Lumwana: Zambia’s largest open cast mine
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?
Zambia earned a meagre $50m from mining royalty revenues in 2009 from a combined revenue receipt bill of $5bn.
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.’
Youths in the capital Lusaka
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 $520m, according to the Extractive Industry Transparency Initiative 2009 Zambian report. This is less than 10%. This 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.
Transforming economies
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.
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.
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’.
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.
Miles Sampa, Zambia’s Deputy Finance Minister
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.
President Sata with the UK’s international development minister, Andrew Mitchell.
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.
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June 15th, 2012 at 5:46 pm (#)
Sorry my friend. Nice try but michael Sata is an idiot. He is corupt, a liar and illiterate. Read websites from Zambia and see how tattered his mind is. This is the same guy who said he will expel the chinese when he becomes preisident because they are infestors not investors, today he is getting money from them and encouraging them to come in droves to Zambia. He was in UK to cheat and tell lies. And did you consider his relatiohship with Mugabe?
June 15th, 2012 at 9:36 pm (#)
I was struck by this: [Despite being in the] “top quadrant’ of resource-dependent countries, it ‘still belongs to a group of economies with very low levels of capital accumulation.’” There has never been a correlation between resources and capital accumulation. Nigeria collapsed and dozens of other countries with rich natural resources haven’t prospered (and some even suffer for their resources through Dutch disease and huge swings in GDP from volatility in resource prices and their lack of diversification).
Bad governments govern poor people. Countries without strong intermediary institutions (church, reliable press, justice system) and civic society do not prosper. Blaming the West will not help as long as the government does not protect property rights and allow businesses to develop. Transparency International ranks them 91st in corruption, or a 3.2 (http://cpi.transparency.org/cpi2011/results/#CountryResults). Of course the president wants a “fairer” deal with the West–he wants more for himself and the corrupt in his government. Until that is solved, the people are never going to see much more than $2 per day.
June 16th, 2012 at 5:02 pm (#)
Excellent article Anthony Mukwita
June 16th, 2012 at 6:26 pm (#)
A United African movement has to follow a simple course in togetherness & understanding, for decades now they are at a historic juncture, and yet they lack responsible leaders who are capable of steering them into the future. That is because the internal unity that currently commands the weighty authority of electoral legitimacy is yet to be attained. People look to their government for answers in terms of accountability, security and sustainability. The lack of job opportunity, education and the lack of transparency is replaced by the current system of aid, that is failing and is partly responsible for the lack of progress in Africa, it is a real eye opener, not just too how much needs to be done, but how it is being done by Africans themselves. Western powers, has created a political and legal infrastructure for intervention in other words, which has been stable Independent countries. In order for Zambians to move forward and manage out copper they need to educate themselves.
June 16th, 2012 at 10:38 pm (#)
“Globally Zambia ranks seventh in copper production, and currently the world trading price of copper is at an all-time high. Yet Zambia ranks just 164th in the human development index, and has a shockingly low life expectancy of 49 years. Where are the profits from such a potentially lucrative mining industry going?”
June 17th, 2012 at 10:48 pm (#)
I think what is important at this point is how the Zambian technocrats, the key decision makers are goind to react to this informative missive
June 18th, 2012 at 8:50 am (#)
The 2009 figures from EITI show government received a total of ZMK2,526,135,000,000 (about USD501.2 million) from the mining companies captured – USD147.4million was PAYE.
Diamonds and oil are not copper – let’s get that straight. Base metals (copper nickle cobalt etc)are not as lucrative. In Angola, the diamonds are alluvial to best of my knowldge and do not require huge investments in deep underground mines and big open pits – I understand that there is little exploration never mind investment in base metals mining in Angola because of the free-loaded government shareholding requirement – so it would not benefit Zambia to go that route which equally has little menaingful exploration going because of its mining legislation which provides little security of tenure and chopping-and-changing taxation etc. The Botswana government when it comes to base metals buys any equity share it wants (the Debswana diamonds deal is unique and probably not repeatable anywhere in the world, but even if it was, it would require a government that keeps its word and pays its way, as Botswana has and Zambia has failed to). Chile has different copper mineralisation to Zambia, its government does not free-load, it has a seaboard straight to China and Japan, it has bigger deposits and much lower costs (scale, minerlaisation, productivity, mechanisation, access to markets and inputs) and is more mechanised but its labour and professionals are better educated, skilled and therefore more productive.Zambia has rather hig taxation on mining but fails to collect it – partly political will/corruption and partly lack of capacity. But it is not just the big foreign miners who are not paying their fair share, it is also gemstone and manganese miners and small-scale copper miners(both Zambian and foreign) most of whom pay NOTHING (not even PAYE or corporate tax, never mind royalties) to ZRA at all hence their exclusion from Zambia’s Extractive Industries Transparancy Initiative (EITI) reports and which are potentially as significant as the big foreign mines – too hot a political potato there, much easier to bash foreigners?
June 19th, 2012 at 7:40 pm (#)
” The 2009 figures from EITI show government received a total of ZMK2,526,135,000,000 (about USD501.2 million) from the mining companies captured – USD147.4million was PAYE. ”
PAYE does not come from the mining companies, it comes from workers, it is an income tax on employees, not on profits or revenues from the mines.
And all the money, all mining profits and salaries come from OUR copper. Unlike what supply siders want people to believe, businesses do not ‘create jobs’, demand for goods and services creates jobs. No demand, not only no jobs, but no profits either. All salaries and profits come out of the pockets of people who buy the end product.
People should very quickly start wrapping their heads around the fact that ALL the natural resources in Zambia belong to the Zambian people first and foremost, not foreign mining companies, not the president and not the finance minister.
The most fundamental reason why people in Africa are poor, is because they do not get paid for their own resources. Solve that, and you can say goodbye to ‘donor aid’ – which is really the substitution by western taxpayer money for taxes not paid by the mining companies.
And there should be mines owned by the state outright, which would truly maximize profits.
June 19th, 2012 at 7:44 pm (#)
Chobby Chobbs,
” Where are the profits from such a potentially lucrative mining industry going?” ”
They go to the shareholders of Anglo-American De Beers (NM Rothschild, JP Morgan), Rio Tinto (NM Rothschild), Equinox Corporation, First Quantum Mining, Glencore International (Nat Rothshild is a big investor).
This is why people in Africa are poor, and why it is a deception to think of ‘donor aid’ as charity, which is what the name implies. It is a congame.
June 24th, 2012 at 5:59 pm (#)
MrK Zambia has tried government-owned mines – they failed and by the end of ZCCM’s life, it was costing the country K1million a day to stay open and provide jobs, money Zambia borrowed.And even now, the government owns some part of most foreign-owned mines (except Lumwana and maybe soem Chinese operations). Equinox is no longer in Zambia – Barrick bought Lumwana. Rio Tinto owns no mines here or shares in any.Anglo/De Beers is not in Zambia either.
Indeed demand drives supply of copper and therefore creation of jobs. But even so, Zambia does not have raw copper which magically appears at its destination – it has ore with copper mineralisation which needs to be processed to get the copper out and needs to be transported. So mining does create jobs and without thsoe jobs there would be no PAYE being paid from mine operations – it is not mining tax but it is revenue earned from mining operations at the end of the day.
Of course natural resources belong to the people of Zambia – but they are worthless sitting in the ground. Africa is not poor because it does not get paid for its resources,period – it is poor because its leaders do not ensure it gets paid an equitable rent for its resources and because what revenue governments do get is misspent, missapplied and stolen. Africans need to accept responsibility for their plight and then Afrcans can start to find solutions – continue to blame others and we will wallow forever.