Zambia - Export Rehabilitation and Diversification Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10847 PROGRAM PERFORMANCE AUDIT REPORT ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) JUNE 30, 1992 CR L C Y (pPAR) Auth 16 oo Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (annual averages) Currency Unit = Zambian Kwacha (K)* 1983 US$1.00 = K 1.25 1984 US$1.00 = K 1.79 1985 US$1.00 = K 2.71 1986 US$1.00 = K 7.30 1987 US$1.00 = K 8.89 1988 US$1.00 = K 8.22 1989 US$1.00 = K 12.90 1990 US$1.00 = K 28.99 1991 US$1.00 = K 61.73 ABBREVIATIONS AND ACRONYMS ADB - African Development Bank CEO - Chief Executive Officer EEC-Sysmin - Minerals System Facility of the European Economic Community ERR - Economic Rate of Return FRR - Financial Rate of Return ICB - International Competitive Bidding INDECO - Industrial Development Corporation LME - London Metal Exchange MEMACO - Metal Marketing Corporation MET - Medical and Educational Trust MIL - Mulungushi Investments, Ltd. OED - Operations Evaluation Department PAR - Performance Audit Report PCR - Program Completion Report PPAR - Program Performance Audit Report PR - President's Report SAR - Staff Appraisal Report UNIP - United National Independence Party ZAL - ZAL Holdings Ltd. ZCCM - Zambia Consolidated Copper Mines, Ltd. ZIMCO - Zambia Industrial and Mining Corporatioa, Ltd. FISCAL YEAR Government: January 1 to December 31 ZCCM: April 1 - March 31 *The Zambian Kwacha is officially valued in terms of a basket of currencies, for which the US dollar is the intervention currency. FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 USA Offic of Dlrector-Goeneral Operations Evaluation June 30, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Zambia - Export Rehabilitation and Diversification Project (Loan 2391-gA) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Zambia - Export Rehabilitation and Diversification Project (Loan 2391-ZA)" prepared by the Operations Evaluation Department. Yves Rovani by H. Eberhard K8pp Attachment This document has a restricted distribution and may be used by reciplents only in the perfomance of heir oMcdal dutes. Its contents may not otherwise be disclosed without World Bank authorzation. PROGRAM PERFORMANCE AUDIT REPORT FOROMCIALIUSEONLY ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) TABLE OF CONTENTS Paxe No. PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BASIC DATA SHEET . . . . . . . . . . . . . . . . . . . . . . . . ii EVALUATION SUMMARY . . . . . . . . . . . . . . . . . . . . . . . v PERFORMANCE AUDIT REPORT I. BaCKGROUND . . . . . ....... . . . . . . . . . . . 1 II. PROJECT OBJECTIVES AND DESIGN ....... . . . . . . . 2 Copper Sector Strategy. . .......... . . . . . . . 2 Project Objectives . . . . . . . . . . ......... . . 2 III. PROJECT IMPLEMENTATION.......... . ..... . . 3 IV. PROJECT OUTCOME ......... . . . . . . . . . . . . . 5 Organizational Changes . . . . ........... . . . . 5 Rationalization of Mining and Metallurgical Facilities . . . 6 Operating Efficiency . . . . ............. . . 7 Human Resources Development. . ............ . 9 Financial Performance and Position . . ........... 10 Financial and Economic Rates of Return . . . . . . . . . . . 12 V. FINDINGS AND ISSUES. ......... . . . . . . . . . . .13 Reserve and Resource Development . . . . . . . . . . . . . 13 Cost-Effectiveness . . . . . . . . . . . . . . . . . . . . . 14 The Tax Regime . . . . . . . . . . . . . . . . . . . . . . . 14 Diversification . . . . . . . . . . . . . . . . . . . . . . 16 Accountability . . . . . . . . . . . . . . . . . . . . . . . 17 Environmental Concerns . . . . . .............. 18 VI. OVERALL ASSESSMENT AND SUSTAINABILITY ....... . . . . 19 Overall Assessment . . . . . . . . . . . . . . . . . . . . . 19 Sustainability . . . . . . . . . . . . . . . . . . . . . . . 20 Required Government Initiatives . . . . . . . . . . . . . . 21 Actions Required by ZCCM . ........... . 4 . 21 VII. LESSONS AND RECOMMENDATIONS . . . . . . . . . .. . . . . . 22 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OV CONTENTS (cont'd.) Paae No. ATTACHMENTS 1. ZCCM - Memorandum on Corporate Objectives and Policies . . . 27 2. Synopsis of Key Elements in the Rehabilitation Program . 29 3. ZCCM - Sales Revenues, 1984-1991 . . . . . . . . . . . . 31 4. ZCCM - Amplified Income Statement, 1984-1991 . . . . . . . . 32 5. ZCCM - Copper Production Trend, 1981-1991 . . . . . . . 33 6. Status of Technical Studies . 34 7. ZCCM - Organization Chart (1985) . . . . . . . . .. 35 8. ZCCM - Organization Chart (1992) . . . . . . . . . . . . 36 9. ZCCM - Utilization of Processing Capacities, 1983-1992 . 37 10. ZCCM - Local and Expatriate Work Force, 1980-1991 . . . . . 38 11. ZCCM - Trends in Labor Productivity, 1980-1991 . . . . . . . 39 12. Copper Price Trends (Actual and Projected), 1981-2000 . . . 40 13. ZCCM - Consolidated Balance Sheets, 1982-1991 . . . . . 41 14. ZCCM - Consolidated Profit and Loss Accounts, 1982-1991 . . 42 15. ZCCM - Consolidated Statement of Source and Application of Funds, 1982-1991 . . . ...... ......... . . . 43 16. ZCCM - Financial Ratios . . . . . . . . . . . . . . . 44 17. ZCC' - Consolidated Balance Sheets . . . . . . . . . . . . . 45 18. ZCCM - Consolidated Profit and Loss Account . . . . . . . . 46 19. Copper Production, 1986-1995 . . . . . . . . . . . . . . . . 47 20. ZCCM - Investment Outlays, 1983-1991 . . . * . 6 . . . . 48 21. Financial and Economic Rates of Return . . . . . . . . . . . 49 22. Zambia - Copperbelt Ore Reserves . . . . . . . . . . . . . . 50 23. ZCCM - Distribution of Ore Reserves . . . . . . . . . . . . 51 24. ZCCM - Future Copper Production Scenarios . . . . . . . 52 25. ZCCM - Projected Production: Finished Copper . . . . . . . 53 26. ZCCM - Mineral Resource Availability . . . . . . . . . . . . 54 27. ZCCM - Production Costs, 1984-1991 . . . . . . . . . . . . . 55 28. ZCCM Subsidiary: ZAL Holdings Ltd. . . . . . . . . . . . . 56 29. ZCCM Subsidiary: Mulungushi Investments Ltd. . . . . . . . 57 30. ZCCM - Environmental Aspects . . . . . . . . . . . . . . . . 59 PROGRAM COMPLETION REPORT PART I - PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE . . . . . . . 65 1. Project Identity . . . . . . . . .. . . . . . . 65 2. Background . . . . . . . . . . . . . . . . . . . . . . . 65 3. Project Objectives and Description . . . . . . . . . . . 66 4. Project Design and Organization . . . . . . . . . . . . 67 5. Project Implementation . . . . . . . . . . . . . . . . . 67 6. Project Results . . . . . . . . . . . . . . . . . . . . 69 7. Project Sustainability . . . . . . . . . . . . . 71 8. Bank Performance . . . . . . . . . . . . . . . . . . . . 71 9. Borrower's Performance . . . . . ........... . . . . . 72 10. Project Relationships . . . . . . . . . . 72 11. Consulting Services . . . . .*.. . . . . . . . . . . . . 72 12. Project Documentation . . . . . . . . . . . . . . . . 72 TABLE OF CONTENTS (cont'd.) Page No. PROGRAM COMPLETION REPORT (cont 'd.) PART II - PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE . . . . 73 A. The Implementati.n of the Project . . . . . . . . . . . 73 B. Cofinancing . . . . . . . . . . . . . . . . . . . . . . 74 C. Project Costs . . . . . . . . . . . . . 75 D. Summary . . . . . . * . . . .* * * * 75 PART III - STATISTICAL INFORMATION . . . . . . . . .. . . . . . 76 1. Related Bank Loans . . . . . ..... . . . . 76 2. Project Timetable . . . . . . . . . . . . . . . . . . 76 3. Loan Disbursement . . . . . . . . . . . . .. 77 4. Project Implementation . . . . . . . . . . . . . . . . . 77 5.A Project Costs . . . . . . . . . . . . . . . . . . . . . 78 5.B Financing Plan . . . . . . . . . . . . . . . . 78 6. Project Results . . . . . . . . . . . . . . . . . . . . 79 6.A Assumptions Used in Calculating Project Rate of Return . . . . . . . . . . . . . . . . . . . . . . 80 6.B ZCCM Balance Sheet Data . . . . . . . . . . . . . . . . 81 7. Status of Covenants . . . . . . . . . . . . . . . . . . 82 8.A Use of Bank Resources . . . . . . . . . . . . . . . . . 84 8.E Missions . . . . . . . . . . . . . . . . . . . 85 APPENDICES 1. Comments Received from ZCCM on the Draft PPAR . . . . 87 II. Comments Received from ZIMCO on the Draft PPAR . . . . 91 III. Comments Received from the Commission of the European Communities on the Draft PPAR..... . . .95 MAP: IBRD 16492R1 PROGRAM PERFORMANCE AUDIT REPORT ZAMBIA EXPORT REHA TLITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) PREFACE This is a Program Performance Audit Report (PPAR) on the Zambia Export Rehabilitation ar:.d Diversification Project, supported by Loan 2391 in the amount of US$75 million. The Loan was made to the Government and the funds were on-lent to the Zambia Consolidated Copper Mines (ZCCM) -- a state- controlled mining company. Additional funding for the US$300 million project was provided through co-financing by ADB (US$27 million), EEC-Sysmin (US$46 million), and ZCCM (US$152 million). The Loan was approved in March 1984 and was closed in September 1988, on schedule. About US$3.1 million of the Loan was not disbursed as a result of the suspension of Zambia's witiidrawal rights as of May 1, 1987, due to the country's arrears problems. The PPAR consists of the Performance Audit Report (PAR) prepared by the Operations Eveluation Department (OED), and the Program Completion Report (PCR) prepared by the Africa Regional Office of the Bank (Parts I and III) and ZCCM (Part II). The PAR is based on the attached PCR, the Staff Appraisal and President's Reports, studies commissioned by the Project, sector and economic reports, the loan documents, summary of the Board discussions, study of the project files, and discussions with Bank staff. An OED mission visited Zambia in January 1992, and discussed the effectiveness of the Bank's assistance with ZCCM and Government officials. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. The PCR provides a satisfactory account of the project experience with regard to the origin, preparation, implementation, management, operations, and financial, economic and institutional performance, and draws the lessons learned. The PAR focuses on the country's mining strategy and policies, project design and scope, quality of the Bank's appraisal work and effective- ness of supervision effort, project outcome, factors impacting on ZCCM's operating and financial performance, the impact of the policy environment and external interventions on ZCCM's performance and future operations, the Bank's 3tance in the face of intrusive state interventions, outstanding issues impacting on the project's viability requiring Government and ZCCH initiatives, and on the underlying conditions for the project's sustainability. The PAR then draws additional lessons from the project experience. Copies of the draft PPAR were sent to the relevant Government officials, ZCCM, and the co-financiers for review and comments. ZCCM's comments were duly reflected in the text and are reproduced in Appendix I. The comm-ents of ZIMCO and the Commission of the European Communities are reproduced in Appendices II and III, respectively. - iii - PROGRJJ4 PERFORMANCE AUDIT REPORT ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) BASIC DATA SHEET LOAN POSITION (Amounts in US$ Million) As of May 31, 1992 Loan No. Original Disbursed Cancelled Revaid Outstandinx 2391-ZA 75.0 71.9 3.1 12.0 59.9 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS ------ --- CY---------------- 1984 1985 1986 I67 1988 Estimated (US$M) 11.3 43.1 61.1 75.0 75.0 Actual (US$M) 0.2 39.1 69.0 71.5 71.9 Actual as a % of Estimated 1.8% 90.7% 112.9% 95.32 95.9% Date of Final Disbursement: 10/3/88 PROGRAM DATES Original %ctual Identification 09/15/80 09,15/80 Preparation 05/29/81 05/29/81 Appraisal Mission 02/10/82 03/08/82 Loan Negotiation 01/09/64 01/09/84 Board Approval 03/20/84 03/20/84 Loan Signature 05/14/84 05/14/84 Loan Effectiveness 07/19/84 07/19/84 Project Completion 12/31/87 12/31/87 Loan Closing 09/30/88 09/30/88 STAFF INPUTS (staffweeks) Pre- FY82 FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 TOTAL Priappraisal 3.0 54.3 - . . . - . - - - 57.3 Appraisal - 61.8 51.4 14.8 . . . . - - - 128.0 Negotiations - - - 19.6 - - - - - - 19.6 Supervision - - - 10.0 44.4 59.6 16.4 3.7 4.8 0.1 5.7 144.7 Other 1.9 17.8 6.9 13.7 - - . ._- 40.3 Total 4.9 133.9 58.3 58.1 44.4 59.6 16.4 3.7 4.8 0.1 5.7 389.9 MISSION DATA No. of No. of Staff Month/Year Weeks Persons Weeks Preparation 08/81 3.0 6 18.0 Appraisal 03/82 3.0 7 21.0 Post-AppraisEl 1 03/83 4.2 3 12.6 Post-Appraisal 11 09/83 2.0 2 4.0 Supervision I 06/84 1.6 2 3.2 Supervision II 09/84 2.8 4 11.2 Supervision III 01/85 2.0 2 4.0 Supervision IV 05186 2.8 5 14.0 Supervision V 11/86 3.0 2 6.0 Supervision VI 01/87 1.6 1 1.6 Supervit'rn VII 03/87 1.0 1 1.0 OTHER PROGRAM DATA Borrower/Executing Azency: R p=>blic of Zambia Follow-on Operations: Operation : Recovery Prograo, I Credit Number: 1720-ZA Amount : $50.0 million Approval Date; June 26, 1986 Operation Recovery Program II Credit Number: 2214-ZA/2214-1-ZA Amount : $237.2 million Approval Date: March 5, 1991 PROGRAM PERFORMANCE AUDIT REPORT ZAMBA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) EVALUATION SUMMARY Introduction the investment decision-making process, and support substructure to 1. This is an audit of the Export improve ZCCMIs overall operating Rehabilitation and Diversification efficiency and profitability (paras. Project, approved in March 1984, 2.01-2.03). involving the Zambia Consolidated Copper Mines (ZCCM) -- a state-con- Implementation trolled company. The Bank's loan, amounting to US$75 million, was 3. ZCCM implemented the supplemented by co-financing and rehabilitation component of the ZCCM funding, raising the total project efficiently and on schedule. project cost to US$300 million Project design and organization (Preface, p. i). The circumstances remained unchanged throughout imple- and pressing issues that led to the mentation. The set up for the man- genesis of the project are discussed agement of the project was appropri- in paras. 1.01-1.05. ate, the selected consulting firm experienced, and their performance Obiectives satisfactory. ZCCM complied fully with procurement procedures, and was 2. The project supported ZCCM's quite imaginative in devising effort to improve the efficiency of arrangements that facilitated and its operations, and comprised the expedited processing. There were following components: (a) replace- practically oo cost overruns. Some ment/rehabilitation of worn-out and flexibility during adjudication of obsolete equipment, including mate- bids to facilitate the desideratum rials handling equipment and spare of standardization would have been parts, in mining operations and desirable. Also, a more pro-active processing facilities; (b) training response at the time of appraisal to of mining engineers, techniciaw-ns and rectifying crippling bottlenecks to technologists; and %c) technical maintain existing equipment would studies that would lead to recommen- not have been inconsistent with the dations for the rationalization and rehabilitation objective (para. optimization of ZCCM's mining and L.01). metallurgical operations; prepara- tion of an action plan and timetable 4. ZCCMIs ability to fund its to close uneconomic mines and pro- share of the project was seriously cessing facilities; improvement of impaired, following a dramatic de- operating methods and procedures; cine in revenues and losses because formulation of a comprehensive of declining copper production and equipment maintenance and replace- prices; increased mineral export ment program; and specific actions taxes and levies; and inadequate and to strengthen the planning function, ereatic fareign exchange alloca- - vi - tions. The shortfall was made up by fined and the requirement for a increased funding from the two co- specified degree of compliance by financiers, thereby preventing the year 1995 (para. 5.17, Attach- changes in the scope of the project ment 30). and time overruns (para. 3.02). Outcome 5. The technical studies focussed on optimizing ZCCM's operations and 9. ZCCM reorganized its corporate on developing management information management structure to increase and procurement systems. Most of divisional management authority, tne recommendations were accepted by initiative, and accountability for ZCCM's management and were imple- production, productivity, and finan- mented, albeit with varying degree cial results -- but without much of success (paras. 4.01-4.06). success. De facto centralized Particular suggestions, though management and decision-making have desirable, required levels of ex- persisted, while accountability has penditure or additional skilled been rendered more opaque (paras. personnel not immediately available, 4.01-4.03). while others required mcre detailed investigation, and their implementa- 10. In an effort to rationalize its tion was deferred (para. 3.03). mining and processing operations, ZCCM closed down several mines and 6. The trainini component was placed on care and maintenance a implemented with some delay, but the number of processing facilities. intended objectives at appraisal However, ZCCM's facilities have yet were largely attained. The extended to be fully optimized. Also, ZCCM support helped increase the number made an effort to improve perfor- of mining engineers, technologists, mance standards and productivity technicians and craftsmen. Never- levels at its mining and metal- theless, the throughput has not been lurgical operations, sourcing proce- sufficient to cover ZCCM's technical dures, and accounting and budgeting needs, and shortages of well-trained systems. In mining, training became personnel persist (para. 3.04). more systematic, an improved bonus payment scheme based on production 7. The second tranche was released was introduced, and individual per- on time. Compliance with other formance targets were established covenants has been mixed, as certain for various stoping and development understandings were only partially activities; but their effectiveness fulfilled and others were either remains questionable. An intensive waived as unenforceable or were not rebuilding and maintenance program complied with (para. 3.05). was initiated to increase equipment availability, and a three-shift, 8. The belated promulgation by the seven-day operations plan was intro- Government of the Environmental duced in appropriate areas to in- Protection and Pollution Control Act crease equipment utilization; but in June 1990, is nonetheless a major the effort has been hampered by, step towards initiating government inter alia, inadequate supply of action aimed at bringing the Zambian spares and shortage of skills. The industry under environmental con- mine planning process was strength- trols similar to those in developed ened, mining methods were studied, countries. It is expected that the and improved procedures were intro- legislation generated by the new Act duced; but productivity in mining will be in place within the next few operations continued to deteriorate years, with the main standards de- (para. 4.04). - vii - 11. In metallurgical operations, severe resource constraints (para. smelter capacity improvements were 4.06). undertaken; control instrumentation was installed in concentrators; tank 13. Contrary to official pronounce- houses were rehabilitated in re- merts (para. 2.01), the Government's fineries; and electrolyte filters approach continued to be maximiza- were installed in the leach plants. tion of foreign exchange earnings, A maintenance engineering management tax revenue, and employment, at the syste was introduced in all divi- expense of ZCCM's operating ef- sions, and special attention was ficiency, financial health, and given to skills training, spare long-term planning. This has parts forecasting, and quality con- resulted in a drain of resources, trol. But inability to introduce overmanning, retaining loss-making the envisaged fully computerized units (through cross-subsidization), maintenance system remains a major and neglect of ore reser-ie develop- handicap. Steps were taken to im- ment. Shortage of foreign exchange prove inventory control procedures has fostered technical inertia, and for spares and consumables, reduce impeded long-term planning and their consumption levels, and sourze modernization efforts. Mining local supplies. However, shortages projects, routine equipment replaceL have persisted because of insuf- ment, and investment in infrastruc- ficient allocations of foreign ex- ture have been postponed due to change. A materials management ZCCM's inability to fund them from information system has been imple- internal resources. Inadequate and mented in phases. The operations irregular foreign exchange alloca- phase is expected to be completed in tions have prevented ZCCM from early 1992. Implementation is ham- stocking adequate levels of spares pered by resource constraints (com- and consumables to ensure proper puters, technical staff). Finally, maintenance and continuity of pro- erformance against agreed targetscapital has been monitored (para. 4.05). replacements have resulted in de- Yet, the results attained to date terioration of plant and equipment are far from satisfactory (see (ppras. 4.07-4.09). paras. 13-15, 24 below). 14. The conscious policy of in- 12. The establishment of the Cor- digenization and cost cutting has porate Planning Department, with reduced ZCCM's core of seasoned responsibility for investment and expatriates to critically low production strategies, has improved levels. Also, turnover among ex- the Planning function. Capital patriate staff has been very high. requirements were integrated into Efforts to accelerate indigenization the planning process, and investment have led to premature promotion of budgeting and approval procedures unseasoned staff to managerial and were formulated to ensure continuity supervisory posiUons, resulting in of projects. All divisions have poor monitoring, problem-solving, mine planning units, annual plans ard decision-making capability ard run concurrently with the budget and fostering production inefficiencies. reflect constraints, and five- and The intended greater discretionary fifteen-year forecasts are prepared. autonomy and authority of the divi- Nonetheless, the effectiveness of sions has been attenuated in prac- the planning function has been tice by excessive standardization greatly hamrered by skill avail- and centralized allocation of for- ability, while implementation by eign exchange, capital and inputs, strong labor unions, indigenization - viii - policies, financial constraints, and undertaken. ZCCM is actively re- a paternalistic management culture viewing its waste management program (paras. 4.09, 4.10, 4.12). to improve the degree of control, particularly in respect of effluent 15. In sum, weaknesses at the mid- quality control. Heretofore, the dle management level, skill short- discharge of effluent water, the ages, and declining labor produc- disposal of other solid wastes, and tivity have been pervasive; copper the dispersion of stack emissions production kept falling during the from ZCCM's operations has resulted 1980s and early 199C9; and capacity in a limited environmental impact, utilization has been constantly which is restricted to a local zone declining and has reached unsatis- adjacent to each mine. The all factory levels -- all with inimical important values for dissolved effects on the company's operating metals lie within acceptable levels, efficienc7 and financial performance and ZCCM has been taking steps to (paras. 4.07-4.13). bring effluent releases under con- trol (para. 5.15, and Attach- 16. ZCCM's financial performance ment 30). has not been satisfactory, and its financial position is difficult. Findings and Issues ZCCM has been unable to service its debt, borrowings from the Government 19. ZCCM is running out of econom- and the Bank of Zambia had to be ically exploitable reserves. Also, subordinated, reschedulings of over- prospecting has identified deposits due obligations have been recurring of potential mineralization. How- during the past decade, lenders have ever, development of reserves and been requested to defer repayments detailed exploration of resources falling due, while creditors have have not been carried out to the stopped short from formally extent required because of lack of declaring the company in default. emphasis throughout the 1980s in Failure to service foreign debt has developing a deftnitive, comprehen- impacted on ZCCM's creditworthiness sive medium- and long-term strategy and borrowing capacity, restricting for the company, reinforced by suppliers' credit and deliveries, shortage of funding and diversion of forestalling access to new term funds and energy to other non-mining financing, and adversely affecting activities at the Government's be- its operating efficiency (paras. hest. A study to devise a long-term 4.13-4.15). corporate strategy for the extrac- tion of ZCCM's ore resources is in 17. The re-estimated financial and progress. To exploit this poten- economic rates of return are satis- tial, continuous capital investment factory. The lower FRR and ERR of in the development of these re- the project at audit, compared to sources is required over the next 10 SAR's and PCR's, is attributable to years for an estimated total of over overly optimistic copper production US$800 million. The issue remains, and price forecasts, and the fact however, whether the mining of the that ZCCM remains an inefficient ores would be economically and proaucer (paras. 4.16, 4.17). financially attractive at current and projected world copper prices, 18. ZCCM is conscious of its en- whether ZCCM can realistically vironmental responsibilities, albeit achieve sizeable cost reductions, financial constraints circumscribe and whether ZCCM1 can raise these the extent to which investments in funds on its own (paras. 5.01, pollution control equipment can be 5.02). - ix - 20. ZCCM is among the highest cost cies, exigencies, and imperatives. producers in the world -- at a time UNIP's dominant role in policy- when major competitors are reducing making and powerful influence, by their costs significantly, and a permeating all branches of Govern- number of large low-cost projects ment, made ZCCM increasingly subject are coming on stream. Costs could to intrusive political influence, be reduced significantly, provided weakened significantly oversight by actions are taken to stabilize cop- government agencies, and rendered per production at circa 400,000 tons ZCCM unaccountable to Parliament annually; introduce new mining (paras. 5.10-5.14). methods; standardize makes of equip- ment; rehabilitate, balance, and Overall Assessment optimize processing capacities; strengthen supervision and dis- 23. Bank support for the project cipline; reduce labor costs and was fully justified in view of the overhead expenses; improve main- vital importance of the sector for tenance and labor productivity; the country's economy. Although the improve inventory control; ensure project was aptly designed tech- uninterrupted availability of for- nically, the need for ore reserve eign exchange; eschew the mineral development did not receive the tax on export proceeds; and assure emphasis it deserved. ZCCM1s mana- managerial autonomy. Given that gerial autonomy and accountability ZCCM's viability as a going concern were not even considered as a poten- is at stake, this presents a major tial issue, given the dominant role challenge for ZCCM's new management of the Party (UNIP) in the manage- team (paras. 5.03-5.06). ment of the economy, the way the appointments of the top executives 21. In recent years, ZCCM has ac- were made, and the strong sense of quired a mishmash of unviable non- party loyalties within the corporate mining enterprises -- clearly rescue structure. In terms of account- operations. The Government has also ability, ZCCM has been "a state used ZCCM's resources as an instru- within the state." This sustained ment to spearhead general economic the strong link forged between the diversification, a policy the wisdom previous Government and ZCCM, fos- of which has been questioned, inter tered decision-taking with impunity, alia, because it was politically and attenuated the results achieved. motivated and resulted in diversion The receptiveness of ZCCM's manage- of scarce foreign exchange, capital, ment to change, strength to ward off skills and management time away from external interventions, ability to core mining operations. Subsidi- adapt to changing circumstances, and aries involved in strictly mining- fortitude to implement the requisite related activities could be incor- measures to improve labor produc- porated in ZCCM's existing structure tivity, i.e. the existence of a while all others should be divested rather rigid corporate culture, were (paras. 5.07-5.09). not fathomed at appraisal, while attempts during supervision io ad- 22. Oversight over ZCCM has de dress the issue were frustrated facto been replaced by political (para. 6.01). control. Presidential and Party influence on ZCCM during the Second 24. Capacity utilization, labor Republic (which ended in 1991) has productivity, and operating ef- been particularly extensive in the ficiency have been constantly 1980s, and accountability has been declining. The cumulative and in- compromised by political expedien- teractive effects of intrusive ex- -x - ternal interventions in ZCCM's deci- ZCCM's operations depends on sion-making process, shortage of (a) capital injections to upgrade foreign exchange, promotion of non- technology of the existing mining mining social tasks, paternalistic and metallurgical facilities and management culture, inadequate ore satisfy operational requirements of reserve development, utilization of spares and consumables; (b) addi- outmoded technologies, inadequate tional capital outlays during the investment, poor maintenance, dis- rest of the decade to realize the proportionate and premature shedding potential of the company's ore of skilled expatriates, over-promo- resources; and (c) adoption of stern tion despite skill deficiencies, measures to improve labor produc- high turnover among technical and tivity and control the rising costs professional staff, inadequate to secure the financial viability of training, and tepid discipline en- the company (para. 6.04). forcement have had a deleterious effect on ZCCM's problem-solving and 27. ZCCM1s oRerating efficiency and decision-making capability, overall viability would be greatly enhanced operating efficiency, and financial if the new Government were to take performance (paras. 4.07-4.12, particular initiatives to ensure 6.02). ZCCM's managerial autonomy. In view of the past history of intrusive 25. The reorganized corporate interventions, this would necessi- structure, because of its modus tate the whole or partial privatiza- operandi, did not achieve the ex- tion of ZCCM, and at least reducing pected increase in divisional mana- the Government's shareholding fr gerial authority and accountability 60% to 492. Also, there is need to for production, productivity and reconsider the tax regime as applied financial results, inter alia, to ZCCM. As any other industrial because of politics and the per- undertaking, ZCCM should be sub- vasively centralized management of iected to the same corporate income the company. ZCCM has yet to formu- tax, payable quarterly on an esti- late long-term production and in- mated basis. But as a natural re- vestment strategies coimmensurate source extraction company, it should with its mineral, technical and also pay royalties and an additional financial resources. Although steps tax to capture some of the economic have been taken to rationalize its rent that normally accrues to the operations, mining and processing state albeit such that, taking into operations have only partially been account the cyclical nature of the optimized. Ore reserve and resource industry, ZCCM when operated ef- development has been neglected, ficiently can produce a strong cash inter alia, because of the absence flow. Furthermore, as long as the of a definitive medium- and long- Government remains a majority share- term strategy. In-house studies to holder, it is imperative to estab- devise such strategies are in lish unequivocal rules regarding the progress (paras. 4.01-4.03, 6.02). relationship between ZC and the Government authorities concerned, Sustainability and such understandings should be adhered. The costs of socio-econom- 26. ZCCM's pervasive organizational ic tasks thrust uRon ZCCM (including and operational shortcomings and overmannini) should be defrayed precarious financial position imply through special funding and per- that ZCCM's sustainability is uncer- tinent cost-sharins arrangements. tain. Besides efforts to rectify And a system of oversight should be these shortfalls, the viability of instituted to ensure ex ost ac- - xi - countability and assess performance. them, and severely undermine their The political authorities would have efficiency and sustainability. to appreciate that the national Unless government authorities re- interest dictates that ZCCH be run solve to discipline themselves by as a commercial undertaking and not exercising a "self-denying as an arm of the government, if ?CCM ordinance," there is a moral hazard is to operate efficiently, re-estab- that the political leadership will lish its creditworthiness, and re- not always act responsibly but store its tarnished image (paras. rather on impulse or opportunism. 5.05, 5.06, 6.05-6.06). * Prudent guidance/oversight by 28. ZCCM, for its part, would do parent ministries, regulatory au- well to devise a comprehensive, thorities, and minority shareholders consistent and realistic five- to should suffice to safeguard the ten-year all-encompassing Business interests of the fiscus. In author- Plan, taking stock of the financial itarian or one-party political re- situation of the company and the gimes, the pervasive control exer- physical condition of plant and cised over the Executive and Legis- equipment, assessing financial lative, more often than not, pre- restructuring and rehabilita- clude any meaningful control to tion/modernization requirements, and ensure Parastatal accountability. outliring a strategy for the future development of the company, as sug- * Despite the long association gested in para. 6.07. with parastatals and the apprecia- tion of the quintessential impor- Lessons and Recommendations tance of managerial independence in the judicious conduct of indus- 29. The lessons of experience and trial/mining operations, the Bank suggestions for potential courses of has not addressed squarely the issue action are detailed in paras. 7.01 of autonomy and accountability. The and 7.02, and are briefly summarized need for safeguards, assurances, below. strict enforcement of pertinent conditionality, and keeping the 30. Concerning Parastatal perfor- issue under constant review has not mance, ZCCM's experience affirms the been duly appreciated. following: 31. The experience with actions * State-controlled enterprises that address specific issues on contributing substantially to tax Parastatal reform provides some revenue and foreign exchange are useful insights: Particularly vulnerable to intrusive state interventions and myopic fis- * Experience commands a premium,. cal policies, and the indigenization process can- not be unduly accelerated with im- * Encroachment on managerial Punity. autonomy stemming from political expediencies reflects narrow, if not * It is extremely difficult to self-serving, perceptions by the downsize' let alone divest, enter- political leadership of the role of prises in the public domain because parastatals, force parastatals to of the resistance of entrenched deviate from their main objective, bureaucracies and a concerned labor distort their behavioral pattern, force. drain their resources in discharging incongruous social tasks thrust upon - xii - * Early initiatives to ease the * RecaRitalization of a Para- social impact of reforms and facili- atatal without solid progress in tate the redeployment of the rectifying the policy environment, affected work force would go a long changing the form of ownership, way toward speeding up the process revamping the corporate culture as and mitigating resistance. reflected in management practices and operating procedures (e.g., * A re-evaluation of ZCCM'e po- greater devolution of authority, tential, financial situation, and with commensurate managerial conditions for future development accountability for performance), and and sustainable growth is in order. desisting from external interven- In this regard, the derivative im- tions affecting management deci- plications of the form of ownership, sions, is unlikely to promote sound viewed in the light of the pre- industrial/mining entities. vailing socio-political circum- stances, economic environment, and cultural strains, deserve greater attention than that received hereto- fore, and privatization, or at least minority state ownership, would have to be considered as an alternative, since majority state ownership has turned out to be an unworkable op- tion. PROGRAM PERFORMANCE AUDIT REPORT ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) I. BACKGROUND 1.01 Copper mining has traditionally been the mainstay of the Zambian economy, and accounts for 15% of GDP, 85% of foreign exchange earnings, and 30% of government revenue. ZCCM is the sole company in the sector, employing some 55,000 employees and accounting for 15% of the country's formal employment. The Government owns 60.3% of ZCCM's shares, a subsidiary of the Anglo-American Corporation (SA) 27.3%, and 1.4% is held by other private invectors. Currently, ZCCM produces annually about 400,000-425,000 tons of copper, 4,500 tons of cobalt, 3,700 tons of lead and 12,000 tons of zinc. ZCCM exports practically all its production, earning over US$1.5 billion per annum. 1.02 Copper production was declining steadily when the project was appraised -- from a peak of 712,000 tons in 1976 to 575,500 tons in 1983, or by 20%. A major problem was the inabilkty of the mines to deliver sufficient tonnage of suitable ore, which led to underutilization of the concentrators, smelters, and refineries. Ore output was decreasing as existing mineral deposits were becoming deeper and less accessible, while ore grades were declining as the mining operations tapped less rich ore bodies. Development was inadequate in the underground mines, and overburden removal was inefficient in the open pit mines, largely because shortage of spares and materials and inadequate maintenance left equipment in poor working condition. Dilution rates (tonnage of waste rock per ton of ore mined) increased as mine develop- ment and preparation worsened, and copper recovery fell with declining millhead grades. Deteriorating mine management and inadequate supervision, discipline and work incentives led to a decrease in workers' productivity over the years -- from an average of 12.2 tons of copper per employee in the mid-1970s to 9.8 tons in 1982 (PR, para. 49). 1.03 Declining production and metal prices reduced foreign exchange earnings. Inadequate foreign exchange, and the consequent shortage of spares and consumables and deferral of normal replacement programs, decreased the operating efficiency of plant and equipment. Shortage of skilled personnel resulted in too high manning levels in some areas and critical shortages in others. Performance standards among employees were low, and were reinforced by weak supervision, as supervisors had insufficient authority to discharge effectively their responsibilities. A highly centralized management system affording limited autonomy, authority and responsibility to divisional managers, transportation and communication problems, and costly social responsibilities (e.g., housing, medical care, schooling and community programs), exacerbated the situation and raised further production costs. External interventions added to ZCCM's difficulties and operating costs. An onerous tax regime and a heavy debt servicing burden drained ZCCM's resources, and led to severe cash flow difficulties. Development of new ore reserves had fallen to critically low levels (PR, paras. 51, 53). - 2 - 1.04 Traditionally, the mining industry had relied on expatriates to man positions at the higher managerial and technical levels. In ar, effort to accelerate the participation of indigenous personnel, expatriate employment had been reduced substantially. The limited availability of qualified Zambians to fill the positions vacated by expatriates meant that important management and technical positions had remained vacant, or had been filled with underqualified staff, particularly in mining, metallurgy and engineering. This led to inefficiencies in mining and processing operations, poor planning and maintenance, and decreasing production (PR, paras. 47, 48). 1.05 Although Zambia's copper reserves had an average grade of 3%, which was much higher than other world producers, ZCCM was one of the world's higher- cost producers, inter alia, due to a production philosophy which emphasized maximization of foreign exchange earnings and revenue regardless of operating efficiency and financial viability, inadequate organizational structure, insufficiently qualified staff, lax attitude toward cost-effectiveness, sub- optimal use of production facilities, and lack of materials and spare parts due to foreign exchange shortages. Cost-cutting measures, mostly through reductions in the work force, improvements in purchasing methods, lower expenditures on some social services led to some reduction in operating costs, but they were not sustained (PR, para. 53) II. PROJECT OBJECTIVES AND DESIGN Copper Sector Strategy 2.01 In a communication to the Bank,/ the Minister of Finance emphasized that it was essential that ZCCM conduct its affairs in accordance with sound business, financial and administrative practices, remain a financially healthy company, and become a net contributor of resources to the rest of the economy. Accordingly, ZCCM's mandate was to optimize net foreign exchange earnings and net contribution to the Government's budget. At the same time, it was recognized that these goals may not be compatible. Thus, it was fully understood that closure of inefficient operations, labor lay-offs, revision of the tax regime, and access to foreign exchange were vital for ensuring ZCCM's operating efficiency and creditworthiness. ZCCM's task would therefore be to formulate long-term production and investment strategies, compatible with its mineral, human,, technical and financial resources. Proiect Obiectives 2.02 The project would support ZCCM's effort to improve the efficiency of its operations through rationalization of ics mining and metallurgical facilities; closing down and/or rehabilitating worn-out or economically inefficient facilities; and improvement of labor productivity. This effort was expected to reduce production costs, improve ZCCM's financial health, and sustain ZCCM's contribution to the country's net foreign exchange earnings and I ZCCM - Memorandum on Corporate Objectives and Policies, November 13, 1983 (Attachment 1). - 3 - domestic savings.2- Specifically, the project would assist ZCCM to maintain production levels consistent with technical and ore reserve constraints; determine investment priorities and strengthen the planning function; prepare mine development plans; improve mining controls (e.g., sampling, surveying, and grade control); introduce better cost control practices; strengthen supervision and discipline over the work force, along with an incentive program to improve labor productivity; establish adequate management information systems and operational procedures; and provide the necessary training to ZCCM staff locally and abroad. A synopsis of the key elements of the rehabilitation program and timetables are shown in Attachment 2. 2.03 To this end, the project comprised the following components: (a) replacement /rehabilitation of worn-out and obsolete equipment, including materials handling equipment and spare parts, in mining operations and processing facilities; (b) training of mining engineers, technicians and technologists, involving on-the-job craft training locally, specialized on-the- job craft training abroad for engineers, technicians and craftsmen, and management training for supervisor and managerial personnel; and (c) technical studies that would lead to recommendations for the rationalization and optimization of ZCCM's mining and metallurgical operations; preparation of an action plan and timetable to close uneconomic mines and processing facilities; improvement of operating methods and procedures; formulation of a comprehensive equipment maintenance and replacement program; and specific actions to strengthen the planning function, the investment decision-making process, and support substructure to improve ZCCM's overall operating efficiency and profitability (for details see PCR, paras. 3.02-3.04, 4.01; PR, paras. 59-61; SAR, paras. 5.03-5.06). III. PROJECT IMPLEMENTATION 3.01 ZCCM implemented the rehabilitation component of the project efficiently and on schedule. Project design and organization remained unchanged throughout implementation. The set up for the management of the project was appropriate, the selected consulting firm experienced, and their performance satisfactory. ZCCM ccmplied fully with procurement procedures, and V Successful implementation of the project would also enable the Government to "buy time" and put in place a program of policy reforms which, along with improvements in economic management, would create conditions conducive to developing new sources of foreign exchange, tax revenue and employment (PR, para. 14). For details see the following World Bank Reports: No. 5000, Zambia: CEM - Issues and Options for Economic Diversification, April 14, 1984; No. 6355, Zambia: CEM - Economic Reforms and Development Prospects, November 19, 1986; OED, PPAR No. 10846, Zambia - Industrial Reorientation Proiect (Credits 1630 and A-004-ZA), June 30, 1992, paras. 1.01-1.03. The Export Rehabilitation and Diversification Project was followed by the Agricultural Rehabilitation (approved in March 1985), the Industrial Reorientation Project (approved in October 1985), and the Recovery Program I (approved in May 1986), which collectively were to address these concerns. was quite imaginative in devising arrangements that facilitated and expedited processing. There were practically no cost overruns (see PCR, para. 5.08 and Part III, Table 5A). International competitive bidding enabled ZCCM to obtain prices below original estimates. This, coupled with the favorable movement of the foreign exchange rate, resulted in considerable savings which were reallocated largely for the purchase of additional spares (PCR, para. 5.07). On occasion, procurement procedures were applied too rigidly, in the sense that insistence on international or limited tendering militated against the standardization of some types of equipment. Some flexibility during adjudica- tion of bids to facilitate the desideratum of standardization would have been desirable. Also, ZCCM's request at appraisal for increased funding for spares to maintain existing equipment was disallowed -- a decision that was reversed during supervision. A more pro-active response at appraisal to rectifying crippling bottlenecks would not have been inconsistent with the goal of rehabilitationil (PCR, paras. 4.02, 5.01-5.05, 6.01; Part II, A, 10.01, 11.01). 3.02 ZCCM's ability to fund its share of the project was seriously impaired during implementation. ZCCM experienced a dramatic decline in revenues and incurred losses because of declining copper production and prices, increased mineral export taxes and import duties, and inadequate and erratic foreign exchange allocations (Attachments 3-5). The shortfall.was made up by increased funding from the two co-financiers, thereby preventing changes in the scope of the project and time overruns (PCR, paras. 5.06-5.07, Part III, 5.B). 3.03 The technical studies, completed during 1984/85, focussed on optimizing the totality of ZCCM's operations (i.e. mining, concentration and metal extraction), and on developing appropriate management information and procurement systems, to enhauce the effectiveness of the investment and operating decision-making process. These studies complemented earlier ones on the organization of ZCCM's divisions and related services (Attachment 6; SAR, paras. 3.07, 5.06). Most of the consultants' recommendations were accepted by ZCCM's management and were implemented, albeit with varying degree of success (see paras. 4.01-4.06). Particular suggestions, though desirable, required levels of expenditure or additional skilled personnel not immediately available, while others required more detailed investigation, and their implementation was deferred. 3.04 The training component was implemented with some delay, but the intended objectives at appraisal were largely attained. Bank funds financed attachments to overseas companies and assisted various institutions that trained personnel for ZCCM (School of Mines - University of Zambia, Department of Mining - University of Copperbelt, and Engineering Trade Schools run by i The Bank was fully aware of ZCCM's circumstances: "The high foreign exchange content of copper production costs makes the industry sensitive and vulnerable to shortages and delays in obtaining foreign exchange from the Government, and in fact, stringent foreign exchange conditions in Zambia for the past five years have had serious adverse effects on the copper sector's performance. Unavailability of foreign exchange for spare parts, machinery, equipment, reagents and other intermediary goods has caused increased equipment downtimes and increasing maintenance problems in all Copperbelt operations." (SAR, para. 3.30). - 5 - ZCCM). The expenditures involved construction of a student hostel and staff houses, provision of training aids and equipment, financing of salaries of instructors, and on-the-job training courses. The extended support helped increase the number of mining engineers, technologists, technicians and craftsmen. Nevertheless, the throughput has not been sufficient to cover ZCCM's technical needs, and shortages of well-trained personnel persist. 3.05 The second tranche, conditioned basically on completion of the studies and the development of action plans to implement their recommendations, was released on time. However, compliance with other covenants has been mixed, as certain understandings were only partially fulfilled and others were either waived or were not complied with. Specifically, the Government did not abide by its commitment to provide ZCCM with the requisite local and foreign exchange resources to implement the project, albeit for budgetary constraints and shortage of foreign exchange. ZCCM has not been allowed to service its external debt following the Government's decision to limit debt service because of foreign exchange shortages. Also, no systemAtic effort was made to produce a comprehensive study on the fiscal regime to be applied to ZCCM; rather, there have been ad hoc changes, while the current regime leaves much to be desired (see paras. 5.04-5.06). Though with significant delay, the Government did carry out a study and promulgated the Environmental Protection and Pollution Act in 1990. ZCCM, for its part, complied with virtually all project covenants except for the current ratio. The covenant was subseq,.ently waived as compliance by the set deadline was not possible, because the continuing devaluations led to a dramatic increase of ZCCM's foreign indebtedness as expressed in local currency (PCr, para. 6.03, and Part III, Table 7). IV. PROJECT OUTCOME Organizational Cbanges 4.01 ZCCM reorganized its corporate management structure in 1985 to increase divisional management authority, initiative, and accountability for production, productivity, and financial results. Responsibility for day-to-day operational matters technically was decentralized and devolved to the Copperbelt, while corporate planning, financial management, and marketing functions were retained at headquarters in Lusaka. The mining divisions were reduced from 8 to 5. Monitoring of the divisional general managers became the responsibility of the Executive Director - Operations, situated in the Copperbelt, with line authority f&r all facets of operations. He was also the link with corporate headquarters, as the sole operational representative on the Executive Committee which is responsible for company policy. The planning function was strengthened with the creation of the Corporate Planning Department, and the institution of short-term planning exercises at the divisional level. The new arrangement was also expected to improve liaison between the divisions and the corporate support services. All local commercial and industrial subsidiaries were grouped under a new holding company, Mulungushi Investments, Ltd. (MIL) wholly owned by ZCCM. Also, ZCCM's overseas subsidiaries were grouped under ZAL Holdings Ltd., also wholly owned by ZCCM (see paras. 5.07-5.09). The rationale was to enable ZCCM focus on its core mining operations by disassociating itself from non-mining activities, while -6- increasing the subsidiaries' managerial independence and direct access to capital and foreign exchange. 4.02 The organizational structure was changed again in early 1992, effectively reverting to a more centralized organizational structure, with the abolition of the position of the Executive Director - Operations and the move of the Technical Director to headquarters, However, the separation of the job of CEO from that of the Chairman of the Board augurs well for ensuring a better focus, coordination and monitoring of management: the CEO being more responsive to divisional manage-rs, particularly if he were to be stationed at the Copperbelt; and the Chairman being more sensitive to shareholders and exercising oversight over management. There were also changes at the top management level following the October 1991 election results that led to the removal from office of the UNIP (Attachments 7, 8). 4.03 Although five of the twelve Directors ac ZCCM's Board are appointed by private shareholders, in practice they have not been able to have an input or their concerns reflected in the decision-making process. To all intents and purposes, ZCCM's Board has been fully under Government control (see paras. 5.10-5.14). Staff accountability within the company also has been diluted because of plitical appointments, in the sense that Party loyalty overshadowed merit in many important non-technical appointments. The corporate-wide allocative system of foreign exchange, capital, labor skills, and inputs, not only reduced managerial flexibility, but also rendered more opaque the accountability of managers because they could unhesitatingly attribute inefficiencies and poor performance to rationing of resources. Furthermore, those responsible for mining operations at the Copperbelt have been sidelined and under-represented in the Executive Committee, while managerial power effectively rested with non-technical staff at corporate headquarters. Thus, the organizational restructuring of ZCCM in 1985 has failed to achieve the objective of increasing the operational autonomy of divisions and improving accountability. The new management team would be well advised to take a hard look at the organizational structure and try to rectify these shortcomings. Rationalization of Mining and Metallurgical Facilities 4.04 ZCCM took steps to rationalize mining and processing operations; but the facilities have yet to be fully optimized. The Kansanshi open pit, Konkola No. 3 shaft, and Chambishi mine were closed, while two concentrators, a smelter and a refinery were placed on care and maintenance (see map). Also, ZCCM made efforts to improve performance standards and productivity levels at its mining and metallurgical operations, sourcing procedures, and accounting and budgeting systems. On-the-job and formal training programs were given priority, and remunerative packages were designed to attract skilled expatriates. In mining, training of supervisors, operators and artisans became more systematic, albeit the throughput has not kept up with divisional requirements. An improved bonus payment scheme based on production was introduced, and individual performance targets were established for various stoping and development activities; but its effectiveness remains questionable. An intensive rebuilding and main- tenance program was initiated to increase equipment availability, and a three- shift, seven-day operations plan was introduced in appropriate areas to increase equipment utilization. But the effort has been hampered by, inter -7- alia, inadequate supply of spares and shortage of skills. The mine planning process was strengthened through recruitment of experienced professionals, improved training, and computerization. Stoping methods for 1lat-dripping overbodies were studied to improve productivity, reduce dilution, and cut costs. Improved procedures for draw control, sampling and assaying were introduced to diminish dilution. Nonetheless, productivity in mining operations continued to deteriorate: ore output per man-year fell from 63 tons in 1985-87 to 50 tons in 1991. 4.05 In metallurgical operations, improvements in smelter capacity were undertaken; control instrumentation was installed in concentrators to improve accounting, increase recoveries, and reduce costs; tank houses were rehabili- tated in refineries; and electrolyte filters were installed in the leach plants. A comprehensive maintenance engineering management system was introduced in all divisions, and special attention was given to skills training, spare parts forecasting, and quality control. But inability to introduce the envisaged fully computerized maintenance system remains a major handicap. Steps were taken to improve inventory control procedures for spares and consumables, reduce their consumption levels, and source local supplies. However, shortages have persisted because of insufficient allocations of foreign exchange. A materials management information system has been implemented in phases. The operations phase is expected to be completed in early 1992. Implementation is hampered by resource constraints (computers, technical staff). Performance against agreed targets is monitored at the divisional level, units within divisions, and central functions. Yet, the results attained to date are far from satisfactory (see paras. 4.07-4.12). 4.06 The establishment of the Corporate Planning Department, with responsibility for investment and production strategies, has improved the planning function. Capital requirements were integrated into the planning process, and investment budgeting and approval procedures were formulated to ensure continuity of projects. All divisions have mine planning units, annual plans run concurrently with the budget and reflect constraints, and five- and fifteen-year forecasts are prepared. Nonetheless, the effectiveness of the planning function has been greatly hampered by skill availability, while implementation by severe resource constraints. A technical assistance project approved in June 1991 would have helped ZCCM, inter alia, develop and implement a comprehensive corporate plan that would include: phasing down particular ZCCM mining operations with depleting reserves; joint-venturing of under- developed copper resources; and divestiture of subsidiaries and/or assets with no direct relation to mining.!/ However, the Credit was not disbursed following the suspension of Bank lending to Zambia in 1991. Operating Efficiency 4.07 A confluence of factors have adversely. affected ZCCM's operating efficiency over the years (see also para. 5.03). Contrary to official pronouncements (para. 2.01), the Government's approach continued to be maximization of foreign exchange earnings, tax revenue, and employment, at the ' PR No. 5496, Zambia - Mining Sector Technical Assistance Project, May 23, 1991, paras. 26, 32 and Annexes 5 and 6 therein. -8- expense of ZCCM's operating efficiency, financial health, and long-term planning (see also paras. 5.07, 5.08). This has resulted in overmanning, retaining loss-making units (through cross-subsidization), and neglect of ore reserve development which has an eight to ten-year lead. Mining projects, routine equipment replacement, modernization, and investment in infrastructure have been postponed due to ZCCM's inability to fund them from internal resources. Weaknesses at the middle management level, skill shortages, and declining labor productivity have been pervasive. As a result, copper production kept declining during the 1980s and early 1990s. From a peak 592,000 tons in 1982, production fell to 390,000 in 1992, and will probably hover around 400,000-430,000 tons in the next five years or so (see also PCR, para. 6.01). The expectation at appraisal was that production would stabilize at 570,000 tons annually from the mid-1980s onwards (SAR, para. 7.02). This represents a shortfall of over 30% (Attachment 5). Capacity utilization, with exceptions in particular facilities, has been constantly declining and has reached unsatisfactory levels, with inimical effects on the company's operating efficiency and financial performance. Average capacity utilization in milling operations fell from 72% in 1983 to 61% in 1991, concentration from 75% to 66%, leaching from 88% to 60%, smelting from 83% to 67%, and refining from 80% to 56% (Attachment 9). 4.08 Although the various mines are unique and their requirements differ, traditional methods continue to be applied, while allocations of foreign exchange, capital and inputs are -aade on the basis of standardized, corporate- wide procedures that lead to inefficiencies and hamper innovation. The allocation of overhead and taxes across the mines also appears to have affected the efficiency of resource extraction. Ore deliveries to mill have been hampered because, inter alia, the waste stripping ratio is high (typically 15:1); overburden removal has been consistently short of requirements due to persistent low availability of major equipment fleets; inability to maintain overburden stripping rates at required levels, forcing periodic redesign of pit operations; inadequate time lags between development, stope drilling, and production; mine development shortfalls; and materials handling constraints. The presence of vast quantities of water has further complicated the extraction of ore, whether underground or in open pits. Shortage of foreign exchange has fostered technical inertia, and impeded long-term planning and modernization efforts. The altered geological geometry of ore bodies has rendered certain mining techniques out-of-date, and their retention has implied increased inefficiency and technical risks. Research into modern, more efficient mining methods has not proceeded at the required pace. In the past, high grade ores (5%) were suited to high production bulk mining, using rudimentary open-stoping techniques and drawing on a plentiful unskilled labor force. Nowadays, efficient copper production from deeper and thinner ore bodies of much lower grade (2%-3%) dictates the introduction of new techniques, such as cemented backfilling. But, as a mechanized and continuous method, backfilling requires skilled operators and uninterrupted supply of spares, which ZCCM has not been able to secure. 4.09 Inadequate and irregular foreign exchange allocations have prevented ZCCM from stocking adequate levels of spares and consumables to ensure proper maintenance and continuity of production. Insufficient capital replacements have resulted in deterioration of plant and equipment. The conscious policy of Zambianization has reduced ZCCM's core of seasoned expatriates to critically -9- low levels. Also, turnover among expatriate staff has been very high (Attachment 10). Efforts to accelerate indigenization and cut costs have led to premature promotion of unseasoned staff to managerial and supervisory positions with adverse repercussions on production efficiency. Finally, the intended greater discretionary autonomy and authority of the divisions has been attenuated in practice by excessive standardization and centralized allocation of foreign exchange, capital and inputs,- strong labor unions, indigenization policies, financial constraints, and a paternalistic management culture. 4.10 Despite wage adjustments, workers' compensation remains low. As a result, many workers show inadequate interest and attention in the job, and resort to moonlighting. Labor productivity has been poor by international standards and, more importantly, continues to decline. Annual output per employee fell from 10 tons of copper in the early 1980s to less than 8 tons in the early 1990s, compared with 30 tons in Chile (Attachment 11), reflecting the combined effect of the shortcomings just mentioned. The state railway system is another factor significantly hampering ZCCM's production and operating efficiency, and adds to production costs. The track is old and deteriorating, while Zambia Railways' rolling stock is insufficient to satisfy ZCCM's needs. About 25% of the concentrates produced on the Copperbelt have to be trucked by road resulting in delays and increased transport costs because the system is unable to cope. Often, mine artisans are used to maintain Zambia Railways' tracks. Bottlenecks in Dar-es-Salaam (e.g, shortage of handling equipment) have been very common and, coupled with erratic wagon supply and priority movement of maize and fertilizer, have restricted cargo and throughput, causing a backlog of cargo awaiting dispatch from the port and adding to the financial costs of exports. Finally, since 1987, and until very recently, redirection of supplies to observe sanctions against South Africa, led to appreciable increases in costs. Human Resources Development 4.11 A human resources development plan was initiated with the objective of eventually arriving at a reduced and more effective work force. Some 7,000 w9rkers were laid off between 1985 and 1987, but the policy was reversed thereafter. Although ZCCM had acknowledged that the continuing loss of experienced staff was a major concern, and that management would make every effort to retain and recruit skilled personnel, it failed to do so and the number of expatriates continued to decline: from 1,788 in 1984, or 3.1% of the work force, to 723 in 1991, or 1.3%. Also, ZCCM has yet to develop a labor retrenchment policy, largely due to social considerations and government influence, and overmanning persists. Employment rose by 4% between 1983 and 1985, declined by 12% between 1985 and 1987 when a cost-cutting effort was s Centrally controlled foreign exchange allocations with insufficient reference to end users tas led to incorrect prioritization of orders, and has resulted in excessive stocks of slow moving items alongside a shortage of urgently needed spares and consumables. Not infrequently, there has been an urgent search for alternative spares locally, which drove prices up. On occasion, creditors have refused supplies of stores due to overdue payments. Management and supervisors spend an inordinate amount of their time tracking spares rather than managing the operation. - 10- undertaken in earnest, but rose again by 6% between 1987 and 1991, at a time when production levels were constantly declining (Attachment 10).1i A project, approved in June 1991, would hrve enabled ZCCM to hire some 50 technical spec-.alists with urgently needed skills in maintenance, operations, inventory management, management information systems, and environmental protection, to perform hands-on operational and planning functions. The project would also have strengthened both in-house and overseae training activities of ZCCM. However, the Credit was not disbursed because of suspension of lending to Zambia in 1991.Zi 4.12 Individual standards of performance apparently have not improved measurably over the years. The principal role of ZCCM's Manpower Planning and De,relopment Department is to develop an effective work force through manpower p.anning, recruitment, selection, development, promotion, and training programs. However, progress to date to alleviate ZCCM's technical weaknesses has been limited, to a large extent because of undue emphasis on indigenization of positions and the absence of adequate programs to support the transition (see also PCR, para. 6.02). Skill shortages persist, and this has meant that positions are staffed with people one stage beyond their level of competence. The result has been poor monitoring, problem-solving, and decision-making capability, especially at the middle level management, fostering inefficien- cies. Financial Performance and Position 4.13 ZCCM's sales revenues fell from US$1,045 million in 1984 to US$786 million in 1987, due to declining world prices and production levels. Despite the continued decline in production, sales proceeds rose significantly to US$2,043 million by 1989 as world prices resurged. Revenues tapered off to US$1,821 million in 1991 affected by both production and price declines (Attachments 3, 5, 12). The array of factors that have affected ZCCM's operating efficiency and cost of production were discussed in paras. 4.07-4.12. ZCCM's financial performance has also been materially affected by the fiscal regime, which has been draining ZCCM's export revenues through the haphazard application of the mineral export tax, thereby depriving ZCCM of the requisite resources to meet regular input requirements, undertake new investments, and develop new ore reserves (paras. 5.04-5.06). Uncalled for investments in and diversion of foreign exchange resources to non-mining activities has exacer- bated the situation (paras. 5.07-5.09). Unlike all other exporters, ZCCM's retention entitlement is capped, with the cap being negotiated annually; it has averaged at about 38%, as opposed to the legislated 50% for all exporters. Given the high import content (75%) of mining operations, this low level of si Studies had recommended a 35% reduction of the labor force within a five- year period based, inter alia, on mechanization of certain manual operations and replacement of labor-intensive with capital-intensive equipment. However, such a switch may not always be cost-effective in the Zambian circumstances. Nonetheless, a 20%-25% target of work force reduction would be realistic, and in fact imperative, given present and prospective production levels and ZCCM's precarious financial condition. 2i PR No. 5496, Zambia - Mining Sector Technical Assistance Project, May 23, 1991, para. 32 and Annex 6 therein. - 11 - export earnings reteation, coupled with a 20% overall shortfall of requirements and the delays in obtaining the supplementary foreign exchange, has resulted in a continuous shortage of spares and consumables, constant interruptions of the productive process, and inability to plan ahead. Faced with shortfalls in its requirements, ZCCM has been forced to borrow offshore, discount foreign sale proceeds, etc., thereby raising further financing costs. In addition, ZCCM has been losing money in recent years (K 11.7 billion in 1991) by buying and selling third-party copper to the tune of 250,000 tons annually.Y The justification for ZCCM's involvement in such a speculative activity is not clear. 4.14 ZCCM's financial performance and position during the past decade is reflected in the appended financial statements (Attachments 13-18). Profit- ability has been poor through 1988, and has improved only slightly in more recent years. Return on equity has remained abnormally low throughout, the capital structure lop-sided, and the equity base thin. In reality, ZCCM's financial situation is much worse than that shown in the financial statements, because the company has not complied fully with international accounting standards, in that all foreign exchange losses arising from long-term borrowings,- other than those capitali;ed, have been deferred and recognized in the profit and loss account over the repayment period of the loans. Had ZCCM complied with international accounting standards, the entire deferred exchange would have been recognized in the profit and lose account in the years in which such losses incurred,L' thereby exacerbating losses or eliminating all profit. Furthermore, outstanding debt amounting to K 3.1 billion in 1990 due to lenders of the Paris Club Group of Creditors was rescheduled and reclass- ified as long-term with a ten-year grace period. Under the arrangement, repayments do not commence until September 1, 1999. Similarly, financial and commercial institutions, excluding multilateral organizations, agreed to reschedule the principal amount outstanding at December 31, 1990. As a result, an additional amount of K 2.1 billion was reclassified as long-term debt. Lenders have also agreed in principle to waive the requirement that total liabilities should not exceed net worth, and replace it with the restriction that it be applied on new borrowings." 4.15 All in all, ZCCM's financial position is precarious as its equity basis has been eroded and the company is illiquid. ZCCM has been unable to service its debt, borrowings from the Government and the Bank of Zambia had to be subordinated, reschedulings of overdue obligations have been recurring gi ZCCM, Annual Report 1991, p. 22. i It is noteworthy, that the Government's tax policy has forced ZCCM to incur a massive foreign debt. Also, ZCCM has on occasion borrowed directly on behalf of the Government, committing metal sales as a form of collateral (e.g., in 1987, a loan was raised abroad to pay for the importation of motor vehicles for the Government). The outstanding amount of such borrowings exceeds K 3 billion equivalent. It should also be borne in mind that ZCCM bears the foreign exchange risk on such borrowings. 1' ZCCM, Annual Report 1991, p. 28. LU Ibid., p. 26. - 12 - during the past 8 years, lenders have been requested to defer repayments falling due, while creditors have stopped short from formally declaring the company in default.L2 Failure to service foreign debt has impacted on ZCCI's creditworthiness and borrowing capacity, restricting suppliers' credit and deliveries, forestalling access to new term financing, and adversely affecting its operating efficiency. Finally, the alleged lack of transparency in ZCCM's financial management and use of funds obfuscate the company's true financial condition. Financial and Economic Rates of Return 4.16 In estimating the FRR and ERR, a judgment has to be made as to the actual and prospective contribution of the project to ZCCM's total production. It is certain that, without the project, production would have continued to decline, albeit the rate of decline cannot be determined precisely. The assumption is therefore made that production would have followed the FY78-86 trend, declining by an average of 16,000 tons (3.8%) annually. The difference between actual and projected production levels through the remaining life of the project, and the extrapolation of the FY78-86 production decline trend is assumed to be the project's contribution to ZCCM's total production (Attach- ment 19). The net value of this output is then estimated based on the actual and projected price of copper and incremental costs of production/realization. The investment outlays and re-estimated FRR and ERR are shown in Attach- ments 20, 21. 4.17 The re-estimated by the audit FRR for the project, which accounts for some 15% of total production at recent levels, is 11% -- which is satisfactory. The FRR at appraisal had been estimated at 21%, and ex post in the PCR at 17%. The recalculated by the audit ERR is 18%, which is also satisfactory. The respective estimates by the SAR and the PCR were 36% and 23%. The lower FRR and ERR at audit, compared to SAR's and PCR's, can be attributed to several factors. First, the SAR assumed that production would stabilize at 570,000 tons annually from the mid-1980s onwards (para. 7.02), whereas the prospects are that it would do so at about 425,000 tons, or 25% less. The PCR also assumed increasing levels of production, reaching 489,000 tons by 1995. Second, price forecasts have also been optimistic both at appraisal and at completion (SAR, paras. 7.14-7.16, 8.02, Annexes 7-1, 7-5 and 8-1; PCR, paras. 6.04, 6.05, and Tables 6, 6A). In reality, prices fell during 1984-86, picked up during 1987-89, but started declining from then on, and are forecast to decline substantially through the mid-1990s (Attachment 12). Despite the projected respectable growth in copper demand during the first half of the 1990s, an excess supply is forecast because of large capacities coming on- stream in the very near term. In the second half of the 1990s, the market balance is likely to improve and turn into a deficit, as stocks are depleted. The relatively low prices expected to prevail during the first half of the 1990s are likely to discourage new investments in mining projects. Indeed, only a few large-scale projects have been identified for the 1995-2000 period. Third, for the reasons discussed in paras. 4.07-4.12, 5.01-5.03, 5.07-5.09, ZCCM remains an inefficient and high cost producer. 1l ZCCM, Annual Reports, various issues. - 13 - V. FINDINGS AND ISSUES Reserve and Resource Development 5.01 One of ZCCM's major operational problems since the early 1980s has been the lack of fully developed ore reserves.-3 Similarly, prospecting has identified deposits of potential mineralization. However, development of reserves and detailed exploration of resources have not been carried out to the extent required because of lack of emphasis throughout the 1980s in developing a definitive, comprehensive medium- and long-term strategy for the company, reinforced by shortage of funding and diversion of funds and energy to other non-mining activities at the Government's behest (paras. 4.06, 4.07, 5.07- 5.09). A study to devise a long-term corporate strategy for the extraction of ZCCM's ore resources, and establish priorities for the profitable development of existing and prospective mines is in progress. Tentative estimates indicate that, with an annual capital expenditure of some US$35-40 million, copper production can be maintained at 400,000-430,000 tons per annum through 1998 based on current reserve ore of some 400 million tons (Attachments 22, 23). A precipitous decline in the level of production is inevitable from 1998 onward, unless diminishing ore reserves are replaced (see Attachments 24, 25). ZCCM has identified resources of some 1.2 billion tons of ore of 2.4% average grade, containing about 29 million tons of copper (Attachment 26). These resources have the potential to sustain copper output at levels of about 425,000-450,000 tons annually at least though the year 2010. To exploit this potential, continuous capital investment in the development of these resources is required over the next 10 years for an estimated total of US$820 million, of which US$470 million in foreign exchange. This iuvestment is in addition to the required capital expenditure to maintain production levels during this period. The respective financial contribution and prospective cost reductions for each mine have yet to be firmly established. Also, the issue remains whether the mining of the ores would be economically and financially attractive at current and projected world copper prices, whether ZCCM can realistically achieve sizeable cost reductions, and whether ZCCM can raise these funds on its own. 5.02 Future production will largely be dependent upon output from underground mines. Moreover, it would be nscessary that resources be converted to reserves at the requisite rate and ratio; new mining methods, as applicable, be introduced to improve materially the grade of run-of-mine ore and the recovery of in situ resources; the quality of supervision in underground L31 Reserves are ores at various stages of development available for mining from existing or planned facilities. Resources are mineralized materials which have been examined in sufficient detail to establish their mode of occurrence, size and essential qualities, and there is reasonable expecta- tion for their future exploitation. Reclaimable materials already mined or treated are also included. Before such mineral resources can be classified as ore reserves, the feasibility of economic exploitation woald have to be established, which entails additional investment. L This exercise would also enable ZCCM to assess with some confidence the value of its copper ore assets. - 14- operations be raised significantly, in line with the degree of mechanization and backfill required; there be a rise in the overall educational and skill levels, commensurate with the increase in the sophistication of the equipment to be utilized; the foreign exchange required for mechanization be made available; the amount of copper per ton of ore delivered to mill be increased; and operating costs per ton of finished copper be reduced significantly by introducing major changes in current operating practices, and achieving productivities and efficiencies well above current levels. Cost-Effectiveness 5.03 ZCCM's operating costs are estimated at 970/lb of copper, debt repayment and interest charges add another 164/lb, and taxes (income tax 6.70/lb and copper revenue tax 2/1/b) 90/lb further, bringing the total cost to US$1.22/lb. Li This is about 15% above world prices, and places ZCCM among the highest cost producers world-wide, at a time when major competitors are reducing their costs significantly, a number of large low-cost projects are coming on stream Lt and pollution control expenditures would be mounting. Moreover, as a high cost producer, ZCCM is especially vulnerable to the cyclical movements of copper prices, which are forecast to decline through the mid-1990s (Attachment 12). According to estimates, costs could be reduced by some 20%, provided actions are taken to raise and stabilize copper production at circa 400,000 tons annually; introduce new mining methods; standardize makes of equipment; rehabilitate, balance, and optimize processing capacities; seek more aggressively toll smelting to raise capacity utilization and revenue; strengthen supervision and discipline; reduce labor costs and overhead expenses; improve maintenance and labor productivity; source from less costly suppliers; improve inventory control; change the tax regime; ensure uninter- rupted availability of foreign exchange; and assure managerial autonomy. Understandably, such cost reductions and improvements in operative efficiency would be difficult, in the sense that as mines age, costs tend to rise: workings become deeper and more extensive, resulting in longer hauling distances, and travelling times; internal routes require maintenance, extra support, etc.; stripping ratios have to increase significantly. Nevertheless, the fact remains that ZCCM's viability as a going concern is at stake (paras. 4.13-4.15), there is considerable scope for improvement, and this presents a major challenge for ZCCM's naw management team. The Tax Regime 5.04 ZCCM is subject basically to three types of taxes. First, import duties and sales taxes levied on most items used in mining. Second, corporate -5 Estimated unit costs for FY90 at appraisal were US$1.13 (SAR, para. 7.09). For the trend of production costs during 1984-91, see Attachment 27. t It is noteworthy, that Zambia's higher average ore grade and relatively lower labor costs are offset by the extra costs of pumping water, mine waste removal, mining highly contorted layers, narrowing ore bodies and dimin- ishing grade with depth, low labor productivity, and inefficiencies in the procurement of supplies and stores which represent some 40% of operating costs. - 15 - income tax assessed at a 45% rate. However, the effective income tax paid by ZCCM is higher than that indicated by the tax rate because ZCCM keeps its books in local currency, which results in an understatement of costs and an overpayment of corporate income taxes. Costs are understated because (a) depreciation, expressed in Kwacha, tends to be below replacement costs; and (b) the accounting cost charged to operations for items taken from inventory under the FIFO (First-in, First-Out) method used by ZCCM is lower than the replacement cost of these items during periods of rapid currency depreciation and price inflation -- which has been the case particularly in the last five years or so. Given the high import and foreign exchange content of copper mining operations (about 75%), a case can be made that ZCCM be allowed to keep its books also in a foreign currency. 5.05 Third, the mineral tax on copper export proceeds levied in addition to the corporate income tax. In April 1984, a mineral tax was introduced at the rate of 51% on profits, plus an 8% tax on mineral revenues. Since April 1, 1990, the tax on copper export revenue has been revised, and a more progressive levy on a sliding scale was introduced. ZCCM is not subject to the tax as long as the average monthly price of copper on the London Metal Exchange (LME) does not exceed US$1.00 per pound. When the price of copper exceeds US$1.00/lb but is less than US$1.05/lb, the levy is 60%; between US$1.05-1.10, 70%; between US$1.10-1.15, 80%; between US$1.15-1.20, 90%; and over US$1.20, 100%. The mineral tax is a surcharge intended to capture some of the economic rent but mainly to appropriate windfall gains arising from increases in world copper prices or devaluations of the Kwacha but, in practice, it turned out to be a convenient way to extract additional revenue from ZCCM for the public coffers. This extra levy has forced cutbacks in capital expenditure, decreased ore reserve development, raised significantly ZCCM's foreign debt exposure, and contributed to its present weak financial position and capital structure (paras. 4.13-4.15). 5.06 Furthermore, the mineral tax as implemented has had other flaws as well. Ideally, such a tax should be deductible as a business cost for the purposes of income taxation; being levied on revenue rather than profit, the tax may have impacted on efficient ore resource extraction by discriminating in favor of high-grade ore bodies; the tax may inadvertently have distorted resource allocation; and, finally, any windfall profits would be taxed, rightfully so, through the corporate income tax. In short, when applied haphazardly, the mineral export tax is counter-productive, and disregards fundamental principles of equity because of ZCCM's unequal treatment vis-a-vis other industrial undertakings.-U ZCCM should be subjected to the same corporate'income tax, payable on an estimated quarterly basis, as well as any other levies as applied to all industrial enterprises. But as a natural resource extraction company, it should also pay royalties and an additional tax to capture some of the economic rent that normally accrues to the state albeit such that, taking into account the cyclical nature of the industry, ZCCM when operated efficiently can produce a strong cash flow. -1 The fact that ZCCM is in the public domain should be immaterial for tax purposes. - 16 - Diversification 5.07 In the last decade, ZCCM has acquired a wide range of mining and particularly non-mining interests. ZCCM has two main subsidiaries: ZAL Holdings Ltd. (ZAL) and Mulungushi Investments Ltd. (MIL).-e ZAL consists of UK-based subsidiaries which provide services that cannot be easily obtained in Zambia. In recent years, ZCCM has also acquired a large number of small unviable non-mining firms, such as a laundry chain, tourist, elevator, and saw- mill concerns, as well as agricultural properties seized by the Government in 1989 in accordance with the Lands and Acquisitions Act. MIL comprises an array of Zambia-based enterprises, some being ZCCM's suppliers but others engaging in other non-mining activities, such as farming and tourism (Attachments 28, 29). The amount invested in these companies i difficult to establish with certainty, but apparently represents a fraction of ZCCM's mining assets. They employ some 12,500 people, of whom 330 are expatriates. Also, substantial amounts of foreign exchange is being allocated to some of these companies (about 10% annually), which yield little, if any, foreign exchange in return. Over thd years they have shown a nominal profit, but more recently a loss. However, the transparency of the accounts of these subsidiaries remains questionable and, as a result, their true financial performance and position cannot be ascertained.'' 5.08 Since 1987, when the decision was made that Zambia will pursue its own brand of economic policies (growth based on the country's own resources),L1 the Government has used ZCCM's resources as an instrument to spearhead general economic diversification -- a policy the wisdom of which has been questioned by both ZCCM's minority shareholders and company managers. Indeed, it is an open question why ZIMCO and/or INDECO, which already had a mandate to promote such activities, were not entrusted with the task, and ZCCM was compelled to infringe on ZIMCO's domain (e.g., tourism). This forced diversification effort has meant diversion of scarce foreign exchange, capital, skills and management time away from core mining operations, at the expense of ZCCM's more vital interests and efficiency. Lt Other subsidiaries include the Copper Industry Service Bureau Ltd., Mines Air Services, Circuit Safaris Ltd., Zambia Detonators Ltd., Prime Marble Products, Ltd. Also, ZCCM owns 40% of the share capital of Memaco Trading Limited (MTL), incorporated in the UK, which trades in commodities. In 1986, the Medical and Educational Trust (MET) was created, sponsored by ZCCM, to take over the health and educational services provided by the company to mining employees (10 hospitals, 32 clinics and 4 nursing schools). These services were also made available at a nominal fee to the public at large. L9 For instance, in FY91, "MTL suffered a serious breakdown in controls, procedures and systems affecting its transactions. As a result, MTL recorded a loss amounting to K 466 million for the year, of which K 178 million is accounted for in the Group's financial statements." ZCCM, 1991 Annual Report, p. 25 (emphasis added). Lt For the economic and industrial policies pursued during the past decade, see OED, PPAR No. 10846, Zambia - Industrial Reorientation Project, June 30, 1992. - 17 - 5.09 Aside from purely rescue operations, interspersed with instances of promotional considerations, ZCCM has also been burdened with a number of other tasks which hardly represent a genuine diversification effort. They emanate from the decline of government services due to poor macroeconomic management and include: management of the zoo and botanical gardens which had been neglected; supporting public works, such as building a commuter railway, repairing infras:ructure (roads, rail); performing municipal services, such as the purchase and running of a bus company to ferry miners between Copperbelt towns, or maintenance of streetlights; and secondment of managers to para- statals and newly acquired businesses. These acquisitions, which were politically motivated and thrust upon ZCCM, not only have distracted ZCCM from its main activity, but also have constituted a poor portfolio of assets and a drain on its financial and human resources. ZCCM would be well advised to incorporate in its existing structure those subsidiaries involved in strictly mining-related activities and take steps to divest all others. Accountability 5.10 Oversight over ZCCM has, in fact, been replaced by political control. ZCCM has been effectively part of the Party's (UNIP) constituency, was expected to display loyalty, and was compelled to provide financial and other support for political causes. The person to fill the dual position of President/CEO was hand-picked by the President of the Republic, and this enabled him to exercise overbearing authority and influence over the Board. A frustrating managerial dichotomy was created within the company! Party-loyal managers, mostly in non-technical positions, wielding disproportionate power and being acquiescent to political manipulation; and technical managers, with business- like approach and attitude, who resented political interventions in ZCCM's management decisions, and the attendant de-emphasis on core mining operations. Furthermore, UNIP's dominant role in policy-making and powerful influence during the Second Republic," by permeating all branches of Government, made ZCCM increasingly subject to intrusive political influence, weakened signifi- cantly oversight by government agencies, and rendered ZCCM unaccountable to Parliament. 5.11 Government (and Party) control over ZCCM has been exercised through the wholly state-owned holding company, the Zambia Industrial and Mining Corporation, Ltd. (ZIMCO), which appoints the seven "A" Directors, usually from among high ranking government officials, and formally the Chairman/CEO of ZCCM's Board. The other five "B" Directors are appointed by the private minority shareholding interests. Thus, the President of the Republic was assured of a loyal group that includes the Chairman of the Board and all "A" Directors. ZCCM has complete autonomy from ZIMCO's Management, as ZIMCO is not represented in ZCCM's Board, and has no formal access to its operations. All company appointments are made by the Chairman, subject to approval by ZCCM's Board. Presidential and Party influence on ZCCM has been particularly extensive in the 1980s, and accountability has been compromised by political expediencies, exigencies, and imperatives. Effectively appointed by the U1 The one-party system during the Second Republic ended following the October 1991 elections; the Third Republic ushered in a period characterized by a multi-party system. - 18 - President, ZCCM's former Chairman/CEO has had a long-standing and close relationship with him, reported directly to him, and was accountable to him only. It is widely considered that both have been responsible for most decisions taken by ZCCM. 5.12 Although it has wide-ranging powers for operational oversight, the Ministry of Mines is underfunded, has a skills deficit, and virtually no presence on the Copperbelt. The Ministry participates in major company decisions, but it has never challenged political decisions. The Ministry of Finance administers the tax regime for copper and, through the Bank of Zambia, controls the allocation of foreign exchange to ZCCM and its foreign borrowing and repayments. The strong mineral dependence of the country has forged a close link between the economic fortunes of ZCCM and the Zambian economy (para. 1.01). This has resulted in conflicting short-term objectives. E.g., higher foreign exchange allocations to ZCCM imply cuts elsewhere in the economy; taxing ZCCM is politically more expedient than introducing tax reforms to reduce budget deficits. Consequently, oversight has been confined to the tax and foreign exchange regimes. 5.13 The link with the Central Bank is more direct, as the Governor sits on ZCCM's Board, and the Bank of Zambia enforces controls concerning foreign exchange, external borrowing and trade. Transparency regarding utilization of foreign exchange allocations by ZCCM reportedly has improved in more recent years due to the vigilance and independence of the new Governor. The Auditor General, as well as the Ministry of Finance and the Central Bank, are empowered to examine ZCCM's books; but, in practice, this right has not been exercised -- in part because access has not been unrestrained. This has raised questions regarding the transparency of ZCCM's accounts, and speculations concerning its financial management. 5.14 ZCCM's Board also has not been effective in its oversight function, despite the presence of "B" Directors. The structure of the Board and nature of directorate appointments ensured that minority shareholders could be bypassed, and that their concerns not be fully aired. The right of veto of minority shareholders was abolished in 1973, while their power to break the quorum (three "A" and two "B" Directors) has never been exercised, reportedly in the interest of continued good relations and, ostensibly, of advancing their own agenda. Poor oversight is also related to certain functional features of the Board: vulnerability and high turnover of "A" Directors, poor attendance, withholding of information, the purely political nature of the directorate appointments, and the political power of the Chairman. The Chairman's appointment to UNIP's Central Committee in 1988 enhanced his influence, and apparently made him more vulnerable to political pressure. Environmental Concerns22/ 5.15 ZCCM is conscious of its environmental responsibilities, albeit financial constraints do set limits on the extent to which investments for pollution control equipment can be undertaken. ZCCM is actively reviewing its waste management program to improve the degree of control, particularly in ' For details see Attachment 30. - 19 - respect of effluent quality control. Heretofore, the discharge of effluent water, the disposal of other solid wastes, and the dispersion of stack emissions from ZCCM's operations has resulted in a limited environmental impact, which is restricted to a local zone adjacent to each mine. ZCCM has not been as successful as it would have wished in controlling all effluent releases. Nonetheless, the all important values for dissolved metals lie within acceptable levels, and ZCCM has been taking steps to bring effluent releases under control. 5.16 For most of the year, meteorological conditions are favcrable to achieving rapid dispersal of stack emissions. Thermal inversion layers never persist for more than a few hours and, as a result, the sulphur oxides discharged by the industry do not accumulate and build up to hazardous levels. Nevertheless, ZCCM has embarked on a major rehabilitation program for the four acid plants at Nkana to ensure that they operate with maximum efficiency. The completion of this program, coupled with a plant operational schedule which is sensitive to local meteorological conditions, would ensure that the local impact of sulphur oxides in the Kitwe area is substantially reduced. Dust collection from the electric furnace and gas collection from the converters also need to be addressed at Mufulira, while the roaster plant at Nchanga needs to be fitted with a fume scrubbing system. 5.17 The belated promulgation of the Environmental Protection and Pollution Control Act in June 1990, is nonetheless a major step towards initiating government action aimed at bringing the Zambian industry under environmental controls similar to those in developed countries. The Act is largely enabling legislation which provides for the establishment of committees of experts, through an Environmental Council, each charged with responsibility for controlling the quality of different sectors of the environment. It is difficult to predict the actual standards or the degree of compliance that will be required. It is expected that the legislation generated by the new Act will be in place within the next few years, with the main standards defined and the requirement for a specified degree of compliance by the year 1995. However, as environmental controls entail heavy financial expenditures, resource availability and delicate cost-benefit analyses would ultimately dictate the pace with which controls would be phased in. VI. OVERALL ASSESSMENT AND SUSTAINABILITY Overall Assessment 6.01 Bank support for ZCCM's rationalization of mining and metallurgical facilities and improvement of operating efficiency was fully justified, given the vital importance of the sector for the country's economy. Although the project was aptly designed technically, the need for new ore reserve develop- ment did not receive the emphasis it deserved. ZCCM's managerial autonomy and accountability were not even considered as a potential issue, given the dominant role of the Party (UNIP) in the management of the economy, the way the appointments of the top executives were made, and the strong sense of party loyalties within the corporate structure. In terms of accountability, ZCCM has been "a state within a state." This undergirded the strong link forged between - 20 - the previous Government and ZCCM, fostered decision-making with impunity, and attenuated the results achieved. The recaptiveness of ZCCM's management to change, strength to ward off external interventions, ability to adapt to changing circumstances, and fortitude to implement the requisite measures to improve labor productivity, i.e. the existence of a rather rigid corporate culture, were not fathomed at appraisal, while attempts during supervision to address the issue were frustrated (see also PCR, para. 9.02). Forecasts of copper production turned out to be overly optimistic, albeit in small part due to foreign exchange shortages and erratic allocations, and diversion of funds to non-mining activities. Finally, the appraisal projected an almost steady upward movement of world copper prices through the mid-1990s, when a downward cycle had already started during the year of project approval. 6.02 ZCCM has yet to formulate long-term production and investment strategies, commensurate with its mineral, technical and financial resources. Although steps have been taken to rationalize its operations, mining and processing operations have only partially been optimized. Ore reserve and resource development have been neglected, inter alia, because of the absence of a definitive medium- and long-term strategy. In-house studies to devise such strategies are in progress (paras. 4.04-4.06, 5.01, 5.02). The reor- ganized corporate structure, because of its modus operandi, did not achieve the expected increase in divisional managerial authority and accountability for production, productivity and financial results, inter alia, because of political appointments and the de facto centralized management of the company (paras. 4.01-4.03). Capacity utilization, labor productivity, and operating efficiency have been constantly declining. ZCCM's training requirements, even at the present much lower production levels, remain unsatisfied. The cumulative and interactive effects of intrusive external interventions in ZCCM's decision-making process, shortage of foreign exchange, promotion of non- mining social tasks, paternalistic management culture, poor planning, inadequate ore reserve development, utilization of outmoded technologies, inadequate investment, poor maintenance, disproportionate and premature shedding of skilled expatriates, over-promotion despite skill deficiencies, high turnover among technical and professional staff, inadequate training, and tepid discipline enforcement have had a deleterious effect on ZCCM's problem- solving and decision-making capability, overall operating efficiency, and financial performance (paras. 4.07-4.12). Sustainability 6.03 Though marginally profitable on paper, ZCCM's equity base has been eroded and its financial position is not sound. ZCCM's financial performance has been materially affected by the declining production levels and world prices, the fiscal regime, excessive external debt, and operating inefficien- cies. In fact, the company's financial position is more difficult than it appears in its financial statements, as it has not fully complied with international accounting standards, it has been unable to service external debt falling due, and has had recourse to repeated reschedulings, while the alleged lack of transparency in financial management and use of funds becloud the company's true financial condition (paras. 4.13-4.15). 6.04 ZCCM's precarious financial position and illiquidity, and the pervasive organizational and operational shortcomings as outlined in - 21 - para. 6.02, imply that ZCCM's sustainability is uncertain. Besides efforts to rectify these shortfalls, the viability of ZCCM's operations dependa on (a) capital injections to upgrade technology of the existing mining and metallurgical facilities and satisfy operational requirements of spares and consumables; (b) additional capital outlays during the rest of the decade to realize the potential of the company's ore resources; and (c) adoption of stern measures to improve labor productivity and control the rising costs to secure the financial viability of the company. ZCCM's poor financial position, heavy indebtedness (US$870 million), inability to service outstanding loans, and the nature of mining projects which are characterized by extended periods of investment and long payback time-spans, are severely constraining factors that preclude their funding from ZCCM's internal resources. It follows, that other options (e.g., recapitalization, extension of subordinated loans, formation of joint ventures) would have to be explored. At this juncture, it is not possible to judge whether such capital outlays offer sufficient returns to attract the requisite investment, and whether ZCCM can secure such funding in light of its present financial position. 6.05 ZCCM's sustainability would be greatly enhanced if the new Government that emerged after the October 1991 elections and ZCCM were to take particular initiatives, as set forth in paras. 6.06 and 6.07. Required Government Initiatives 6.06 Fundamentally, ZCCM's onerating efficiency and viability depend fundamentally on attaining managerial autonomy. In view of the past history of intrusive interventions, this would necessitate the whole or partial privatization of ZCCM, and at least reducing the Government's shareholding from 60% to 49%. Also, there is need to reconsider the tax regime as applied to ZCCM. As any other industrial undertaking, ZCCM should be subjected to corporate income tax, payable quarterly on an estimated basis. But as a natural resource extraction company, it should also pay royalties and be subjected to an additional tax to capture some of the economic rent that normally accrues to the state albeit such that, taking into account the cyclical nature of the industry, ZCCM when operated efficiently can produce a strong cash flow. Furthermore, as long as the Government remains a majority shareholder, it would be imperative to establish unequivocal rules regarding the relationship between ZCCM and the Government authorities concerned, and such understandings should be adhered. The costs of socio-economic tasks thrust upon ZCCM (including overmanning) should be defrayed through special funding and pertinent cost-sharing arrangements. Finally, a system of oversight should be instituted to ensure ex post accountability and assess performance. The political authorities would have to appreciate that the national interest dictates that ZCCM be run as a commercial undertaking and not as an arm of the government, if ZCCM is to operate efficiently, re-establish its creditworthiness, and restore its tarnished image. Actions Required by ZCCM 6.07 ZCCM, for its part, would do well to devise a comprehensive, consistent and realistic five- to ten-year all-encompassing Business Plan, taking stock of the financial situation of the company and the physical condition of plant and equipment, assessing financial restructuring and - 22 - rehabilitation/modernization requirements, and outlining a strategy for the future development of the company.L The Business Plan would define ZCCMI's prospects, activities and objectives, and set forth the elements of a development strategy. Specifically, the Plan would (a) delineate a rational- ization/optimization program for ZCCM's mining and metallurgical operations; design an ore resource development program; and draw up a production and marketing plan, consistent with ore, technical and financial constraints, ensuring optimum utilization of facilities and cost effectiveness by setting production, capacity utilization and efficiency goals, and assuring coordina- tion of marketing and production. (b) Devise detailed investment and financing programs, including priorities and sources of funding. (c) Work out a corporate organization and management plan following a review of the modus operandi of ZCCM's organizational structure, with a view to strengthening the company's management information system; removing impediments to greater devolution of authority to divisions and increasing their accountability; and decentralizing the allocation of foreign exchange, capital and inputs. (d) Devise a human resources development plan, establishing staff requirements, job descriptions/qualifications, procedures for filling positions, promotions, skill upgrading and training, etc.; working out a labor retrenchment plan, including a timetable and provisions to facilitate the redeployment of the affected work force. Finally, the Plan would develop proposals to streamline ZCCM's entire operations by incorporating those subsidiaries involved in mining-related activities in its existing corporate structure and divesting all others. 24/ VII. LESSONS AND RECOMMENDATIONS 7.01 ZCCM's experience provides inatructive lessons regarding the forces that impact on parastatal performance, and offers suggestions that may provide a better analytical framework for shaping the Bank's posture and approach to country micro-economic issues and lending operations. Further to the lessons aptly drawn in the PCR, paras. 8.02 and 9.02, additional lessons and recommen- dations are presented below. 7.02 Concerning Parastatal performance, ZCCM's experience affirms the following. (i) Intrusive state intervention in the decision-making process and policv-induced distortions (e.g., poor fiscal, monetary and foreign exchange policies) not only tend to undercut the contribution of U1 ZCCM could explore the possibilities of vertical integration in copper fabrication -- cast copper rods, cables and wires, extruded shapes and profiles, brass products and copperware, assuming that economies of scope and scale can be reaped. Fabricated copper products have a higher value added, and command substantially higher and much less volatile prices than copper billets. Also, as fabrication is a relatively labor-intensive process, ZCCM could have a comparative advantage -- but much would depend on progress to improve on labor productivity and transportation costs. L ZCCM points out that the new Government is taking steps to rectify many of the shortcomings of past policies. See Appendix I. - 23 - parastatals to sectoral development and economic growth, but also have detrimental effects cn their financial viability and sustainability. State-controlled enterprises contributing substantially to tax revenue and foreign exchange are Particularly vulnerable to myopic fiscal policies. This raises the question whether the Bank should be lending if the prevailing conditions are uninviting, it is unable to exercise any influence, and project sustainability is likely to be impaired, as such lending may not be consonant with prudent banking policies and responsible development assistance. (ii) There is no inherent reason why parastatals cannot be as dynamic and efficient as privately owned enterprises. But this can happen only if their corporate culture is not impervious to change, they are run by qualified managers who are allowed the requisite degree of autonomy in decision-making, and they operate in an inviting environment. In practice, however, and with few exceptions, state-controlled enter- prises suffer from politically motivated interventions in their day- to-day operations, the appointment of top executives and board members with dubious qualifications except for political loyalty, unclear or conflicting objectives, and a drain in their resources due to an array of incongruous social tasks thrust upon them. ncroachment on mana- gerial autonomy stemming from political expedidncies reflects narrow, if not self-serving, perceptions of their role by the political leadership, force parastatals to deviate from their main objective, distort their behavioral pattern, and severely undermine their efficiency and sustainability. Unless government authorities resolve to discipline themselves by exercising a "self-denying ordinance," there is a moral hazard that the political leadership will not always act responsibly but rather on impulse or opportunism. (iii) In principle, judicious guidance/oversight by parent ministries, regulatory authorities, and minority shareholders should suffice to safeguard the interests of the fiscus. Historically, however, and particularly in authoritarian or one-party political regimes, the pervasive control exercised over the Executive and Legislative, more often than not, preclude any meaningful control to ensure Parastatal accountability. (iv) Despite the long association with parastatals and the appreciation of the quintessential importance of managerial independence in the judicious conduct of industrial/mining operations, the Bank has not addressed squarely the issue of autonomy and accountability. The need for safeguards, assurances, strict enforcement of pertinent condition- ality, and keeping the issue under constant review has not been duly appreciated. 7.03 The experience with actions that address specific issues on parastatal reform provides some useful insights. (i) Experience commands a premium, and the indigenization process cannot be unduly accelerated with impunity. - 24 - (ii) It is extremely difficult to downsize, let alone divest, enterprises in the public domain because of the resistance of entrenched bureauc- racies and a concerned labor force. The situation is exacerbated when the political leadership is unable to reach a consensus on this issue; when there is lingering suspicion of the non-indigenous private sector and the implicit objective of divestiture is to ensure indigenous ownership; and when there is vacillating concern about the trans- parency of asset valuation, funding, concentration of economic power, and social repercussions. (iii) Early initiatives to ease the social impact of reforms and facilitate the redeployment of the affected work force would go a long way toward speeding up the process and mitigating resistance. Such provisions may include retraining programs, assistance in finding new jobs and relocation, arrangements for and funding of severance payments, unemployment compensation, transfer of accumulated pension and health benefits, access to land, extension of credit to set up a business activity, etc. (iv) In view of the persistent difficulties state-controlled enterprises are facing, including ZCCM, a re-evaluation of their role, potential, financial situation, and conditions for their future development and sustainable growth is in order. In this regard, the derivative implications of the form of ownership, viewed in the light of the prevailing socio-political circumstances, economic environment, and cultural strains, deserve greater attention than that received heretofore, and privatization, or at least minority state ownership, would have to be considered as an alternative, since state ownership (whole or majority) has turned out to be an unworkable option. (v) Where the institution of public enterprise is viewed as serviceable, to preserve its independence even while a re-evaluation of their role is being considered, it is imperative that unequivocal rules be established regarding the relationship between the Parastatal and the government authorities concerned, and such understandings should be adhered to. Parastatals slould have clear objectives, and be assured of a degree of autonomy sufficient to enable them to make management decisions free from political pressures. The costs of socio-economic tasks thrust upon the parastatal should be defrayed through special funding and pertinent cost-sharing arrangements. At the same time, a well-designed system of ex post accountability should be instituted based on meaningful and monitorable criteria to assess their perfor- mance. (vi) Given that the composition, quality, continuity, and modus operandi of the Board of Directors ereatly affect an enterprise's effectiveness and performance, due attention should be paid during selection to the qualifications, experience, allegiance to special interests, and diversity (e.g., in terms of affiliation, skills, background) of the appointees to enable the Board provide guidance free of self-serving influence, and ensure impartial decision-taking based on strictly commercial principles. On the other hand, in order to be able to discharge their function effectively, Board members should serve for - 25 - a fixed term, be kept fully informed of the firm's operations, participate actively in its strategic planning and key operational decisions, and minority views should be aired and recorded. (vii) Recapitalization of a Parastatal without solid progress in rectifying the policy environment, changini the form of ownership, revamping the corporate culture as reflected in management practices and operating procedures (e.g., greater devolution of authority, with commensurate managerial accountability for performance), and desisting from external interventions affecting management decisions, is unlikely to promote sound industrial/mining entities. - 27 - Attachment 1 Page 1 of 2 OFFICE OF THE MINISTER MINISTRY OF FINANCE PeOe BOX 50062 LUSAKCA SF/312 21st November, 1983 Mr. W. Vapenhans Vice President Eastern Africa Region World Bank 1818 H Street, N.V. Washington, DC 20433 Dear Mr. Wapenhans: ZCCM - MEMORANDUM ON CORPORATE OBJECTIVES AND POLICIES In early 1983, the Government of Zambia set out its current development objectives and described a number of actions and measures which it Intended to take to help achieve structural change in the economy and better economic management. These objectives and policies were presented in a document to the World Bank, entitled "Memorandum on Development Objectives and Policies." The Memorandum specifically refers to a proposed mining rehabilitation programs intended to arrest the decline in copper production and enhance the efficiency and profitability of the mining sector. The purpose of this memorandum to to briefly review the contexts in which ZCCH operates, to reaffirm its commitments to Zambia's economic development and its mandate to increase net export earnings and Government revenues, and review the policies that will need to be implemented in the near term to fulfill this mandate. Over the next 20 years the context in which ZCCM will have to operate Is a combination of lower copper grades, depletion of deposits, scarcity of foreign exchange, shortage of skilled personnel, and unreali- ability of the transportation network. These effects, felt most intensely at the time when copper prices are low, have in the past resulted in ZCC Incurring large financial losses, and being unable to contribute positively to the Government budget. In order to optimise its contribution to Zambia's development, and in particular in order to become again a not contributor of resources to the rest of the Zambian economy, it is essential that ZCCH remains a financially healthy company, and conduct its affairs with accordance with 'sound business, financial industrial and administrative practices. The mandate of ZCCH, under those conditions, is to optimise net foreign exchangi earnings, and net contribution to the Government's budget. - 28 - Attachment I Page 2 of 2 Because they are not synonymous, and may in fact be incompatible with other related considerations (e.g. maximiaing tonnages produced, maxi- mising employment levels, or reducing investment costs), the above objec- tives, to be realistic and achievable, will require that their implications be duly recognised by both ZCCM ar4 the Government. An effort by ZCCK to improve its productivity at the mine, at the plant and in its central services, i bound to be linked with decisions concerning labour. It may mean that some labour would have to be released (permanently or temporarily), or that the overall compensation package presently available to the Zambian workforce would have to be adjusted. During years of low copper prices, sales and hence production levels would need to be reduced in order to limit financial losses, maintain ZCCK's financial creditworthiness, and preserve for the futur. Zambia's limited and valuable mineral resource. The closure of uneconomic operations has to be an option open to ZCCM and accepted by the Government. Timely availability of foreign exchange is a necessary ingredient to ZCCK's successful operation, not only because it permits the financing of the necessary input needed to produce, and hence to generate foreign ex- change, but also because the survival of the Company is based on its ability to make long-term production plans, and the corresponding large development investments. In order for ZCCH to accumulate sufficient financial reserves to arrive at a sound structure, present taxation regime and dividend policy may need to be revised in order to permit ZCCH to absorb in the future the effects of lowering copper prices. The paragraphs above have only briefly described the conditions under which ZCCK, while maintaining the financial, commercial, managerial and business standards expected from a company of this size and of this Importance to ZAMBIA, can contribute to Zambia's earnings and efforts towards economic diversification. In order to assist ZCCH In translating such broad corporate objectives into specific production or x,.vtstment programmes, ZCCH has asked Stanford Research Institute International (SRI) to carry out a series of studies to review and rationalise Its mining and metallurgical operations, and to introduce technical, accounting, purchasing and other financial practices permitting further improvement on ZCCK's efficiency. The above statement of corporate objectives and policies foc ZCCH has been discussed with and approved by His Excellency the President. Yours sincerely, L. J. Mwananshiku MINISTER OP FINANCE - 29 - Attachment 2 Page 1 of 2 ZAMBIA EXPORT REHABIUTATION AND DIVERSIFICATION PROJECT SYNOPSIS OF KEY ELEMENTS IN THE REHABIUTATION PROGRAM Actions Taken up to Problems September 30 1983 Actions Planned Responsibility Completion Date 1. Strategy for the Lack of clear directions ZCCM assumed foreign Formulation of long-term Government November 21. 1983 Copper Industy from the Government exchange earnings and objectives for ZCCM, (ZCCM's majority employment to be compatible with its shareholder) to permit Government main con- natural, human, technical ZCCM strategic plan- cems. and financial resources. nmg. lack of long-term Creation of Corporate Formulation of produc- ZCCM, assisted by June 30. 1985 production and invest- Planning Department. tion and investment SRI ment strategies. strategies to attain defined objectives. Estimation of resources required. 2. Restructuring of Following mrrger of Following, Booz. Allen Developmentof appropri- ZCCM, assisted by June 30. 1984 Manapement NCCM ana RCM in and Hamilton (BAH) ate management informa- BAH April 1982, extensive recommendations, new tion and -reporting sys- reorganization is re- top levels structure to tems. quired. strengthen management control and efficiently Strengthening of ZCCM March 31, 1984 use personnel now in Corporate Planning place. Department. 3. Rationalization of Following merger, Stanford Research Optimization of mining SRI March 31. 1985 Operations rationalization in over- Institute (SRI) engaged and metallurgical opera- all use of mines plants to survey ZCCM's tions and transportation is required. facilities and recommend network, in line with changes in mines and ZCCM's strategy. plants operations. 4. Efficiency of Tendency to maximize hiang: Bank recom- Review of underground ZCCM, assisted by December31. 1984 Operstion mine output, without mends in-depth review mining methods. Deter- mining consultants proper regard to pro- of all mining operations. mination of cut-off ductivity and costs. grades. Preparation of mine development plans. Preparation of an action ZCCM, assisted by March 31, 1985 plan on mining controls mining consultants to reduce dilution. Productivity: Compro. Formulation of a policy ZCCM September 30, 1984 hensive training program for gradual replacement underway. of expatriates by Zambian work force, and of train- ing and skills upgrading program for Zambian work force. Review of wages and ZCCM September 30, 1984 other benefits to Zambian work force. Formulation of policy to ZCCM and Govern- December 31. 1984 contain ZCCM wage bill. ment Recommendation to ZCCM, assisted by December 31, 1984 improve store inventory SRI management and pur- chasinglordering systems. Cost-Cutting Measures: Incorporate actions on ZCCM March 31. 1985 Austerity measures rationalization of opera- successfully implemented tions on improvement of during FY1983. mine productivity per- manently within ZCCM policies, operations and control systems. - 30 -Attachment 2 Page 2 of 2 Actions Taken up to Problems September 30, 1983 Actions Planned Responsibility Completion Date S. Impact of Produc- Output maximization Study of closue of Review of major high ZCCM. assisted by March 31. 11985 tion Cut-back without due regard to selected facilities. cost facilities. and study SRI economic, fiancial and of closures of selected market consideration. facilities. 6. Rationalization of Lack of systematic Renlacement Eauipment Review of physicsl state ZCCM, assisted by December 31. 1984 cost/benefit analysis Postponement of least of equipment, and formu- SRI Decisions leading to sub-optimal priority investments. lation of comprehensive use of ZCCM financial maintenance and replace- resources. ment policy. Preparation of an equipment replace- ment program. Definition of priority ZCCM June 30, 1984 criteria for investment, in line with ZCCM's strategy. Establishment of methods SRI December 31, 1984 of systematic financial and economic coat/benefit analyses. Improvement in cost ZCCM, assisted by December31. 1984 control accounting system SRI and formulation of proce- dures for budget prepara- tion. based on above methods. 7. Rationalization of Foreien Exchange New allocation scheme Review of Zambia's Government March 31, 1984 Factoum Exosenous Allocation: Lack of approved in June 1982. foreign exchange obliga- to ZCCM systematic and adequate Marked improvement in tions. foreign exchange alo- the use of funds, but cation, disrpting lack of sufficient foreign Estimation of ZCCM's ZCCM August 31. 1984. and ZCCM's ability to exchange earnings have foreign exchange require- each year thereafter operate smoothly. limited benefits of new ment, in line with its scheme. existing financial obliga- tions and with ZCCM strategy. Agreement on foreign Government October 31, 1984. and exchange allocation. each year thereafter Taxation and Dividend New export tax intro- Review adequacy of Government and December31, 1984 Policies: Fiscal regime duced in April 1983. taxation and dividend ZCCM and dividend policy policies protecting ZCCM leave little reserves in solvency. ZCCM's accounts. Source: Staff Appraisal Report. No. 4624-ZA, dated Februaly 22, 1984. - 31 - Attacbment 3 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - SALES REVENUES, 1984-1991 (US$ million) Year ended March 31, 198 1985 J186 1987 198 1989 12g 1291 Copper 936.8 796.8 844.6 701.1 1,203.0 1,835.8 1,641.0 1,577.5 Cobalt 43.2 75.9 74.0 43.6 59.2 74.7 80.5 90.4 Lead 5.9 4.4 3.0 3.3 4.7 5.7 2.7 0.4 Zinc 31.0 27.4 14.5 15.5 17.2 25.7 20.9 15.7 Other 27.7 22.4 28.1 22.2 57.7 101.0 124.7 137.2 Total a.044.7 927.0 964.3 785.5 1,341.8 2R&.9 1-869.8 L J Source: ZCCM Financial Statements and Annual Reports. ZAMBIA EXPORT REHABILlTATION AND DIVERSIFICATION PROJECT ZCCM - AMPLIFIED INCOME STATEMENT. 1984-1991 (Year ended March 31; Kwachm million) 1984 1985 1986 1987 1988 1989 1990 1991 REVENUES Copper - Own Production 1.278.8 1.476.6 2.788.7 5,326.9 7,947.0 10.113.0 21,147.0 41.21.0 - Bought In 0.0 117.7 800.2 898.8 2,706.0 6.183.0 7,706.0 15,528.0 Cobalt 59.0 151.9 314.6 387.2 524.0 663.0 1,415.0 3,253.0 Lead - Own Production 8.1 8.9 12.7 28.9 42.0 40.0 47.0 13.0 - Bought in 0.0 0.0 0.0 0.0 0.0 11.0 0.0 0.0 Zinc - Own Production 42.3 52.9 61.4 134.8 152.0 228.0 368.0 564.0 - Bought In 0.0 20.0 0.0 2.5 0.0 0.0 0.0 0.0 Precious Metals 25.2 18.7 37.0 73.8 114.0 78.0 97.0 156.0 Subsiiaries 12.6 26.2 82.5 123.0 397.0 819.0 2 4 Total Revenue 0d49 40 I6S880 981350 328760 6559-0 COST OF SALES Operating Costs Expatriate Labor 61.5 69.3 146.9 522.4 742.0 1,006.0 1,960.0 5,054.0 Local Labor 273.4 302.3 426.8 271.6 326.0 277.0 595.0 1,696.0 Materials Fuel Stores 97.8 118.6 190.2 388.9 485.0 533.0 1,016.0 2,936.0 Other Consumables 275.1 211.5 322.0 807.7 1,328.0 1,602.0 2.425.0 5,592.0 Maintenance/Spare Parts 47.7 245.9 355.7 1,054.8 1,533.0 1,859.0 2,882.0 5,419.0 Contractors 47.1 80.7 120.2 248.3 256.0 325.0 588.0 1,499.0 Electricity -. 56.2 59.3 80.6 138.8 236.0 312.A 528.0 841.0 Other 40.1 43.5 99.1 187.9 320.0 420.0 1,002.0 3.340.0 Cost of Bought in Copper/Zinc 0.0 117.6 794.3 888.9 2,701.0 6 710 248.9 48 2 4 0 125.940 41880. inventory Chanie 55.9 -39.5 -208.1 -740.8 -136.0 -789.0 -1.178.0 -3,531.0 Sellini & Distribution Expenses 118.2 135.3 237.1 473.0 527.0 535.0 1,465.0 3.108.0 Depreciation 91.5 117.9 264.2 1,263.7 988.0 955.0 1,235.0 1,346.0 Subsidiaries 12.6 26.2 82.5 123.0 397.0 819.0 2,096.0 4.245.0 OPERAT1NG INCOME 248.9 366.3 1,185.6 1,347.7 2,179.0 4,021.0 10,446.0 18,539.0 Share of Associate Company Profit 0.3 0.1 3.0 14.8 21.0 43.0 186.0 -3.0 Net Financial Charges 102.0 140.6 303.9 692.6 585.0 626.0 1,131.0 3,164.0 Exchange Los 50.3 92.9 556.5 445.0 951.0 715.0 3,945.0 4,417.0 Closuem Coos 0.0 0.0 28.0 14.0 20.0 0.0 0.0 0.0 rt PROFIT/(LOSS) BEFORE TAXES 96.9 132.9 300.2 210.9 644.0 2,723.0 5,556.0 11,225.0 n Taxes 95.9 132.5 355.7 772.9 272.0 891.0 2,970.0 6,036.0 PROFIT/(LJDSS) AFTER TAXES 1.0 0.4 -55.5 -562.0 372.0 1,832.0 2-5K0 51890 Note: Hea Offe/OPS Centre Cost 69.4 76.9 175.6 345.4 381.0 512.0 1,265.0 3,004.0 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCf - COPPER PRODUCTION TREND, 1981-1991 (Tons) 1961 1982 1983 1984 1985 1986 1987 198 1989 1990 1991 oRE Him (.000 TCS) Open Pit 8.819 8.289 7.630 7.899 7.347 6,468 6.157 6.014 6.510 6.703 6.527 Underground 21,408 22.358 24.450 21,953 20.992 18.483 19.156 18.216 17,311 17.164 16.549 Total 30.227 30,648 32.088 29,852 28.339 24.951 25.913 24.230 23.821 23.867 23.076 CONCETATORS Copper Concentrate Produced (Tons) 1,655.904 1,871.482 1.011.409 1.777,391 1.934.554 1.629.518 1.679.204 1,641.845 1.507.319 1,487.749 1.345.642 Average Copper Grad* (X) 28.75 28.99 29.54 27.27 26.72 26.43 23.13 24.55 26.14 21.63 29.63 Copper Concentrate Produced (Tons) 180,328 200,234 187.030 121,676 197,911 244.531 294.975 295.677 268.662 275.101 258,623 Average Copper Grad* (2) 2.58 2.30 2.06 1.87 2.42 2.70 2.00 2.48 2.65 2.63 2.71 FINAL PRODUCTICH (Tons) LO Copper $87,918 591,853 575.518 $51.021 525,811 463.354 470.982 473,084 415.645 448.468 421.590 Cobalt 2,988 2,686 2.212 2,748 3,654 4.565 4,160 4,694 4,87) 4,447 4,674 Lead 9,988 11,407 15,164 11,639 10,294 7.664 6.793 7,554 6.345 3.653 3,670 zLac 33,928 36,106 39,448 33.521 29,699 21.600 22,112 20.899 18.343 12,351 9.717 Soures CCN. rt co oi - 34 - Attachment 6 EXPORT REHABILITATION AND DIVERSFICATION PROJECT STATUS OF TECHNICAL STUDIES Original Revised Completion Comletion Consultant Date comments 1. (a) Review of mining operactone Pluor Dec. 31, 1984 Jan. 31, 1985 Drae report discussed during January. (b) Review of metallurgical operations Bechtel Dec. 31, 1984 Feb. 15. 1985 Draft resort discussed during JanuarY. 2. Rationaliaetion and opciatation Pluor/ of ZCCM's operations Bechtel mar. 31, 1985 Apr. 30, 1985 To be based on studies I(&) and (b). 3. Study Of uneconomic operaCtons ZCCM Mar. 31, 1985 May 31, 1985 To be based on studies 2 and 5. 4. Action plan for improved mining operations Fluor ar. 31. 1965 Apr. 15, 1985 Undewav, based on study L(a). 5. Comprehensive production and investment program SRI Jun. 30, 1985 Jul. 22, 1985 Last study, based on all others. Will require major Bank input 6. Mecods for investmeat analysis SRI Dec. 31. 1984 Feb. 15, 1985 Drate report discussed during January. 7. Comprehensive equipment main- Cenance and replacement program SRI/PAI Dec. 31, 1984 Feb. 15, 1985 Oraft report discussed during January. 8. Reorganisation of stores inventory management and of purchasing and ordering system SRI Dec. 31, 1984 Feb. 15, 1985 Draft Report discussed during January. Uill require major changus to sed u" implementation of new system. 9. Divisional cost control accounting and budgeting system SRI Dee. 31, 1984 Feb. 28, 1985 Drate report discussed during January. 10. Preparation of austertey program 2CCN Mar. 31, 1985 way 31, 1985 Austerity program underwey. Loan term program to be based mainly on studies 2, 3 and 4. 11. Information and reporting system BANI/CCM Jun. 30. 1985 September 1984 Study completed. till be reviewed in view of Comoany reorgenisction. 12. Workforce compensation package ZCCN Dec. 31, 1984 Mar. 31, 1985 Further delays expected to view of study 3 and of labor negotiations due start Sumer 1985 . 13. Comprehensive training program ZCCH Sep. 30, 1984 October 1984 Study comoleted. Will require major changes to reflect recommendation of studies I to S. SR3s Scantord Research Institute PAls Performance Associates, Inc. 8ARs Boos, Allen and Hamilton Industry Depertment February 1985 Sgurc: Staff Appraisal Report, No. 4624-ZA. dated February 22. 1084. - 35 - Attachment 7 ZAMBIA EXPORT REHABILITATION AND D'=RSIFICATION PROJECT ZZCM - ORGANIZATION -rIART (1985) -~aaone ard Col Exe~mdv - Comuniy se wee Ex~aw Oh~lr M~fcI aminisaaln E~U c~my CP W~d Sk~r Nah"eFio L ~~wal - 36 - Attachment 8 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZZCM - ORGANIZATION CHART (1992) soad o 01D(I ors ChaiMan Chet Exo ve Dieor Diretov Tactne0recr ofror u reor Re organ ation Gerowa MWaomwMgl ManagerMage oran Magr Cons. Eng. Nchang Mechm MukffsCons. met"ote Senior Iuanshya 2X CM-sCe Power - Kwe (Manager - Technica) MPU Connandart pt0s1AO0 EX~ e ang, =oA .fTD A DfifinERS:CATIO mw>JECT1 '1483 :484 1985 1416 1987 188 1989 1440 1991 tate4 ktöl 1 mle klul 1 a@d kl% e l I atet klut I aiet klua 1 baef ktmal I led kial 1 1at kisal 1 faid kil 1 gett 1le mhI186l'SU Ia 1 BBRA 27.51 0 1 7 25 1 01 S 25 IU 69 2 14 M66 2255 144 65 255 1144 51 2255 1112 4 2255 101 48 2255 1263 56 1g0l&. 886 19 1113 81 78 lill 801 72 1113 82 74 1113b 8108 73 11136 M3 70 12625 8033 64 12625 1563 60 12625 6972 55 IUtA %N 2 1278 ?M 41401 2M 56851 122 544 0 M 4013 122 448462 7224 482467 1M4 498 69 M 4611 6 am %9517 37H 55 30864 157 1944 545 1 5255 W 595 355 16 595 3 5458 5957 3M1854 5957 325 54 17 3 20 tei^ t87 321 8 448 3816 4887 l2a 6 2855 314 28 24468 2855 23228! 2855 212815 2855 203 1 28S 1t5 68 KtWA 25i1t 18 9 1t 21 9 23 8131 3 21 2168 M 251 2513 1 251 24 85 251 221 37 305 23176 270 2213 1 Mt2 7 3363D 2am6 n 333222 6 a 42428 1 317 21319 67 200 22101 69 32 21625 8 334% 21576 4 3 21219 33386 20532 61 Cy ^T FITUIRIfwq18 10 S) tiTAm a 21 a 18 214 t714 8 21% 160 76 21% ill 14 214 1514 12 21% 1144 52 21% 1153 53 210 1112 51 21% 1319 LO 0UMM a t1 9921 1 11133 9929 8 111 10260 92 11133 9643 87 1i1a 9488 85 1119 9213 83 11133 1523 86 1111 9312 84 11133 9029 i1 JIIi 116 S61213 1 460 4 166 4264Så 1fi5 3550 4 1665 4011 2 1665 448 58 16 48263 1665 4"1 65 1665 49 60 Wa 54175 3772 5 13808 70 545 374 69 587 355 64 545 355 15 54 345 63 5475 3238 59 5475 32 549 5475 3520 64 1!I 511 3121 77 5110 3426 61 5110 212 % 5110 2314 4 5110 286 48 5110 2322 45 5110 2128 42 5110 203 80 5110 1954 38 KWA 2540 224 9 250 23 9 250 23 8 2540 2168 85 2540 2513 9 2540 244846 2540 2241 8 2540 311 2502213 87 1mA 38113 258 73 34113 21114 78 38113 2528 3810 12 k7 341t3 2354 69 34113 230 34113 23t11 68 34113 23005 67 34113 22644 66 EAm I'ol 1M mieli P 1 4758 ' 75 4n 61 785 41662 1 M 47 785 428 54 785 421 54 785 330 42 785 249 32 785 216 27 U 1173: 9 91 413 Till 9 13 95210 613 9412 94 100 14320 81 11100 14% 82 1100 110 562 17700 105 60 17700 1086 61 om ra 61 0 6 140 102 13 145 11881 145 1341 145 10100 145 141 97 1I 134 92 145 136 94 145 118 1 UMig@ * 1 ff 13 17 180 126 70 18 136 6 180 92 51 10 136 76 180 14511 8 180100 180 164 9 180 ie 63 Mjt 109. 1611 M1 11078 1080 94 11083 10691 4 1183 1016 0 1i 15029 to 18110 1521 83 1810 1168 6 t181 11114 5 18810 I132 60 51110 liI. Cei r01 etSIm AM 25% 19446 251 20 81 2% 214 84 256 194 1 2% 110 70 2% 11 68 256 149 58 256 194 6 256 96 65 111111 115 1 4 115 140 15 14181 11 t12411 11 159 1 115 11 100 175 160 91 115 151 86 115 151 m tum IN I W a a 9 681 91 6 1 6926 it 62 1016 62 0 0 6? 00 62 0 62 15 25 ILt. 551 ' 43 #1 4983 4431185 03 3811 438 4 11 01 34 I! f3 304 63 03 1 70 03 332 67 ulima= pw i8m m 17250M1508 92 11350 111152 " 172501110 4 12350 1673 41 1723508161813 4 112350 12102 100 172350 1553t2 1 17250166822 97 172i 0 168508 8 WI1IV. 30002180 73 30001811025 56 3008 f1611 % 301818168010 53 300000 1fäs1 a 30000021977 1 3 300000 195971 5 300000215028 12 300000 199115 66 112 141250 14125 7 141250 102172 72 1412 43791 6M 141250 9&2 70 141250 238 26 141250 0 0 141250 0 141250 0 141250 0 DM III8 128 1131 80 12190 128844100 130 93561 123M04152 62 128340 94706 74 128 0 79263 12830 85704 67 12830 5307 59 128340 50892 39 WAL 71440 59410 741890 5193 77 4190 5272 71 1148 583M 8 71140 88938 6 419840 431 tt 1490 43817 59 141940 457157 12 181940 418115 56 om al Ni?t tus Oindm htot:sv aterial recovered bring asting, prirt padia, irPass grioia stage. bl Plat @rstes 4 UP 11I e9 Caaile et 1 t e . feract fra 1988 41 Iith efteottes o i ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - LOCAL AND EXPATRIATE WORK FORCE, 1980-1991 Flscal Years ended March 31, 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Local 57,845 58,207 57,637 55,644 56,316 57,935 52,940 51,077 53,038 54,502 54,202 54,454 Expatriate 2,608 2,596 2,584 2,032 1,788 1.512 1.452 1.371 1.092 981 765 723 Total 60.453 60,803 60 221 57.676 58,104 59,437 54392 52,448 54&.130 55o.83 54 967 55&177 Expatriate (1) 4.3 4.3 4.3 3.5 3.1 2.5 2.8 2.6 2.0 1.8 1.4 1.3 Annual Turnov- Expatriate (2) 24.8 21.7 17.2 31.4 19.6 17.2 15.3 13.9 32.5 21.6 18.2 17.9 Local (2) 5.4 5.7 7.6 5.6 5.9 5.7 10.7 11.4 9.7 6.2 5.0 6.6 Source: ZCCM, Manpower Planning Department. ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - TRENDS IN LABOR PRODUCTIVITY, 1980-1991 19s 1991 1982 1983 1983 1985 198' 197 1988 1989 1990 1991 Copper Production (tons) 537,240 587,918 591,853 575,518 551,021 525,811 463,354 470,982 473,084 415,645 448,468 421,590 Work Force 60,453 60,803 60,221 57,676 58,104 59,437 54,392 52,448 54,130 55,483 54,967 55,177 Output/Man-Ycar (tons) 8.9 9.7 9.8 10.0 9.5 8.8 8.5 9.0 8.7 7.5 8.2 7.6 Sour* Operations Evaluation Depmrment. - 40 - Attachment 12 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT COPPER PRICE TRENDS (ACTUAL AND PROJECTED). 1981-2000 (US$ per ton) 1985 Constant US$ 1991 Year Current US$ MUV Lb US GNP Le Constant US$ i 1981 1,742 1,654 2,057 2,570 1982 1,480 1,427 1,642 2,005 1983 1,592 1,571 1,700 2,076 1984 1,379 1,391 1,420 1,730 1985 1,417 1,417 1,417 1,728 1986 1,374 1,165 1,338 1,636 1987 1,783 1,377 1,681 2,057 1988 2,602 1,873 2,371 2,901 1989 2,848 2,064 2,493 3,053 1990 2,662 1,826 2,247 2,742 1991 2,339 1,573 1,917 2,339 1992 2,160 1,414 1,720 2,097 1993 2,070 1,303 1,600 1,940 1994 2,000 1,212 1,500 1,831 1995 1,950 1,138 1,420 1,733 1996 2,120 1,184 1,500 1,828 2000 2,820 1,336 - - /a Deflated by US GNP Deflator 1991 - 100; assumes 3% annual inflation in 1991-96. AL Deflated by Manufacturing Unit Value (MUV) index. /c Deflated by US GNP Deflator 1985 100. Source: World Bank. - 41 - Attachment 13 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - CONSOLIDATED BALANCE SHEETS. 1982-1991 (Year ended March 31; Kwacha million) 1982 1983 1984 1985 1986 1987 1988 1989 1990 I1 Fixed Assets 1,369 1,538 1,653 3,661 15,035 21,064 14,314 14,436 18,243 81,649 Investments, Loans and Advances 12 12 11 16 54 575 556 693 1,888 4,207 Current Assets Stocks of Metals and Concentrates 274 267 210 254 463 1,203 1,339 2,129 3,307 6,838 Inventories 227 200 212 335 774 1,735 1,825 2,483 5,000 10,937 Accounts Receivable 158 148 224 278 691 726 1,308 2,424 5,643 12,468 Short-term Investment - - - - - - - - 1,000 1,000 Recoverable Taxes 25 25 25 - - - - - - - Cash and Funds in Transit 45 43 45 63 158 311 634 L1 3.979 _5&S 729 683 716 930 2.086 3.975 5,M LW 11.222 26.111 Current Liabilities Accounts Payable and Provisions 329 335 329 425 882 1,580 2,043 3,045 8,216 16,417 Equity Levy Payable 4 8 12 - - - - - - - Dividend Payable 2 - - - - - - 134 141 150 Taxes Payable - 1 18 21 8 115 15 22 1,010 63 Current Maturities of Long-Term Borrowings 57 46 74 197 422 883 1,004 1,379 3,943 5,116 Short-term Borrowings 165 127 177 200 717 999 1,011 1,188 3,086 8,061 Bank Overdrafts 91 85 56 60 13 3 38 _0 _124 1,01i 648 602 666 903 2,042 3,580 4,111 5,858 16,520 30,825 Net Current Assets 80 82 50 _.? AA ._.22 995 3.42 227g 4 35221 Unrealized Exchange Loss 7 58 158 - - - _ ___ 1469 .. 1 .87 3.704 I3224 15.6 17.L8 33M &W J.&S Financed by: Share Capital 893 893 893 893 893 893 893 893 893 893 General Reserve 94 (34) (33) (55) 53 566 1,742 4,216 7,625 13,719 Revaluation Surplus - - - 1,884 12,155 17,315 9,980 9,203 10,323 67,946 Deferred Exchange Loss - -- - (34) (2,285) a3,46) g2Ag42 (3.018. 1 23337) 987 859 860 2,368 10,816 15,628 10,203 11,294 8,306 59,221 Subordinated Borrowings - 202 202 203 203 203 203 - - - Long-Term Borrowings 405 545 710 1,027 3,926 5,970 5,261 5,773 13,816 31,566 Deferred Liabilities 77 83 _0.J0g 10 188 .332 199 2 a.418 = 1469 ZCCM2 Ana Repo3 2203 1I.86ts1. EZWM1 Sou : ZCCM Annual Reports. - 42 - Attachment 14 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - CONSOLIDATED PROFIT AND LOSS ACCOUNTS, 1982-1991 (Year ended March 31; Kwacha million) 1982 1983 1984 1985 1986 1987 1988 198_9 19_90 1991 Sales 977 973 1,426 1,862 4,097 6,976 11,882 18,135 32,876 65,559 Cost of Sales 1.083 (1.,036) (1,171) (1,484) (2,911) (.628) (9,703)(14.114)(22Q430)(47,02) Profit/(Loss) on Sales (106) (63) 255 378 1,186 1,348 2,179 4,021 10,446 18,539 Share of Associated Companies' Results - 0 0 1 4 15 21 43 186 (3) Closure Costs - - - - (28) (14) (20) - - - Exchange Gains/(Losses) 8 (4) (50) (93) (558) (445) (951) (715) (3,945) (4,147) Int, est Charges (47) (59) (113) (147) (318) (793) (671) (758) (1,819) (4,544) Interest Income 4 3 5 6 14 J00 86 132 688 .380 Profit/(Loss) Before Taxes (142) (123) 97 145 300 211 644 2,723 5,556 11,225 Income Tax 2 (1) (1) (4) 1 (13) (17) (891) (2,970) (2,088) Tax on Copper Revenue /a - - (91) (140) (357) (760) (255) - - (3,948) Equity Levy _(U (4) L4 _ .. __ - - - - Net Profit/(Loss) 144 128 1 1 (61 (562) 372 1.832 2586 9 Dividend Proposed . (134) (134) 134) Retained Profit " 1.698 2.452 .05 Earnings/(Loss) Per Share K(1.62) K(1.43) KO,01 KO.01 K(0.63) K6.29 K4.17 K20.52 K28.96 K58.11 Dividend Per Share K1.50 Ki.50 K1.50 /a Mineral export tax. Source: ZCCM Annual Reports. - 43 - Attachment 15 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - CONSOLIDATED STATEMENT OF SOURCE AND APPLICATION OF FUNDS, 1982-1991 (Year ended March 31; Kwacha million) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Source of Funds Profit/(Loss) Before Taxation (142) (123) 97 145 300 211 644 2,723 5,556 11,225 Items Not Involving the Movement of Funds: Depreciation 82 80 98 126 290 1,284 1,052 1,020 1,378 1,579 Exchange Loss on Borrowings - 25 49 93 748 948 626 794 3,716 7,513 Other Items I1 3 1 18 (19) (12) 21 61 (308) (336) From Operations (64) (14) 245 382 1,319 2,431 2,343 4,598 10,342 19,981 Long-Term Borrowings 246 228 69 270 628 1,342 286 376 1A81 3,417 Investments, Loans & Advances 1 2 - - Total Source of Funds 182 215 21 652 1j947 3.773 2 4,974 12157 Application of Funds Expenditure on Fixed Assets 273 252 215 291 1,229 1,097 870 1,191 3,009 6,323 Capitalized Exchange Loss - (41) (51) (24) (524) (138) - (35) - - Long-Term Borrowings Repaid 70 48 47 108 219 588 633 1,066 1,704 3,447 Taxes - - 75 128 374 660 374 967 1,919 7,020 Investments, Loans & Advances (3) - 4 14 405 (16) 11 1,153 120 Dividends 8 2 - - - 127 123 348 260 287 507 1.312 2,612 1,861 3,200 7.912 17.033 Increase/(Decrease) in Working Capital Requirements Metal Stocks 19 (34) (46) 167 648 1,701 226 1,448 1,178 3,531 Inventories - - - 2,517 5,937 Accounts Receivable & Funds in Transit 51 (27) 76 53 423 136 687 1,047 4,201 6,144 Accounts Payable & Provisions (103) 19 (11 (102) (539) (742) (303) (1.055) (5.338) (8.836) (34) (42) _19 118 532 1095 610 1.440 2-558 6-7 Total Application of Funds 315 218 306 23707 2471 4640 10470 23 Cash inflowl(Outflow) 133 3 10 27 103 66 158 334 1.687 411 Cash Inflow/(Outflow) Represent Movements in: Cash & Bank Balances (14) (2) 2 18 85 35 167 375 1,847 1,663 Bank Overdrafts (90) 6 29 (4) 47 10 (35) (52) (34) (894) Short-term Borrowings (291 M1 (21) 13 (29) 21 26 11 (126) (1.180) (133) 10 27 103 66 158 334 1 687 Source: ZCCM Annual Reports. - 44 - Attachment 16 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - FINANCIAL RATIOS (Financial Years 1982/83 to 1990/91) IS83 1984 1985 1986 1987 1988 1989 1990 1991 Current Assets/Current Liabilities 1.14 1.08 1.03 1.02 1.11 1.24 1.37 1.15 1.19 Medium & Long-Term Debt/Equity 0.93 1.30 0.52 0.38 0.39 0.54 0.51 1.66 0.53 Total Debt/Equity 1.26 1.74 0.71 0.49 0.52 0.74 0.75 2.52 0.77 Net Profit/Average Equity (0.10) 0.00 0.00 (0.01) (0.03) 0.02 0.12 0.17 0.14 Note: In the ratio *Net Profit/Average Equity," Net Profit has been taken as Profit After Tax. Source: ZCCM Annual Reports. EXPORT REHABILITATION AND DIVEISSIFICATION PROJECT zCCH - CONSOLIDATED ALANCE SHEETS (Years ended March 31; US$ millions) im m im ff me fi im LOLS9 m l "a Iffi #Ied ses 1 551 I e 386 1 89 388 280 to 55020 1287 416 Invesseas, loda§ and advaces 8a 4 66 10 65 8 1 1 80 83 Curreat assets Sthis of atals and foncentrates a30 129 204 167 136 a m0 830 32 m • mure 308 195 238 2 196 tir 142 38 . 1 245 . S loar lera Investeents .t89 39 1 . Oåster 231 220 233 864 8 t00 8l8 138 824 Ii .Cash anduds tra s i 106 815 9 19 35 23 . 21 28 36 49 700 138 in 838 449 302 39 451 593 164 Cerreat liubilitie • • Credieors ad proviskcas 312 328 392 255 89 828 Bi 203 280 359 • 1Ivided ayable 3 5 83 3 - lax&ilo l 39 t 2 13 1 9 19 8 (23) . Current netateitSs of lag-term borrtulogs 91 854 132 a26 100 68 84 46 39 62 . Sort.trem borrwings 353 820 884 26 13 304 85 09 50 180 -na ovadrafts a9 5 9 b 0 2 25 35 ?3 99 - - - - - - - - - i 585 644 562 514 405 296 384 41 504 69 mat trem assett al1 94 2i0 124 44 6 st 46 89 85 81 46 819 lö6 2 ' 983 2 490 894 1 514 1 013 1 386 3 554 ..... .......- å.. 8 Imanced by p Skare capita& 8 35 a8 lir 108 e29 380 551 14? 90 General reserve 268 291 405 288 64 8 (23) (351 (49) 60 eva unc surplus 1 298 403 88 a 24 95 l 162 805 84 21 offeallsed exch~ae loss (443) (485) <389) (302) (356) (331) (858) (97) (49) S826 324 5084 1 25 1 166 1 68 8 O0 433 610 1 030 5werdiat4ed sarregs 215 23 3 86 125 ti0 &g-~Ir b~ ung. 500 539 114 658 674 69 436 438 456 440 Deferred Pilities 20 16 24 25 27 23 45 62 69 84 8 146 89 i 66 i 983 2 490 2 94 81 513 801 1 365 554 C8ANGEW RAff (ear ad eed-rate) KB . 8 0,089 0.039 0.096 0.25 0,83 0.45 0.425 0.61; 0,831 8.086 eurrent rette 1,20 .185 8,31 8.24 5.8 &.03 1.93 8.88 8.8 1.83 urrueuls.tatie lit 32 116 146 531 496 186 1146 126 16 ZAIBIA EXPORT REABIITATION AD DIVERSIFICATION PROJECT ZCit - COIISOLIDATED PROFIT AND LOSS ACOUT (Years ended liarch 31; UJS$ millions) Utues 1 48 Ia m a im 13 på m m Ben m I at testae sale 84 95 AmS 393 526 69 6r (185) (806> a16 prhalms(bss) m sales 69 66 416 346 849 3m3 80 181 <641 (il) Cis*re tes (2) (2) (8) Sa et csseclotd c~ @0ales rese 0 at 6 2 3 a tsce~e lsses (6) (5N) (M3> (01) (49) (861 (46) (m) (4) laters eotab 1 44 1s in te 4 3 4 3 4 lIterest pau&M (12) <(86) (86) (16) (m8) (9m) (13) (8) <60) (Pl) kaft betar* teales t m6 31 13 23 0 18 på <834> <16) . Steeal uspert tai (118) (39) (64) (806) (69) (66> - acm t a. (5S) (1980) (802) (2) (8) (3) (3) 3 *p.lay ley (8) (3% (n) aet pwifitfo(ss) 846 16 306 42 (62) (1) a 1 (0) (89 etyl~s ~pes (4) (9> (s) 142 81 893 a3 (6 ) 0 l (126) (19) c ... ... ... ....... ......... ..... ...... ....- ..... 8 riaqis(1ess) per skare 1.63 8.85 2.33 0.41 (0.69) (0.9) 0.00 0.01 (8.43) (2.81) olveid per sura 0.03 0.06 miiin u GENELJ. 6E11811 get prftl(loss> 84 15 193 42 (6) (81) 0 1 (b26) A atlos et re2ataetmes surpls . 0 31 14 101 211 24 0 i 31 8a 194 ?196 143 59 8 (808) Accuumlsted profItsI lsses) at 8 April 891 405 ti 64 8 (23? (35) (49) 39 lacaeage it)stssts (89) (303) (60> i8 (3) 24 et 13 83 at 38 narch 368 391 405 ett 64 0 (23) (35) (49) ceswislem reseres en the accouta ef . 1he Cow*n ti4 fl 15 all al 1 (40) (66) (Il) f stottery compaks s 14 16 4 0 6 år 35 så . Assctlatd cop es 1 6 5 3 3 l 0 0 0 6i 391 40s tig 64 6 (3> ((1) (49) t i ~ut (Avep tur the ma) 0.90 0.114 0.883 0.111 0.9 0.495 0.11 .009 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT COPPER PRODUCTION, 1986-1995 (Tons '000) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Actual/Projected 463 471 473 416 448 422 400 425 425 425 Actual/Projected Based on Past Trend (3.8%) 1978-86 (avg. decline by 16,000 T/year) 447 431 415 399 383 367 351 335 319 303 Project Contribution 16 40 58 17 65 55 49 90 106 122 1 -4 Source: OED. I ft et 1z; ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - INVESTMENT OUTLAYS, 1983-1991 Year ended March 31, 1983 1984 1985 1986 1987 1988 1989 1990 1991 TOTAL US$ Million (Holding Company) 232.14 157.51 131.43 264.32 93.32 85.15 105.89 157.14 156.86 1,383.76 Loan Finance: Facility (Millions) Sysmin I - $ million ECU 55 2.20 9.82 15.50 19.47 - - - - - 46.99 Syamin 2 - $ million ECU 28 - - - - 16.91 7.36 5.20 1.15 1.90 32.52 ADB - $ million UA 26 - - 1.58 8.60 4.08 7.29 3.26 0.78 - 25.59 IBRD - $ million US$ 75 - - 1.19 48.95 19.73 1.95 0.11 - 71.93 2.20 9.82 18.27 77.02 40.72 16.60 8.57 1.93 1.90 177.03 OD Internally Generated Funds 1.55 6.94 12.90 54.39 28.75 11.72 6.05 1.36 1.34 125.00 3.75 16.76 31.17 131.41 69.47 28.32 14.62 3.29 3.24 302.03 Source: ZCCM. i rf ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT FINANCIAL AND ECONOMIC RATES OF RETURN (US$ 1991 prices; '000) FINANCIAL RATE OF RETURN ECONOMIC RATE OF RETURN Invest. Oper. Net Invest. Oper. Net Cc.ats Costs Revenue Benefits Costs Costs Revenue Benefits (1) (2) (3) (1)+(2)+(3) (1) (2) (3) (1)+(2)+(3) 1983 (4,889) 0 0 (4,889) (4,645) 0 0 (4,645) 1984 (21,029) 0 0 (21,029) (19,978) 0 0 (19,978) 1985 (38,012) 0 0 (38,012) (36,111) 0 0 (36,111) 1986 (156,440) (15,069) 26,176 (145,333) (148,618) (12,920) 26,176 (135,362) 1987 (80,127) (35,462) 82,280 (33,309) (76,121) (29,750) 82,280 (23,591) 1988 (31,572) (79,274) 168,258 57,412 (29,993) (59,653) 168,258 78,612 1989 (15,670) (26,498) 51,901 9,733 (14,887) (19,869) 51,901 17,146 1990 (3,380) (85,527) 178,230 89,323 (3,211) (74,643) 178,230 100,376 1991 (3,240) (72,696) 128,645 52,709 (3,078) (59,980) 128,645 65,587 1992 0 (62,850) 102,753 39,903 0 (51,896) 102,753 50,857 1993 0 (111,384) 174,600 63,216 0 (91,953) 174,600 82,647 1994 0 (128,212) 194,086 65,04 0 (105,868) 194,086 88,219 1995 0 (143,210) 211,426 68,216 0 (118,218) 211,426 93,208 FRR - 11% (before taxes) ERR 182 Assumptions for calculation of ERR: rt - Import duties and salev tax on capital goods have varied from zero to 102. An average of 52 is assumed throughout. - incremental local labor costs have been reduced by 202 to reflect the opportunity cost of labor. - Duties and taxes on materials, etc., are assumed to be 20%. - Depreciation, interest rate expenses, corporate and copper export taxes have been excluded. rt S-o Source: OED. - 50 - Attachment 22 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZAMBIA - COPPERBELT ORE RESERVES ('000 tons) 1983 Coppet Cobalt Reserve Cateeory Ore Reserves ]'C Tonnage Ore Reserves [ C 08nna Fully Developed 20,212 3.72 751 17,461 0.48 82.1 Partially Developed 57,799 3.53 2,040 22,983 0.13 31.1 Undeveloped 419.212 3.0 12,620 167,68 013g 214.0 Total 497,223 3.10 i 0.16 327.2 Note: In addition to these geological reserves, over 800 million tons of potential ore resources, grading 2% copper, are indicated or inferred in the Copperbelt itself. Source: ZCCM Annual Report, 1983. 1991 Copper Cobalt Reserve Cate&ory Ore Reserves % Cu Tonna Ore Reserves % Cu TnaS Fully Developed 12,194 4.60 561 5,070 0.18 9.3 Partially Developed 54,432 3.65 1,987 18,569 0.17 31.8 Undeveloped 322 2.6 9.209 1 34 0.19 Total 388.608 7 150.18 289.0 Note: In addition to these geological reserves, 1.2 million tons of potential ore resources, grading 2.4% copper, are indicated or inferred in the Company's mining reserve areas. Source: ZCCM Consolidated ore reserve statements, 1991. - 51 - ZAMIA Attachent 23 EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - DISTRIBUTION OF ORE RESERVES (at March 31, 1991) 000 Tonnes Copper % =00 Tonnes Cobalt % NCRANGA Fully devetoped 4 SS1 ?72 1 196 039 Partly devetoPed 20 176 507 1 684 038 Undeveloped 79 627 310 10 453 0.61 total 104 2540 3.68 13 333 0.56 KONKOLA Fully developed 679 3.98 Partly developed 5 692 400 Undeveloped 39 841 3.87 Total 46 212 389 MUFULItA Fully develooed 1 937 3.16 Partly aeveioped 8 199 308 Undevelooed 48 743 317 7.ai 58 879 316 Fully developed 2 633 2.19 0.11 Partly developed 11 666 219 0.14 Undeveloped 63 149 2.35 014 Total 97 448 2.33 0.14 CIDBMRUMA Fully developed 510 3.69 0.10 Partly developed 2 386 3.73 0.19 Undeveloped 2 006 3.33 0.08 Total 4 902 3.S6 0.14 tANUHYA Fully developed 796 2.43 Partly developed 3 498 2.18 Undeveloped 27 995 2.45 Total 32 289 2.42 SALUBA Fully developed 731 228 017 Partly developed 2 833 2.37 0.16 Undeveloped 36 746 Z54 0.18 Total 40 310 2.S2 0.18 MO0Tonnes Sulphur% Copper% NAMPUNDWE Fully developed 620 14.M Partly developed 609 1660 Undeveloped 6 778 1620 total 8 007 ;610 V00 Tonnes Zinc% Lead% KrW Fully developed 325 16.0 11 Partly developed 348 17 20 Undeveloped TTS 6.3 25 Total 1 446 6.6 34 NOeW Dre reserves are defined as those tonnages that meet the definition of ore ind are available for mirung from exasting or approved pianned facilities. * !ncludes 13 333 000 tonnes cobalt ore. - 52 - Attachment 24 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - FUTURE COPPER PRODUCTION SCENARIOS 600 550 a 500 450- -400 cL350- 0. 300 . 250 U- 200- Scenario 1 Insufficient Funding * Continuing Decline in Production 150- Scenario 2: Sufficient Funding to Maintain Production @450 000 tpa up to 1999 Scenario 3: Sufficient Funding to Maintain Production @ 475 000 tpa beyond 1999 100- 1980 1985 1990 1995 2000 2005 2010 2015 Year ZCCM LIMITED PROJECTED PRODUCTION FINISHED COPPER (TX1000) 800- 600- PRODUCTION AT AN INCREASED LEVEL OF INVESTMENT 400- ADDITIONAL COPPE ON HIGHER 200 IF INCREASED FOREX IS INVESTMENT NOT MADE AVAILABLE THIS WILL HAPPEN TO PRODUCTION 0 i ' 1 1 1 1 1 1 1 1 1 1 1 11' I ' ' ' I ' iI I 199119931995199719992001200320080072009201120132015201720192021 rt Year Ending March 31 rt - 54 - ZAMBA Attacnent EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - MINERAL RESOURCE AVAILABILITY (at March 31, 1991) Tonnage Grade Copper Cobalt% Comments (Million) % TCu C 00 NCHANa Underground 49 3.1 1616 Four separate bodies including 4mt at 029% C:. open Pit 81 16 2 083 Six separate bodies including 103m at 02% Co. Refractory Ore 178 12 2 223 Micaceous refractory material awaiting metallurgical neatmuet route Tailings Dumps (TD 1, . & 4) 123 0.7 900 Tailings dumps scheduled for treatment through existing Tailings Leach Plant. 1OTAL NCHANGA RESOURCES 431 1.6 6 722 SCNEOLA Kirila Bombwe 297 38 11268 Lateral and depth extensions to existing orebodlet Konkola 30 2S 747 Shaft system on care and maintenanceL Saddle Lode SI 6e 1316 Exploration area with considerable potential for further resources. Fitwaola 3 3.5 106 Pilot shaft and metallurgical testwork completed Refractory are TOTAL KONKOLA RESOURCES 381 is 13 45S 14UPULRA Orebody Extensions 43 2.9 1 247 Extensions to existmg orebodies to 1940m Oxide mineralisation 4 Z6 104 Mixed oxide mineralisation. Suitable as "end of life" operation. TOAL MUFULtRA RESOURCES 47 29 1 351 INEANA Extensions 116 24 2832 0.12 Nkana syncline and Mindola extension. Oxide caps II 31 340 Oxide cappings. Nkana Slag Dump 140 150 065 .Metallurgical treatment route required for cobalt resource. TTAL NKANA RESOURCES 144 3 3322 CIIBULUMA Chibuluma - West 2 &S 50 0.12 Extension to existing orebody. Chibuluma - South 9 3.9 351 0J02 (Sulphide + Oxide ore) OTAL CHIBULUMA RESOURCES 11 36 401 C.lAMBISIB Chambishi - Main 45 2.6 1161 Established mine currently on care and maintenance Chambishi - West 46 22 1017 Extension to established mine. Chambishi - South-east 45 2.4 1 C.3 Conservative estimate of exploration area TAL CHAMBISHI RESOURCES 136 14 3254 IMANNitA Extensions 27 2.3 621 Extension to existing orebodie& Oxide mineralisation IT Z4 336 Oxide caps Possible "end of life" operation. Sag Dump 9 0.7 63 0.40 Metallurgical treatment route requr9d for cobalt resource TOTAL .UANSHYA RESOURCES 63 21 1 00 Extensions 13 22 242 011 Extension to existing orebody. Oxide mineralisation 14 14 330 Mixed oxides and sulphides - oxide caps possible "end of life" operation. TOTAL BALUBARESOURCES 2? 23 578 RANSAM SR 26 29 754 Under small existing pit and dill indicated resources in the northern extensilon. TAl,WKANSANSHI RESOURCES 26 29 764 ABWO %n Grade% Ph Old Airfield Area 27 22 08 Inferred to IS0m. Disseminated sulphide and oxide. Speaks Orebody 2 120 2.D Mine canal precludes minir. at present Mine Club/Mine Hospital area 1 814 256 Sub-total Kabwe Orebodies 3D 31 0S Reclamation Resources Leach residues 3 6s 83 Treatment route identified for "end of Ifte" operation. Isrsag 1 8.3 0.7 Treatment route identified for "end of life" operation. Others I 126 S4 Vanous post metallurgical treatment dumps and stockpiles. Sub-total Kabwe Reclamation 5 Tz 62 1FAL KABWERESOURCES 35 38 1.7 MAMMUNDWE 18 ISS=S Depth extension to existing arebody below 730 foot lvel. TOAL NAMPUNDWE RESOURCES 18 iSStS T AL 2CCM COPPER RESOURCES I 256 Z4 28 891 Within existing Company Mining Licence Areas MoinrlresoucesaredeAndasthosemineadsedmtedalwhich havebmeesmdindlsuSlentdetiltoestablish their modeafoacurne,ased esealqaliMesandcude reclamation materials already mined or treated forwhi there is a reasonable expecaton of fuure exploitation. Before such mineral resouse can be transferred to the ore reserve category. Invesugation into the feasibility of ecnomic explotatie must be made and additonal investment inoured. ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM - PRODUCTION COSTSt 1984-1991 (USC/LB) Year ended March 31, 1984 1985 1986 1987 1988 1989 1990 1991 Production Finished Copper 551 526 463 471 473 416 448 422 Exchange Rate 1.365 2.001 4.249 8.881 8.855 8.877 17.583 36.000 Production Costs mining 27.1 22.5 17.8 18.6 26.3 33.5 26.3 30.7 Concentrating 5.3 4.6 3.2 3.6 5.7 7.5 6.1 6.9 Leaching/Smelting/Refining 10.3 9.5 7.7 8.4 12.4 17.7 13.3 16.9 Management/Administration 7.7 8.6 8.5 5.7 8.3 13.7 12.9 19.2 Depreciation 4.9 4.5 5.6 12.5 9.7 11.0 6.7 3.8 Total Production Costs 55.2 49.7 42.8 48.8 62.5 83.4 65.3 77.5 Realization Costs 7.5 9.3 5.0 4.7 5.3 6.0 8.0 8.8 Net Interest 6.5 13.1 7.0 7.5 6.3 7.7 6.5 9.5 Total Cost 69.3 72.1 54.8 61.0 74.1 97.1 79.8 95.7 Average UIE Price (USC) 70 6 65 62 89 130 112 120 Source: ZCC". - 56 - Attachment 28 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM SUBSIDIARY: ZAL HOLDINGS LTD. ZAL Holdines Ltd. (UK) Techpro Model and Tractor Techpro Buying Redirection Placement Ltd. Zambia Appointments Ltd. Zambia Engineering Services Ltd. Zamcargo Ltd. Hyperion Properties (Jersy) Ltd. SCCC ZAL Holdings Ltd. (Zambia): Company Divisions ZAL Technical and Management Systems Cleanwell Drycleaners (Lusaka, Copperbelt branches) Mundawanga Zoo Botanical Gardens ZAL Holdines Ltd. (Zambia): Subsidiaries and Associated Companies Company NJature of Operation Redirection Placements Ltd. Recruitment, secretarial services Inter Continental Travel Ltd. Travel agency International Travel Agency Travel agency (branches on Copperbelt) Zamcargo Zambia Ltd. Freight and forwarding Lake Hotels Hotels and lodges Coolwell Systems Ltd. Ventilation, refrigeration, maintenance Buildwell Construction Ltd. Maintenance of Properties (residential, commercial) ZAL Elevators Elevator installation/maintenance Zuva Zambia Ltd. Jewelry manufacture Scaw Ltd. Metal casting and mill ball manufacture United Quarries Ltd. Quarrying Zambia National Shipping Line Container ships Sourc: ZCCM. - 57 - Attachment 29 ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT ZCCM SUBSIDIARY: MULUNGUSHI INVESTMENTS LTD. Zambia Circuit Construction Ltd. Circuit Engineering and Tooling Ltd. Circuit Sawmilling and Joinery Ltd. Mbala Farming Enterprises Mining Timbers Ltd. Mpelembe Drilling Company Ltd. Mpelembe Properties Ltd. Nchanga Farms Ltd. RYCUS Heavy Haulage RST Management Services Ltd. South Africa Zambia Procurement Services (Private) Ltd. Source: ZCCM. - 59 - Attachment 30 Page 1 of 3 ZCCM - ENVIRONMENTAL ASPECTS Legislation 1. The Trade Effluent Regulation of 1985 proved to be ineffectual, largely through lack of enforcement. The belated promulgation of the Environmental Protection and Pollution Control Act in June 1990, is a major step towards initiating government action aimed at bringing the Zambian industry under environmental controls similar to those in developed countries. The Act is largely enabling legislation which provides for the establishment of committees of experts, through an Environmental Council, each charged with the responsi- bility for controlling the quality of different sectors of the environment. It is difficult to predict the actual standards or the degree of compliance that will be required. Formulation of discharge/effluent standards will be an early task for the Committees, with a requirement for compliance following soon thereafter. It is expected that the legislation generated by the new Act will follow international trends in respect of both air and water quality. Namely, the pattern is likely to be that new plants installed after the implementation of such legislation will be required to achieve total compliance with the new environmental standards from the date of commissioning; existing plants would be given a grace period for the requisite modifications to achieve compliance. It is anticipated that such legislation will be in place within the next few years, with the main standards defined, and the requirement for a specified degree of compliance by the year 1995. Anuatic Environment 2. The Kafue River drains the whole of the Copperbelt receiving the total industrial and domestic liquid waste of this major industrial area. But it is also the source of potable water to approximately three quarters of the total population in the region and, to a lesser extent, meets the demands of agriculture in the area. ZCCM has maintained a regular monitoring program for a wide range of parameters not only of the Kafue River, but also of all subsidiary streams and rivers which receive mining industry discharges. This monitoring program, coupled with the process of effluent quality control, has generally proved effective in providing adequate protection of the quality of receiving streams and rivers. 3. In general, plants based on concentration, smelting and refining processes do not have major liquid effluent control problems, apart from releases of suspended solids in particular areas (Luanshya river; Wusikile storm drain; Uchi, Nchanga and Mushima streams). The introduction of hydrometallurgical processes escalates the magnitude of the control problem because of the need to achieve effective precipitation of dissolved metals, neutralization to acceptable pH values, and clarification prior to discharge. Such processes generate a high level of dissolved solids which, through the contained sulphate, may constitute a significant pollution problem. This has already been observed within areas of the existing operations. The limiting value of sulphate in surface water is likely to be set at 400 mg/l against the current Industry standard of 600 mg/l. Sulphate levels in the Mwambashi River, which is a major source of water for two towns and a significant number of - 60 - Attachment 30 Page 2 of 3 farms, already grossly exceeds this standard for the major part of the dry season, with levels exceeding 1,000 mg/i. Effective controls to limit the sulphate level in this river would be an early target. Any plans for additional leaching processes or acid production/handling capacity will have to take full cognizance of the limited capability of the Kafue River to absorb additional sulphate containing effluents. 4. The effluent control process is based on the full neutralization of acidic wastes, coupled with the settlement and retention of suspended solids. ZCCM has not been as successful as it would have wished in controlling all releases. The main problem has been compliance with the standard for suspended solids, particularly in the effluent released from the Nehanga operations. Although the all important values for dissolved metals lie within acceptable levels, ZCCM has been taking steps to bring this area of release under control through changes to the spillage control system associated with the Tailings Leach Process. ZCCM is considering the construction at Nchanga of the first tailing dam spill-way, which would provide a very high degree of dry season water retention of hard process water to reduce the dry season dissolved solids burden in surface waters. Air Quality 5. For most of the year, meteorological conditions are favorable to achieving rapid dispersal of stack emissions. Thermal inversion layers never persist for more than a few hours and, as a result, the sulphur oxides discharged by the industry do not accumulate and build up to hazardous levels. While concentrations occasionally reach noticeable levels outside plant boundaries, serious pollution levels have not been experienced on the Copperbelt. However, complaints are being voiced with increasing frequency, while awareness of the health hazards from exposure to such levels of pollution is rising. 6. The levels of sulphur oxide and dust emissions that are experienced derive from the smelting and roasting of concentrates, the conversion of copper matte, and the burning of sulphur-containing fuels. Reduction in the total quantity of sulphur oxides discharged to atmosphere is achieved by conversion into sulfuric acid. Future plans involve a considerable reliance on hydro- metallurgical processes to recover copper from low grade oxide ores, in addition to continuing the leaching of metal values from reclaimed material from the older paddock type tailings dams. ZCCM has embarked on a major rehabilitation program for the four acid plants at Nkana to ensure that they operate with maximum efficiency. The completion of this program, coupled with a plant operational schedule which is sensitive to local meteorological conditions, would ensure that the local impact of sulphur oxides in the Kitwe area is substantially reduced. Dust collection from the electric ft-rnace and gas collection from the converters also need to be addressed at the Mufulira plant, while the roaster plant at Nchanga needs to be fitted with a fume scrubbing system. - 61 - Attachment 30 Page 3 of 3 Costs and Benefits 7. ZCC4 is conscious of its environmental responsibilities, and is actively reviewing its waste management program in order to improve the degree of control, particularly in respect of effluent quality control' Heretofore, the discharge of effluent water, the disposal of other solid wastes, and the dispersion of stack emissions from ZCCM's operations has resulted in a limited environmental impact, which is restricted to a local zone adjacent to each mine. However, in discharging this responsibility, ZCCM feels that although the impact to the health of the local population, including the visual and aural effects, is of prime importance, it must also be recognized that environmental control techniques impose heavy financial outlays, and that preservation of the environment at the expense of development or at the risk of shutting down the industry, could have significant negative effects on the welfare of a large proportion of the community. To balance mining development with achieving optimum environmental standards, controls would have to be phased in gradually. t ZCCM had agreed at appraisal to abide by internationally accepted pollution control standards (SAR, para. 5.12). - 63 - PROGRAM COMPLETION REPORT ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) JUNE 26, 1991 Industry and Energy Operations Division Southern Africa Department Africa Region - 65 - PROGRAM COMPLETION REPORT ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) PART I - PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE 1. Prolect Identity Project Name: Export Rehabilitation and Diversification Project Loan No. 2391-ZA RVP Unit Africa Region Country Zambia Sector Industry (SECAL) Subsector : Mining 2. Background 2.01 Copper mining has traditionally been the main support of the Zambian economy, contributing about 85% of foreign exchange earnings, while providing work to about 65,000 employees accounting for roughly 18% of the country's formal employment. Zambia Consolidated Copper Mines (ZCCM) dominates the sector producing all of the country's copper and cobalt. It is owned 60.3% by the Government, 27.3% by a subsidiary of Anglo-American Corporation (SA), with the balance held by private investors. 2.02 In the early 1980s, ZCCM was faced with decreasing production and declining copper prices. Ore output was declining as existing mineral deposits were becoming less accessible and deeper, while ore grades (metal contents) were diminishing with depth. Additionally, much of ZCCM's equipment was in need of rehabilitation. All of these factors lead to increasing costs of production. This poor overall situation was reflected in dramatic reductions in profits and taxes. 2.03 Given the above mentioned circumstances, the Government issued directives to ZCCM in late 1983, requiring it to give primary consideration to profitability and economic efficiency. These were duly endorsed by ZCCM's Board in February 1984. They implied: (i) closing uneconomic operations; (ii) releasing some labor; (iii) establishing priority allocations of foreign exchange to sustain operations of ZCCM; (iv) reviewing and possibly revising levels of production. Within this context, ZCCM defined a US$300 million project to rehabilitate its facilities and to rationalize its operations. This rehabilitation project received full Government support since it was viewed as crucial for reestablishing the competitiveness of ZCCM on the world market and ensuring its future financial viability. - 66 - 3. Project Objectives and Description 3.01 The main objectives of the Project, stated in the Staff Appraisal Report (SAR), were to improve the performance and competitiveness of ZCCM, as well as its contributions to Zambia's foreign exchange earnings. For this purpose, its design aimed at funding certain of ZCCM's replacement and rehabilitation investments, and at assisting ZCCM tot (i) analyze its activities and establish rationalized capacity and production levels for the short, medium and long terms, w.iich were fully justified on technical, economic, financial and market grounds; and (ii) adopt a management and investment strategy in line with such rationalized capacity and production levels. 3.02 To achieve these goals, the Project was designed with three main components which consisted of: (i) investments in equipment including spares; (ii) implementation of a training program; and (iii) execution of technical studies. First, the investment in equipment and spares was oriented at improving ZCCH's operations of mines, concentrators and metallurgical plants by: (i) replacing unreliable mining and materials handling equipment, including ventilation and dewatering systems, and by installing a trolley assist system for the existing electric-wheel truck haulage; (ii) replacing old equipment in the concentrators and introducing large modern flotation cells, rehabilitating tailings disposal and slurry pumping systems; and (iii) modifying the gas handling components, upgrading the control systems, and rehabilitating conveyors, cranes, crushers and ore storage at the metallurgical plants. 3.03 Second, the training program was oriented at upgrading the skills of the technical and supervisory work force by providing assistance to: (i) increase the number of mining engineers graduating at the University of Zambia, and of technicians and technologists graduating at the Zambia Institute of Technology in the fields of mining, metallurgy, surveying and ventilation; (ii) expand on-the-job training programs for craftsmen in the electrical, plant fitter and welding trades; (iii) increase fellowships to send engineers, technicians and craftsmen for on-the-job training abroad; and (iv) establish management training courses for staff, ranging from junior supervisors to top management, in the fields of supervision, financing, budgeting, communication skills and cost reduction. 3.04 Third, the preparation of technical studies was oriented at developing the information and decision making foundations to improve ZCCH's operations. In this regard they aimed at optimizing the company's operations by: (i) a thorough review of its mining operations, including underground methods and approaches for control and reduction of ore dilution; (ii) the rationalization and optimization of the processing activities of ZCCM; (iii) the preparation of an action plan and schedule to close uneconomic mines; (iv) the formulation of an extensive maintenance and replacement program for equipment; (v) the introduction of standard procedures for investment decisions, including systematic financial and economic investment analysis; (vi) the overhaul of warehousing and purchasing/ordering systems; and (vii) the implementation of new cost control, accounting and budgeting systems on a divisional basis. - 67 - 4. Proiect Design and Organization 4.01 The Project was designed within the context of ZCCM's five year (1984-88) investment program. Basic project design, to meet its stated goals (para. 3.02) was straightforward, and aimed at assisting ZCCM to: (i) maintain a production level consistent with its technical and ore reserve constraints; (ii) determine priorities and strengthen its planning functions; (iii) estab- lish adequate management systems and operational procedures to improve its efficiency and productivity; and (iv) train its staff. Basic project design and organization remained unchanged throughout implementation. 4.02 The organization for implementing the project was established within ZCCM's existing structure, relying strongly on coordination and services provided by Techpro, its wholly owned consulting group, which is based in England. Project components were handled and implemented by various relevant departments within ZCCM as follows: (i) decisions on equipment replacement and rehabilitation, by existing divisional management, which provide technical specifications, assisted in bid evaluations and managed on-site work; (ii) procurement, by the Purchasing Department with support from the Techpro team in London, and from the Technical Services Group and the technical divisional staff of ZCCM; (iii) training, by the Department of Manpower Development and Training; and (iv) technical studies, by the Corporate Planning Department in combination with the Technical Department and with virtually every operational division of ZCCM. Overall, ZCCM implemented the Project competently and rapidly. A significant contribution to this superior performance was made by Techpro. 5. Project Implementation 5.01 No delays were experienced in declaring the Project effective. The implementation of project components funded by the Bank was satisfactory and generally completed ahead or within the SAR schedule. The Project execution was characterized by an unusually rapid disbursement of the IBRD Loan, and a timely release of its second tranche on January 17, 1986. (The Loan was tranched primarily in order to ensure the timely completion of certain studies and the development of plans to implement them). Main project activities included: (i) the procurement of equipment and spares, virtually completed about three months ahead of time table, with over 96% of the IBRD Loan committed by December 1986; (ii) the technical and other studies, completed betwee-a 1985 and mid-1986, which met the time tables set in the SAR; and (iii) the training element, which extended throughout the Project execution period, although its performance was weak ir. comparison to other components. Due to Zambia's arrears with the Bank, the Loan was suspended in May 1987, but this had little impact since it was about 90% disbursed and over 96% committed at the time of suspension. 5.02 Procurement and Allocation of Loan Proceeds. After a relatively slow start on procurement, ZCCM acted very impressively in processing purchases. Procurement was slow between the time of Loan Negotiation and Effectiveness, because technical and procurement staff of ZCCM were fully involved in addressing problems. concerning existing loans from the ADB and SysminIEEC, which resulted initially in not committing significant staff resources to preparing procurement documentation, prior to fulfilling all conditionality of - 68 - the IBRD Loan and to having such funds fully available. Subsequent to Loan Signature in mid-May 1984 and to Loan Effectiveness in mid-July 1984, bid openings for equipment and spares started rather slowly, but proceeded rapidly and achieved about 902 completion within 10 months. This swift performance allowed the second tranche of the Bank Loan to be released, just prior to reaching the US$40 million limit of the first tranche, and ultimately resulted in disbursing about 90% of funds for equipment within 28 months of Project Signature, which was about four months earlier than estimated in the SAR and about 26 months earlier than the Bank's standard mining industry estimates. 5.03 A reallocation of about US$10.47 million from IBRD's Loan occurred in May 1986, when loan disbursements and commitments reached about 75 and 90%, respectively. The reallocated funds originated from the unallocated category of the Loan (US$7.96 million), savings derived from reduced use of funds under the category for surface equipment and spares (US$1.51), and the initial deposit for the Special Account (US$1.0 million). The majority of reallocated funds were assigned to additional consultant services (US$4.85 million), spare parts, mining and mobile equipment (US$3.38 million), and technical assistance and training (US$1.36) to improve materials inventory, control systems and maintenance. 5.04 Overall, ZCCM conformed well with the procurement procedures of IBRD, and its results on ICB were satisfactory. Bid invitations for equipment generated broad competition from bidders and resulted in obtaining good prices for ZCCM, at levels significantly below appraisal estimates. This was caused primarily by favorable changes of the US currency, after February 1984, when the estimates were prepared, and by the keen competition that existed in the international heavy equipment market at the time of Project Implementation. Accordingly, for procurement cleared by the Bank through July 1985 actual costs for ICB packages were on average only 79% of the appraisal estimates. The resulting savings amounted to about US$8.5 million, which were subsequently used to help fund about US$12.5 million in purchases of additional spares (para. 5.06). 5.05 ZCCM's procurement performance was facilitated by: (i) the rehabilitative nature of the Project, which dealt mostly with replacement and addition of equipment components, with a minimum of civil works and erection; (ii) the additional flexibility resulting from not having a critical path; (iii) the learning and training acquired by ZCCM staff from recent procurement initiated under a loan from the African Development Bank; and (iv) the procedural framework established to expedite procurement activities. Additionally, during Project Implementation, the procurement of equipment and spares was facilitated and accelerated considerably by some of the relevant arrangements devised and adopted by ZCCH, which included: (i) generating packages with the integrated requirements of ZCCM, for each major type of component, and hence eliminating independent and isolated purchasing by the various divisions; (ii) providing flexibility for various procurement changes including shifts towards purchasing by ICB procedures instead of sole source and LIB; and (iii) assigning specific staff to handle project procurement. 5.06 Proiect Fundina. Throughout the period of Project Execution, the financial health of ZCCM remained adversely affected by low copper prices, high taxes and low foreign exchange allocations. Copper prices during the period - 69 - 1984-1986 were very low by historical standards, far below the forecasts in the SAR, and this reduced ZCCM's revenues and cash flows. In addition, the company was hampered by: (i) inadequate and relatively erratic foreign exchange allocations from the Bank of Zambia, ranging between 25-40% of ZCCM's foreign exchange earnings, which was significantly below the amount needed or agreed with ZCCM; (ii) large indirect taxes, mostly in the form of import tariffs at about 10% of revenues; and (iii) elevated mineral export taxes, that were increased from 10% to 13% of revenues, retroactive to October 1985, with the effect of draining much of ZCCM's cash flow. All of these factors severely reduced the company's ability to fund its share of the equipment and fixed investments required by the rehabilitation program. 5.07 The shortfall in ZCCM's ability to fund the project was offset by higher than anticipated funding from the co-financiers especially the EEC, (see Table 5.B of Part III). Thus ZCCM's financial constraints did not impede the project per se. However, these financial constrrints affected ZCCM's ability to buy spares and consumables which resulted in difficulties in maintaining production schedules in the short term, in neglect of stripping at the Nchanga open piv and in developing underground ore reserve. The resultant scarcity of developed ore reduced ZCCM's operational flexibility, by hindering mine production, and damaged further its financial situation. This raised the need for Bank flexibility in assisting ZCCM, which materialized chiefly through: (i) agreement in 1985, to allow the purchasing of additional spares amounting to US$12.5 million on a sole source basis; and (ii) rapid preparation and processing of a US$16 million technical assistance project. (See para. 6.02). 5.08 Proiect Costs. The cost of the Project was estimated in the SAR at US$300 million of which about 74.8Z was in foreign exchange. Actual costs of US$302 million were very close to the SAR estimate in dollar terms. However, the amount of spares and equipment purchased as part of the project was somewhat greater than anticipated since equipment prices were lower than expected (para. 5.04) while ZCCM1s ability to fund its own spares requirement was reduced (para. 5.06). A comparison of Project costs estimated at appraisal and actual costs is shown in Table 5A of Part III. 6. Project Results 6.01 Overall, the Project was generally successfully and rapidly implemented, with the minor exception of its training component (para. 6.02). It had three main achievements. First, the Project permitted halting, at least, on a medium-term basis, ZCCM's declining trend of copper production, which stabilized at about 440,000 tons ann;-,lly, largely as a result of the new equipment purchased under the Bank Loan, and of improvements in management and planning. This level of production is below the level anticipated in the SAR due to: (1) continuing depletion of existing reserves with no new discoveries; (2) management weaknesses at the middle management level and certain skills shortages; and (3) the impact on production of the shortage of operating funds (para. 6.03). Second, in spite of the lower than anticipated level of production, ZCCM during the period of the project, managed to reduce unit costs in real terms with its performance being substantially better than anticipated in the SAR (Part III, Table 4). Finally, the financial rate of return (FRR) on the project was reasonable (para. 6.04) and only slightly below the rate of return anticipated in the SAR. - 70 - 6.02 Training. The implementation of training was weak when compared to other project componenta, and was insufficient to substantially reduce ZCCMts main technical and managerial weaknesses. These weaknesses were not fully anticipated in the SAR, which rather optimistically envisaged completing training activities under the Project in early 1987, while they were not even fully completed at project closure late in 1988. In addition, the advent of the new equipment highlighted further areas of technical and managerial weaknesses within ZCCM. A technical assistance project was prepared in 1986-87, to assist with these areas of weakness, but its preparation was suspended after appraisal due to Zambia's arrears difficulties with the Bank. A new technical assistance loan is currently being prepared. 6.03 Covenant Compliance. The mai, issues on compliance with Loan Agreement covenants concern: (i) allocations of foreign exchanget (ii) studies of applicable fiscal regimes; and (iii) postponement of current ratio obligations. First, the insufficient allocations cz foreign exchange to ZCCM (paras. 5.06) resulted in non-fulfillment of the covenant in Article 3, Section 3.01 (b) of the Loan Agreement, which committed the Zambian Government to provide an adequate allocation. However, a significant factor in this non- compliance was Zambia's low level of copper revenues, caused by low copper prices, which made compliance difficult; if not impossible. Second, the only other major covenant not fully respected, during Project Execution, concerned Article III, Section 3.02 (a) which required studies on the fiscal regime applicable to ZCCM. Given the prevailing lack of stability and predictability of tax payments by ZCCM, the delay of over three years to complete these studies exacerbated the uncertainty facing ZCCM and obstructed rational decision making. Third, the current ratio covenant in Article IV, Section 4.05 was waived by the Bank in early 1986, postponing its compliance by 15 months until June 1987. This action took into account that: (i) ZCCM was not in compliance at the time of the Loan; and (ii) ZCCM could not achieve compliance by its specified deadline of March 31, 1986 due to the effects of continuing Kwacha devaluations on ZCCM1s foreign debt. 6.04 Rate of Return. The incremental FRR of the Project depends largely on what would have happened had the Project not been implemented. If it is assumed that ZCCM's production would have continued to decline at the 1978-86 rate without the Project, then the incremental FRR pre-tax from the project is about 17% since the Project, at least on a medium term basis, broke the declining trend in output (see Table 6, Part III). In this calculation it was also assumed that the impact of the project would have largely ended by 1995. If the impact of the project continues to 1999, the FRR rises to over 251. Also, if ZCCM's estimates of production without the Project are used, the FRR is much higher, since the company believes that without the Project, its decline in production would have accelerated. The economic rate of return tuRR) for the Project, assuming again that its impact ends in 1995, is 231. If the impact of the Project is assumed to last longer, or if ZCCM's assump- tions as to what would have happened without the Project are used, then the ERR would be raised substantially, in line with the rise in the FRR under the same assumptions. 6.05 The FRR and ERR as calculated ex post 4n this PCR are lower than the ex ante calculations of these same rates of return contained in the SAR (see Table 6, Part III). Overwhelmingly, this difference is due to the substan- - 71 - tially lower levels of copper production by ZCCM than forecast in the SAR. This result was anticipated by the sensitivity tests done in the SAR (paras. 7.17 and 8.02) which showed that the rates of return from the Project are most sensitive to ZCCM's actual levels of copper production. 7. Proiect Sustainability 7.01 The issue of project sustainability is a difficult one and has to be viewed in two different time frames. First, in the longer run, that is to say beyond eight years from the date of this PCR, the results of the Project are probably unsustainable. ZCCM is steadily depleting its existing ore .reserves and no major new discoveries have been made for a number of years. This depletion has caused a decline in production and will cause a further decline especially at the beginning of thf aext Jecade when several major mines will close due to exhaustion of their known reserves. 7.02 In the mealum term, that is for most of this decade, the improvement in productivity and competitiveness that occurred at ZCCM as a result of the Project are sustainable though they will need to be reinforced and built upon. While ZCCM made considerable progress in improving its operations there is still a great deal which needs to be done, especially in the areas of planning, maintenance, training and corporate restructuring. ZCCM is interested in further technical assistance from the Bank and has requested an IDA credit for technical assistance which is under preparation. 8. Bank Performance 8.01 Overall Bank performance during Project Execution was satiefactory. The appraisal was generally well focused, with the sole exception of a rather optimistic assessment of ZCCM's needs for training. This was recognized subsequently as an important area for further improving productivity and efficiency, which warranted being addressed by a supplemental project (para. 7.02). Also, an extensive and active dialogue developed between ZCCM's management and Bank supervision missions, that visited Zambia regularly, to review ZCCM's mining and metallurgical operations. This rapport, however, was affected by the suspension of regular supervision missions in early 1987, due to Zambia's arrears to the Bank, and changed into a link based on regular reports from ZCCH, and occasional v.dits to the Bank by its management. This link has been recently strengthened by more frequent missions and an active dialogue is re-emerging. 8.02 The main 1. sons to be learned are three fold. The first is that for companies which domir .te an economy, of which ZCCM is one of the more extreme examples, micro-economic issues are in fact macro-economic and vice versa. ZCCM's foreign exchange revenues are overwhelmingly the country's main source of foreign exchange and its tax payments are a substantial part of the Government's tax receipts. Furthermore, a major part of the industrialized sectors of the economy (power, railroads, coal etc.) are to a large degree suppliers to ZCCM. This creates complex trade-offs between ZCCM on the one hand and the Government and the rest of the economy rn the other, and makes decision-making difficult. The second lesson is simpler and more micro economically oriented. It is the slowness in getting large inbred organiza- tions with strong corporate cultures to accept and adopt the technical - 72 - assistance provided (see para. 9.02). Finally, the Bank should be careful in accepting the forecasts of borrowers, in this case production forecasts, even when they are made by as competent an operating company as ZCCM. 9. Borrower's Performance 9.01 The official borrower of the IBRD Loan was the Government, which on- lent the proceeds to ZCCM. The Government's position was ambivalent. On the one hand, it wanted to increase the profitability, production and economic efficiency of ZCCM, which required substantial investments by the company. Financing these investments in turn required that the company's taxes be limited and that it have adequate access to foreign exchange. On the other hand, the Government needed a large part of ZCCM's foreign exchange revenues to fund imports for other sectors of the economy and its cash flow to finance the Government budget. These two goals were unfortunately inconsistent in the short run, especially given the low level of copper prices. Thus, the Government's efforts to extract rents from the company damaged the rehabilita- tion project. 9.02 The performa.te of ZCCM r s generally good thoagh changes in ZCCM's procedures and approaches were neither as thorough nor as efficacious as expected. The company has a strong inbred cotporate culture that is somewhat resistant to change. Moreover, ZCCM's Management could have encouraged more rapid change in procedures and approaches, but clearly chose not to do so. It is difficult for an outsider to gauge how much change an organization can undergo, but if it could have been implemented successfully, a more rapid adoption of new approaches and procedures would have beer. helpful. 10. Proiect Relation'hips 10.01 The Bank's relationships with the Government and ZCCM remained excellent throughout Project Execution. During Project preparation, appraisal and supervision, ZCCM provided all required support. 11. Consulting Services 11.01 The performance of the consultants was generally good. The requirement to study thirteen topics under the Project was timely and well executed. Preliminary studies of mines, plants and procedures were started in early 1983 and largely concluded in 1985, with the consequence that by mid-1986 all studies required as part of the Project were finished. 12. Proiect Documentation 12.01 The conditions in the Loan Agreement were quite strong (see Table 7) but one of the most important (Government provision of funds) was not or could not be enforced due to the low level of copper prices (see para. 6.03). The Staff Appraisal Report was thorough and generally well done. It was, however, optimistic about ZCCM's production capacity while underestimating the compaay's ability to reduce costs. - 73 - PART II - PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE A. The Implementation of the Proiect The implementation guidelines from the Bank were well studied and few problems were encountered thereafter. The Company's methodology for handling the elements making up the Loan was accepted by the Bank as an example for other recipients of IBRD funds. The Impact on the Company's or the Country's Development It ic difficult to single out the impact of one loan in the Company's Export, Rehabilitation and Diversification Project which was supported by three multilateral organizations. Certainly, the Project as a whole allowed the Company to halt the deterioration of its equipment and plant and to maintain a steady level of production. The training component started slowly but at the completion of the Loan, a well structured training program was established. In addition a Manpower Plan was created, allowing for more specific training programs to be launched to fulfill Company manpower requirements. Because of the country's reliance on th foreign revenue from copper sales, undoubtedly the improvements reported by the Company will have benefitted the country. Comments on the Bank's Performance The split of support categories was effective i.e., - equipment - training - consultants assistance. The third category above was especially valuable to the Company as it allowed a detailed audit of all facets of operations by specialist personnel. Two aspects of the first category above, equipment should be noted: First, despite a desire by the Company to standardize on some types of equipment which had been shown by experience to be more suited to the Company's conditions, international or limited tendering procedures were insisted upon by the Bank. In some cases, this merely delayed the acquisition of equipment, in other cases non-standard equipment, because of price, was acquired defeating the standardization program. i.e. the Bank should consider: either increasing the proportion of direct bidding items, or allowing greater flexibility during adjudication of bids to support standardization programu. - 74 - Second, initially the purchase of spares to maintain existing equipment was disallowed, although in some cases a two years stock of spares was allowed with new equipment ordered. The early decision on spares for existing equipment was later reversed, following a visit to the Company by a member of the Bank who had seen the need during his visit. i.e. the Bank's appraisal mission should be guided more by the Borrower's requirements, than by inflexible adherence to existing interpretations. The provision of a small fund (revolving) held by a selected Bank in London was of great value in handling payments to Consultants. What Lessons were Learnt A detailed understanding, of the rules and procedures relating to specifications, publicizing requirements, tendering and adjudications together with the disbursement agreements of the Bank, by all personnel involved with the project, is essential if unnecessary time waste is to be avoided. Relationship between the Bank and ZCCM The relationship between the Bank and the Borrower throughout the Loan preparation and implementation periods was steady and mutually helpful. B. Cofinancinx An evaluation of the Cofinancing that supported the Company's Export Rehabilitation and Diversification Project from: - the World Bank - the EEC (Sysmin) - the ADB Although similarities existed in the procurement and disbursement procedures of the three supporting multilateral agencies, some differences in the choice of projects for funding and their sourcing existed. As the preparation of the items for procurement under each loan was not simultaneously and was separated by several months and as there was insufficient experience of the procurement rules of each loan, inevitably amendments were necessary during the early lives of the loans. Some items were moved from one loan to another where, for example, sourcing was more accept- able. The differences in emphasis given to items for funding were in fact effective in supporting a wide range of the Company's requirements e.g. one loan emphasized the need to audit our operations, to strengthen our training and to rehabilitate equipment; - 75 - another emphasized the need to complete necessary and specific projects and to acquire spares; and another emphasized training and equipment replacement. C. Prolect Costs Although the disbursement of the IBRD Loan was completed at the time of this report, there remained small balances on the African Development Bank and Sysmin II Loans. Lower metal prices, high taxation and low foreign exchange allocations had the effect of reducing the Company's ability to fund its programmed share under the Export, Rehabilitation and Diversification Project. This resulted chiefly in a lower expenditure in foreign exchange. D. Summary The Export, Rehabilitation and Diversification Project was launched at a critical time in the Company's life. The benefits of the Project can be measured to a degree by the levelling off of production but the full benefit must be assessed with the knowledge that without the Project, the downward spiral in all aspects of the Company's operations would have become irrever- sible. In an environment of falling metal prices and acknowledging the country's acute economic problems, it will be essential to prepare a follow-up project to sustain and perhaps improve upon the Company's operations, now and in the short- to medium-term. - 76 - PART III - STATISTICAL INFORMATION 1. RELATED BANK LOANS Loan/Credit Year of ite Purpose Anroval Statug Investment 483-ZA ZCCM Cobalt Project Increase Production 1979 Completed Investment 600-ZA ZCCM 3 Stage Tailings Expansion of Finished Leach Copper Production 1981 Completed Credit 1333-ZA Assist Coal Company in Maamba Coal Formalizing Rehabilita- Engineering Project tion Project 1983 Completed 2. PROJECT TIME-TABLE Date Date Date Planned Revised Actual Identification 09/15/80 - 09/15/80 Preparation 05/29/81 - 05/29/81 Appraisal Mission 02/10/82 - 03/08/82 Loan Negotiation 01/09/84 - 01/09/84 Board Approval 03/20/84 - 03/20/84 Loan Signature 05/14/84 - 05/14/84 Loan Effectiveness 07/19/84 - 07/19/84 Project Completion 12/31/87 - 12/31/87 Loan Closing 09/30/88 - 09/30/88 - 77 - 3. LOAN DISBURSEMENT (US$ million) -------------------Cy------------------- 1984 1985 1986 1987 1288 Estimated 11.3 31.8 18 13.9 0 Cumulative Estimated 11.3 43.1 61.1 75.0 75.0 Actual 0.2 38.9 29.8 2.5 0.3 Cumulative Actual 0.2 39.1 69.0 71.5 71.9 Cumulative Actual as a % of Cumulative Estimated 1.8% 90.7% 112.9% 95.3% 95.9% Note: The Loan was tiuspended on May 1, 1987. US$3.1 million of the Loan was cancelled after it closed. 4. PROJECT IMPLEMENTATION Indicators Appraisal Estimate ActualfPCR Estimates Ratings Available Funds a/ 1 1,3 Project Management 1 1 Development Impact 1 2 Overall Status 1 2 Other Copper Production FY1990 622 440 (thousand tonnes) P/ Cobalt Production FY1990 3.6 4.4 (thousand tonnes) Unit Cost FY1990 113 76 (0/lb of copper) Net Income After Tax FY1990) -76 +166 (US$ millions) Note: (a) ZCCM was short of funds to finance its part of the project. Nevertheless, the full funding the the project was available as a result of additional financing provided by cofinanciers. ZCCM's shortage of funds negatively impacted on-going operations. (b) SAR estimates of future copper production were quite high, based on ZCCM's plans which were very optimistic. - 78 - 5.A PROJECT COSTS (US$ million) Appraisal Estimate Actual Local Foreign Local Foreign Item Costs Exchange Total Costs Exchange Total Rehabilitation and Replacement Equip. 57.6 172.3 229.9 61.7 221.3 283.0 Training 2.5 8.8 11.3 2.7 8.0 10.7 Technical Studies 0.3 1.8 2.1 0.7 7.5 8.2 Contingencies 15.3 41.2 56.5 - - - Front End Fee - 0.2 0.2 - 0.2 0.2 Total 75.7 224.3 300.0 65.1 237.0 302.1 =WWW =W mWW S.B FINANCING PLAN (US$ million) Appraisal Estimate Actual Local Foreign Local Foreign Costs Exchange Total Costs Exchange Total Debt IBRD 0.8 74.2 75.0 0.5 71.4 71.9 EEC-Sysmin - 45.8 45.8 - 74.3 74.3 ADB - 27.3 2.3 31 3.. Total 0.8 147.3 148.1 0.5 177.0 177.5 Equity ZCCN 74.9 ..0.. 151.9 64.6 60.0 124.6 Total 75.7 224.3 300.0 65.1 237.0 302.1 MM R====R ==== W==== =m==W comments The EEC, and to a lesser extent, the ADB, provided more finance for the Project than expected at appraisal. ZCCM, due to financial constraints related to high taxes and low copper prices, provided less financing than expected. - 79 - SAMBIA EXPORT REHABILITATION AND DiVERSIPICATION PROJECT (LOAN 2391-ZA) 6. PROJECT RESULTS Appraisal PCR Estiate Estimate Incremental Financial Rate of Return pre-tax 21% 17% Economic Rate of Return 36% 23% Comments: The rate of return from this Project depends on what would have happened had the Project not been undertaken. In particular, the key issue is what production would have been without the Project. In calculating the PCR estimate of the financial rate of return (FRR), and the economic rate of return (ERR), it was assumed that without the Project, production would have continued to decline, following the FY1978 to 1986 trend. The incremental difference in production between (1) actual production and ZCCM's most recent estimates of future production, and (2) the extension of the 78-86 production decline trend, is assumed to be the primary gain from the project. The net value of this incremental production is then calculated as the actual price of copper or the Bank's forecast price of copper, minus out-of-pocket copper production costs. The benefits from the Project are thus incremental production for each year times the calculated net value for the year, while project costs are the US$302 mi!lion in outlays. (Corporate taxes and export taxes, which changed repeatedly during the period, are excluded from all rate of return calculations). The impact of the rehabilitation project is assumed arbitrarily to cease in 1995. (This is the same assumption that is used in the SAR). If this calculation procedure is extended to 1999 the FRR rises to 26%. Also, if ZCCM's own estimates of production without the Project are used, which show an accelerating decline in output, the FRR would be much higher. Finally, the ERR for this project is 6% higher than the FRR due primarily to the elimination of import duties and sales taxes in calculating the ERR though not in calculating the FRR. The primary reason that the SAR's estimates of the FRR and ERR are higher than the PCR's estimates, is that the SAR used high estimates of praduction. - 80 - SAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) 6A. ASSUMPTIONS USED IN CALCULATING PROJECT RATE OF RETURN Fiscal Copper Production Actual or Forecast Actual or Forecast Years Based on Trend Copper Production Coper Prices (1000 tonnes) (1000 tonnes) (US$) 1986 453.7 463.0 0." 1987 437.1 471.0 0.! 1988 421.0 473.0 0.8 1989 405.6 416.0 1.1 1990 390.7 448.0 0.9 1991 376.3 456.0 1.2 1992 362.5 466.0 1.1 1993 349.0 477.0 1.1 1994 336.4 476.0 1.1 1995 324.1 489.0 1.1 Note: (i) 1978 - 1986 Trend extended through 1995. (ii) Production Data - Actual through 1990, ZCCM Forecast 1991-95. (iii) Copper Prices - Actual through 1990, Bank Forecase 1991-95. ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) 6B. ZCCM BALANCE SHEET DATA -------------------------------Fiscal Years------------------------- 1984 1985 1986 1987 1988 1989 1990 Production (tonnes) Copper 540,961 542,643 458,753 461,879 463,072 431,833 450,989 Cobalt 2,748 3,654 4,565 4,160 4,694 4,871 4,447 Balance Sheet Information (Kwacha million) Fixed Assets 1,653.0 3,660.6 15,035.0 21,064.0 14,314.0 14,436.0 18,243.0 Investments, Loans and Advances 10.6 16.4 54.0 575.0 556.0 693.0 1,888.0 Current Asset 716.4 929.7 2,086.0 3,975.0 5,106.0 8,047.0 18,929.0 Current Liability 660.0 902.8 2,042.0 3,580.0 4,113.0 5,858.0 16,520.0 Net Current Assets 56.4 26.9 44.0 395.0 995.0 2,189.0 2,409.0 Long-Term Borrowings 709.9 1,026.9 3,926.0 5,970.0 5,261.0 5,773.0 13,816.0 Deferred Liabilities 100.0 106.1 188.0 233.0 198.0 251.0 418.0 Profit and Loss Information Revenues 1,426.0 1,862.0 4,097.0 6,976.0 11,882.0 18,135.0 32,876.0 Costs 1,171.2 1,484.0 2,911.0 5,628.0 9,703.0 14,114.0 22,430.0 Net Loss/Profit 1.0 0.7 (56) (562) 372.0 1,832.0 2,586.0 - 82 - ZAMBEA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LON 2591-ZA) 7. Status of Covenant. Covenant Sublact 16usof Comp anc* Comment 1. Project Agreement Section 2.01(b) ZCCM to prepare forecasts of a foreign exchange needs for Government. Section 2.02(s) ZCCM to hire consultants, a Training staff hired late. lecturers, training staff satisfactory to the Bank. Section 2.02(b) Consultants reports shall be a provided to Bank. Section 2.02(c) ZCCM shall exchange views with x Bank on consultant's recommendations and implement appropriate recommendations. Section 2.06(d) ZCCM to prepare Its part of PCR. x Section 3.01(a) ZCCM to carry out agreed action a x Implementation of action program. program slowed sharply after suspension. Section 3.01(b) Finance Department to be staffed x with competent personnel. Section 3.0?(c) Corporate Planning Department to a Specified staff generally have certain specified staff. available though not all positions filled at all times. Section 8.02(d) Company to employ training a consultants. Section 4.03 ZCCM to furnish Bank with a 6-year financial forecaste. Section 4.04 ZCCM not to invest in any fiscal x year more than US30 million, aside from these investments included in the 1984-08 Investment Program, without Bank approval before Project completion. Section 4.05 Ratio of current **e to current a See pars. 6.08. liabilities greater than 1.2. - 83 - Covenant SubJect Status of Compliance Comment yes No Other Section 4.06 Consolidated Debt must be less x Section amended efter than Consolidated Equity. closure. Section 4.07 Forecast Consolidated internal x cash generation to be greater than 1.8 times Forecast Consolidated debt service. Section 4.08 Tangible net worth greater than 900 million Kwacha. 2. Loan Agreement Sections 2.07 Borrower shall pay interest x Government has not 2.08 and principal, serviced debt since 1987. 2.09 Section 3.01(a) Borrower shall ensure x See pars. 6.08 ZCCM has adequate resources to Implement project. Section 3.01(b) Borrower shall propose to Sank x See pare. 6.03 for its approval ZCCMs foreign exchange allocation. Section 3.02(a) Borrower shall furnish or cause x See para. 6.08 ZCCM to furnish a study of the fiscal regime applicable to the company. Section 4.02 Borrower shall furnish to the Bank at regular intervals reports a on progress of study of health and safety aspects of mining and progulgation of regulations. ZAMBIA EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) 8.A USE OF BANK RESOURCES ----------------------------Staff Inpute (s.w.) ----------------------------- FY80 FY81 FX82 FY83 FY84 JY85 FY86 FY87 FY88 FY89 Total Pre-Appraisal 1.6 1.4 54.3 - - - - - - - 57.3 Appraisal - - 61.8 51.4 14.8 - - - - - 128 Negotiations - - - - 19.6 - - - - - 19.6 Supervision - - - - 9.9 43.3 57.7 15.4 3.7 4.8 134.8 Total 1.6 1.4 116.1 51.4 44.3 43.3 57.7 15.4 3.7 4.8 339.7 2AMI EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) 8.B MISSIONS Stages of Number of Days in Performance Types of Proiect Cycle, MonthfYear Persons Field Specialization (*) Rating Status (**) Problems (***) Preparation 08/81 6 15 M, M, E, E, B, C Appraisal 03/82 7 15 E, M, M, E, C, E, M Re-Appraisal 03/83 3 21 M, M, E Supervision 09/85 2 10 E, E 2/2/2/2 F 06/85 2 8 M, M 2/1/2/2 F 04/84 4 14 M, F, R, E 2/1 F, M 01/85 2 10 F, E 2/1 F, M 05/86 5 14 E, E, M, M, M 2/1/2/2 F, M 11/86 2 15 E, E 2/1/2/2 M, F 01/87 1 8 E 2/1/2/2 M, T 03/87 1 5 C 2/1/2/2 F, M Notes (*) M=Mining Engineer, E=Economlst, F=Financial Analyst, R=Operations Assistant, C=Consultant. (**) Through 1965, the status rating is Status/Trend, thereafter ratings follow the revised Form 590 - Available Funds/Project Management/Development Impact/Overall Status. (***) M=Managerial, F=Foreign Exchange, T=Technical. - 87 - Assendl&.I Page 1 of 3 Zambia Consolidated Copper Mines Limited 11n 1' 1fKatedI : t1m0 0 ,p :: .esitutu corpoaa Oeaom 42 June, 1992 Comnents Received from ZCCK on the Draft PPAR DCP/ZCCM/12a/92 Mr Mark Baird Division Chief Country Policy, indus-ry and Finance Operations Evaluation Department World Bank 1818 H Street, N.W. WASHINGTON, D.C. 20433 United States of America Dear Mr Baird ZAMBIA - EXPORT REABILITATION AND DIVERSIPICATION PROJECT (LOAN 2391-ZA) DRAPT PROGRAM PERVORMANCE AUDIT REPORT Thank you for your letter of May 21, 1992 and-the enclosea draft report. We were pleahed to have the opportunity of reading and reviewing a report which we found concise and an accurate record of our recent history. It was important Lhat as many of our people as possible who were directly involved with the Export Rehabilitation and Diversification Project should study the report and this has delayed the despatch of our comments. As you will note from the enclosed general comments, the report was well received and our comments refer to the future outlook rather than qualifying the accuracy of the recent history. Yours sincerely Edwin M Koloko (Dr) DIRECTOR OF CORPORATE PLANNING ZAMBZA CONSOLIDATED COPPER MINES LIMITED Enc - 88 - Appendix I DRAFT PROGRAM PERFORMANCE AUDIT REPORT Page 2 oI 3 ZAMBIA - EXPORT, REHABILITATION AND DIVERSIFICATION PROJECT LOAN 2391-2A) ZCCM COMMENTS General Comment The report is a concise and essentially factual recent history of ZCCM. ZCCK, like the report, has now the benefit of hindsight and is fully cognisant of ittprevious shortcomings as catalogued in the report. As a genezal comment however we feel that the report does Reflectedin not delineate clearly enough the twi significantly different pan. 5.10. time periods namely those pre and post the change of 6.01.6.05. government in October 1991. If as a result tha rcport is suggesting that the future may become a repeat of tne past then we must disagree. Specific comment on PAR I sackoround Whilst a factual account of the position c ZCCM leading to the onset of the project, this section ReQuadi may benefit from an initial commentary on the generally 1m.i, difficult economic climate in which the industry had 2.01.4.07. to operate in and the aspirations of the government 4.09.4.11. toward the contributions expected from the industry 4.13.4.14. toward the national economy. 5.07-5.09. LI Project Objective and Design - no comment III Project Implementation - no comment IV Project Outcome Page 7 para 4.05 It is not understood what 'small scale smaller improvements' refer to. The projects to implement new technology and rehabilitate the Nkana smelter complex have a consumer value of USS139 million. Page 9 Para 4.09 and 4.10 Tent amended. The comments on turnover of expatriate staff and local workers compensation whilst factual and the resultant impacts essentially correct should be viewed in the context of the Company's cost cutting endeavours and poQr financial status. Also 4ith reference to the non compensation to ZCCM by ZR, such work is debited to ZR for work done. - 89 - Avvendix I Page 3 of 3 V Findings and Issues It is this section which is historically and factually correct representing the pre October 1991 position, which conveys a message of pessimism for the future. it is accepted that the report was drafted at a time, although post October 1991, when new Government politics were not clearly defined. However the new government has so far taken steps to initiate policies regarding the operation of parastatals which clearly address many of deficiencies outlined in this section. Also, with the inception of the new TAP project, ZCC RelleWin will as a result of the project fully define a long Pras 5.10. term business plan within the near future. 6.01.6.05. and fooot We fully expect that new government policies will 24onp.22. result in managerial autonomy and a fairer treatment of zCCm with respect to tax regime and the allocation of foreign exchange, which perhaps form the three major contributing factors towards previous shortcomings. VI and VII overall Assessment/Lessons and Recommendations No comment other than reference to the comments under V above. We trust that our comments are constructive and will assist you in the preparation of tho final report. 3 June 1992 - 91 - Appendix II Page 1 of 3 ZAMBiAZIMCO House, INDUSTRIAL Cao Road AND P.o. Box 3o090, Lusaka MINING Repubk or Za CORPORATION Tdophoto. 227M/30 2W4 LIMITED Teles ZA 4079W Z/13/11 June 12, 1992 OFCE OF TH Telefax No. (202) 676-0560 DnUC GENERAL Comments Received from ZIMCO on the Draft PPAR Mr Mark Baird Division Chief Country Policy, Industry and Finance Operations Evaluation Department The World Bank 1818 K Street, N.W. Washington DC 20433 USA Dear Mr Baird ZAMBIA - EXPORT REHABILITATION AND DIVERSIFICATION PROJECT (LOAN 2391-ZA) DRAFT PROGRAM PERFORMANCE AUDIT REPORT - -- ------ -- --- -- - -- ---- Thank you for your letter dated May 21, 1992 under cover of which you sent me a copy of the above-mentioned Report, which I have read with great interest. Having left the ZCCM Managment team in mid-1984 and the Board of Directors in 1986, I feel somewhat handicapped in my efforts to make meaningful comments on the Report, particularly as the initial documentation on the rehabilit-a- tion and diversification project has not been available at Zimco due to the fact that the Chairmanship of ZCCM was held by the ZCCM Chief Exeuctive. Inevitably, the comments that follow have to be measured in scope: (a) the rights of the minority shareholders in ZCCM have changed since 1970/71, influqnced by the redemption of the Zimco bonds, the adoption of depreciation accounting and by the relative attitudes of the "A" and "B" shareholders in regard to issues such as capitalisation and the rendering of finaacial support to ZCCM over the years. In this connection, I ave also noted with interest that while the Report talked about ZCCM's non-adherence to international accounting standards, I recently read the amended Article of the ZCCM Articles of Association which provides for the additional depreciation arising on account of revaluation of assets not being charged - 92 - Appendix II ZMW Low . CONTINUATION Page 2 of 3 to the profit and loss account for the purpose of determining the profits available for distribution, thereby boosting the profits to be paid as dividend. Did the World Bank have anything to say about this at the material time? (b) Accountability The Report says, in reference to the question of accountability, ZCCM has been a "state within the state" and "oversight over ZCCM has de facto been replaced by political control". It is noteworthy that these developments occurred over a period of more than a decade, during which the World Bank has been involved with ZCCM. It would have been of greater benefit to ZCCM if these obser- vations had been made much earlier, ie at the material time. Hopefully, since the Report recognises the fact that "the Bank has not addressed squarely the issue of autonomy and accountability", it will assist in respect of the implementation of the contents of the President's letter on "governance of parastatal com- panies" through the exercise of "self-denying ordinance" as well as the Report's reference to the CEO being more responsive to divisional managers" and "the Chairman being more sensitive to shareholders and exercising oversight over management." I believe the process of accountability as being crucial to the future well-bein of --CCM; (c) whether or not total or partial privatisation is the answer to the resolution of ZCCM difficulties, it is notable that the Report recognises, inter alia, the fact that "there is no inherent reason"why parasta- tals cannot be as dynamic and efficient as privatell owned enterprises. But this can haUp Pen only 4999090 Since the attainment Of privati sation of zccm4 would$ quite conceivably, take some times it is imperative that everything possible is done to achieve efficien- cy as soon as possible. Therefore, a meaningful programme for the implementation of the recommenda- tions is called for; rib - 93 - Appendix II Page 3 of 3 ZIMCO UMITED. CONTINUATION (d) I am in broad agreement with the other observations in the Report and so feel it unnecessary to make detailed comments on them. I am grateful for the opportunity afforded me to make the foregoing comments although, I must confess, these have been made not without difficulty for the reasons stated above. Yours sincerely RL a DIRECT GENERAL - COMMISSION - 95 - Appendix III of the Brussels, 12 June 1992 EUROPEAN COMMUNITIES DIRECTORATE-GENERAL FOR DEVELOPMENT VI1/8/5 Comments Received from the Commission of the European Communities on the Draft PPAR F A X N' 11785 Attn Mr. BAIRD Division Chief Country Policy, Industry and Finance Operations Evaluation Department The World Bank Dear Mr. Baird, Thank you for the draft Program Performance Audit Report on ZCCM. which Yok recently sent me. We have studied It with great interest, in particular lecause of our involvement with ZCCM. As you know we have twice provided substartial loans to ZCCM and a third request, based on the reduction in copper production, is under examination. The findings In your report co=respond well with the study we commisaioned through the Ecole des Mines in Paris. We share your opinion that it Is doubtful whether any real improvement in the situation of ZCCM can be achieved without an Independent management. One point In your report which we think requires further clarification Is the Involvement of ZCCM In buying and selling third-party copper and the lose incurred by these transactions (point 4.13). Such operations seem in certain cases to have been used to divert funds. Best regards. H. MARTIN Head of Unit Addres Telephone: Tdlex Teleaphic address: Ru e o Lot 200 Direct tHe: 29. ..... CONEU 8 21877 COuEL Orasels 8-1049 ruseis Exchonge: 299.11.11 Telefac: 299.28.72 Z A M B I A MINES AND PLANTS IN THE COPPERBELT { • EXPORT REHABILITATION AND DIVERSIFICATION PROJECT CHILILAlBOMBWE '..... Open Pit Mine SV Underground Mines Konkola Mine 51 Leach Plants 0 Caoalt Plants v v l MufulirC Mine N efineries Nchanga Mine Roads cH lA Rcilroads International Boundaries CHAMB15H1 Operation Closed 0 v y Operation Care and Mointenance Chambishi Mine 0 10 20 3'0 40 50 KILOMETERS Chibuluma Mine C K AOLULUSH 10,1 N'Kana Mine NDLA•2'1. ä,TANZAN lA Z A l RE. E ® Bvisna- BalbaMin VNdola Mkubwa ANGOLA - Copper Refinery -2 AREA< Thi mcp hs bm peImd OF MAP e o e Omcnen~ Lucnshya Mine g V Z A M B l A o Wodd Bank LUSAKA C Gmp %h dew~~siin omed NO5HYAQU n. Lboucs sh~ WANSHYA - AMBIQUE on thi. -p do .ot i~py on dhe .11. pot of The Wodd Bank G- - judqmwo mt t0e legof endatont Oacceptance O Z &AIMRAPWE \BW · 28- 32