ECONOMY-ZAMBIA: Conflict Looms Over Revision of Mineral Tax

By IPS Correspondents Reprint | | Print |

Isabel Chimangeni

LUSAKA, Nov 15 2006 (IPS) - The Zambian government’s recent move to increase the mineral royalty tax could meet with resistance from foreign mining companies in the copper-rich country. This may bring mining interests in direct conflict with ordinary citizens who feel they are benefiting neither from the higher international copper price nor from privatisation.

Zambia’s copper mines were privatised during the 1990s. Afterwards, the mineral royalty tax was set at 0.6 percent of annual gross earnings, one of the lowest mineral tax rates in the world.

Mines minister Kalombo Mwansa earlier this year justified the low royalties, saying higher taxes could discourage investment, especially in low-grade deposits.

The government has since changed its position and now intends to increase the mineral royalty tax to around three percent of gross earnings. The proposed increase is partly aimed at reaping the benefits of the rising copper price.

Finance Minister Ng’andu Magande has explained that the government’s proposal falls within the average margin of mineral royalties in other countries, which is 2.5 to three percent.

Magande has also announced that government will be reviewing other taxes from which firms are exempted when they receive their mining licenses.

Under the Mines and Minerals Act and the taxation laws, local and foreign mining companies carrying out copper and cobalt extraction operations have to pay a corporate tax of 25 percent – compared with 35 percent before privatisation.

Magande has stressed that the proposed increments are subject to negotiations with the mining companies. However, the government hopes to introduce the changes by the end of this year.

In an apparent bid to address public concerns, the government intends to invest the increased revenue in education and health programmes.

India’s Vedanta Resources and Canada’s First Quantum Minerals, two major foreign mining companies in Zambia, at first said that they supported the government’s plan to review taxation. They expressed the hope that the review would not affect their operations and profitability.

However, First Quantum Minerals and another mining company, South Africa’s Metorex, have now said they will seek legal advice should the government officially indicate its intentions to increase the mineral royalty.

Metorex chief executive officer Charles Needham points out that one of the conditions of the privatisation of the mines in 1997 was the so-called stabilisation clause which entrenched a 0.6 percent royalty for 15 years.

“We would certainly have a very long discussion about whether (a review) would prejudice our rights under the privatisation agreement,” says Needham.

In contrast, ordinary Zambians question whether the mining deals can really contribute to the developmental goals of Zambia.

Chanda Chileshe is a housewife who, with her retrenched husband, was forced to re-locate from the Copperbelt to the capital city of Lusaka because of the “hard economic conditions” after privatisation of the mines. The Copperbelt is a copper-rich region north of Lusaka.

“We have not seen any tangible benefits from the mines since their sale to foreign-owned companies,” Chileshe stresses. “These new owners have failed to invest in the community.”

“In the past, the mines supported social amenities such as schools, hospitals and recreation facilities. All these amenities are now run-down because of the lack of support from the new mine owners. Yet they are making high profits.”

Robert Lungu, another former Copperbelt resident now working as a freelance photographer on the streets of Lusaka, agrees: “After privatisation, the new mine owners failed to invest resources in surrounding communities. This is in stark contrast to the pre-privatisation period.”

“Before privatisation, living in a mining residential area was considered a privilege because of the many amenities available. We all remember how the mines used to sponsor sport development and maintain the residential areas by providing garbage removal and street lights,” he added.

“The mines used to run schools and hospitals that were among the best in the country. Now things have changed. Despite enjoying huge government incentives, the new mine owners have not been doing anything for the community in which they operate. That is why a lot of us are supporting government’s stand on raising mineral tax,” he says.

The National Union for Miners and Allied Workers (NUMAW) has urged mining companies to pass the benefits of the rise in copper prices on to their workers.

According to NUMAW president Sikufela Mundia, none of the mining companies have rewarded workers in a way that is commensurate with the companies’ own benefits from the copper price gain.

Andrew Kashita, a minister in former president Frederick Chiluba’s government, is also critical of the provisions in the agreements between the mine owners and government, arguing that the deals did not benefit ordinary Zambians.

Kashita was also a permanent secretary in the Ministry of Mines during the reign of Zambia’s first president, Kenneth Kaunda.

He argues that by 1997, when the mine sale agreements were being negotiated, there was enough expertise in the country to devise better terms to safeguard the national interest. Nevertheless, at the time legal advisors failed to provide for reviews of the agreements after a set period or for clauses to limit the time-span of some of the provisions.

According to Kashita, one of the pressures on the government at the time was to meet the demands of the World Bank.

This led to the government having to accept “the uninterruptible right of the mining companies to send foreign currency out of Zambia, to maintain monetary assets including foreign currency outside Zambia, and to bring into the country only the amount of foreign currency needed to convert into kwacha to pay the bills,” he says.