Cement

Zambia has experienced disrupting shortages of energy and cement during 2007 such that industry has had constant nightmares when it comes to business planning in the areas of continuity of production and cost of production irrespective of which sector one might want to consider. This across the board problem that manifests itself in the form of erratic electricity supply, or increased fuel prices, or shortage of cement, or increased cement prices plays havoc with all business plans and cash flows for most businesses.

ZESCO is attempting to stabilize the supply of adequate electricity by rehabilitating and upgrading various power stations in addition to embarking on the building of additional power stations at Itezhi-tezhi and Kafue Gorge Lower.

The issue of oil based fuels will continue plaguing us until INDENI oil refinery finds some serious investment and the world oil prices start to fall – an unlikely expectation for at least one more decade.

As for cement, we can actually do something about it.

At the moment the two major cement producers are based in Lusaka and Ndola. These two plants have been around for many years and have expanded only due to pressurized demand. Another small producer based in Lusaka probably outputs around 100 metric tons per day.

A huge opportunity exists for some new investment in the cement production sector. The mining industry is poised to grow exponentially in the next five to ten years. At the moment the existing mines are expanding their capacities and therefore require lots of cement to meet their construction needs. In addition, the new mining companies in the North Western Province and the Southern Province are going full throttle in building the mining infrastructure and will demand a huge amount of cement as they roll out. The growth in the economy is witnessing the building of new hotels, office blocks and housing estates in the strategic areas and the consumption of cement is escalating every day. Furthermore, the ZESCO program of expansion of our electricity production will demand vast amounts of cement as the different projects come on line. The two Economic Zones earmarked for Chambeshi on the Copperbelt and Chalala in Lusaka East will demand a lot of cement to see the intended construction work through. The indicators are there for all to see. A regional focus offers export opportunities for Zambian cement to South Africa where major construction of Stadia and transport systems are underway in preparation for the 2010 World Cup. Burundi, Congo DR, Tanzania, Angola and Mozambique are countries where economic development is on the increase and cement for construction will be required in large quantities.

This is the time for Zambian businesses to consider investing in this sector. This is the time for Zambia to attract foreign investment into this sector. This sector offers opportunities for Joint Ventures and other permutations such that Zambia can become the largest producer of cement in the region to supply the entire sub region covering SADC, COMESA, and the EAC.

The basic inputs for cement production are plentiful in Zambia. The technologies vary from small plants that produce 50 to 100 metric tons per day, to large installations that will produce as much as 2,000 metric tons per day. Cement production inputs include Limestone, Coal, Gypsum, and Clay. Zambia has vast reserves of these minerals and some strategic investment will render the cement industry self sufficient in raw materials.

Maamba Collieries is sitting on vast coal deposits that would both provide alternative fuel for the mining industry and other heat process manufacturing industries. Maamba Collieries can also provide much of the requirements for large scale cement production.

The current large investment in cement is expanding its production capacity to 2000 metric tons per day in an attempt to meet the growing demand. The fact is that there is, and will be, more than enough market for any new investor in this sector for some decades to come. The profile of the new investments in Zambia and the region that will require constant large volumes of cement, is that of businesses that are in for the long haul, and have chosen to put their investments in brick and mortar.

The current plans to regulate the number of registered sales outlets for cement is another restrictive and anti-development measure being considered between by the major cement producer and the Ministry of Commerce, Trade and Industry. The consequence of the shortage of supply of cement to the local market is seen in the high retail pricing of the commodity and a quickly developing black market. The stop gap solution may be to regulate the supply chain to the market, but experience tells us that as long as there is a buyer out there that is willing to pay more for the commodity, we can be sure that a black market price will prevail. The real problem is to address the shortage of supply. The existing producers should be persuaded to upgrade their production to meet the ever rising demand, and the Government through the Zambia Development Agency, should be going out full throttle to attract new investment and investors into the sector.

Several investments in cement production will benefit the cement consumer since broad and effective competition will be created, thereby developing a conservative pricing structure that will ensure a sustained and expanding local and regional market.

Published 18 December 2007

ZIM Yuan

‘Zim Yuan’ immediately reminds one of some Chinese name that may be a politician or a Kung Fu expert. It seems to fall in line with names such as Zhou Enlai, Deng Xiaoping, Jhao Ziyang, and Jiang Zemin, all names of former and successive Chinese national leaders.

In this case it is neither. It is the description of a currency that may be the ‘magic bullet’ for an economy that is convulsing and kicking before it finally dies. It may be compared to the blood transfusion that saves a terminal patient, the antibiotic to treat a ravaging epidemic, the rain which revives a dehydrated crop, or the air that is pumped into a polluted lake to supply oxygen to the suffocating fish.

Southern Africa is a sub region that has been dominated by predominantly European colonialisation since the 1600’s. Several Southern African economies have had to make bedfellows of the very people that they fought off for political independence. The post independence relationship between former master and former slave was that of economic and social development for the newly independent states. The basis for this continued and seemingly adjusted relationship between the independent states and their colonial masters may have been simply, ‘dealing with the devil that you know’. For many African countries the devils that we new back then have remained devils to this day and our people continue to struggle to scratch a living in their own ‘independent’ country.

If we were to put politicking aside and look at some options for a state that finds itself in a very difficult position in as far as relationships with their colonial masters and friends are concerned, what options does such an African state have when no developed country wants to dialogue with it? When the world monetary system descends on it with no mercy for its people and assists to introduce rampant inflation that multiplies every couple of weeks? When the freedom of movement of its people are checked and curtailed by aggressive immigration officers around the world? When the deck of cards is stacked against them to undermine any economic activity that will feed, clothe and educate the ordinary person? When its people can hardly trade their produce with the rest of the world because the physical product is reduced to a currency that is worthless? When schools, hospitals, roads, railways systems, and law and order are stressed by the sudden infusion of poverty in an otherwise very productive country?

Outside the arena of politics, what can such a country do to push ahead and climb out of this spiral downwards to disaster?

If this question were asked two decades ago, the simple answer would be ‘not much’ but to seek the political solution as demanded by the outside powers that be.

Today, there are some new options. An African country that works its way into such a tight scenario can consider taking a good and hard look at who is who on this planet for some possible strategic alliances.

Our history tells us that at the attainment of independence in the 1960’s, our newly introduced local currencies were pegged to the British Pound as that was the currency of most of the sub continent. A decade or so later the United States emerged as both the super power and economic giant of the world, so Africa scrambled to align our currencies to the US Dollar. Two decades later Japan came forward as the nation to watch as it held the world’s largest foreign reserves, but this achievement was not enough to attract other currencies to align to the Japanese Yen. The G7 Western countries assemble their Finance Ministers to fix international exchange rates and currencies presumably to suit their own economic needs, which leaves very little room for any single country to influence the monetary system. In this decade, we see China dominate as the world’s largest producer of manufactured goods, and holding the world’s largest foreign reserves that stands at almost double the amount that the Japanese have put aside. In addition, we see the BRIC’s team of Brazil, Russia, India and China get together and form an economic club of their own that may eventually displace the dominance of the G7 club.

Is there an option for an African state that wants to resurrect itself and break away from its hostile traditional partners in favour of strategically aligning itself with China? Can Chinese companies and state enterprises replace Western multinationals in African economies? Is there a case for the Bank of China to substitute the World Bank and IMF in providing development finance for social and economic infrastructure? Can African states opt to peg their currencies to the Chinese Yuan, or maybe, as the case has been for US Dollar and Pound Sterling, even use the Yuan in their economies, as a mechanism to provide currency stability and shield their domestic economies from foreign influenced currency devaluation? Any developed nation that would dare to devalue the Yuan would be committing economic suicide as their own economies would be invaded with cheaper Chinese imports.

Is it unthinkable for developing countries to think beyond their colonial boundaries? India, Indonesia, Thailand, and Malaysia all entered into strategic alliances with new non traditional partners and have today transformed their economies into vibrant and aggressive world players. The romantic notion, that our old friends will see us through thick and thin, needs to be re-evaluated. Where is the evidence? What have we achieved in the last half a century? Who really cares for our people except ourselves? The future lies in what is openly put on the table, and what agreements we can enter into that clearly shows what is in it for us, and what is in it for them.

Published 18 December 2007

Agreements

We have all no doubt read the contributions from the great Professor W J Baumol of New York University on issues related to privatization and development agreements.

We have also read comments from both the existing Minister of Finance and a previous Minister of Finance from the last administration on the same issues. Our compatriots spend much time and energy on claiming credit for successes or laying blame on each other instead of working together in national interest.

On the other hand, our anecdotal Professor prescribes some useful advice that is too little, too late, and well after the proverbial ‘horse has bolted.’

The Professor highlights that ‘Governments come under political pressure to renege on their promises once the benefits of privatization begin to be harvested’, but he forgets that many of our privatization programs were shoved down our throats by our co-operating partners namely; the World Bank, the IMF and the Western Donor Community. Very few Zambians were comfortable with the rush privatization program that our Government was forced to do in order to receive foreign support from the west. Today, at the expense of our people’s welfare, we are told that ‘they could not predict that copper prices would soar’ and that puts an end to the discussion. In the meantime, we pay the price for this indiscretion. The dissent is slowly surfacing as public pressure mounts on the Government to either re-negotiate the privatization terms and various agreements or renege on commitments as they were not in the best interests of the country.

The Professor cautions us when he states that ‘The danger is that these benefits may vanish.’ This scenario is not new to us as Zambia has had to bale out the mining industry many times before when times were tough much in the same way that it has done with the Development Agreements currently taking centre stage. The public understanding is that when business activity is difficult and the economy is sluggish, then the Government is called upon to make concessions to support the domestic industry. Conversely, when there is an economic boom, then Government is expected to collect more taxes to invest in the national infrastructure such as roads, communication, water and energy. The pendulum is expected to swing both ways.

The Professor argues that ‘The new price cap rules supposedly solve the problem by setting upper limit on price rather than profits so that a firm can increase profits by cutting costs.’ This scenario generally applies to industries or developments that have developmental impact such as roads, communications, energy and water. The Government therefore plays a much more instrumental role in these sectors than it would do in purely private sector investment where the sector is an economic end in itself. There are many permutations of how these special ‘catalyst effect’ sectors can be supported and facilitated as seen elsewhere in the world. Subsidies, soft loans, grants, guarantees, Private-Public-Partnership’s etc. are part of the support regime.

One cannot agree more with the Professor when he concludes that ‘The moral of this is that governments must be careful and conservative in what they promise…’ and ‘But once a promise is made it should be kept.’ The difficulty for Zambia is that many agreements were made under duress of some kind or another. This is characteristic even in the current relationships with our co-operating partners. Zambian Government officially will very seldom criticize or censure any of our colleagues on the other side, but our partners will waste not time in giving us a good tongue lashing when we are seen to step out of line.

The big question however, is what should we do about the current issue of the Mining Development Agreements?

We need to consider the effect of leaving the agreements as is – loss of tax revenues, energy revenues, mineral royalties, and so on, and weigh these against our ability to continue to grow the economy. We also need to consider the impact of the current agreements on how they attract expansion of existing investments and re-investment into the economy by the same companies enjoying the special incentives therein. Are substantially more jobs being generated for our people? We need to consider what our regulations are in respect to the export of copper and related products from the point of view of foreign exchange receipts and how these inflows affect our economy. Is all the forex accounted for in our banks because of the copper export boom? How is the current Mining industry supporting local businesses in the area of supply of goods and services? Is there more money available to lend out to the private sector because of the copper boom?

The Professor seems to have missed out on some of the issues above and therefore cannot truly appreciate Zambia’s predicament.

As a member of the global economy, it is very important for Zambia to be sincere in her dealings. To this end, we must respect our commitments and agreements to the letter. However, we must also recognize that the increased investments and operations in Mining subjects our roads and environment to high levels of damage and degradation. The cost of building a two lane paved road hovers at USD 1 million per kilometre and the water resources and air in the mining areas are being polluted with acid, effluents, noise, and other waste from the various operations.

The Government would be wise to focus on these areas by considering ‘Copper/Copper Ore Transportation’ road levies, ‘Pollution and Environment’ maintenance levies, and possibly introduce a ‘Copper/Copper Ore Shipment Protection’ levy that will ensure that theft in this industry is curbed to zero.

Levies are subject to annual review unlike develop agreements, and the levies can be adjusted on a need-to basis as the roads and environment require to be attended to in a bid to ensure that the Mining sector is supported with good infrastructure.

As Zambia develops her infrastructure as witnessed by the Zamtel Fibre Optic network currently being installed in Lusaka metropolitan area, our opportunities to attract investments both in the Mining sector and other sectors will be greatly enhanced such that in the near future our economy will be come more broadly based and we may never have to be forced to sign some unpalatable development agreements for the foreseeable future.

Published 4 December 2007