16 December 2008
Plummeting copper prices have caused investors to shy away from the $1.5 billion Kafue Lower Gorge Dam, which is designed exclusively for use by foreign mining companies.
According to Reuters, the World Bank’s private sector arm, the International Finance Corporation (IFC), reports that the proposed $1.5 billion Kafue Lower Gorge Dam in Zambia has been put on hold, as many investors shy away from major commitments in light of the financial crisis. While the IFC attributes the delay in part to technical considerations, the more likely scenario is that the precipitous drop in copper prices has caused financiers to reconsider.
Surging copper prices had been the primary rationale for pursuing the project, which is designed exclusively for use by foreign mining operators in Zambia’s copper belt. But demand for copper has plummeted since the onset of the financial crisis, and the price has dropped to a third of what it was when it peaked in July.
Preparations for the dam were revived earlier this year at a time of record copper prices to address energy shortfalls affecting the country’s mining industry. The IFC is financing the feasibility study, while the World Bank had previously indicated that it was likely to support the project through a guarantee. At 750 MW, the dam would become the largest privately financed hydroelectric project in Africa, and its output would equal roughly three times that of the contentious Bujagali Dam in Uganda.
According to the World Bank, more than half of the electricity in the country serves the mining sector. At the same time, 98 percent of the rural population lacks electricity, a situation that the Kafue Dam is expected to do nothing to address.
Meanwhile, despite declining copper prices, the long anticipated Lumwana copper mine began production last week. Lumwana has received financial backing from the African Development Bank and the European Investment Bank, and will become the largest open-pit mine in Africa. It will require a large supply of power at a time when other mines have reduced production due to rationed power.
The delay on Kafue Dam is likely one of many projects that the IFC will put on hold as a result of the financial crisis. Some sources estimate that as much as 20 percent of new IFC projects will not get off the ground, as they are rendered unviable and project developers struggle to attract investors.
At the same time, declining metal prices have shifted the negotiating positions of resource-rich African governments with respect to mining companies, which until the onset of the crisis were eager to take advantage of record high prices. The government of the Democratic Republic of Congo (DRC) announced last week that it would reduce export taxes and royalty payments from mining companies in an effort to convince them to continue operations. Reuters reports that royalty rates would be reduced to just a tenth of their current level. This has generated concern that Zambia, which exploits a contiguous copper area with the DRC, might also offer discounted tax rates to copper companies. Earlier this year, Zambia unilaterally instituted a modest mining tax increase to rectify the unfair and unbalanced rates that the World Bank encouraged in the late 1990’s.
Resources
- World Bank arm sees delay in Zambia power project by Shapi Schacinda, Reuters, December 2, 2008
- World Bank continues to push African hydro despite concerns over vulnerability to climate change, Bank Information Center, June 23, 2008
- Zambia's Lumwana mine starts copper production, Reuters, December 8, 2008
- Congo to cut taxes to save sinking mining sector by Joe Bavier, Reuters, December 10, 2008
- Zambia to revise “unfair and unbalanced” mining tax rates set by World Bank, Bank Information Center, February 7, 2008