Maravi

Ad-Valorem Royalty of 3% shines light in dark tunnel

Ad-Valorem Royalty of 3% shines light in dark tunnel
By Professor E. Clive Chirwa
Sunday April 13, 2008 [04:00]

Every Zambian who read the news about the ratification of ad-valorem royalty of 3 per cent by the Parliament jumped into the air with joy as if they have been trebuchetted out of tribulation. This issue involves us all Zambians and friends of Zambia who have for a long time sacrificed our natural resources by giving them away “free of charge” while we plunge deep into poverty, see our infrastructure crumble, education system collapse, health quality demise, and our fiscal policy unable to balance the books as a result end up borrowing when we should not.

The government initiative on increasing copper mines’ taxes is greatly welcomed and I commend all those who participated in its formulation. The salute too goes to all the opposition parties, individuals and institutions that have been airing constructive criticisms.

From the Parliament point of view, this is democracy in action. Thinking this is not a dream, you wonder just how Zambia signed up to the original privatisation agreement. Why didn’t the contracts, which ran to over 20 bulky volumes, never presented to Parliament. These contracts would have been thrown out of Parliament.

The fault is not entirely ours. A lot of blame must also be levelled at the World Bank and its advisers who were on the side of the purchasers and not Zambia. Indeed, in the mid-term, Zambia should take the World Bank to international courts of law and seek compensation for lost revenue based on misappropriated advice that tightly tied Zambia’s negotiating hands and greatly influenced the outcome of the contracts negotiations. A good example is the mischief portrayed by the World Bank when they assured Zambia that some mines that were sold had finite life spans of up to 7 years.

This has now transpired as peddling on untruth since after 7 years, all the mines are in full working order and have long life in them based on the amount of investments. In business, if you are supplied with defective products, the supplier either replaces them, return your money or pays compensation. The advice from the World Band was defective to the core and therefore a call for us to take them to court must be made.

On the part of Rothschild and law firm Clifford Chance who played a major role in advising the government to parcel the mines and smelters into seven entities should have surely known of the raw deal. Why nowhere in all the documentation benefits are mentioned just risks and hazards are flagged out. This is a puzzle. Did these London-based firms know something and did not tell the client, that is, Zambia?

We will know when we go to court. Indeed I have been assured by my very good friends at the London School of Economics and Harvard University in USA that the World Bank and its advisers plus other players have a big case to answer.

If taken to court we will win and we will be compensated for lost revenue. This will not be easy but as it stands it is 90 per cent achievable. With little more effort, we will do it.

For now let us count the eggs in our basket. Therefore, the ad-valorised mineral royalties of 3 per cent that is law from 1st April 2008 shines the needed light in a long dark tunnel.

This is just the genesis of the journey Zambia will take through the dark tunnel as the country heads for that faint shone light at the other end and seeks the exist into prosperity. As the diagram on earnings from mineral royalty shows, Zambia is at the bottom. By moving into 3 per cent corridor, Zambia will still be no better off so to say. The mining outfits will still be paying very little to Zambia in comparison with what mines pay taxes in other countries. Zambia will again be at the bottom and always play a catch up game.

As the government focuses a revenue of US$3.5 billion ( K12.25 Trillion) from copper mining firms, this year’s (April 08 – April 09) contributions will be 3 per cent or US$105 million (K0.37 trillion). Our competitor Chile meanwhile have increased their productivity and will earn US$460 million (K1.61 trillion) that is 5 per cent of US$9.2 billion. This is just above four times Zambia’s take home pay.

Mineral resources in Zambia are our source of revenue and the only money printing machine. If we can maximise our take home pay we will be able to do a lot for our people. Currently as it stands and what will be in the year to come is not good enough to move us out of poverty and into prosperity.

The increase of mineral royalty to 3 per cent will bring into our coffers only K0.37 trillion, while the hard working people of Zambia will contribute about three times that to K1.11 trillion through mainly income tax. Priorities are not right. We tax our people too much. To reduce the tax burden on our citizens we need to further ad-valorise royalties from 3 per cent to 5 per cent as soon as possible and later even more.

The reasons for this thinking can be found in the diagram shown here and on the websites of all mining companies operating in Zambia. For analysis and for clear explanation, I have chosen the parent companies of KCM and Kansanshi/Bwana who are Vedanta Resources and First Quantum Minerals Ltd.

Both of these companies have made enormous investments in Zambia and we say thank you for coming to our rescue when we needed you most. As we were partners at the beginning of this journey, we want to remain partners as revenues have increased. This means sharing the cake fairly with the same spirit that all of us showed when we embarked on this partnership.

From our side we gave you the lowest royalty taxes ever given by any nation on earth of 0.6 per cent. We know we were a laughing stoke of the world, but we bit our pride as we wanted you to grow and stand on your two feet. Now it is your turn to reciprocate the generosity we showed you when we gave you all our natural resources on a golden plate.

If you are humane enough, you will stand up and say “even the 3 per cent you have proposed to us is still below the belt. We can immediately afford 5 per cent. May God bless you Zambia. From our side we will say “you have just saved millions of lives”. But I know you will not have the guts to say it. This is capitalism in a nutshell.

So we have to crack it and force you because your income last year according to your fiscal year annual return 2007 showed that you can afford it. Vedanta Resources from operations in Zambia made net sales of US$1.02 Billion (K3.57 trillion).

After paying Zambia with all the taxes and all the operating costs, Vedanta Resources had a net profit of US$413 million (K1.45 trillion). According to Vedanta Resources website (www.vedantarecources.com) this constituted an increase in profit of 44 per cent on 2006 fiscal year. First Quantum Minerals Ltd on the other hand had a bigger operation in Zambia last year.

The company had net sales of US$1.3 billion (K4.55 trillion). After also paying Zambia with all the taxes and all the operating costs that were reduced by 8 per cent, First Quantum Minerals Ltd pocketed a net profit of US$755 million (K2.65 trillion). Again according to First Quantum Minerals Ltd’s website (www.first-quantum.com) this is 37 per cent up in profit based on the 2006 fiscal year.

Profit taken out of Zambia by these two companies is in the total US$1.168 billion (K4.088 trillion). Is this not excessive profit taken from the vulnerable and poor people?

Can we share based on our initial partnership and gentleman’s agreement and not contracts? We scratched your back when things were tough and gave you 0.6 per cent and it is your turn to scratch ours by at least giving us 3 per cent that will quickly rise to 5 per cent. Dear Zambians, this is how much we are partly losing by not having ZCCM in the driving seat.

Labels: CLIVE CHIRWA, DEVELOPMENT AGREEMENTS, WINDFALL TAX

posted by MrK @ 8:14 PM