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ZAMBIA: Mineral tax increase holds no benefit for citizens

21 Feb 2007 08:23:47 GMT
Source: IRIN

LUSAKA , 21 February (IRIN) - The Zambian government's attempt to assuage criticism for charging foreign investors one of the world's lowest mineral royalties by announcing that it will increase mineral tax to the global norm, is stoking renewed controversy after it was revealed that in reality nothing much will change.

Finance Minister Ng'andu Magande said in his 2007 national budget address earlier this month that the mineral royalty tax would be increased from the current 0.6 percent to the world average of 3 percent, tax holidays for foreign investors would be curtailed, and company tax for mining firms would be increased to "ensure more collection of revenue from the mining sector".

However, a few days later the finance minister conceded: "The new tax revisions won't affect existing mining companies ... the difficulty we have is that all mining operations have legally binding development agreements. Most of them are actually expanding their operations on the basis of the [existing] development agreements, which contain 0.6 percent as mineral royalties."

President Levy Mwanawasa's government has been under sustained criticism by trade unions, business, political opposition parties and civil society for the generous conditions offered to foreign investors, which detractors say have deprived one of the world's poorest countries from benefiting from the global commodities boom, recognised as the biggest base-metal bull market in 50 years.

China is one of the main foreign investors in the mining sector, and the 0.6 percent royalty tax has fuelled Zambian xenophobia against people of Chinese origin. Chinese business practices and investments became a political football during general elections in late 2006, with opposition leader Michael Sata threatening to expel Chinese mining companies and nationals if he became president. Although Sata failed to secure the presidency, his party swept to power in the country's cities and the wealthy Copperbelt Province.

People feel cheated

"People feel cheated that the minister of finance had to announce the new tax measures for the mines and then clarify later that old companies will continue operating under the old agreements," said Mwilola Imakando, president of the Economic Association of Zambia.

Foreign companies are exempt from customs duties on capital machinery and equipment as well as raw materials, for up to 20 years in some cases, and there are no restrictions on the amount of profits and dividends that can be repatriated.

Imakando told IRIN that to change existing agreements unilaterally, without negotiating with the mining companies, could result in the country becoming a pariah to foreign investors, but was ambivalent about whether the discount deals had benefited the country's citizens, two-thirds of whom live on a dollar or less a day.

"On the question of these mines benefiting ordinary citizens, I would say yes and no: no, in that there is little coming from these earnings, meaning little is being invested in social sectors to benefit the majority citizens; yes, in that there has been increased production, which has generated more employment opportunities and more foreign exchange, which is good for our balance of payments," Imakando said.

Rayford Mbulu, president of the Mineworkers Union of Zambia, said the jobs created were of poor quality, the mining houses had implemented no social policies for their employees, and employment had not provided any escape from poverty.

"It would have been better if these investors, in spite of paying low salaries, could at least invest more in the communities where they operate, but generally their approach to corporate social responsibility is very poor," he said.

Two years ago, 49 miners were killed in an accident at the Chinese-owned Chambishi Mine in Copperbelt, and last year five miners were shot dead by police during violent protests over working conditions at the same mine. These incidents go some way to explaining the cold reception Chinese president Hu Jintao received from ordinary Zambians during a recent visit, which led to last-minute changes in his itinerary to avoid planned protests against his presence in the country.

Global norm of 3 percent seen as too low

The global norm of a 3 percent royalty tax has been cited by Chile, the world's largest copper exporter, as too low. When Chilean socialist Michelle Bachelet became president last year, it was expected that the royalty would increase. Although this has yet to occur, which has provoked social unrest, Chile has used the commodities boom to its advantage.

Last year copper hit record highs of about $8,000 per tonne on the London Metal Exchange, up from an average price of US$1,200 five years ago. Zambia's annual copper production is worth billions of dollars but, unlike Chile, where the price contributed to a record budget surplus of $8 billion, Zambia has little to show for the boom.

"We've not done a conclusive comparison study as yet between Zambia and Chile in terms of the earnings from copper, but the facts are there to speak for themselves on what makes Chile different from Zambia," said Mathias Mpande, head of the mining engineering department at the University of Zambia.

"Of all the world's largest copper producers - Chile, Zambia, Australia and Peru - Chile is the only country that has performed far better than even most developed countries, especially in the last 30 years. This is because they have invested heavily in high technology and the specialised training of their people."

Unlike Zambia, Chile has beneficiation projects for copper and so earns more from selling processed and finished copper products. "Our studies show that we [Zambia] are still predominantly selling copper concentrates, which are not as expensive as finished products, and our total sales of copper concentrates account for less than 1 percent of the produced copper in Zambia. It is really sad that 43 years after independence we should be producing less than 1 percent of exportable industrial and finished copper products," he commented.

"The biggest problem is that our privatisation agenda lacked foresight, because whoever was negotiating the royalties and development agreements was ignorant of the fact that prices go up and down. And now it is very tricky - we can't tell whether the government will actually be able to negotiate for a better deal, because copper prices have even started falling on the international market. What we need is a serious change in policy direction from the short-term to the long-term measures if Zambia is to really benefit from our copper deposits," he said.

Mining analyst Thom Kamwendo told local media recently that many lives could be improved if the earnings from the country's rich copper deposits were increased, and that the issue of mining tax needed to be revisited. "If we look back, no one ever predicted that copper prices would be high. It is the holistic way of how we set royalties that we must look at. It will not be prudent to base the reviews on the price alone. What happens if the price goes down tomorrow?"

Government needs to renegotiate the anti-poor mineral tax

The new mineral tax regime announced by the finance minister appears to be a case of too little too late. "To be quite realistic, the new tax measures may only come into effect after Mwanawasa's tenure of office, because even ... [new investors] will still ... enjoy tax holidays for a period of five years, which ultimately means that the country will still continue earning little from copper sales, despite the record prices on the international market," said University of Zambia consultant economics professor Oliver Saasa.

Mwanawasa's second and final term of office ends in 2011.

"Although there are legal implications, government just has to get back to the negotiating table with all mining companies and really push hard but, again, it will be the quality of negotiators that will determine the outcome of such negotiations. We would do better to move now to amend these investor-friendly and anti-poor development agreements," Saasa said.

Copper accounts for 80 percent of Zambia's foreign earnings but is a diminishing resource, and with the cyclical nature of commodity booms, the fear is that the Zambia's last chance to use its resources to develop the country may have been missed.

Several recent studies have shown that only one copper mine, Konkola Deep, owned by the London-listed Vedanta Mineral Resources, has a lifespan beyond 2035.

The perceived preferential treatment given to foreign investors has been creating resentment among Zambians that the government places foreign companies ahead of its own citizens.

"It seems government has no agenda for us, the poor people - everything has to work against us. To start up a business, as a Zambian, you have to struggle very much because borrowing from a bank is like drawing blood from a stone, and yet foreign investors find it so easy. And as if that was not enough, government even awards them tax exemptions, which we do not enjoy as local businessmen," said Costain Musonda, who owns a shop in the capital, Lusaka.

"It is like nothing in this country works for the poor. They have to struggle till death but the rich get it so easy ... the rich have more opportunities to keep on getting richer and the poor have 99 percent chances of getting poorer."

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Last updated:Wed Feb 21 08:27:09 2007