MAC/20: Mines and Communities

Undermining Zambia's development

Published by MAC on 2007-11-05


Undermining Zambia's development

5th November 2007

A major examination of the degree to which Zambian mining companies are failing to sustain the national economy, including their workforces, was published last week by Scottish Catholic International Aid Fund (SCIAF),Christian Aid, and Action for Southern Africa (ACTSA).

At the centre of the criticisms and concerns is UK-based Vedanta Resources plc, the biggest mining outfit operating in Zambia.

Release of the report was rapidly followed by a statement from Zambia's World Bank country manager, urging that the government should not only increase mineral royalties-related taxes, but also consider introducing windfall taxes.


VEDANTA UNDERMINING DEVELOPMENT IN ZAMBIA?

Press Release, London

29th October 2007

Vedanta Resources-owned copper mining firm, Konkola Copper Mines (KCM), is selling Zambia short whilst generating huge profits from the country's finite natural resource, according to evidence in a report published today. It calls on Vedanta's management and major UK shareholders to use their 'corporate social responsibility' credentials to rectify the situation during current contract renegotiations with the Zambian government.

The joint report,"Undermining Development? Copper Mining in Zambia", by three international development organisations SCIAF, Christian Aid, and ACTSA, examines the record of KCM, Zambia's largest copper producer.

KCM is majority-owned by Vedanta Resources - a UK-based FTSE 100 company backed by household names such as Standard Life, HBOS, and Barclays. The report explains that KCM is 'short changing' Zambia with royalty fees of just 0.6 per cent instead of the 5 to 10 per cent industry average in developing countries. Whilst legal, this rate of royalty implies that, in 2006/07, the Zambian government would have received mineral royalties of only US$6.1 million from KCM, while company extracted copper ore worth over US$1 billion.

Zambia's copper generates 75 per cent of the country's foreign export earnings but the government is not receiving its fair share of the income generated at a time when life expectancy in the country is 37 years, one in three children do not go to school, and 68per cent of the population live in extreme poverty. Last year KCM made a net profit of US$310 million which is more than Zambia spent on healthcare. If the country continues to receive such a raw deal, it is likely to remain the ninth poorest country in the world according to UN rankings.

The international development charities organisations are calling on Vedanta, during the current contract re-negotiations to pay 30 per cent of profits in income tax (up from 25 per cent); pay mineral royalties of at least 3 per cent, up from the current 0.6 per cent; pay the Zambian government a larger share of the difference between the actual copper price and the trigger copper price in the price participation scheme.

According to the Zambian Finance Minister at the time, the government was put under considerable pressure from the World Bank, IMF and other donors to privatise its copper mining industry in the 1990s; privatisation was a condition for debt relief. This contributed to the Zambian government having a much weakened bargaining position when entering into negotiations with the private mining companies.

SCIAF Policy Analyst Abi Dymond states that whilst private investors in developing countries are there to make a profit and do provide social benefits such as employment, Zambia is not receiving a fair proportion of the money raised by its copper resources at a time when the country urgently needs funds to lift its population out of absolute poverty.

Dymond said, "It is vital that Zambia is given a fairer share of the profits from its main natural resource to help combat crippling poverty in the country. SCIAF, Christian Aid, and ACTSA are now calling for Vedanta management and UK investors to use their influence to make sure Zambia gets a fairer deal. Evidence suggests that Zambia is drowning in poverty whilst a rich mining company is running away with its greatest natural resource."

Joyce Nonde, President of the Federation of Free Trade Unions of Zambia (FFTUZ) said, "we endorse this report and are encouraged by the international pressure being applied on the company and the support for Zambian Civil Society calls for improved development agreements, labour rights and environmental protection. It is time that companies operating in Zambia started paying fair taxes and mineral royalties and commit to assist the development of our country rather than undermine it."

ACTSA Campaigns Officer, Simon Chase said, "Corporate accountability and social responsibility in the Copperbelt are being badly neglected as the evidence shows in the report. Zambian people are suffering at the hands of companies like Vedanta and this is their opportunity to implement real and positive change."

The report also focuses on the KCM's employment practices which have been described as 'draconian' with some sub-contracted skilled labourers claiming they are paid as little as £37 per month when it is estimated that the average Zambian family needs at least £151 a month to meet their basic needs. Concerns are also highlighted over the pollution arising from KCM's activities, and its effect on local communities. According to the Environmental Council of Zambia cited in the report, the 'grossly negligent' behaviour of 'KCM management' resulted in rivers used by local communities for drinking water being 'significantly polluted'.

The report also calls on the government to make amendments to the Companies Act 2006 to ensure that UK businesses are held to account for the social and environmental impact of their activities in vulnerable developing countries.

The full report and executive summary can be downloaded from:

<http://www.actsa.org/>

<http://www.sciaf.org.uk/>

Notes to editors

1. The Scottish Catholic International Aid Fund (SCIAF) is Scotland's leading international development charity. It works in 23 countries world-wide to provide emergency and development aid as well as campaigning for fair trade, debt relief, more and better aid, and to stop climate change. SCIAF supports poor people regardless of race, creed or religion.

2. Christian Aid works in some of the world's poorest communities in nearly 50 countries. It works where the need is greatest, regardless of religion, helping people to tackle the problems they face and build the life they deserve. At home and overseas, Christian Aid campaigns to change the structures that keep people poor, challenging inequality and injustice.

3. ACTSA is Action for Southern Africa (ACTSA) is the successor organisation to the Anti-Apartheid Movement. ACTSA campaigns with the people of southern Africa as they strive to build a better future, working for peace, democracy and development across the region

Media contacts:

SCIAF: Val Morgan Tel: +44 (0) 141 354 5555 / Mobile: +44 (0) 7914 408 589

Email: vmorgan@sciaf.org.uk

ACTSA: Simon Chase Tel: +44 (0) 20 3263 2001/ Mobile +44 (0) 7809 396 128

Email: Simon.Chase@actsa.org

Christian Aid: Judith Melby Tel: +44 (0) 207 523 2408 / Mobile: +44 (0) 7720 467 679

Email: JMelby@christianaid.org

FFTUZ :Joyce Nonde Tel: +260 1 231364 / +260 1 222105

Email: zufiaw@zamnet.zm


Zambia does the work. But who makes the money?

JACKIE KEMP, The Herald, Scotland

29th October 2007

The price of copper is exploding, and money is pouring in to an impoverished African nation. That should be good news for the people of Zambia. Except they're barely seeing any of it - and sometimes it's even going to shareholders in the UK.

It is claimed that less than one penny in every pound is going to the impoverished Zambian government, whose health and education programmes are collapsing for lack of resources. One-third of children do not get even basic schooling, and hospitals have to make do with paracetamol tablets for pain relief.

The "outrageous" situation is attacked in a hard-hitting report by the Scottish Catholic International Aid Fund (SCIAF), released today, which says the Zambian government was blackmailed into privatising its nationalised copper industry by the IMF and the World Bank, who threatened to withhold debt relief and other aid, eight years ago.

Then the weakened government signed away most of the rights to its own minerals. Instead of the average 5%-10% mineral royalty rate most developing countries receive, Zambia's Mines and Minerals Act specified 3%. Even then, many mining firms - including the largest, Konkola Copper Mining (KCM), which is majority-owned by the British firm Vedanta - managed to negotiate a rate of just 0.6%.

Although the company extracted copper worth more than $1bn last year, and made three-quarters of the country's foreign export earnings, it was obliged to pay only $6m to the government. Indeed, SCIAF believes the real amount paid might be as little as half that. The company refuses to release the figures.

SCIAF argues that the responsibility for change lies with Scottish-based firms such as Standard Life, HBOS and Alliance Trust, which invest in Vedanta, and with the UK government and the UN, which should impose a heavier burden of regulation on multinationals.

The Zambian government's hands are tied by contracts signed by the previous administration, which mean it cannot levy a windfall tax of the kind Gordon Brown imposed on the North Sea oil industry when the price of oil increased dramatically.

The Sciaf report also says KCM has secured opt-outs from environmental legislation and is allowed to emit more than 25 times the internationally recognised safe levels of sulphur dioxide under Zambian law.

It has not been prosecuted despite claims that it was responsible for polluting rivers including the Kafue, which sustains one of the world's greatest wildlife habitats and is a major tributary of the Zambezi. Some villagers told the SCIAF investigators that, after their water source became polluted, making them ill with vomiting and diarrhoea, the firm drilled boreholes for them. But SCIAF quotes them as saying: "The boreholes are crowded, there are long queues which can take three hours or more, and we can't use water from the boreholes to water our crops."

This causes huge problems for the farming community. They are also concerned about their health as the pollutants are believed to have contained elements that can cause long-term heart and lung problems, and liver and kidney damage. But Zambia's laws mean the government has little power to do anything other than warn any suspected firm that a violation has taken place.

While the conditions for direct employees of KCM are adequate, many workers are employed by contractors. Some of them told SCIAF they were made to work seven days a week, were not paid for overtime, and were charged for health care and absence, earning on average a quarter of the basic living wage of $150 a month.

Zambia is now one of the poorest 10 countries on the globe, with a life expectancy of just 37, and the life chances of a baby born there today are worse than for one born in a Victorian slum in Britain. The majority of people struggle to live on less than $1 a day; the basic global poverty line is considered to be about $5 a day. One-fifth of the population is living with HIV.

Just a generation ago, things were looking up for Zambia. It was being compared to Brazil and other expanding economies. It was a middle-income country, one of the most prosperous in Africa, sitting pretty on top of a vast mineral resource - copper.

Then there was a slump and the bottom fell out of the copper market. At this point, paying pensions and wages to the vast army of copper workers employed by the nationalised industry was costing the government money. Edith Nawakwi, the finance minister at the time, told SCIAF about the pressure the government was put under in 1999 to privatise. "We were told by advisers, who included the IMF and the World Bank, that not in my lifetime would the price of copper change Zambian copper could not make a profit. Conversely, if we privatised we would be able to access debt relief, and this was a huge carrot in front of us - like waving medicine in front of a dying woman. We had no option."

But the advisers were wrong. A few years later, a manufacturing boom in China and a worldwide surge in demand for electrical goods led to the price of copper trebling. It is now almost £8000 a tonne. UK shareholders and pensioners are reaping the rewards while Zambians struggle.

Abi Dymond, SCIAF policy analyst and principal author of the report, says: "It's outrageous that the people of Zambia are living in crippling poverty while mining companies like Vedanta and KCM are making huge profits from the country's greatest natural resource. At a time when the Zambian government desperately needs cash to pay for its five-year National Development Plan to alleviate poverty, it is a disgrace that profits are not being adequately shared with the host country.

"The miners and sub-contracted workers are in a desperate situation, with many not able to meet their basic needs despite huge profits being made by the companies and investors. Even if a company makes an effort with its own employees, they do not ensure that subcontractors meet the same standards. Many thousands live in abject poverty while the company bosses and investors get rich.

"It is vital that Zambia is given a fairer share of the profits from its main natural resource to help combat crippling poverty in the country. SCIAF, Christian Aid and ACTSA Action for Southern Africa are now calling for Vedanta/KCM management and UK investors to use their influence to make sure Zambia gets a fairer deal. This is a great opportunity for the big UK-based investors to put their much-vaunted corporate social responsibility policies into practice, and we look forward to their support.

"Evidence suggests that Zambia is drowning in poverty while a rich mining company is running away with its greatest natural resource. KCM and its UK investors such as Standard Life and HBOS might have fine words to say on corporate social responsibility on their websites, but our report shows that on the ground there's a lot of work to be done."

There is limited scope, Dymond adds, for the Zambian government to change the situation.

President Levy Mwanawasa, who won a second term in September 2006, has been praised by western investors for being pro-business. His efforts to attract foreign investors have boosted economic growth to 5%, and his cooperation with the IMF and the World Bank has resulted in major debt relief being offered, cutting the debt to $502m million from an estimated $7.2bn in June 2005.

"The president and the government have to be very careful," says Dymond. "They want to negotiate with the company. They don't want to change the law on their own.

"But there is a lot of anger and resentment from the people in the copper belt, who see these huge sums being made by the mining companies. They are aware of what has happened to the price of copper. It is a political issue and we think the company would be better advised to deal with it now than to let it fester."

Edith Nawakwi, now an opposition MP, says in the report: "The international community must assist us you cannot live in opulence while others live in poverty. Truly we Zambians deserve more. We are not asking for a revolution, we are simply asking for a fair share."

Martin Wight, of Edinburgh-based ethical investment managers Ethical Futures, said investors who were concerned about these issues should look for ethical funds. "The corporate social responsibility stuff that some big firms put out can be a bit of a smokescreen. Only ethical funds are screened. But ethical investment can play a role - it is called engagement. Mining can be ethical, but what you do is you go and visit the company and mark them on various criteria such as how they treat their workers and their environmental record. If they pass, often their shares will be in higher demand and their share price will go up. Companies that pass the test tend to do better in the long run."

A spokesman for Vedanta said: "Vedanta is a major investor in KCM, which is Zambia's largest corporation and generates a large proportion of the country's income. It has invested in the business and its expansion is creating jobs and wealth."

Vedanta pointed out in a reply to SCIAF that only one-third of KCM employees were contract[ed]. It also said almost no dividends had been paid to shareholders in recent years, with money being reinvested in developing deep- mining techniques, and accused the SCIAF report of being "misleading" by failing to make clear that the Zambian government has a 20% share of the business. It also said that KCM spent $13m a year on corporate social resposibility projects, that it had made "substantial investments" in improving environmental performance and that, since the Kafue leak, had done "everything in its power to help the local communities".

An spokesman for Alliance Trust said: "In evaluating investments, our managers review whether that company's operations could result in any damaging social or environmental impact, this being one aspect that could affect the quality of the investment. This is a continual process of research and review, and we welcome any new information which supports this process."

A spokesman for HBOS said: "We own a fraction of 1% of Vedanta. We will read the SCIAF report and look at its findings."

Standard Life, which owns 5%, said: "We have only just received the report and therefore we are not currently in a position to give a considered response."

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Zambia's new bid to cash in on copper

It has the raw material, so why doesn't it have the wealth? Nick Mathiason reports from Africa

The Observer

28th October 2007

Last week, Anshell Chibuye took a day off work as a turbine operator in one of the largest copper mines in the world - Zambia's Konkola - to bury his 20-year-old nephew, who had died of malaria. 'My nephew went to hospital too late,' the 40-year-old explains quietly.

In Chamboli, his shanty compound near the border with Congo, 10,000 people are crammed into breezeblock bungalows and mud huts. There, Chibuye, a father of three, also brings up two other children whose parents died of HIV/Aids - a disease affecting well over 1 million of Zambia's population of 11 million. Chibuye is better off than most. In one of the world's poorest countries, where half are unemployed and the average life expectancy is 38, his wife also has a job, as a teacher. Their combined incomes place them above the poverty line.

Chibuye believes education, healthcare and roads have deteriorated in the last decade. He is not alone. Church and union leaders, opposition politicians and aid agencies all point to Zambia's central question: why is this once middle-income country so poor, when it is so rich - £2bn worth extracted from its mines last year - in copper?

Copper is used in everything from electrical wiring, phone and internet lines to computers and cars, and since Zambia's copper mines were privatised at the insistence of the International Monetary Fund and World Bank, the metal has quadrupled in value to about £4,000 per tonne.

The answer to the Zambian question boils down to the terms of that privatisation, in which Rothschild and law firm Clifford Chance played the leading role as advisers, seven years ago.

On behalf of the Zambian government, the London-based firms parcelled the mines and smelters, which were then losing £500,000 a week after years of underinvestment and low commodity prices, into seven entities. The government holds a tiny stake, which it has used as collateral on new loans. Zambia's mines are now owned by the likes of Canada's First Quantum Minerals, Glencore International, the firm founded by controversial American commodity trader Marc Rich, and Vedanta Resources, the UK-quoted mining firm run by Indian billionaire Anil Agarwal.

Last year the Zambian government, led by newly re-elected President Levy Mwanawasa, admitted that the royalties it received from copper represented just 0.6 per cent of sales - little more than £12m against £2bn of copper turnover. That royalty percentage is considered by academics and government officials to be the lowest any country has agreed to.

'We say "we sold the mines but the mining companies forgot to pay us",' joked a senior government official in Zambia's capital, Lusaka, last week. But the last fortnight has seen a development which is being closely watched by other African governments and mining executives in boardrooms across the world.

Stung by being virtually wiped out in Zambia's Copperbelt region in last year's elections, Mwanawasa has forced mining firms to the renegotiation table. On the agenda are moves to raise the royalty rate fivefold to 3 per cent and to increase corporation tax on mining firms from 25 to 30 per cent. Even that increase will leave mining outfits paying less than £100m a year because of generous capital allowances, whereas Zambia's hard-pressed personal taxpayers contribute four times as much: £280m.

Government insiders say mining firms have 'no legal obligation to sit with us; all we're using is moral persuasion'. But unless a new deal is signed, officials admit that one of history's biggest commodity booms will pass Zambia by, and with it the chance to improve the lives of its people.

Just how Zambia signed up to the original privatisation agreement remains, after seven years, something of a mystery. The contracts, which ran to over 20 bulky volumes, were never presented to parliament. At the time the country was run by disgraced former President Frederick Chiluba. Earlier this year, Chiluba, who is now gravely ill, was convicted in a London court of siphoning off tens of millions of pounds. Civil servants allege that MPs received advances on expenses as the vote came to a head, and there is widespread suspicion that government officials benefited greatly from the sale.

Others point the finger at the World Bank and its advisers. Professor John Lungu, a respected academic at Zambia's Copperbelt University, says the World Bank told the government that some of the mines to be sold had just seven years of life in them. Yet the very same mines are still fully functioning and scheduled to operate for at least another 15 years.

'How could so much investment go in with seven years' worth of copper left? It baffles the mind,' Lungu said.

This week a report by Christian Aid will focus on the need to create a new tax framework for Zambia's mineral resources. It will say: 'Pressure must be brought to bear on all parties - from the Zambian government to the mining companies - to ensure that the renegotiation is as successful as possible and that any funds generated are used transparently to the benefit of the population.'

Zambia is a peaceful country, not riven by tribal rivalries. Yet there is now a tangible resentment at the arrival of Chinese workers on the back of copper production agreements between the two countries. Of course, the real root of anger is Zambia's inescapable poverty set against the mining firms' huge profits.

'People are angry,' said Chibuye. 'It shouldn't be taken for granted that [the stability] will stay like this forever. I'm sure one day we will react.'


Mining industry awaits decision on royalties in Zambia

The Southern African

22nd October 2007

An anticipated hike in mineral royalties from 0,6% to 3%, and corporate tax , from 25% to 30%, has not been effected in Zambia as no agreement between the government and the foreign mining firms has been reached.

A few months ago, Zambian President, Levy Mwanawasa indicated he would invite mining executives to his residence to discuss government plans to raise the royalties and the corporate tax.

The rationale to raise the taxes is that the high output of particularly copper and cobalt metals and the corresponding high prices they fetch on the world market earn the foreign companies substantial profits yet they remit very little to the government.

Mwanawasa also has to answer to an electorate that forced a second ballot in the last election when opposition leader, Michael Sata received more votes when he promised to hike mineral royalties.

On the other hand, although it now denies it, the World Bank - seeking to share its budget support burden with the private sector - pushed the government to hike the taxes.

Sources in both the government and the mining industry indicate that no formal meeting has been held yet but informal consultations have been held between Mwanawasa's government and executives of major copper producers like First Quantum Minerals, Equinox Minerals, Vedanta Resources and Glencore International AG.

The sources say there is a general understanding of the need to increase the royalties and the corporate tax, but it might not be as high as the respective 3% and 30% the government wishes for.

Companies are touting their corporate social responsibilities plus the value added tax, personal income tax for workers and land tax to municipal councils as part of their payback for their mineral rights.

It is almost certain that mineral royalties and the corporate tax will be hiked somewhat, but the timing is not certain since no substantial negotiations have taken place yet. A sure bet is that President Mwanawasa will want to have these increased before the next election.


World Bank says Zambia needs to raise mining taxes

Reuters

1st November 2007

The World Bank said on Thursday Zambia should raise mineral royalties paid by foreign mining firms and even introduce windfall taxes if feasible to gain more benefit from higher global metals prices.

New World Bank country manager for Zambia, Kapil Kapoor, said the mineral-rich southern African country should take advantage of higher metal prices and raise taxes so that its citizens could profit from the good prices.

Last month Zambia's finance minister Ng'andu Magande said the government had engaged a team of foreign consultants to help it renegotiate mineral royalties and taxes with foreign miners.

"Given that commodities prices have gone up, Zambia needs to get high benefits from the increased prices," Kapoor told journalists.

"Zambia needs to raise the taxes, whether it is withholding tax or windfall tax because this is not unique to Zambia and it's up to the government to decide what taxes it wants to raise (and) we really support that," Kapoor said.

Kapoor said the country required revenue to spend in social sectors and one way of achieving this would be through revenue raised from the mining taxes.

Zambia's government has previously said it wanted to raise mineral royalties to 3 percent from 0.6 percent and corporate tax rates to 35 percent from 25 percent.

The country previously scrapped a 15 percent withholding tax to allow mining companies some financial stability after they made huge capital investments in the country, which depends upon mining for much of its foreign earnings.

Key foreign investors in Zambia's mining sector include Canada's First Quantum Minerals, Australia's Equinox Minerals, London-listed Vedanta Resources and Swiss firm Glencore International AG.

Although copper mining is the economic lifeblood of Zambia, some analysts argue the country does not reap enough benefit because the mines are owned by foreign companies.

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