Pessimism continues over mining agreements

Pessimism continues over mining agreements
By Kingsley Kaswende
Tuesday May 15, 2007 [08:41]

LUSAKA businessman Mark O'Donnell has said he believes that the lopsided nature of the mining development agreement between the government and Konkola Copper Mines (KCM) will be difficult to re-negotiate. And O'Donnell said the concept of develop agreements entails that government is not doing enough to address the needs of business.

Commenting after he read the development agreement between government and KCM made available to him by The Post, O'Donnell said while it was accepted that there was need to re-negotiate and change some provisions of the agreement, it was unlikely that this would happen before the end of the Stability Period, which ends on December 31, 2009.

"Where there is a failing at the moment is in trying to talk to the mine owners in order to better the agreements that are currently on the table, there is no doubt things they would like changed and at the same time government wants certain things changed. Who is talking to anybody at present? I do not see any negotiations taking place at all," he said.

He said most of the agreements in the agreement were already there in law and were being dealt with by a number of ministries, adding that their restatement only rendered the existing law useless.

He said from the language contained in the agreement, government had no room to change anything.

"What this says to me is that government has entered into an agreement with the KCM shareholders and through this agreement is obliged, in accordance with the law, to do certain things.

The language is very strong and the word "Shall" is used very often. The government shall do this and shall do that. In law the word shall does not allow for any discretion at all, so when it states the government shall, then the government has no option. This agreement the renders all the ministries referred to ineffective as once the agreement is signed they will simply deliver whatever was promised," he said.
The agreement does not even give government room for arbitrary decisions.

Clause 13.2 of part C states: "Government further undertakes that, during the stability period (between November 2004 and December 31, 2009), it shall not by general or special legislation or by administrative measures or decree or by any other action or omission whatsoever vary, amend, cancel or terminate this agreement or the rights and obligations of the parties under this agreement, or cause this agreement or the said rights and agreements to be varied, amended, cancelled or terminated or prevent or hinder performance of this agreement by any other party thereto, provided always that this agreement and the rights and obligations of the parties under this agreement may be varied, amended, cancelled or terminated as expressly provided herein.

Clause 13.4 says government shall ensure (both during and after the stability period) that no law, statute, regulation or enactment shall be passed or made which would discriminate against KCM.

Clause 15 shows how the government tied itself and gave no room for any re-negotiations or changes.

It states that government undertakes that it shall not during the stability period "increase any rates of taxation (whether direct or indirect and including without limitation, corporate income tax or withholding tax) applicable to KCM (or change the basis of calculation which would result in the decrease or increase of deductions, rebates or other allowances available to KCM in computing its liability for such taxes or change the basis of computation of such taxes) from those prevailing at the effective date."

"(Government shall not) increase the royalty rate applicable to KCM or change the basis of computation of royalty from that prevailing at the effective date, in a manner that increases royalty payable by KCM.

"(Government shall not) amend the VAT and corporate taxation regimes applicable to KCM from those prevailing as at the effective date including but not limited to, the rules regarding carry forward losses, in a manner which will result in an increase in taxes payable by KCM.

"(Government shall not) impose new or additional taxes or fiscal imposts including export duties on the conduct of normal operations or increase withholding taxes applicable to KCM and its shareholders on the remittance by KCM of principal, interest, dividends, royalties or management fees above the rate prevailing at the effective date."

But the agreement provides that government will have the ability to
impose new, incidental and one-off levies only when it is to fund programmes relating to public health, education utility or benefit, and provided they do not result in increased cost to KCM beyond US $250,000.

O'Donnell said the mining companies sought such agreements because, in his view, they do not trust government.

"You have to look at their point of view as well. Mining is a long-term venture. You invest today and it will take at least three to four years to produce the first copper. It will then take at least another five to 10 years to recover the investment cost, and it will probably only be in year 10 and beyond that returns are made out of this investment.

Ten years sees two general elections in Zambia and this could mean two completely new governments in that period of time. While the government today is friendly towards investment, the next one may not be. Anybody spending hundreds of millions of dollars is going to want some sort of guarantee and protection. Hence the need, in their view, for these development agreements," O'Donnell said.

He said the fundamental problem was that government was not trusted by large international investors.

And O'Donnell said the develop agreement concept only showed that government was not doing enough to address the needs of business.

"In this case it is a foreign enterprise, but the same applies to local investment. Why are local investors not given the same opportunity to sign development agreements and obtain protection in the same way KCM has done?" he asked.

"All businesses need to be assured that their investment has the best chance of success and in addition, there should be no interference from government officials in the running of the business. This is what is being guaranteed in the development agreement. Why does not this automatically apply to all investment?"

The agreement grants KCM a special tax racket of 25 per cent, the normal rate being 35 per cent.

"If this is good for KCM then it has to be good for all business. Why was the rate not lowered to other businesses?" O'Donnell questioned.

"How this rate of 25 per cent was granted I am not sure, but being that it is a special tax bracket, I thought it would have had to have gone through parliament, which it did not."

On the 16-year carry forward losses granted to KCM by the agreement, O'Donnell said the period was unreasonably long.

"Why should they carry forward for 16 years? I think the law currently allows for losses to e carried forward for only five years, which is also not reasonable. A reasonable period should be seven years. By the look of things KCM will not be paying tax for the foreseeable future. So although the agreement says they will pay tax I think this is unlikely," he said.

The agreement also calls for KCM to be deemed a new mine in order to make allowances for capital expenditure but O'Donnell said this was not acceptable.

"This mine is one of the oldest in the country. Such a clause could have only been agreed to by a person who has no idea of tax law and this clause will have cost the government hundreds of millions of kwacha in tax revenue," he said.

The agreement also allows for KCM not to pay withholding tax, which is normally at 15 per cent.

It also allows KCM to make duty free imports, which, according to O'Donnell, effectively prevents any Zambian business being able to do business with KCM.

"How does a local company that pays tax on everything they import, remain competitive in order to supply KCM? It was wrong to do this and it should have only been done if the same opportunity was given to all companies that supply the mines."