What is happening to Konkola Copper Mines?

When President Levy Mwanawasa announced on 21st August 2003, that a London listed Indian Company Vedanta Resources had bought Konkola Copper Mines (KCM), there was genuine relief to the country that a disaster was averted…… until the details emerged later.

Following the General Elections of 2001, KCM major shareholders, Anglo America Corporation (AAC) pulled out of KCM reducing its shareholding from 65% to 28%. AAC minority shareholding was held by a Zambian registered firm – Zambia Copper Investments. World Bank’s International Finance Corporation (IFC) and British Commonwealth Development Corporation (CDC) also pulled out their 15% shareholding.

The coordinated pull out was a disaster. The KCM assets reverted to the State. Fears gripped the nation that production at the largest copper company in Zambia would halt.

In 2003; Vedanta Mining Resources were announced as new owners after buying 51% shares of KCM at what clearly was a knock down price of US$25million.

Although the shares were valued at USD650million (as valuated by Rothschild and Clifford Chance), the low world copper prices at the time were blamed for the low purchase price. Vedanta also won the right of first refusal for the share options held by ZCI.

But within three months, Vedanta announced profits of USD26million and informed its shareholders that the company had raked in incomes of over USD100m in the short period. Vedanta also announced that the company would proceed to develop the Konkola Deep Mining Project (KDMP) at a cost of US$600million. Vedanta also projected that they would expand the Nchanga Smelter at a cost US$92million.

In April 2008, Anglo America sold its 28% shares in KCM to Vedanta. The shares held by Zambia Copper investments (ZCI) were sold for US$231million! Vedanta now owned KCM to the tune of 76% with ZCCCM-IH holding down the residue shares on behalf of government.

Following the death of Mwanawasa, it has emerged that this sale was not a naturally bungled affair but a secret and deep scandal.

How could government sell KCM shares worth US$650million for US$25million? The value of these shares could be augmented by Vedanta’s own willingness to buy Anglo American Corporation shares held by Zambia Copper Investments – shares of 28.4% bought for US$231million?

Vedanta proceeded to recoup their investments in KCM within three months!

The protestations from Opposition parties, industry experts, commentators and other citizens were roundly ignored and as things are in Zambia, the matter died a natural death and the corrupt atmosphere surrounding the sale cleared. Or did it?

Those that orchestrated the giving away of Zambia’s major assets to Vedanta are also fingered as part beneficial owners of the entity. A former Finance Minister, a Former First Lady,  and local Indian businessman who once owned a bank  have secret shares in KCM.

KCM former Resident Director, Deb Bandyopadhyay who left Zambia a few years ago for India but still maintains a Zambian (ZAIN), constantly handles the trio’s affairs.

More is being revealed due to KCM’s own poor labour practices and the marginalization of local suppliers.

THE MINING SECTOR IN ZAMBIA

Zambia is blessed to have one of the largest copper ore deposits in the World. Since the first copper mine was opened in 1928 at Roan Antelope in Luanshya, copper has proved to be the mineral wealth for Zambia and has supported the economic and social development of Zambia.

At independence in 1964 the mines in Zambia were owned by two private companies; Roan Selection Trust and the Anglo-American Corporation. By 1969, Zambia was classified as a middle income country with rapid urban and industrial developments. It had one of the highest GDP higher than Egypt, Brazil, Malaysia, South Korea and Kenya.

However the independence ambitions and promises forced first President Kenneth Kaunda to nationalize the entire mining sector. At this stage the two companies refused to give more to the national treasury choosing to rely on an unfavourable royalty system claiming that any other method would dissuade investment in the sector.

Following the successful constitution amendments in 1968 which removed protection among other things the two mining firms, Kaunda nationalized the companies. All rights of ownership of minerals (up to 51%) as well as exclusive prospecting and mining licenses reverted to the State. The two companies were later merged in 1982 to form a conglomerate, the Zambia Consolidated Copper Mines (ZCCM).

However the sector experienced steep decline following the oil crisis of 1974 and 1979. And since ZCCM was treated as a cash cow for government, the years of neglect boomeranged with production falling from 750,000 tons a year to 250,000 tons a year and massive urgent capital investments required to replace plant and machinery.

During its boom years, ZCCM employed up-to 45,000 pensionable workers and its paternalistic policy made the company provide for free or subsidized health, education, housing, water, electricity and other many social amenities to them.

The mines also provided for other social services social such as roads and refuse collections.

However, by 1989, the mining sector had almost collapsed and Zambia’s economy was in tatters. Zambia was now among the poorest countries in the World with a burdened debt of USD7billion.

SELLING THE CROWN JEWEL

Privatization was a recommended central policy feature in the new liberalization policy. The country was advised by the International Monetary Fund (IMF) and World Bank to sell all the 280 parastatals.

However, caution was to be practiced when it came to prized possessions such as ZCCM, ZAMTEL, ZESCO, ZANACO and others and were placed in the last tranches for privatization.

However the sorry state of assets like ZCCM with reduced and inefficient production due to poor plant and equipment required they be sold earlier than planned.

In 1993, a study commissioned by the World Bank and conducted by a Germany consultancy firm, Kienbaum Development Services (Gmbh) recommended that ZCCM be unbundled and be sold in five separate units.

Despite the protestations from the British who wanted the ZCCM to be sold to as a single unit to Kafue Consortium, Second President, Frederick Chiluba heeded to the professional advice and unbundled ZCCM.

The mine was broken down and sold to as follows:

  1. The Nkana mine and assets were packaged with the Mufulira Mine and concentrating and treating assets to form one of the largest copper mine unit in Mopani Copper Mines. (Glencore and First Quantum).
  2. The assets at Nchanga, Konkola and Nampundwe formed the largest copper mine unit and became Konkola Copper Mines (bought  by Anglo, IFC, CDC and later bought by Vedanta)
  3. The mines at Baluba, Luanshya, the concentrator and Mulyashi Green Fields formed Luanshya Mines or Roan Antelope Corporation of Zambia (RAMCOZ) (Binani and later to J&W Enya)
  4. The smelter at Chambishi, the acid and cobalt plants, the Nkana slag dumps formed a company Chambishi Metals (Non-Ferrous Metals Co.).
  5. An acid plant and the Kansanshi copper deposit in Solwezi were put together to form Bwana Mkubwa Mines ( First Quantum)
  6. The mine at Kalulushi was sold as a firm called Chibuluma Mines (Meteorex)

DEVELOPMENT AGREEMENTS

The sale of the mines 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.

But the details of the actual sales were shrouded in secrecy as the Mines were protected by special legislation and agreements now famously 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 now included a rigid structure that protected new mine owners.

The two institutions advised government that in order to make it an attractive investor’s destination Zambia had to create new legislations for the mining sector and further relax laws or exclude enforcement to the new mine owners.

The Development Agreements were formulated and brokered by the World Bank and were signed between the year 1997- 2000 between government and the new mine owners.

These agreements had a legal status only comparable to our Constitution. Any amendments to the Agreements are barred for up to 20 years. These agreements if breached call for arbitration to be held at the United Nations through its trade organisations! They cannot be amended or contradicted by future legislation until after the twenty years.

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 have allowed the new owners to literally abandon workers, communities and the local economies they operate in.

The agreements also allowed new mine owners to abandon a pension system that their workers enjoyed and now employed workers either on contractual, non-pensionable or temporal basis. This has bred the casualisation of the labour force and where there was a well pensioned labour force was reduced to casual workers.

This has reduced the quality of work and mine workers that have in the past, enjoyed an unprecedented good, secure and decent conditions of services now  find themselves holding down to this dangerous work without any safety net.

The Agreements also exempted the new owners from paying many types of taxes and reduced such obligations as company tax (35% to 25%) and mineral royalties (from 3% to 0.6%). They also allowed losses made in bad year to be carried forward and deducted from the year of profit!

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 is now left to government and sickness liabilities and responsibilities cannot be met by the mines during the period covered by the Agreements. Government is left with toxic leach dumps, heaps and dams to government for management.

Although the mines are expected to file Environment Management Plans with the Environment Council of Zambia (ECZ), its policing capacity and ability to enforce regulations to such a sector treated with political sacredness is absent.

The passing of the Investment Act and the Mining and Minerals Act reduced state control and regulation on the sector. The new laws gave huge incentives and concessions to the new mine owners allowing them to import mining and exploratory machinery and equipment tax-free. This importation is categorized as investment and the mines are 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 has collapsed with 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 has fallen on deaf ears with the new owners totally ignoring the pleas.

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

The sector is expected to produce copper exports of up-to US$4.2 billion from the US$1.9billion in the 1990s. Some new mine owners such as Vedanta who signed the Development Agreements later enjoyed more preferential treatments and robs the country of required and realistic benefits from its prized wealth. With the current copper prices on the market, Zambia provides the best and extremely favourable investment climate for the mine owners while proving to be the country reaps trickle benefits while its citizens, mine suppliers, mine workers and the environment bear the brunt of this one sided policy which proves short of a criminal rip-off.

WHAT’S HAPPENING AT KCM?

Vedanta Resources owns Konkola Copper mines to the tune of 76% shareholding. Vedanta is an Indian company and listed on the London Stock Exchange.

Vedanta has now expended with mining ventures outside India. Its ventures include copper, aluminum and lead in Zambia, Tasmania and Australia. It is now listed on the London Stock Exchange and FTSE 100 index.

Vedanta is owned by Anil Agarwal and his family who runs most of his operations in India. His ventures are mired in controversy and constant industrial unrests for his blatant disregard of safe labour practices, damage on the local environment, unsafe mining operations and human rights abuses. Vedanta has been criticized regularly by Human Rights Watch, Amnesty international and Survival International for these abuses.

It is facing litigation for its subsidiary AGRC in Armenia for violating tax regulations and for regularly submitting incorrect data on its production to manipulate royalty and tax payments. AGRC has been fined US$50million in penalties and fines.

In February 2010, the Church of England withdrew its investments in Vedanta accusing the company of maltreating local communities and disregard of human rights. The Church accused Vedanta of exploitative methods used in its new investments across the world.

Other organizations such as Joseph Rowntree Charitable Trust, Marlborough Ethical Fund, the Millfield House Foundations and the BP Pension Fund have pulled out citing the company’s disregard for human rights, poor labour practices and unsafe mining methods.

In Zambia, Vedanta has chosen to import labourers and casual workers from India when they are only required to bring in expatriate staff in specialized fields.

Although ZCCM trained a cadre of engineers and miners, Vedanta has ignored this well trained human resource and contracts Indian firms to bring in engineers, technicians, and electricians from India at a huge cost.

These Indian firms are also contracted to bring in helpers and semi-skilled workers.

It also pays varying amounts to Zambian contractors as compared to the Indian and other foreign firms contracted for the same goods and services.

The tragedy with KCM as run by Vedanta and a few other mining firms is that almost the entire workforce is “outsourced” to contractors whose duty it is to hire miners and other support staff.

This immediately compromises safety and the mining methods used, promote impossible production targets only met by use of unsafe mining methods. This also promotes selfish benefits to accrue to the contractors at the expense of workers’ health, safety and legal labour practices. It has also brought serious problems for Unions that are now representing workers who have no security of tenure and are subcontracted by private firms.

Mine owners argue that to remain competitive, they have to be allowed to employ from across the world.

The contractors especially the Zambian contractors are not paid in time and the contracts are not priced differently from those of Indian firms.

The local communities and the local economies on the Copperbelt has been driven to extinction as the support industry in manufacturing and supply firms that employed a considerable number of people and the new mining houses such as Vedanta are exacerbating this by failing to uphold their end of the bargains.

There are also constant allegations that Zambian firms that support the Opposition are given considerable contracts and are paid promptly.

CONCLUSION

Government should immediately review the entire regime governing the mining sector and to avert the boiling social crisis and despondency that has engulfed the Copperbelt. This will also allow realistic financial benefits to accrue to the country and its citizens. The country should be allowed to collect a credible share of revenue from this wealth. Government has a duty to protect the rights of workers, to provide social service to local communities, and to be an effective regulator in order to protect the environment.

The constant argument that the mines have provided employment is not enough as the billion of US$ raked annually can help with this fragile economy.

Although we have secured a good investment climate, but this appears to have been done at the expense of fundamental issues such as labour, safety, health and the environment. Privatization of the mines was expected bring benefits to the economy, create jobs and offer business opportunities to local suppliers and therefore if these basic needs are not met, it portends a serious social and political crisis against government.

Although privatization of the mines has rescued the imminent collapse of the industry, it has however spawned social collapse, casualisation of labour and has brought a manufacturing sector that supported the mining sector to extinction.

The Development Agreements are valid up to the years 2017-2023. This is unacceptable whatever the arguments. A fresh review should be done that will bring financial benefits to Zambia while securing minimum interests for the mine owners.  For example the blatant casualisation of labour including specialized staff can’t wait till 2023?

Recently Chambishi Metals was refusing to pay K9.8billion on accrued rates to the local authorities. This is unacceptable. The mining frims are privilidged to be in Zambia which has enjoys peace and stability and a favourable business environment. The fears and sensitivities surrounding this sector are unfounded and a genuine and beneficial conversation should take place. The mineral wealth Zambia has is for the people of Zambia and therefore the largest benefits should go to them.

The mining industry has recorded tremendous growth in the last eight years and the firms have responsibility as their investments in the purchase and capital equipment have been recouped. The Chinese and Indian firms in the mining sector are proving to be the worst culprits at industrial malpractices and government has a bound duty to bring this to an end.

Lumwana has departed from this unsafe practices and has provided credible investment bringing to life a new mine. Lumwana employs its miners on a secure and pensionable basis a practice abandoned by KCM. Lumwana has built a new township – Lumwana Township. The company is running a 20 year historical mortgage facility to enable workers retire with these houses. The company also provides health and education facilities operating a social scheme similar to ZCCM’s cradle to death policy where workers welfare is integrated and is central in the company’s social policy and operations.

KCM is instead exploiting the weak laws and relying on the Development Agreements to maximize their profits at the expense of labour, safety and the environment issues.

More so, government should investigate the corrupt transfer of shares of KCM to Vedanta Resources at a ridiculous price of US$25million, money the firm makes in a week. It has become apparent that the sale forms part of the worst financial scandal in the history of this country.

Government is unusually sensitive when it comes to malpractice in the corporate sector fearing that any unwarranted investigation would bring down its own investment climate promoted over the years. But this investigation cannot be unwarranted, especially that shadowy beneficiaries continue to accuse President Rupiah Banda of corruption and continue to use this stolen wealth in activities that are intended to push him out office.

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