BIJ, 15 June 2012, by Anthony Mukwita* – Zambia is Africa’s top copper producer and it is in the midst of a spectacular boom. The scale of international investment – a reported $6bn – means Zambia will soon ‘overtake’ Australia and Indonesia to become the world’s fifth largest copper producer. But the tax revenue to build schools, train and employ teachers, sink boreholes and buy medicine has simply not materialised. Wealth from Zambian copper has not trickled down – 64% of the population live on less than $2 per day according to the United Nations. Infant mortality is high – 69 per 1,000 births, life expectancy low – just 49.
The country’s copper has for too long not brought the much needed financial resources. Weak tax laws mean little revenue is collected. And mining companies were given controversial license agreements under the former President Rupiah Banda’s administration according to a recent World Bank study.
Could this be about to change?
In a visit last week to London the new president Michael Sata, 75, laid down a gauntlet. Addressing a meeting of businessmen during the Commonwealth Economic Conference (CEC) at Mansion House, the former trade unionist said his countrymen were being short changed.
’We are not getting enough from our mineral resources,’ he told the packed conference as he sought what he called ‘good’ investors from London, Canada and Australia.
Profits go overseas
There is no question that this change is desperately needed. Zambia is a stable country and has been for decades. Its copper should be pulling the country’s people out of the grasps of poverty. But its performance on any measure is comparatively miserable.
The World Bank study expressed concerns that despite Zambia featuring in the ‘top quadrant’ of resource-dependent countries, it ‘still belongs to a group of economies with very low levels of capital accumulation.’
The Zambian Economist, a not for profit organisation describes the level of revenues collected from the mining companies under existing contracts as ‘pitiful’ and ‘unlikely to improve the lives of Zambians’, in its report Debunking the government’s case for low mining taxation in Zambia. The report emphasised the dichotomy under the recent Banda administration: Zambians remained stuck in a poverty rut, while mining companies grew hugely profitable and invested the money abroad.
Unlike other countries weak Zambian laws allow foreign investors to transfer all their profits abroad to overseas banks without any ceiling or restrictions.
This has had a significant impact on earned state revenues. Zambia earned a meagre $50m from mining royalty revenues in 2009 from a combined revenue receipt bill of $5bn. Even when non-mining taxation such as company taxes and PAYE are included the government only recovered $270m, according to the Zambian Economist’s report. This is less than 5%. This terrible imbalance had been reached under the Banda government, which under heavy lobbying from foreign mining companies had reduced the taxes on mining including scrapping a windfall tax.
It has prompted local NGOs such as Civil Society for Poverty Reduction (CSPR) and donors such as the World Bank to urge the government to raise its game and pass laws that would benefit the country, not just the mining companies.
Contrast Zambia with Botswana which, according to the Zambian Economist’s report has profited nicely from its diamond fields.
World Bank figures show that the country, which is mostly desert, transformed itself from one of the poorest southern African countries to a middle-income country with a per capita GDP of $16,300 in 2011. In Zambia it is just $985.
Likewise, Angola, after years of bitter civil war, is now surpassing Zambia in revenue earnings from its oil and diamond reserves. This is down to new ‘pro-poor’ laws claims the World Bank study.
These laws require mining firms in Angola to employ a large number of Angolans both at exploration and completion stage to deliberately reduce unemployment. Again not the case in Zambia.
Angola also ensures the country gains a sizeable share of its mining resources. Extractive firms in Angola have to fund 100% of any venture despite ultimately owning only a 40% stake in the mineral project (diamonds or oil) – the larger stake remains in the hands of Endiama, the Angolan state enterprise.
Admittedly, mine firms in Angola pay a lower tax rate until their capital expenditure outlay is recovered, but even this can amount to only 80% of initial revenues because of stringent profit sharing agreements laid down by the Angolan state.
It is hardly surprising then that the World Bank observes that, ‘Angola is growing at a faster pace than Zambia’. For the people of Angola it means massive infrastructure development as a result of these revenues.
The roads, the schools, the medical clinics being built all remain a pipedream in Zambia.
The World Bank study recommends that in order to reverse the trend ‘Zambia needs to capture a larger share of the resource rents (money from mines) and invest the money in the nation’s productivity.’
The previous Banda administration always defended the mining giants in the face of calls for higher taxes during boom times. The response was that it would be ‘irresponsible for (the Banda) government to collect a few dollars from the companies and kill the goose that lays the golden egg’.
Banda’s support for the mining companies and condemnation for local critics in fact compelled the opposition to suggest that he seemingly cared for big Chinese business – one of the big investors in the country – more than he did for his own people.
Chola Mukanga, founder of the Zambian Economist, described Banda’s policy of low taxes as a way of encouraging investors as ‘demonstrably intellectually bankrupt.’
Challenged to act
And now the new government has been challenged by the supporters of higher mining taxes, who maintain that there is no reason to keep taxes low to attract investment.
Economists, such as Professor Oliver Saasa, a Zambian Professor of International Economics, suggest that the government should not only introduce a better tax regime but also ensure mining companies do not engage in profit transfers.
President Sata’s young administration has tried to take a number of radical measures to turn the tide in favour of the state.
For instance, Sata has toyed with suspending issuing mining licenses until laws are passed to help Zambia capture more money from mines in future.
He has also ruled that all copper exports be receipted through the Central Bank of Zambia so the government knows exactly how much mining companies earn and so build a fair profit sharing scheme.
There are still giant hurdles to get over. Today, Zambia’s internal revenue authority, the ZRA clearly lacks the ability to determine how much a mining company has earned in profits. And under agreements made by the Banda government companies have an incentive to increase their costs and limit their official profits as then they can avoid paying any taxes to the government. And there is little Zambians can do about it.
And not all in the government seem to agree that taxes should be increased. Zambia’s Deputy Finance Minister Miles Sampa stated this week that the reasons investors in mining and other sectors should favour Zambia is because: ‘We boast of a free market economy with very little prohibitive industry regulation and we have virtually no exchange controls. You can repatriate a hundred percent of your dividends from Zambia as a business and our labour costs are low.’
There is some good news. The sector is the largest employers outside the public service creating 40,000 jobs, 20,000 of which have been created since 2009. And there is more investment on the horizon.
Canada’s First Quantum has said it may spend US$1.9bn on its Trident and Kansanshi mines in Zambia after losing the Kolwezi copper project in Congo in a 2009 rights battle with the government.
Vale’s joint venture with African Rainbow Minerals Ltd. will invest $1bn in Zambia’s Konkola North project, while Vedanta’s Konkola Copper Mines Unit plans to spend approximately US$1bn over the next two years.
London-listed Glencore International has also announced plans to invest $500m in its Zambian Mopani operation.
Where did the money go? Privatising Zambia’s mines
Zambia’s copper mines were privatised at the insistence of the International Monetary Fund and World Bank in 2000.
The sale contracts, which ran to over 20 bulky volumes, were never presented to parliament. At the time, Zambia was run by Frederick Chiluba, its second president. Before his death last year, Chiluba faced a large number of corruption charges but was acquitted of most of them. A London High Court found Chiluba guilty of stealing $46m of taxpayers money.
There were many other allegations of corruption around the privatisation vote.
Lifting a child out of poverty
This large scale investment means Zambia is now on track to export about two million tons of copper annually by 2015. Mining revenues are expected to top $8.4bn this year. But the question is: will this intense activity make any tangible difference to the many Zambian families barely managing to feed their children. To find cash to invest in building schools, sinking bore holes or supplying drugs to hospitals, Zambia requires radical action.
The process has started.
When presenting the budget in Lusaka last November, Alexander Chikwanda, the finance minister, announced that mineral royalties had been revised upwards to 6%. This is double what had been previously predicted and is now approaching the regional average.
There has been talk about ‘going the Angolan way’. This would mean the Zambian government increasing state shareholding to at least 35% in the mining companies up from the 20% it currently holds through the state-owned ZCCM-IH.
There is a long way to go before Zambia’s resource wealth benefits the poor more than the rich foreign owners. It is now up to the new government. The question is: will Sata’s administration be able to impose a new settlement that goes some way to improving life for ordinary Zambians?
* Anthony Mukwita is deputy managing director of the Zambia Daily Mail based in Lusaka . He is currently on a World Bank funded secondment to the Bureau.