NATIONALIZATION AND THE ZAMBIAN COPPER MINING INDUSTRY SIMON JOHN CUNNINGHAM Ph. D. UNIVERSITY OF EDINBURGH 1985 fý Ar DECLARATION I declare that this thesis has been composed by myself and is my own work. Parts of the thesis, particularly material included in Chapter 2,3,4,6 and 8, have been published previously in my work The Copper Industry in Zambia (Praeger, New York, 1981). LAýk wo.A Simon Cunningham ACKNOWLEDGMENTS This thesis was conceived and much of the work carried out under the sponsorship of a Shell Research Fellowship that enabled me to travel to Zambia. Mr. Michael Hodd of the University of London supervised the final preparation of the manuscript. Professor J. N. Wolte and Dr. Gavin Reid gave me much support and encouragement. I am particularly grateful to Sir Ronald Prain for his constructive reading of my work and his encouragement. I would also like to thank the past and present editors of the Natural Resources Forum, Steven Hein, Bension Varon, and Keith Walton, for their support and advice. This wor k benefited greatly from discussions with Jean Vuillequez, R. H. Hobson, 0. Woolcott, W. H. Ellis, G. Brebner, A. J. Wilson and F. T. Ostrander and many company and government in Zambia. Professor Raymond Mikesell and Dr. Lewis Gann and my colleagues at the United Nations, Jozef van Brabant, Ulrich Hewer, Manuel Agosin, Shahrokk Fardoust, Mansoor Dailami and Adrzej Krassowski provided me with many helpful criticisms. Mr. Henry Chamberlain, the London archivist of the Anglo-American Corporation, allowed me to consult the company reports that were used extensively in the research. I am very grateful to Ann Vaughan, Josefina Enriquez and Rosemarie Waters for typing the manuscript. It bears stressing most emphatically that none of those who helped me bears any responsibility for any of the views expressed in this thesis or for any mistakes that might remain. Moreover, the views expressed in it are my own and do not imply expression of any opinion whatsoever on the part of any- organization with which I might be connected. ABSTRACT This thesis examines whether the performance of a mineral industry in a developing country changed after its nationalization. The criteria for evaluating the performance of a mineral industry were set out at the beginning of the thesis, drawing on the economic theory of the exhaustion of. mineral resources and on the considerations of how to determine efficiency that have been at the forefront of the recent debate about the efficiency of the private as opposed to the public sector. The industry to be examined, the copper industry in Zambia, was then placed in its historical and economic context. After compiling and describing the relevant data series for the entire period to be examined, 1960-1981., the performance of the industry before its nationalization in 1969 was examined. The reasons given at the time for nationalization and for the subsequent cancellation of the management contracts that the former private owners had been awarded were then analyzed, and, in the light of this analysis, the post-nationalization experience of the industry was examined. Two important factors the war in neighbouring Rhodesia and the collapse Of the copper market - could be expected to have affected the industry's Performance after nationalization and these were dealt with in a separate chapter. -Econometric work on production functions and cost equations produced results that were consistent with the earlier findings that the industry's Performance did deteriorate after nationalization and especially after the cancellation of the management contracts. i TA13LE OF CX)NTENTS chapter 1: Introduction 1 chapter 2: Criteria for evaluating the performance of an Industry under under goverrynent*control 6 2.1 Introduction 6 2.2 Reasons for nationalization 8 2.3 The economic rationale of the nationalization of foreign-owned mining enterprises 10 2.3.1 Econcm ic 'r en t 10 2.3.2 Mining operations under private ownership 2.3.3 Differences between private and public development of mineral. deposits 2.4 Counter arguments against those for nationalization 25 2.5 Growing emphasis on market forces at the international level 28 2.5.1 The interest of the World Bank 28 2.5.2 The interest of the International Monetary Fund 30 It 2.6 Comparative studies on efficiency 31 2.7 Summary: criteria for evaluating the performance of the mining industry under private and government control 33 Chapter 3: The Development of the Zambian Copper Mining Industry 36 3.1 The pre-1914 search for minerals in Central Africa 36 3.2 The post-1981 discovery of the country's mineral wealth 36 3.3 The formation of the large copper companies 45 3.4 The. post-war development of the industry 48 3.5 Summary 50 Chapter 4. Copper and the Zambian Economy 54 4.1 Zambia's position in the world copper industry 54 4.2 The contribution of the copper industry to the Zambian economy 57 4.2.1 The overall contribution 57 4.2.2 The fall in profitability and the increase in indebtenedness ' 59 4.2.3 Zambia's resort to the International Monetary Fund 62 4.3 Summary 64 Chapter 5 Data on the perforLnance of the Zambian copper mining industry 65 5.1 Comparing the pre- and post-nationalization companies 66 5.2 Figures on mine production 70 5.2.1 Copper production 70 5.2.2 Ore production 74 5.3 The efficiency of operations 76 5.3.1 Labour productivity 76 5.3.2 Technical efficiency at the treatment plant 76 5.3.3 The accident rates 81 5.4 "The trend in costs of production 81 5.4.1 Costs at the mine 81 5.4.2 The cost of ldbour 86 5.5 Investment in the mines 94 5.5.1 The capital stock of the Roan Selection Trust/ Roan Consolidated-Mines group 94 5.5.2 The capital stock of the Zambian Anglo-American/ Nchanga Consolidated Copper mines group 98 5.5.3 Investment as measured by changes in fixed assets expenditure 99 5.5.4 Investment as measured by development work completed in 5.6 Financing investment in the mines 106 5.7 Expenditure on exploration 116 5.8 Summary 119 ýefore Chapter 6: The Zambian copper industry nationalization 120 6.1 Copper production 120 6.1.1 The effect of production dontrols 120 6.1.2 Rhodesian UDI and production 122 6.1.3 Independence, Zambianization and production 124 6.2 Productivity and efficiency 125 6.2.1 Copper and ore production per employee 125 6.2.2 The efficiency of metallurgical operations 128 6.2.3 The safety record 133 6.3 The costs of production 135 6.3.1 Costs of sales and production: overall trends 135 6.3.2 Costs of production when deflated 137 '6.4 Labour costs and problems 138 6.4.1 The increase in labour costs 1965-1966 138 6.4.2 The Brown Award, 1966 138 6.4.3 The progress of Zambianization 144 iii 6.5 The performance of investment 148 6.5.1 The change in investment expenditure as given in the companies' reports 148 6.5.2 Problems in using a suitable deflator to arrive at real investment 148 6.5.3 A measures of the capital stock in real terms 155 6.5.4 Some pre-nationalization investment projects 157 6.5.5 Investment-as shown by the development work completed 158 6.6 Financing investment before nationalization 160 6.7 Exploration begun before 1970 161 6.7.1 Roan Selection Trust's work of Exploration 162 6.7.2 The exploration conducted by the Zambian Anglo-American Group 164 6.7.3 The work of the Geological Survey 167 6.7.4 Exploration at the time of nationalization 168 6.8 Summary% the period before nationalization 171 Chapter 7: Reasons for the nationalization of the _given Zambian copper mininq industry 173 7.1 Zambia. not having an-independent Ministry of Mines 173 7.2 Reasons given for the 1969 51 per cent nationalization 174 7.2.1 The analysis and recommendations of the Seers Mission 175 7.2.2 From the Seers Mission to Mufunqushi 179 7.2.3 Mr. Faber's arguments for nationalization 180 7.2.4. The President's reasons for nationalization in 1969 182 7.3 The cancellation of the Management Contracts 184 7.4 -An assessment of the reasons for nationalization 187 7.4.1 The overall objectives 187 7.4.2 Internal problems with the reasons for nationalization 188- 7.5 The way in which nationalizati on took place 192 7.6 Reasons that wer'e not given for nationalization 196 7.7 Summary 199 Chaptýer 8: The Performance of the industry aiter nationalization 200 8.1 Production after nationalization 200 8.1.1 The effects of the Mufulira disaster on production 200 8.1.2 The effects of the switch towards cobalt on production 203 iv 8.2 Productivity and efficiency 206 8.2.1 The relationship between productivity and production 206 8.2.2 Productivity and th6 decline in grades 207 8.2.3 Productivity and mining methods 207 8.2.4 Efficiency in the treatment plant 212 8.2.5 The accident rates 213 8.3 The costs'of production 214 8.3.1 Nominal costs f. o. r. mine 214 8.3.2 Deflated costs of production 1970-1981 216 8.3.3 Efficiency in the use of fuel 218 8.3.4 The cost of labour 220 8.3.5 The progress of Zambianization 221 8.3.6 SEability in management 226 8.4 The performance of investment 230 8.4.1 The rise in the capital stocks 230 8.4.2 The ratio of replacements to total expenditure 231 8.4.3 Investment expenditure in nominal terms after nationalization 236 8.4.4 Real replacements expenditure after nationalization 236 8.4.5 The overall picture of investment after - nationalization 236 8.5 Financing investment in the mines 241 8.6 Exploration After nationalization - 245 8.7 Conclusion: the performance of the industry after nationalization 250 Chapter 9.- Possible explanations for the poor macro-economic performance of the Zambian copper mining industry .