Dealing with the Giants

At the heart of the Zambian economy are two corporate giants, Roan Selection Trust and the Anglo-American Corporation, whose taxes have annually contributed over half of all government revenue. RST is 85% American· owned with American Metal Climax having a 44% share. Anglo-American, despite its name, is a British and South African firm connected with the vast financial empire of Harry Oppenheimer. The combined sales of these two companies would rank them among the top. 150 of America’s largest companies. Without the income from their mineral products Zambia’s exports would amount roughly to the same as those of Sierra Leone.

The new 50%-30% repatriation formula announced at Mulungushi forced accountant and tax lawyers at the mining companies to grapple with the complexity of their own corporate structure in applying this seemingly simple rule of thumb.

The interlocking share holdings of their companies made it extremely difficult to ascertain exactly how the rule applied. “The Mulungushi reforms,” exclaimed one executive, “make nonsense out of a holding company.” Subjecting the profits from Zamanglo, the Anglo-American group’s key holding company, to the 50% limit would theoretically have led to a second halving of the profits from its three subsidiary operating companies. The company eventually had to ask for a special dispensation in Zamanglo’s case to allow remission of profits in excess of 50%.

The 30% limit hit Zamanglo pretty hard, too, because the holding company’s ratio of profits to capital was very large since it had no significant installations. Anglo-American showed considerable ingenuity in its book-keeping to minimize the damage of the 50%-30% formula. It declared a bonus share from reserves which doubled Zamanglo ‘s equity capital, taking care of the 30% limit. Simultaneously, the company changed its accounting procedures so as to increase the apparent profits from which dividends (and remissions) were declared.

The man responsible for administering these Exchange Control regulations was the Governor of the Bank of Zambia, Dr. Justin Zulu, a 34 year old economist who took his PhD at the University of Colorado. Looking over the bookkeeping strategy of the mining companies he summarized their position succinctly: “Before Mulungushi they minimized profits in order to pay less taxes. Now they maximize profits to get them out of the country.”

Dr Zulu’s comments after Mulungushi also suggest that the government was adopting a strategy of measured response toward the various manoeuvres by the mining companies. “We could pass an act preventing the declaration of bonus shares.” he pointed out “Other countries have such laws. The Government has not decided to take the most stringent measures, but we know we can.”

Six months later the Zambians attempted to extend their influence over the actual marketing of mineral product- when they set up a metal marketing company 51% owned by the Government The new company was designed to give the Zambians a direct hand in the negotiation of sales contracts and pricing. Little was ever heard about its actual operation and now it had apparently been superseded by the recent takeover. The latter was due at least partly to the companies’ evasion of the Mulungushi formula and the failure of the metal marketing company to provide the government with significant leverage on company policy.

The subsequent mining reforms which accompanied the Government’s bid for 51 % participation throw some light on why Kaunda chose to go beyond the repatriation formula. Three-month time limits have now been put on all prospecting licenses and 25 year leases have been substituted for the mining rights previously held in perpetuity by the companies. The Zambians also replaced the old royalty and export tax agreement with a new mineral tax of 51% on profits from copper sales.

The primary goal of Kaunda’s action does not seem to have been increased revenue from the existing mining operations. The companies have welcomed the new tax system which is based on profitability rather than copper price since it basically offers them a better tax break. The key issue is rather the expansion of mining activities and the development of untapped resources. In this respect the restrictions on concessionary rights may be of more immediate significance than the acquisition of 51% share-holding.

Kaunda has long voiced his dissatisfaction with the copper companies’ rate of expansion. Fortune magazine has claimed that 70% of the free world copper production is controlled by10 large companies. These oliogopolistic conditions within the world copper market have made it difficult for the producing countries to enlarge their market share or expand production faster than the rate desired by the companies. Zambians have only to look across the border at preparations being made by Japan’s Nippon Mining to see how the Congo has capitalized on its revocation of Union Miniere’s old concessionary rights. The Japanese plan to produce some 60,000 tons of copper within a few years, which represents nearly a 20% increase over current Congolese production.[i]

There is also strong evidence that Zambia’s latest initiative was influenced by the Chilean case where a 51% shareholding was coupled with tax concessions when that government took over an American Subsidiary of Kennecott. Business Week[ii] claims that Kenecott’s precedent-setting deal with the Chileans actually increased the company’s share of earning from 19% to 27% despite the selling of 51% shareholding. This may help to explain why the concept of participation is slowly gaining acceptance as an alternative to old fashioned “nationalization” among companies.

President Kaunda had assured company executives that arrangements for compensation would be consistent with the Mulungushi terms, “bearing in mind,” Kaunda added, “the advantage the shareholders will derive from associating with the state.” These latter were immediately evident when the President banned all strikes and froze the wages of mine workers simultaneously with the takeovers. Kaunda conceded to a Wall Street Journal reporter that the “replacement value” of the copper companies would be about $1.36 billion, but under the current settlement terms he intends to pay compensation at book value – roughly $112.5 million for RST and $179.5 million for Anglo American. The 6% interest on the eight year bonds, which will be tax free, will up the total payment by about one-third in each case. Taxes on mining operations will remain around the present level of roughly 73%.

With the additional income from their fee for management services plus the 49% shareholding, the companies will probably be able to increase the amount of dividends repatriated since their profits will now be exempted from the 50%-30% formula. Ian MacGregor, President of American Metal Climax, recently told an audience of security analysts that the near term earnings of his company wouldn’t suffer “much of a dent” from the Zambian takeover. Spokesmen for Shell-BP, whose marketing organization controls about one half of Zambia’s market for petroleum products, claim that the initiative for the government’s newly announced 51 % participation in their operations came from the company and was “a good business deal.”

The most sensitive issue for the companies beyond compensation is the question of management control. Sir Ronald Prain of RST indicated before the settlement that the government’s 51% participation would not only require a management and sales contract between the holding companies and the mining companies, but also a reorganization of RST’s corporate structure. Like the earlier 50%-30% repatriation formula, the 51 % shareholding has highlighted the interlocking financial structures characteristic of the mineral industry throughout Southern Africa. Both companies have effected changes in their corporate structure so that the Zambian takeovers only affect the operating companies, not the entire complex of holding companies. The implications of the new arrangements follow the prescription outlined by William H. Beatty- Vice-President of the Chase Manhattan Bank, in his remarks to the Conference of Industrialists and Financiers sponsored by the Economic Commission for Africa in January 1967: “Most successful projects have been achieved without hard and fast requirements for certain rigid percentages of stock ownership. The important element is that there be a meeting of minds at the beginning as to who does what – who manages and controls. Under these circumstances, a minority shareholder can in fact functionally not only manage but control the enterprise.”