VZCZCXRO4737
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #0302/01 0740802
ZNR UUUUU ZZH
P 140802Z MAR 08
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC PRIORITY 5572
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

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