Zambia vs. Vedanta: Could the government be paving the way for a Chinese buyer?

Zambia vs. Vedanta: Could the government be paving the way for a Chinese buyer?

Story by Deutsche Welle

Zambia’s largest copper mining operation, KCM, has been liquidated. Many are asking now if the country could repossess private mining operations in a bid to shore up financing amid rising debt levels.

Zambia’s economic situation is getting dire. The Zambian Kwacha has fallen six percent against the US dollar this year alone. That makes it one of the world’s worst performing currencies. Last month, rating agency Moody’s downgraded the country’s credit worthiness to junk status. That means there’s a chance of Zambia defaulting on its debt — it owes around $10 billion (€8.88 billion) to foreign creditors, more than 40% of the country’s gross domestic product (GDP). The overall public debt is actually $15 billion — equivalent to 73% of GDP So the recent liquidation of the country’s largest copper mining operation, Konkola Copper Mines (KCM), is being viewed with suspicion. The government alleges that India-based Vedanta Resources, which owns a majority stake of around 80% in KCM, has violated its mining licence and owes money in unpaid taxes.

The insolvency proceedings that led to KCM’s liquidation were started by the state-owned ZCCM Investment Holdings, which only owns a minority stake of around 20% in the company. Vedanta had no lawyers present at the court hearing in which a judge decided to place KCM under the administration of a liquidator.

Miners feel the pinch

Zambia may be trying to shore up its finances. Last week, news agency Bloomberg reported that the government had lined up two potential buyers for KCM. A sale of the country’s largest mining operation “could potentially alleviate short-term debt financing problems that the government has,” says Nick Branson, a Senior Africa Analyst at Verisk Maplecroft. 

“I would say overall, this is all driven by financial consideration on the Zambian government side,” he told DW.

But that isn’t the only reason. Many locals feel they haven’t benefited from rising copper prices on the global market.  That’s why the government announced a sliding royalty tax regime for copper producers in the 2019 national budget. The tax is linked to the global price. That means miners pay more when the industry is performing well. The change was met with widespread criticism by investors and the industry.

“A stepped regime makes for sudden changes when prices cross thresholds, which can be quite unsettling to industry,” says Sokwani Chilembo, Zambia Chamber of Mines CEO.

According to him, mining companies had already been facing challenges. Vedanta says it has invested $3 billion in its Zambian subsidiary but the operation has not been making a profit in recent years. KCM runs one of the wettest copper mines in the world, and pumping water costs money. Power can also be a problem for miners, especially after a recent drought significantly reduced hydroelectric power output. 

With so many challenges, mining operations had been importing copper ore from neighboring Democratic Republic of Congo to supplement shortfalls in production. That allowed them to maximize the refinery and smelting capacities in which they had invested. But that business was basically wiped out when the government introduced an import duty on foreign copper ore, according to Chilembo.

“Very, very limited amounts have some through, and it accounts for quite a significant proportion of what was forecast for the growth,” he says.

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    Draw Parallels 2 weeks ago

    Zimbabwe, Venezuela here we come?
    Zambia’s public debt has increased significantly in recent years, and concerns over a possible crisis have lately attracted the attention of Western media. On September 3, a report by British business intelligence outlet Africa Confidential warned of escalating debt caused by allegedly unsustainable Chinese loans and claimed that Zesco, the state-owned national electricity company, has been in talks about a takeover by a Chinese company.
    The Zambian government refuted the allegations and denied the existence of plans for Zesco’s privatisation.
    The allegations coincided with increased Western concern over the expansion of Chinese loans to African countries. Two weeks after the UK froze its aid to Zambia following an investigation into large-scale corruption in a Social Cash Transfer programme it supported, other donors (Ireland, Finland and Sweden) did the same.
    In early August, 16 US senators, led by Trump loyalist David Perdue, sent a letter to the US Secretaries of Treasury and State, to warn against China’s use of “debt-trap diplomacy” to advance the Belt and Road Initiative and create a world economic order centred around the Asian superpower.
    The senators wrote that China pumps large loans for infrastructure projects into countries in Africa, Asia and Europe with the explicit purpose of leveraging the debt to influence national policies and gain control over strategic assets and resources. Their letter expressed concern over the role of the International Monetary Fund (IMF) in bailing out countries indebted to China and called for decisive action to stop the Chinese “hegemonic” project.
    Who are Zambia’s creditors?
    However, the reality of Zambia’s debt tells a different story: China is not the only major player. As the Economist magazine wrote in September, China probably holds a quarter to a third of Zambia’s external debt. In recent years, Zambia joined several other African countries in borrowing US dollars through large bond sales (known as eurobonds) on international markets controlled by Western institutions.
    The government issued three eurobonds between 2012 and 2015 for a total of $3bn – this does not include interest repayments, which keep going up due to sinking investor confidence. The yields on these bonds reached 17 percent last month. The first 10-year eurobond was issued in 2012 with a 5.6 percent yield.
    It is also true that Zambia has heavily borrowed from Chinese sources and critics point out that a large number of these loans might be unaccounted for in the government official figures. Either way, the government declared a staggering $9.4bn of external debt in June this year, or 34.7 percent of GDP, up from $1.9bn at the end of 2011, or 8.4 percent of GDP.
    But while the figures are worrying, it is irresponsible to pour fuel on the fire. A debt default would open up opportunities for vulture funds and international creditors to take over the country’s rich mineral and land resources and the few remaining parastatals that survived two decades of aggressive privatisation and public spending cuts imposed by the IMF and the World Bank from the 1980s to the mid-2000s.
    Health, education and other public services have already been decimated and the mining sector, previously under state control, is now for the most part in foreign hands – as are most sectors of the formal economy. Zambia is the 4th most unequal country in the world, and 74.3 percent of the population lives on less than $3.20 a day.
    It is a tragic irony that China is now being blamed by the West for allegedly doing exactly what the IMF has been doing for decades: providing unsustainable loans to countries in need to further plunge them into debt, weaken state capacity and open up national economies to international investors (primarily from Western countries). While China might be pursuing its own debt traps, they are certainly less experienced than the IMF when it comes to leveraging debt over heavily indebted countries.
    Chinese vs Western debt
    The real story here is not that Zambia is – once again – trapped by international creditors. Rather it is that the IMF and its Western allies are scared of losing their grip on Zambia and other African countries, threatened by the parallel economic system that China has built in recent years.

    China is understandably hiding details of its loans from IMF oversight and Zambia’s President Edgar Lungu and his entourage are now perceived as an open threat to Western hegemony due to their vocal support for Beijing. At the end of August, after protracted negotiations over a failed bailout, the IMF recalled its envoy from Zambia, Alfredo Baldini, apparently under pressure from government officials unhappy with his conduct.
    Lungu’s blatant mismanagement of public finances and his increasingly authoritarian tendencies show that his stance is far from principled and is driven by desperation. But Western criticism of the Zambian president is not well-intentioned either.
    The Western media has downplayed the fact that an eventual IMF bailout would come with hefty conditionalities, imposing further spending cuts and privatisations in an already downsized state. There is no evidence that suggests that an IMF programme would be better than a Chinese deal.
    It was the IMF and World Bank that pushed hard for the privatisation of the national electricity company in the 1990s and early 2000s. Zesco became a symbol of resistance in a country that was largely sold out to foreign investors and their local brokers in business and politics. The attempts at privatising the parastatal failed.
    In 2016, talks of privatisation resurfaced. In an interview with the authors, Ernest Chanda, editor of Zambian independent newspaper The Mast, pointed out that throughout 2016, rumours about Saudi Arabia’s interest in buying Zesco circulated in connection with Lungu’s state visit to the kingdom in May that year, and the announcement that Saudi Arabia offered to provide cheap oil to Zambia.
    This year, the signing of a memorandum of understanding on diplomatic and political consultations, and an agreement to export Zambian goats to Saudi Arabia made headlines in local news. The Saudi government is financing several projects in Zambia, including hospitals and roads. Western media have been largely silent about these developments. This is not surprising, given Saudi alignment with the US and UK administrations.
    We should be careful however not to replace one form of xenophobia – anti-Chinese sentiment – with another: Much debate about Saudi Arabia is accompanied by Islamophobic undertones. The truth is that fears about Saudi and Chinese presence in Zambia deflect from continued, but threatened, Western hegemony.
    In a world of depleted mineral resources, Western countries, especially resource-dependent Europe, need Zambia’s copper, uranium and cobalt – the latter is in high demand recently due to the booming electric vehicle industry. The West is also interested in the landlocked country’s strategic position at the heart of the African continent. Zambia has borders with eight countries and close ties with neighbouring conflict-ridden and resource-rich Democratic Republic of the Congo.
    The threat of debt default
    Hopefully, the current alarmism in the West will not cause the country to default. But if it does, the biggest losers will be the Zambian people. A default could trigger a chain reaction and bring down other African economies that borrowed heavily through eurobonds and are struggling with debt repayments.
    What Zambia needs is debt cancellation and a strong state that takes back control of strategic national resources such as mining and agricultural land, as used to be the case at the height of former President Kenneth Kaunda’s socialist rule from the late 1960s to the early 1980s. Thanks to his nationalisation policies, Kaunda was able to make significant progress on reverting Zambia’s colonial legacy and redistributing national wealth across society.
    With all the neoliberal rhetoric that has dominated Zambian politics in the past three decades, many Zambians look back with nostalgia at those years. However, neither President Lungu nor his main opponent Hichilema is willing or able to deliver wide-ranging redistributive reforms of the kind implemented by Kaunda. Zambians will have to search elsewhere if they hope to revert the trend.

  • comment-avatar
    samlindo 2 weeks ago

    I will not be surprised if the final new owners are CNMC the guys that own Luanshya mine because Luanshya Mine is actually owned by the Chinese government itself so it makes sense to conclude that should this happen it means these guys are just trying to debt swap and that comes as no surprise because it is PF we are dealing with.

  • comment-avatar
    Miles Mulenga 2 weeks ago

    Zambia owes more than $4 billion to China, and that does not include the debts to Chinese contractors which have not been paid, just the Chinese government. So if KCM is “sold” ro rhe Chinese, no money will change hands – the Chinese will just take possession of KCM and the $4 billion will change into $3 billion. Lungu Liar is making a real mess of the economy!