The extractive industry in Africa has a long and complex history. For better and for worse, the business of exporting of the continent’s minerals, fuels, and other natural resources is an inextricable component of many African economies – and continues to be a major driver of political events in the region.
Lately, it seems the news hasn’t been 100% positive. South Africa, a bellwether of African mining, is navigating major economic challenges, with GDP shrinking by -3.2% in the first quarter, representing the biggest drop since the global economic crisis ten years ago. For the past two years, Tanzania has been involved in a protracted and bitter dispute with Acacia Mining, with $300 million in back taxes in the balance. Nigeria, the continent’s largest economy, is again facing anemic growth forecasts and recently got hit with a staggering $9 billion arbitration claim in London by an oil and gas firm.
And now, there is Zambia, the continent’s second largest copper producer, which recently introduced a controversial new tax regime. In an extraordinary dispute with Konkola Copper Mines (KCM), a company controlled by Indian billionaire Anil Agarwal, the Zambian government named a provisional liquidator to run Vedanta Resources’ KCM business after accusing KCM of breaching its operating license, lying about planned expansions and cheating on tax payments. Agarwal subsequently criticized the Zambian government’s actions, and warned that mining investors were being scared out of Zambia.
To get a clearer sense of what the government is attempting to achieve with the sanctions against KCM and what to expect next, I recently chatted with the Honorable Richard Musukwa, Zambia’s Minister of Mines and Mineral Development. He tried to make sense of the KCM situation and explained to me why he is confidently optimistic about the future of Zambia’s copper mining industry in spite of the bad publicity.
Many seem quite worried about these recent developments in Zambia’s mining sector. Are you concerned that these events are being seen by some as a warning sign of further state interventions?
Zambia remains one of the top destinations across Africa for mining investment thanks to our country’s strong incentives, stability, peace and security, and rule of law. We have a clear and transparent mining code, and are committed to successful partnerships with foreign investors, where investors get a fair return on their investment. We’re heavily endowed with rich natural resources, while the explosive growth of electric cars has made Zambia a growing destination for investment in cobalt mining. The potential for expansion in this area is significant.
There are, however, a lot of misinformed opinions flying around out there, and we need to do a better job at communicating the facts and correcting the numerous misleading claims.
Firstly, in the matter of the liquidation of Konkola Copper Mines, people need to understand that this is a unique, isolated case. Unlike any other mining operator in our country’s history, the majority shareholder Vedanta Resources has repeatedly failed to abide by the provisions of Mines and Minerals Act, violated a series of agreements on investment, production, and employment, and, for the past five years, has been headlines over a number of management and environmental failures. This is not a government problem we are looking at, but a mining company problem, and we are taking the appropriate actions to address it.
Secondly, the Government of Zambia has no intention whatsoever of expanding its presence in the mining sector. The fact of the current situation is that we have a solvent liquidation, allowing mining operations to continue while the government seeks a credible investor to take over. We are currently seeking a new credible and law-abiding investor to take over and continue to successfully operate KCM in an open and transparent manner. Zambia’s mining industry will continue to be driven by the private sector, and foreign investors who abide by the law will find that they are protected and supported by a government that maintains a simple, flexible, and predictable fiscal regime with clear guarantees of security of tenure.
Can you be more specific? What exactly had gone wrong at KCM requiring the state to intervene?
To be clear, the government has at several instances attempted to engage with Vedanta including at the level of chairman, offering numerous opportunities for the company to redeem themselves from their violation of the Mines and Minerals Act. We must always remember that KCM was sold with conditions, and among those conditions was the requirement to operationalize the Konkola Deep Mining Project (KDMP). To date the project is behind by seven years, and clearly Vedanta has failed to mobilize the resources to recapitalize the operations. Another problem is that the Nchanga underground ore body remains unexploited, as well as the fact that Vedanta has failed to pay suppliers and contractors significant sums totaling millions of dollars.
At the time of the government’s intervention, KCM was found to be completely broke. The mineral audit commissioned by the government in 2013 revealed that Vedanta failed to raise the required $357 million external capital injection which had been promised in the development agreement. Instead, the company was applying internally generated profits toward other operational costs. So we are dealing with a company that has broken the law in Zambia, and we should hope to have support from the international community in our effort to enforce the law.
For these reasons and others, the intervention to liquidate Vendanta’s shareholding in KCM has been broadly supported by Zambian people across the political spectrum.
Some observers argue that the new tax regime in Zambia makes mining unprofitable and economically unfeasible. If this is true, how can the Government expect to collect more tax revenue when mining firms are losing money?
This claim is flatly false and an unfortunate example of the sort of misleading information which appears aimed at pressuring the government. We are also now very accustomed to being threatened as a response to taxes – it seems like the first page of the mining company playbook is to issue press releases promising layoffs, production cuts, and ultimately the bluff to walk away.
Here are the facts of what’s happening. Last year, the government passed new mining tax legislation that raised the sliding scale royalties rate for copper products by 1.5%, with a windfall tax of 10% when copper prices reach above US$7,500 per metric tonne. These adjusted rates, which went into effect earlier this year, are simply a continuation of what’s been a methodical, years-long effort to balance the concurrent needs for increased public revenue and foreign investment. The tax regime is designed to create attractive conditions for the expansion of production by the mining houses while at the same time achieving a fair share of the national mineral wealth for the Zambian people – revenue that is much needed to improve our schools, provide quality healthcare, build roads and fund basic infrastructure.
You may recall that only a few years ago in 2014, Zambia experimented with a 20% royalty rate, but it failed to increase revenue. Now, royalties are half that amount, and still lower than the royalties charged by many of the world’s other leading copper producers such as Chile, while other countries such as Democratic Republic of Congo have made decisions to triple their royalty rates (for cobalt). The criticism of Zambia’s tax regime as somehow “unfair” to operators is not an accurate nor honest appraisal given industry trends.
A lot of mining companies are quite vocal about their corporate social responsibility programmes. Do you believe these are real and effective solutions to potential community problems, or just PR window dressing?
We very much welcome operators who are willing to work with communities, but delivery of promises – as we saw with KCM – can be uneven. Corporate social responsibility can’t be the only thing – there also has to be good regulation.
Our government has long been committed to designing regulation that accounts for stakeholders’ concerns, real or imagined. In fact we’ve recently improved our ability to uphold our commitment to cooperative engagement by enhancing our financial modeling capabilities, as well as affording any affected firms the opportunity to share their proprietary data regarding the impacts of any forthcoming regulations. Moreover, government has demonstrated before its willingness to grant certain mining firms the preferential utility tariffs, certain tax exonerations, and favorable compliance conditions they need to remain profitable.
Regardless, I think it must be said that the first priority of the Zambian government is, and always will be, the people. Our copper and other mineral resources are non-renewable, and ensuring that Zambians share in the wealth their resources generate is a time-sensitive matter. It’s with this in mind that the government has adjusted its mineral tax and royalty rates, as well as instituted measures meant to keep multinational corporations accountable, and profitable.
Zambia was recently in the headlines for a court case brought by a large group of villagers against a mining firm that had allegedly polluted a river with waste from one of its sites. What is your ministry doing to ensure that mining operators have sustainable policies and practices?
This is a private legal matter that the state is not involved in, so I cannot comment with any authority beyond what is already known the media. The allegations are that under Vedanta’s management, the Nchanga Copper Mine allegedly significantly polluted the Kafue River, and all but destroyed the livelihoods of nearly two thousand Zambian villagers who depend on the waterway to irrigate their crops, cook their food and wash their belongings. This case is now going through the London courts and has cast a light on the alleged irresponsible operational record of Vedanta.
If the claims in that lawsuit are upheld in court, then it is clear that more needs to be done to protect Zambia’s environment from pollution caused by mining. To ensure that this such gross negligence does not happen again, the Ministry of Mines, in cooperation with the Ministry of Finance, is designing a series of new audits for all mines operating in Zambia. These will be randomly administered, holistic and comprehensive inspections of all mine operations. These will not only verify compliance with tax and royalty payments through evaluation of financial documents, but these will also determine whether mines are satisfying environmental regulations. The Ministry is prepared to conduct surveys and interviews, anonymously and at random, with “at-risk” stakeholders, similar to those who are currently seeking damages from Vedanta in the United Kingdom. Similar measures will be undertaken to improve labor conditions at mines, and decrease the number of workplace accidents and fatalities.
Other than seeking a replacement for Vedanta at KCM, what else is your ministry doing to incentivize greater foreign investment in the mining industry?
We are well aware that mining is a capital intensive, long-term activity which requires close cooperation with a reliable host government. Added all together, the costs of exploration, capital equipment, labor, legal compliance and other expenditures make risk very difficult to measure, especially when commodity prices sharply rise and fall in cycles.
However, it’s for precisely this reason that the Ministry of Mines and Mineral Development, in collaboration with the Ministry of Finance and other government bodies, is doing its best to be as transparent and responsive as possible with private sector operators in our mining sector. We feel that this will lessen the burden of compliance, as well as remove any perceptions of political risk to investment.
We also are regularly engaging in partnerships with international institutions to better equip our workforce with skills training and safety protocols, which provides additional added value for all mining firms operating in our country. We feel strongly that our most valuable resource is the Zambian people, and what our country can offer the world goes far beyond what is found beneath our feet.