Change in Mineral Royalty Tax is not a risk to Zambia’s sovereign sustainability

By Brenda Zulu

The Zambia Chamber of Mines dispel assertions in the Post newspapers of Monday, April 25,2016 by Moodys, lead Sovereign analyst for Zambia, Zuzana Brixiova that the proposed changes to the Mineral Royalty Tax(MRT) in the Mines and Minerals Development amendment Bill, before the Zambian Parliament, are a risk to sovereign sustainability.

According to a Press Release made available to the Africa Interactive Media (AIM), the announcement of changes to the mining fiscal regime in the 2015 national budget, the Chamber of Mines and its membership have been engaging government and other relevant stakeholders through a constructive dialogue process.

It must be noted that the disastrous consequences of the MRT regime as it stood, would have resulted in virtual death of the mining sector, something which would certainly have not boded well for the country. The industry together with government was looking for a longterm solution that would take the industry through the next 20 to 30 years. Increased production is fundamental to increasing government revenue.

It must be realized that having high nominal tax rate does not necessarily result in positive revenue. A realistic revaluation of tax rates that sustains the taxed sector is more progressive than an unsustainably high rate one that ultimately only serves to destroy the target sector.

What is an ideal mineral tax regime? It is one that delivers the maximum benefit for a country’s citizens from its mineral resources. Maximum benefit to the citizenry might not necessarily be the same as maximum benefit to the Government, in terms of tax receipts.

For example, a healthy mining industry has significant multiplier effects within the wider economy that far outweigh its contribution to the national coffers.

Studies by the International Mining and Minerals Council (ICMM) have shown that for every $1 generated by mining, at least an additional $3 are generated elsewhere in the host economy. In addition, for every one direct mining employee, employment is generated for further 3-5 employees elsewhere in the economy.

The broad aims of Government minerals taxation policy must therefore be to generate immediate and lasting revenue in a manner which:

• Has no adverse impact on the health of the Industry.
• Encourages (or, at least does not discourage) the investment needed for future development, which is the pipeline of future tax receipts.

Royalties are a blunt instrument; they are not sensitive to the distinctive circumstances of each mine. As MRT is based on production, it has no regard for costs – which will always vary between different mines. So, two mines with completely different cost structures and profit levels might end up paying the same royalty tax.

In fact, a mine can be making a loss and still have to pay the royalty – that is precisely what is happening across the Industry at the moment. Some loss making mines might even have to borrow money in order to make the payments.

A country report (No. 15/153, June 2015) by the International Monetary Fund (IMF) suggests Zambia’s MRT rates are too high.

“A comparison of prevailing royalty rates in 2014 shows that, at 6%, Zambia’s royalty rate was among the highest fixed rate among copper-producing countries.

A World Bank report (Making Mining Work for Zambia, June 2015), also suggests the country’s MRT levels are too high. “Zambia’s mineral royalty rates have in recent years tended to exceed the global norm, even before the rate jumped temporarily to 20 percent on open-pit mines in 2015. Most major mineral producers charge less than six Percent.”

According to the table below based on trends in Taxation by KPMG Global Mining Institute

Comparison with other national mining taxation regimes

COUNTRY ROYALTY CORPORATE INCOME TAX 

Australia 2.5%-5 % 30%
Brazil 2 per % 25%
China 0.5%-4 % 25%
Ghana 5% 25%
Indonesia 4% 25%
South Africa 0.5%-7% 28%

DRC 2% 30%

Zambia 30% 6%-9%
We in the mining industry have been restructuring our operations, lowering our costs and contemplating investments which improve our efficiency and try to keep people in work. But what are the right measures when we’re dealing at the level of an entire country.

This basic truth is tremendously encouraging for us in Zambia, for it tells us that despite the serious situation we currently find ourselves in, there is a way out. This explains why we, as an industry, are calling for a national strategic consensus among all stakeholders to promote the growth not just of the mining industry, but of the economy in general.

The long-term objective is a diversified high-growth economy in which the mining industry is no longer the sole contributor, but simply one of many industries selling products and services, creating jobs, and generating wealth for Zambia’s people and tax revenue for Government services.

Recent public pronouncements by His Excellency, President Edgar Lungu on the absolute necessity for a growing, diversified economy are encouraging, and show the government is alive to the need for such a transformation. As an industry, we stand ready to work with government, and all other stakeholders, to help make this a reality.

GOVERNMENT PARTNERS WITH MINING HOUSES TO DEVISE CONSISTENT SECTOR POLICIES- Cape town

By Brenda Zulu

GOVERNMENT says it is engaging mining companies to consider different options so that the two parties could come up with consistent and predictable policies for the mining sector.

And mining houses in Zambia have hailed the Zambian Government for its continued commitment to finding lasting solutions facing the sector.

In a Press Release, Gemfields Plc, 75% owners of Kagem Mine, and Vedanta Resources Plc, owners of Konkola Copper Mines (KCM) have said that they appreciated the openness with which Government was approaching the various efforts that have been tabled so far in order for the parties to arrive at a mutually beneficial set of policies.

Minister Yaluma making his presentation at the Country Case Study on Zambia session at the 2016 Mining Conference in Cape Town on 10th February.

Vedanta Resources Plc Chief Executive Officer, Mr. Tom Albanese, said during a ‘Country Case Study’ on Zambia at the on-going Mining Conference in Cape Town today that his company was proud of what the negotiating team had achieved with the Zambian Government in getting round the challenges facing the sector.

He said KCM respected the “owners of the resources in Zambia” because they realised the pivotal role that the company played in the lives of Zambians.

Germfields Plc Chief Executive Officer, Mr. Ian Harebottle said his company had all the confidence in the Zambian Government which had continued making the country “an excellent investment destination.”

The two were part of a panel discussion which also comprised Zambia’s Minister of Mines and Minerals Development Mr. Christopher Yaluma, Deputy Finance Minister Mr. Christopher Mvunga and ZCCM-IH Holdings Chief Executive Officer Dr. Pius Kasolo. 

The session was also attended by Deputy Minister for Mines and Minerals Development Mr. Richard Musukwa, Zambia’s High Commissioner to South Africa His Excellency Mr. Emmanuel Mwamba, several multi-national mining investors, and business executives from various sectors.

And Mr. Albanese disclosed that KCM has made tremendous progress in repositioning itself in the last two years and could comfortably say that it was now able to withstand the current low copper prices.

“We are hopeful that there will be positive trends soon and the copper business will start coming round this year although this will not be in the range of 6 to US$8, 000 per tonne.”

He said Vedanta Resources understood the current problems, such as the energy shortage, that the Zambian Government was grappling with and would like to be part of the solutions.

On the developing consistent policies to guide the mining sector, Mr. Mvunga said Government was alive to the fact that mining was a long term investment for which owners needed to be able to plan ahead without difficulties.

“We are in constant dialogue with the mines to arrive at a consistent and predictable tax regime. We realise that there is need for a certain form of certainty as these are long term investments,” he said.

Mr. Mvunga said Government, just like many other players in the sector, realised that mining had moments of “troughs and crests”. He said Government was glad that there was still a show of optimism from the mining houses themselves.

He reminded mining companies to look at the ‘Remission rule’ governing the operations of mines in Zambia so that they could put it to use in troubled times as the current scenario.

Dr. Kasolo pointed out that trends in the mining business were of cyclical nature and that these occurrences were beyond the control of any government. 

And responding to a question from the audience, Mr. Yaluma assured the mining sector that Government was not considering reintroduction of the Windfall Tax until such a time when conditions dictated so.

Mr. Yaluma said Zambia had been through a period of depressed metal prices and that Government was confident that the country would emerge out of the current one victoriously.

He said Government, the industry and all other stakeholders had their roles to play in order to reverse the downturn.

The Minister told the audience that in order to ensure growth and sustainability of the mining industry during all financial scenarios, a clear and articulate policy that sought to create a competitive, thriving and sustainable mining industry had been adopted.

Mr. Yaluma noted that Government had also adopted the revised Mines and Minerals Development Act of 2015 which was enacted to bring the law in line with international best practices.

The new law addresses among other things; the unnecessary bureaucracy in the issuance of mining rights; inadequate tenure of mineral processing licences; Mineral royalty rates, and promoting good governance, transparency, adherence to the rule of law and regular dialogue with stakeholders.

Privatised mining industry drives growth and development

By Brenda Zulu
Zambia’s modern copper growth story really started around the turn of the century, in 2000, with the privatisation of the country’s copper mines, says Nathan Chishimba, president of the Chamber of Mines.

Speaking at a media conference today, Chishimba says available statistics show a dramatic improvement, from 2000 to 2011, of key indicators not just of the mining industry itself, but the economy in general.

“The newly privatised industry was able to invest and modernise, and so take maximum advantage of the steadily rising demand for copper coming out of China,” he says. 

This drove Zambia’s development, spurring GDP growth and helping the country achieve annual growth rates of 7% to 10%. 

“In the first decade of the new century, the mining industry has ploughed more than US $10 billion into new mining ventures. It has trebled the country’s annual mining output to around 800 000 tonnes and increased employment fourfold to more than 80 000. This mining growth has been key in taking government tax revenue from less than half a billion in 2000 to a peak of K8 billion ten years later,” Chishimba says.

In addition, the mines were able to invest heavily in CSR and socio-economic development in local communities. These include the funding and operation of schools and hospitals; the building of roads, houses and community infrastructure; and the funding of scholarships at school and university level.

Growth the answer to Zambia Mining crisis

By Nathan Chishimba, President: Chamber of Mines

It’s easy to be despondent in the current economic crisis facing the country, what with power shortages, a depreciating currency, a sluggish economy, and a mining industry battling shrinking demand, declining profitability and job losses.

But it’s precisely at times like these that we, as a nation, need to focus and learn the lessons from the current crisis, because it need not be permanent.  There’s a saying which argues that being broke isn’t a big deal – it just means you’re short of cash. It’s a temporary situation, and can be remedied by the right measures.

We in the mining industry have been restructuring our operations, lowering our costs and contemplating investments which improve our efficiency and try to keep people in work. But what are the right measures when we’re dealing at the level of an entire country? Is there a magic bullet?  All the research available on how countries get rich and stay rich suggests that there is – and it’s economic growth.

No country has ever lifted itself out of poverty other than through economic growth. Economic growth creates wealth; and wealth creates jobs, disposable income and tax revenue. 

Economists like to talk about the “The Rule of Seventy”, which says that if you divide 70 by a country’s annual growth rate, you get the number of years it takes for the economy to double in size. So with a consistent growth rate of say, 7% (which Zambia has easily achieved before), a country’s economy would double in size within 10 years – in other words, the average citizen would be twice as wealthy.  After another 10 years of 7% growth, the economy would double in size again; and so on.

China has set the standard in recent times. With its average growth rate of 10% a year for nearly four decades, its economy has grown more than 30 times since 1980. People like to talk about the Chinese miracle; but, it’s no miracle – it’s just economic growth.

Perhaps the biggest surprise about economic growth is that any country can achieve it. This emerges in an interesting study, Habits of Highly Effective Countries. It was published in 2006 by the South African Law Review Project to help that country’s policymakers. The study doesn’t advocate particular policies, but merely notes, empirically, which ones are correlated with high economic growth.

It concludes that “the outlook for a country’s economy is dependent on factors within its direct control, and not on such variables as natural resources, climate, size, race, culture or arable land; nor is it dependent on extraneous [factors] like foreign aid or tariff-free access to foreign markets.”

In support of this counter-intuitive statement, the study lists the 20 highest-growth economies over periods of 5 and 10 years respectively, and notes that they cover “the full range of possibilities”, from poor to rich, small to big, formerly capitalist to formerly socialist, resource-rich to resource-poor, countries that were until recently colonised and countries that were not, and which cover a wide range of religions, races and cultures. African colonies feature both among the highest- and lowest-growth countries, and none of the world’s colonisers appear in either [category].

“This reaffirms the evidence suggesting that any country is likely to prosper, regardless of its circumstances or history, if it implements policies that are associated elsewhere with prosperity,” the study notes.

In all fairness, it is only reaffirming what numerous other studies have shown over many years: economic growth is no accident, but the direct result of policy.

This basic truth is tremendously encouraging for us in Zambia, for it tells us that despite the serious situation we currently find ourselves in, there is a way out. This explains why we, as an industry, are calling for a national strategic consensus among all stakeholders to promote the growth not just of the mining industry, but of the economy in general.  The long-term objective is a diversified high-growth economy in which the mining industry is no longer the sole contributor, but simply one of many industries selling products and services, creating jobs, and generating wealth for Zambia’s people and tax revenue for Government services.

It requires tremendous political leadership and courage to implement such policies, for they invariably upset the status quo and create short-term challenges for some even as they generate gains for others.  Recent public pronouncements by His Excellency, President Edgar Lungu on the absolute necessity for a growing, diversified economy are encouraging, and show the government is alive to the need for such a transformation. As an industry, we stand ready to work with government, and all other stakeholders, to help make this a reality. 

Economic growth is not a short-term fix; it’s a long-term imperative. These are policies which must take us not to the next Budget, or the next set of corporate financial statements, but 30 years and more into the future, to the economy that our children and grandchildren will inherit. 

Whether Zambia’s economy will have grown in size several times by then, or merely stagnated, will depend directly on the policies which we have the courage and foresight to implement today.

Power shortage makes a bad Mining situation worse

By Brenda Zulu

The power shortage in Zambia has made a bad situation worse by placing additional constraints on the mining industry, says Nathan Chishimba, president of the Chamber of Mines.

Amplifying a key point made in his media presentation in Lusaka on 16^th December, he says this makes Zambian mines even less competitive in the present crisis relative to their counterparts in other copper-producing countries.

“In all countries, mining is a very energy-intensive business, requiring steady and reliable supply to ensure that equipment and machinery is operated efficiently, and that the safety of workers is not compromised.”

The main effect of the power shortage has been to force mines to operate at reduced capacity. This results not just in lower production, but idled workers and lower productivity. Meanwhile, mines have fixed costs, which have to be met.

Emergency power has to be sourced – whether through generators or imports – and this is invariably more expensive than the traditional supply. In some cases, expansion plans have had to be put on hold, and operations have had to be closed or put on care and maintenance, resulting in layoffs and retrenchments.

“This is the most unfortunate aspect of the power shortage, because it adds to the pressure on jobs already caused by the global crisis and the slowdown in demand for copper,” says Chishimba.

Operationally, the net effect is to push up the costs of production, making Zambian copper even more expensive to produce.  “A low copper price and a serious power shortage are probably the worst possible combination, both for the mining industry and for the country,” says Chishimba.

How China’s growth stumble affected Zambia

By Nathan Chishimba, President: Zambia Chamber of Mines

There’s a well-known saying in the banking business which goes something like this: if you owe the bank $100, it’s your problem; if you owe the bank $1 billion, it’s the bank’s problem.

Similarly, if a single country consumes 10% of the world’s copper production, it’s not a problem; but if a single country consumes 45% of the world’s copper, then it’s a big problem. Why? Because if that country should suddenly run into economic difficulty and cut back on its copper consumption, then the world’s copper mines would face a serious and sudden drop in their business. 

That, simplistically speaking, is exactly what has happened in the world copper market in the past five years. China is the world’s largest consumer of copper, accounting for some 45% of world production. Barely 10 years earlier (2004), China’s consumption was only 21% of world production; and 10 years before that (1994), it was a mere 8% of world production.

So over the course of the past 15 years or so, particularly since the turn of the century in 2000, China has been like a giant industrial glutton, literally gobbling up much of the world’s copper. Its voracious appetite has been caused by the country’s spectacular economic growth, fuelled by the market reforms initiated in 1979 by the Chinese leader, Deng Xiaoping. Concerned with the depth of poverty in then communist China, Deng astonished the world by permitting free-market practices and the profit principle to operate in the country. 

He said: “It doesn’t matter if the cat is black or white, so long as it catches mice.” This deliberate and strategic policy decision unleashed the spirit of enterprise of the Chinese people, attracted billions in foreign investment and made the country a magnet for the world’s leading manufacturers and industrial companies. Since 1980, the country’s economy has grown more than 30 times, and China has lifted more than 700 million people out of poverty – a feat unequalled in history.

Today, China is the world’s largest manufacturer, the world’s largest exporter, the world’s largest car market, the world’s largest retail market, the world’s largest user of the internet and the world’s leading producer of industrial patents.

This decades-long growth spurt meant the country became a key consumer of industrial minerals like copper and steel. That’s because copper is used in all the areas that one would associate with a growing economy: construction, power transmission, industrial machinery and transportation (cars, trains, planes). Copper wiring and plumbing is also an integral part of household appliances, heating and cooling systems, and telecommunication devices such as cell phones.

Businesses expand to meet demand, and the world’s major mining companies, from Zambia to Chile, expanded production and invested in new mines to be able to supply China’s appetite for copper. Zambia’s newly privatised mining industry caught this wave in about 2000,and expanded massively over the next decade, investing more than $10 billion, trebling employment in the mining industry to around 70 000, and boosting copper production nearly threefold to around 800 000 tonnes.

But about five years ago, in 2011, growth in the Chinese economy began to slow, resulting in a contraction in demand for copper, steel and other industrial metals. After years of double-digit annual economic growth, which reached levels of 14%, the country’s growth rate slowed to around 7%. That’s still spectacular, but the fall was enough to cause a prolonged decrease in demand in copper consumption. 

The resulting oversupply of copper on the market as a result of all that mining investment during the boom years means the price has fallen steadily, from a high of nearly $10 000 a tonne in 2011 to around $4 600 today. From Peru and Zambia to Australia and the United States, copper mines have felt the effect on their operations – shrinking revenue, rising costs and declining profitability. The world’s copper mines have been rocked by retrenchments, layoffs and mines being put on care and maintenance.

The current period of crisis is being used by the world’s copper mines to review the efficiency of their operations, cut their costs, and in many cases automate aspects of their operations to produce copper more cheaply. We in Zambia are in the same boat, and hope to emerge from the present crisis in better shape. It’s the world’s strong, competitive copper mines which will be the least immune to future price shocks.

Nobody doubts that the upturn will come, as it always has in the past; but at this stage, no one is prepared to say when.  The bottom line is that China has not stopped buying our copper; it is still buying increasing quantities of the metal – but just not at the same phenomenal rates as before. For now.