China digs Pakistan into a
hole By Syed
Fazl-e-Haider
QUETTA, Balochistan - The
Rs18 billion (US$297 million) Saindak copper-gold
project in the Pakistani province of Balochistan
has been run by a Chinese contractor on a 10-year
lease without any independent monitoring for the
past three years.
Higher-than-anticipated production of blister copper at the site in
the Chaghi district may reduce the estimated
19-year life of the mine. If the rate of mining
continues unchecked, the Chinese contractors will
exploit all the resource within the 10-year lease
period, leaving no copper
or gold for Pakistan to mine from
Saindak after the lease
contract comes to an end.
Is the project
really yielding a prudent return to Pakistan in
the absence of any monitoring mechanism? Technical
calculations and financial data need to be
maintained about the project's return in terms of
production and metal sales. Only on the basis of
these data can one decide who is the real
beneficiary of the Saindak project, China or
Pakistan. Yet the Pakistani government has failed
to find an independent monitor.
According
to best estimates before the lease was signed,
Pakistan should have nine more years for mining
copper and gold from the Saindak project after the
Chinese hand it back. But if there is nothing left
to mine, Pakistan will be the ultimate loser.
The Saindak project was based on estimated
ore reserves of 412 million tonnes containing on
average 0.5 gram of gold per tonne and 1.5 grams
of silver per tonne. The mine is reported to have
produced about 50,000 tonnes since October 2003.
According to official estimates, the project has
the capacity to produce 15,800 tonnes of blister
copper annually, containing 1.5 tonnes of gold and
2.8 tonnes of silver. The reported production
results, however, have generally remained on
average more than 2,000 tonnes per month, which
means that more than production of 24,000 tonnes
per year has been taking place.
The
discovery of copper deposits at Saindak was made
in the 1970s in collaboration with a Chinese
engineering firm. The Saindak copper-gold project
was set up by Saindak Metals Ltd (SML), a company
wholly owned by the government of Pakistan, by the
end of 1995 at a cost of Rs13.5 billion.
It was financed through Pakistani
investment and guaranteed borrowings. The project
was put on trial production during the period from
August 1995 to January 1996, and it achieved the
designed production capacity and quality. It
produced 1,541 tonnes of blister copper containing
12 kilograms of gold and 198kg of silver during
trial operations, which sere sold in the
international market at a price of Rs280 million.
The project was then shut down in February 1996
because of a lack of working capital.
The
Bank of America and ABN Amro had agreed to lend
Rs15 billion as working capital against guarantees
of Islamabad. The two banks, however, backed out
of their commitment because of the economic
sanctions that were imposed against Pakistan after
its May 1998 nuclear tests. This once again threw
the project into abeyance. Then the Chinese
contractors who had been involved with the project
since its inception offered to take over the
project's management. The Chinese proposals
injected new life into the long-neglected project.
About Rs1.3 billion was put into the
project in the late 1990s under the military
government of President General Pervez Musharraf
to revive the mine and the operation was leased to
the Chinese company Metallurgical Construction
Corp (MCC) for 10 years in September 2002.
Pakistan and China signed a formal contract worth
$350 million for development of Saindak
copper/gold project. Under the lease agreement,
MCC was to run the project on an annual rent of
$500,000 plus a 50% share of copper sales to the
Pakistani government.
It is primarily a
fault on the part of those drafting the lease
contract with MCC that they neglected to identify
and discuss the issues relating to excessive
mining or a monitoring mechanism to check and
evaluate the production from Saindak. A technical
body for monitoring and evaluation of the
production and export of copper, gold and silver
at the Saindak project should have been
constituted before the copper and gold assets were
handed over to Chinese.
An effort was
reportedly made in 2004 to appoint a technical
firm for this purpose, but only a single
non-responsive bid was received and the Pakistani
government had to cancel the bidding results.
Officials say that the poor response for a
monitoring contract was due to a lack of
base-metal analyzing technology in the country.
The option of engaging some international firm for
the scheme was not considered because of high
costs.
Bids were reportedly invited from
financial institutions to undertake technical and
financial monitoring of the project, which was not
practical because such institutions did not have
the capacity to monitor a highly technical project
such as Saindak for a period of 10 years, and
hence technical firms failed to meet the bid
criteria. At present, two non-executive directors
of the Saindak board are responsible for
monitoring activities. As they are based in
Islamabad, however, it is not practical for them
to monitor the project.
The Chinese,
simultaneously the producers and buyers of Saindak
copper, are pioneers in transferring technology in
metal mining, mainly in copper. They face few
problems since they built the whole plant. They
are committed to train Pakistanis by offering them
on-the-job training facilities. The Chinese
companies prefer to import copper from Chaghi,
which is currently meeting the Chinese demand.
Since August 2003, a subsidiary of MCC has
been operating in the Saindak project, with an
initial investment of $26 million, and it had
produced 18,000 tonnes of blister copper by
September 2004. Such a high rate of production may
end the life of the mine, previously estimated at
19 years, before the 10-year lease of the Chinese
firm expires if excessive mining goes unchecked.
China's demand for copper has increased
greatly because of rapid economic development and
big expansion of infrastructure construction.
According to one estimate, China's appetite in the
past decade grew by more than 9% annually. In
2003, China consumed 2.5 million tonnes of copper,
accounting for 16.5% of the world's total, ranking
second after the United States. It was because of
the strong demand from China that Chile's
copper-export income doubled in October 2004 from
the same month in 2003 to $1.4 billion.
Today China is a big market for Pakistani
copper. The Saindak project produced about $70
million worth of copper during the last financial
year and contributed about $10 million to
Islamabad in export and royalty earnings. It was
earlier estimated that the project would generate
annual revenue of about $65 million. Copper
exports from Saindak began in 2004 when Pakistan
exported copper worth more than $30 million to
China during four months, from July to October.
Pakistan is also bearing the environmental
costs of the projects, as the production of copper
is a long and dangerous process. The smelting of
the copper ore emits arsenic and carbon monoxide,
which pollutes the air and water near the mines.
The copper is heated at high temperatures several
times before the metal is ready for export. The
impact of copper production on the country's
environment is bound to grow at an alarming rate
in the next seven years of the lease contract.
Most threatened is the atmosphere in the immediate
vicinity of the copper mine.
Syed
Fazl-e-Haider
(sfazlehaider05@yahoo.com) is a
Quetta-based development analyst in Pakistan. He
has contributed articles to the Daily Dawn
newspaper and is the author of six books,
including The Economic Development of
Balochistan, published in May 2004.
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