Backlash against Zambia’s new mining tax is loud but baseless
The time is long overdue for Lusaka to stand firm in the face of intimidation tactics from mining giants grown accustomed to the state’s largesse
Next month, Zambia’s newest mining tax regime will enter into force. According to claims circulated by multinational mining houses that dominate the country’s sector, the new legislation will spark “mass layoffs” and threaten a collapse of the nation’s economy.
But if we really want to have an honest debate about mining and social development, any objective examination of the numbers indicates precisely the opposite outcome.
The new tax regime, first announced by finance minister Margaret Mwanakatwe last September, aims to shore up Zambia’s foreign currency reserves and rein in debt to put the country on a path toward fiscal stability. With the IMF warning that Zambia’s fiscal deficit and debt load will preclude the country from aid programmes, the urgency of this long overdue reform cannot be overstated.
Mineral resources are non-renewable. Zambia’s copper deposits will not be around forever, and ensuring that the revenue from its extraction reaches the Zambian people is paramount. Accordingly, Lusaka is set to implement a 1.5 percentage-point increase in mineral royalty taxes, currently ranging from 4%-6%, with a ceiling of 10% only when copper prices exceed $7,500 per ton. These royalties remain far below the rates of comparable copper exporting countries.
Nevertheless, the backlash from mining giants has been loud and fully expected. Several companies claimed that they would be forced to lay off thousands of workers and halt new investments. However, when the government requested them to provide a transparent accounting breakdown of exactly how the new taxes would impact their business, they refused to answer.
Right now all the attention is focused on the confrontation with the multinational shareholders of Konkola Copper Mines (KCM), who have been steadfast in their rejection of co-operation and compliance with the new tax regime. This has forced the leadership to take legal steps to notify the investors that Zambia is willing to part ways and invite new partners to the country that respect our sovereignty.
There are clear and reasonable reasons for the government’s position on KCM. In 2011, the mine paid just $105m in tax on its $2.16bn worth of production, amounting to an effective tax rate of less than 5%. Vedanta and its peer strong-arm the Zambian state at every opportunity, allegedly underreporting their earnings in official accounting all while threatening massive layoffs and unviability at any mention of a tax increase.
Zambians will also never forget the humiliation suffered at the hands of Vedanta chair Anil Agarwal in 2014, when the mining magnate boasted to a trade organisation that KCM was turning over a profit of $500m a year despite having fleeced the Zambian government for a purchase price of only $25m. This, despite its annual report stating that it operated at a loss of $6.3m the preceding fiscal year.
Enough is enough, and it should be interesting to note that in our heavily polarised country, this is one move that is supported across the political spectrum.
Not every company has responded the same way. Canadian giant First Quantum Minerals, accounting for more than half of Zambia’s copper production, quietly announced this year that it would not move forward with its earlier threat to slash 2,500 jobs.
First Quantum’s about-face makes a great deal of sense when one looks at the facts. Zambia’s post-privatisation history has been one of unparalleled tax incentives for mining giants —incentives that other successful mineral-based economies like Chile would find unimaginable. Even after the new regime enters into force, Zambia’s highest royalty bracket will remain a full 4 percentage points lower than Chile’s.
The Chilean state also resisted the privatisation push of the late 20th century, and today retains exclusive ownership of all mines. The state instead grants mining concessions to private companies for two-year periods with the option to renew. While this largely flew in the face of Washington Consensus orthodoxy, Chile’s mining sector has remained strong, and the country’s population has reaped the benefits.
Meanwhile, Zambia’s more generous approach has created what some describe as a “Wild West environment” in the country’s mineral sector. Latest research by British NGO War on Want indicates that the Zambian public is losing out on a mind-boggling $3bn a year in tax revenue — equivalent to more than half the government budget in 2013 — as a result of rampant tax avoidance from multinational mining giants.
While private miners are integral to the health of the Zambian economy, they cannot be allowed to hold the state hostage. They, of course, have a role to play in Zambia’s development, but the Zambian people must see their fair share.
The time is long overdue for Lusaka to stand firm in the face of intimidation tactics from mining giants grown accustomed to the state’s largesse. These companies have for years enjoyed tax incentives unmatched elsewhere, and still chronically underreport their earnings.
Tackling this issue is neither easy nor popular, as bringing the state into an arm-wrestle with powerful multinationals requires significant political will. But the numbers show that these firms can indeed afford to pay their due share for Zambia’s precious resources while remaining solvent and even profitable. The experiences of successful mineral-based economies elsewhere show that endless tax incentives are not a prerequisite for a strong mining sector.
Zambia can and should hold to account the multinationals operating on its lands. At a time when inequality is rising and debt is becoming unsustainable, the country can no longer afford to allow its rightful earnings to be siphoned away. It’s time for the Zambian people to see the returns from their vast resource wealth.
• Mathews Muyembe is Copperbelt chair of the Economic Association of Zambia.