Saturday, January 12, 2008

Zambia is not benefiting from mineral revenues, says Levy

Zambia is not benefiting from mineral revenues, says Levy
By Brighton Phiri and Mutuna Chanda
Saturday January 12, 2008 [03:00]

THE government has introduced a windfall tax and a variable profit tax for the country to benefit from its mineral resources. The tax regime, yet to be approved by Parliament, will be designed to work in periods of both high and low prices and for both low and high cost mining projects. The development moves Zambia into the median position in international comparisons at 47 per cent effective tax rate for mineral resources.

Opening the second session of the Tenth National Assembly yesterday, President Mwanawasa announced that the government would swiftly move to introduce a tax regime that would increase its share of mining revenue.

He said in recent years the price of copper on the international market had risen from an average of US$1,714 per tonne in 2001 to US$6,893 per tonne in 2007, an increase of over 400 per cent.

President Mwanawasa said the rise in copper prices made the mining companies to re-coup their initial capital investments and make huge profits in a short period.

"To illustrate the point of the effect of mining companies paying taxes at concessional rates, the companies only paid a paltry US$142 million in company taxes and mineral royalty to the treasury from the total earnings of US$4.7 billion in the 2005 and 2006 financial year," President Mwanawasa said. "If the current prevailing prices and production forecast hold, the mining companies under the development agreements tax regime will earn an estimated income in excess of US$4.0 billion in the 2008/9 financial year while they will only pay an estimated US$301 million in taxes to the treasury."
President Mwanawasa said by international comparisons, Zambia today earned far less from its mining activities than any other mining country in the world.

He said Zambia's average effective tax rate at 31.7 per cent was eight per cent points lower than the next lowest country in the world, Peru which stood at 39.2 per cent. President Mwanawasa said it had been brought to his attention that even if the mining companies were to move to the 2007 tax regime, the country would still not get fair returns on its mineral resources.

"The government, has therefore, decided to introduce a new fiscal and regulatory regime in order to bring about an equitable distribution of the mineral wealth between the partners, namely the government and mining companies," he said.
President Mwanawasa said the new tax regime would introduce a windfall tax and a variable profit tax that had been designed to work in periods of both high and low prices and for both low and high cost mining projects.

"With these measures, the Zambian tax regime still remains competitive and moves Zambia into the median position in international comparisons at 47 per cent effective tax rate," he said.

"Assuming that current prices and production forecasts hold, we anticipate that the country will earn in excess of US$400 million in additional revenues in 2008 when the new fiscal regime is implemented by all the mining companies."

He said when the new tax system was enacted, and assuming that current prices and production forecasts hold, the country would earn an estimated revenue of US$250 million. President Mwanawasa told the House that the government had already prepared all the paper work for the new tax measures.

He said there was no need anymore for special agreements with investors in the mining sector and any other sector of the economy.

"I ask you Honourable members of parliament to support us when we bring legislations to the House for enactment," President Mwanawasa told the House as members of parliament responded in support:"Bring them tomorrow...bring them tomorrow."
President Mwanawasa said as a result of the team's findings, the government had decided to put in place a new fiscal and regulatory framework for the mining sector.

"Many people have expressed concern that the country and indeed the people of Zambia are not getting the maximum benefit from the current high metal prices. This is because the mining companies are paying low taxes based on the concessions in the development agreements signed with the government at the time of investment. As a result, there have been loud calls on the government to renegotiate the agreement," President Mwanawasa said. "Given the history and importance of mining in this country, my administration has examined this matter with extreme caution.

A special team of experts was therefore appointed to study this issue in great detail. Based on the findings of the team, it has been concluded that the development agreements in their current form and in the current circumstances are unfair and unbalanced, and further, the development agreements no longer meet their stated purpose of providing maximum benefits to the Zambian people and an appropriate return to the mining companies."

On governance, President Mwanawasa disclosed that government had established eight pilot integrity committees with a mandate to address corruption and other malpractices in government ministries.

On the Freedom of Information Bill, President Mwanawasa told the House that the government intended to provide safeguards to ensure that increased access to information did not compromise the country's national security and violated people's rights to privacy, before re-introducing the bill to the House this year.

He further told the House that the Zambia National Broadcasting Corporation (ZNBC) board of directors would be in place this year.

On rural electrification, President Mwanawasa said it was unacceptable that access to electricity in rural areas was less than three per cent and yet the majority of Zambians resided in the rural areas.

On telecommunications, President Mwanawasa said the government intended to introduce three bills to the House, (Information and Communications Bill, Postal Services Amendment Bill and the Electronic Communications and Transactions Bill), which would provide the appropriate legal framework in the sector.

Earlier, President Mwanawasa led the House in observing a minute of silence in honour of the late Kanyama Patriotic Front (PF) member of parliament Henry Mtonga.
The House adjourned to next Tuesday.

And commenting on President Mwanawasa's speech, Cuban Ambassador to Zambia Francisco Javier Correa said investors should share the profits in Zambia's mining industry.

"Most Zambians should own mineral resources and get as much profit from them. I fully agree with the President that Zambia should have higher taxes in the mines," Ambassador Correa said. "Foreign investors are always exploitative and are getting as much resources as possible. They can bring technology, yes that is good, but they should share profits."

Ambassador Correa said if the revenues from what would be earned from the mines resulting from President Mwanawasa pronouncements were properly utilised, many Zambians would benefit.

And United Nations resident coordinator Aeneas Chuma said the measures that President Mwanawasa spoke of on the mines were a new initiative of domestic mobilisation of resources which allowed the mines to make reasonable profits.

"Government is desirous of encouraging investment through the measures announced," Chuma said. "It is important to realise that the mining agreements were obsolete and it is important to have a regime that is consistent with international standards."

And Reform Party president Pastor Nevers Mumba said there was need to set up strong regulations to ensure that safety was not compromised.

"Many of the accidents that we've had on the mines are that there's been a compromise on safety," Pastor Mumba said.

Pastor Mumba said corruption needed to be dealt with firmly to ensure that regulations were upheld and further loss of life and productivity were avoided.
And European Commission head of delegation Derek Fee said there was need for the government to emphasize on the private sector over the next few years to achieve job creation.

"It's important for Zambia to increase revenues from the mines and the important thing is get the economic growth to be felt by the people," Ambassador Fee said. "Economic growth will depend on providing jobs so there must be emphasis on the private sector. The President touched on agriculture and tourism and there are jobs in tourism and agriculture and that is where emphasis should be."

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5 Comments:

At 4:33 AM , Blogger MrK said...

The results from the renegotiated mining contracts/laws are in.

These are good results. I would say they are excellent results, if I knew that this was the maximum that could be negotiated.

I didn't know the mining companies made $4.7 billion in profits, I thought that was about the size of their total turnover. I thought they would make about $2.4 billion in profits.

However, even with my lower number, the $250 million the mining companies would pay in taxes seems low. It would be about 10% of profits, while corporate taxes today stand at 25%.

At the least, for future mining developments, the state should negotiate some significant share ownership, on top of the 25% of corporate tax.

Also, it would be a good idea if the government tried to lock in the high present day prices in the financial markets, in case a recession would drag them lower. The only way to do that in a significant way, is to use some of the profits from the mines themselves. But that would just be me being cautious.

I hope more opinios come in on this issue, and I am looking forward to a detailed discussion, either here, on Cho's blog or MineWatchZambia.

 
At 10:03 AM , Anonymous Nel said...

Happy new year all.

I was actually shocked to hear this announcement from LPM. I just hope there is some seriousness behind this announcement given the dragging of feet that has taken place over the last two years.

$250 million does appear to be low but perhaps given the unwillingness to get this started perhaps we should be thankful for small mercies.

 
At 2:55 PM , Blogger MrK said...

Hi Nel,

And a happy new year to you too.

I think $250 million is very low too. However, it opens the door to at least a more aggressive collection of revenues.

I still think the mining companies are making around $2.4 billion in profits, and if the 25% corporate tax truly applies to these companies, the state should be collecting at least $600 million, not $250 million. (As it happens, $600 million is the exact amount of 'donor aid' in the 2004 budget.)

Also, as it is now acknowledged that it is national law that now applies, not the agreements, it is open to parliament to raise taxes any way they see fit.

This may be the biggest gain out of all of this - the supremacy of parliament as the elected body and representatives of the people, to determine the level of taxation.

I think the state should be much more aggressive, if they are going to show seriousness in collecting revenues from the mines, instead of from the miners salaries (PAYE).

What I would like to see in future, is that the mines not only pay higher taxes, like 50%, but also share (post-tax) profits through joint share ownership. In fact, any future dealings between the state and foreign companies should be joint ventures, which require joint share ownership. The state should have the option to buy more shares in the future, so it can in fact become the majority or sole owner at some time.

This was the model followed by Saudi Arabia, in it's dealings with the national oil company, ARAMCO.

What is also important is that the dealing between government and foreign companies is becoming more professional and more based on law, instead of personal relationships, which have led to the issue of persons in government 'protecting' their 'friends' from scrutiny, which I think is where much of the resistance to change has come from.

 
At 2:13 AM , Blogger Alastair Fraser said...

Hi,
I notice you have different assumptions about how to read the story than those I've reached on the www.minewatchzambia.com blog, I just re-read it carefully to try and work out why:

1) "Assuming that current prices and production forecasts hold, we anticipate that the country will earn in excess of US$400 million in additional revenues in 2008 when the new fiscal regime is implemented by all the mining companies."

I read this as meaning 'additional' to the revenues previously expected, which I have interpreted as meaning $300m + $400m = $700m.

However, next para - Post journalist, not direct quote from Levy.

2) "He said when the new tax system was enacted, and assuming that current prices and production forecasts hold, the country would earn an estimated revenue of US$250 million. President Mwanawasa told the House that the government had already prepared all the paper work for the new tax measures."

Hmm, that suggests a different answer, but one that in the context of the rest of the article seems unlikely to me. Unfortunately, no transcript of the speech is yet on the national assembly website so it's hard to tell for the moment.

Alastair

 
At 7:09 AM , Blogger MrK said...

Wouldn't it be great if the Zambian government had the forsight to set some of that money aside, and used it to buy shares in Equinox, Vedanta and the rest, when the stockmarket takes a dive.

Or used some of it to expand into put options and futures, to lock in the price of copper.

Or if Zambia had it's own commodities exchange.

I really hope their new revenues from the mines is around $700 million. Combined with greater attention to government expenditures, and the management of projects, it would make a real difference. And it won't be bad for the exchange rate of the Kwatcha either.

 

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