(SCIAF) Undermining Development -Copper Mining In Zmabia
Undermining Development - Copper mining in ZambiaSCIAF
October 2007
http://www.sciaf.org.uk/content/download/2638/19265/file/Mining%20Report_final.pdf
Here are some highlights from the report:
In 1999, with the Zambian government still reluctant to privatise ZCCM,
‘major donors withheld some $530 million in aid until the government
conceded.’29
That is nearly the entire amount of aid to the government, about 1/3
of it's entire budget.
...
According to the then finance minister Edith Nawakwi, the government was put under enormous pressure:
‘We were told by advisers, who included the International Monetary Fund and the World Bank, that not in my lifetime would the price of copper change. They put production models on the table and told us that there [was] no copper in Nchanga mine, Mufulira was supposed to have five years’ life left and all the production models that could be employed were showing that, for the next 20 years, Zambian copper would not make a profit. [Conversely, if we privatised] we would be able to access debt relief, and this was a huge carrot in front of us – like waving medicine in front of a dying woman. We had no option [but to go ahead].’31
...
This kind of company-by-company analysis is extremely difficult to do in Zambia. We asked KCM for a copy of their annual report, but did not receive one. We also asked Vedanta and KCM to comment on the report and on the figures cited below but, at the time of writing, they had not given us the relevant information. Vedanta’s annual report does not detail the amount of net profit that KCM makes in various financial years, or how much was paid to the Zambian government in various forms of revenue transfer.35
Given the lack of information available, the figures cited below are approximate. We firmly believe that Zambia was placed under considerable pressure, which weakened its bargaining position, leaving it unable to replicate models that had been successfully applied elsewhere – in Botswana, for example, as mentioned above. As a result, various mining companies locked the government into 15-20 year contracts that, in our opinion, allow the exploitation of its key natural resource on unfavourable terms.
...
Mineral royalties provide a case in point. Given the high quality of Zambia’s copper deposits,36 the high rate of extraction, and the country’s dependence on copper, the Zambian government should be able to charge a relatively high rate of mineral royalty. An IMF paper states that the ‘common range’ for royalty rates in developing countries is 5-10 per cent, with some royalties as high as 30 per cent.37 Zambia’s Mines and Minerals Act specifies a royalty rate of just 3 per cent of the netback value of minerals produced.38 However, many mining companies (including KCM under Anglo American’s leadership) managed to negotiate a different rate than that specified in the Act. Indeed, KCM pay just 0.6 per cent of the gross revenue of minerals produced. However OECD guidelines, standards for company behaviour signed up to by OECD member governments, expressly state that ‘enterprises should refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to... taxation, financial incentives or other issues.’
...
Another example of the effects of the Zambian government’s weak negotiating position is the rate of corporate income tax. While KCM’s corporate income tax rate is set at 25 per cent, there are several exemptions and allowances – for example, an extended carry-over loss period – which can lead to the headline rate not being paid in practice.
...
While it is standard practice to allow losses to be carried over and offset against future profits, the net effect of this and other tax exemptions, according to the World Bank’s International Finance Corporation,44 is that mining companies in Zambia can legally enjoy a marginal effective tax rate of 0 per cent.
...
The practice of ‘price participation’ is further evidence of the government’s weak negotiating position. Price participation constitutes a separate contract in its own right. We have been unable to obtain a copy of the contract, but a ZCCM official told us that, if the price of copper at the London Metal Exchange (LME) exceeds a specific benchmark (US$2,700-2,800 per tonne), then the government, via ZCCM-IH, starts to claim back a certain percentage (in KCM’s case, 25 per cent) of the difference between the benchmark price and the current price. According to the same official, ZCCM-IH rarely receives the full percentage as ‘there are conditionalities [attached]’, and a cap on the amount that ZCCM can receive from KCM in any one year (roughly US$16-19 million).45 The Zambia Privatisation Agency also notes that there is a cap of US$125 million on how much ZCCM can receive ‘over the life of the operations’.46 Clauses such as these have led an official from the Ministry of Justice to state that ‘the principle of price participation is very good [and]...on paper they [the clauses] look fine...[but] the amount the government got was pathetic’.47 If this is the case, it would be appropriate for Zambian civil society to have access to the price participation document so that they can assess the validity of these statements.
...
In our view, the net result of these clauses is that the Zambian government is unable to derive what would normally be considered its rightful or normal rewards from the extraction of the country’s key natural resource.
...
Action to rectify this would not be unprecedented. Indeed, the UK government took action along similar lines in 2005, when the doubling of the oil price meant that companies operating in the North Sea were averaging a 40 per cent return on capital, compared with the more usual rate of around 13 per cent. In an effort to generate more government revenue, the then Chancellor Gordon Brown increased the supplementary North Sea charge from 10 to 20 per cent.61
Labels: CORRUPTION, DEVELOPMENT AGREEMENTS, EDITH NAWAKWI, IMF, MINING CONTRACTS, World Bank
posted by MrK @ 4:06 AM
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