Business News: Chinese Companies Expand to U.S. Soil and Markets

Business News: Chinese Companies Expand to U.S. Soil and Markets

Chinese Companies Expand to U.S. Soil and Markets

Posted: 28 Dec 2010 08:30 PM PST

RIM's PlayBook Stock Rally Is Fizzling

Posted: 28 Dec 2010 08:01 PM PST

U.S. Companies Deftly Skirt Repatriation Tax

Posted: 29 Dec 2010 04:21 AM PST

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By Jesse Drucker

Dec. 29 (Bloomberg) -- At the White House on Dec. 15, business executives asked President Obama for a tax holiday that would help them tap more than $1 trillion of offshore earnings, much of it sitting in island tax havens.

The money -- including hundreds of billions in profits that U.S. companies attribute to overseas subsidiaries to avoid taxes -- is supposed to be taxed at up to 35 percent when it’s brought home, or “repatriated.” Executives including John T. Chambers of Cisco Systems Inc. say a tax break would return a flood of cash and boost the economy.

What nobody’s saying publicly is that U.S. multinationals are already finding legal ways to avoid that tax. Over the years, they’ve brought cash home, tax-free, employing strategies with nicknames worthy of 1970s conspiracy thrillers -- including “the Killer B” and “the Deadly D.”

Merck & Co Inc., the second-largest drugmaker in the U.S., last year brought more than $9 billion from abroad without paying any U.S. tax to help finance its acquisition of Schering- Plough Corp., securities filings show. Merck is also appealing a federal judge’s 2009 finding that Schering-Plough owed taxes on $690 million it had earlier brought home from overseas tax-free.

The largest drugmaker, Pfizer Inc., imported more than $30 billion from offshore in connection with its acquisition of Wyeth last year, while taking steps to minimize the tax hit on its publicly reported profit.

Disclosures in Switzerland and Delaware by Eli Lilly & Co. show the Indianapolis-based pharmaceutical company carried out many of the steps for a tax-free importation of foreign cash after its roughly $6 billion purchase of ImClone Systems Inc. in 2008.

‘Trivially Small Taxes’

“Sophisticated U.S. companies are routinely repatriating hundreds of billions of dollars in foreign earnings and paying trivially small U.S. taxes on those repatriations,” said Edward D. Kleinbard, a law professor at the University of Southern California in Los Angeles. “They devote enormous resources first to moving income to tax havens, and then to bringing those profits back to the U.S. at the lowest possible tax cost.”

With the exception of the Schering-Plough case, no authority has accused Merck or Pfizer or Lilly of paying less tax than they should have. While corporations have no obligation to pay any more than the legal minimum, “the question is what should that minimum be?” said Kleinbard, a former corporate tax attorney at Cleary Gottlieb Steen & Hamilton LLP and former chief of staff at the congressional Joint Committee on Taxation.

U.S. companies overall use various repatriation strategies to avoid about $25 billion a year in federal income taxes, he said.

‘Best of Worlds’

“The current U.S. international tax system is the best of all worlds for U.S. multinationals,” said David S. Miller, a partner at Cadwalader, Wickersham & Taft LLP in New York. That’s because the companies can defer federal income taxes by shifting profits into low-tax jurisdictions abroad, and then use foreign tax credits to shelter those earnings from U.S. tax when they repatriate them, he said.

They’re aided by a cadre of attorneys, accountants and investment bankers in the tax-planning industry -- such as a panel of KPMG LLP tax advisers who held forth in a chilly hotel ballroom at a Philadelphia conference last month. There, they discussed a series of techniques for multinationals to return cash from overseas while avoiding or deferring the taxes.

KPMG tax advisers Kevin Glenn and Tom Zollo used slides to describe several methods. One diagram resembled a schematic from the Manhattan Project. Another strategy would require certain “bells and whistles” to convince regulators of an actual non- tax business purpose, Glenn explained.

Cat and Mouse

Such maneuvers reflect a decades-long cat-and-mouse game. As regulators and lawmakers tighten the rules, companies seek new, legal methods for getting around them. One of the techniques the KPMG advisers discussed was in response to loophole-closers Congress passed in August to address a projected $1.4 trillion federal budget deficit. The changes will make it harder for companies to manipulate the credits they get for taxes paid overseas.

“Some of the best minds in the country are spent all day, every day, wheedling nickels and dimes out of the tax system,” said H. David Rosenbloom, an attorney at Caplin & Drysdale in Washington, D.C., and director of the international tax program at New York University’s school of law.

Chambers, Cisco’s chief executive officer, brought up a repatriation break during the White House meeting, according to a person familiar with the discussion. It could reprise a 2004 tax holiday that allowed multinationals to return profits to the U.S. at a tax rate of 5.25 percent. U.S. corporations brought home $362 billion, with $312 billion qualifying for the relief, according to the Internal Revenue Service.

Short-Term Fix

Such a move “is a short-term fix to a long-term problem, which is the uncompetitive U.S. tax structure,” said Cisco spokeswoman Jennifer Greeson Dunn. The San Jose, California- based company reported $31.6 billion of undistributed foreign earnings, on which it had paid no U.S. taxes, as of July 31.

President Obama, who campaigned in part against companies’ use of offshore havens to avoid U.S. taxes, asked Treasury Secretary Timothy F. Geithner to follow up on the issue with business leaders, according to a White House official who asked not to be identified because the discussions were private.

The argument that a new tax break for offshore earnings would generate a domestic stimulus “holds no water at all,” said Joel B. Slemrod, an economics professor at the University of Michigan’s school of business and former senior tax economist for President Reagan’s Council of Economic Advisers. U.S. companies are already sitting on a record pile of cash -- $1.9 trillion in liquid assets, according to Federal Reserve data.

‘Cash Hoards’

“The fact that they have these cash hoards suggests that investment is not being constrained by lack of cash,” Slemrod said.

U.S. multinationals boost earnings by shifting income out of the country via transfer pricing, a system that allows them to allocate costs to subsidiaries in high-tax countries and profits to tax havens. Google Inc., for example, cut its taxes by $3.1 billion in the last three years by moving most of the income it attributed overseas ultimately to Bermuda, Bloomberg News reported in October.

The tax benefits from such profit shifting can have a greater impact on share price than boosting sales or cutting other expenses, since the reduced rate goes straight to the bottom line, said John P. Kennedy, a partner at Deloitte Tax LLP, speaking at the conference in Philadelphia Nov. 3.

Boosting Share Prices

For a hypothetical company that has 1,000 shares outstanding, has pretax income of $5,000 and trades at 20 times earnings, cutting just 2 percentage points off the rate could drive the share price up $2, Kennedy said.

“You may think two bucks isn’t much, but when you’re the CFO and she has 100,000 options, that’s pretty interesting,” he said. He cited large pharmaceutical and biotech companies, including Merck, Amgen Inc. and Eli Lilly, which have reported effective income tax rates at least 10 percentage points below the statutory 35 percent rate.

The bottom line: The effective tax rate “is, and will continue to be, the metric that is used to judge your performance,” he told the audience of corporate tax accountants and attorneys.

U.S. drugmakers shift profits overseas far in excess of actual sales there. In 2008, large U.S. pharmaceutical companies reported about four-fifths of their pre-tax income abroad, up from about a third in 1997, according to a March article in the journal Tax Notes by Martin A. Sullivan, a contributing editor and former U.S. Treasury Department tax economist. Their actual foreign sales grew more slowly, to 52 percent from 38 percent.

Stranded Cash

Deloitte’s Kennedy warned that booking large portions of income overseas can mean “you are going to strand so much cash offshore that your business chokes.” That’s because the foreign profits cannot be used for such purposes as building domestic factories without triggering federal tax. Overall, U.S. companies reported more than $1 trillion in such “indefinitely reinvested earnings” offshore at the end of 2009, according to data compiled by Bloomberg.

Last year, Merck, based in Whitehouse Station, New Jersey, tapped its offshore cash, tax-free, to pay for just over half the cash portion of its $51 billion merger with Schering-Plough, according to company filings.

At the deal’s closing, Merck’s foreign subsidiaries lent $9.4 billion to a pair of Schering-Plough Dutch units. Then the Dutch companies used those funds to repay a pre-existing loan from their U.S. parent, securities filings show. The $9.4 billion ended up with Schering-Plough shareholders as part of the cash owed under the merger, according to the company’s disclosure.

No Tax Hit

Bottom line: Merck used its overseas cash to pay the former Schering-Plough shareholders -- with no U.S. tax hit. In considering whether companies owe taxes in such cases, the IRS often asks whether payments from an offshore unit constitute a dividend, which would be taxable.

In Merck’s case, it arguably could be, said Robert Willens, who runs an independent firm that advises investors on tax issues.

“Merck was obligated to pay Schering-Plough shareholders and they tapped into the funds of their overseas subsidiaries to do it,” he said. “You’d have to be concerned about a constructive dividend there.”

Merck objected to any characterization of the payment as a dividend. “We don’t think the characterization is accurate and we remain confident with our tax position,” said Steven Campanini, a company spokesman.

On Appeal

In the Schering-Plough case decided last year, the drugmaker brought home $690 million tax-free as a result of assigning its rights to income from a complex interest-rate swap to a foreign subsidiary in the 1990s. A judge found the company “failed to establish a genuine purpose for the transactions other than tax avoidance” and said Schering-Plough was not entitled to $473 million in back taxes in dispute. Merck is appealing the judgment.

Even when companies pay large tax bills to import their foreign profits, they find ways to minimize the impact on the earnings they show investors. Last year, New York-based Pfizer repatriated more than $30 billion from offshore to help pay for its $64 billion purchase of Wyeth, according to company disclosures and a person familiar with the transaction.

The acquisition created a so-called deferred tax liability on Pfizer’s balance sheet of about $25 billion, according to securities filings, in part to allow for an anticipated tax hit on the earnings that would be repatriated.

Impact Wiped Out

While bringing home more than $30 billion helped generate a $10 billion tax obligation, Pfizer was able to draw down $10 billion of its new deferred liability through its income statement. Doing so wiped out the tax impact of the repatriation on its earnings reported to shareholders.

So while the company paid a real tax bill to the U.S. government stemming from the repatriation, that tax payment had limited impact on its publicly reported profits.

Pfizer made use of a legal accounting quirk that allowed it to set up the deferred liability on its balance sheet, but reverse part of that liability through its income statement, said Edmund Outslay, a professor of tax accounting at Michigan State University.

“Had Pfizer repatriated these earnings independently of the purchase of Wyeth, it would have incurred a huge tax charge” on its income statement, Outslay said. “So through the magic of purchase accounting, you create an opportunity to bring this money home while mitigating its impact on your effective tax rate.”

Effective Tax Rate

Pfizer spokeswoman Joan Campion said the $10 billion tax hit was indeed erased on the income statement because of the accounting treatment, but noted that the company’s effective tax rate rose in 2009 in part because Wyeth’s overseas profits were repatriated to help finance the deal.

Other strategies based on acquisitions have achieved nickname status among corporate tax advisers.

The “Killer B” maneuver is named for section 368(a)(1)(B) of the Internal Revenue Code, which deals with tax-free reorganizations. A U.S. company using the technique would sell its shares to an offshore subsidiary, bringing cash back to the U.S. tax-free. The offshore unit could then use the stock to make an acquisition. In 2006, the IRS issued a notice aimed at shutting down the maneuver.

Using a Variation

International Business Machines Corp. used a variation on the technique in May 2007, with an offshore unit purchasing the shares from a trio of banks, according to a company securities filing. That permutation wasn’t covered by the IRS in 2006. Two days after IBM’s disclosure, the agency announced plans for additional rule changes addressing stock sales to subsidiaries from shareholders as well as directly from parent companies.

The “Deadly D,” also named for a section of tax law, allows a U.S. company to attach the high tax basis in a newly acquired company to one of its existing foreign units. In some cases, doing so enables the U.S. parent to pull cash from the subsidiary up to the amount of the recent purchase price tax- free. The Obama administration has proposed changing the provision that enables the maneuver.

Lilly closed on its purchase of ImClone in November 2008. The next month, the newly acquired company converted to an LLC and Lilly transferred the investment to its main Swiss subsidiary, Eli Lilly SA, according to disclosures in Switzerland and Delaware. The transfer was in exchange for a $5.8 billion note payable to the U.S. parent company due at the end of 2011.

Extracting Earnings

Willens, the independent tax adviser, said the steps indicated a likely D reorganization, or another method “to extract earnings from overseas without tax consequences -- of course.” Lilly had no comment beyond its filings, said David P. Lewis, the company’s vice president for global taxes.

The KPMG panel discussion in Philadelphia, called “Global Cash Tax Management Plans and Repatriation Planning,” dissected other techniques, including one that took six slides to explain. It works like this:

Soon after a U.S. multinational has purchased another U.S. company, the new unit promises to pay the parent a large amount of cash pursuant to a note agreement. Since both parties are U.S. companies, there is no tax bill for the parent under current U.S. law.

Then the new acquisition converts to a foreign company. So when the payment pursuant to the note is made, it comes from overseas. That means the foreign cash is treated as a nontaxable payment under the note, instead of a taxable dividend.

Going Offshore

The newly converted foreign subsidiary could access the multinational’s existing offshore cash by borrowing from a foreign sister unit, said Glenn, the KPMG tax partner. He and Zollo were joined by colleague Frank Mattei, as well as Don Whitt, a Pfizer tax official.

“This basic transaction is something that at least a couple of taxpayers have done, and I know a number of others have evaluated,” Glenn said. The strategy’s name follows the alphabetic tradition of Bs and Ds. It’s called “the Outbound F.”

--Editors: John Voskuhl, Gary Putka.

To contact the reporter on this story: Jesse Drucker in New York at jdrucker4@bloomberg.net.

To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net.

After a Strong Decade, a Weak 2010 for Perkins

Posted: 28 Dec 2010 07:30 PM PST

Population Changes Accelerate Global Economic Shift Toward Asia

Posted: 29 Dec 2010 04:43 AM PST

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By Timothy R. Homan and Catherine Dodge

Dec. 29 (Bloomberg) -- A global economic power shift is being accelerated by population growth in Asia’s emerging markets, while the U.S. will be buoyed by a relatively youthful populace, according to analyses of international figures.

Germany, Europe’s biggest economy, is poised to see its population contract at a 0.2 percent rate in 2015 after expanding at a 0.3 percent in 1995, data from the U.S. Census Bureau yesterday showed. China, the world’s most populous country, is projected to grow at a 0.4 percent rate and India will expand at a 1.2 percent rate in 2015.

Changes in population help determine a country’s economic prospects. Slowing growth rates, and even contracting populations, in advanced economies had been offset by migrating workers in the past decade. That trend has fallen off in recent years as a result of the global recession.

“There will be a difficult adjustment period ahead as advanced economies, particularly the smaller ones, have to cede their dominant positions on the world economic stage to the dynamic emerging markets,” said Eswar Prasad, a senior fellow at the Brookings Institution and a professor at Cornell University.

“Emerging markets will have to grow into their role as major economic powers and shoulder their responsibilities to contribute to the collective global good,” he said.

U.S. Count

The latest count of the U.S. population shows the nation’s population grew 9.7 percent to 308,745,538 in the 2010 Census, the slowest pace of growth since 1940. The government estimated the growth rate in 2015 would be 1 percent.

The Census Bureau estimates that 194 of 227 countries are seeing growth accelerate, yesterday’s figures showed. Germany, the world’s fourth-largest economy, and Japan, ranked second by gross domestic product, are the only Group of Seven nations with contracting populations.

“One of the concerns when you have slow growth is the aging of the population,” said Peter Johnson, special assistant for international demographic and economic studies at the U.S. Census Bureau. “That to some extent can be mitigated by immigration, particularly by able-bodied people who can work and contribute to the support of the elderly.”

The U.S. has the lowest median age -- 36.6 years -- of the Group of Seven nations, according to United Nations’ estimates for 2010. Youthfulness is one variable for future growth because younger people tend to have more children.

Ageing China

The population in China, the world’s third-largest economy, will become older than that of the U.S. by 2025, the U.N. estimates show. China’s median age now is 34.2 years, and will rise to 38.9 in 2025 compared with 38.7 for the U.S., the U.N. data shows.

“The aging population will reduce the rate of labor force growth, knocking a couple of percentage points off China’s long- term growth potential,” Prasad said. “The question is whether China can drive up productivity fast enough to compensate for this drag on growth.”

Slower population growth can be a drag on economic expansion. Higher fertility rates mean more potential workers and consumers -- who can both stoke economic growth with tax revenue and spending.

Chinese industrial companies’ profits rose 49.4 percent in the 11 months through November from a year earlier, putting pressure on the central bank to add to this year’s two interest- rate increases.

Net income climbed to 3.88 trillion yuan ($585 billion), the statistics bureau said in a Dec. 27 statement on its website. That compared with a 7.8 percent gain in the same period in 2009 and an increase of 55 percent in January through August.

China, India

“In the decade to come India and China are going to be the center of international trade,” said Laishram Ladu Singh, professor and head of the Department of Mathematical Demography & Statistics at International at the International Institute for Population Sciences in Mumbai. “Unless there is a big U-turn in the outsourcing policies of these developed countries, the world economy is going to be concentrated in these two countries.”

While there is evidence of a so-called brain drain, in which educated residents seek employment in another country, Singh said that about 2 percent of India’s annual $1.3 trillion GDP comes by way of remittances from workers abroad.

China has the smallest share of net migrants -- the difference between the number of migrants entering and those leaving a country -- and the U.S. has the biggest, according to yesterday’s figures.

Some demographers say China and India are decades away from becoming advanced economies.

“Both countries are still very, very poor,” said Jane De Lung, president of the Princeton, New Jersey-based Population Resource Center. “China is growing by leaps and bounds, but the majority of the Chinese still live in very poor and poverty- stricken areas. You don’t have widespread economic growth outside the cities in either country.”

--Editors: Christine Spolar, Carlos Torres

Catherine Dodge in Washington at Cdodge1@bloomoberg.net

To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Most European Stocks Rise; Skanska Rallies, Smith & Nephew Falls

Posted: 29 Dec 2010 04:41 AM PST

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By Adam Haigh

Dec. 29 (Bloomberg) -- Most European stocks climbed, with the benchmark Stoxx Europe 600 Index trading close to the highest level since September 2008. U.S. index futures and Asian shares also advanced.

Skanska AB, the Nordic region’s biggest builder, rallied 3 percent after selling a stake in a Chilean venture. Smith & Nephew Plc slid 1.8 percent as Europe’s largest maker of shoulder and knee implants got a warning letter from the U.S. Food and Drug Administration.

The Stoxx 600 climbed 0.2 percent to 280.28 as of 8:21 a.m. in London, as more than two companies rose for every one that fell. Futures contracts on the Standard & Poor’s 500 Index expiring in March rose 0.2 percent, while the MSCI Asia Pacific Index jumped 0.7 percent to a 2 1/2-year high.

The Stoxx 600, which last week capped its longest stretch of weekly gains since April, has surged 10 percent this year as better-than-estimated U.S. data bolstered confidence in the economic recovery. The rally last week wiped out losses for the benchmark gauge since the bankruptcy of Lehman Brothers Holdings Inc. in September 2008.

Stocks advanced yesterday as a surge in U.S. holiday spending overshadowed reports showing that consumer confidence unexpectedly fell and home values dropped. Data tomorrow from the Institute for Supply Management-Chicago Inc. is forecast to show that businesses in the U.S. expanded in December for a 15th consecutive month. Additional stimulus measures by the Federal Reserve, which is preparing to buy notes today, have fueled speculation the recovery will strengthen into next year.

Volumes Tumbled

Volumes in stocks traded have tumbled this week amid the Christmas and New Year holidays. Yesterday about 432 million shares of companies in the Euro Stoxx 50 Index changed hands, compared with the daily average volume for the year of 1.38 billion, according to data compiled by Bloomberg.

Skanska gained 3 percent to 134.9 kronor after selling its 50 percent share in PPP highway Autopista Central to Alberta Investment Management Corporation of Canada. Skanska will book a gain after tax of about 5 billion kronor ($731 million).

Smith & Nephew slid 1.8 percent to 674 pence after the company got a warning letter from the FDA saying it failed to properly test medical devices.

Desire Petroleum Plc slumped 9.5 percent to 54.5 pence. The U.K. energy explorer said it found no hydrocarbons in its Jacinta prospect and will now drill deeper to evaluate the Dawn prospect.

--Editors: David Merritt, Christiane Lenzner

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net.

Mizuho Expects Capital to Exceed Basel Requirements

Posted: 29 Dec 2010 04:40 AM PST

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By Shigeru Sato and Takako Taniguchi

(Closes shares in fifth paragraph.)

Dec. 28 (Bloomberg) -- Mizuho Financial Group Inc., Japan’s third-biggest bank by market value, expects to exceed global capital requirements without additional stock sales, the lender’s president said.

“We won’t need a share sale as an emergency measure to boost our capital,” CEO Takashi Tsukamoto said in an interview this month. The Tokyo-based bank plans to meet the capital rules by “steadily” building profit, managing risk assets and reducing costs to buffer the effects of possible economic slowdowns or increases in bad loans, he said.

With a lower capital ratio than those of its two bigger local rivals, Mizuho plans to cut operating costs by 50 billion yen ($600 million) in three years. Slowing loan demand at home is prompting Japan’s largest banks to seek growth in Asia led by China and India, where infrastructure projects need financing.

Mizuho “has a lot of things to do internally such as a reduction of personnel expenses,” said Yoshinobu Yamada, an analyst at Deutsche Bank AG in Tokyo. “They should then go ahead with their growth plans by boosting businesses in Tokyo and Asia.”

Mizuho, the most actively traded stock in the Nikkei 225 index today, rose 1.3 percent to close at 155 yen. Rivals Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. each rose 0.5 percent

Asia Focus

Tsukamoto, 60, said he is seeking to expand in Asia to help combat a decline in domestic syndicated loans. The bank plans to relocate more than 200 staff to offices outside Japan, including China and India, to bolster earnings from abroad, he said in the Dec. 2 interview in Tokyo.

Syndicated loan demand in Japan dropped 8 percent to 9.4 trillion yen in the six months ended Sept. 30, said Tsukamoto, who became CEO in April 2009. Mizuho captured the biggest slice of the market, increasing its share by 1 trillion yen to 43 percent, he added. Overall bank lending in Japan fell for a 12th month in November, central bank figures show.

Mizuho has already bolstered its capital by raising more than 1 trillion yen over the past two years through share sales.

The bank plans to hold common equity between 8 percent and 9 percent of its risk-weighted assets by March 2013, Tsukamoto said, compared with a 5 percent ratio on Sept. 30 estimated by UBS AG. The Basel Committee on Banking Supervision agreed in November to boost the minimum capital requirements in stages to 3.5 percent by January 2013 and 7 percent by January 2019.

Capital Ratio

Bigger rival Mitsubishi UFJ’s core Tier 1 capital ratio stood at 7.2 percent on Sept. 30 and Sumitomo Mitsui’s was 6.5 percent, according to UBS.

Mitsubishi UFJ and Sumitomo Mitsui also sold shares over the past two years, raising a total of about 3 trillion yen to bolster capital ahead of the stricter global requirements.

Mizuho will be able to withstand any capital surcharge that may be imposed should the company be deemed too big to fail by banking supervisors, Tsukamoto said, without elaborating.

International regulators have yet to determine which banks should be categorized as global systemically important financial institutions and whether they should hold more capital than the minimum requirements under the so-called Basel III regime.

Earnings grew at Japan’s three megabanks in the six months to Sept. 30, though the improvements were mainly the result of bond trading and a reduction in bad-loan costs that made up for lower net interest income. Mizuho last month raised its profit forecast 16 percent to 500 billion yen for the year ending March.

--Editors: James Gunsalus, Russell Ward

To contact the reporters on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net; Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net.

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net.

China May Need More Affordable Homes Than Targeted, ISI Says

Posted: 29 Dec 2010 04:40 AM PST

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By Bloomberg News

Dec. 29 (Bloomberg) -- China may need to build more affordable homes next year than the 10 million units planned as the target may not be “sufficient” to meet the country’s demand, according to International Strategy & Investment Group.

The government plans to almost double the 2011 supply of affordable housing from 5.8 million units this year as it introduces more measures to curb property speculation, Premier Wen Jiabao said in a radio broadcast on Dec. 26.

“Over the last decade, a backlog of about 20 million houses needs to be satisfied,” said Donald Straszheim, Los Angeles-based director of China research at ISI, who was ranked first in the Macro and Economics categories in Institutional Investor magazine’s survey last year.

Increasing the supply of social housing is among measures China took this year to curb home prices. Property values rose for an 18th month in November after the government suspended mortgages for third-home purchases and a pledge to speed up trials of property taxes. In October, the central bank increased interest rates for the first time in three years and raised borrowing costs again on Dec. 25.

China also emphasized building social housing in its annual central economic meeting earlier this month that set plans for next year, and ordered local governments to set their own goals for such homes with a focus for building public rental housing.

Significant Inputs

The country has completed 3.7 million of the 5.8 million low-cost homes targeted for 2010, Wen said. The government will probably complete 75 percent of its goal next year because “the demand for commodities, workers, the ability to plan and execute, with space, coordination of subcontractors and the inputs will be significant,” Straszheim said.

The increase in China’s social housing will drive the nation’s economic growth by as much as 0.2 percentage point each year, according to Straszheim. “This is important, but not sizable enough to change the overall course of the economy,” he said in an e-mailed response to questions late yesterday.

Only 6 percent of urban Chinese families live in social housing, which includes low-rent homes and apartments with controlled prices, according to a report by China International Capital Corp. in June. The government provides land that costs less than market values, and developers are required to sell homes at regulated prices.

China’s social housing is a key investment area in the government’s five-year economic plan, and that bodes well for the cement and machinery industries, according to Goldman Sachs Group Inc. in November.

$71 Billion Investment

China invested 470 billion yuan ($71 billion) in the construction of social housing this year, accounting for 60 percent of the year budget, the Ministry of Housing and Urban- Rural Development said Sept. 20 in a statement. China also allocated a 69.2 billion yuan subsidy for the construction of such homes this year, the ministry said.

The social housing plan may add 1.5 percentage points to China’s economic growth in both 2010 and 2011, Bank of America Corp.’s Merrill Lynch unit said in a Dec. 15 report. The brokerage estimated that the 5.8 million units, which include 3 million new homes and 2.8 million refurbished apartments, will cost 700 billion yuan this year. The 10 million planned next year will add a further 1.3 trillion yuan, it said.

Shanghai is planning 15 million square meters of affordable homes in 2011, a 25 percent increase from this year, the city’s Housing Support and Building Administration Bureau said on Dec. 24. The port city of Tianjin in northeastern China expects 190,000 units of such homes next year, the state news agency Xinhua reported on Dec. 27.

China’s property boom continues “unabated” and has even picked up since the government enacted policies to cool speculation, Jim Chanos, the hedge-fund manager who predicted the market may crash as early as 2010, said in a Bloomberg Television interview earlier this month. A lot of policies in China are designed to be “skirted,” he said, reiterating his view that China is on a “treadmill to hell.”

--Bonnie Cao. Editors: Linus Chua, Malcolm Scott.

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

Alfred Kahn, Father of 1970s Airline Deregulation, Dies at 93

Posted: 29 Dec 2010 04:37 AM PST

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By Anne Swardson

Dec. 28 (Bloomberg) -- Alfred E. Kahn, the economist- turned-regulator whose moves to end U.S. government controls on airlines in the late 1970s set the stage for today’s cheap fares and for much of the industry’s financial troubles, died yesterday. He was 93.

Cornell University in Ithaca, New York, where he spent most of his career, said on its Web site that he died from cancer.

As chairman of the Civil Aeronautics Board under President Jimmy Carter, Kahn was probably the first Washington regulator to put himself out of a job. He argued that airlines could serve consumers and business best by competing with each other, a novel notion at a time when prices and routes were government- controlled.

It was under pressure from Kahn and Carter that Congress passed the Airline Deregulation Act of 1978. Later, as Carter’s anti-inflation adviser, Kahn also earned fame for saying “banana” rather than “depression” to avoid uttering an unpopular word.

He was often asked in his later years whether his push for deregulation had made the industry worse off than if government oversight had remained.

“Consumers have benefited to the effect of $20 billion a year,” Kahn was quoted in the Denver Post as saying at a February 2005 conference. “Where competition is feasible, the government should get the hell out of the way.”

Stocking Feet

Kahn was known not just for what he did but for the humor and informality with which he did it. As CAB chairman, he granted media interviews in his stocking feet, hanging a leg over the arm of the old rocking chair in his office. He had a bad back, and once spoke to a conference of 60 utility lawyers while lying flat on a table.

He was chairman of the economics department and dean of the College of Arts and Sciences at Cornell before entering public service. He also finished his career there, as the Robert Julius Thorne Professor of Economics Emeritus and as a consultant to National Economics Research Associates.

At Cornell, he was an enthusiastic performer in Gilbert & Sullivan operettas. His roles -- he sang baritone -- ranged from Sergeant Meryll in “Yeomen of the Guard” in 1964 to the poet Bunthorne in the 2000 production of “Patience.”

Alfred Edward Kahn was born in Paterson, New Jersey, on Oct. 17 1917, to parents Jacob and Bertha Kahn. His father, a Russian Jewish immigrant, worked in a silk mill, according to “Prophets of Regulation,” by Thomas K. McCraw.

NYU, Yale

Kahn graduated from high school at 15 and New York University at 18, summa cum laude and first in his class. He earned his doctorate in economics from Yale University in 1942 after graduate study at NYU and the University of Missouri.

Before World War II, he also worked for policy research organizations and government agencies in Washington, including the Brookings Institution and the antitrust division of the U.S. Justice Department. He served in the Army during the war and began teaching at Cornell in 1947.

His thinking on what is called marginal-cost pricing -- setting a product’s price to account for the cost of producing one more unit -- led him to focus on ways to inject competition into industries previously viewed as monopolistic, such as power utilities. Rather than merely controlling prices and service, he argued, regulators could set the stage for lower prices by applying some of the principles of classical economics.

His two volumes of “Economics of Regulation” appeared in 1970 and 1971; McCraw called the first volume “the most influential work written on the subject.”

Utility Regulator

In 1974, Kahn was named chairman of the New York Public Service Commission, which regulated more than 40 industries, including buses, telephones, shipping docks and the electric-and gas-utility industry. Against the wishes of the affected companies, he pioneered such notions as peak- and off-peak pricing for electricity and disclosure of the cost of telephone services rather than bundling them together in rate applications.

Carter named Kahn to head the CAB as one of a host of new appointees empowered to overturn regulatory practices. At the time, the five-member board governed where airlines could fly and how much they could charge for all the routes in the U.S. It was ostensibly in the name of public service, but the lack of flexibility meant planes flew barely half-full and airlines were mostly required to charge the same price for the same route. No new airline had started up in the U.S. since 1938.

Kennedy Hearings

The airlines liked this state of affairs, as did their labor unions. But even before Kahn arrived at the CAB, calls for deregulation had begun. The late Democratic Senator Edward Kennedy of Massachusetts held congressional hearings in 1975 that showed airlines that avoided federal regulation by operating in state only, such as Southwest Airlines Co. in Texas, had full planes and fares half those of national airlines.

Kahn was no industry expert. Shortly after his appointment, he told executives at now-defunct Eastern Airlines Inc.: “I really don’t know one plane from the other. To me, they’re all marginal costs with wings.”

That didn’t stop him from going to work swiftly, helped by cost pressure from the in-state airlines that induced the national carriers to lower prices sporadically.

Under Kahn, the CAB began approving discount fares for interstate and trans-Atlantic travel. From Texas International Airlines’ “Peanuts” fare to the “Super Saver” of AMR Corp.’s American Airlines, passengers began flying cheaper, and planes began filling up. Load factors rose from 55 percent to 61 percent in 12 months, according to McCraw.

New Airlines

Kahn also loosened rules to let airlines set their own fares, rather than applying for each one to the CAB, and to choose their routes with more freedom from government oversight. Such new airlines as Midway Airlines Corp., flying from Midway Airport in Chicago, started up.

The fuller planes caused some consternation among passengers accustomed to a high level of service. One friend wrote Kahn to complain that he had had to sit next to a “hippy” on a flight to Denver.

Kahn’s response: “Since I have not heard from the hippy, I presume the distaste was not reciprocated.”

He also ended the CAB’s traditional goal of ensuring that no airline failed financially. The board’s official decision granting multiple new rights for Oakland (California) Airport said: “We cannot agree to define healthy competition as that state where the fortunes of the competitors fluctuate but no competitor ever goes to the wall.”

People Magazine

Kahn, understanding that the changes he had pushed through the CAB were subject to judicial review and the appointment of future board members, threw his weight behind congressional legislation to cement the new environment. He lobbied lawmakers concerned that service to their districts would be curtailed, and cultivated journalists to get his message across. He was one of the few federal regulators ever profiled in People magazine.

With the support of the Carter administration -- and, by this time, most of the airline industry -- the deregulation bill passed in October 1978. It gave the airlines more freedom to set fares and routes, and set a timetable for the phase-out of the CAB itself in 1985.

The day the act was signed, on Oct. 24, Kahn announced that he had a new job. He would become Carter’s anti-inflation czar, at a time when consumer prices were rising at an annual rate of 8.9 percent.

He was less successful there. With monetary policy in the hands of the Federal Reserve and economic policy run by Treasury Secretary Michael Blumenthal, Kahn’s only role was to explain and exhort.

Banana, Kumquat

His tendency toward frankness didn’t endear him to the administration. He said that certain policies would bring on a “depression” and, when rebuked by the White House for using such a negative word, instead began warning that the economy faced the threat of a “banana.” He later changed that to “kumquat” after banana companies objected.

Kahn returned to Cornell, to teach and consult, in 1980. He continued to make speeches and appearances, and to opine on such regulatory issues as telecommunications. He survived a serious auto accident in 2003 and endowed the New York hospital that saved him with funds to set up a camera traffic-surveillance system so emergency-room doctors could view the accidents that injured their patients.

In a luncheon tribute to him on June 24, 2003, former U.S. Assistant Attorney General John Shenefield said:

“He taught us a lesson that competition, even imperfect competition, is better than imperfect regulation; that facts make a difference, if only we have the humane procedures to uncover them and the brains to understand them; and that intellectual rigor, decked out in wit and flair, even in Washington, can be a winning combination.”

Kahn is survived by his wife, Mary Simmons Kahn, and three children, as well as a nephew to whom the Kahns were legal guardians.

--Editors: James Greiff, David Henry

To contact the reporter on this story: Anne Swardson in Paris at aswardson@bloomberg.net.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net.

M&A Bankers Forecast India Deal Volumes to Surpass Record 2010

Posted: 29 Dec 2010 04:37 AM PST

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By George Smith Alexander

(Updates with Riversdale Mining in ninth paragraph.)

Dec. 29 (Bloomberg) -- Indian mergers and acquisitions in 2011 may surpass this year’s record $71 billion of deals, led by oil and gas, metals and mining companies, according to M&A bankers including Topsy Mathew of Standard Chartered Plc.

Billionaire Sunil Mittal’s $10.7 billion acquisition of mobile-phone operators in Africa led an almost four-fold increase in takeovers this year as deals surpassed 2007’s $69 billion, according to data compiled by Bloomberg.

“Large Indian corporates are going through a growth phase: they think there is a lot of opportunity, they think they have access to capital,” 35-year-old Mathew, managing director for M&A for India, said in an interview Dec. 27. The London-based bank climbed 13 places to No. 2 among Indian takeover advisers this year, its highest ranking, Bloomberg data show. “They are capitalizing on the positive sentiment to undertake long-term strategic transactions,” he said.

Companies in Asia-Pacific including India and China are expected to be the most acquisitive buyers in 2011 as attractive valuations and domestic competition drive deals globally, according to Bloomberg’s M&A Global Outlook survey. Overseas companies may target Indian pharmaceutical and consumer firms, and local enterprises will seek natural resources, said Bank of America Corp., ranked No. 3.

‘Highly Active’

“Outbound deals would continue to be highly active given that international companies’ valuations are still relatively depressed, and Indian companies have access to debt and equity capital,” Saurabh Agrawal, the 41-year-old head of India investment banking at Charlotte, North Carolina-based Bank of America, wrote in an e-mailed response to questions on Dec. 14. “Inbound and local deals will also take place.”

Cross-border deals rose to a record $59.2 billion in India this year, according to data compiled by Bloomberg, after Mittal’s New Delhi-Bharti Airtel Ltd. in March agreed to buy the African assets of Zain for $10.7 billion. Outbound M&A accounted for 74 percent of that volume.

The acquisition spree in India, China and Brazil contrasts with a slowdown in global deals. Mergers worldwide are down 46 percent from 2007’s record, according to Bloomberg data. In the U.S., the world’s largest market, volumes are 51 percent lower, and levels in Europe are down by 59 percent.

Pending Deals

Pending deals in India including the sale of a controlling stake in Mumbai-based software maker Patni Computer Systems Ltd. and Honda Motor Co.’s holding in New Delhi-based Hero Honda Motors Ltd. Buyout firms including Carlyle Group are bidding to acquire those shares, people familiar with the matter have said.

A group of state-run companies hired Citigroup Inc. last week to prepare a bid for Sydney-based Riversdale Mining Ltd., countering a A$3.9 billion ($3.9 billion) offer from London- based Rio Tinto Group.

“Resources will be a big focus, with Indian companies looking at consolidating their position in oil and gas, metals and mining,” said Standard Chartered’s Mathew. “There will be a particular focus on Indian public sector companies looking at oil assets internationally as well as Indian companies looking to acquire iron ore and coal assets for their steel and power operations.”

Natural resources and telecommunications will continue to drive M&A, said Frank Hancock, managing director of corporate finance for Barclays Capital in Mumbai. Telecom takeovers accounted for 26 percent of deals in India this year, while energy and mining companies accounted for another 30 percent.

Takeover Rules

A proposed overhaul of Indian M&A rules may also stoke interest in domestic targets, Hancock, 50, said in an e-mail Dec. 14. London-based Barclays is ranked No. 4 on takeovers in India, its highest ever position.

“While cross-border will still make up 70 percent of the total pie, the balance between inbound and outbound will increasingly become more even,” said Hancock. The new rules “are going to make it easier for a listed company to be taken over and thereafter delisted.”

A panel formed by India’s capital markets regulator in July recommended increasing the threshold shareholding level that would trigger mandatory open offers to 25 percent from 15 percent. Shareholders who already own more than 25 percent would also be allowed to offer to buy an additional 10 percent, half the existing requirement.

Indian Targets

Easing limits on foreign direct investment would also bolster overseas companies’ appetite for Indian takeover targets, Sameer Nath, managing director and head of M&A at Citigroup’s local unit, said in an e-mailed response to questions Dec. 20. New York-based Citigroup is No. 6 among takeover advisers in India this year.

“Liberalizing the FDI framework in a sensible way could be a positive for all parties,” Nath said. Overseas companies may look to India for its telecom, health-care and consumer industries, while local companies will look overseas for oil and gas, metals, mining and technology assets, he said.

Financing remains a major prerequisite for large takeovers in the nation, bankers including Nath said. Outbound deals are particularly dependent on funding, Agrawal wrote.

A decline in borrowing costs has allowed Indian companies to replace debt with cheaper financing, putting them in position now to be more aggressive on acquisitions, said Ganeshan Murugaiyan, managing director and head of investment banking at UBS AG’s local unit. The Swiss bank was ranked No. 7 this year in advising on takeovers in India.

“The benign debt market environment, especially from the second half of 2010, has helped several corporates to refinance the debt or raise long-term funds at attractive costs,” Murugaiyan, 37, wrote on Dec. 14. “With this back-drop, we expect Indian corporates to be more acquisitive next year.”

--Editors: Stephen Foxwell, Chitra Somayaji

To contact the reporter on this story: George Smith Alexander in Mumbai galexander11@bloomberg.net.

To contact the editor responsible for this story: Jeffrey St.Onge jstonge@bloomberg.net

Shooting Gold Diggers at African Mine Seen Amid Record Prices

Posted: 29 Dec 2010 04:34 AM PST

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By Cam Simpson

Dec. 23 (Bloomberg) -- Barrick Gold Corp.’s North Mara mine near the Tanzanian border with Kenya disgorges millions of pounds of waste rock each week, piled high around communities where almost half the people live on less than 33 cents a day.

Children in school uniforms scurry across the rubble to reach their classes. Women with water pails atop their heads skirt past the heaps. The piles grow as the longest bull market for gold in at least 90 years pushes Barrick, the world’s largest miner of the precious metal, to increase production.

Villagers, too, are hunting the ore on the North Mara land that their ancestors worked for decades, sometimes paying with their lives.

Security guards and federal police allegedly have shot and killed people scavenging the gold-laced rocks to sell for small amounts of cash, according to interviews with 28 people, including victims’ relatives, witnesses, local officials and human-rights workers.

“They are not arresting them or taking them to court,” said Machage Bartholomew Machage, a member of the Tarime District Council, the highest local government body. “They are just shooting them.”

At least seven people have been killed in clashes with security forces at the mine in the past two years, according to the 28 people interviewed. In at least four cases, police acknowledged the shootings in contemporaneous press accounts.

Killed and Wounded

The dead include Mwita Werema, a father of four who was killed one day after gold set another record price in October 2009; Chacha Nyamakono, who was one year from becoming the first in his family to complete a basic education; and Daudi Nyagabure, shot in February, who was eager to build a future for his pregnant wife.

Fifteen people were seriously wounded in the same period, according to the Legal and Human Rights Center, a human-rights group in the Tanzanian city of Dar es Salaam, and Machage, who was the district council vice chairman until August.

Toronto-based Barrick and African Barrick Gold Plc, which is 74 percent-owned by the Canadian miner, pay the Tanzanian government for federal police protection at the mine and employ private armed guards, according to company documents.

The violence at North Mara is a brutal dividend of gold prices that have risen almost threefold in the past five years to a record $1,431.25 on Dec. 7.

In written responses to questions about the situation, African Barrick said it frequently faces groups of intruders, often armed, who illegally enter the North Mara mine with the intent of stealing valuable ore.

Mine Trespassers

It also said some thefts, vandalism and other incidents are the result of organized crime, in part stoked by transients in the border region with Kenya.

People killed or injured after crossing into the mine area shouldn’t be considered small-scale miners because they were all trespassing and therefore acting illegally, said Andrew Wray, head of investor relations for African Barrick, in a Dec. 21 written response to questions.

“ABG categorically refutes any claim that any persons injured or killed were artisanal or small scale miners,” he wrote.

He declined to comment on specific cases, citing active or potential police investigations, except for one. He said allegations that mine security inflicted lethal injuries in that instance are “fundamentally untrue.” They were the result of a fight between intruders over stolen ore, he wrote.

Security Improves

Security incidents at the mine have “significantly declined” during the past two years despite record gold prices, Wray said. The company declined to comment on the number of people killed or injured by security forces in the past two years.

Barrick didn’t respond to written questions about North Mara, instead directing them to African Barrick. The Canadian company raised 581 million pounds, the equivalent of $872 million at the time, from the March 19 initial public offering in London of African Barrick.

Aloyce Tesha, a spokesman for Tanzania’s Ministry of Energy and Minerals, which oversees mining, declined to comment when presented with a list of the alleged killings at the mine. In an e-mail, he said the issues involved criminal investigations and referred questions to the police. Calls to the Inspector General of Police and the office of Tanzanian President Jakaya Kikwete were not returned.

“The villagers are human beings and so they would like to get the minerals, and the policemen do not want them to get to the minerals,” Constantine Massawe, the commander of federal police forces at the mine and throughout the region, said in Swahili in a Nov. 11 telephone interview. “It’s not easy. If you tell them to leave, it’s not easy to get them to leave.” He declined to comment further.

Tensions Erupt

During the reporting for this story, Tanzanian police arrested a photographer working for Bloomberg News on suspicion of trespassing at the mine site. He was jailed for a night and had his passport held for six days before he was freed without charges.

Security at the mine, where there are four open pit deposits, escalated after a riot in December 2008, African Barrick has said. A group of people invaded one pit after it had been blasted for ore. They burned $7 million of equipment and cost the mine several days of production. Police shot and killed one trespasser, Wray said.

Much about the killings since then is unknown, including their precise locations. In some areas popular with scavengers, few fences or signs mark where mine property ends and village life begins.

Firing Into Crowds

In several incidents, witnesses and contemporaneous press accounts quoting police indicated that officers fired into or over large crowds. In one killing, police told the government newspaper that shots were fired into the air after some miners tried to disarm officers.

According to Barrick, in some instances deaths and injuries were inflicted by other trespassers, not by the police or security. Barrick said some incursions go deep into its mining areas.

John McKay, a Canadian member of Parliament who sponsored legislation this year that sought to sanction mining companies for human-rights abuses abroad, said he wasn’t familiar with the North Mara mine and he declined to single out specific operators. Still, he said the profits delivered by gold’s high prices are causing a “moral blindness” at some companies.

Knocking Heads

“It seems like the attitude is, ‘If we have to knock a few heads along the way, so be it,’ because there is so much money to be made,” he said. His proposal was defeated in Parliament on Oct. 27.

The government of Guatemala is considering a suspension of operations of Vancouver-based Goldcorp Inc.’s Marlin mine after the Inter-American Commission on Human Rights alleged that the facility was contaminating water supplies. Jeff Wilhoit, Goldcorp’s vice president of investor relations, said the complaints underlying the ICHR’s petition, including alleged human-rights violations, were without merit.

He also said the company was implementing recommendations from an independent human-rights assessment completed in June.

The World Gold Council, the London-based mining trade group, helped boost the surge in investor demand now bringing record results to Barrick and other members. It started SPDR Gold Trust, the first exchange-traded product backed by bullion approved in the U.S. The 10 largest such funds held more than 2,113 metric tons of gold valued at about $94.2 billion as of Dec. 21, according to Bloomberg data. They allow investors from retirees to hedge funds to invest in gold.

Land Once Theirs

Mining firms are spending some of the money they’re earning from record gold prices to boost production, exploration and development at North Mara and in other corners of the developing world. Those living near veins of gold are in turn trying to profit from ore in their communities.

“There is awareness amongst communities about the fact that the gold price is so high, but that very little of the benefit from that seems to be coming back to them,” said Keith Slack, the Washington-based head of Oxfam America’s extractive industries program, which works on security and human-rights issues globally.

There are growing fears that the collision of these forces could yield a new wave of turmoil for years, Slack said.

Barefoot Geologists

At North Mara, local “barefoot geologists” were the first to mine this rock, working by hand decades ago on their ancestral lands. An estimated 40,000 people in the area depended on small-scale mining for their livelihoods, according to a history compiled by the mine’s first developer, Afrika Mashariki Gold Mine Ltd.

The mine’s development and growth displaced an estimated 10,000 households, including many who didn’t receive compensation under previous owners, according to the African Barrick prospectus.

Vancouver-based Placer Dome Inc. bought the mine in 2003. Barrick acquired Placer Dome in 2006 for $10.4 billion, making the company, founded by Canadian billionaire Peter Munk, the world’s largest gold producer.

Total payments to the local community are unclear. African Barrick said in its written response that it supported thousands of school scholarships. It didn’t say how much it had spent on those efforts.

Security Incidents

Barrick acknowledged deaths at the North Mara mine in two sentences in its 486-page IPO prospectus, dated March 19. “In some cases, those involved in security incidents have been injured, sometimes fatally,” one of the passages read.

Two months after the December 2008 unrest, Barrick Chief Operating Officer Peter Kinver credited “a great deal of support” from the Tanzanian government for helping with what he called “sporadic incursions of people coming onto the mine.” That support helped the company meet its production goals at North Mara in January 2009, he said on a call with analysts on Feb. 20, 2009.

The company has reported no other major disruptions to production since.

Mwita Werema knew the risks of scavenging waste rock for gold, said his widow, Eunice Mwita. Her 35-year-old husband was a lifelong small-scale miner who lost his land to the mine in 2002, she said.

The Two-Six

“He used to tell me, ‘If they catch me one day, I’m sure they will kill me,’” she said, speaking in a whisper barely loud enough to be heard above the clucking of a single chicken just beyond her open doorway. Her four children played outside on a low, sallow mound of earth, their father’s grave. As she spoke in July, she was expecting a fifth child any day.

Werema was shot on Oct. 15, 2009. That morning he and his mining partner, Nchia Mwita, had worked their way deep into a vast area of waste rock that locals call the “Two-Six,” which abuts one of the pits. They carried water bottles, hammers and their rucksacks, his friend recalled.

People each day flood the Two-Six, named long ago when the mine designated it as rock pile No. 26, according to villagers. The daily activity supports a single-stool barber shop, operating from a shack erected on the stones. A handwritten sign identifies it as the Two-Six Hair Salon.

Nchia Mwita’s and Werema’s story mirrors the daily cat-and- mouse routine described by other miners. Typically they may get 30 minutes to sift stones before security guards appear and force them to flee, they said. They’ll lie low for 10 or 15 minutes, then return.

Bribes for Access

Sometimes they can buy time by paying small bribes, which some police and security officers routinely demand, said miners and local officials. Mwita said those who are paid can easily betray villagers, turning on them if fellow officers arrive.

The day Werema was killed, he and his friend weren’t prospecting long when two large crowds of scavengers began moving in behind them, working their way up the rock piles as well, Mwita recalled. About eight armed security men appeared on higher ground roughly 500 feet away, Mwita said. One guard began firing randomly at the crowd, he alleged.

Suddenly, “I saw him go down,” Mwita said of his friend Werema. Blood spilled onto the stones. He was shot once in the back and died, Mwita said.

Police took responsibility for the shooting in statements to local newspapers, though they said Werema was shot in the left leg. Mwita said he saw a private Barrick guard pull the trigger.

North Mara’s Allure

There’s no mystery to North Mara’s allure for locals. While company data show that the rocks African Barrick processes there yield an average of about 3 grams of gold per metric ton, a bagful of the best waste rocks can be sold for the equivalent of a few dollars to buyers operating from the trunks of cars parked right on the rock fields.

The mine, sitting east of Lake Victoria, had 2.9 million ounces of proven and probable reserves at the start of 2010.

As much as 40 percent of the population in the surrounding Tarime district survives on less than 33 cents a day, the government estimated in 2005. Many live mostly off what they can grow.

Record gold prices have drawn more people to scavenge for gold-laced ore during the past two years, said Nyagabure Chacha, who lives in a hut that is an easy walk from the rock piles.

Miners track the price of gold using the internet connections on mobile phones they must take to a communal solar- powered charging shack because most have no electricity.

‘People Have Nothing’

“These people have nothing,” Chacha said. “They have no resources to survive.”

On Feb. 2, Chacha’s son, Daudi Nyagabure, allegedly was among the victims. Around 1 p.m. that day, security forces shot and killed the 21-year-old, his father said, based on accounts from others at the scene.

The son was starting his own family. He and his 19-year-old wife had one child, and she delivered another four months after becoming a widow.

Like several relatives of miners killed here, the old man expressed resignation, not bitterness. He quoted a popular Swahili proverb about the impossible task of gathering spilled water back into a cup.

Those who own the mine and the people who live around it “are moving in opposite directions,” he said. The company is rising, he said, as the people fall.

Human-Rights Standards

On Nov. 19, Barrick announced it had joined an international group of extractive companies, governments and non-profits that promotes voluntary standards to foster human rights in security operations.

The non-binding guidelines, called the Voluntary Principles on Security and Human Rights, include one saying that companies should report credible allegations of human-rights abuses by public security forces to the appropriate authorities.

Wray, of African Barrick, said the company “will make a formal request” to the regional police commissioner’s office for an investigation if it’s made aware of allegations of abuse.

The company mentioned no violence at the mine in reports describing its social-responsibility record on community relations, health and safety for 2009 and 2010. Last year’s report stated: “At Barrick, we are committed to making a positive difference in the communities in which we work.”

Wray wrote in a Dec. 15 statement that the company is installing additional perimeter fencing, walls and security cameras “in certain sensitive areas” and is trying to educate local residents about the dangers of illegal mining.

Gold’s Payoff

Rising gold prices pushed Barrick to record net income in the third quarter of $837 million, or 84 cents a share. As of Dec. 22, its stock had gained 30 percent this year, matching the gain of the 16-company Philadelphia Stock Exchange Gold and Silver Index. Barrick produced 7.42 million ounces of gold in 2009, compared with 5.3 million for its nearest competitor, Greenwood Village, Colorado-based Newmont Mining Corp.

“We are a company that has been a major beneficiary of raising the gold price,” Regent, Barrick’s CEO, said Nov. 11 at a London gold conference sponsored by RBC Capital Markets.

In the first nine months of this year, Barrick’s cash margins increased 52 percent to $783 an ounce, compared with $515 an ounce a year earlier, according to a financial statement released by the company Oct. 28.

African Barrick has been a laggard. On Oct. 14, its share price dropped 9.5 percent in London after the company cut full- year output estimates at its new Buzwagi gold mine, which is about 300 miles south of North Mara. It said workers had stolen diesel fuel from the mine, causing production delays.

‘Appalling Start’

“They’re off to an appallingly bad start,” said Peter Rose, an analyst at Fox-Davies Capital Ltd., in London, who recommends buying ABG stock and has a one-year price target of 674 pence. The March IPO wouldn’t have been possible without high gold prices, he said.

African Barrick’s share price began recovering after it announced positive exploration results at two separate sites Nov. 29 and Dec. 2, including North Mara. It closed at 591 pence yesterday.

Production stoppages are down at North Mara, Wray said, adding that the company budgeted a total of $20.4 million for security at all four Tanzanian mines this year. The biggest share of those costs goes to North Mara, a 16-square-mile (42- square-kilometer) property just west of Tanzania’s Serengeti National Park, one of the world’s most renowned game preserves.

Of the 15 people listed as injured at the North Mara mine by the Legal and Human Rights Center of Dar es Salaam, Bloomberg News interviewed two. It also found a woman, Mwora Marwa, who was listed as dead by the human-rights group, after she was shot and hospitalized for almost a year. All three provided medical or other records documenting their injuries from gunfire.

Ruptured Eye

They included a 12-year-old boy whose right eyeball was ruptured by a bullet and a 28-year-old man, Joseph Ikaya Mgaya, who said police approached him and fired a single shot into his right leg without warning or provocation.

Mgaya carries two letters in his pocket. One is from the general secretary of his village. It says he was “shot by the patrolling police near the mining area” and asks police officers to stop harassing him. The second, stamped by police, obliges the request. “Please don’t disturb him, he is sick and I have checked his documents and they are legal,” it says.

Of the seven killed whose families were interviewed by Bloomberg News, at least five of the incidents were reported in Tanzanian newspapers. Police were quoted taking responsibility for four.

One report stated that on July 8, 2009, police confronted hundreds of villagers at the mine. Massawe, the police commander, was quoted saying villagers threw stones.

Rushing for Bullets

“Police fired so much tear gas and so many gunshots to prevent the villagers from invading the mine (they) ran out of ammunition stock and had to rush for more bullets,” Massawe was quoted saying in the state-owned Daily News.

Two people were killed by the gunfire. One was Chacha Nyamakono, 17, who lived with his extended family in huts made of mud, stone and handmade bricks about a two-hour walk from North Mara.

He was the first in the family to attempt an education, loved science and always had his nose in his books, said his sister-in-law, Paulina Chacha, 36. The family burned his high school papers and notebooks after his death because they were too painful a reminder, she said.

“He said, ‘When I’m done with school, I’ll provide a better life for you,’” recalled his 73-year-old grandmother, Marita Nyamakono, perched on a stool next to a scrawny, sleeping dog.

‘Hard to Survive’

“It’s very hard to survive here,” she said. “We don’t have sugar. We don’t have medical care -- nothing.” The other miner killed that day was Mwita Machapele, 37, a father of three sons. He was shot in the back, according to both his wife and Massawe’s comments in the government newspaper.

His widow, Mama Godfrey, said she collected her husband’s bloodied corpse from police on a road next to the mine, where about 500 people had gathered.

“I didn’t bother asking the police what happened,” she said, “because it was the police who killed him. There was no point of asking. Even if I asked, what could I do?”

Bloomberg News did not include some cases tallied by local officials or human-rights investigators in its count, often where there wasn’t a witness or a contemporaneous press account. One of those cases involved Christopher Jakuo, 42, who was shot and killed at the mine on June 3, 2009, according to his widow and Machage.

Earning Extras

What her husband earned scavenging ore paid for extras, like meat and milk, said Mama Christopher, who lives in a mud and thatch hut in a hamlet called Chuchuri. Since his death, the family survives on what it can grow: sweet potatoes, corn, cassava and millet.

“You can see the children are losing weight,” she said. She dreams of her dead husband. “We speak together and I tell him about my problems raising the children. I can’t do this alone.”

One incident brought the community close to rioting, according to several accounts -- the death of Muhere Biraro, a popular local leader.

Biraro, 40, lived with his wife and seven children in three stone and mud huts in a hamlet called Sekube.

Starting in late 2008, Biraro worked for Barrick in one of the mine’s pits, according to his wife, Rhoda. It was the first full-time employment in Biraro’s life, bringing steady income and even health services, including medicine, from the mine dispensary.

Hardhat Memorial

The family began building a brick home so they could finally move from the huts, she said, sitting on a plastic chair just a few feet from where her husband’s hardhat hangs. It’s on a nail pounded into the mud wall above the bed they shared.

Their new life ended when Biraro was fired in early 2009 as part of 200 dismissals that a company press release called a cost-saving move.

Desperate, Biraro began small-scale mining in the Lake Victoria region, hours from the family’s home, his wife said. This year he focused on the Barrick rock piles instead, because they were close, according to a friend he worked with at the mine.

On March 20, one day after Barrick completed the IPO of its African Barrick unit, Biraro went hunting for stones. The next morning, his wife learned her husband was at a small health clinic near the mine.

Drenched in Blood

A friend of her husband’s, Charles Mbusiro, 39, arrived first at the hospital and recalled seeing Biraro drenched in blood. “He had lots of injuries, in the head, in his back, all over,” Mbusiro said.

Biraro was weak, his friend said. He described being confronted at the mine by Barrick’s private security officers.

“They surrounded me and they attacked me and beat me and they stabbed me and took me and dumped me by the roadside. The police picked me up from there,” Mbusiro said Biraro told him before he died.

With villagers on the verge of rioting over the death, Tanzania Omtima, the village chairman, and Isaac Zablo, a local Christian minister, said they met with senior mine managers and demanded answers. Mine security officials said they had found Biraro disoriented, then handed him over to police, both men said in separate interviews.

Omtima and Zablo insisted on being taken to the scene to question security guards and others, and to examine the surroundings. After gaining permission, both said they were stopped en route by mine security guards, who refused to let them pass. The family and Omtima said no one was arrested.

Killers Unclear

In a statement to the government newspaper that was published on its website that same day, Massawe, the police commander, alleged that Biraro had been killed by other small- scale miners after retrieving ore.

“He was an intruder and it seems he has been killed by colleagues,” Massawe was quoted saying.

In his statement, Wray said the allegations that mine security killed Biraro “are fundamentally untrue” and that “evidence instead strongly suggests that his injuries were the result of a conflict with other intruders over gold-bearing material stolen from the mine.”

He also said that while the two community leaders, Omtima and Zablo, initially were granted access to the site of the killing, it was under the control of police and “this area was a crime scene.”

Biraro’s widow now spends her days walking from home to home with her children in tow, offering to do odd jobs so they can live off more than the crops they grow.

Her oldest boy is often absent. He feels responsible now for the family, she said, so he scrounges rocks at the same mine where his father was killed.

--With assistance from Sarah McGregor and Eric Ombok in Nairobi and Christopher Donville in Vancouver. Editors: Marcia Myers, Flynn McRoberts, John Voskuhl

To contact the reporter on this story: Cam Simpson in London at csimpson13@bloomberg.net

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net