Who’s Buying Zambia’s Gold?
Recent reports that Zambia’s state mining investment company ZCCM-IH has entered into a Joint Venture Agreement (JV) with mining firm Array Metals to process gold deposits has led to an uproar amongst citizens. This is primarily due to questions being raised as to why the government has sought to raise ZMW2.5million from an outside investor, could it not procure this amount itself when it’s capable of spending $42million on fire trucks? Many citizens also feel that raising this money in the Zambian market from local investors would have offered an opportunity to establish a Zambian owned mine that citizens could be proud of.
The deal has also led to criticism about the lack of transparency and minority shareholding which will provide minimal financial benefits to citizens in comparison to the investors. This has led to ZCCM-IH releasing a statement responding to the uproar, however, this has led to more questions than answers surrounding the tender process, shareholding and lack of financial and technical expertise asserted by ZCCM-IH especially when locals have spent decades mining minerals themselves.
Zambia’s move to designate Gold as a strategic mineral is indicative of the state’s desire to diversify its revenues. A reliance on copper has created a symbiotic relationship in which copper prices solely determine the socio-economic trajectory of the nation. Therefore, maximising gold production offers opportunities to a nation currently suffering a debt crisis, and specifically the North-Western region of the country which has gold deposits but a high incidence of poverty.
To determine who is buying Zambia’s’ gold and how such transactions can stimulate growth, several legislative and regulatory changes should be adopted, these are discussed below.
LEGISLATIVE
Zambia could look to its neighbour Botswana and how it has successfully dealt with diamonds which have been responsible for the rapid economic growth that has propelled the nation as a beacon of good governance. Botswana’s Mines and Minerals Act 1999 (MMA 1999) states that all mineral rights are vested in the state. The Government is not mandated to enter into joint venture agreements, however, the most successful joint venture is that of Debswana. Debswana is a JV between the Government of Botswana and De Beers where both entities hold a 50% shareholding. Botswana developed upon this JV initiated by its founding father by ensuring that subsequent JV’s involved a 50/50 shareholding between the state and foreign entities, a rare phenomenon for a resource-rich African country.
Furthermore, under S.40 of the MMA 1999, the government is permitted to acquire a minority stake in mining projects amounting to 15% and also have active participation by being able to appoint directors to the board to represent the government’s interests. S.40 explicitly states that the government has a right to appoint two directors and to receive all dividends or other distributions in respect of its working interest percentage.
In contrast, options to acquire a definitive stakeholder percentage do not exist in Zambia’s mining legislation. The only restrictions to foreign ownership apply to small scale mining licenses, small scale gemstone licences and artisan mining rights. This restriction states that foreign ownership must be citizen-owned, this being a company in which at least 50.1% of its equity is owned by Zambia citizens and one in which citizens have control over the company’s management. This restriction does not apply to large scale mining licenses which will inevitably develop throughout the gold sector.
There is an opportunity for the Zambian government to adopt a similar approach by mandating that the strategic nature of the mineral warrants a requirement for the government to safeguard citizen interests by holding significant shareholding in JV’s. This would prevent the current situation where the state-owned investment vehicle has entered into an agreement via a majority-owned Sudanese subsidiary, the profits accruing to government and consequently citizens will, therefore, be minimal due to this structure.
Local miners at Lukuzi Mine
TRANSPARENCY
Zambia currently ranks 113 out of 198 countries on the Corruption Index which ranks how corrupt a country’s public sector is perceived by business. Not only does this deter investment, but it also results in added scrutiny of deals that Government enters. In this case, Array Metals is a supposed global mining company that has no annual reports or details about its relevant mining experience. There is no benefit to citizens if private companies are marred in secrecy and intrigue. This is not to say that private investment should be dissuaded, on the contrary, it should be encouraged but not at the expense of partnering with private companies that do not provide evidence regarding their solvency, expertise and structure.
For example, Botswana is now diversifying its economy towards coal, one of its coal mines is state-owned while the other is run by a private company (Minergy Limited). Minergy has listed on the Botswana stock exchange and the company has extensive corporate social responsibility programmes which will support Botswana alongside the tax payments and jobs provided. All this information, including annual reports and solvency status, are readily available on their website.
Such measures help curb capital flight and ensure that the entity doing business is transparent. Information on Array Metals including its online profile is extremely scarce and they are multiple contradictions in the press release. The company has been described as a global mining firm but the Vice President in the same press release claims refers to his organisation as a medium-sized company. Such contradictions undermine the trust, efficiency and transparency in political systems and their anti-corruption message.
The government should ensure transparency and accountability in JV’s by administering the creation of an independent ombudsman who would be tasked with reviewing and monitoring the activities of JV’s. This ombudsman would also have the power to pressurise parties to a JV to be transparent about their capabilities in the mining sector and whether they are a viable partner for Government.
PROFIT SHARING AGREEMENTS
Once satisfied with a review, the Government could prevent tax and capital flight by entering into profit-sharing agreements. Botswana has taken such a step by entering into profit agreements with key foreign entities in its diamond sector such as De Beers and Anglo American and holding shares in these companies.
Furthermore, Botswana also implements an increase in tax rates for investors who are domiciled in tax havens. Zambia could adopt a similar approach as this would allow it to retain profits in JV’s being run alongside foreign entities registered in tax havens. An increasing tax rate and equity in the foreign entity would ensure that the government can accrue and retain profits that would be destined for offshore corporate shareholders at the expense of public coffers.
The government should also ensure that it continues to hold a right in contracts to increase its stake or renegotiate its terms at pre-determined dates during the license period in JV’s, this would allow it to ensure that it can negotiate shares which it deserves rather than being locked in long term deals with minimal financial returns.
SUPPORTING CITIZENS
With gold prices at their highest, being able to successfully manage its gold deposits is important for Zambian citizens’ economic future. The government could ensure that any JV includes a dedication towards supporting, training and retaining local workers within the community that the gold deposits are present in.
Botswana has set up the Citizen Entrepreneurial Development Agency which is tasked with providing financial and technical support to local businesses. The creation of a similar entity could ensure that citizens interests are being positively impacted by the discovery of gold deposits, the objective of such an entity would be to work directly with foreign-owned companies operating within the mineral sector to ensure that citizens interests are of paramount importance.
Sensible leadership and management are required within the government and corresponding mineral sectors to ensure that resources are managed effectively to create sustained economic growth. With the nation facing an imminent sovereign default and dwindling currency reserves, prudent measures are of utmost importance. The question of who is buying Zambia’s gold can only be answered if the institutional environment is conducive to being an open process.
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