On 17th May 2019, Zambia’s President, Edgar Lungu, announced the take-over of Konkola Copper Mines (KCM) Plc. – a Zambian copper mining and refining company which is a subsidiary of Vedanta Resources Ltd. According to President Lungu, the Zambian government had made the decision because KCM “had made to many empty promises of investing billions of dollars.” On the other hand, Vedanta KCM notes that “over $3B has been invested in Zambia since Vedanta became a shareholder in KCM in 2004, with a 50 year mining vision for Zambia.” Questions must be asked. Who is telling the truth? And who benefits from the liquidation of KCM?
THE MINING INDUSTRY IN ZAMBIA
It is important to remember Zambia was a British colony (“Northern Rhodesia”), and that its natural resources were exploited for the benefit of the colonial authority and the ‘home government’ in London. Zambians themselves were discriminated against and did not benefit from their country’s mineral wealth. John Mwanakatwe, in a book titled “End of Kaunda Era”, observes that:
“It may be said that within the protectorate of Northern Rhodesia two racial groups lived side by side. The settler group was the privileged group, the black majority was the under-privileged group, deprived of political rights and disadvantaged in every respect.”
With independence in 1964, and the inauguration of the ‘humanist and socialist’ government of Kenneth Kaunda and his United National Independence Party (UNIP), a new mining regime was put in place.
Apart from agriculture, mining has been the biggest contributor to the Zambian economy since independence. According to the World Bank:
Mining accounts for 12% of Zambia’s GDP and 70% of total export value. The sector is also a significant source of government revenue and formal employment, both directly and indirectly. Continuing to attract investment in the sector is crucial to the country’s growth since it constitutes 62% of foreign direct investment.
These figures show the critical role played by mining in Zambia’s economy – and demonstrate the need for the mining industry to be properly regulated. David Manley wrote in “A Guide to Mining Taxation in Zambia” that “The objective of mining policy should be to maximise government revenue over time. This involves taxing mines as much as possible without discouraging new investment. Given the characteristics of mining, the policy maker has a difficult job. It is argued that despite the various ways in which mineral extraction can benefit Zambia, by far the most important channel is from tax revenues.”
The Patriotic Front (PF) – then led by President Michael Sata – became Zambia’s governing party in 2011. With an election manifesto which promised “lower taxes, more jobs and more money in your pockets”, its views on mining were set out as follows:
“The Mining Industry has been characterised by uncertainty in the policy framework and frequent amendments to the legislative regime of the sector giving rise to erratic investment in mining and minerals development. The small scale mining activities which would contribute significantly to national economic development have also not performed well due to lack of credit financing and poor marketing in this sector.
Despite the availability of mineral occurrence data, there has not been any meaningful effort in diversifying from copper to other minerals. Additionally there has been no deliberate policy to promote value addition industries in the mining sector which has led to colossal loss of revenue and lack of creation of job opportunities.
In order to enhance the development of the mining sector the PF government shall:
- Diversify mining minerals from base metals (e.g. Copper) to other minerals such as Industrial and energy minerals;
- Rump up copper production to 2 million tons per annum by the year 2017;
- Review the mining policy framework so as to bring about stability in the sector;
- Review the legislative framework in order to restore confidence in the sector by mining investors;
- Establish micro credit financing for small scale mining;
- Establish a centre for the marketing of minerals from small scale mines so as to assist small scale miners realise value for their products;
- Promote investment in the exploitation of other minerals other than copper;
- Promote investment in value addition industries in the mining sector by providing incentives;
- Review the regulatory framework for mining rights with a view to extending the period of validity of mining permits;
- Provide incentives to encourage the adoption of environmentally sustainable mining technologies incorporating energy saving, reduction of health hazards, pollution control and safe disposal of waste;
- Promote ownership of large-scale mines by indigenous Zambians; and
- Increase the contribution of the mining industry to governments’ revenue base in line with trends and best practice in the mining sector emerging markets.”
This manifesto led to the enactment of the Mines and Minerals Development Act No. 11 of 2015 (amended 2016 ). However, despite these legislative interventions, the PF Government has continued to make a major political issue of who benefits from Zambia’s natural resources, and who should shoulder the blame for the clear absence of any distribution of those benefits to ordinary Zambians.
AN INSATIABLE APPETITE FOR LIQUIDATIONS AND TAKEOVERS?
It has been suggested that the current Zambian government has a tendency towards the nationalisation of private businesses – via liquidation, compulsory acquisition and takeovers – since it first assumed office in 2011. Two examples are discussed here:
LAP GREEN (2011)
In 2010, then-President Rupiah Banda sold 75% of Zambia’s telecommunications authority – Zamtel – to a Libiyan company, Lap Green Networks. Almost immediately on assuming power, President Michael Sata instituted an inquiry into the sale, which claimed to have found serious irregularities, including bribery. The PF government then used the findings of that inquiry (and the provisions of the Lands Acquisition Act, Chapter 189 of the Laws of Zambia) to re-assume control of Zamtel – without compensation – claiming that the corruption allegations meant that the deal had disadvantaged Zambians. Close to a decade later, the consequences of that rash action are becoming clear:
The London High Court has ordered that Zambia compensates $380million for nationalization of Zambia Telecommunications Company. This was a deal in which Lap Green deal on purchase of Zamtel was abruptly reversed without compensation. The Libyan Investment Authority (LIA) launched legal action against Zambia over the alleged nationalization of the Zambia Telecommunications Company (Zamtel).
POST NEWSPAPERS LIMITED
In November 2016 (3 months after Edgar Lungu was inaugurated as President), the Post Newspapers Limited was liquidated, based on claims that it owed significant taxes to the Zambia Revenue Authority (ZRA). The Zambia Daily Mail story read:
“The Lusaka High Court has placed The Post Newspapers Limited under compulsory liquidation and has appointed Lewis Mosho of Lewis Nathan Advocates as provisional liquidator in respect of all the assets of the company. This is according to the notice of winding up issued by the provisional liquidator.”
While it is clearly unlawful not to pay taxes due, the case of The Post is not straightforward. The ZRA (as with most tax authorities around the world) is empowered to enter into payment arrangements with defaulting taxpayers. The question must be asked why the ZRA had allowed The Post to get into such a difficult situation which then necessitated such a sudden liquidation. Surely there must have been other ways to resolve the problem, apart from liquidation?
WHAT IS LIQUIDATION?
Martin, in “A Dictionary of Law”, defines liquidation or winding up as:
A procedure by which a company can be dissolved which may be instigated by members or creditors of the company (VOLUNTARY WINDINGUP) or by order of the court (COMPULSORY WINDING-UP). In both cases the process involves the appointment of a liquidator to assume control of the company from its directors. The liquidator collects the assets, pays debts, and distributes any surplus to company members in accordance with their rights.
Zambia’s Corporate Insolvency Act No. 9 of 2017, Section 2, defines “winding up” as “the process of settling accounts and liquidating assets in anticipation of a company’s dissolution.” Liquidation on the other hand, is defined as “the process of converting the property of a company into cash in order to settle the company’s debts and other liabilities.” Dissolution, according to the same Act, is the termination of a company’s legal existence by liquidation in accordance with this Act.
Logic thus suggests that a company can only be ‘liquidated’ if it is ‘insolvent.’ For avoidance of doubt, Section 2 of the Act defines “insolvent” as “having liabilities that exceed the value of assets, having stopped paying debts in the ordinary course of business or being unable to pay them as they fall due.”
Section 50 of the Act notes that the winding up of a company can be done:
- By the Court;
- Voluntary Winding Up by:
- Members themselves; and
Although it could be argued that KCM failed to pay debts as they became due, practice and actual KCM business dealings show that there have previously been understandings between KCM and the ZRA (and indeed other creditors) to defer debts and pay them later in accordance with taxation laws – and indeed the Mining Act.
It is the author’s view that the move to wind up KCM – as with the Post – has not been carried out in accordance with the provisions of Part 5 of the Corporate Insolvency Act. This is made absolutely clear by President Lungu’s comment that KCM is being wound up because “it had made to many empty promises of investing billions of dollars”. This is not a reason provided for in any section of the Corporate Insolvency Act.
TO ARBITRATE OR NOT?
Arbitration, according to Justice Winnie Sithole Mwenda, is “is a semi-judicial and more formal dispute resolution process whereby parties are heard before a neutral decision maker known as the arbitrator.” Arbitration is voluntary and parties agree to arbitration through an arbitration agreement. Justice Mwenda notes that:
Arbitration has a number of advantages over litigation some of which are as follows. Firstly, it is especially suitable for disputes where a neutral with a highly specialized knowledge of the subject-matter of the dispute is needed for example, in construction disputes; or where the parties’ business relationship makes the publicity and formality of the courts unsuitable. Secondly, it offers the parties the confidentiality they desire; thirdly, it is less formal than litigation. Fourthly, costs are normally lower than litigation costs and offers quicker resolution of disputes.
With this in mind, it makes sense that the Zambian government and KCM entered into an arbitration agreement in case of any dispute needing to be resolved. In Zambia, arbitration is accepted practice, and is governed by the Arbitration Act No. 19 of 2000. It is a straightforward mode of alternative dispute resolution. This begs the question of why the why the Zambian government opted not to take its concerns about KCM to arbitration in compliance with he KCM shareholders agreement. Yet again, we must ask who benefits from such a decision? Is there an ulterior motive? Why would the Zambian government breach the shareholders agreement and depend rather on liquidation proceedings in the Zambian courts?
Zambian history should make it clear that liquidations and compulsory acquisitions of private companies – with hidden agendas and unclear beneficiaries – can only become a drain on the country’s economy. This drain is one that will be borne by ordinary Zambians on the street, when funds have to be found to pay damages and compensation as a result of breaches of contract and law.
Due process and international law must be complied with.
We, the people of Zambia, are constantly let down by the failure of our governments to put in place sensible policies which will ensure long-term and lasting benefits from Zambia’s mineral wealth for all its people – not just the few.
We earnestly hope that President Lungu’s decision to take control of KCM is in the best interests of all Zambia’s people. If an example is needed, we have only to look to Botswana. Let us look to correct the ongoing failure by those in government to manage Zambia’s mineral resources.