Energy Red Card

Zambia continues to struggle with a self made energy crisis as a result of poor planning and investment, exacerbated by the global economic recession and the rising cost of crude oil.

In addition, the rainy season is upon us and the demand for energy, both in the form of oil based fuels and electricity, will increase exponentially in both the productive sectors as well as the average domestic households.

Lusaka is characterised by long queues at petrol stations as the fuel shortage continues, and during the 24 hour day most households and major industry experiences power outages. This has now become normal to us, until we are reminded about the abnormality in a developing country by outside visitors, who question whether the situation is acceptable.

Indeni Oil Refinery is gasping to stay operational as the private investor pulls out and Government assumes 100 percent control of the plant. Problems of plant maintenance and the non availability of specific refining requisites have crept up and one only expects to hear more challenges emerging as the saga unravels. The basic situation is that there is no fuel coming out of Indeni and the country has to rely on imports of finished fuels from South Africa and other sources. The queues which we were told would be temporary are fast becoming a normal feature of the country’s status. There seems to be no solution in sight.

Electricity is an ongoing challenge as fire guts part of the Kariba North Bank power station which now requires at least 6 months to rehabilitate and upgrade. The Zambia Electricity Supply Corporation (ZESCO) is now faced with additional costs of repairs, and the replacement of transformers and sub stations where the supply units have been damaged due to overloading and other disasters that affect the electricity supply industry.

The energy crisis is not unique to Zambia. South Africa and Uganda are grappling with similar problems. In Uganda, the Government has stepped in to resolve problems with the Umeme private distribution project which included addressing the high tariff systems and issues with the billing system that have pointed towards fraud. The South African trade unions have risen up to challenge the Government for allowing the tariffs for electricity to be increased by 45 percent every year for the next three years. Industry and private sector experts have argued that a 45 percent tariff increase would cause price spirals upwards for almost all commodities and services. In addition, mining smelters would shut down, and inflation would be pushed up by 2 percent. Mining operations costs would go up by 15 percent of which electricity costs would account for 25 percent of total running costs. This could be the way Zambia will go too.

Electricity deficits result in selective supply strategies which naturally impacts greatest on the common man. Households suffer the most as high density residential areas are the worst hit while low density urban areas will usually enjoy relatively consistent supply of electricity.

Zambia’s energy crisis demands some new and innovative thinking in respect to current management of the resources, and committed investments in the short term and long term development of energy sources. This is not happening in any meaningful way. There are no partnerships between ZESCO and the local television and radio stations to manage electricity more prudently and to engage the consumer in the exercise. We have no concrete plans for developing new electricity generating resources but see value in supporting intermediary distributors that will only add to the cost of energy, and probably develop similar problems as those experienced in Uganda, at Umeme.

We may be better off taking a lesson from Angola, where foreign investors have been invited to exploit oil resources on condition that all the roads and railway systems be re-built as part of the deal. Rwanda is working on a similar program to engage investors in a more developmental partnership than to just focus on energy production taxes.

Now the World Bank and their bunch of experts have added to the energy debate by making recommendations that do not take into account the vision of the country, nor the requirements on the ground to facilitate economic activity that is the engine for private sector growth. The only useful comment coming from the World Bank is that infrastructure growth which includes the supply of electricity, will support an increase in Gross Domestic Product.

World Bank comparisons of Zambia’s electricity tariffs with those of Chad is ridiculous. Zambia has 40 percent of the region’s water while Chad has very little water resources. Water and electricity should be Zambia’s comparative advantage. We do not see Saudi Arabia comparing the price of diesel with Zambia. We do not see the port of Durban comparing sea shipping costs with Zambia’s airfreight costs.

It is nonsense for a World Bank expert to note that Zambians who have access to electricity do not have problems paying for the commodity, but at the same time the experts acknowledge that very few people in Zambia do have access to electricity. Does it not occur to our foreign experts that the benchmark cannot be the minority ‘well to do’s’, it must be the majority ‘have nots’.

Zambia should be striving to electrify almost all industries in the nation. Electricity is a commodity that Zambia produces and can produce more of. Electricity can run all our industries, households, mining activities, and even mass transport railway systems.

Electricity and oil based fuels are development inputs and this is acknowledged all over the world. The United Kingdom, the United States of America and all of Europe run the electricity sector through Government and quasi Government institutions. Some Pseudo private ownership is sometimes noted as private sector investments in the energy sector. Examples are, British Energy in which over 90 percent ownership is camouflaged in seemingly private ownership which cannot be traced. All USA nuclear power stations have Government oversight seemingly to cover public safety (radiation monitoring and waste disposal) but it is well known fact that the Government will finance any developmental costs in the public interest. Where does the World Bank and other misguided experts get the notion that electricity can be a privately run utility in a developing country where low cost energy is the pre-requisite for development?

It is time to pull out the Energy Red Card. Red card to the World Bank! Red card to the Minister of Energy and his team! Red card to the misguided perception that energy is just another business! Zambia is held to ransom when fuel and electricity are not available at a cost that will facilitate and support development.

Published 24 November 2009

Holding Hands

As Government has joint hands amongst the various ministries to change the 2010 budget cycle so that programs can be streamlined over the 12 month fiscal year, regional groupings get together to negotiate various partnership agreements, and the World Trade Organization is poised to enter yet another round of trade negotiations that impact every country on the planet.

The private sector is yet to make the same alliances and rally numbers and muscle to present a united front to Government on various issues affecting the development of private enterprise.

The efforts of the Zambia Association of Chambers of Commerce and Industry and the Zambia Business Forum to adequately harness the various private sector interests and make the appropriate representations to Government and other development partners, has not yielded the desired results.

Manufacturers have a representative body that champions the cause for manufacturing and endeavours to promote domestic production of goods and services. The cries from manufacturing companies are continuous as they jostle for support and facilitation to expand the country’s manufacturing base with the goal of not only supplying the domestic market, but to also export to the region and beyond.

Much as manufacturing is an important development activity as outlined in the Fifth National Development Plan, the plight of manufacturers is not responded to with the urgency that is required. The threat to manufacturing posed by the COMESA Customs Union and other Economic Partnership Agreements is not adequately registered in the minds of Zambians. Manufacturers need to hold hands with other sectors of the economy to make their case for domestic manufacturing across the country and even in the new Economic Zones being promoted by Government.

The Construction sub sector is currently experiencing a relative boom with growth rates recorded of 10 percent during 2009. This sub sector is closely related to manufacturing as it is dependent on cement, sand, stones, steel, and timber amongst other requisites.

Construction will only continue to register growth if the cost of construction material can be kept low enough to render the sub sector cost effective. In addition, opportunities for construction work for Zambian companies should be encouraged and supported through pro active threshold project levels, joint ventures, and mechanisms for procurement of plant and machinery.

The work of the National Construction Council may be commendable, but an option exists for the sub sector to hold hands with other players in the economy to ensure that construction is supported through different mechanisms such as manufacturing.

The Transport sector has witnessed a rapid growth in the last two decades. Buses and trucks have dotted the highways across the country as they ferry passengers and goods to every corner of the country. Inner city transport is still an unresolved challenge as mini bus routes force commuters to travel to the city centre hub before branching out to another suburb. Very few options exist for commuters to travel across the city from one neighbourhood to another. This travel paradigm makes commuting costly and time wasting.

The transport sector has an option to hold hands with other sectors to develop a more commuter friendly routing system, to resuscitate the Njanji Commuter railway system, and to collaborate on building new stations at strategic places within our various cities.

The future of our intercity railway network is yet to be determined. Holding hands to collectively find a way forward in the railway sub sector is the country’s greatest challenge.

Agriculture has always been the focus of Zambia’s food security program. Crop production annually requires adequate supplies of seed and fertilizer. Irrigation systems support farmers to grow crops all year round. Challenges for livestock development and fisheries have yet to be addressed. The global debate on Genetically Modified Organisms (GMO) in the agriculture sector is still ongoing.

The Agriculture sector needs to hold hands with the manufacturers and the transporters to develop a sustainable agriculture support system. The banking sector and the various proponents in the GMO debate must hold hands with the Agriculture sector to find solutions to the annual problems of insufficient financing and quality of harvests.

The Mining sector has done reasonably well on its own with strong Government support. New mines are emerging and old mines are being recapitalized. However, the mining industry is not adequately integrating with the wider economy to transfer the benefits of mining to other economic activities.

There is need for the mining sector to hold hands with the manufacturing sector and other sectors to form strong and sustainable alliances that benefit all sectors and consequently develop a stronger and more diversified economy.

Tourism is challenging Zambia as the 2010 World Cup prepares to roll out after the first quarter of the year. Tourism development demands the full cooperation and support of other sectors. A promising tourism industry requires a cost effective transport system, a quality food supply chain, a pro tourism banking system, adequately packaged tourism attractions, and a supportive Government policy.

The tourism sector must join hands all round to collaborate and partner with many sectors of the economy to develop a tourism program that will attract tourism from near and far. The challenges are hefty but teamwork can provide the answers to developing a predictable and sustainable tourism industry.

There are however, several cross cutting services that either support economic development, or can retard development. The nation must hold hands to acknowledge the importance of cost effective and reliable communication systems across the country. Telephone and internet communication is essential for development as they offer information and knowledge that is vital to business development.

The banking sector and the insurance sector are essential for business to flourish. These sectors must be part of the link of hand holding partners for economic development.

The impact of energy in respect to availability and affordability is essential for any long term and sustainable economic activity to prosper.

Cost effective energy, communications, and raw materials are the three common pre requisites in any environment for economic activity to develop.

There is definitely a case for all sectors of the economy to hold hands and plan the future together.

Published 17 November 2009

Tax Audits

The Zambia Revenue Authority (ZRA) have undertaken to audit the books of investors in the mining sector for the obvious reason that they want to be confident that the taxes being collected from the sector are reflective of the actual business activity.

ZRA expected to collect K7.6 trillion but instead only managed to collect K7 trillion even though the price of copper has risen substantially within the last 6 months.

The pre-emptive explanations that support the possible reasons for lower tax collection could be the poor performance of trade taxes, or the rapid depreciation of the Kwacha against major currencies, or indeed the general global economic slowdown. These explanations are probable but do not generally trigger an audit operation.

The norm is that when the ZRA suspect that a tax payer is not declaring the correct figures for trade and profit, then a tax audit is usually conducted. Mining is no exception and one can simply consider the sector for possible areas where the figures may not inspire confidence in the ZRA and therefore persuade them to launch an audit.

The ZRA acknowledge that after the removal of Windfall taxes a Variable Profit tax was introduced which by definition, requires that mining operations be audited to verify their tax obligations to Government.

If the comments by Caritas Zambia at their recent conference on ‘Exploiting our Natural Resources’ are anything to go by, then the issues of secret agreements between the Government and selected mining investors must be a thing of the past and all agreements must be put in the public domain for all to see and evaluate. Additionally, the stated short fall in revenue collection from the mining sector of 75 percent on Windfall taxes and 92 percent on Company taxes begs that the books be re-looked at, to either arrive at a more realistic figure for budget planning, or to be more accurate on the figures for tax collection.

The realization that mining operations damages the environment and eventually negatively affects the residents in the mining communities, should be enough motivation to ensure that taxes from this sector are correctly collected and used to develop the nation and invest in the future economies of these mining areas.

On the drawing table are new investments in mining from Brazil with collaboration from South Africa, coming to the Konkola North Project which will develop and open pit mine with an expected production capacity of 44,000 tonnes of copper concentrates per year. Already on the ground are the new mining investors in Luanshya Copper Mines and at the Munali Nickel mines in Mazabuka. North Western province is experiencing a mining boom with several new investments in copper mining activities.

Siavonga is also opening up to mining of uranium at Mutanga and Dibwe thereby establishing yet another sub sector of the mining industry. The target in this sub sector is to export uranium oxide to the developed world where it is expected to fetch very good prices.

The picture in mining is quite clear. There is going to be a proliferation of mining activity across the country within the next five years and yet the tax regime governing this sector is not clearly up to speed.

In the name of liberalization and free market economics, Zambia has allowed the mining sector to literally decide what taxes they want to pay because they are not compelled to account for all export earnings through export receipts via Zambian commercial banks. All countries around the world insist on these export earnings to be initially recorded in home based banks, before the money can be employed in any other business activity.

The recorded revenues from mining exports gives the ZRA a basic idea of the turnover of the company and some simple assessment criteria can be employed to arrive at an acceptable figure for tax payments to Government. The option is always open for the tax payer to argue any special mitigating and convincing circumstances that would result in lower taxes being paid than that calculated by the tax office.

The reality is that for too long, has the mining regime been one of handheld investors being allowed to walk on the red carpet for investment, while all the normal procedures and benchmarks are set aside to allow the investment to settle very comfortably. Well, the salad days are over, mining like any other investment is open to all and sundry.

Investments in the mining sector must pay their taxes like any other business. Accountability and transparency must prevail for tax purposes. If ZRA does not get a meaningful tax return from the mining companies, then the legacy that Zambia will inherit from all the mining activity around the country will be gigantic potholes, polluted rivers, and desolate waste lands.

We may actually fulfill the prophecy that the meek will inherit the wasted earth while the powerful inherit the minerals and useful resources.

Published 10 November 2009

Bricks and Mortar

The nation comes to the end of the year and is plagued by various energy deficits that slow down the national economic development agenda.

The situation is compounded by the shortage of builders cement in the domestic market, such that prices have rocketed from the recommended retail price of around K55,000 per 50kg pocket to a high of K75,000, and a general norm of K65,000.

This situation appears to be quite strange when we note that LaFarge in Chilanga has doubled its production capacity as a result of the plant upgrade which has been their pride and joy.

Where is the extra production going to if not into the domestic market?

The plant sells to the domestic market 2 to 3 days per week and sells to the export buyers on the remaining working days. Technically, this suggests that half the production goes into the domestic market whilst the other half is set aside for the export markets.

The plant upgrade therefore, is not targeted for the benefit of the Zambian market. It may be argued that business is business, irrespective of which markets the production goes to. And this is acceptable as long as there are no barriers to other investors entering the industry to fill up the shortfall demanded by the Zambian market.

At a management level, domestic distributors buying in bulk on a preferential price and quantity basis should be discouraged from opening retail outlets and engaging in insider trading within their own business group purely to maximize their profits by enjoying both distributor profits and retailer profits at a time when cement is selectively allocated and therefore removes the free market spirit. This may explain why cement is selling at K65,000 instead of K55,000 thereby costing the nation an additional 20 percent.

The current status is that there is an artificial shortage of cement in the country which delays projects, increases the cost of project completion, and escalates the costs of doing business in the construction sector.

Furthermore, construction pre-payments made by the real estate development promoters become more expensive when the funds are borrowed from the banks. Much working capital is eventually tied up in either pre-payments to the suppliers, or bulk purchases to cater for future cement needs. However one describes the cement supply business, it amounts to very poor use of resources, the cost of which is finally borne by the economy at large.

What is a possible way forward? The easy answer is to open up our borders and import as much cement into the country as industry and development demands. This route places the country at the development mercy of our neighbours, and ignores the opportunity that Zambia has to exploit our capacity to produce cement to build the entire region. The COMESA Customs Union will probably demand this open border policy in so far as cement is concerned.

The more difficult route is to take stock of what is happening in the domestic economy in respect to the current supply and demand of cement, and to assess the medium and long term cement requirements as a consequence of the national strategic development plans. The exercise can become the basis for developing a strategy for the cement industry in the country.

A quick look at the 2010 national budget, the Fifth National Development Plan, and the draft Sixth National Development Plan, gives us a clear message that construction is top of the agenda for both economic development and social services development throughout the country.

The 2009 budget recorded the construction sector has having the highest growth rate at around 10% during the budget year.

It is clear from public reports that mining is developing fairly rapidly with expansion programs, old mine rehabilitation programs, and new mining investments targeted over the next five years.

Manufacturing is poised to grow as the new Multi facility Economic Zones are developed and as the competition from the COMESA Customs Union begins to impact on the country.

Agriculture is booming as seen from the 2009 figures and the new investments in new farming blocks will demand more construction work for feeder roads, sheds, dams, ponds, and silos.

Tourism is earmarked to grow as Government invests in upgrading airstrips and airports around the country. We expect to see new lodges, guest houses and hotels mushrooming up around our game parks, lakes and rivers.

Government has an ambitious program to build new health centres and hospitals, schools, power stations, roads, and water works either directly or through subsidiary entities such as ZESCO and local councils.

Quite clearly, the nation has a challenge to fast track the production of cement to meet the nation’s aspirations for development.

In order to meaningfully encourage and facilitate rapid development in the cement production industry, Government may have to reconsider the stance of restricting foreign investment in this sector and open the doors to serious investors. There have been a handful of medium and large investors looking to develop cement production plants in the country but none of them has yet put a pocket of the product on the consumers table.

If Zambia is interested in maintaining and surpassing the current level of infrastructure development in the country, then some foresight and immediate action is required to create an enabling environment that promotes and supports competition in the cement production industry.

Published 3 November 2009