Zambia's plans to raise equity stakes in its copper mines could scare away foreign investors already unnerved by the global downturn, and hurt plans to boost the metal's output in Africa's largest copper producer.

The plan was a surprise to copper firms and investors at a time when countries reliant on mining were trying hard to give incentives to attract investment following the collapse of commodity prices hit by the global financial crisis.

Obiageli Ezekwesili, the World Bank vice president for Africa, said the plan would backfire by jeopardising Zambia's wider market reforms, hailed by the West as a model for Africa.

The populist reaction is to say let's take a stake, but do you want to risk capital in a sector where the private sector can take the risks? she told Reuters. This is an industry better left to the private sector to run.

Zambia has been among the African countries hit hardest by the global crisis because of its dependence on copper, which contributes more than 60 percent of export revenues.

The mineral-rich southern African country says it wants to up its stakes in existing and new foreign owned copper mines to 35 percent from between 10 and 20 percent so as to influence decisions, including protection of jobs during the downturn.

The plan has put Zambia in the spotlight, with fears it could be reverting to the failed nationalisation of copper mines in the past, or aping neighbouring Zimbabwe, which has said 51 percent ownership of foreign firms must be locally held.

The move appears to have come as a knee-jerk reaction to the December closure of Luanshya Copper Mines (LCM) units -- the Baluba copper mine and Chambishi Metals Plc -- the country's largest cobalt producer, which led to huge job losses.

The closure unnerved Zambia's government, forcing it to react in the face of demands from unions to save jobs in the Copperbelt region where the government is already unpopular.

However, neither the government nor ZCCM has the budget or access to finance to make good on this plan, Eurasia group's analyst for Middle East and Africa, Philippe de Pontet said.

These comments may reflect political posturing and a bit of empty nationalism rather than a clear policy direction.

London-listed Vedanta Resources Plc, Canada's First Quantum Minerals, Equinox Minerals Ltd and Glencore International AG operate in Zambia.

Officials at some of the companies said privately they were concerned by the plan to raise equity, and that it had caused uncertainty as they were unsure how it would work.

POORLY RUN

Zambia's Mines Minister Maxwell Mwale said copper mines such as Luanshya were poorly run and inefficient and had shut down costing many jobs, and were blaming the global downturn.

This was why the government wanted even more control.

We don't plan any nationalisation of the mines as they will still remain in private hands, Mwale said.

But all we want is to have a say in decision-making, after learning from what has happened in Luanshya.

Zambia may be forced to re-think its latest move after scrapping in January a windfall tax on copper mines meant to take advantage of the commodities boom after mining firms protested and the metal's price slumped.

The country expects economic growth to fall to 5.0 percent in 2009 from a forecast 5.8 percent expansion last year, due to the global slowdown, which has hit its copper output.

Foreign exchange will shrink, but a big concern is the loss of up to 10,000 jobs and loss of earnings from copper exports, which pay for universities, schools, roads, hospitals, bridges in this poor nation of 12 million.

Zambia's currency, the kwacha, has devalued by nearly 40 percent and the country plans to trim its budget and seek more aid from agencies such as the World Bank to weather the storm.

Zambia nationalised its copper sector in the 1970s, but poor management and lack of fresh capital to develop the mines, led to a near-collapse of the sector before it was privatised again.

It has since flourished. Treasury data shows foreign mine owners have pumped in more than $4 billion in expansions in the last seven years, while output has soared to 569,887 tonnes in 2008 from record lows of 200,000 tonnes in the early 2000s.

Analysts said any move to upset the industry's momentum would see investors leave and output decline.

The government can't run the mines and this move could have a significant backlash. Donors may reduce their financing, University of Zambia professor of economics Oliver Saasa said.

The government might end up clouding out investors. (Editing by James Macharia and James Jukwey)

(c) Copyright Thomson Reuters 2009.