ZAMBIA FEBRUARY 2008 ECONOMIC ROUNDUP

UNCLAS SECTION 01 OF 02 LUSAKA 000302 SIPDIS DEPARTMENT FOR AF/S AND EB/CBA - DENNIS WINSTEAD COMMERCE FOR 4510/ITA/IEP/ANESA/OA SIPDIS E.O. 12958: N/A TAGS: ECON EINV BEXP EAIR ZA SUBJECT: ZAMBIA FEBRUARY 2008 ECONOMIC ROUNDUP REF: LUSAKA 139 LUSAKA 115 ¶1. SUMMARY -- Government Seeks Financing for Large Oil Deal -- Chinese Expand Commercial Relationship -- Electricity Rates to Mining Companies Increase -- Officials Question Safety of Chinese Coal Mine -- Mining Companies and GRZ Bicker Over New Tax Regime -- Kafue Gorge Power Station Experience Power Failure -- Inflation Rises Slightly -------------- Government Seeks Financing For Large Oil Deal -------------- ¶2. The GRZ is seeking another financier for its USD 1.2 billion crude oil contract with Independent Petroleum Group (IPG). In November 2007, the Kuwait-based IPG won a tender to supply Zambia with 1.5 million tons of crude oil over the next two years (Ref A). Although the GRZ decided in mid-January to finance the deal through Stanbic Bank, a subsidiary of South Africa's Standard Bank, both parties failed to reach agreement on the lending conditions. Energy Ministry Permanent Secretary Peter Mumba blamed Stanbic for the failure, calling its terms "unfair to the government." A senior government official told one reporter that Stanbic had demanded GRZ collateral to back the loan. It is unclear whether the Zambia National Tender Board will solicit new tenders, or award a contract based on previous submissions. According to press reports, the first crude oil shipment of 90,000 tons has already arrived in Dar es Salaam and is pending payment. -------------- Chinese Expand Commercial Relationship -------------- ¶3. A Chinese business delegation led by Vice Minister for Commerce Gao Hucheng was in Lusaka February 24-26 to follow up on commitments made during Chinese President Hu Jintao's visit to Zambia in 2007. The delegation expressed particular interest in the mining and agriculture sectors. The delegation also targeted products that enjoy duty free access under the Chinese Special Preferential Tariff Treatment Scheme. Among the products covered under the scheme are fresh and dry vegetables, processed foods, fish, poultry, woven fabrics, asbestos, motor vehicle parts, and glass, metal, and leather products. Mr. Gao announced USD 12 million in new grants for projects, including the construction of a hospital and agricultural demonstration center. The delegation signed contracts to purchase over USD 200 million in Zambian goods and announced their intentions to expand this commercial relationship by another USD 300 million. China is the third largest investor in Zambia after South Africa and Great Britain and in 2006, according to COMESA data, Zambia exported goods to China valued at USD 380 million and imported goods valued at USD 81 million. -------------- - Electricity Rates to Mining Companies Increase -------------- - ¶4. Copperbelt Energy Corporation (CEC),the primary power distributor to the mining sector, reached an agreement with mining companies on new electricity rates. CEC chairman Hanson Sindowe told Reuters on February 27 that the mining companies had agreed to a 35 percent rate increase. The new rates, which still require approval from the parastatal electricity company ZESCO, will be retroactively effective beginning January 1, 2008. Sindowe declined to reveal the actual electricity rates, pointing out that the mining companies pay different rates based on their individual agreements with CEC. Background: To attract mining investment in the late 1990s, the Zambian government gave generous concessions, including discounted electricity rates, to numerous mining companies. According to some reports, the GRZ gave Konkola Copper Mine the most concessional rate because its mine is one of the wettest in the world, and therefore highly energy intensive. For every ton of mineral ore it extracts, KCM must pump out 50 tons of water, causing it to incur operational costs that are much higher than those of its competitors. End background. -------------- - Officials Question Safety of Chinese Coal Mine -------------- - ¶5. After several miners sustained critical injuries at the Chinese- owned Collum coal mine in Sinazongwe, Southern Province, local authorities appealed to the Ministry of Mines to close the mines until the company implements adequate safety measures. According to press reports, district officials are often unable to perform safety checks due to difficulties in communicating with Chinese managers, who do not speak English. In 2006, the Ministry briefly closed the LUSAKA 00000302 002 OF 002 Chinese mine following a visit by the Southern Province Deputy Minister, who was shocked with working conditions. -------------- -------------- Mining Companies and GRZ Bicker Over New Tax Regime -------------- -------------- ¶6. The GRZ's 2008 National Budget proposal included significant tax increases to the mining sector (Ref B),such as a windfall tax, a royalty rate of three percent, a variable profit tax of 15 percent, and a corporate tax of 30 percent. Chamber of Mines General Manager Frederick Bantubonse told journalists on March 1 that mining companies submitted a counter proposal and requested the opportunity to meet with government officials to negotiate the new rates. President Mwanawasa rejected the counter proposal and publicly warned the companies that "if they cannot show how we have made errors, they will be wasting my time and Government's time in asking to hold discussions with my Government." A Chamber of Mines delegation appeared before the Parliamentary Committee on Estimates and recommended a higher threshold for variable profit tax, a royalty rate of one percent that would rise over time to three percent, and a corporate tax of 25 percent (its current level). Several of the longer-established mining companies continue to assert that the new tax rates, if uniformly applied, will breach development agreements that the GRZ signed in the late 1990s to attract mining investment. Some companies have also suggested that they will take the matter to court if necessary. -------------- -------------- Kafue Gorge Power Station Experiences Power Failure -------------- -------------- ¶7. A turbine bearing failure at Kafue Gorge Power Station contributed to increased electricity shortages and additional load shedding in mid-February. Although ZESCO has repaired the generator at Kafue Gorge, its total electricity generation capacity is still deficient by approximately 450 megawatts, due to ongoing renovation work at the major hydropower facilities. -------------- Inflation Rises Slightly -------------- ¶8. According to the Central Statistical Office's Consumer Price Index, Zambia's year-on-year inflation rate for February rose to 9.5 percent, from 9.3 percent in January. Bank of Zambia officials attributed the upward movement primarily to increases in food prices, but also pointed to higher "recreation" and education costs. MARTINEZ