Zambia does the work. But who makes the money?

The "outrageous" situation is attacked in a hard-hitting report by the Scottish Catholic International Aid Fund (SCIAF), released today, which says the Zambian government was blackmailed into privatising its nationalised copper industry by the IMF and the World Bank, who threatened to withhold debt relief and other aid, eight years ago.

Then the weakened government signed away most of the rights to its own minerals. Instead of the average 5%-10% mineral royalty rate most developing countries receive, Zambia's Mines and Minerals Act specified 3%. Even then, many mining firms - including the largest, Konkola Copper Mining (KCM), which is majority-owned by the British firm Vedanta - managed to negotiate a rate of just 0.6%.

Although the company extracted copper worth more than $1bn last year, and made three-quarters of the country's foreign export earnings, it was obliged to pay only $6m to the government. Indeed, SCIAF believes the real amount paid might be as little as half that. The company refuses to release the figures.

SCIAF argues that the responsibility for change lies with Scottish-based firms such as Standard Life, HBOS and Alliance Trust, which invest in Vedanta, and with the UK government and the UN, which should impose a heavier burden of regulation on multinationals.

The Zambian government's hands are tied by contracts signed by the previous administration, which mean it cannot levy a windfall tax of the kind Gordon Brown imposed on the North Sea oil industry when the price of oil increased dramatically.

The Sciaf report also says KCM has secured opt-outs from environmental legislation and is allowed to emit more than 25 times the internationally recognised safe levels of sulphur dioxide under Zambian law.

It has not been prosecuted despite claims that it was responsible for polluting rivers including the Kafue, which sustains one of the world's greatest wildlife habitats and is a major tributary of the Zambezi. Some villagers told the SCIAF investigators that, after their water source became polluted, making them ill with vomiting and diarrhoea, the firm drilled boreholes for them. But SCIAF quotes them as saying: "The boreholes are crowded, there are long queues which can take three hours or more, and we can't use water from the boreholes to water our crops."

This causes huge problems for the farming community. They are also concerned about their health as the pollutants are believed to have contained elements that can cause long-term heart and lung problems, and liver and kidney damage. But Zambia's laws mean the government has little power to do anything other than warn any suspected firm that a violation has taken place.

While the conditions for direct employees of KCM are adequate, many workers are employed by contractors. Some of them told SCIAF they were made to work seven days a week, were not paid for overtime, and were charged for health care and absence, earning on average a quarter of the basic living wage of $150 a month.

Zambia is now one of the poorest 10 countries on the globe, with a life expectancy of just 37, and the life chances of a baby born there today are worse than for one born in a Victorian slum in Britain. The majority of people struggle to live on less than $1 a day; the basic global poverty line is considered to be about $5 a day. One-fifth of the population is living with HIV.

Just a generation ago, things were looking up for Zambia. It was being compared to Brazil and other expanding economies. It was a middle-income country, one of the most prosperous in Africa, sitting pretty on top of a vast mineral resource - copper.

Then there was a slump and the bottom fell out of the copper market. At this point, paying pensions and wages to the vast army of copper workers employed by the nationalised industry was costing the government money.

Edith Nawakwi, the finance minister at the time, told SCIAF about the pressure the government was put under in 1999 to privatise. "We were told by advisers, who included the IMF and the World Bank, that not in my lifetime would the price of copper change Zambian copper could not make a profit. Conversely, if we privatised we would be able to access debt relief, and this was a huge carrot in front of us - like waving medicine in front of a dying woman. We had no option."

But the advisers were wrong. A few years later, a manufacturing boom in China and a worldwide surge in demand for electrical goods led to the price of copper trebling. It is now almost £8000 a tonne. UK shareholders and pensioners are reaping the rewards while Zambians struggle.

Abi Dymond, SCIAF policy analyst and principal author of the report, says: "It's outrageous that the people of Zambia are living in crippling poverty while mining companies like Vedanta and KCM are making huge profits from the country's greatest natural resource. At a time when the Zambian government desperately needs cash to pay for its five-year National Development Plan to alleviate poverty, it is a disgrace that profits are not being adequately shared with the host country.

"The miners and sub-contracted workers are in a desperate situation, with many not able to meet their basic needs despite huge profits being made by the companies and investors. Even if a company makes an effort with its own employees, they do not ensure that subcontractors meet the same standards. Many thousands live in abject poverty while the company bosses and investors get rich.

"It is vital that Zambia is given a fairer share of the profits from its main natural resource to help combat crippling poverty in the country. SCIAF, Christian Aid and ACTSA Action for Southern Africa are now calling for Vedanta/KCM management and UK investors to use their influence to make sure Zambia gets a fairer deal. This is a great opportunity for the big UK-based investors to put their much-vaunted corporate social responsibility policies into practice, and we look forward to their support.

"Evidence suggests that Zambia is drowning in poverty while a rich mining company is running away with its greatest natural resource. KCM and its UK investors such as Standard Life and HBOS might have fine words to say on corporate social responsibility on their websites, but our report shows that on the ground there's a lot of work to be done."

There is limited scope, Dymond adds, for the Zambian government to change the situation.

President Levy Mwanawasa, who won a second term in September 2006, has been praised by western investors for being pro-business. His efforts to attract foreign investors have boosted economic growth to 5%, and his cooperation with the IMF and the World Bank has resulted in major debt relief being offered, cutting the debt to $502m million from an estimated $7.2bn in June 2005.

"The president and the government have to be very careful," says Dymond. "They want to negotiate with the company. They don't want to change the law on their own.

"But there is a lot of anger and resentment from the people in the copper belt, who see these huge sums being made by the mining companies. They are aware of what has happened to the price of copper. It is a political issue and we think the company would be better advised to deal with it now than to let it fester."

Edith Nawakwi, now an opposition MP, says in the report: "The international community must assist us you cannot live in opulence while others live in poverty. Truly we Zambians deserve more. We are not asking for a revolution, we are simply asking for a fair share."

Martin Wight, of Edinburgh-based ethical investment managers Ethical Futures, said investors who were concerned about these issues should look for ethical funds. "The corporate social responsibility stuff that some big firms put out can be a bit of a smokescreen. Only ethical funds are screened. But ethical investment can play a role - it is called engagement. Mining can be ethical, but what you do is you go and visit the company and mark them on various criteria such as how they treat their workers and their environmental record. If they pass, often their shares will be in higher demand and their share price will go up. Companies that pass the test tend to do better in the long run."

A spokesman for Vedanta said: "Vedanta is a major investor in KCM, which is Zambia's largest corporation and generates a large proportion of the country's income. It has invested in the business and its expansion is creating jobs and wealth."

Vedanta pointed out in a reply to SCIAF that only one-third of KCM employees were contractors. It also said almost no dividends had been paid to shareholders in recent years, with money being reinvested in developing deep- mining techniques, and accused the SCIAF report of being "misleading" by failing to make clear that the Zambian government has a 20% share of the business. It also said that KCM spent $13m a year on corporate social resposibility projects, that it had made "substantial investments" in improving environmental performance and that, since the Kafue leak, had done "everything in its power to help the local communities".

An spokesman for Alliance Trust said: "In evaluating investments, our managers review whether that company's operations could result in any damaging social or environmental impact, this being one aspect that could affect the quality of the investment. This is a continual process of research and review, and we welcome any new information which supports this process."

A spokesman for HBOS said: "We own a fraction of 1% of Vedanta. We will read the SCIAF report and look at its findings."

Standard Life, which owns 5%, said: "We have only just received the report and therefore we are not currently in a position to give a considered response."