The Zambian government is under increasing pressure from business and labour to increase its mineral taxes in the wake of surging copper prices on the world market but, ÂÂanalysts say, a revision could lead to litigation.
Copper prices on the London Metal Exchange have shot to record highs of about $8 000 per metric tonne — from the average of $1 200 six years ago — in what is considered the biggest base-metal bull market in 50 years, fuelled by strong demand from China and India.
But the Zambian government has continued to charge paltry mineral royalties of 0,6% — the world average is 3% — and offers lengthy tax holidays to foreign investors, resulting in poor earnings from the booming prices of its main export, copper.
Mining companies doing business in Zambia are also exempt from customs duties on imports of capital machinery and there are no restrictions on the amount of profits, dividends or royalties that can be externalised.
The incentives were introduced and enshrined in the mining firms’ legally binding development agreements in 2002, to attract investment at a time when copper prices were depressed and South Africa’s mining conglomerate, Anglo American, had just pulled out of Zambia’s mining sector.
And now, with the current boom in copper-market prices, there are increasing calls from Zambian business, opposition political parties and the labour movement for the government to renegotiate the development agreements and raise the mineral tax to levels that would benefit the country.
On a recent visit to Zambia World Bank economic adviser Paul Collier, said ”government has made a tactical error in imposing a tax-free-regime on the copper industry and should quickly impose a windfall tax, so that the people of Zambia can benefit from their resources before the boom in copper prices subsides”.
A proposal for the introduction of the windfall tax was also lauded by a senior Zambian business leader and former owner of the defunct Meridian BIAO Bank, Andrew Sardanis, who said renegotiating the agreements would be a time-consuming exercise for the development-hungry country.
”Businesses have a way of delaying things. By the time talks are concluded, copper prices could have fallen from the current highs. Windfall taxes are the country’s practical solution to benefiting from stronger copper prices. It [the windfall tax] won’t be against the agreements, all governments do it. Even Britain did it. With the high price of copper, the mines want to produce; they will accept it, we must not be behaving as if we are walking on eggs,” Sardanis told local media.
With reasonable mineral royalties, analysts say the country could raise enough revenue required for national development as has been the case with the world’s largest copper producer, Chile, which last year netted a record budget surplus of $8-billion from its 3% royalties.
Early this year Zambian Finance Minister Ng’andu Magande announced in his budget speech that government had eliminated tax holidays and increased mineral royalty taxes to 3% for all mining firms ”to ensure more collection of revenue from the mining sector”.
But a few days later Magande disclosed that the new tax revisions would not apply to existing mining companies.
The government is now trying to target mining companies on the basis of their poor corporate social responsibility. Mining firms in Zambia, many of them from China and India, have been accused of adopting a ”step-brotherly” attitude towards the communities in which they operate, coupled with paying poor perks and not sending Zambian employees for specialised training.
”I will soon be meeting the mining companies to explain to them that the development agreements were about more than tax breaks; they are also obliged by the mining firms to train local contractors if they lacked the necessary skills. Now, when we go into these negotiations, we want to know whether the mines have been able to do that. If they haven’t, what is the problem and how can we work together to create this capacity?” asked Magande, who is also chair of the government committee to revise mineral royalty taxes.
But mining analyst Frederick Bantubonse, general manager of the Zambia Chamber of Mines, cautioned the state not to tamper with the existing development agreements, saying mining companies still need more breathing space.
”The government should honour the development agreements despite calls from stakeholders to review the contracts … mining is a long-term business and government efforts should be directed towards growing the economy,” Bantubonse said.
”The investment that has been coming into the mining sector since 2000 has gone into plant rehabilitations, expansions and [acquiring] new production facilities, and therefore, mining companies should be given a bit of time to realise some profits from their investment.”