INSIGHT-Road builder Sata enthuses Zambians but unnerves foreign investors
* Road projects, labour policies popular with Zambians
* Disputes with business worry foreign investors
* President threatened mine owner over lay-off plan
* Protecting profits no reason for redundancies - minister
* Mega-projects at risk due to rising funding costs
By Ed Stoddard and Chris Mfula
KATOBA, Zambia, Nov 24 (Reuters) - John Moyo is at the end of the road. At least now it's paved.
"I never imagined a paved road coming to my village," said the spry and bespectacled 82-year-old Zambian as he sat in the shade of a tree. About 42 km (26 miles) of freshly tarred road, replacing a gravel one, end exactly at his homestead.
President Michael Sata's drive to upgrade the country's rough roads, which often become impassable in the rainy season, is popular with many Zambians like Moyo. But foreign investors, who must partly fund such ambitious schemes, are less keen on his costly promises and very public dust-ups with business.
Sata swept to power in 2011 on a platform to defend workers' rights, create jobs - and pave roads.
The government plans to continue paving a winding route beyond Moyo's home about 50 km south of Lusaka for another 400 km to the Zimbabwean border, part of the campaign to seal 8,000 km of dirt roads in the landlocked southern African country.
Sata is pursuing his vision with gusto, building on a legacy of reforms in Africa's top copper producer that are helping many of the 14 million Zambians to climb out of poverty. With annual economic growth rates of 7 percent and more, the World Bank now classifies Zambia as a lower-middle-income nation rather than low-income, meaning its gross national income per person has risen above about $1,000.
His government has tapped global capital markets - unthinkable a few years ago - to help fund the 31.4 billion Zambian kwacha ($5.6 billion) road project. Zambia's debut $750 million Eurobond last year was oversubscribed 15 times.
Now Sata, nicknamed "King Cobra" for his sharp tongue, is unnerving investors, threatening his ability to raise the affordable capital required to meet his development promises.
His disputes with South African retailer Shoprite and Konkola Copper Mines - Zambia's biggest private sector employer which is owned by Vedanta Resources - over their plans to fire or lay-off workers, has cooled what was becoming one of Africa's more promising investment climates.
At the same time, Sata is pursuing costly budget policies.
The government has increased civil servants' pay by between 4 and 200 percent to close salary gaps, while sacrificing revenue by raising the threshold where Zambians start paying income tax to 3,000 kwacha a month from 2,200.
Next year's budget deficit is forecast to double to 8.5 percent of gross domestic product. As the risk of lending to Zambia rises, so will its commercial borrowing costs, ultimately making Sata's mega-projects less affordable.
A treasury official said last month that Zambia may issue a second Eurobond to finance the 2014 budget.
However, these funds would be considerably dearer than the first Eurobond which yielded 5.625 percent when it launched in September 2012. It is now yielding 7.37 percent, having risen close to 8 percent in September this year.
Many of the roads are being built by Chinese contractors who arrange soft loans to fund them. While cheaper, few details of this debt are published, making it hard to determine what Zambia owes China, according to AidData, a research initiative tracking development finance.
Sata has also criticised the Chinese and scolded road contractors earlier this month for not hiring more Zambians to work on their projects.
Zambia, which AidData estimates borrowed over $1 billion from China between 2010 and 2012, is looking increasingly at other sources of funding. However, yields on its 12-month debt have also risen steadily from around 9.50 percent in January to 15.25 percent last week, underscoring the fiscal fragility.
Last month the Fitch agency cut Zambia's credit rating to B from B-plus, citing "crumbling government finances". Just when Lusaka might be wooing markets, the public rows with companies have rattled investors.
In October the government threatened to shut Shoprite's Zambian stores for firing 3,000 workers who went on strike over pay. Africa's biggest retailer quickly backtracked.
Earlier this month, Sata tilted at Konkola chief executive Kishore Kumar over KCM's plan to lay off around 1,500 workers as it mechanises some of its mining operations. "If he is threatening to lay off people, let him lay off one and we will take away the licence from him," Sata said.
Such comments are helping to boost Sata's working-class support in mining communities.
"We asked him to intervene and stop what KCM was doing. And for us as a union we were very glad that he stepped in and defended the workers," Joseph Chewe, the General Secretary of the Mineworkers Union of Zambia, told Reuters in an interview.
Mines Minister Chris Yaluma told Reuters the government was angry at management's "unilateral decision" which by-passed the board, where the top civil servant from the mines ministry sits. KCM's owner Vedanta, an Indian energy and mining conglomerate which bought KCM a decade ago, described the incident as a "misunderstanding".
Sata's moves revive memories of heavy state control of the Zambian economy for almost three decades under founding president Kenneth Kaunda, who nationalised the copper mines, leading to a dive in production.
"It harkens back to the policies of the 1970s, which were interventionist and which is what held Zambia back as a low-income country," said Tara O'Connor of Africa Risk Consulting.
Kaunda's successors reprivatised the mines, lifting annual copper output from 257,000 tonnes in 2000 to around 900,000 tonnes this year with a target of 1.5 million tonnes by 2015.
As the economy opened up, Johannesburg-listed firms poured in. The malls dotting Lusaka are now dominated by South African names: Shoprite, retail rival Pik N Pay, fast-food chain Spur and lenders such Standard Bank.
Sata, who renamed Lusaka's main airport after Kaunda, is signalling his government will take an active role in the economy and defend jobs - no matter what it costs investors.
"CAN'T ALWAYS MAKE A PROFIT"
Deputy Labour Minister Rayford Mbulu, whose union background gives him political clout in Sata's Patriotic Front party, told Reuters in an interview that "as government we have a mandate to control the economy".
He went on to say that under Zambian law, an employer can make an employee redundant only if the operation is closing or if "there is a shrinkage in business".
"But none of these reasons were given by KCM. All they were saying is that the copper prices have dropped and costs have gone up," Mbulu said.
Zambian labour law is ambiguous, stating that a business can make an employee redundant "due to the business ceasing or reducing the requirement for the employees to carry out work".
Much is at stake for Vedanta; its Zambian unit is underperforming with margins lagging other divisions.
Asked if maintaining profitability was a legitimate reason to lay off workers, Mbulu replied: "In business, my brother, it's not every day that you make a profit."
A ROAD TO VOTERS' HEARTS
Protecting jobs is a likely vote winner for the minority of Zambians who have a steady wage. Road improvements, however, also reach much of the majority who still work the land in subsistence farming.
Only about 8,000 km of Zambia's 67,000-km road network are paved and the government's plan is to double that by 2017.
Several Zambians interviewed by Reuters in two areas where tarred roads are replacing gravel had only praise for Sata.
A new 20 km paved road from Lusaka's main airport to the town of Chongwe will soon be complete.
"We are very happy they are upgrading this road; we use it to take our vegetables to market in Lusaka. President Sata has done a great job because this will make life easier for us," said 31-year-old Simon Phiri, a small-scale farmer in the area.
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