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The World Bank

FOR OFMCLAL USE ONLY

ROMij;1 No. P-5496-ZA

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

OF SDR 15.6 MILLION

TO THE

REPUBLIC OF ZAMBIA

FOR A

MINING SECTOR TECHNICAL ASSISTANCE PROJECT

MAY 23, 1991

This document has a rstrkited distation and may be used by recipients only in the perfoanae ofthedr dkal dutis. Its contents may not otherwise be discosd wihout Wo_id Dak authrztion.

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CURRENCY AND EQUIVALENT UNITS

Currency Name KwachaUS$1.00 48 Kwacha (end-December 1990)Kwacha 1.00 US$0.0208

VEIGHTS AND MEASURES

1 short ton (T) = 2,000 lbs.1 metric tonne (mt) = 2,205 lbs.

ABBREVIATIONS

AfDB - African Development BankBoZ - Bank of ZambiaEEC - European Economic CommunityMEMACO - Metals Marketing Corporation Ltd.HIL - Mulungushi Investments Ltd.ODA - Overseas Development AgencySADCC - Southern African Development Coordination ConferenceZAL - Zambia Holdings Ltd.ZCCM - Zambia Consolidated Copper Mines Ltd.ZIMCO - Zambia Industrial and Mining Company Ltd.

FISCAL YEAR

ZCCM: April 1 - March 31Government: January I - December 31

FOR OFFXILAL USE ONLY

ZABIA


TABLE OF CONTENTS

Page No.

CREDIT AND PROJECT SUMMARY

PART I - THE MINING SECTOR ***************...................... 1

Background ................................................... 1

Sector Organization ........................................... 2Mining Sector Issues ....................................... 3

nART II - THE PROJECT . ....................... .. ..... . ........ 8

Project Objectives ............. ......................................... 8Rationale for IDA Involvement ............................... 9Lessons Learned from Previous Operations .................... 9Project Description ......................................... 10Implementation and Reporting .. ......... ....... ...... ..... 15Project Cost and Financing . ............ ............. ....... . 16Procurement and Disbursement ................................ 16

PART III - JUSTIFICATION AND RISKS ............... to...... ..... 17

PART IV - RECOMM ENDATION ............................ . ....... 18

ANNEXES

1. Estimated Costs and Financing Plan2. Disbursement and Procurement3. Supplementary Credit Data Sheet4. Status of Bank Group Operations5. Key Project Activities6. Scope of Project Components7. Issues to be Covered in the Mining Sector Policy Letter8. The Zambian Mining Sector

This President's Report was prepared on the basis of an appraisal missionthat visited Zambia in January 1991. The mission consisted of James Moose(Mission Leader/Economist), Ernst Bolte (Economist), Felix Remy (MiningSpecialist) and Derek Bullock (Consultant). The managing Division Chief isDavid Cook (AF6IE) and the Country Director is Stephen Denning (AF6).

This document has a rtricted distribution and may be used by recipients onlY in the pertotimanceof their offlcia duties. Its contents may not otherwise be disclosed without Wofd Bank authrizatier .

ZAMBIA


CREDIT AND PROJECT SUMMARY

lBrrowert Government of Zambia

Beneficiariess ZCCM, Government, Naamba Collieries

Amount: SDR 15.6 million (US$21 million)

Termst Standard with 40 years maturity

Onlending Terms: The Government will onlend to ZCCM andMaamba at the IBRD lending rate plus a3OZ premium for 10 years including a 3-year grace period. (At the currentIBRD lending rate of 7.732 p.a., thiswould result in an onlending rate of8.52 p.a.). ZCCM and Maamba would bearthe foreign exchange risk.

Financing Plan: IDA US$21.0 millionZCCM US$ 2.3 millionGovernment US$ 0.6 millionMaamba US$ 0.1 million

Total US$24.0 million

Economic Rate of Ret.rn: Not applicable

Appraisal Report: This is a combined President's Reportand Staff Appraisal Report.

EMNORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A PROPOSED CREDIT

TO ZAMBIAFOR A MINING SECTOR TECENICAL ASSISTANCE PROJECT

1. The following memorandum and recommendation on a proposeddevelopment credit to Zambia for SDR 15.6 million (US$21 millionequivalent) is submitted for approval. The proposed credit would helpfinance a technical assistance project to aid the mining sector, thecountry's leading foreign exchange earner. The three components of theproject would cover technical assistance to Zambia Consolidated CopperMines Ltd. (ZCCK), the state copper mining company; the Ministry of Mines;and Maamba Collieries Ltd., the state coal mining company. The creditwould be on standard IDA terms to the Government who would on-lend part ofthe credit to ZCCM and Maamba Collieries on terms and conditions acceptableto IDA.

I. *THE MINING SECTOR

Background

2. The mining sector has long been the backbone to the Zambianeconomy. It consistently contributes about 852 of foreign exchangeearnings, around 152 of GDP and 302 of Government revenue. It is also thelargest formal employer after the Government. The dominant product iscopper which is 852 of the mining sector value added and exports, and isproduced solely by ZCCM. Cobalt (a copper by-product) and small volumes oflead and zinc are also solely produced by ZCCM, while a modest amount ofcoal is produced by Maamba Collieries. Finally, substantial amounts ofgemstones, mostly emeralds, are mined by artisanal miners and two -mllindustrial mining operations. Most of the gemstones are currently smuggledout of the country.

3. The dominating enterprise in Zambia's mining sector is ZCCM.The company currently produces per year about 430,000 tonnes of copper,4,500 tonnes of cobalt, 3,700 tonnes of lead and 12,000 tonnes of zinc.ZCCH's lead, zinc and copper production declined sharply during 1975-85,while cobalt output experienced a substantial increase. In recent yearscopper production, which accounts for over 802 of ZCCM's revenues, hasstabilized and ZCCH projects that output can be maintained above 400,000tonnes for another 7-9 years. ZCCQ exports practically all of itsproduction, earning over US$1,000 million per year in foreign exchange.Annual tax payments of ZCCM have been of the order of US$250 million inrecent years. ZCCH performs also an Important function as an employer. Incontrast with the company's declining production trend, its total workforceincreased from less than 60,000 during the early 1980s to currently over67,000 of which about 12,000 are employed by subsidiary companies. In thearea where most of ZCCH's operations are located (Copperbelt), but to someextent also in other parts of Zambia, ZCCM provides a broad variety ofservices, including schooling, medical services, transportation and

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housing. Such services frequently benefit not only ZCCM's workforce butalso the population at large.

4. Given its high dependence on copper mining and ZCCM inparticular, the Zambian economy deteriorated rapidly after the end of thecamnodities boom in the early 19708. Large and unsustainable external andinternal imbalances developed, savings and investment ratios fell and theexternal debt rose sharply. Several attempts at economic reform were madebut were unsuccessful. By mid-1988, Zambia was facing a number of acuteeconomic problems, including a large and rising budget deficit,accelerating inflation, low investment levels, shortages of essentialimported inputs due to lack of foreign exchange, and a severe external debtproblem. In late 1988 and early 1989, the Government, in the context of aPolicy Framework Paper agreed with the Bank and the Fund, began to takeremedial actions which involved the devaluation of the kwacha, decontrol ofprices, and interest rate increases. Zambia has basically remained on theadjustment program through 1990, though with occasional slippages.

5. Zambia's commitment to the adjustment program has beenreinforced during the discussions with the Bank, in late 1990 and early1991, on an Economic Recovery Credit (ERC) and on a strengthened PolicyFramework Paper for 1991-93. The adjustment program for 1991-93 aims atstabilizing the economy through fiscal and monetary restraint and, in themedium term, at restoring economic growth through effective policies ofstructural realignment. Specifically, such policies would aim atdiversifying the economy away from its over-reliance on copper and wouldemphasize private sector development. In the mining sector, theGovernment's adjustment policies focus on increasing the efficiency andproductivity of existing operations, in particular those of ZCCM, and onopening the sector to private investments in order to encourage thedevelopment of new mines sad mineral exports.

Sector Organization

6. Ministry of Mines. The Ministry of Mines is the mainGovernmental institution in the mining sector. It is organized in threedepartments: the Mines Development Department has responsibility formonitoring the sector and encouraging new investments; the GeologicalSurvey Department gathers geological data and provides geologicalinformation to mining investors; and the Mine Safety Department supervisesthe safety of mining operations. The Ministry's mining policies aredetermined by the Mines and Minerals Act of 1977. This Act was issued at atime when Zambian economic policies emphasized public sector domination inmining and tight regulation and close control of the remaining privatemining operations. A supplementary description of Zambia's mining sectoris in Annex 8.

7. ZCCM. ZCCM is owned 60.32 by the Zambia Industrial and MiningCompany Ltd. (ZIMCO), which in turn is wholly owned by the Government ofZambia. The remaining 39.7t of ZCCN is held by private investors thelargest of which is a subsidiary of Anglo-American Corporation of SouthAfrica (which holds 27.32 of the company). ZIMCO, though it owns themajority of ZCCM, does not control its operations. Rather, the Chairman

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and Chief Etecutive of ZCCN is appointed by the President of Zambia, who isalse Chairman of ZIMCO, and reports directly to him.

8. ZCCO's production complex consists primarily of four largecopperlcobalt divisions as well as a small leadjzinc division. Thecoppericobalt divis_ons, consisting of mines and metallurgical processingfacilities are all located in the Copperbelt adjacent to the Zairean borderwhile the lead/zinc division is located in Rabwe, between Lusaka and theCopperbelt. ZCCM has two main subsidiaries, ZAL Holdings Ltd. (ZAL) andMulungushi Investments Ltd. (MIL). The former consists largely of theU.K.-based subsidiaries which provide services that cannot easily beobta84 ed in Zambia. MIL consists of the Zambia-based subsidiaries of ZCCM,most of which are suppliers to it, but some of which are engaged in otherbusinesses such as farming and tourism.

9. Maamba Collieries. Maamba, which is a well-managed operation,consists of a single strip mine which is located in the Southern part ofZambia. Maamba is presently in a loss-making position. Current annualproduction is about 450,000 tons of coal with a relatively high ash contentwhich results in marketing problems. Employment is about 1,400 workers.

10. Small-scale mining. Mining of emeralds, amethysts andaquamarines has experienced strong growth in recent years. Estimates oftotal annual production value of Zambian gemstones are in the range ofUS$180-400 million. Emeralds account for an estimated 802 of the total.Reportedly, a quarter of the world supply of emeralds is mined in Zambia.The enterprise structure of the gemstone sector includes two mechanizedlarger-scale operations which are joint-ventured with the Government, anestimated 30-40 registered generally non-mechanized private gemstone minesand a large number, probably several thousand, of unregistered artisanalminers.

Mining Sector Issues

11. MininR Policy Issues. The Mines and Minerals Act is now out ofdate and does not meet the requiremeuts of the Government's private sectororientation outlined in the Policy Framework Paper and the new draftInvestment Act of 1990. The proposed project will finance a review of theMines and Minerals Act as well as the preparation of a new draft Act. Thereview of the Nines and Minerals Act would be conducted in the context of abroad-based analysis of the constraints to private mining investment inZambia. The mining policy analysis would result in detailed proposals formineral taxation and incentives. The Government will also prepare a miningpolicy statement outlining the overall direction of policies the Governmentintends to implement with respect to privatization, revision of the Minesand Minerals Act, mineral taxation and Incentives as well as the policymeasures needed for improving the growth prospects of gemstone mining. Theissues to be covered in the mining policy statement are in Annex 7.

12. While the Mine Safety Department of the Ministry of Ninesobtains substantial operational assistance from ODA of the U.K., the MinesDevelopment and Geological Survey Departments need strengthening both interms of their operational capabilities and in terms of fully defining

their tasks. In particular, the Ministry must play a more active andhelpful role In attracting private investment to the mining sector, both byforeign firms and by small Zambian entrepreneurs. The Ministry siouldsubstantially simplify the procedures and shorten the processing period forissuing exploration and mining licenses as well as improve the provision ofgeological information to potential investors. The proposed project willprovide assistance to the Mines Development and Geological SurveyDepartments which would strengthen their capabilities in the abovementioned areas.

13. ODerational Issues of ZCCM. Zambia's existing miningoperations, both ZCCM and Maamba Collieries, have considerable scope forimprovements in their efficiency of operations. ZCCM is profitable and itscost of copper production is currently slightly below average worldproduction costs. ZCCGWs competitiveness is due to the relatively high oregrades mined in the Copperbelt which have compensated to a large extent forZCCM's comparatively low labor and capital productivity rates. As the oregrades that ZCCM will mine in the future are rapidly declining--and miningconditions in the Copperbelt are becoming more difficult--measures toimprove productivity have to be introduced if ZCCM is to remaincompetitive.

14. ZCCM is in a tight financial situation. Though the company isprofitable, its cash requirements are also very high. In addition tooperating costs, ZCCM has exceptionally large cash requirements for debtservice, taxes, capital investments and working capital. ZCCM's cashgeneration from operations during fiscal 1990 was about US$400 million onoperating revenues of about US$1,280 million, valued at the officialexchange rate. Total available funds were US$475 million including US$75million of long-term borrowing. The main non-operational expenditures werefor net debt repayments US$70 million; income and copper revenue taxpayments: US$75 million; capital investments: US$120 million; and workingcapital increases: US$100 million. The fiscal 1990 cash flow surplus ofZCCM was about US$70 million. ZCCM had a cash deficit during 1991 sincedebt service obligations, tax payments and working capital requirementsincreased while gross revenues declined due to lower copper prices.

15. ZCCM's difficult financial situation evolved in spite of arecent longer period of favorable copper prices on the world market. Thecompany is currently unable to finance all of its cash requirements withits cash flow and borrowing potential. Among the main reasons for thissituation are high tax payments, heavy net debt service obligations andrelatively high production costs. ZCCH's tax payments rose considerablywith effect of April 1, 1990 when the Government introduced a mineralsexport levy on copper. The levy is in addition to the corporate income taxof 45Z of net income and taxes all ZCCM copper revenues resulting fromprices above US$1.00 per pound of copper. The tax rate varies between 60Sand 100t of additional revenues. Therefore, adjustments in ZCCM's paymentsof the copper revenue tax will largely offset any future decline in ZCCM'ssales revenues due to lower copper prices (for details see Annex 8).ZCCMl's debt service obligations result from a debt of about US$820 million,most of which is long term and in US dollars. In tVe short term, debtservice payments will decline due to the limitations imposed on ZCCM under

the macroeconomic restructuring arrangements agreed with major bilateraldonors, IF and the Bsank. In the longer term, an analysis of ZCCH'sfinancial structure which will be performed under the project would supporta reduction in ZCCM's debt service obligations. ZCCM should also be ableto reduce current high additions to working capital if policies of valuingspare part stocks and inventory managemuent are improved. The proposedproject will help ZCGM to achieve the needed improvements in these areas.Finally, ZCCM's operating costs have considerable scope for reduction. Thecompany is relatively inefficient in its use of labor and, to a lesserextent, in its use of capital equipment. Reduction in ZCCM's currentsevere over-staffing will have a strong effect on the company's laborproductivity and on financial performance. The program of adjustment inthe labor force which is to be implemented under the proposed project wouldreduce over-staffing in stages and could reduce ZCCG's annual operatingcosts by about 5Z. Overall, in the medium and long term, a reform ofmineral taxation, financial restructuring of the company, improvedinventory management and a reduction of labor costs -- all of which aresupported by the proposed project -- would place ZCCM in a much strongerfinancial position.

16. Recent adjustments in the Government's exchange rate regulationswith respect to ZCCM also help achieve short-term improvements in thecompany's profitability and cash flow. Because ZCCM is a net seller offoreign exchange, the company's kwacha revenues have been lower than theymight have been, since ZCCM has used the "official* exchange rate toconvert dollars into kwacha rather than the higher 'second window' rate.These two rates were unified in April 1991 so that this is no longer acause for reductions in ZCCM's profits and cash flow.

17. within the framework of a comprehensive corporate plan,consulting services will assist ZCCH in strengthening maintenance andoperational planning areas, improving procurement and inventory operations,strengthening training, and enhancing management information systems whichcurrently suffer from certain weaknesses. The assistance provided byconsultants aims at rationalizing ZCCM4's operations, helping to reducecosts and improve capital productivity by permitting a higher degree ofutilization of ZCCM's plant and equipment. Externally hired technicalspecialists -- who would be subsequently replaced with trained Zambians --

have a crucial function in implementing the corporate plan developed by the

management consultants. Due to ZCCM's past policies of sharply reducingemployment of expatriate staff, the company faces serious shortages oftechnical skills in critical areas of production and planning.Implementation of an effective corporate plan would only be feasible ifZCCM quickly fills such key operating and planning positions. The proposedproject would finance the cost of a small number of consulting specialistswho would put into practice the operational part of the corporate plandesigned by the consultants. At the same time, the specialists would

perform, within the overall concepts developed by the consultants, an

important function in the training of Zambian staff who would take over the

positions of the expatriate specialists after termination of theirassignments. Specialist hiring and training components therefore performcrucial roles in achieving the objectives of the proposed project.

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18. ZCCH's copper ore reserves are being steadily depleted and nosubstantial new reserves have been developed for a number of years. As aresult, copper production has tended to decline during the past 15-yearperiod, though it has stabilized in recent years, partly as the result ofthe Bank-assisted rehabilitation of ZCCM during the 1980s (ExportRehabilitation and Diversification Project No. 2391-ZA). Duringimplementation of this project, a number of weaknesses in ZCCM'soperations, staffing and planning procedures became apparent. The projectshowed that ZCCM couli not effectively address its long-term problems ofdeclining copper reserves, increasingly difficult mining conditions andrapidly declining competitiveness on the world market without specificmeasures taken within a comprehensive corporate plan prepared for the wholecompany. Current cash operating costs of ZCCM are about US$0.70 per poundof copper which is slightly below the world average of about US$0.75.ZCCM's total costs, including tax, depreciation and interest payments,however, are considerably higher than one US dollar per pound of copper,creating financial problems for the company even at the current relativelyhigh copper prices. Furthermore, declining ore grades and increasinglydifficult mining conditions will tend to raise both cash operating costsand total costs of ZCCM. Without measures aimed at sharply reducing ZCCM'scosts, in both operational and non-operational areas, the company wouldrapidly lose its competitiveness on world markets. The corporate planwhich will be prepared and implemented under the proposed project wouldhelp ZCCM to reduce costs and remain competitive.

19,. Provided ZCCM invests adequately in mine development and plantmaintenance and strengthening its operations, staffing and management inline with the recommendations resulting from the studies under the proposedproject, ZCCM's annual copper production can be stabilized at currentlevels of 410,000-430,000 tonnes for the next six to seven years. Towardsthe end of the decade, however, ZCCM's copper production will start to dropsharply to less than half of current output, as several of ZCCM's majormines will have exhausted their known reserves. Zambia still has sizeablecopper resources which can be developed to partially offset the decline inproduction from ZCCM's existing mines. The economic viability of thesecopper resources has not been fully determined, although it is clear thatlarge investments will be required and that the mining and metallurgicalprocessing costs would be higher than in the current operations. Theanalysis of ZCCM's resource base and assets forms a key input into thepreparation of the company's corporate plan, including a program fordivestiture, and would be financed by an advance provided under a ProjectPreparation Facility.

20. Given the sizeable financial resources needed to develop theremaining copper resources as well as the requirement for highly efficientoperation of the new mines in order to make them economically viable, theGovernment and ZCCM intend to attract private investors to implement andmanage the new copper mining projects in Zambia. ZCCM's longer-termstrategy, in addition, would focus on managing the existing mines andplants with maximum efficiency and on the systematic phasing-out of certainmines at the end of this decade. ZCCM will also sell to the private sectorcertain operations which are not directly related to mining. ZCCM willdevelop a detailed corporate plan in order to implement the overall

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corporate strategy, including the measures needed to ersable ZCCM to remainviable while major components of its operations are being phased out. Theproposed project would assist ZCCM in conducting the necessary strategicstudies as well as in preparing a comprehensive corporate plan.

21. Operational Issues of Maamba Collieries. Hamsba Collieries hasalso room for productivity improvements, and the coal mine faces additionalconstraints to achieving profitability from lack of foreign exchange,transport bottlenecks and marketing problems. Haamba obtained support fromIDA-financed technical assistance from 1984 to 1986 (Coal EngineeringProject 1333-ZA), but is currently again in need of major rehabilitationinvestments in order to remain operational. Given Maamba's difficulties inmarketing its low-quality coal, the rehabilitation program should only beimplemented after an analysis has determined the mine's longer-termoutlook. The proposed project would provide the financing for such ananalysis, which would also address the environmental problems faced byMaamba. Assistance is also proposed to ascertain if Maamba's short-termforeign exchange requirements can be reduced by proaucing certain spareparts in the company's workshop.

22. Issues of Small-scale Mining. Mining of gemstones has sufferedunder past restrictive Government policies. In order to increaseproduction and profitability, the gemstone miners need access to financingand technical assistance. This in turn requires the complete legalizationof gemstone mining. More recently, the Government has taken steps toliberalize the marketing of gemstones by eliminating the buying monopo.,esand supporting the establishment of a gemstone auction organized by theprivate sector. However, the Government continues to impose tightrestriction on the mining of gemstones while providing inadequateassistance to improve production and profitability of the small-scaleminers. The proposed project would provide support to a study ofoperational, financial and marketing problems of small-scale mining whichis aAzed at developing effective measures to strengthen artisanal gemstonemining in Zambia. The project would also provide assistance in setting-upthe gemstone auction and in monitoring the functioning of the new privategemstone marketing system.

23. Environmental Issues of Mining. There are no environmentalissues directly associated with this project. 1/ However, ZCCM, MaambaCollieries and small-scale gemstone mining all have a number of seriousenvironmental problems in their operations. ZCCM's environmental problemsare mainly related to (a) pollution of the Kafue river which supplies waterto both the population in the Copperbelt and ZCCM's operations; (b) ZCCWBetailings dams, some of which require additional vegetation to increasetheir stability and reduce erosion; and (c) the end of life of severalmines at the turn of the century. ZCCM operates a small environmental unitwhich needs additional staff, supplementary outside analytical inputs toaddress specific environmental issues, and more effective integration into

1/ The project is in Category C with no substantial environmentalissues.

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ZCCM's overall corporate planning process. The proposed project wouldstrengthen ZCCM's activities in environmental protection by: (a) providingqualified specialists to strengthen ZCCM's environmental unit; (b) helpingZCCM to prepare a comprehensive corporate plan which would provide foreffective Integration of environmental aspect into ZCCM's operation andplanning process; and (c) supporting the preparation of phase-down studiesfor ZCCM's mining operations with an emphasis on the required environmentalprotection measures.

24. The environmental problems of Maamba Collieries result from thespontaneous combustion of the over-burden and from the acid minJe drainage.The study of Maamba's long-term outlook would analyze these environmentalproblems and design mitigating measures. There is little detailedknowledge of the environmental problems created by the small gemstoneminers but evidence from other countries indicates that there may beserious safety and other operational problems which requires urgentattention. The study of small-scale mining which forms part of theproposed project will analyze the safety and environmental problems in thegemstone mining areas and will propose measures for their elimination.Finally, the proposed project would include preparation of environmentalregulations and strengthening of environmental capabilities in the Ministryof Mines, and would provide for effective integration of environmentalaspects of mining into the Environmental Protection and Pollution ControlAct which the Government is currently preparing.

II. THE PROJECT

Prolect Objectives

25. The proposed project would help the Government of Zambia toimplement an effective development strategy for the mining sector. In theshort term, the strategy aims at making the mining sector more efficientand productive than -urrently, so that mining can continue to generate theresources needed to oupport recovery and diversification of the Zambianeconomy. In the longer term, the strategy would support the development ofnew copper mines by private investors in the framework of joint ventureswith ZCCH; would ensure the systematic phasing-out of certain miningoperations as reserves are depleted; and would support the development ofnon-copper mining sector exports, in particular by attracting investment togemstone mining. The strategy would also aim at strengtheningenvironmental protection in the mining sector.

26. The proposed project would achieve the above objectives bys (i)assisting ZCCM to improve its mining and metallurgical operations with aparticular focus on lowering costs; (i;) supporting development andimplementation of a comprehensive corporate plan which will include anefficient phase-down plan for certain ZCCM mining operations with depletingreserves; (iii) assisting ZCCM in joint-venturing its undeveloped copperresources and in the divestiture of subsidiaries and/or assets with littledirect relation to mining; (iv) supporting a program to encourage newprivate investments in gemstone mining; (v) facilitating the preparation ofa plan to aesist small-scale miners, especially gemstone miners; (vi)

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developing a long-run strategy for Maamba Collieries: and (vii) assistingin developing environmental regulations for mining and providing support tothe protection of the environment in the areas mined by ZCCM, Maamba andthe small-scale miners.

Rationale for IDA Involvement

27. 2CCM and the mining sector play a dominant role in the Zambianeconomy. A close working relationship between ZCCM and IDA and a broad-based dialogue with the Government about the future of the mining sectorare therefore an effective part of the support provided by the Bank to therecovery and the restructuring of the Zambian economy. Furthermore, it isimportant for the Bank to support Zambia in the difficult tasks of openingthe mining sector to private investors and the joint-venturing of ZCCM'sassets. The proposed technical assistance project would strengthen theexisting relationship with ZCCM and renew the dialogue with the Government.

28. The Bank Group has played a major role in providing assistanceto the mining sector. In 1983, IDA extended SDR 4 million for a CoalEngineering Credit to Maamba Collieries. In 1984, as part of a US$300million rehabilitation program, the Bank extended a loan of US$75 millionto ZCCM and assisted with arranging cofinancing of approximately anotherUS$90 million from AfDB and EEC. The IFC provided project financing toZCCM in 1980 and 1982. In the course of the ZCCM Export Rehabilitation andDiversification Project, it became clear that ZCCH's operations sufferedfrom a shortage of skills, especially in the intermediate management andtechnical areas. In 1986, ZCCM and the Government of Zambia requested IDAto finance a technical assistance project for ZCCM. Negotiations for theproject were completed in 1987, but further processing was discontinued dueto Zambia's arrear; problems.

29. The current project resumes the dialogue with ZCCM and theZambian Government, broadens it to include the entire sector and focuses onstrategic and mining policy issues as well as on improving operations ofZCCM, Maamba and the gemstone mines. The project emphasizes helping ZCCMto develop a comprehensive corporate plan which would include divestitureand joint-venturing of important assets of the company. The projectcomponent aimed at mining policy reform focusses on the creation of anenabling environment for private mining investmen-:, including a revision ofthe Mines and Minerals Act and the design of a new mineral taxation andincentive system. It will also help improve environmental, health andsafety conditions in the sector. Both the divestiture of ZCCM assets andthe reform of mining sector policy will be conducted in the framework ofthe Government's economic restructuring and privatization programs whichare supported by the Bank with lending operations and technical assistance.

Lessons Learned from Previous Operations

30. The design of the project takes the experience from the twoprior Bank group operations in Zambia's mining sector into account. TheExport Rehabilitation and Diversification Project (Loan 2391-ZA) whichmainly provided funds for replacement and rehabilitation investments inZCCMHs plant and facilities during 1984 to 1987 was generally successful in

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helping stabilize the declining copper production trend of ZCCM at about430,000 tone per year. The main lessons learned from the project resultfrom the macroeconomic role of ZCCM in terms of foreign exchange earningsand fiscal revenues. ZCCM also dominates major parts of Zambia's non-mining economy, particularly transportation and power supply, and has astrong influence on practically all other sectors of the economy throughits subsidiary companies. Corporate planning and decision making in ZCCMtherefore have been frequently determined by macroeconomic factors leading,in many cases, to less than optimal decisions in investment, production andemployment. The proposed project assists the Government to establish amining policy and incentive framework which will reduce ZCCM's dependencyon short-term changes in Zambia's macroeconomic environment. Furthermore,divestiture of undeveloped copper resources and non-mining operations,which is supported by the proposed project, will tend to reduce over timethe overwhelming role of ZCCM in the mining sector and in other parts ofthe country's economy.

31. The Coal Engineering Project (Credit 1333-ZA), which financedtechnical assistance to Maambs Collieries during 1983 to 1986, providedalso an important lesson for the design of the proposed project. WhileMaamba's operational performance, with the support of IDA's EngineeringProject, improved substantially in recent years, increasingly difficultmining conditions, declining markets and transportation problems may notpermit profitable operations in the future. The proposed project willtherefore finance a study of the longer-term outlook of Maamba Collierieswhich would determine whether or not the needed major rehabilitationinvestments in the mine are economical.

Prolect Description

32. The project consists of three major components providingassistance to ZCCM, the Ministry of Mines and Maamba Collieries. Annex 6presents a detailed description of the project components. The technicalassistance for ZCCM covers the following components:

Mi) preparation of basic information needed for thedivestiture of undeveloped mining resources and non-copper assets to be implemented under the project.This component would be financed under a ProjectPreparation Facility (P683/ZA) which would provide anadvance of US$500,000 for assisting in the completionof on-going work regarding ZCCM's ore deposits andmining operations;

(ii) a comprehensive corporate plan prepared by consultantsin collaboration with ZCCMI's management, covering boththe near term and the longer (15-year) term. The planwould spell out in detail the technical, financial andstaffing strategies and actions needed by ZCCM duringa period of deteriorating mining conditions and severefinancial constraints. The plan will specificallytake into account the expected phasing down ofexisting mines due to ore depletion, the proposed

- 11 -

joint-venturing, divestiture or sale of mining andnon-mining assets and the need to strengthen thefinancial structure of the company including apossible financial restructuring. Total estimatedrequirements in terms of consultants staff time wouldbe 450 man months. Major activities to be performedas part of the preparation and implementation of thecorporate plan includes

(a) a program of joint-venturing and divestitureof ZCCM's under-utilized or unused assets.Certain copper resources, shut mines, andunder-utilized or unused metallurgicalplants would be sold to or joint-venturedwith private investors who would beresponsible for providing financing andmanagement. Other assets, which are largelyunrelated to ZCCM's copper operations,including those of its subsidiaries, such asagricultural and tourist facilities, wouldbe divested and sold. ZCCM would alsoreduce its involvement, through a variety ofdivestiture methods, in housing,transportation, schools, health servicefacilities as well as in other serviceswhich it currently operates. Assetdivestiture would be a pro-active processwith the management consultants not onlyassisting ZCCM to identify and contactpotential partners and buyers, but also tosubsequently complete the divestiture orjoint-venturing process;

(b) phase-down plans for mines with depletingreserves, placing particular emphasis onworkforce implications, environmentalprotection and land reclamation measures;

(c) various studies and implementation ofrecommendations to improve ZCCM's efficiencyand financial performance, including studiesto improve procurement, inventorymanagement, marketing and financialstructure; and

(d) a manpower and training plan for ZCCM andthe implementation of such a plan, includingphased reduction in the labor force tosupport increased labor efficiency in ZCCM.

(iii) hiring of technical specialists with urgently neededskills, especially in maintenance, operations,inventory management, management information systems

- 12 -

and environmental protection. The specialists wouldperform crucial functions in implementing the short-term measures recommended by the consultants for thefirst phase of the corporate plan. The specialistswould perform hands-on operational and planningfunctions in key areas of ZCCM's operation wbereimprovements are most needed and ZCCM is currentlyinadequately staffed to effectively implement themeasures recommended in the corporate plan. Thecrucial function of implementing the corporate planperformed by the specialists requires their closecooperation with the consultants. Given the specificrole of the technical specialists in the corporateplan they cannot effectively be employed under ZCCM'snormal expatriate hiring program. The specialistsshould be highly qualified professionals who wouldperform their functions of implementing the corporateplan under guidelines established by the consultants;

(iv) a training program for Zambian staff with a view toeffectively filling, in due course, the positions ofthe technical specialists. The component would alsostrengthen both in-house and overseas trainingactivities of ZCCM. The training of Zambian staffwould be closely linked to the specialist hiringprogram under (iii) above. The consultants, incooperation with the specialists and ZCCM staff, would(a) identify Zambians for training, (b) organizetraining programs in Zambia, mainly by working closelywith the specialists, and in well selected overseasassignments, and (c) prepare and select Zambians totake over the functions of the hired specialists inimplementing the corporate plan after termination ofthe specialist contracts. The consultants would beresponsible for the design of the training program andwould assist in achieving the objectives of theprogram.

33. The second component of the project would be technicalassistance to the Ministry of Mines with a view tot

(i) providing about 60 man months of consultancy to: (a)establish an environment in the mining sector whichwould attract private investment; and (b) improvesmall-scale mining. The measures to be taken toestablish an enabling environment would be based uponthe mining policy letter which the Government wouldsend to IDA prior to Credit effectiveness. Themeasures would involve undertaking a study of thebarriers to private sector mining investment,preparing a new Mines and Minerals Act, designing anew taxation and incentive system for mining,preparing and implementing an organizational plan for

- 13 -

the Ministry of Mines, developing and implementing aprogram for strengthening the capabilities of Ministrypersonnel, including extensive training, so that theMinistry can take an active role In attracting privateinvestors to mining, and improving environmental.health and safety regulations. Improvements in theoperations of small-scale miners (especially gemstoneminers), will involve undertaking a study of small-scale mining activities, identifying and implementingtechnical assistance measures for small-scale minersand specialized training of those Ministry employeeswho would work with small-scale miners.

(ii) providing better services for potential new investorsby creating data banks for geological and mining titleinformation and for economic mining sector data, andpreparing additional geological maps; and

(iii) providing urgently needed assaying equipment for thelaboratory of the Ministry of Mines.

34. The third component would be technical assistance for MaambaCollieries and would consist ofs

*il identification and implementation of measures toachieve short-run savings of foreign exchangeexpenditures; and

(ii) a consultancy of about 30 man months to determine thelonger-term outlook of the mine and to devise andimplement a long-term strategy to deal with Maamba'sproblems of environment, marketing, transportation,excess capacity and inadequate foreign exchange.

35. During negotiations, the following agreements have been reached:

(a) the Government will:

(i) carry out an analysis of the barriers to privateinvestment in the Zambian mining industry includinginstitutional, legal and regulatory issues andavailability of geological information, and recommendmeasures to overcome those barriers and encourage newinvestments, discuss the analysis and recommendationswith IDA by December 31, 1992, and implement measuresacceptable to IDA by December 31, 1993;

(ii) prepare a new Mines and Minerals Act and design a newtax and incentive system for mining; discuss proposalswith IDA by December 31, 1992 and present forenactment the proposed legislation and regulations tothe appropriate legislative authority by December 31,1993;

- 14 -

tiiL) design a program to support the sound and timelydevelopment of small-scale mining with adequateenvironmental, health and safety provisions, discussthe program with IDA by December 31, 1992 andimplement the program by December 31, 1993;

(iv) design plans for the staffing of the Ministry ofMines, discuss the draft plan with IDA by December 31,1992, and implement the staffing plan by December 31,1993 taking into account IDA's views.

(v) submit quarterly reports to IDA on the progress madein implementing the project components of the Ministryof Mines and of Maamba Collieries. The first reportsshould cover the period January-March, 1992.

(b) ZCCM will:

Mi) prepare a corporate plan covering both the near andlonger term, with suitable performance targets,specifically addressing the expected phasing down ofexisting mines due to ore depletion, and the need tostrengthen the financial structure of the companyincluding possible balance sheet restructuring. Anoutline of the plan should be prepared and discussedwith IDA by December 31, 1992 and a plan acceptable toIDA implemented for ZCCM's fiscal year starting April1, 1993. Subsequently, the plan will be updated anddiscussed with IDA by December 31 of each year;

(Li) develop and discuss with IDA by December 31, 1992,programs and timetables fort (a) joint venturing orselling its under-utilized or unused assets relatingto mining activities; (b) rationalizing and divestingthe non-mining assets and activities; (c) improvingthe performance of the procurement, materialsmanagement and maintenance functions; and (d)improving the marketing functions. The above programswill be included in the corporate plan and implementedby June 30, 1995.

Ciii) prepare a manpower and training program for theperiod 1993-1995, including a phased reduction inlabor force, and discuss it with IDA by December 31,1992 and include a program, acceptable to IDA, in theannual corporate plan and implement it with agreedyear by year targets for completion by December 31,1995. The training program, in line with therequirements of the corporate plan, would aim at on-the-job and overseas training for a total of aboutfifty professional staff. The training program forartisans would aim at achieving the annual graduationrate of about two hundred artisans. The program for

- 15 -

the reduction in ZCCM's labor force alms at anapproximate 40 percent reduction of ZCCM's total staffof currently 67,000, including subsidiaries, throughattrition, divestiture and dismissals. Theapproximate employment targets are 55,000 for December31, 19921 47,000 for December 31, 1993 and 40.000 forDecember 31, 1994.

(iv) submit quarterly reports to IDA on the progress madein implementing the project component. The firstreport should cover the period January-March, 1992.

(c) Maamba Collieries will prepare an analysis of the long-termoutlook of its operations including measures to reduce foreignexchange requirements, with recorwndations for a follow-upaction program, and discuss the analysis and recommendationswith IDA by December 31, 1992 and implement them by June 30,1994.

36. The following are conditions of effectiveness (i) theGovernment will prepare a Mining Policy Letter satisfactory to IDAsupporting private investment in the mining sector and divestitures by ZCCMconsistent with the Government's overall private sector developmentstrategy, (ii) the Government will enter into subsidiary Loan Agreementswith ZCCM and Maamba Collieries, and (iii) the Ministry of Mines, ZCCM andMaamba Collieries will each establish counterpart teams to coordinateproject activities with staff and terms of reference acceptable to IDA.

Implementation and Reporting

37. ZCCM, the Ministry of Mines, and Maamba Collieries have alreadyidentified senior staff in their institutions who will function ascounterpart for cooperation with the consultants. Project coordinationarrangements satisfactory to IDA would be established prior toeffectiveness of the Credit. The counterpart teams would be responsiblefor submitting quarterly progress reports covering all project aspectsincluding use of technical experts and implementation of trainingactivities. The progress reports should be submitted to IDA not later than45 days after each quarter. IDA would closely supervise implementation ofthe project. A mid-term project review, scheduled for early 1993, wouldprovide a detailed analysis of the progress in implementing the project inparticular concerning the meeting of the December 31, 1992 target date.

38. ZCCM and Maamba Collieries will submit to IDA annual reportsexamined by independent auditors, acceptable to IDA, within six months ofthe end of the accounting year. At the completion of the project, ZCCM,the Ministry of Mines and Maamba Collieries will prepare a completionreport satisfactory to IDA. In the past, ZCCM and Maamba Collieries haveconsistently complied with the auditing and reporting requirements underthe Export Rehabilitation and Diversification Project and the CoalEngineering Project. They have also complied with the requirement ofpreparing completion reports for these projects.

- 16-

Prolect Cost and Financing

39. The total cost of the proposed project would be US$24.0 millionequivalent, including US$3.2 million for contingencies. IDA would financeUS$21.0 million, ZCCM US$2.3 million, the Government of Zambia US$0.6million and Maamba Collieries US$0.1 million. IDA's component would coverthe project's direct foreign exchange costs while ZCCM, tis Government andMaamba would finance the kwacha costs of their respective projectcomponents. The Republic of Zambia would be the Borrower and theGovernment would on-lend the designated credit components to ZCCM andHaamba for 10 years including a 3-year grace period at the IBRD lendingrate plus a premium equivalent to one tenth of the IBRD lending rate.

40. Detailed cost estimates are shown in Annex 1. 2CCM would obtainthe major share (US$15.0 million) of the proposed IDA credit to obtainconsultancy services to prepare the different components of the corporateplan (US$5.9 million), to hire needed technical specialists for helping inthe implementation of the corporate plan (US$6.5 million) and to train ZCCMstaff (US$2.6 million). IDA financing allocated to the Ministry of Mines(US$2.5 million) would cover the cost of consultants to improve the miningsector investment environment and to strengLhen small-scale mining (US$0.8million), training of Ministry staff (US$0.3 million) preparation of databanks and acquisition of assaying equipment (US$0.6 million) and thepreparation of geological maps (US$0.8 million). Maamba's IDA credit sharewould be for a study by consultants of the mine's longer-term outlook(US$0.4 million) and for technical assistance (US$0.3 million) to achieveforeign exchange savings. Contingencies of 151 have been added to theabove cost estimates.

Procurement and Disbursement

41. The selection of the consultants for ZCCM, the Ministry of Minesand Maamba Collieries would be in accordance with the "Guidelines for theUse of Consultants by World Bank Borrowers and by the World Bank asExecuting Agency" of August 1981. IDA has reviewed during CreditNegotiations the terms of reference, the proposed short list to be used inthe selection process and the draft contract (including supplementaryconditions) for the consultants financed by the proposed project. ForZCCM, the consultancy services will also include hiring of individualspecialist staff for providing support in the implementation of thecompany's corporate plan. Hiring of the specialist staff will be done byZCCM in consultation with the consultants in accordance with IDAGuidelines.

42. Procurement of the goods and services needed by the Ministry ofMines to install the data banks, prepare the geological maps and establishthe assaying equipment would follow the 'Guidelines for the Procurementunder IBRD Loans and IDA Credits" of May 1985. Production of geologicalmaps involves mainly cartographic printing which is performed by a smallnumber of specialized enterprises. Such services will therefore beprocured through Limited International Bidding (LIB) obtaining quotationsfrom at least four eligible and qualified suppliers from at least threedifferent countries. This list of such suppliers will be approved by IDA.

- 17 -

The establishment of data banks in the Minstry of Mines involves theprocurement of hardware (a small number of personal computers and printers)and software (specialized computer programs for mining data banks).Procurement of the hardware would be done through Local Shopping (LS) byinviting quotations from at least three Zambian representatives/agents offoreign manufacturers who have after-sales service and spare partsfacilities. Procurement of the computer software would be done throughInternational Shopping (IS) with quotations from at least three suppliersfrom at least two countries. There are a few software suppliers for such ahighly-specialized purpose. The equipment needed for setting up theassaying laboratory vould also be procured through International Shopping(IS) obtaining quotations from at least four suppliers in at least threecountries. There are only a small number of specialized firms providingboth the equipment and the complete installation of a gold assayinglaboratury. All procurement of equipment and services for the data banks,the production of maps and the assaying laboratory would be performed bythe Ministry's consultants. IDA would review the procurement of allcontracts above US$100,000. Detailed information on the procurementarrangements are in Annex 2.

43. The proposed IDA credit vould be disbursed against 100 percentof foreign exchange expenditures. The proceeds of the proposed creditwould be disbursed in four categories: ti) equipment, mainly computing andtesting equipment (US$0.3 million); (ii) consultants for studies andtechnical services (US$9.2 million); (iii) training of staff of ZCCM andthe Ministry of Mines, mainly through short-term overseas assignments(US$3.2 million); and (iv) hiring of technical specialists by ZCCM toreduce skills shortages (US$8.3 million). To facilitate foreign exchangepayments for the different project components a Special Account would beestablished in a commercial bank which would be operated according to IDAprocedures. An initial deposit of US$1 million from the proposed IDAcredit would be used for the initial payments to be made at the time ofordering equipment and appointing consultants. The Special Accourn wouldbe replenished regularly on the basis of documentary evidence as topayments made from the account for goods and services required for theproposed project. Expenditures for less than US$40,000 would be based onstatements of expenditures. Annex 2 presents the projected disbursementschedule of the IDA credit.

III. JUSTIFICATION AND RISKS

44. Mining is vital to the economy of Zambia both in the short andlonger term since, for the rest of this decade, copper is likely to remainZambia's dominant export and mining the largest industry. Furthermore,Zambia still has considerable potential in the mining sector not only incopper but also in gemstones. The mineral resources must be developed inan effective way during the remainder of this decade, if Zambia's longer-term goals of economic growth and diversification are to be achieved. Theproposed project would support the above objectives by providing effectiveincentives to private investment in Zambian mining. The project would alsosupport ZCCM in maintaining current production levels until about the endof the 19909. The technical assistance and the studies financed by the

- 18 -

project would help ZCCM to remain profitable during a period ofincreasingly difficult mining conditions. The support provided by theproject In joint-venturing and divestiture as well as in mining policyreform would open up the sector to private investors. The project wouldtherefore help Zambia in developing its remaining copper resources in aneffective way and in diversifying mineral production toward gemstonemining.

45. The main risks of the proposed project result from a weakeningin the commitment of the Government and Z5CM to privatization and miningpolicy reform during project implementation. However, even with a strongcommitment, the policy of opening the mining sector will not be successfulif private investors are unwilling to risk their capital in the Zambianmining sector. The risk of failure of the privatization program, however,would be reduced by effective macroeconomic policies. Furthermore, ZCCMitself faces a number of risks including sharply lower copper prices,insufficient foreign exchange allocation and a breakdown of theinfrastructure systems on which it depends. In all cases, the companywould benefit from the increased operating efficiency and skill levelswhich would result from the project.

IV. RECOMMENDATION

46. I am satisfied that the proposed credit would comply with theArticles of Agreement of the Association and recommend that the ExecutiveDirectors approve the proposed credit.

Barber B. ConablePresident

Washington, D.C.

May 23, 1991

- 19 -

AnNE 1

REPUBLIC OF ZAMBIA


ESTIMATED COSTS AND FINANCING PLAN

Estimated Costs IDA Local Total_------------US$ million---------… -

Management consultancy 5.9 1.0 6.9Specialist hiring 6.5 0.5 7.0Staff training 2.6 0.5 3.1

Total ZCCM 15.0 2.0 17.0

Ministry of Mines

Management consultancy 0.8 0.1 0.9Staff training 0.3 0.1 0.4Data banks 0.5 0.1 0.6Geological maps 0.8 0.2 1.0Assaying equipment 0.1 - 0.1

Total Ministry of Mines 2.5 0.5 3.0

Maamba Collieries

Management consultancy 0.4 - 0.4Technical assistance 0.3 0.1 0.4

Total Maamba Collieries 0.7 0.1 !.e

Total grogram 18.2 2.6 20.8

Contingencies 2.8 0.4 3.2

Total project cost 21.0 3.0 24.0

ForeignFinancint Plan Exchange Xvacha Total

----------eUS$ million-----------

IDA 21.0 21.0ZCC1 - 2.3 2.3Goverument - 0.6 0.6Maamba Collieries - 0.1 0.1

Total financing 21.0 3.0 24.0

-20- ANNEX 2Page 1 of 2

REPUBLIC OF ZAMBIA


DISBURSEMENT AND PROCUREMENT

(a) Disbursements bs CategorZ

CateLory Amount 2 Disbursement Percentage(US$ million)

Management consultancy 7.1 34 (1002 of foreign expenditure)

Technical specialists 6.8 32 (1002 of foreign expenditure)

Training 2.9 14 (1002 of foreign expenditure)

Data banks and maps 1.3 6 (100Z of foreign expenditure)

Assaying equipment 0.1 1 (100X of foreign expend 4 tare)

Unallocated (contingencies) 2.8 13

Total 21.0 100

(b) Estimated IDA Disbursement Schedule

IDA Fiscal Years92 93 94 95 96

------------------ US$ Million-----------------

Annual 2.1 6.0 6.0 6.0 0.9Cumulative 2.1 8.1 14.1 20.1 21.0

- 21 - ANNEX 2

Page 2 of 2

(c) Procurement Arrangements al

Prolect Element Procurement Method TotalLIB ISILS Other Cost--_--------_ (us$ million) -----------

Consultants 15.6 15.6(13.9) (13.9)

Training 3.5 3.5(2.9) (2.9)

Data banks 0.6 0.6(0.5) (0.5)

Geological maps 1.0 1.0(0.8) (0.8)

Assaying equipment 0.1 0.1(0.1) (0.1)

Unallocated 3.2 3.2-(2.8) (2.8)

Total 1.0 0.7 22.3 24.0(0.8) (0.6) (19.6) (21.0)

a/ Figures in brackets indicate the amounts to be financed by the IDA Credit.

22 -

ANNEM 3

REPUBLIC OF ZAMBIA


SUPPLEMENTARY CREDIT DATA SHEET

I. Timetable of Key Project Processing Events

(a) Time taken to prepare: Six months

(b) First IDA mission: October 1990

5C) Appraisal mission departure: January 1991

(d) Negotiations: May 1991

(e) Planned date of effectiveness: August 1991

II. Actions to be Taken Before Credit Effectiveness

(a) Government to prepare a Mining Sector Policy Letter,acceptable to IDA (para. 36).

(b) Government to enter into subsidiary Loan Agreementswith ZCCM and Maamba Collieries (para. 36).

(c) The Ministry of Mines, ZCCM and Maamba Collieries toeach establish counterpart teams to coordinate projectactivities with staff and terms of reference acceptableto IDA (para. 36).

Tl} 1 S n W X i SiSiSE§E§|!E S Ii 1iT

*-T liiftl i tt I iii§ i 1-* I- S |*

± t 3iEi -u 2 3232322222322 F

s I. ££ 2. I e A *~~U ***@**" I

a ,

* 33 tx*lstxX

i r tas8 s s 8 rjrr

- 24 -

UC,~~~~~~~~~~~~~q 2 of

NEPIMLC OF ZAMBIA

MIMIN SEC TECHNICAL ASS TAE PE

LIST OF CLOSED S3S -AND SL

Amont In US$ mlilion*lgs cnel lations)

Lom or Fiscal Undi- Closingedwit No.. r sorr" PurH ank DA bhr"d Dot*

C15450- 1065 Zabia Agri. Rehab. 24.15 .00 06/80/18Caoo00-ZAM 19U6 Zamia Agri. Rehab. 9.15 .00 06/80/01CAOOII-ZAM 1,15 Zamri ld. Reoroentation 42.00 .00 12/81/15CULW0-ZAM 198S Zombi* lcd. R.ortntat4on 19.46 .00 12/81/0LOSZO-ZAM 1154 Zambia Export Rehab. & Diver. 71.92 .00 00/30/08

Total Zabia 71.92 95.45 .00

SUMMARY STATEMENT OF IFC

Fioeal -Amount in U#S-OblieC r tae. oy Buriness Loan EquIty Total

1072, 1078 Z tbia Bat Shoe Company Ltd. Shoes 2.1 0.2 2.8

1075, 178 Contury Package Ltd. Plastic Wrappins 0.9 0.2 1.1

1i76 ve opsent Bank ofZambia Limited Devolopment Finance 0.0 0.5 0.5

1i02 Ethanol Cmpny of Chmicals &Zambia Limited Petrocemicals 8.7 0.0 4.8

Company Litomlm Food & Food Procesing 8.7 0.6 4.6

10SO, 105 Kafue Tetiles of Zambia, Ltd. Textiles A Fibers 10.7 0.0 10.7

1o" M1s1tock (Zambi) Limited Food & Food Procaing 6.0 0.0 8.0

loss _pnp Devlop_t5pongY Lomite Fewood A Food Proceing 1.0 0.8 2.1

1084 Zambia notel Properties Ltd. Tourism 21.0 0.0 21.0

im, son ~Zambia Conso Idtedo Copper*980, 19K2 Gtntimes LimIted 68.1 0.0 53.1

TotI Gross Comiteents 106.0 2.6 107.6LIseg rpayment, canelolaionus,

terminations awn sIes fl2S 1.0 54.8

Total uncomitted Investments 0.0 0.0 0.0Total Comitent. now held by IFC 61.8 1.0 52.8Toftl UndisbureW 6.5 0.0 6.5

- 25 -ANNEX 5

Page 1 of 3

REPUBLIC OF ZAMBIA


KEY PROJECT ACTIVITIES

Maior Activity Timetable Expected Outgut

ZCCM

(i) Corporate plan ZCCM should propose Outline of corporateshort list of con- plan should besultants at negotia- prepared by end-tions and issue 1992. The corporateinvitations for plan should beproposals by June completed by mid-1991. Work should 1993.start at early 1992.

Joint venture Search for joint- The joint ventures/and divestiture venture partners asset sales should

and buyers of assets start in 1992. Byshould begin by mid- 1994, most of ZCCM's1991. assets and opera-

tions not directlyrelated to miningshould have beendivested.

Copper To be initiated Pre-feasibilitypre-feasibility with help of the studies for thestudies management consul- Nkana Synclinorium

tants by early 1992. and the ChingolaRefractory Oreprojects should becompleted by end-1993.

Special studies Management con- Detailed proposalsof procurement, sultants will on improving pro-copper market- initiate studies curement, marketinging and financial in early 1992. and financial struc-structure. Imple- ture should bementation of available by end-study recommenda- 1992 and implementedtions. during 1993 and

1994.

- 26 -AWX S

Page 2 of 3

Malor Activita Timetable Expected Output

Manpower and Management consul- Initial proposalstraining tants will initiate for staffing andprogram design of program training will be

by early 1992. completed by mid-1992. Agreedtraining and staffreduction targetsvill be achievedby end-1994.

(1i) Specialist Hiring should begin The majority of thehiring soon after complet- persons to be hired

ing initial pro- should provide theirposals for the man- assistance duringpower program. a 36-months period

in 1992-95.

(iii) Trainina Training is ongoing, Training of adequatebut enhanced training number of ZCCM staffunder the project to effectively con-should begin soon tinue implementationafter the management of the corporateconsultants have plan after comple-established the tion of specialistinitial proposals assignments.for a trainingprogram.

Ministry of Mines

(i) Studies of Ministry of Mines Mining policy studymining-Policies should propose and study of small-and small-scale short list of con- scale mining wouldminLnA. sultants during be completed by mid-

negotiations and 93. New draftissue invitations Mining Act andfor proposals by detailed proposalsJune 1991. Con- for mineral taxationsultants should be and incentives vouldappointed and work be available also byinitiated by early mid-93. Recommenda-1992. tions of the studies

would be implementedand new Mining Codepresented in Parlia-ment by end-1993.

- 27 -ANNEX 5

Page 9 of 3

Maior Activity Timetable Expected Output

(ii) Training Training of Ministry Training of adequatestaff would commence number of Ministryafter completing the staff to effectivelyinitial organiza- perform ministerialtional plan for the function in privati-Ministry of Mines. zation and mining

policy implementa-tion.

(iii) Data bankst Procurement of equip- Data banks andtesting ment and systems testing equipmentequipment would be initiated should be opera-

by mid-1992. tional and Zambianstaff trained tooperate the systemsby mid-1993.

(iv) Geological Editing and print- Twenty maps wouldmap prepa- ing of the maps be completed duringration would be initiated 1992-93.

by mid-1992.

Maamba Collieries

(i) Viability study Maamba should pro- The study would bepose short list of completed by mid-consultants during 1992.negotiations andinvite proposalsby June 1991.Consultants shouldbe appointed andwork initiated byearly 1992.

(ii) Technical Assistance would The major part ofassistance be initiated by the assistance

early-1992. would be completedby end-1992.

- 28 - ANNEX 6

Page 1 of 11

REPUBLIC OF ZAMBIA


SCOPE OF PROJECT COMPONENTS

I. ZCCM

A. Corporate Plan

ti) Obiective

To assist ZCCM in maintaining longer-term viabilityand in increasing efficiency of operations in theshort term during a period of declining ore grades andclosure of major mines.

(ii) Scope of Work

The preparation and implementation of the corporateplan would take into account the following issues:

(a) the depletion of reserves in certain ZCCM miningoperations;

(b) the potential to develop certain ZCCM resources(Nkana Synclinorium, Chingola Refractory Ore andother resources) and their preparation for joint-venturing or complete divestiture;

(c) the current inadequate labor and capitalproductivity which is largely caused by ZCCM'sover-staffing;

(d) the need for divestiture of other ZCCM assets;and

(e) ZCCM's current financial structure which requiresstrengthening with a view to improving thecompany's longer-term financial performance.

Preparation and implementation of the corporate planwould include the following main components:

(a) detailed annual technical, financial and staffingprograms;

-29 -AM ANNEX 6

Page 2 of 11

(b) a program of joint-venturing and divestiture ofZCCM's assets which are underutilized orunrelated to mining;

(C) a strategy for developing ZCCM's remainingundeveloped copper resources;

(d) preparation of phase-down plans for depletingmines;

(e) preparation of special studies of procurement,marketing, inventory management and financialstructure; and

(f) preparation and implementation of a manpower andtraining scheme.

Ciii) Monitoring and Reporting

The work of the consultants requires close cooperationwith ZCCM's management and early establishment of theoverall long-term corporate objectives, including thefinancial targets. The consultant would thereforeprepare initially a conceptual report afterdetermining the objectives and targets. Theconsultant would also prepare a short-term corporateprogram for ZCCM's fiscal years 1993-96 to beImplemented with the support of the consultants. Inaddition to quarterly progress reports, theconsultants would prepare an interim status report anda final report which would present the detailedcorporate plan for the period 1993-2007.

B. Specialist Staffing

(i) Objective

To help implement the corporate plan with a view toenhancing ZCCM's performance and reducing costs in anumber of key areas.

(ii) Scope of Program

A certain number of individuals would be hired forperiods of up to 36 months each in accordance with therequirements established by the managementconsultants. ZCCM has indicated the operational areaswhich need most urgent attention in the attachedStaffing List. Five specialists would be allocated toZCCM's Nchanga division, 15 specialists to theMufulira division, 12 specialists to the Nkanadivision, 13 specialists to the Technical Services

- 30 - ANM 6

Page S of 11

division, and 3 specialists to ZCCHs headquarters.The main skills needed are In maintenance, operationalplanning, inventory management and informationsystems. External staff would also be needed forintroducing new mining methods.

(Ail) Monitoring and Reportinx

Quarterly reports prepared by the counterpart team InZCCN would report on hiring schedule of specialiststpff and on the effect of such staff on productivityand performance of the relevant operations in theframework of implementing the corporate plan.

ZCCM PROPOSED SPECIALIST STAFFING LIST

NumberRequired Level

Nchanga Division

Fitter Foreman (Grinding Mills) 2 GlFitter Foreman (Slurry Pumps) 2 G1Electrical Foreman (Protection Equipment) 1 G1

Mufulira Division

Electrical Engineering 2 SOHoist Mechanical 1 SOMech. MRS Implementation 1 SOSkills Training Officer 3 SO

- Hydraulics and Pneumatics- Deutz Engineer- Computer Hardware Maintenance

Geotechnical Engineer 1 SOMining Project Superintendent 1 SUPTProject Construction Site Superintendent 1 AISUPTSafety and Loss Control Expert 1 SORefractory Expert 1 SOPyrometallurgical Engineer 1 AISUPTRefinery Metallurgist 1 AISUPTManpower Planning Specialist 1 SO

- 31- ANN-X 6

Page 4 of 11

NumberReauired Level

Nkana Division

Smelter Manager 1 MANAGERDeutz Engineer Specialist I G1Cat Engine Specaalist 1 GISymons Crusher Specialist 1 GIHigh Speed Machine/Compressor Specialist 2 GIOxygen Plant Manager 1 AISUPTMet Plant Mechanical Sectional Engineer 2 A/SUPTPlant Process Control (Foxboro IA System) 1 GI

Luanshya Division

Sectional Engineer - Hoists 1 SOCost Engineer 1 SO

Technical Services

Senior Pyrometallurgist 1 AISUPTSenior Hydrometallurgist l AISUPTBackfill Technology Specialist 2 AISUPT

- Design and Construction- Site Implementation

Ventilation Specialist 1 AISUP?- Air Cooling

Senior Cost Engineer 2 SUPT- Training- Project Cost Estimate

Senior Project Engineer 2 SUPT- Evaluation, Implementation

and Control of ProjectsGroup Engineer Maintenance Services 1 MANAGERSenior Mechanical Engineer 1 SUPT- Heavy Duty Machinery Mechanic

Mechanical Engineer, Central Winding Team 1 A/SUP?Shaft Engineer, Central Winding Team 1 A/SUP?

Miscellaneous

Manpower Planning Specialist 1 A/SUPTBusiness Analyst 1 A/SUPTProject Manager - Corporate Planning 1 SUPT

48

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Page S of 11

C. Training

() Obective

To improve productivity of ZCCN's staff and to permitthe effective replacement of temporary specialiststaff with Zambians after termination of thespecialist hiring program.

(ii) Scope of Training Prosram

Training would be performed both in-house, mainlyunder the supervision of the specialists, and throughoverseas work/study assignments.

(a) The overseas assignments for ZCCM staff would bedetermined on the basis of the specific trainingneeds. The staff would be assigned to carefullyselected mining companies and institutions withexperience/operations in the areas where trainingis required. Where possible, assignments wouldbe in neighboring countries (RSA, Zimbabwe,Namibia) where mining and operating conditionsare similar to those in Zambia.

(b) About 200-300 artisans (craftsmen) would betrained in ZCCM-run training schools.

(iii) Monitoring and Reporting

The quarterly reports of the counterpart team wouldprovide the details of the staff to be trained, thescope and nature of the training to be provided, andthe reasons for selecting the assignment. Thequarterly reports would also inform on the effect oftraining on staff performance.

II. Ministry of Mines

D. Mining Policy Study

(i) Obiective

To design sector policies which would promote privateinvestment in mining;

(ii) Scope of Work

The study would analyze the constraints to private-sector oriented mining in Zambia. The emphasis wouldbe on analyses of the Mines and Minerals Act and the

-33- ANNEX 6Page 6 of 11

incentive system (taxation, foreign exchangeallocation and regulatory system, includingenvironmental aspects). The work would includepreparation of a new draft Mines and Minerals Act andassociated regulations, including environmentalaspects as appropriate, proposals for a revised taxand incentive system for mining as well as proposalsfor and implementation of a reorganization of theMinistry of Mines.

(iii) Monitoring and RePortinr

The consultant would cooperate with the counterpartteam of the Ministry during the period of studypreparation. An interim report will be prepared afterthe consultants have established the facts and wouldinclude the proposals for the design of policies andfor organizing the Ministry. A final report at theend of the work would include the new draft Mines andMinerals Act and revised regulations, and the proposedpolicy schemes. Quarterly reports would provideinformation on implementing the organizationalproposals.

E. Study of Small-Scale Mining

6i) Obiective

To assist the Government in developing andimplementing promotional policies for the small-scalesector.

(ii) Scope of Work

The consultant should assess the size of the currentgemstone operations in Zambia, the country's gemstonemining potential and the constraints which arepreventing the realization of this potential. Theconsultant would then make detailed and practicalproposals on how to eliminate/minimize the constraintsand to implement a realistic program of supportmeasures for the sector. Such a program would addressboth production and marketing issues of gemstones anddistinguish between measures which can best beperformed by the private sector and measures which theGovernment should implement. The work of theconsultant should make use of existing studies bySADCC and bilateral donors. Furthermore, coordinationis needed with the assistance provided to the recentlyIntroduced Gemstone Marketing Board. In addition,current operations aAd potential for small-scalemining of other minerals will be assessed. The

- 34 ANWEX 6Page 7 of 11

consultants vould also help implementing the proposalsmade in the study.

(iii) Monitoring and Reportins

The consultant would prepare quarterly progressreports, an interim report and a final report whichwould contain the main finding and the proposals.Preparation of the reports would be closelycoordinated with the Ministry of Mines.

F. Staff Trainin

(i) Ob1ective

To prepare the staff of the Ministry of Mines toperform its functions more effectively under aprivate-sector oriented mining policy.

(ii) Scope of Training

Training of selected Ministry staff would be performedat the Ministry by the consultants and throughoverseas worklstudy assignments at suitable-nstitutions and ministries. The assignments would beselected with a view to providing training inadministering a mining sector operated by privatecompanies (licensing, monitoring and reportingrequirements etc.) and in methods of attractingprivate investors to the mining sector (investmentpromotion, preparation of project documentation,contract negotiation, etc.). A third category ofassignments would focus on training in provision ofassistance to small-scale mining. Given the nature ofrequired training, the assignments would be largely inneighboring countries with strong private miningsectors (RSA, Namibia, Zimbabwe). The programenvisages training of an adequate number of staff foreffectively performning the functions of the Ministryafter completion of the consultants' contract.

(iii) Monitorina and Reporting

Selection and assignment of staff for training wouldbe determined by the consultants In accordance withthe operational needs of the Ministry. The results ofthe training wou d be monitored and reported In thequarterly progress reports of the counterpart team.

- 35- ANNEX 6Page 8 of 11

0. Geological and Minint Data Systems

(M) ObJective

To establish information systems needed to effectivelyadminister and monitor a private-sector based mininSindustry.

(ii) Scope

Assistance would be provided in two areas:

(a) a geological data base would be established inthe Ministry of Mines. The assistance wouldcover the necessary hardware and software, thecost of installing the system and waking itoperational, as well as the training of Zambiansto operate the system;

(b) a data base for both mining titles and mineralstatistics would be established in the Ministryto store data for a mining sector informationsystem and to assist in the administration ofmining licenses. The assistance would cover thehardware, software and training of Zambian staff.

(iii) Monitoring and Reporting

Progress in implementing the project component wouldbe monitored by the counterpart team and be reportedin the quarterly progress reports.

B. Geological Maw Preparation

ti) Obiective

To provide detailed geological information topotential mining investors.

(ii) Scope of Work

The work would continue the program initiated with nECfunding to prepare an additional total of 20geological maps of areas with high mining potential.The work would make use of existing geologicalInformation and would include the editing and printingof the maps.

(iii) Monitoring and Revorting

Progress would be monitored by the counterpart teamand registered in the quarterly progress reports.

- 36 -ANNEX 6

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L. Gold Assaying Equi_ment

(i) Obective

To support the development of small-scale gold mining.

(ii) Scope of Work

Establishment of a small gold assaying facility in theMiniatry would provide effective support to theemerging small gold mining operations in Zambia. Thenecessary equipment would be installed in the mineraldressing laboratory which is fully operational. Theassistance would cover the cost of the equipment andthe installation. The moderate training needs wouldbe included in the equipment supply package.

(iii) Monitoring and Reportina

The counterpart team woald be responsible formonitoring implementation.

1II. Maamba Collieries

J. Viability Study

Mi) Obiective

To determine whether or not Maamba is viable in thelonger term and would merit allocation of major fundsfor rehabilitation, expansion and environmentalprotection.

(ii) Scope of Work

The consultant should determine the long-runproduction costs of Maamba, comparing such costs tothe costs of alternative supplies of coal to ZambiaFor this purpose, the consultant will perform thefollowing functions:

(a) determine the long-run cost of coal production atMaamba for different output levels, taking intoaccount the investments needed forrehabilitation, expansion and environmentalprotection during the next ten years as well asthe cost of increases in the carrying capabilityof Zambia Railways;

- 37 - AM 6

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(b) prepare a market forecast for 14aamba coal, bothin Zambia and in neighboring countries, takinginto account the quality of Maamba coal relativeto supplies from alternative sources;

(c) determine the supply cost of Maamba'scompetitors, mainly of those in Zimbabwe and RSA.

Based on the evaluation of costs and markets. theconsultant should prepare,

(a) for the case that long-term viability of Maambacan be achieved, detailed plans of operations,investment and marketing aiming at a maximumreturn to investment, and help Maamba implementsuch pl.i4ns; or

4b) for the case that Maamba is not viable in thelong term, a detailed phase-down plan, includingenvironmental reclamation, which would aim atminimizing the financial and social cost duringthe remaining period of operation, and helpMaamba implement such a plan.

(iii) lonitorig and Reporting

The consultant would prepare an interim reportpresenting the initial findings with respect to costsand markets. This would be followed by a secondreport which would establish whether or not Maamba isviable. The third and final report would, in the caseof viability, present the plans for investment,operation and market strategy, or, in the case of non-viability, present the phase-down plan and thereclamation measures.

K. Short-ternm Technical Assistance

(i) Objective

To reduce operating cost in the short-tenm, inparticular, the cost which require expenditures inforeign exchange.

(ii) Scope of Work

The consultant should assess Maamba's currentequipment maintenance and repair operations anddetermine the extent to which savings in importedparts can be achieved In the short run.

- 38 - ANN= 6

Pare 11 of 11

(Ili) Wonitordn and Reporting

the consultant will prepare a report on the findingsand the detailed recommendations with respect to aprogram of cost reduction.

- 39 - AMn 7Page 1 of 3

REPUBLIC OF ZAMBIA

MINING SECTOR TECHNICAL ASSISTACE PROJECT

ISSUES To BE COVERED IN THE MINING SECTOR POLICY LETTER

1. strategl for the Mining Sector: (i) in the short term, theexisting mining operations, In particular ZCCGf, will aim at ilmproving theirefficiency, so that they can continue to generate substantial net economicresources for the country; and (ii) in the longer term, mining operationswith depleting reserves will be systematically phased out and privateinvestors will be attracted to develop and operate the currentlyundeveloped resources. both in copper and in gemstone mining.

2. Mining Investment Policiess the Government will (i) take allnecessary measures to create an environment conducive to private investmentin mining; and (ii) implement pro-active steps in the divestiture andjoint-venturing of certain ZCCG assets and resources.

S. Divestiture Strategy: ZCCM will identify those assets which aresuitable for divestiture in accordance with the following categories:

Mi) assets which will be completely sold off to theprivate sector;

(ii) assets which are suitable for joint-venturing; and

(iii) assets which are suitable for a variety of divestituremethous, including sale to private Investors ortransfer to trust organizations.

4. ZCCK's Corporate Plan: to facilitate performance monitoring andto enable the Government and ZCCM to take timely measures to safeguardZCCM's viability and profitability, ZCCM will prepare a comprehensive long-term corporate plan including targets and performance criteria in the areasof divestiture/joint-venturing, production, organization and management,staffing, investment, profitability and productivity, and environmentalreclamation.

5. Minint Legislation: the Government Intends to seek assistancein revising the Mines and Minerals Act In line with the followingprinciples:

(M the overall direction of the revised Act will bepromotional and will reflect the objective ofattracting private investors to the mining sector.

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Page 2 of S

The rights and oblipgtions of mining companies will beclearly spelled out;

(ii) licenses for exploration and miulng will be issued bythe Ministry of Mines with a minimum of administrativerequirements;

(iii) mining rights will be issued for renewable periods oftime ad holders of concessions may sell their miningtitle to other investors without GovernmentInterference; and

tiv) all mining investors are treated equally. Propertyguarantees provided by the Investment Act of 1990would fully apply to investments in the mining sector.

6. Taxation and Incentives: the Government's policies of mineraltaxation and incentives will take into account the following principles:

Mi) mining enterprises will be subject to the same ratesof corporate and sales taxes and import duties asenterprises in other sectors;

(ii) in addition, mining companies may pay royalties, inrelation to the volume of mineral extracted, andloradditional profit taxes during periods of high mineralprices;

(iii) the Government wil1 charge and collect market-basedlicense and area fees for mining rights; and

Uiv) special agreements with investors may be used inexceptional cases involving large investments ofmacroeconomic importance.

7. Foreign Exchange Regulations, the Government recognizes thatthe unrestricted transfer of foreign exchange for importation of inputs andfor dividend and debt service payments is an indispensable part of theincentive package for foreign mining investors. The foreign exchangeregulations of the Investment Act will also be applied to mining investors.

8. Policies for Small-scale Mining: the Government's policiestoward small-scale mining will be promotional and will eliminate allunnecessary state interference in production and marketing of small miners.Technical and financial assistance needed by small miners will be providedthrough schemes whlch promise to be cost effective. Government policieswill also emphasize that services to small-scale miners will be provided bythe private sector. In gemstone marketing, the Government's aim is to helpestablish a well-functioning auction in Lusaka which would trade the bulkof the gemstones mined in Zambia. The Government would provide smallminers with an adequate incentives package -- composed mainly of foreign

- 41 - MU 7

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exchange retention and taxes -- so that illegal exportation of gemstoneswill be minimized.

9. The letter would be signed by a representative of the Governmentof Zambia.

- 42 - AM=E 8

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REPUBLIC OF ZAMBIA


THE ZAMBIAN MINING SECTOR

Institutional Framework and Policies

1. The Mining sector in Zambia is the dominant industrial andexport sector, with ZCCM in turn being the dominant institution in themining sector. The mining sector operates within a framework of economicpolicies established and implemented by the Government, the most importantof which are those concerning taxes and foreign exchange. In addition, theMining and Minerals Act of 1979 directly regulates the sector. Finally,the sector is heavily influenced by the condition of Zambia'sinfrastructure, especially the railway which transports most of ZCCM's andMaamba's inputs and production.

2. Taxes. The sector is subject primarily to three types of taxes.First, there are import duties and sales taxes on most items used inmining. These duties and sales taxes are fairly high and for ZCCM infiscal year 1990 (April 1, 1989 to March 31, 1990) were equivalent to about30? of its profits after tax. The second important type of tax is thecorporate Income tax which is levied at a 452 rate. While this tax rate isin line with tax levels of other mining countries, the total amount ofincome tax paid by ZCCM is higher than indicated by this tax rate. This isprimarily because ZCCM keeps its books in kwacha leading to anunderstatement of costs during periods of kwacha depreciation, as has beenthe case over the past few years. This understatement of costs occursmainly for two reasons. First, depreciation expressed in kwacha tends tobe below replacement cost during such a period. Second, the accountingcost charged to operations for items taken from Inventory under the first-in-first-out principle applied by ZCCM is often below the replacement costof such items during periods of rapid currency depreciation and priceinflation. These two factors lead to understated costs and overpayment ofcorporate income taxes.

3. A third type of tax levied on ZCCM is the Minerals Export Levyon copper. This is a tax which does not impact on ZCCM until the price ofcopper exceeds US$1.00. Above this level, the Levy is in addition to thecorporate income tax. The rates of the Minerals Export Levy have beenestablished as percentages of the London Metal Exchange (LME) copper priceIn accordance with the table presented below.

- 43 -ANNEX 8

Page 2 of 7

Sharing of Incremental RevenuesUS¢ per lb S Export US¢ per lb of Copper a/of Copper Levo Government ZCCM

Over 100-105 601 3.0 2.0Over 105-110 70Z 3.5 1.5Over 110-115 80S 4.0 1.0Over 115-120 952 4.8 0.2Over 120 1002 total

a/ Applies to copper prices at the upper level of each price range.

The Minerals Export Levy effectively operates as an Additional Profits Taxwhich taxes away most of ZCCM's profits resulting from high copper prices.Additional profits resulting from copper prices above USCt20 per lb arebeing taxed away completely, while the marginal tax rate for copper pricesbetween US¢100 and 120 rises from 602 to 951. 11

4. Maamba Collieries have not been profitable in recent years and,therefore, have not been subject to corporate taxation. Maamba pays,however, duties on imported production inputs. There is no Minerals ExportLevy for coal. Given its largely informal nature, gemstone mining iscurrently not taxed in Zambia. Only the two mechanised operations aresubject to regular corporate income taxation. However, in the context ofthe newly established auction system for gemstones, the Government intendsto impose an ad-valorem tax of 91 on the gemstones exported through theauction.

5. Foreign Exchange Allocation. Exporters generally obtain aforeign exchange allocation corresponding to 502 of their exports. Suchforeign exchange may be used to import production inputs or, since 1990,may be sold at market price to others who have inadequate foreign exchange.Mining is treated differently. ZCCM negotiates with the Bank of Zambia(BoZ) a division of the foreign exchange generated by the company.Typically, ZCCM is allocated only 40-452 of the foreign exchange it earns.ZCCM can then use its allocation to pay for imports. However, in periodsof foreign exchange shortages, ZCCM's allocation can slip below the 401level. Furthermore, ZCCM is not allowed to buy additional foreign exchangeon the free market. Maamba, on the other hand, benefits from an

11 Recent relatively high copper prices have resulted in considerabletax payments by ZCCM under the Minerals Export Levy. E.g., anaverage annual copper price of US¢120 per lb results in a MineralsExport Levy of USC15.3 per lb (3.0 + 3.5 + 4.0 + 4.8). At annualproduction of 450,000 tons of copper, ZCCM's payments under the Levywould be US$151.8 million, corresponding to a tax rate of 76.51 forthe revenue resulting from copper prices above USC100/lb.

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exceptional 1002 foreign exchange retention of its export revenues. Maambamay also purchase additional foreign exchange on the free market. However,Maamba's export earnings are small (about US$l.5-2.0 million per year) andits kwacha earnings inadequate to purchase additional foreign exchange onthe free market. Gemstone miners selling their production through theauction expect to obtain a 502 foreign exchange retention, as is the casefor non-mining exporters.

6. Railroad Infrastructure. For ZCCM and Naamba Collieries railtransport is vital. ZCCM has to move its concentrate between itsconcentrators and smelters by rail and then must export its finished copperby rail. Furthermore, its heavier imports mostly arrive by train.Similarly, Maamba must transport all of its coal by rail. Currently,Zambia Railways is in poor condition. The track is old and deterioratingwhile the company is short of both locomotives and wagons. This transportproblem has slowed ZCCM's production and added significantly to itsexpenses. It has also tended to limit Maamba's production at current lowlevels, since Zambia Railways are unable to carry additional volumes.

7. Electricity Infras ructure. The mining sector benefits from lowcost and reasonably reliabl electricity supplies. Because of the amplecapacity of the Kariba hydro-electricity dam, Zambia normally Las surpluslow cost electricity available. In 1989 and early 1990, however, due toproblems with the generating plants on the Kafue river, there was ashortage of electricity in the country. Nevertheless, ZCCM was largelyexempted from the electricity supply reductions which were implemented atthat time. As Zambia's economy resumes its growth, the current excesspower generating capacity will be eliminated over time. It is thereforeimportant that mining projects--which tend to have long implementationperiods and are generally power intensive--be evaluated on the basis oflong-run marginal power supply cost, and not based on the currentlyextremely low short-run marginal cost.

Operating Position of ZCCM

8. Mining and Production Activities. ZCCM's production complex isan intricate system of operations spread over 100 kilometers in theCopperbelt with a small lead zinc mine located at Kabwe. Copper producingoperations consist of four divisions, of which Nchanga is the largest.This division comprises several major components, the most important ofwhich are: (i) the lchanga Open Pit which alone accounts for 25-301 ofZCCM's production; (ii) the leach operations producing copper from currentand old tailings; (iii) two underground mines; and (iv) two concentrators.The three other copper divisions are substantially smaller and comprise sixunderground mines, five concentrators, three smelters, two refineries, twoacid plants and two cobalt plants.

9. Exports and Sales. ZCCM's copper production, which over thepast five years has averaged around 430,000 to 450,000 tonnes per year, isalmost entirely exported, with the largest markets being Japan, France,Belgium and Italy. The copper is shipped over the TAZARA railway to theport of Dar es Salaam in Tanzania, though smaller amounts go to Beira in

- 45 - NM aPage 4 of 7

Mozambique and occasionally to East London in South Africa. More recently,ZCC4 has started shipping through Walfis Bay in Namibia. The MetalMarketing Corporation of Zambia (HEMACO). a subsidiary of ZIMCO, is thesales agent for all of ZCGM's copper and cobalt. In addition a subsidiaryof MEUACO and ZCCM, MEMACO Trading Ltd., is a major copper trader on theLondon Metal Exchange (LME).

10. Financial Situation. ZCCM is currently in a constrainedfinancial situation in spite of a longer period of favorable copper priceson the world market. ZCCK is basically unable to finance all of its cashrequirements with its current cash flow and borrowing capacity. There areseveral reasons for tbis, the most important of which ares (i) high taxpayments including import duties, sales taxes, corporate taxes and theMineral Export Levy; (ii) a heavy net debt service burden due to thecompany's large foreign debt and limited ability to borrow; (iii) asignificant capital investment program, especially on overdue projects;(iv) the decline in the value of the dollar relative to the pound sterlingin which ZCCM makes many of its purchases and tv) the company's accountingsystem which tends to understate costs (see para. 2) and thereforeoverstates the cash flow. In this situation the company needs to improveits cash flow by cutting costs and improving efficiency. In addition, theGovernment can contribute to the improvement in ZCCH's financial positionby reducing the differential between the official rate for foreign exchangeand the parallel market rate. ZCCM sells all of its foreign exchange tothe Bank of Zambia at the official rate but a large fraction of itsoperating cost are in kwacha and tied to the parallel market rate. Thus alarge differential between the official and parallel market rates squeezesthe cash flow by reducing revenues relative to costs. Attachment 1presents key data of ZCCM for the fiscal years 1989 and 1990.

11. Organization. In addition to its copper operations, ZCCM hastwo major subsidiaries, Mulungushi Investments Ltd. (MIL) and ZambiaHoldings Ltd. (ZAL), which are primarily engaged in supporting thecompany's metals mining and processing operations but have diversified intoother areas. MIL has its headquarters in Zambia, on the Copperbelt, withabout 70? of its sales to ZCCM. The other 302 of MIL's sales consist oft(i) agricultural products produced by its Copperbelt farms; (ii) transportservices and management of Government-owned mills; and (iii) tourismfacilities. These latter activities are generally unrelated to copperproduction. ZAL Holdings is headquartered in the U.K. and basicallyprovides services to ZCCM which it cannot easily obtain in Zambia. In thepast three years ZAL has begun to diversify into new areas both in the U.K.and by setting up its own subsidiaries in Zambia. Consultants reviewed in1990 the operations of both ZAL and MIL. They recommended a divestitureand rationalization program for ZAL, especially of its Zambiansubsidiaries. Work on determining the future of MIL is continuing.

12. Future Production. After a sharp decline during 1975-85, copperproduction levels have stabilized in recent years at around 430,000 tonsper year. ZCCM projects that current production levels can be maintainedabove 400,000 tons for another 7-9 years. By the turn of the century,however, copper production will decline sharply. The table of projected

-46 - ANNEX 8

Page 5 of 7

schedules for ZCCM's operations in Attachment 2 shows the details of theproduction forecast. The slow decline of production during the 19909 iscaused by declining ore grades. The abrupt decline of copper production atthe turn of the century is largely due to the closure of the Nchanga OpenPit. Thereafter, the declining trend continues as more operations areclosed down. Cobalt, which is a by-product of copper, will have aproduction trend similar to copper.

13. Copper Reserves and Resources. 1990 proven copper ore reservesamounted to about 420 million tonnes with an average copper content ofabout 3.1Z (including tailings and the Nchanga Open Pit cobalt ore ZCCM'scopper content of ore at the mill is less than 22, see Attachment 2).Proven ore reserves have been declining for a number of years and are nowadequate to maintain current levels of copper production for only another7-9 years. Zambia, however, has large copper ore resources in severaldeposits which require detailed evaluation of their economic viability.These copper resources consist of four main categories, which areidentified and relatively well delineated. First, there are mineralizedextensions, at depth or on the fringes, of existing deposits totallingabout 930 million tonnes of ore with an average copper content of 2.52,including around 380 million tonnes with a 3.5Z average copper content atKonkola. Recent studies by ZCCM seem to indicate that the Konkola depositmay be economic, although operating costs would be high and there would bea long lead time before large-scale production could commence. Alsoinvestment cost, estimated at US$350 million, would be high. Nevertheless,the Konkola project currently appears to be the most promising project topartly compensate for the closure of the Nchanga Open Pit at the turn ofthe Century. Also, included in the above total is the Nkana Synclinoriumwhich contains approximately 120 million tonnes of ore with a coppercontent of 2.3?. However, the economic studies of the Nkana Synclinoriumare just beginning and its mining conditions are known to be difficult.Second, there are numerous small separate deposits within the Copperbeltwhich are estimated to hold about 321 million tonnes of ore with a coppercontent of 1.6?. Third, there are ores which are metallurgically verydifficult to exploit. These include 140 million tonnes of the so-calledChingola Refractory Ore (copper content 1.25?), which are already mined,and another 146 million tonnes which are not yet mined. Fourth, theLumwana surface deposit, which is located outside the Copperbelt, containsabout one billion tonnes of ore with a low copper content of about 0.82.However, exploitation is made difficult by its relatively low grade and thelack of infrastructure in the Lumwana region.

14. Investments. While development of the copper resources inZambia will have to be done by private investors, ZCCM has severalimportant stand-alone investments which have been long delayed and whichneed to be completed in order to maintain the current levels of productionduring the next several years. The key investments which have to beimplemented in the near future are as follows: (i) rehabilitation of theNkana acid plants in order to ensure sulfuric acid supplies for thetailings leach and hydro-refineries; (ii) rehabilitation of the Nkanasmelter to improve efficiency and provide a superior sulfur-dioxide streamfor the acid plants; (iii) the mining at depth project at lufulira to

- 47 - ANNEX 8Page 6 of 7

ensure production from this mine after the middle of this decade; (iv) theMindola sub-vertical shaft to extend the life of the Mindola section of theNkana mine; and (v) rebuilding of the roof at the Mufulira electric furnacewhich may collapse unless rebuilt in the near future. In addition, thereare several smaller stand-alone projects which seem economic and need to beundertaken. These investments will cost a total of around US$300 millionequivalent over the next four years of which slightly over half is foreignexchange. On top of these projects there will be a continuing need forequipment replacement amounting to US$60-US$70 million per year.

Operating Position of Maamba Collieries

15. Maamba Collieries produces coal in the south of Zambia primarilyfor ZCCM, but also for a number of other customers in Zambia. Modestamounts are exported to neighboring countries. At its current level ofproduction of approximately 425,000 tonnes per year, the company coversoperating costs but it cannot satisfy the cash requirements for debtservice and capital investments. With additional investments the companyhas the capacity to increase coal output to substantially higher levels.However, Zambia Railways has no capacity to carry coal volumes above thecurrent levels. Furthermore the Zambian market for coal is declining.Maamba would like to make substantial investments in rehabilitating itsequipment a significant part of which is now in need of overhaul or repair.Investment decisions must take into account: (i) the likely evolution ofcoal demand in Zambia and surrounding countries over the next severalyears; (ii) changes in the carrying capacity of Zambia railways; (iii) thecost to Zambia of importing coal from the nearest supplier (Zimbabwe)compared to the cost of production at Maamba; and (iv) Maamba's investmentneeds over the next several years in both local and foreign currency.

Gemstone Miners

16. Gemstones are Zambia's second largest minerals product by valueand the country's second largest export. The main product is emeralds butsignificant amounts of aquamarines and amethysts also being produced. Mostof the production is by small-scale miners. The bulk of this production isnot reported to the Government and is exported illegally. The total valueof Zambian gemstones production and exports are broadly estimated atsomewhere between US$150 and US$400 million per year. The Governmentinitially followed a policy of trying to control production and exports bylicensing monopoly buyers who paid the small-scale miners generally lessthan the going prices for their stones. This policy failed and a promisingindustry suffered a serious set-back. More recently, the Government haseliminated the buying monopolies and has actively supported theestablishment of gemstone marketing organized by the private sector.

17. The small-scale miners associations are currently in the processof establishing a gemstone auction system in Lusaka. The first auction isscheduled for April 1991. A regular auction has the potential of solvingthe marketing problem of small miners, but their serious productionconstraints continue to limit the growth of gemstone mining in Zambia.Four main production constraints seem to exist: (i) lack of mechanical

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mining equipment; (ii) insufficient credit and equity financing; (iii)inadequate training; and (iv) insufficient geological information on thegemstone mining areas. A detailed study will help to identify effectivemeasures to reduce these constraints.

- 49 -

ANNEX 8Attachment 1

Zambia Consolidated Copper Mines (ZCCM)

Key Data for Fiscal Years 1989 and 1990

------Fiscal Year---- a/1989 1990

Production (tons)

Copper 415,645 448,468Cobalt 4,871 4,447Lead 6,345 3,653Zinc 18,343 12,351

Number of emploaees 65,312 67,448

Average price realized (b)(per ton)

Copper K 25,721 K 45,475US$ 2,469 US$ 1,773

Cobalt K 130,903 K 328,674US$ 12,567 US$ 12,818

sales b/

K million 18,13S 32,876US$ million 1,741 1,282

Capital expenditures b/

K million 1,191 3,090US$ million 114 121

Net profit bl

K million 1,832 2,586US$ million 176 101

al Fiscal years April 1 - March 31.b/ US dollar asounts at the official exchange rate.

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