than random amnesties whose criteria is unknown! How do we know those released are not PF supporters imprisoned by under the old regime? Also rather than undertake blanket pardons, have alternatives been explored?

Why can't those released for example work on community sentences to repair our much needed infrastructure? There are many alternatives that ensure that justice is seen to be done - though it is ironic that where justice is needed, for remandees, very little is being done to bring it down. We are letting criminals go scot free and keeping innocents in jail. No one wants amnesties for remandees, what is needed is to make the system for remandees more efficient. That should be the priority.

In any case the President should not have such powers. In other more developed nations amnesties are undertaken by the Legislature or subject to Legislative clearance. There's a principle of justice that cannot simply be vested in one man. Presidential amnesties are also bound to be abused and become very corrupt as suggested above. As a nation we should be limiting presidential discretion not increasing it. If we are serious about reducing corruption in the Executive Branch.

The Anti-Corruption Commission (ACC) recently arrested and charged Wilfred Serenje, the former Chief Executive Officer of the Rural Electrification Authority (REA) for Abuse of Authority of Office contrary to section 99(1) of the Penal Code Cap 87 of the Laws of Zambia. It is alleged that that between 1st January 2008 and 31st November 2011, Mr. Serenje abused the authority of his office by allowing his personal motor vehicle to draw fuel and lubricants from the REA account. Mr. Serenje’s contract with the REA was terminated on 9th November 2012 after the ACC instituted investigations into his conduct.

The ACC has also arrested a Local Court Clerk in Kitwe for Corrupt Practices involving K200.00 Ms. Barbra Chansa 34, of house number 7 Wusakile Township, in Kitwe was arrested and charged with one count of corrupt practices contrary to Section 19(1) of the Anti-Corruption Act Number 38 of 2010. Details are that between 1st September, 2013 and 23rd September, 2013, Ms.Barbra Chansa as a Court Clerk with the Judiciary Department corruptly solicited for and actually received K200.00 cash gratification from Peter Ngalandi as an inducement or reward for herself to facilitate for a favorable Judgment in a local Court case between Peter Ngalandi and Mr. Silavwe at Wusakile Local Court.

The ACC has confirmed that it has opened investigations into the US$210 million Digital Migration tender procedure in which Western Province permanent secretary Amos Malupenga is heavily implicated following his two years at the Ministry of Information. Mr Malupenga is a former journalist who worked at The Post Newspaper before joining the Sata led government.

A lot of cases for the ACC and great progress being made in investigation. But prosecution remains poor. This week we learnt that Liato's case had collapsed and now he was being hunted over a different allegedly crime. After huge sums of money has been wasted in prosecuting him, State prosecutors decided to climb down. It is vital that Government puts in place stronger prosecution arrangements otherwise the detection process will be a pure social cost! There's no point in the ACC, police and the public working hard to catch criminals if we cannot convict people. The DPP's office is need of a serious broom!

AUTHOR

Chola Mukanga | Economist

Transport Minister Yamfwa Mukanga MP says government has engaged a Chinese firm TSDI to carry out feasibility study on TAZARA in order to recommend to the Tanzanian and Zambian governments on what to do about TAZARA. The study started in 2011 and was supposed to end in 2012, but GRZ is still waiting for the consultant to hand over the documents.

Hon Mukanga, who is also the Government’s Chief Whip, says TAZARA has been under-performing and is highly indebted. Although the arrears for the workers have been cleared after the two governments released US$8 million, TAZARA is on life support. Among the options which may be presented may include privatising TAZARA.

TAZARA has virtually collapsed. One suspects the team of experts have not issued the report because they have found the task was too difficult. How long does a feasibility study take? The problems facing Tazara are not new but come off the back of historic mismanagement and insufficient demand. No new government money or experts can turn it round. The problems are so huge that even the injection of US$40 million by the Chinese government in 2011 to revive operations following the signing of the 14th protocol yielded nothing.

Tazara has unfavourable debt and equity ratio which closes opportunities for accessing long term operational loans from any financial institution.The company needs more than US$700 million to operate smoothly. In addition it owes the statutory authorities round $100m. These include NAPSA, ZSIC and ZRA. And as if that was not enough, it is still owing TAZARA retirees more than $20m. The list is endless as this does not include legal fees and money owed in other areas.

TAZARA’s fundamental problem is that, even if it were well capitalized and managed, the rationale for its existence largely disappeared once sanctions against Rhodesia / Zimbabwe were lifted and the border re-opened. In recent years the expansion of Beira, Nacala, Walvis and other regional ports has further reduced the need for heavy investment in TAZARA. With RSZ itself having substantial surplus capacity, it is doubtful whether there is sufficient traffic for one railway, let alone two.

Which brings us to the basic question - if not TAZARA, where should government prioritise investment? The answer is clear : roads! Zambia suffers from a "landlocked trap". We are heavily dependent on our neighbours for road and rail access to sea. However, even in terms of internal road network, Zambia has not invested significantly enough compared to other aspirational African countries. In other words, its okay that we have neighbours with poor road or rail network or insufficient port capacity, but there's no reason why cannot do our bit, to get road network in order! Its no surprise therefore that evidence appears to suggest that Zambia's lack of adequate infrastructure is acting as a constraint on the expansion of trade and economic activity. The World Bank's Logistics Performance Index, ranks Zambia's transport infrastructure below the average of other sub-Saharan African countries and low-income countries.

Many of our local areas are isolated and in desperate need of good accessible rural infrastructure. With good roads accessibility improves in terms of delivery of services and local commerce. Without proper rural roads it becomes impossible to make serious efforts in improving market development. Good roads reduce local market failures in critical sectors such as agriculture and tourism.

The PF government therefore should continue to rightly prioritize investments in rural roads over rail because roads have a greater potential to directly affect the poor and enable them to become players in the market. Minister Mukanga is performing exceptionally well in delivering at pace the Link 8000, Lusaka 400 and Pave Zambia 2000 projects. Zambia is on course for total transformation of its road network thanks to the excellent priority President Sata has placed on these project. My prayer is that the Minister and the President do not get distracted with TAZARA issues.

The Government should press ahead and sell TAZARA - but who would buy it?

AUTHOR

Chola Mukanga | Economist

Government has started opening offices for tourism promotion abroad. Tourism PS George Zulu says the countries were offices are being set up include South Africa, France, Spain, Britain and USA. In his words : “There’s great potential in the tourism industry to boost the Zambian economy more than in other sectors because the hospitality of the nation draws tourists into the country".

I was under the impression that our many costly embassies around the world are already geared towards this sort of promotion. What are they doing in the embassies if they are not already promoting Zambia?

My free advice to Zulu and others is to ask the diaspora to help market Zambia instead of such expensive ventures. Its quite obvious that if they want to sell Zambia abroad, their best ambassadors are the diaspora. They understand what Zambia has to offer and what the foreigner wants. Incidentally, I have always found that there's something to say for "person-to-person" recommendation. More importantly, it will save taxpayers a lot of money.

In general a stronger diaspora policy can help Zambia's tourism policy on the demand side directly. For example one suspects that tourism arrivals would go up if Zambia had dual citizenship because there would be increased frequency of returnees due to elimination of visas for second and third generation Zambians abroad who may now start to hold Zambian passports.

Of course the benefits of a strong diaspora policy go beyond tourism. The benefits of increased investment, voluntary services, foreign education and civil society are well rehearsed in academic literature. But the lack of one has certainly impeded this sector. One wonders what Zulu and others are doing if they can’t even think through basic issues like this.

AUTHOR

Chola Mukanga | Economist

Daniel Pule has formed a political party called the United People's Jubilee Party (UPJP). He says the party will “fight discrimination and tribalism of all kinds” and will be a party “for all Zambians”. Mr Pule says, “this is our 49th and I will invite you on the 24th of October for a major press conference, where we shall give the details of our Jubilee Party...this is a party for all Zambians, and it's grounded in the word of God. We are here to encourage Christians, Christian business people to participate in national affairs."

When asked who the other leaders in the party are, Pule said it will be revealed at the “Independence Day press conference”. Pule last served as deputy information minister in the Frederick Chiluba regime. In 2002, he formed the Party for Unity, Democracy and Development (PUDD), which is presumably no longer in existence.

Mr Pule has has been asked to change the name by Government for a somewhat foolish reason (apparently the word jubilee can only be used by government due to the independence celebrations next year). If he does succeed to keep the name, UPJP is the latest in the birth of new parties in 2013, which has already seen George Mpombo’s PDP, Frank Bwalya’s ABZ, Peter Sinkamba’s Green Party and Mike Mulongoti’s party (the name escapes me!).

My position on these mushroom / one-man/ family parties remain the same. People should always be free to congregate as they wish and form as many parties as they like as long as tax payers don't have to foot the bill for their activities (regular readers will know I have a deep seated opposition to public funding of political parties). What is important is to ensure that voters are fully informed and parties are operating within a contestable electoral system. In that vein let us all oppose the current Draft Constitution’s provision to fund political party. It is not only irresponsible but creates perverse incentives for more mushrooming of parties.

One ide I would consider supporting is what I call the “Angolan formula”. Angola has a law in the constitution that hands a death certificate to all parties that failed to pass the 0.5 percent threshold in elections. The measure does NOT apply to parties that do not run in the last election. The set up is designed to ensure that only viable parties remain and hopefully force other small parties into coalitions, therefore making the politics more competitive.

Angola has a unicameral parliament with a four year term. The National Assembly (Assembleia Nacional) has 223 seats elected by proportional representation; 130 members are elected from national lists, 3 members by Angolans living abroad and the 18 provinces each elect 5 members. In fact its registration system is envy of many, not to mention the 30% reservation rule of seats for women. Though I am not fully in favour of the 30% rule, it does have some merit. There’s a lot of empirical evidence on the macroeconomic benefits of gender equality in legislative or policy positions. But that is a topic for another day.

AUTHOR

Chola Mukanga | Economist

The government earlier this month suspended maize and bran exports, the Ministry of Agriculture said in a latest move to ensure availability locally. According to Statutory Instrument No. 85 of 2013, only government-to-government exports and exports by the World Food Programme (WFP) are exempted from the ban. All export permits issued before or after the release of this S.I have since been revoked.

Zambia's maize production fell 11 per cent this year after poor weather and a worm infestation impacted on yields. The 2012/13 maize output was recorded at 2.5 million tonnes from 2.85 million tonnes in the previous season.

Although industry officials have placed the total national requirement of maize at an average of 1.2 million tonnes for food, the brewery and stock feed industries, there are fears the country may experience shortages of maize and bran if exports are not banned.

Closing borders in a small market like Zambia invites the prospect of significant price volatility. Government needs to keep markets open to sustain the incentives for farmers to engage in maize production in the long term. This the PF government knows very well. In fact it said so in the manifesto. Have they stopped reading it?

The PF manifesto criticised MMD for the same thing it is doing. It said the PF believes that biggest obstacle to more rapid growth in agriculture is “the uncertainty about the MMD government’s policies on buying, importing and exporting many products...", especially for maize and wheat. It went on to observe that this "has made it difficult for the private sector to undertake investment decisions..."

The policy of banning maize exports hurts small scale farmers who we are trying to help. It's these farmers who need access to more lucrative foreign markets to increase their incomes. By the time a decision is taken to allow for exports, the prices will have come down and those opportunities gone. It is such misguided and arbitrary policies that are keeping many of our small scale farmers in perpetual poverty.

What we need is to get agriculture policy back on track by dealing with the big issues : improving commodity exchange; removing export and import restrictions; improving physical infrastructure; widening credit access to smallholder farmers; improving "market discovery" for small farmers; better investment in education and research.; targeted subsidies to support mechanised farming; and, removing distortions in fertiliser / input market by giving the private sector a greater role.

AUTHOR

Chola Mukanga | Economist

An important recent report which has not had much discussion. The Government recently announced that it plans to cede control of ZCCM-IH. Mines Minister Chris Yaluma says that Cabinet will decide on the size of the divestment and that go is to give up control : “We are not looking back, but looking forward and getting the mining houses TOTALLY into private hands...We have gone past nationalisation and we are not going back.” (Source: Bloomberg)

Government currently owns about 87.6% of ZCCM-IH which in turn owns miniority shares in a number of mining houses. Yaluma’s statement suggests not merely a reduction to shares in ZCCM-IH below 50% as some have suggested, but potentially completely selling its shares and allow individuals (most of them likely to be foreigners) to purchase shares in ZCCM-IH. This is very consistent with a similar statement he gave Metal Bulletin.

The picture with ZCCM is currently very confusing. It is not clear how Government plans to do this. ZCCM-IH, effectively owned by Government, currently on paper owes Government substantial amounts of money following the privatisation exercise. It recently announced plans to sell stock to existing shareholders (including Government) to repay debt to Government and invest in new developments. It suggested that Government did not intend to increase its ownership through the exercise.

Most minority shareholders own their stock through the NYSE Euronext in Paris, according to ZCCM-IH. An independent company completed a valuation of the in September, and is yet to announce the results of the exercise.

AUTHOR

Chola Mukanga | Economist

Berkeley Mineral Resources (BMR), through its Zambian subsidiary Enviro Processing Limited (EPL), is planning to reopen Kabwe Mine and is expected to initially invest US$300 million (about K1.5 billion) in its operations. BMR is listed on the London Stock Exchange Alternative Investment Market. It hopes to commence operations in 2014 / 15.

EPL has been acquiring surface rights in Kabwe and licences over zinc and lead tailing dumps since 2008. It completed the the acquistion of all the relevant assets, surface rights, mining plot and licences in 2012. It says, it “has done a quality intensive verification process of samples in South Africa and we found that there [is] still a large percentage of base minerals in those (tailing) dumps..”. There also other minerals such as indium, silver and gallium inside the tailing dumps.

Kabwe Mine was closed in 1996 after the operations were judged to be “uneconomic”, turning the town into a ‘ghost town’. BMR owns other mineral assets in Zambia. It appears the environmental issues have been sorted out with GRZ. - but as yet no details have been provided.

The ongoing rebirth of Kabwe is good news. I remember in 2006 the town made it into the world’s ten most polluted spots in the world. But thanks to the environmental lobby, within a year the World Bank gave a $50m grant to help clean up the damage. Kabwe is a good reminder that the world is much quicker to respond to "environmental damage" than damage caused by "poverty". Imagine asking the World Bank for $50m to tackle the problem of street children in Kabwe? Would they respond to the query with the same urgency? Not that I am suggesting that we should perpetuate our addiction to foreign aid.

AUTHOR

Chola Mukanga | Economist

The government recently signed two loan agreements with Saudi Arabia worth $40m to buy urea fertiliser ($20m) and renovate the University Teaching Hospital ($20m). This is the third loan agreement with the Saudi Fund for Development under the Patriotic Front government.

Zambia has witnessed unprecedented speed of borrowing over the last two years. Since PF came to power Zambia's external debt is nearly three times what it was 2 years ago. In 2012 alone, Alexander Chikwanda borrowed a staggering 14 times abroad!

The new budget projects over $1.3bn (K7bn) dollars of external borrowing (foreign finance) - and possibly more given PF's inability to manage public finances, as evidenced by its doubling of the fiscal deficit in 2013 . GDP growth in 2013 is predicted to decline by 1.3% further reducing the debt sustainability envelope.

AUTHOR

Chola Mukanga | Economist

Finance Minister Alexander Chikwanda on low mining revenues :

[Members of Parliament] have rightly expressed their disquiet about the paltry contribution of the mining sector to tax revenue. The mining sector in Zambia contributes merely 5 percent to domestic tax revenue while the contribution of the mining sector in the other major SADC mining countries is at 11 percent. The mineral royalty in these countries is 3 percent while it is 6 per cent in Zambia.

The low contribution of the mining sector in Zambia can only be attributed to pervasive fraudulence, a state of affairs we are dealing with by placing a team of experts in Zambia Revenue Authority to design systems which will enable government to determine both the quantities and content of the minerals produced in Zambia.

Only then shall we be able to restructure the taxation of the mining sector in a way that optimises revenue from the sector without impairing the operations of the sector. Minerals are a non-renewable resource and it is only fair that the country gets a fair and reasonable return from its non-replenishable resources, in the process safeguarding the interests of posterity.

(Source : Ministry of Finance)

Chikwanda's example is a case of failing to think. The relationship between the level of mineral royalties and its share of total domestic revenue is not direct across countries. It is possible that other countries are more dependent on mineral royalty revenues to raise national domestic revenues than Zambia, and hence have higher shares of mineral royalties.

A better way to compare Zambia against other countries is to look at effective mining tax rates and what is actually collected in practice. That way we can begin to form of basis for checking whether it is a case of fraud or the effective tax rates are too low. As always Chikwanda appears struggle with very basic ideas.

AUTHOR

Chola Mukanga | Economist

Here is a conundrum :

You are a shrewd and very successful businessman. You started off in the mining supply business, before venturing into micro-lending where you made an absolute fortune charging your desperate clients outrageously high interest rates. Over the years, business has been incredible and you now find yourself with excess cash that you would like to invest in other ventures.

It has always fascinated you that although your country is endowed with substantial mineral resources, there are not that many local entrepreneurs who actually own and manage a substantial share of the mining enterprises. The major players involved in mining in your country are all foreign, all largely managed by expatriates (although you are fully aware that the labourers are predominantly local).

It has always struck you that in other countries endowed with mineral resources, there is always a local entrepreneur who has made a vast fortune from investing in mining operations, but this is not the case in your country. You surmise that you could be that local citizen to break the mould and become the first homegrown mining magnate. The thought of it, gets you very excited -- almost giddy!

Your street smarts, rather than any academic credentials (of which you have none worth touting), are what you consider to be the most valuable asset that has enabled you to make a success of your business thus far. However, your incredible business instincts tell you mining is unlike any other business you have ventured into previously, so you decide to seek some advise. You remember that an old classmate, who was one of the brightest in your time at school, now runs her own investment advisory firm. So, before making any rush decisions, you decide to meet with her over dinner to explore a bit further your newly found dream to invest in copper mining.

During dinner and after you have explained your thoughts, she says the following:

"Firstly, I will have to assess your specific requirements more formally with my team of experts in mining investments before I can give you a detailed view on this. However, there are a few considerations perhaps worth exploring from your perspective. For a start, copper mining is an incredibly capital intensive business. If you are considering a greenfield copper mine, be it open pit or underground, you should expect to make a substantial investment in construction works as well as equipment -- the type of costs that cannot be recovered easily by sale or transfer, so your commitment must be long term. It is not unusual, these days, for mining companies to invest well above US$10,000 to build capacity to produce a tonne of copper ore on new mines. For perspective, if you were looking at opening a mine the size of KCM whose current production capacity is reported at 160,000 tonnes, you would be looking at a conservative investment of US$1.6 billion to build that sort of capacity. Of course, the capital requirements all depend on the unique circumstances of your mine, such as depth of the ore body, grade of the ore, proximity to infrastructure like transport, electricity, etc. In addition to your up front capital injection, you will also have to consider how you will fund the day-to-day operations of the mine, like labour, fuel, electricity and other consumables, at least until the mine becomes self sustaining."

She goes on, "currently, copper prices appear to be closely linked with economic activity in China, which consumes nearly half of the global production of copper. The price of copper price, like that of all other commodities, tend to fluctuate depending on a series of factors -- demand from China being one of those factors. Over time, you can expect these fluctuations, which in your case would mean having the flexibility to cut your costs when copper prices are low. The easiest cost to reduce, usually, is labour. However, if you have followed media reports, the government has absolutely no appetite for shedding staff as a cost cutting measure -- you risk losing your mining license if you considered such a move. You may have to do with high operational costs, even when copper prices deep."

She further explains, "depending on how much mining capacity you build, you have to consider how you will sell the copper. If you intend refining the copper locally, you may need to look at where you will be having the copper refined. Exporting unprocessed copper attracts an export duty of 10%, which is could easily cut very deeply into your margins. You would have to consider processing locally, but there just isn't enough capacity, plus you would also have to consider the added costs of logistics. That is, you would have to transport the unprocessed concentrates to a refinery -- wait for the processing before exporting it, all while you continue to incur operational costs.

Finally, she adds, "there's also an uncertain outlook on the tax regime overall. The 10% export duty was introduced last year, suspended this year and re-instated again this year. There had been a mining windfall tax introduced in 2008, suspended in 2009, but the talk of re-introducing it is never too far from politicians mouths. Both these taxes I have mentioned here, exclude the mineral royalties, corporate and variable profit taxes you would have to pay on your margins. When you look at taxes, one thing you may want to consider -- if you have a long-term view -- is the current budget deficit in the country, sitting at 8.5% for 2013. Whilst seemingly unrelated to mining, if the budget deficits are not controlled, they may have the long term effect of resulting in inevitably higher taxes, beginning with the mining industry. So there's a lot to consider, but as I mentioned, I will have to assess your specific requirements more formally with my team of experts in mining investments. Let's take it from there..."

All the while you have been listening very intently to these explanations.

Are you still as excited about investing in copper in your country as you were before the meeting?

AUTHOR

Ntheye Lungu | Guest Writer

Government has approved the proposal by ZESCO to increase electricity tariffs. Energy Minister Christopher Yaluma says that the Energy Regulation Board (ERB) approved ZESCO’s application, without indicating by how much the tariffs will rise.

Earlier this year ZESCO applied for electricity tariffs to increase 26% on average in order to meet its operational costs, high inflation and meet rising demand for electricity in the country. Yaluma says that the new electricity tariffs will increase less than 26%, but he has refused to state the exact amount. We have to wait for ERB to announce how much has been approved.

Electricity is vital for economic and social development. Unfortunately, affordable access to electricity clean remains an elusive dream for many of our people, especially those living outside of urban centres and the poor. Only 30 percent of our population have access to electricity, which means that the remaining 70% live in the dark! Rural areas are virtually disconnected from the national electrical grid, with less than 4 percent of people living in rural villages using electricity, while over 95 percent use firewood for cooking.

Over the past decade, Zambia has increased access to electricity at a rate of less than 0.5 percent per year. At this rate, it would take us well into the 22nd century to achieve universal electrification. While power is relatively abundant in Zambia, much of that power is going to the mining sector, leaving relatively little for domestic consumption.

On the flip side, at $0.03–$0.04 per kWh, Zambia has some of the lowest power tariffs in Africa. Namibia charges as much as $7,83/kWh. Malawi and SA have roughly the same end-user tariff of $4,47/kWh and $4,02/kWh respectively. While Zambia’s power production costs are low, tariffs are lower. Tariffs are capturing only about 40 percent of historic costs, and the power sector today is living on the investments of the past without making provision for the future.

The question is what should be done?

The first thing is that ZESCO should press ahead with increasing tariffs to fund the additional power. I have long been a supporter of GRZ efforts to increase electricity tariffs towards cost reflective levels. Given the financial mess Zambia finds itself it is important this step is taken urgently. The key is to ensure everyone pays the full cost of use.

The government also needs to ensure that the it pays its own bills to ZESCO. Last year we learnt that GRZ ministries owe ZESCO over $40m in unpaid electricity bills. To help address the situation, the government apparently intends "to settle the bill through the introduction of pre-paid meters in all government ministries... 40 percent of all electricity purchased will be going towards offsetting the bill". It is not clear how much progress has been made on that promise.

One thing is certain : the idea of a “pre-paid” meter at a police station or hospital is a non-starter. At the end of the day the real problem is that there are perverse incentives for GRZ to let ZESCO carry the loses because it is an easier way of hiding inefficiencies. The public does not understand that it is losing out on ZESCO. What we are actually told is that we have little capacity because the economy is growing. This may true but its not the whole truth!

Which brings us to the real issue that needs to be sorted. We need to reform ZESCO. My standing proposal is that ZESCO should unbundled into three - generation, transmission and distribution. A monopoly is only needed for transmission due to network benefits. There's nothing radical about that idea because it has cross party support. A parliamentary committee on Economic Affairs and Labour (2009) concluded:

ZESCO, which is a major player in the energy sector, is in-efficient and undercapitalised due to poor management and a bloated management structure. ZESCO must be restructured by unbundling it into generation, supply and distribution components to run as separate entities. Unbundling ZESCO will make it more efficient and responsive to the current challenges in the sector. This will address the inefficiency that exists in ZESCO.

Unfortunately Yaluma is on the wrong page of history because he continues to insist ZESCO has been totally transformed. Earlier this year he claimed that “The ZESCO of about nine months ago is totally different from the ZESCO is see today...Clearly the ZESCO of today is far much better than the ZESCO we had before”. With that attitude don’t expect any reforms!

Then there’s the question of the mining companies. We were told earlier this year that GRZ will gradually raise the electricity tariffs it charges mining firms so that by 2015 they reflect the true cost of producing power : "We would like to see a situation where all the mines pay cost-reflective tariffs and we want to see this migration by 2015". No more subsidies they said! We are still not sure where we are with that. Given the control that mining companies appear to have over Yaluma, the forthcoming ERB statement will be interesting to read!

The bottom line of course is that the tariffs have to go up! That's unavoidable! The key point is that any new prices must be put forward as part of an overall policy package that includes renewed obligations by GRZ to settle its own debt on time; mining companies paying a fair price; and, new privatisation reforms for ZESCO that sees it only retaining monopoly over transmission. After the fuel subsidies were transferred to civil service wages, many people will rightly oppose the new tariffs. Therefore it is important PF follow my suggested advice above to help restore policy credibility.

AUTHOR

Chola Mukanga | Economist

William Harrington (Former Transport Minister) is asking for financial assistance to ensure justice is done. Mr Harrington intends to move a motion in the High Court to probe Tourism Minister Sylvia Masebo over allegations of abuse of authority regarding the operations at ZAWA. This follows a recent High Court ruling that Mr Harrington has the right to a judicial review against Masebo. Contrary to the position taken by Acting Chief Justice Lombe Chibesakunda who continues to refuse to appoint a Tribunal to probe Masebo.

Unfortunately the High Court did not award him costs for his action against Justice Chibesakunda because “the matter had been moved in public interest". This means Harrignton has to continue carrying the financial cost alone even though his actions benefits the public in general. He is now considering giving up the fight due to lack of financial resources. Unless other stakeholders who wish to see justice in the matter come on board, the judgment granted in his favour would remain on paper.

Harrington’s situation unfortunately illustrates the problem of justice in Zambia. In any other society suing government or bringing ministers to account is fairly standard due to the transparency of government. Unfortunately in Zambia even if a senior government official makes a "wrong decision" or engages in corruption whilst in office very few people would sue them. Part of the reason is that people do not trust our judicial system. Many Zambians do not believe that senior officials and politicians can really be found at fault by our judicial system, especially when you have the likes of Chibesakunda in control of the judiciary.

The other reason is that of the "free rider" problem. In many instances, save for the likes of Harrington, people would prefer to sit on their hands and wait for someone else to bear the cost (and I don't just mean financial) of taking Government to task. We see this in many areas. We always want others to do it for us. We want others to hold government to account on our behalf and we rarely support them financially. We are all like this.

So the only solution in this instance I believe is to ensure that some mechanisms are put in place that helps avoid having to rely on individuals to enforce good behaviour through the courts. We really must fight for the independence of the judiciary, DPP, police and oversight institutions, including ensuring that the Attorney General's advice is compulsory and adhered to in all government business. Unfortunately such fights also needs money! We need Harringtons in every section of society! And they need our support so that in the future we don't rely on them!

So it is my hope that people will come on board and help Mr Harrington pursue justice. Whether you are PF or not, we should all support those that want light to shine in dark places. And if that light does shine and finds Ms Masebo innocent, we shall all rejoice with her! And let us support the Harringtons of this world wherever they may be found - whether it is politics, business, justice or media! Independent voices who refuse to be captured by corrupt people and institutions. They need our help to make a better Zambia!

AUTHOR

Chola Mukanga | Economist

KCM plans to cut at least 1,529 jobs by March 2014. The policy is with immediate effect. Some have already being laid off, though KCM disputes that. It cites the coming to end of the lifespan of some of the mines at Nchanga (Nchanga Open Pit and the Nchanga Underground Lower Ore Body) in the next three years as contributing factors.

Over the years, copper grades at Nchanga underground have significantly decreased, from an average of five per cent up to the 1980s, to three per cent in 2000 and currently 1.6 per cent, while open cast mine grades had dropped from three per cent to one point zero today.

To make matters worse KCM's annual output is around 8 tonnes per employee compared to the global average of 100 tonnes. The reason is that the Nchanga operations are still using the costly conventional method of mining compared to mechanised /automated mining used by its global competitors. So KCM is shifting towards mechanisation and automation for all of its operations in order to increase productivity. Which means job losses!

Earlier this year KCM announced that it was planning to cut its workforce by 24% after costs rose and the copper price dropped. It was temporary talked out of that one with Government allegedly promising to make concessions on tax and other things. This time round it appears to be going ahead. Although GRZ is again "rejecting" it's move. Labour Deputy Minister Rayford Mbulu says the company has not notified the Government as required by law. Mineworkers Union of Zambia is "calling on Government to quickly come in and investigate why the company is behaving in this manner", and "failing to run the mine".

I have previously noted that mining contributes very little to employment because it is not a labour intensive sector. This is becoming increasing pronounced as technology improves and companies seek to raise productivity. As for the unions, they are no longer as powerful as they used to be due to rampant casualisation, dwindling labour force and multiple investors. Many mining union bosses in recent years have been easily captured through political and business corruption. It is just not the same industry that it once was!

And of course this same industry has bigger problems on its plate next year. The outlook for copper prices next is negative. Zambia remains vulnerable to China’s ongoing adjustment which has seen copper prices fall by $3000 per tonne over the last two years. There’s a high likelihood of further fall in copper prices as supply expands off the back of new mines and expansions in Chile, Mongolia, Indonesia and Zambia. The lack of diversification of Zambia’s economy means a significant fall in copper prices may negatively affect the economy. Some small mining closures may also occur, with possible job losses.

AUTHOR Chola Mukanga | Economist Copyright © Zambian Economist 2013

Vedanta Resources owned Konkola Copper Mines Plc is suing Zambia Revenue Authority over a K3.2 billion ($586 million) tax charge relating to exports of copper cathode. KCM wants the Lusaka High Court to quash ZRA’s decision to charge a 16 percent VAT on the exports from January 2011 to March 2013, according to court papers. KCM also wants the court to reverse the authority’s decision to levy the tax from July.

KCM says “there are serious legal questions to be determined with regard to the legality of the assessments". It alleges that the tax charge would “heavily impact” the company’s ability to service its financial obligations, including paying workers. More on this via Bloomberg.

Related Posts:

GRZ Vs Mining Companies (5th Edition)

GRZ vs Mining Companies (4th Edition)

GRZ vs Mining Companies (3rd Edition)

GRZ vs Mining Companies (2nd Edition)

GRZ vs Mining Companies

AUTHOR

Chola Mukanga | Economist

Hakainde Hichilema (UPND) has responded poorly on the KCM crisis with this suggestion :

“The PF government has the responsibilities of lowering the cost of doing business, not just for KCM, but for other mining companies and businesses as well, so as to enhance employment creation. For example, the PF should re-instate the fuel subsidy which was removed and is now a burden to our people and business sector. There are many other ways a responsible government can institute to lower the cost of doing business to save existing jobs and enhance employment creation…” (Source: UPND)

This is a rather poor suggestion for three reasons. First, the government is broke and cannot afford to reinstate the fuel subsidies. Can we please move the debate beyond subsidies? They are not coming back and rightly so!

Secondly, giving a fuel subsidy as a bribe to KCM is simply subsiding jobs. If we want to subsidise workers it may be better to give them money directly. But clearly that would be foolish because presumably the retrenched workers will get a severance packages. If they don’t get a severance package, then the real issue lies with our labour laws. Why don't we actually focus on getting our labour laws right?

Finally, lowering the cost of doing business should not be entertained if it comes with lower mining taxation. Everyone knows that taxation is the biggest constraint to doing business. Equally no right thinking Zambia would ever advocate for low mining taxations. In short, Zambians have to realise that not every job is worth saving. If the economics don't stuck up for KCM let them close and jobs be created everywhere. Have we not read Schumpeter?

The job of government is not to save jobs but to create conditions that allows the private sector to create new ones! Unemployment is part of the creative destruction process. Let the market decide what jobs we need and don’t need. Government's job is merely to create efficient and fair conditions. It is also wrong to ask poor people to subsidise jobs at KCM by reinstating other subsidies. It is merely cost shifting!

The problem in all this debate is a lack of appreciation of two issues. First, as VP Guy Scott has said before, it is not Vedanta’s job, or any company for that matter, to worry about employment levels in the country. It is a job for government.

Secondly, although mining generates significant revenues the transmission from growth in mining investment to jobs is not automatic because the sector is not labour-intensive. Relying on mining companies (even pressuring them) to create jobs is a wrong policy focus in my view. And this is the focus UPND wants to perpetuate here!

Jobs have to come from employment intensive sectors like agriculture and construction. The question we should be asking is what policies are needed to ensure these sectors become big drivers?

In terms of construction, not all construction is labour intensive. But one form of construction which will create jobs is housing : if Zambia's slums can be replaced by decent, low-cost homes it would create mass employment for young men. Housing is an asset that is relatively easy to collateralise: the homes for Britain's nineteenth century cities were financed by building societies.

A massive low cost housing driving can easily be funded by the banks and Government. Every Zambian can have a roof over their head by 2016. And unemployment would be massively reduced.

What we should ask from mining companies is simply taxes not jobs. Let us get the right money for our resources and use it to create employment. NAPSA has also been sitting on money which we should be using for this housing drive!

As far as agriculture is concerned we need to get the policy right by reviewing our agriculture policy. At present export restrictions and inadequate soft and hard infrastructure are preventing growth of this important sector.

We should also encourage more export led diversification and growth in tourism. That means we need to support a depreciation in the real exchange rate (the Kwacha needs to become weaker after accounting for relative price differences between Zambia and other countries).

Over the last decade the real exchange rate has appreciated leading to decline in agriculture's export competitiveness. Our politicians do not seem to understand the difference between real and nominal exchange rates.

Let us get away from this narrow and misguided debate and focus on the big question:

How do we create more jobs in Zambia?

AUTHOR

One of the most common complaints I get is that many Zambian graduates do not have access to jobs because the jobs are normally given to foreign expatriates. Many see the challenge of unemployment as being largely compounded by the presence of foreign experts doing jobs that can be competently executed by Zambian graduates.

There are three fundamental questions help us unpack this issue :

(1). Are Zambian graduates really not getting the jobs that they are equally competent to do, and may even be able to do at lower wages?

(2). If the answer to (1) is yes, is this a failure of the market, or is this effectively a failure of government?

(3). What is the appropriate way of addressing these market or government failures, assuming they exist?

Question 1 is essentially an empirical one, and one which Zambian economists have yet to address. There's no available robust evidence to verify whether Zambian graduates are losing out on jobs that they can actually do to foreign born experts. However, many people hold this belief - so it is probably safe to assume, in the absence of rigorous evidence, that on the balance of probabilities, the answer to Question 1 is "yes".

Question 2 is more complicated. Is the suggested lack of equal access to jobs between Zambian graduates and expatriates a failure of the market or government? I think most people would agree that if two people are equally qualified, they should have equal access to jobs. So either they are not equally qualified (a "no" under Question 1) or they are, and therefore something must be preventing the market from working effectively.

There are three potential market-related explanations why foreign experts may be displacing Zambian graduates. First, the market may place a premium on being foreign compared to being local. Secondly, the foreign employers could simply be practicing discrimination against Zambian graduates, either due to stereotyping or other things. Thirdly, the foreign investors’ preference for foreign expertise may simply reflect the incompleteness of information in the Zambian labour market, as it relates to how much foreign employers know about Zambian graduates relative to foreign expertise.

We can safely rule out the first two explanations based on premium and discrimination arguments. There are laws already that deal with discrimination - and no one is suggesting that government is not enforcing them. The other issue of there being a premium for being a foreigner, although interesting in itself does not essentially correspond to a failure of the market. If being non-Zambian means more exposure to other working practices relevant to the job at hand, it would simply imply that foreigners are more qualified and more competent than Zambians.

This just leaves us with the third explanation above based on “incomplete information”. Essentially, the argument is that foreign firms do not have all the information on Zambian graduates compared to foreign experts and therefore feel more uncertain about hiring Zambian graduates compared to foreign experts. Rather than going out and hiring a Zambian graduate with equal skills and is possibly much cheaper, employers probably feel more certain and more assured of the person from a similar background or nationality. Being a foreigner almost represents the non-identified positive characteristics that the foreign investor can't see in the average employee.

To some this explanation is the same as discrimination, but in the context of the market and the way markets operate it’s simply a feature of incomplete information between the employer and the prospective employee.

"Incomplete information" in any market is a "failure" because the incompleteness of information prevents the market from reaching an efficient solution. In our context, it is immediately obvious to see that if foreign firms had complete information about foreign and Zambian graduates they would probably make different hiring decisions. For one thing, they would almost certainly prefer cheaper labour, which would almost put Zambian graduates at an advantage over foreign expertise. This in turn would lead to cheaper firm costs and greater profits, leading to more investment and so on.

Instead what we essentially end up with is an inefficient scenario where a cheap Zambian graduate is rejected on the basis of incomplete information in preference to a more expensive foreign expert who the foreign investor feels more assured and certain about (due to common nationality and background). Information is therefore what is missing and what essentially needs to be rectified!

So what does this all mean for Government policy?

This is a tough question, but it is clear that central to any solution is the need for Government to ensure that information between foreign investors and Zambian graduates significantly improves. This could be through specific programmes addressing the issues raised in this post, but also through incentivising foreign employers to work harder at getting to know and understand Zambian graduates.

Some policies may include requiring employers to hold workshops at Universities, encourage partnerships between universities and employers, and to possibly consider imposing minimum thresholds on the number of local graduates interviewed for each position. These are more likely to be effective solutions, as they target the problem at hand which is basically incomplete information between the foreign investor and the Zambian graduate.

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