What is happening at Copperbelt Energy Corporation and Mopani Copper Mines?

Sun, 03 Sep 2017 11:37:40 +0000

Professor Mwiine Lubemba

(Not Paramount Chief Chitimukulu)

Some of you may already be aware of this, but if like me you’re not hearing about this for the first time your jaw would not drop. And it would probably raise the same BIG questions in your mind that it did in mine.

Incidentally, once you read this Sunday’s analysis you would no longer wonder why mine owners and managers are sometimes greeted by protesting workers when they decide to scale down their operations or to outsource foreign contractors for their operations in Zambia, even if the protests are about other issues.

Though what other issues could be more important than Mopani Copper Mines (MCM)’s decision to suspend its contracts with some local suppliers and service providers due to the Copperbelt Energy Corporation (CEC)’s refusal to resume full electricity supply to the mining firm I have no idea.

Nevertheless, let’s begin with the historical context that might have produced the electricity tariff standoff between MCM and CEC – the Development Agreements that in turn produced the Power Supply Agreements between CEC and the mining companies in Zambia.

 The sale of the ZCCM mines by the MMD regime under late President Frederick Chiluba was open but heavily supported and driven by the World Bank and the International Monetary Fund (IMF) with their investments wings even making buying shares in the mines.

The first consortium to approach the Zambia Privatisation Agency (ZPA) was the Kafue Consortium, composed of the Commonwealth Development Corporation – Noranda, Phelps and Anglo-Vaal Mining Ltd (USA) offering US$131 million in addition to an investment package of US$1.1 billion. Zambian president then late Frederick Chiluba refused, claiming ZCCM should not be ‘sold for a song’. After transferring the responsibility of privatisation to the former executive director of ZCCM (1973–91) Francis Kaunda, Anglo-American, present in Zambia since the early 1930s, emerged the winner and exercised the company’s pre-emptive rights by purchasing 65 per cent of the Konkola Copper Mines (KCM) – Zambia’s best untapped reserve – via Zambia Copper Investments (ZCI) reportedly at a cash price of US$90 million, with promised investment of just US$300 million.

Albeit, the details of the actual sales were shrouded in secrecy as the mines were protected by special legislation and agreements now infamously known as Development Agreements. Taking advantage of Zambia’s desperate attempts to secure credible buyers of the mines after the Kafue Consortium debacle, the World Bank supervised sale included a rigid structure that protected new mine owners.

The Development Agreements were formulated and brokered by the World Bank and were signed between the year 1997-2000 between the Zambian government and the new mine owners. These agreements had a legal status only comparable to our Constitution. Any amendments to the Agreements were barred for up to 20 years. These agreements if breached called for arbitration to be held at the United Nations through its trade organizations – they could not be amended or contradicted by future legislation until after the twenty years. How on earth did the Zambian government leaders agree to sign such agreements, which have now become an albatross around the necks of their citizens? And we wonder why MCM is not budging to ZESCO and CEC’s new electricity tariffs?

The Agreements exempted new mine owners from covering ZCCM liabilities. A social system of supporting schools, hospitals, roads, housing and sports immediately collapsed after transfer of the ZCCM assets. The services were transferred to the Local Authorities but without corresponding and supporting incomes. The Agreements allowed the new mine owners to literally abandon workers, communities and the local economies they operated in.

The Agreements also allowed new mine owners to abandon a pension scheme that their workers enjoyed and employed workers either on contractual, non-pensionable or temporal basis. This bred the casualisation of the labour force and where there was a well pensioned labour force was reduced to casual workers. Consequently, this reduced the quality of work and mine workers that had in the past, enjoyed an unprecedented good, secure and decent conditions of service found themselves holding down to the dangerous work without any safety net.

Incidentally, Glencore International AG, based in Baar, Switzerland (the world’s leading secrecy jurisdiction), controls over 50 per cent of the world’s global copper market. In Zambia, the company owns Mopani Copper Mines encompassing mining sites of Mufulira and Nkana, one of the main producers of copper and cobalt in Zambia. MCM, incorporated under Zambian law, is owned by the British Virgin Islands-based company called Carlisa Investments Corporations (73.1 per cent), which itself is owned by the Bermuda-based Glencore Finance Ltd (81.2 per cent), which is fully owned by Glencore Switzerland. First Quantum constitutes an owner alongside Glencore indirectly via Skyblue Enterprise Incorporated (18.8 per cent), 100 per cent owned by First Quantum Minerals Limited; the company also directly owns 16.9 per cent of MCM. The ZCCM-IH understandably, representing Zambian interests owns 10 per cent.

According to French advocacy attorneys Sherpa, in 2000 Mopani signed a Development Agreement with the Zambian government obtaining a royalty rate of 0.6 per cent, corporate tax of 25 per cent, exemptions on customs duty and a stability period of 20 years written as a legal clause. Mopani, however, like many others mining copper in Zambia, reports no profits and is therefore able to diminish taxes owed. In 2008, the ZRA contacted two Norwegian accounting firms (Grant Thornton and Econ Poyry) to conduct an audit on mining companies. MCM was amongst the mines. The report included in-depth analysis of documents made available as well as interviews with company executives in 2009.

By the way, the Agreements also exempted the new mine owners from paying many types of taxes and reduced such obligations as company tax and mineral royalties. They also allowed losses made in a bad year to be carried forward and deducted from the year of profit – in 2011 five savvy non-government organisations filed a complaint to the Organisation for Economic Co-operation and Development (OECD) against a subsidiary of Glencore over allegations that a mine it owns in Zambia may not be paying enough tax on its profits.

The cause for the complaint lay in the financial and accounting manipulations performed by the two companies’ subsidiary, Mopani Copper Mines Plc (MCM), to evade taxation in Zambia. A draft Grant Thornton report alleged that tax avoidance by Glencore in Zambia cost the Zambian Government hundreds of millions of dollars in lost revenue. The avoidance was alleged to have been facilitated through mechanisms such as transfer pricing and inflated costs at Glencore’s Mopani Copper Mine. The Mopani mines are controlled through the British Virgin Islands, a recognised tax haven. As expected, Glencore and its own auditor, Deloitte, vehemently rejected these allegations.

In sharp contrast however, comparative analysis revealed that Mopani’s costs were much higher than those of comparable mining companies operating in Zambia. Mopani’s operating costs in 2007 stood at $804.91 million, a full $381.21 million higher than the auditing team’s previsions. No single factor appeared capable of justifying such a discrepancy, since Mopani’s activities had gone on normally between 2005 and 2007, without significant change or development. Production didn’t go up, and actually remained relatively steady.

Besides, the Agreements also exempted mine owners from adhering to certain laws especially those regarding the Environment and Pollution. Since mining creates devastating adverse consequences to the environment in their places of operation and the pollution produced through its smelters, concentrators is adverse to the environment and causes respiratory sicknesses, the damage was left to government and sickness liabilities and responsibilities could not be met by the mines during the period covered by the Agreements. The Zambian government was left with toxic leach dumps, heaps and dams for management.

Although the mines were expected to file Environment Management Plans with the Zambia Environmental Management Agency (ZEMA), its policing capacity and ability to enforce regulations to such a sector treated with political sacredness is absent – albeit, according to officials at ZEMA who believe pollution from Glencore’s Mopani mine was causing acid rain and health problems in an area where close to 2 million people live. The upgrade of the Mopani Mines acid plant in Mufulira was completed in March 2014 eliminating 97 per cent of sulphur dioxide emissions a.k.a. Senta in line with the recommended international standards by the World Health Organisation (WHO).

The subsequent passing of the Investment Act and the Mining and Minerals Act reduced state control and regulations in the sector. The new laws gave huge incentives and concessions to the new mine owners allowing them to import mining and explorary machinery and equipment tax-free. This importation was categorized as investment and the mines were allowed to reduce income tax returns. The new owners were also allowed to deduct interests of their loans from their tax returns.

The business sector that provided a viable support industry to the mines collapsed with the new owners abandoning local suppliers and manufacturers and opting for foreign ones or affiliate companies. Pleas from government to new mine owners to give business to local suppliers and manufacturing firms and to take some on board fell on deaf ears with the new owners totally ignoring the pleas from government authorities. That said, it is unfortunate that at the moment, MCM has suspended its contracts with some local suppliers and local service providers due to the CEC’s refusal to resume full electricity supply to the mining firm.

Although certain amendments to the law especially those related to exploration had earlier brought fresh investments such as the US$1billion injected in the Greenfield Lumwana Mine, and capital investments in mining equipment had made production to jump from 250,000 tonnes of copper in 1990 to the projected 800,000 tonnes in 2010, benefits to the country remained a trickle and arguably elusive.

Even though, the sector was expected to produce copper exports of up to US$4.2billion from US$1.9billion in the 1990s, some new mine owners such as Vedanta who signed the Development Agreements later enjoyed more preferential treatment and robbed the country of required and realistic benefits from its prized wealth. With the current copper prices on the world market of US$7,000 per tonne of copper, Zambia provides the best and extremely favourable investment climate for the mine owners while the country reaps trickle benefits and its citizens, local mine suppliers, indigenous mine workers and the environment bear the brunt of this one sided policy arrangement that has proven short of a criminal rip off.

It is equally known that the MCM’s animosity against ZESCO and CEC’s revised electricity tariffs is due, primarily, to Glencore’s interests in upholding the Development Agreement and the Power Supply Agreement arrangement that obliges the local utility companies to put on hold any amendments to the Agreements for up to 20 years. By all accounts, Zambia badly needs political leaders who would disband such exploitative and neo-colonialist instruments as the Development Agreement and the Power Supply Agreement in the mining sector.