Gross Domestic Product (GDP) depends on copper – Zambia

By Wilfred Zulu

LUSAKA–Zambia, a country whose more than half of its Gross Domestic Product (GDP) depends on copper has long complained of not maximizing benefits from its mineral resources that are run by mostly Australian, Chinese, Indian, and Canadian firms. But the country has now turned around to take a strong grip on its resources.

At a time when copper prices have in the last five years leaped to record highs of about UDD7,000 per tonne and the mines taking home a staggering USD4.7 million in profits for the period 2006/7 financial year, only USD142 million was paid to government in form of taxes and royalties.

Interestingly, the international financial institutions, which had initially persuaded government to sell the mines at what experts call “for a song”, have joined Zambians in calling for the review of the mining agreements that government signed with the mines during the time when metal prices were low “because Zambia is now being deprived of its rightful share of mineral wealth”.

A serious election issue in last years’ elections, President Levy Mwanawasa has responded by severing the concessions given to the mines and introduced measures that would see the treasury getting up to USD400 million fatter this year. The national revenue authority has also set-up a special unit to study the operations of the mines to ensure that no loop-holes are left seeping.

President Mwanawasa in his annual State of the Nation address at the opening of Parliament said the mining agreements government signed with the mines were “unfair and unbalanced”. He introduced windfall tax and increased tax rate from 31.7 percent to 47 percent and raised mineral royalty to three percent from 0.6 percent. He said the new tax regime would earn the country in excess of USD 400 million in the 2008/9 financial year.

The debate about the ‘scandalous’ privatization of Zambia’s copper mines took a twist late last year when the World Bank conceded messing up the country’s sale of the mines.

The development agreements gave the new investors between 15 to 20 years to pay lowly pegged taxes, effective the date when the Agreements were made – between 1997 and 2003.

On his recent visit to Zambia, World Bank vice-president for human development Joy Phumaphi admitted that the bank was responsible for the poor manner in which the mines were sold. The reason being that “it (Bank) did not expect the price for the metal to shoot up – at least not within the next two decades”.

Criticism has been rife in Zambia where the public has increasingly been attacking government, the World Bank and its sister institution, the International Monetary Fund (IMF) for selling, or causing to sale, the copper mines at a give away price and now that the market price for the metal has gone up, the foreign investors who are the owners are minting huge profits that are not trickling down to Zambians, of which 80 percent of the population is poor, according to government figures.

The single case that ignited deep public anger is the $25 million purchase of Konkola Copper Mine (KCM), Zambia largest copper mine, in 2004 by London Stock Exchange-listed Vedanta Resources. Within three months of operations, Vedanta was able to recoup its money with a staggering profit of $26 million on its bosom.

Zambia’s mining exports account for more than 70 percent of export earnings. Despite this, the mining companies contribute only 12 percent of corporate tax, according to the World Bank 2004 report on taxation in Zambia.

In last year’s budget, government indicated that it would receive less than $11 million from the royalties for copper mined in 2005. This was 0.1 percent of the value of production in that year. A 2001 IMF survey of tax and royalties in developing countries, says no any other African country charged royalties below two percent – Zambia’s was 0.6 percent. According to the World Bank’s Doing Business database, the total tax rate on business in Zambia is 22 percent on average across the different sectors. This is the seventh lowest rate in the world.  The other six lowest are Maldives, Vanuatu, Saudi Arabia, the United Arab Emirates, Oman and Samoa.

Why did Zambia agree to such low rates? Former Finance Minster Edith Nawakwi who was a signatory to the development agreements said: “The IMF and World Bank forced us to privatise the mines because according to them, copper prices were not likely to increase for a very long time. So it would have been a big loss on the part of government to continue subsidizing the mines…so you find in the Mines Act provisions for these unreasonably huge concessions. The companies were looking for a situation where they could be profitable. Today I think we are the lowest in the world and causing our people to be so poor yet watching their own money-spinning resource being enjoyed by foreigners”.

As if the 0.6 percent mineral royalties is not low enough, very few mines are paying. The answer lies in the nature of the development agreements that give the firms plenty of leeway on how they can pay these royalties as well as exemptions in the first five years, such as when a firm has a zero cash-operating margin.

This has affected the government’s ability to maximize revenues from copper. A report by the Zambia Chamber of Mines shows that the mining industry’s contribution to the treasury was $200 million in 1992 when the copper price was $2,280 a tonne and Zambia produced 400, 000 tonnes. Comparatively, in 2004 when copper was at $2,868, government revenue was just over $8 million.

Experts add that between 2002 and 2004, Zambia lost $63 million in revenue that would have come in if the mineral royalty was at three percent. However, the high-prices and low-tax regime has led to an investment boom.

Figures from the Chamber of Mines’ investments in copper mines in its last seven years, 1990-1996, was around $125 million a year. After privatization, this went up to $350 million for the next seven years, 1997-2003.

Notwithstanding, government expects to use much of the revenue from the mines to invest in education, health and infrastructure development in rural areas. ENDS//

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