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