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(EIB) How European development money has fed a mining scandal

The Mopani copper mine, Zambia
How European development money has fed a mining scandal
December 2010

Written by: Anne-Sophie Simpere - Les Amis de la Terre (Friends Of The Earth)
Edited by: Greig Aitken - CEE Bankwatch Network
Translated by: Liz Libbrecht
Photo credits: Petr Hlobil, CEE Bankwatch Network, Anne-Sophie Simpere
Layout: Ola Dolinska
December 2010

This publication was produced with the financial support of the European Commission. The content of this document is the sole responsibility of CEE Bankwatch Network and does not necessarily reflect the position of the European Union.

The Mopani copper mine, Zambia. How European development money has fed a mining scandal. The Mopani copper mine, Zambia. How European development money has fed a mining scandal. Mining is a key activity in Zambia. It is important to be aware of its history and current situation if we are to understand the situation at Mopani.

1. The privatization of Zambia’s mines: opacity and corruption

“Whatever the weaknesses of Zambia’s negotiators, there is no excuse for massive multinational investors to blackmail one of the world’s poorest countries to provide special concessions from its national laws.”

Alastair Fraser and John Lungu, For Whom the Windfall?

Zambia is an inland country in southern Africa that is particularly rich in mineral resources, especially copper. At the end of the 19th century, the country was colonized by Cecil John Rhodes’ British South African Company (BSAC) which mined its mineral wealth. The mines were subsequently taken over by two mining giants, Roan Selection Trust (RST) and Anglo American.

In 1964 Zambia gained its independence and in 1969 the government announced the nationalization of the mining industry. The state took over a majority share in all the country’s mines, through two national companies that merged in 1982 to form the Zambian Consolidated Copper Mines (ZCCM).

At the time, ZCCM was responsible not only for mining but also for public and social services throughout the Copperbelt: maintaining the towns, health, education, housing, recreation, etc. Through a system sometimes qualified as paternalist, ZCCM acquired crucial importance in the region, where it was present in all aspects of the lives of its employees and neighbouring communities.

At the time, on a macro-economic level, Zambia remained a moderate-income country with a GDP higher than that of Brazil. But with an economy based essentially on copper mining and exports, it was hit very hard by the oil crises and plummeting copper prices in the 1970s. The result was a drastic increase in its debt and, in the 1990s, structural adjustment policies imposed on it by its financial backers.

Thus, under the influence of its lenders – especially the World Bank – and following the election of a new government in 1991, Zambia decided to dismantle and privatize its mines. The price of copper was very low at the time, and the country was heavily in debt. Mrs Edith Nawakwi, former finance minister responsible for supervising the privatizations, commented: “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]”6.

From 2004, the price of copper shot up to record levels, even topping the 7,000 dollar per ton mark: a 350% increase compared to prices at the time of privatization. The process of privatization of the mines from 1997 to 2000 was characterized by Zambia’s weakness and a context of rampant corruption. Frederick Chiluba’s presidency (1991-2001) has been called the “decade of plundering”. In power during the privatization, this former president was prosecuted and sentenced for misappropriation of funds by the London High Court in 2007. The sentence will not be applied in Zambia.

In this context, privatization negotiations took place in opaque conditions, resulting in the mines being sold off. Dr. M. Mpande, professor at the University of Zambia (Lusaka) and former vice-minister of mining, explained 6 ACTSA, SCIAF and Christian Aid, “Undermining Development? Copper mining in Zambia”, October 2007.

A copper mine around Kabwe (Copperbelt) that in 1991 experts estimated the minimal value of privatization of the mines at 3 billion dollars7. Yet all the ZCCM’s mining assets, divided into seven units, were sold to various private consortiums for a total of 627 million dollars8. According to Prof. Mpande, these payments were probably accompanied by bribes.

The privatization process went hand-in-hand with a new Investment Act and a Mines and Minerals Act passed in 1995, both of which were particularly favourable to investors. In particular, they set up an attractive tax system for the mining companies and allowed for the repatriation of their profits back to their home countries.

In parallel, the private companies buying the mines signed “development agreements” with the Zambian government, which established their rights and obligations. These were to remain secret for a long time, but the publication of some of them revealed that they granted even more exemptions and privileges to the mining consortiums, with regard to taxes, the environment and social issues. Moreover, these agreements provided for “periods of stability” of up to 20 years, in which the mining companies would be exempted de facto from any laws that parliament might pass during that period, and from any other amendment to the national legal framework.

2. A tax system that deprives the state of mining profits

“In 2007, mining revenues contributed something like 0.2% of the GDP in Zambia: this looks more like a statistical error.”

M. Kapil Kapoor, country representative for Zambia at the World Bank, Lusaka, March 2009 With the new legislation and development agreements, the mining companies benefit from a highly favourable tax system in Zambia: the right to carry forward their losses over 15 to 20 years, 100 per cent foreign currency retention, no withholding tax, various tax and special tax exemptions ranging from customs duties to penalties for environmental pollution.

that, in 2001, the average royalty rate for minerals in developing countries was between 5 and 10%. Yet in the Zambian legislation passed for privatization, it was set beneath this average, at 3%. And the development agreements make provision for even lower rates, right down to 0.6%.

These exorbitant advantages have been justified by the necessity to attract private investors to the country – a questionable argument, for when it comes to exploiting resources investors have no choice but to go to wherever these resources are located. The relevance of this system is therefore doubtful. In 2004 the consulting firm McKinsey acknowledged that: “popular measures seeking to attract investors, such as temporary tax exemptions, only serve to inflate the value of investments that would probably be made in any case.”

In addition to this tax system, there is a problem with tax collection and control over multinationals by the Zambian tax administration. The Zambian Revenue Authority (ZRA), which collects taxes on the government’s behalf, acknowledges that the size of the firms and the complexity of their operations make its mission “a real challenge”. It lacks resources and automatically finds itself in a position of weakness faced with huge corporations operating internationally and skilled in tax optimization.

All these factors lead to a situation where mining companies contribute virtually nothing to Zambia’s budget. Various sources of information exist on these companies’ effective participation in the Zambian budget, but they all tend to show that this participation is weak at best – and at worst, negative.

A World Bank report thus recognizes that tax incentives and low tax rates enable the mining sector to benefit from a marginal effective tax rate of around 0%9. According to the ZRA, only one out of the 12 mining companies in Zambia pays tax on its profits; the others show no profits “in terms of the tax legislation in force”.

With regard to other taxes, the ZRA considers that the mining sector contributes no more than 10 to 15% of Zambia’s tax revenue, and most of that is from the income taxes paid by the mines’ employees. Taking into account only what is paid by the firms’ themselves, the ZRA recognizes that their contribution dips to 4% of the total of Zambia’s tax revenues.

Dr. M. Mpande considers that the situation is even more serious than that. He explains that not only do the mining companies pay no taxes, they also ask the ZRA for reimbursement of the VAT that they pay. In the final analysis, the mining companies’ contribution to the Zambian budget is negative10.

3. Communities heavily impacted by privatization

Zambia is experiencing very serious social problems. It is estimated that 10 million Zambians are threatened with malnutrition11, and general infrastructure and social services are often in a deplorable state. Unfortunately, it does not seem that the mining sector is improving the situation, especially since privatization.

In the days when the mines were run by ZCCM, the company took care of all the public services in
the neighbouring communities: hospitals, schools, maintenance of infrastructure, activity centres for women, recreation for children, etc. After privatization, the private mining companies discontinued most of these social activities, which have not been taken over by the state or the municipal authorities.

Generally, the mining towns have been abandoned and much of the services and infrastructure is in a deplorable state. Roads, in particular, are badly damaged due to a constant flow of trucks to and from the mines, and no one takes responsibility for repairing them. Hospitals and public schools now charge fees, whereas in the days of ZCCM these services were available free-ofcharge to all the mining employees and their families.

Most recreational activities (recreational centres, sports facilities, centres for women) have been discontinued. Privatization has, moreover, been accompanied by The companies’ resistance to taxation or the short-lived fate of the windfall tax

One consequence of Zambia’s “attractive” tax system: from 2004 to 2008, copper prices soared on the international markets, without the country benefiting one iota from the exceptional profits generated by the mining companies. In fact, the share of revenue benefiting the country was halved from 1.4% in 2003 to 0.7% in 2004, whereas exports doubled (2005-2006), totalling 2.78 billion dollars.

Faced with this situation, and following multiple campaigns by NGOs, the government decided to change its tax system and to introduce a “windfall tax” on companies’ exceptional profits.

The companies did not take kindly to this threat to their advantages and reacted strongly against the insecurity that this change of system created for them. Lucy Bwalya from Caritas Zambia explained: “To my knowledge, only two firms paid windfall tax, and they then laid charges against the government.”

The mining companies referred to the stability clauses of the development agreements and threatened to close the mines after the financial crisis of end-2008. Under pressure, the government backtracked and replaced the windfall tax by a variable profit tax. Dr. Mpande, who severely criticizes this option, believes that the companies will not readily reveal their profits, and that the Zambian authorities will never be able to collect this tax based on complex calculations. Considering that only one mining company now pays income tax, it seems highly unlikely that the others will start contributing to this new levy.

In the background : Mopani’s smelter

Labels: CORRUPTION, TAX EVASION, WINDFALL TAX

posted by MrK @ 12:19 AM