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.
The Zambia Chamber of Mines welcomes the changes to the new 2015 Mines and Minerals Development (Amendment) Act which was passed by parliament last Friday.
The Chamber maintains its position that the question of having an equitable fiscal regime that promotes the competitiveness of Zambia’s mining sector is not a zero sum choice between Government on the one hand and the mining industry on the other. Rather, it is one of making appropriate and well thought out choices that will result in a vibrant and competitive Zambian economy that promotes overall growth in the long term for Zambia. Given the pivotal importance of the mining industry in promoting long term diversified economic growth, the mining industry supports the forward thinking policy shift by Government, which will no doubt bear fruit in time to come.
We also note that the Government’s decision marks a significant shift in outlook towards the sector, and it can only be of benefit to the industry and the economy in the longer term.
However, given the intense competition we face as a country from other mining jurisdictions in the world, more needs to be done to ensure long-term competitiveness and renewed investment in the mining sector, which is key to securing growth. We are sure that if the country maintains the same momentum as exhibited by the outlook that resulted in the most recent change to the fiscal regime, this should be achievable in the next few years.
We believe the prevailing low price environment continues to present significant challenges for the mining sector over the short to medium term.
The gesture by the Government is a good lifeline that will provide much needed relief. The simplicity, stability, predictability, and ultimately the attractiveness of Zambia’s minerals fiscal policy environment and taxation regime, is vital to providing the assurances these investments require, especially given that copper mining in Zambia is a high cost business.
For the mining industry, this is critical: the instruments used within a taxation regime, and the rates at which taxes are set, together establish the incentives and disincentives a mining company faces in deciding whether and how much to invest, how many workers to employ, and what ore to extract – which in turn can affect the life-span of the mine.
If Zambia is to attract this needed investment its mining taxation levels, particularly Mineral Royalty Tax, must at the very least lie within global norms. Given Zambia’s specific production conditions, many would argue that an even bolder approach is necessary.
Since 2000, on the back of rising copper demand from China, the Zambian copper mining industry has led the nation’s development, spurring GDP growth and helping to achieve annual growth rates of 7% to 10%. The industry has ploughed more than US$14 billion into new mining ventures and trebled the country’s annual mining output to around 800 000 tonnes. This mining growth has been key in taking government tax revenue from less than half a billion Kwacha in 2000 to a peak of K8 billion ten years later.
“We are the basket which holds all the proverbial eggs. Working together we have to create a high-growth, diversified economy which spreads risk and opportunities across the economy creates more jobs and widens the tax base,” said Mr Nathan Chishimba, President of the Zambia Chamber of Mines.
“As we are seeing in the current crisis, Zambia should not be relying only on mining for its future,”Mr Chishimba said.
We commend the government for this new spirit of dialogue and cooperation, and we look forward to continuing to work together to solve these and future challenges.
The Zambia Chamber of Mines has urged Zambians to download its report on Mineral Royalty Tax, after strong endorsement by leading business personalities, who said the report would promote greater understanding of a complex issue which affects them.
The report , A guide to understanding Mineral Royalty Tax (MRT), has already been distributed widely, and is available on the Chamber’s website at www.mines.org.zm
Stakeholders who have welcomed its publication, saying it will help to promote informed comment, include Osbert Sikazwe, Dean of the School of Mines at the University of Zambia; Maybin Nsupila, CEO of the Zambia Association of Manufacturers (ZAM); Yusuf Dodia, Chairman of the Private Sector Development Association (PSDA); prominent Lusaka businessman Mark O’Donnell; and Jackson Sikamo, country manager for Chibuluma Copper Mines.
Osbert Sikazwe, Dean of the School of Mines, said: “The report will help the public to understand the wider operations of the mining sector, and to appreciate the challenges faced by the industry. It will also help people to understand how policy is formulated to enhance the growth of the industry.”
Maybin Nsupila, CEO of the Zambia Association of Manufacturers (ZAM), said any measure intended to promote debate and understanding of MRT is welcome. “The discourse by many people has been on the physical contributions the sector makes to the country’s economic growth, without understanding how the linkages ultimately benefit the country. The MRT report will give people a broader and more informed perspective.”
Yusuf Dodia, Chairman of the Private Sector Development Association (PSDA), said: “Mining plays a pivotal role in economic growth. While there have been challenges on policy as well as tax changes, there has been little or no understanding of the challenges faced by the industry. The MRT report will widen debate and promote a more informed view.”
Jackson Sikamo, country manager for Chibuluma Mines, a division of Metorex, said: “The report will help all stakeholders to appreciate what MRT is, and what its implications on fiscal policy are. It will to better-informed dialogue and debate, which are necessary for the country to come up with equitable taxation policies.”
Prominent Lusaka businessman, and Chairman of Union Gold Investment, Mark O’Donnell, welcomed the release of the report, given the competition Zambia faces from other commodity-producing countries. These include the Democratic Republic of Congo, which has “maximized the benefits realised from the mining sector, spurred by various incentives which have increased foreign direct investment”.
Chenai Mukumba, international centre coordinator for Consumer Unity and Trust Society (Cuts), described the release of the report as timely. “The initiative will help ease the misunderstanding among various players, especially the citizenry, who lack information yet are the ultimate beneficiaries of the mineral wealth.”
Peter Sinkamba, Development Planner/Environmental Protection Activist on the Copperbelt, said: “The MRT report will help to strengthen citizens’ awareness, and promote dialogue on challenges, contributions and shortcomings on policy formulation that might stifle the effective contributions of the mining and copper sector to the country’s growth.”
Zambia Chamber of Mines
Download Guide here. In a bid to improve public understanding of mining taxation, and promote informed comment, the Chamber of Mines today released a report entitled “A guide to understanding Mineral Royalty Tax (MRT)”.
The short, 15-page report is available free of charge from the Chamber of Mines as a downloadable PDF on its website www.mines.org.zm
Commenting on the release of the report, Chamber of Mines president Nathan Chishimba said: “We have recently commended the Government for annoucing the introduction of a sliding scale system for the determination of MRT rates, linked to the prevailing copper price. In order for the public to really appreciate the significance of this move, we believe the whole subject of mining taxation, and MRT in particular, needs to be better explained.
In recent years, MRT has been a hot topic. We wish to set out the cold facts, to give Zambians an understanding of a critical issue affecting the mining industry, and the wider context of taxation and investment in which the issue is situated.”
He added: “The publication of this report signals a more proactive approach by the industry in educating the public about important strategic issues. It is a natural follow-up to the media conference we held in December last year to explain the current crisis facing the global copper-mining sector. In the weeks and months ahead, there will be more such initiatives as the industry continues to engage constructively with stakeholders and the broader public.”
“A guide to understanding Mineral Royalty Tax (MRT)” has been designed to be accessible to a lay audience, and deals with the subject broadly rather than in complex detail. It covers the present situation in Zambia, explains the motivations and mechanics of MRT, and gives an outside view of our mining-tax system by the IMF and World Bank, and ends with some thoughts on the future of the mining industry.
Among the key learning points of the report are the following:
The report also considers Zambia’s approach to MRT in comparison with other mining jurisdictions.
Issued by: Talent Ng’andwe
Zambia Chamber of Mines
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