Is Zambia defaulting to nationalisation?

First published by ISS Today

Is Zambian President Edgar Lungu going to drag his country back to Kenneth Kaunda’s disastrous post-independence experiment with nationalisation of the copper mines, simply by default? This is the suspicion sparked by his aggressive moves to evict the giant London-based mining company Vedanta Resources from its 80% ownership of Zambia’s largest mining enterprise, Konkola Copper Mines(KCM).

The state owns the remaining 20% of KCM through its majority share in the holding company Zambia Consolidated Copper Mines (ZCCM). Lungu has used that as his vehicle for trying to liquidate KCM and remove Vedanta, and so far he is succeeding.

A High Court judge last month appointed a provisional administrator tasked with selling off KCM’s assets. The judge refused Vedanta’s demand – despite its being the majority shareholder – to participate in the liquidation process. But she granted Vedanta leave to appeal so the case is still live.

Lungu accuses Vedanta of not paying due taxes. Vedanta, in turn, accuses the state of not issuing VAT refunds it is owed. The company also says it has not paid the levels of income tax the state demands because its business is unprofitable due to rising tax and electricity bills.

Beyond the economics, there is a suspicion that Lungu is playing the populist card in an effort to reverse the recent political losses of his governing Patriotic Front. Bashing mining companies seems to be good politics in Zambia. Though the facts about all of Vedanta’s alleged sins are unclear, there is a general public perception that it has committed some – including not paying mining supply companies and contracted workers, and polluting the environment.

While analysts differ about the merits of the case, there seems to be a broad consensus that Lungu is going about this in the wrong way. Peter Leon, a mining lawyer at Herbert Smith Freehills in Johannesburg, sees Lungu’s attack on Vedanta as part of a growing trend in African mining companies towards “resource nationalism”.

As in countries like Tanzania and the Democratic Republic of the Congo, Leon believes some African governments offer mining companies incentives to invest – with liberal legal frameworks and fiscal incentives. “Once investments are made (and capital sunk), the government may flex its legislative muscle to claim a greater share of the returns than the original laws or licence terms allowed,” he wrote in the Financial Times.

He noted that in 2017, the Zambia Revenue Authority initiated a mining industry tax audit, claiming it was losing US$3 billion annually through “illicit financial flows”, mostly in the mining sector. The tax authority slapped Canada’s First Quantum with a $7.9-billion bill, and later announced a series of fiscal reforms: a new 5% import duty on concentrates; increasing royalties by 1.5% and making them no longer tax-deductible; and replacing value-added tax with a non-refundable sales tax.

The latter is significant, as mining companies – including Vedanta – were owed $600-million in VAT refunds at the end of 2018. In January this year, the Zambia Revenue Authority declared it wouldn’t pay, claiming that its (unpublished) audit showed mining companies owed more than this in unpaid taxes, penalties and interest.

This about-turn by some mining countries could be because they were cash-strapped – or because they were suffering a deficit in political support, Leon told ISS Today. In Zambia’s case, it was both, he suggested, pointing to Lungu’s loss in a by-election in the Copper Belt in April and the country’s increasingly dire finances.

Leon noted that the country’s finances are extremely sensitive to the price of copper, accounting for 80% of export earnings in 2016, when copper’s price plumbed a 10-year low of US$4 800 a tonne, down from its 2010 peak of US$8 800. By the end of 2018 – after four consecutive years of sub-4% economic growth – the deficit had ballooned to 7.5% of GDP, and Zambia had accumulated over US$10 billion in external debt.

Although his narrative in the Financial Times was about “resource nationalism”, Leon told ISS Today that “this is a pretty blatant case of expropriation. There’s nothing subtle about it”. Expropriation, of course, traverses beyond resource nationalism into the realm of resource nationalisation, a subtle semantic shift but not-so-subtle politico-economic one.

Lungu was using a state company – ZCCM – to liquidate the subsidiary of a listed company, Vedanta, the country’s biggest copper producer, Leon said. As a lawyer, he was astonished about the High Court judge granting ZCCM, the minority shareholder in KCM, an “unprecedented” order to liquidate the company without allowing the majority shareholder a role in the process.

Lungu has told Bloomberg that Chinese, Russian, Turkish, Canadian and Indian companies are lining up to buy Vedanta’s stake. This prompted some analysts to speculate that Lungu is planning to give it to a Chinese company to offset Zambia’s debts to Beijing incurred in taking on large infrastructure loans.

Leon is sceptical, asking whether any foreign company would invest in Zambia after the way it has treated a major international mining company. For one thing, he believes any company planning to replace Vedanta will probably have to contend with legal challenges since Vedanta has threatened to resort to international arbitration.

Claude Kabemba, executive director of Southern Africa Resource Watch in Johannesburg, has a more sympathetic view. He is critical of the way Lungu has gone about tackling Vedanta, mainly because he says the president hasn’t shown any sign of having a coherent strategy. Except he says the Zambian government has indicated that it wants to “protect” KCM rather than break it up.

He believes Vedanta has not been a good investor, not only because of the accusations mentioned above but because it has not kept its promise to expand the extraction of KCM’s considerable copper reserves. He says Vedanta has limited itself to extracting accessible copper but hasn’t sunk new shafts.

He doubts that Zambia has the required expertise or finances, but suggests that it might not be a bad idea for the government to take control of KCM itself rather than selling off Vedanta’s share to another foreign investor. This would help it fulfil many of the natural resource goals propounded by African policy initiatives, but not implemented by foreign mining investors, such as beneficiation of natural resources and advancing local industry, Kabemba says.

That sounds rather like nationalisation, even if more by accident than design. Either way, is the Zambian government any more likely to make it work in 2019 than it did in the 1970s? DM

Peter Fabricius is an ISS Consultant