ZAMTEL REPORT.

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REPORT TO H.E THE PRESIDENT OF THE REPUBLIC OF ZAMBIA MR. MICHAEL CHILUFYA SATA OF THE COMMISSION OF INQUIRY INTO THE SALE OF ZAMTEL CHAIRED BY HON. SEBASTION ZULU S.C. MINISTER OF JUSTICE 31 October 2011 Strictly Confidential

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INDEX
1. Minister’s Report
2. Recommendations of the Commission of Inquiry
3. Summary of Technical Committee Key Findings
4. Report of the Technical Committee inquiring into the sale of 75% of GRZ shareholding in Zamtel
5. Appendix I -Sequence and timeline of events
6. Appendix II - List of documents perused by the Technical Committee
7. Appendix III - List of people interviewed by the Technical Committee
8. Appendix IV - List of oral submissions made to the Commission of Inquiry
9. Appendix V - Transcripts of oral submissions made to the Commission of Inquiry
10. Appendix VI - List of written submissions made to the Commission of Inquiry
11. Appendix VII - Written submissions made to the Commission of Inquiry
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Recommendations of the Commission of Inquiry
1. Zamtel
1.1 The immediate termination of all Agreements relating to the sale of Zamtel to LAP GreennN and the immediate return of 100% of Zamtel to the people of Zambia for the following reasons:
i. LAP GreenN failed ALL the 3 mandatory prequalification criteria rendering this transaction null and void ab initio;
ii. The price at which Zamtel was sold clearly shows that the company was grossly undervalued and GRZ paid more than it received;
iii. In effect, GRZ paid LAP GreenN to receive a gift of 75% of Zamtel;
iv. The ZDA negotiating team was not independent as required by Law and did not negotiate in the best interests of the Zambian Nation resulting in Zambia receiving the same amount of cash equivalent to the amount paid to a single consultant for its sale of the whole of Zamtel.
1.2 The immediate termination of LAP GreenN appointed and seconded directors and management for the following reasons:
i. As a natural consequence of 1.1 above;
ii. In order to ensure compliance with the UN sanctions on LAP.
1.3 The immediate reconstitution of the board of Zamtel for the following reasons:
i. In order to ensure compliance with the UN sanctions on LAP;
ii. In order to reflect the recommended new shareholding.
1.4 A thorough and comprehensive audit of Zamtel post privatization.
2. Zesco Optical Fibre
Immediate termination of the IRU between Zamtel and Zesco and return of control and ownership of the optical fibre to Zesco for the following reasons:
i. It was illegal;
ii. It was signed by Zesco under extreme duress;
iii. It was not in the interests of Zesco and was solely designed to benefit LAP GreenN at the expense of the Zambian people.
3. Zambia Development Agency
i. The ZDA senior management must be held fully responsible and culpable for the grossly negligent and cavalier manner in which they conducted and "oversaw" the sale of Zamtel.
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ii. ZDA should immediately account for and render the balance of GRZ proceeds received for the privatization of Zamtel and must immediately transfer the same to GRZ.
iii. ZDA must forthwith focus on monitoring post privatization a provided in the ZDA Act.
4. RP Capital Group
i. That a civil lawsuit be immediately instituted to recover the excess fees paid to RP Capital;
ii. RP Capital, its affiliates and its employees must be immediately barred from conducting business in Zambia;
iii. A civil lawsuit be immediately instituted against RP Capital and Simmons and Simmons for professional misconduct / negligence in qualifying LAP GreenN in spite of LAP GreenN failing ALL the 3 mandatory prequalification criteria.
5. Other
5.1. A review of all the legislative changes made to accommodate the Zamtel transaction at the expense of the Zambian tax player such as:
i. Reduction of mobile license fees;
ii. International gateway fees;
iii. PSTN exclusivity license;
iv. Barring of a fourth mobile operator.
The Zamtel sale was a clear case of economic sabotage which pervaded and compromised key GRZ institutions to the extent that GRZ decisions and policy were being managed by a foreign consultant. The full extent and continuing effect of these actions can only be determined if a full scale and thorough comprehensive forensic audit of the Zamtel privatization process is instituted.
Internal RP Capital documents project the value of Zamtel in 2015 being in excess of US5 Billion, the benefit of which the Zambian people would not have enjoyed. 31 October 2011 Strictly Confidential Page 5 of 114
SUMMARY OF TECHNICAL COMMITTEE KEY FINDINGS
1. ENGAGEMENT OF RP CAPITAL PARTNERS CAYMAN ISLANDS
1.1. The engagement of RP Capital Partners Cayman Islands for the valuation of the assets of Zamtel, by way of a MoU signed and executed by the Ministry of Communications and Transport and the Zambia Development Agency, on the 22nd of December 2008 was totally irregular.
1.2. The single-sourcing selection of RP Capital Partners Cayman Islands was single-handedly driven by the Minister of Communications and Transport against the express advice of her ministry officials and that of both the Solicitor General and the Attorney General.
1.3. We also note that the ZDA Board, at a Board Meeting held on 26th December 2008, expressed great disquiet at the attempt to have the ZDA Board essentially rubber-stamp a MoU that was fundamentally flawed, non-transparent and one that did not follow laid-down procedures. In addition, the Board noted that a due diligence exercise to establish the credentials of, and the persons behind RP Capital Partners had not been undertaken.
1.4. We also note, from the Zamtel Audited Accounts for 31st March 2009, that Zamtel had, in the past, engaged world-renowned international experts in the field of telecommunications open market assets valuation (i.e. Experts engaged by Commonwealth Telecommunications Organisation in 1997). This is an example of the caliber of consultants that would be expected to undertake the valuation of Zamtel’s assets.
1.5. We further note, that it was an essential pre-requisite for Cabinet approval of the partial sale of Zamtel, that Cabinet be availed of an accurate, professionally conducted valuation of the Zamtel assets. A proper valuation of the Zamtel assets did not take place.
2. ENGAGEMENT OF RP CAPITAL AS TRANSACTION ADVISORS
2.1. RP Capital Advisors were engaged by the Zambia Development Agency to act as Transaction Advisors for the Zamtel Sale.
2.2. The basis for ZDA’s decision to single-source RP Capital Advisors as Transaction Advisors was based on ZDA management’s satisfaction with the work that had already been completed by RP Capital affiliates in respect of the "valuation" of the Zamtel assets.
2.3. We note as per 1.5 above, that a proper valuation of the Zamtel assets did not take place under the MoU. Even under the Agreement appointing RP Capital as
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Transaction Advisors, no mention is made of RP Capital Advisors conducting a valuation exercise of the Zamtel fixed assets.
2.4. We also note that no due diligence in respect of the suitability of RP Capital Advisors (capacity and capability, previous experience, etc.) was ever conducted by ZDA when they elected to single-source RP Capital Advisors.
2.5. This Committee hereby places on record that the engagement of RP Capital Partners by ZDA, was extremely hasty, did not follow normal tender procedures and may have been under duress. Each of the above, renders the engagement illegal.
3. VALUATION OF ZAMTEL ASSETS/BUSINESS
3.1. As has been stated in 1. above, a detailed, professional valuation of Zamtel assets never took place. The only "valuation" that this Committee was availed, is the one contained in RP Capital Advisors’ final report. This "valuation" is not a professionally conducted assets valuation, but essentially a desktop paper exercise that make numerous assumptions.
3.2. The value of Zamtel’s fixed assets as contained in the summary report by RP Capital Advisors dated 22nd July 2009 and presented to Cabinet is US$ 38 million.
3.3. We further note from the Audited Zamtel Accounts dated 31st March 2009, that the book value of Zamtel’s fixed assets only (property, plant and equipment) was approximately US$ 81 million (K 412,072,000,000). This is however, the book value and not the market value of Zamtel’s fixed assets which would be expected to be considerably higher than the book value.
3.4. This Committee finds it difficult to understand how RP Capital Advisors could arrive at a value of Zamtel’s fixed assets of US$ 38 Million in the absence of conducting a thorough, detailed and professional valuation of Zamtel’s fixed assets.
4. ZAMTEL SALE
4.1. The Cabinet decision to endorse and authorize the partial sale of Zamtel shares took place at the Cabinet Meeting of the 23rd July 2009. The Cabinet decision was based on a five page Project Zamtel: Cabinet Summary report provided by RP Capital Advisors. This report is a summary of the 316 page final report produced by RP Capital Advisors. Both of these documents are dated the 22nd of July 2009.
4.2. This Committee finds it totally inconceivable that the Cabinet and any of its sub-committees, officials and advisors could have read, digested, analyzed
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and drawn meaningful conclusions from the voluminous report within a period of less than 24 hours.
4.3. We repeat 3.2 above, and state that in making its decision to proceed with the partial privatization of Zamtel, Cabinet did not have a proper value for Zamtel’s fixed assets, as the fixed assets value presented in the RP Capital Advisors summary is only US$ 38 million.
4.4. LAP GreenN failed all three of the mandatory prequalification criteria and ought to have been disqualified in the preliminary stage.
4.5. The negotiating team appointed by ZDA was not independent.
4.6. The negotiating process gave away more than it gained.
5. ZESCO OPTICAL FIBRE NETWORK
5.1. A Joint Technical Committee comprising Zamtel and Zesco staff was set up under the auspices of the Communications Authority in July 2008 on the understanding that the two parties would seek to rationalize and harmonise their optical fibre network roll-out and expansion plans, based on mutually beneficial and agreed commercial terms.
5.2. Contrary to the above, on the 28th October 2009 the Zesco Board were informed by the Board Chairman that the Ministry of Finance, as principal shareholder, was directing Zesco to cede their optical fibre network to Zamtel and to cease all commercial operations on their optical fibre networks.
5.3. Immense pressure was exerted on the Zesco Managing Director to sign an Indefeasible Right of Use Agreement (IRU). Named individuals threatened him with the loss of his job and accused him of dragging his feet and holding up the process.
5.4. Revenue sharing under the IRU is 80% Zamtel and 20% Zesco; provisions of the IRU will apply to all existing and future optical fibre networks to be rolled out by Zesco.
5.5. The Zesco MD whilst on an official trip to Egypt, was forced into signing the single signature page of the IRU Agreement under extreme duress and thereafter faxing it back to Zambia on the 17th of December 2009.
5.6. The Zamtel board retrospectively approved the IRU in a board meeting held on the 24th of December 2009.
The Zesco Board passed a retrospective board resolution at a Board Meeting held on the 28th January 2010 authorizing Zesco to sign the IRU Agreement which had, in fact, already been signed by Zesco on the 17th December 2009 and the Zesco MD’s contract of employment was terminated. 31 October 2011 Strictly Confidential Page 8 of 114
5.7. This Committee believes that in expropriating the Zesco optical fibre network assets and handing them over to the soon to be privatized Zamtel, GRZ acted in bad faith. GRZ was in effect purloining valuable assets from a 100% government owned company and giving them away – free of charge – to a company that they would soon only own 25% of! We believe that this was done with the express intention of making the soon to be privatized Zamtel, a more attractive proposition to potential buyers, and did not take into account that Zesco had made a considerable investment (approx. US$ 20 million) into their optical fibre network and were operating it on a very profitable basis.
6. FINAL PURCHASE PRICE OF ZAMTEL
6.1. The final purchase price for a 75% shareholding in Zamtel by LAP Green Networks (LGN) was US$ 257 million and is broken down as follows:
ZAMTEL STAFF PENSIONS LIABILITY: US$ 20,000,000
CHINESE BANK LOANS: US$ 32,700,000
ZAMTEL WORKERS REDUNDANCIES: US$ 97,700,000
LAPGREEN NETWORKS EQUITY INVESTMENT: US$ 64,000,000
GRZ PROCEEDS: US$ 42,600,000
TOTAL PAID BY LAP GREEN N: US$ 257,000,000
From the information provided by ZDA Chief Accountant, the proceeds due to GRZ have, to date, been disbursed as follows; Expenditure Breakdown of Govt Proceeds of
$42,600,000
RP Capital Advisors
$12,689,759.03
Net Cash GRZ Proceeds to date (MoFNP)
$15,000,000.00
Legal Fees
$702,296.33
Zamtel Staff Incentives
$85,926.59
ZDA/Zamtel Staff Incentives and Overtime
$307,462.73
ZDA Negotiating Team
$65,797.25
Zamtel Staff Training
$192,907.51
Adverts
$87,468.98
Grant Thornton Consultants – Financial
$94,859.14
ZDA (Zamtel sale) Assets
$46,388.08
Bank Charges
$8,304.28
Other Zamtel Related Payments
$19,473.60
Total Disbursed
$29,300,643.52