The notion that Zambia’s mines are being subsidised by domestic consumers is “wholly untrue and completely at odds with the facts”, Chamber of Mines president, Nathan Chishimba, said today.
Chishimba was reacting to a spate of recent articles in the Zambian media suggesting that the government and domestic electricity users are subsidising the power consumption needs of the mining industry, and that these subsidies are to blame for ZESCO’s long-term failure to invest in power infrastructure and additional generation capacity.
“This argument is demonstrably false, at odds with the facts and very easy to refute,” said Chishimba.
“According to figures by ZESCO presented at the June 2017 ZIMEC conference in Lusaka, the mining industry accounts for 80% of the company’s revenues; the balance comes from households, government and services, general industry and agriculture. How is it possible for these far smaller revenue contributors to be subsidising the major contributor? It makes no sense.”
In fact, the mining industry’s contribution to Zesco’s revenues (80%) is proportionately much larger than its consumption (55%) of national energy production, Chishimba said. “This is certainly not indicative of an industry that is being subsidised – indeed the opposite would seem to be true.”
Chishimba said it is misleading to compare tariffs for residential consumers to those of industrial users like mines, because the cost of supplying power to each is not the same.
“It is vastly cheaper to supply power to heavy industrial users like mines, because they consume it in bulk and at high voltage. Residential customers, on the other hand, consume low-voltage electricity that requires an extensive – and expensive – network of distribution lines, substations and transformers.”
This is a global phenomenon that anyone can verify from available statistics, Chishimba said. In the European Union, for example, average industrial power tariffs are 44% lower than household tariffs; in the United States, they are 43% lower.
Chishimba concluded: “Claims that the mines are being subsidised have the unfortunate effect of portraying the mining industry as being responsible for Zambia’s power deficit and ZESCO’s precarious financial situation. This is simplistic: the power deficit in Zambia goes beyond the sole issue of tariffs, and also includes other factors such as regulation, competition and the operational efficiency of ZESCO.”
Acting Chief Executive Officer
Zambia Chamber of Mines
Critics challenged to produce the evidence!
Chamber of Mines president Nathan Chishimba has dismissed as malicious nonsense allegations that “Zambia loses about US$3 billion annually through illicit financial flows (IFF) mainly perpetrated in the minerals sub-sector”.
The allegations were made in an article in the Daily Mail (24 July 2017), featuring Centre for Trade Policy and Development (CTPD) director Isaac Mwaipopo. The article purports to be based on the findings of the latest Financial Intelligence Centre (FIC) report.
“Even a cursory reading of the 2016 report will show that there is no substance to the allegations,” said Chishimba.
Chishimba proceeded to dismiss the allegations, point by point:
“The portrayal of the mining industry as robbing Zambia of billions of dollars is dramatically at odds with the actual findings of the report,” said Chishimba. “CTPD, and civil society generally, have a key role to play in highlighting corruption, so it is a real pity that they have not got to grips with the actual contents of this report, which indicates large-scale corruption in public procurement.”
Chishimba said the alleged theft of $3 billion of refined copper stretches the bounds of credibility because of the sheer volume of metal involved.
Assuming an average price of $5 000 a tonne for 2016, it equates to some 600 000 tonnes of refined copper annually. To put that in perspective, all Zambia’s copper mines together produced around 750 000 tonnes in 2016. These figures therefore suggest that nearly 50% of Zambia’s annual copper production is unaccounted for. Firstly, it would require two massive ‘ghost’ smelters, each the size of the one at Kansanshi, to secretly process this additional quantity of copper; secondly, to transport it out of the country would require between 50 and 200 trucks leaving the country unnoticed every single day of the year.
“These allegations are so implausible, that even a hardened conspiracy theorist would think twice before believing them,” said Chishimba. “I challenge the CTPD, or anyone else, to produce the evidence.”
He added that the Chamber of Mines was not the only organisation in Zambia to question these constantly recurring allegations that the mining industry was stealing $3 billion in mineral production every year that doesn’t show up in official statistics.
In an interview with the online mining publication Mining for Zambia earlier this year, the allegations were roundly dismissed both by Mooya Lumamba, Director of Mines at the Ministry of Mines and Mineral Resources, and Ron Smit, chief consultant on the Mineral Production Monitoring Support Project, a four-year programme funded by the European Union.
“These allegations are wholly untrue, and come from a position of ignorance – not just about how copper is mined and produced, but how our mineral monitoring systems work,” said Lumamba in the interview. “It’s alarmism.”
Smit agreed. “We have noticed that this particular allegation has been recycled in the media for several years now, but no one ever offers any proof.”
Zambia’s major mines are not exporting copper concentrate, Chamber of Mines Chief Nathan Chishimba said today, reacting to a call by the Mineworkers Union of Zambia that such exports should be banned.
MUZ General Secretary Joseph Chewe was quoted in a news report last week saying that government should ban the export of copper concentrate by mining companies, because refining it into finished cathode copper is “giving jobs to other countries”.
Chishimba said: “This call for a ban suggests there are massive exports of copper concentrate that need to be stopped. We don’t quite know where this is coming from, as the facts paint a very different picture.”
None of the large mines are exporting copper concentrate, he said. It makes no economic sense anyway, because Zambia’s smelters are currently not running at full capacity, and are struggling to find enough concentrate to process. Concentrate is even being imported from the Democratic Republic of Congo to keep certain smelters operating efficiently.
If there is any exporting of copper concentrate by Zambian mines, it is probably being done “at the margins” by very small-scale producers who are unable to have their copper concentrate processed locally for reasons related to their quality.
“Smelters are complex pieces of infrastructure designed to handle copper concentrate only of a certain kind and quality,” said Chishimba. “If anyone is exporting concentrate, incurring all the additional taxes and expense of doing so, one can only assume the concentrate cannot be processed locally.”
In any event, Chishimba said, the answer to job creation in Zambia is not to ban legitimate business activity, but to grow the economy and make it more competitive. “We cannot ban our way to prosperity and employment,” he said.
As for the MUZ leader’s statement that all copper concentrate produced in Zambia should be refined into finished copper cathode locally, Chishimba said Zambia does not have the refining capacity to do this.
Converting anode copper (95% pure) into cathode copper (99.95% pure) is done in a refinery through a process known as electrorefining. Zambia only has two refineries, and their capacity is not sufficient to handle all the copper anode produced by the Zambian mining industry.
“In any event, it is a relatively low value-add process, and it is also extremely power-intensive – an important consideration given Zambia’s current power deficit.”
Chishimba said it would be more helpful if stakeholders addressed their concerns directly with the industry in a spirit of dialogue and engagement, rather than making statements to the media without full knowledge of the facts.
Acting Chief Executive Officer
Zambia Chamber of Mines
Efficient electricity costs must be the basis for tariffs, says Chamber chief.
Knowing the true cost of producing electricity efficiently in Zambia is the first step on the road to cost-reflective tariffs, Chamber of Mines president, Nathan Chishimba, said today.
It is also the first step on the road to eventual reform of the Zambia power sector, which is currently under consideration by the government.
Chishimba’s remarks were contained in a statement released at a media conference held in Lusaka today (Wednesday 9 March 2017) on the challenges and opportunities facing the power sector, and how these are likely to affect the economy.
“At present, the cost of producing electricity in Zambia is not known, as the last study done for ZESCO was ten years ago, in 2007. However, a new study, funded by the African Development Bank, is expected to commence in the course of 2017.”
Chishimba said it was “absolutely crucial” that the findings of this study be the basis for both tariff reform and sector reform.
“Zambia needs a revitalised, reformed power sector able to deliver cost-efficient, competitively priced electricity to grow the economy, employment and disposable incomes,” said Chishimba. “Bringing this about is a mammoth strategic task whose effects with be felt decades from now. It must be done properly.”
Chishimba said the idea that tariffs should be based on the known cost of producing electricity efficiently was one shared by Finance Minister Felix Mutati. “It’s worth recalling that the Honourable minister said in his 2017 national budget speech that cost-reflective tariffs do not mean ‘consumers should end up paying for inefficiency’.”
Chishimba said the idea of reforming the power sector was also increasingly accepted, not just by government but by the Energy Regulation Board itself.
“Minister Mutati said in his 2017 national budget speech that government would conduct a review of the overall structure, governance and operations of the electricity sector, including generation, transmission and distribution. And the Energy Regulation Board issued a paper in 2016 discussing the pros and cons of various reform options in developing countries like Zambia.”
Illustrating the concern the mining industry and other stakeholders have about electricity costs, Chishimba revealed that proposed electricity tariffs at Zambia’s newest power projects are more than 20% above global benchmarks established by the US Energy Information Administration.
“What this suggests is that Zambia’s electricity is not being produced efficiently by global standards, or there is a lack of transparency around the way in which tariffs are calculated,” Chishimba said.
“For new sources of electricity to facilitate economic development and power Zambian homes, it has to be competitively priced. Electricity that users cannot afford is little better than having no electricity at all.”
Competitively priced electricity is all the more important in a developing country like Zambia, because industry needs to generate “much-needed employment”, and households need the affordable power that helps to fuel the growth of the middle class, a key barometer of social progress.
Chishimba said that the mining industry has never shied away from the reality of cost-reflective tariffs. “We are business people, after all, and costs are something we deal with every single day at our mines. We are fully committed to tariffs that reflect the cost of providing electricity in an efficient, transparent and internationally competitive manner.”
The Zambia Chamber of Mines, a body representing mining and allied industries in Zambia has welcomed the removal of 7.5 per cent import duty on copper concentrates following a statement by the Minister of Finance, Honourable Felix Mutati.
The Chamber of Mines and its Members are committed to working with the Government to finding solutions that will allow the mining industry in Zambia to sustain operations, protect jobs, support local communities and contribute to Government revenue.
We note from inception that the Ministry of Finance and the Government at large are committed to fostering the sustainable operations of mining companies, as seen through its resolve to guide the line ministries, including the Zambia Revenue Authority on other issues such as Value Added Tax .This will surely help to continue contributing to job creation and poverty alleviation.
The Zambia Chamber of Mines is committed to working with all stakeholders to put in place a tax system that will:
It must be emphasised that the year 2016 has not been a good year for the mining sector and Government must be commended for striving to make the mining sector stay afloat.
The mining sector in 2015 and 2016 faced challenges that were beyond the control of all stakeholders, including the low copper price and nationwide power deficit. It is our sincere hope that the Zambian Government and the mining industry can continue to have open and fruitful discussions going forward.
The removal of import duty on copper concentrates will help in stabilizing independent smelters, and finished copper output, in addition to employment and contributions to government revenue.
The Zambia Chamber of Mines requested for a waiver before the Parliamentary Estimates Committee based on the following reasons:
The introduction of this duty coupled with the imminent increase in the cost of electricity due to the migration to cost reflective tariffs, would have left mines and smelters with tough decisions to make. If there is insufficient supply of concentrates, finished copper output will be affected, in addition to employment and contributions to government revenue.
Acting Chief Executive Officer
Zambia Chamber of Mines
A range of industry observers have welcomed the release last week of a new education booklet by the Zambia Chamber of Mines, entitled Taxation and Mining Investment in Zambia.
They describe it as a good initiative which will help to raise awareness of a subject that is of critical importance to the Zambian economy.
Mike Phiri, tax partner at professional services firm KPMG, said: “The booklet is a great initiative, and makes the Chamber of Mines a leader among industry players on disseminating information about their industry.”
He said it should help lead to a better understanding of the link between taxation and mining investment, not just at government and policy level, but also among various stakeholders.
Yusuf Dodia, Chairman of the Private Sector Development Association, said: “It is a good document which was well constructed, and kept short enough for readers to embrace the key messages. It is a good mechanism to initiate a dialogue on the issue of taxation and the development of the mining sector in Zambia.”
On World Bank projections cited in the booklet showing that growth in Zambia’s copper production will start to slow after 2019, Dodia said: “This may be a key departure point which should compel the government to consider mechanisms for diversification away from copper mining towards other sectors such as tourism, agriculture, manufacturing and services.”
Siforiano Banda, Chief Executive of the Extractive Industries Transparency Initiative (EITI), welcomed the booklet and said it would lead to a better understanding of the subject of taxation and mining investment.
“There is not enough knowledge among players,” he said. “There is a need for government and industry stakeholders to always dialogue on matters of policy. If possible, the Ministry of Mines should be giving weekly appraisals to fellow cabinet ministers on developments in the sector, so that they are kept abreast and can assist in redirecting the future of the country.”
Musonda Kabinga, economist at the NGO Action-Aid said it was good of the Chamber of Mines to have released the booklet, as it gives an overview of the mining sector in terms of investment and taxation.
Joseph Chewe, General Secretary of the Mineworkers Union of Zambia (MUZ), said: “The Chamber of Mines has come up with another great publication on taxation and mining investment in Zambia. The first one, on Mineral Royalty Tax, was simple and easy to understand.”
He said it was good of the Chamber to release such “informative and educative” booklets, as they help to close knowledge gaps and inform the Zambian public.
“There is a need for such information-sharing mechanisms to continue so that government and policymakers arrive at policymaking and tax regimes from a well-informed background,” he said.
Msoni Mtwalo, deputy national coordinator for Publish What You Pay, a body which promotes transparency in the extractive sector, said: “The booklet is quite useful in that it gives an overview of the mining sector from the industry’s perspective.”
However, he said it would prove less useful for people outside the sector as it does not break down the implication of the various mining taxes, and doesn’t state the basis on which the royalties cited are calculated.
On the question of whether there was sufficient understanding of the topic at government and policy level, Mtwalo said: “Definitely not – otherwise we would not have had six different tax regimes in the past eight years.”
Taxation and Mining Investment in Zambia is free to the public, and is available in hard copy from the Lusaka office of the Zambia Chamber of Mines. It can also be accessed in electronic form on the Chamber’s educational website www.miningforzambia.com.
In July 2016, the government of Zambia announced a new Mineral Royalty Tax based on a
sliding scale that varies between 4% and 6%, depending on the copper price.
We in the industry warmly welcomed this development, which we believe marked a shift away
from the harmful mining tax policy proposals of recent years, towards a more pragmatic and
realistic tax policy that views the mining industry as partners in development.
Zambia’s new Finance Minister, Hon. Felix Mutati MP, in the budget address to Parliament on
11th November 2016, made clear that “we cannot spend what we do not have”; a reference
to the urgent need to deal with the country’s growing budget deficit, and government
indebtedness, caused by past expansionary spending.
Fiscal restraint is necessary, but it need not have an adverse effect on economic growth and
development, if the right climate can be created for increased levels of private investment into
Zambia. The ‘multiplier’ effect of investment is well documented, and recent research has
shown a historic correlation in Zambia between investment levels, mining output and GDP
growth, particularly in the decade following privatisation.
What is the right climate? Let us be clear, it does not mean ultra-low tax rates, and light
regulation. It means being internationally competitive, in every sense.
Whilst there have been significant improvements, Zambia remains an outlier. It still has one of
the highest effective tax rates compared to other copper producing countries, and a terrible
recent history of policy instability. This deters badly needed investment.
With the renewed spirit of dialogue and cooperation which now exists with government, we
believe that it is possible to devise a more competitive mining tax regime that could provide
the economic stimulus that will help to grow industry, the wider economy and employment,
and ultimately deliver more tax over the long run.
With this objective in mind, we are publishing this freely available booklet Taxation and mining
investment in Zambia. It explains, in layman’s terms, the challenges of designing a mining tax
regime that benefits both the mines which pay tax, and the governments which receive it.
President: Zambia Chamber of Mines
Zambia needs a more competitive mining tax regime to entice both new and existing investors to invest billions of dollars into the mining industry and boost flagging production, says Nathan Chishimba, president of the Zambia Chamber of Mines.
“Last Friday’s budget speech by Finance Minister Felix Mutati aims to restore financial stability to the Zambian economy and lay the foundations for long-term economic growth – and economic growth depends on investment,” Chishimba says.
In a press statement publicising the release of a new report by the Chamber, Taxation and Mining Investment in Zambia, Chishimba says despite recent welcome changes to Mineral Royalty Tax (MRT), Zambia’s overall effective mining tax rate remains among the highest in the world.
“How is it that we have ceded our long-held position as Africa’s leading copper producer to the Democratic Republic of Congo (DRC). A key part of the answer has to be investment incentives and policy stability. The DRC’s tax regime is not only more investor-friendly than Zambia’s, but has also been much more stable. This has encouraged long-term investment, which has boosted production.”
Chishimba says the importance of new investment in Zambia is all the more timely, as the World Bank has projected that growth in copper production will start to slow after 2019. “Along with a decline in production, there will be a decline in government revenue, mining industry jobs and foreign exchange. However, production levels can increase if there is a new wave of investment.”
Taxation and Mining in Zambia quotes research showing that mining investment in Zambia benefits not just the mining industry but the wider economy too, through what is known as the ‘multiplier effect’. It means mines procure supplies from local businesses, and employees spend their wages in the economy, stimulating more business creation and more employment. A World Bank study on FQM’s Kansanshi Mine in Solwezi found that for every direct employment opportunity created at the mine, a further five were created in the wider economy.
The report also shows how levels of mining investment and national economic growth are inextricably linked. From 1997, investors in the newly re-privatised mining industry collectively poured more than $12 billion into modernisation, expansion and new greenfield ventures. Both copper production and economic growth recovered in 2000 and accelerated in the years thereafter. Importantly, this growth started before the copper price began to recover in 2004, proving it was the surge in investment which turned around the economic fortunes of the country.
The report goes on to cover the challenges of designing a mining tax regime which encourages continued investment – or at least does not discourage it.
The report considers the various phases that a typical mine goes through, from exploration and development to production and closure, and what incentives are necessary to encourage the development of resources through the various stages.
For example, during the exploration phase, when there is no income, the tax regime should ideally allow mines to defer losses to later years and write them off against future profitability. This incentivises mines to continue beyond exploration to actual mine construction.
“When taking business decisions, mines will respond to the nature of the tax treatment in place,” the report says.
Download Booklet – Taxation and Mining in Zambia
Issued by Zambia Chamber of Mines
Acting Chief Executive officer
A new analysis of mining in Zambia for the past 100 years shows a clear historical link between levels of mining investment and wider economic development.
According to an academic paper published this week entitled Copper Mining in Zambia – history and future.When mining investment is sustained and high, there is growth not just in the mining sector, but also in the broader economy in jobs, new businesses and the overall prosperity of the population.
When mining investment declines, it’s not just the mining sector that is affected but the entire economy, along with the material well-being of the population.
The paper, Copper Mining in Zambia – history and future, by Jackson Sikamo, Alex Mwanza and Cade Mweemba, was published in the journal of the Southern African Institute of Mining and Metallurgy.
The paper identifies three major periods in Zambia’s history when the levels of investment in the mining industry had a pivotal effect on the fortunes of the country.
The first period was in the early 1920s, when mainly American and South African companies invested massively in Zambia’s first commercial copper mines. Jobs were created, infrastructure was built, towns came into existence, and support industries emerged.
“Thus, by 1964, when Zambia was born, it had a strong economy driven by the mining sector,” the paper says. Zambia had one of the highest GDPs in Africa.
The second period was in the early 1970s, when government nationalised the Zambian mining industry and used its considerable revenues to drive an ambitious development programme.
However, because it came at the expense of continued investment in mining, the industry was unable to expand. Copper production and mining employment plummeted, and the economy went into decline. “The business prospects of the mines were bleak, and so were those for the national economy, which was heavily reliant on mining”, the paper says.
The third period was from about 2000 onwards, after privatisation. Investors poured capital into new machinery, new mining methods and new processing and extraction technologies. New mines were started in North-Western province.
“There was a sudden economic upturn, not only on the Copperbelt but in the country as a whole, with the mining industry as a pivotal contributor,” the paper says.
Significantly, this economic upturn occurred before the copper price started to recover, suggesting that it was the result of the investment itself, rather than an accident of commodity pricing.
By 2013, after more than US$12 billion of investment, Zambia’s copper output had tripled to 763 000 tonnes, and direct industry employment had reached 90 000.
Looking to the future, the geology of Zambia shows “great potential for further investment in mining”, say the authors. Consequently, the country’s prosperity hinges on the creation of a stable mining policy, internationally competitive tax rates and an investor-friendly environment.
The original paper can be viewed here (https://issuu.com/saimm/docs/saimm-201606-june) on page 15 of the June issue of the SAIMM journal.”
Issued by: Zambia Chamber of Mines
Contact: Talent Ng’andwe
The new proposed changes to the Mineral Royalty Tax (MRT) regime will enhance the collection of mineral revenue by the government rather than compromise it, Chamber of Mines president Nathan Chishimba said today.
Chishimba was reacting to a media statement issued by a consortium of civil society organisations advising government not to implement the new proposed Mineral Royalty Tax regime on the grounds that it is “investor-led” and will “not maximize revenue in times of commodity price booms”.
Chishimba praised the government for the new proposed MRT regime, saying it recognized the need to balance increased tax revenue with continued employment and investment in new mining ventures.
“One cannot separate mining tax revenue from mining investment, because it is the mining investment which ultimately produces the tax revenue,” said Chishimba. “A good tax is one which balances these two competing objectives.”
Commenting on the civil society’s statement that “we need to make the most of what we have while we have it”, Chishimba said this short-term thinking was not necessarily good for the Zambian economy.
“The largest amount of tax revenue is always generated over the longer term, and this can only happen if mining companies are incentivized to invest over the longer term.”
On the view that the new proposed MRT regime will “not maximize revenue collection in times of commodity price booms”, Chishimba said this reflected a misunderstanding of the role of MRT in the overall tax mix.
“MRT is a tax on production, not profit. It is pegged at a relatively low rate, and is not designed to maximize revenues in times of commodity price booms. Governments collect most of their revenue in times of commodity price booms from profit-based tax, which is much higher.”
Chishimba said the government was on the right track with the proposed MRT regime, and urged civil society to view it in the larger perspective of ongoing investment, employment and economic development.
“One has to balance taking as much as one can now with having a thriving industry into the future, and the government has very sensibly recognized this,” said Chishimba.
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