BY ADAM ROBERT GREEN
“It’s difficult to do ratings on countries. It’s a matter of judgement, much more than just picking up all the stories going round.”
Zambia’s abundant resources are flowing out to Asia and Europe, but the population remains mired in poverty. Although classified as ‘lower middle income’, around 60 percent of Zambians live below the poverty line. Life expectancy at birth is just 48, below the average for Africa.
When Zambia’s new president Michael Sata came to power in September 2011, he promised to deliver jobs and ensure the country’s natural resources – and especially its copper – catalysed development. Two actors were in the dock: tax-avoiding mining companies, and the Chinese. The government has a strategy for both, according to vice president Guy Scott.
While some civil society groups call for Zambia to increase the royalty rate, the government is more concerned about cracking down on tax avoidance. “We are not too interested in changing the mining royalties formula,” Mr Scott says. “The formula is quite advantageous to us. It takes [six] percent of gross value, which is a percentage even if they are making a loss. Then there is a variable profits tax, indirect taxation on the workforce, and so on. Our concerns are that we are not getting accurate reporting by the mine.”
Mr Scott is referring to companies’ mis-reporting production and profit to minimise the share of their taxable revenue. This process of transfer pricing – mischievous and illegal – enables multinational companies to drain taxable profit from subsidiaries by manipulating the costs of intra-company trade. Mr Scott is concerned at how the running costs of mines have shot up in step with the price even though “price rises are driven not by cost but by demand, particularly Chinese demand, Indian demand. Yet the costs seem to be following them up.” Because only profits are taxed, inflating the costs of production is the means through which transfer pricing takes place.
“We are not making allegations. We are just being cautious. Some of these guys have got form. They are wanted by revenue authorities in other countries as well. They didn’t just spring freshly from the ground. They have a history, and we would not like them to be writing any more history in Zambia, in terms of tax evasion.”
Mr Scott rejects major policy shifts such as indigenisation, tried – and often failing – in nearby South Africa and Zimbabwe. “We have no interest in indigenisation, or in anything that would resemble an indigenisation policy,” he says. Ensuring full taxes are paid would be a sufficient achievement, allowing wealth to be distributed around the country, “to build schools and create jobs”.
The ratings agency Fitch downgraded its forecast for Zambia early this year, citing suspicions that whimsical mining reform was afoot. This decision hinged in particular on the government’s choice to de-privatise the sale of Zamtel to Muammar Gaddafi’s holding fund. Standard & Poor’s also took note of a potential rise in Zambia’s risk profile due to pre-election rhetoric, but decided not to adjust the rating. Mr Scott feels there was little justification for either agency’s concerns.
“If a newspaper wants to write a feature on Zambia, they tend to send a young guy so he learns the ropes. It’s fair enough. On the other hand, when Fitch send a 25 year old out there, it’s potentially more damaging to get the balance wrong. It’s difficult to do ratings on countries. It’s a matter of judgement, more than just picking up all the stories going round. A minister says something, and suddenly it becomes a big thing. The trick is to actually assess the weight of different factors, and there is a tendency to go out and come back with more interesting stories than there really are.”
Mr Scott rejects the idea his government is contemplating major re-entry into the economy, harking back to the 1990s, when around 80 percent of economic activity was controlled by the state. “Zambia outdid the Soviet Union in subsidies and all the rest of it. We don’t want to go back to that,” he says.
Investors are also worried about policy inconsistency. Recent changes to the minimum wage were passed with little advance notice, and in July a rule rendered the kwacha the sole legal tender, hampering investors’ ability to make long-term plans.
Ratings agencies have also been concerned at the rhetoric of president Michael Sata, once a cleaner in London’s Victoria station, and today perhaps one of Africa’s most incendiary and aggressive leaders, and one of the few heads of state still supporting Zimbabwe’s Robert Mugabe. During previous electoral campaigns, Mr Sata ran on an anti-China platform, speaking in vitriolic terms about Asian “infestors”. Relations were particularly strained as a result of poor labour conditions in Chinese mines.
In the run-up to September 2011 elections, however, his tone mellowed – partly because the Chinese kept their Zambian mines running while Western companies, leveraged by their home banks, pulled out after the financial crisis. Yet Beijing was clearly concerned at the tenor of the campaigning incomer. Rumours even circulated that the Chinese were funding or tacitly supporting the incumbent government.
Given that Sata’s Patriotic Front won, have dealings with China changed? “Relations are fine,” chuckles Mr Scott. “The Chinese are very pragmatic. They had an ambassador who was campaigning for the previous party last year. He was making an unashamed bid to align China with them. We beat them anyway, and the ambassador was promptly withdrawn and replaced by another one, who sang a different song.”
While Zambia’s mines can spur growth through tax revenue, they cannot meet the country’s enormous employment shortfall. Only 64 percent of the population is economically active, let alone in full and formal employment, and mining will not solve that. “It is costing an awful lot of investment to create one job in the mining sector,” says Mr Scott. In one case it was calculated to cost $400,000 to create a single job, when dividing investment by labour force.
“You use these enormous machines in open cast mining to tear the rock out of the hole and stick it in a lorry to take it away, 100 tonnes at a time. It is very automated. Some of it is even run by GPS and all you’ve got is some chap sitting there, reading a comic book, to press the red button should something go awry.”
The government is now looking to agriculture and tourism as key development sectors, where “a few thousand dollars” of investment can create a job. But the government also wants to unleash greater economic dynamism in an undiversified economy, held back primarily by the inability of many Zambian entrepreneurs to access financing.
“The existence of a real entrepreneurial class in Zambia is questionable,” says Mr Scott. “No-one can be a capitalist here. The interest rates [around 25 percent] are too high. The only capitalists are the ones who borrow money outside the country and bring it in. We are at war with the banks to try and get it down.”
Greater opportunities for Zambian entrepreneurs may help stem the creeping xenophobia experienced here, as in other countries. During a recent pay protest, a Chinese manager was killed by Zambian miners. Malawi recently banned Chinese traders from its streets. In Ghana, over 80 small-scale Chinese miners have been killed since 2005. Underlying these aggressions – by pen and by gun – is a sense of disempowerment, as disgruntled and unemployed locals resent the loss of what few economic opportunities exist in the country.