An analysis of the Government of the Republic of Zambia’s 2015 Budget, endorsed by Parliament, reveals the threat of wide-ranging, unintended ramifications for the Country’s mining industry, including the suspension of certain mining operations; significantly affecting jobs, inward investment and reduced Government revenues. Furthermore, local communities will no longer benefit from the corporate social responsibility initiatives and support programmes of affected operations.
The Zambia Chamber of Mines and its members are committed to working with the Government to find solutions that will allow them to sustain operations, protect jobs, support local communities and pay appropriate taxes. Therefore, it is of great regret that as a direct result the passage of the 2015 Budget through Parliament, Barrick Gold Corporation has announced that it will initiate procedures to suspend operations at the Lumwana Copper Mine. Lumwana is a major-driver of the North-Western Provincial economy, purchasing close to US$400 million in goods and services from Zambian suppliers in 2014 and supporting a range of education, literacy, health care and community projects. Lumwana’s suspension of operations will also impact adversely on the operations of the three smelters on the Copperbelt which heavily depend on the Lumwana copper concentrates.
The Zambia Chamber of Mines remains deeply concerned about the 2015 Budget, most notably:
- The single-tier tax system with no consideration of an operation’s profitability.
- The legislation’s potential for significant unintended financial and social consequences.
The Zambia Chamber of Mines has met with Ministry of Mines, Ministry of Finance and Zambia Revenue Authority technocrats on a number of occasions over the past three weeks. These positive meetings have served to produce a useful dataset which allows both industry participants and Government to benchmark the current state of the Zambian mining sector. It is this benchmark data that this Press Release draws upon.
Concerning the current tax system, the Zambia Chamber of Mines has made the point that Zambia already possesses the highest base-metal tax regime in the world – almost double that of Chile. This was borne out by the International Council on Mining & Metals 2014 report “Enhancing Mining’s Contribution to the Zambian Economy and Society”; this report was endorsed by both Government and the Chamber of Mines.
The proposal to introduce significantly higher mineral royalty taxes from 6% to 8% for underground mines and to 20% for open pit mines with no consideration of a company’s profitability, moves Zambia from a best-practice, two-tiered taxation system into unchartered territory by introducing a single-tier, royalty-only tax system – the only jurisdiction of this type in the world.
Unintended Financial and Social Consequences
Furthermore, the Zambia Chamber of Mines is concerned that the imminent implementation of the 2015 Budget measures may make a number of other operations economically unviable, potentially leading to further mine closures. Of particular concern is the postponement and potential cancellation of major expansion projects such as:
- Mopani’s Mufulira and Mindola Deep Shafts.
- Mopani’s Nkana concentrator.
- Kansanshi’s Sulphide Circuit and Smelter Expansion.
Impact on Jobs
If the proposed Mineral Royalty based single tier tax system is implemented, the suspension of Lumwana could see the loss of around 4,000 direct jobs. The Zambia Chamber of Mines estimates that in 2015 alone, as a direct result of the introduction of the 2015 Budget, mine suspensions and the postponement of major capital projects will lead to over 12,000 direct job losses.
This will have a significant, detrimental impact on those towns and communities of the Copperbelt and North-western Province who benefit from the significant investment in economic and social welfare by the mining sector.
Significant Impacts on Production and Loss of Export Earnings
The Zambia Chamber of Mines’ analysis estimates that production losses in 2015 will exceed 158,000 tonnes of copper; more worryingly, over the next 5 years lost production will exceed 1,100,000 tonnes of copper. Furthermore, Zambia stands to lose over US$1 billion of export earnings in 2015, and a staggering US$ 7 billion over the following 5 years; this equates to around 30% of Zambia’s GDP.
Government Revenues Reduced
Whilst the 2015 Budget does not contain any detail on the impact of the introduction of the higher mineral royalty rates, the Government has forecast that the proposed regime will raise ZMW1.7 billion in 2015. It is clear from the Zambia Chamber of Mines’ own analysis that the Budget has not factored-in the impacts of mine closures and suspensions. Once accounted for, the Chamber estimates that in 2015 alone the Government will raise approximately US$ 320 million less taxes than forecast in the 2015 Budget proposal; and US$115m less than would have been collected if the changes had not been made.
Foreign Direct Investment Impacted
The mining industry represents more than 86% of Zambia’s Foreign Direct Investment. This investment is critical for increased capacity and production levels in the mining industry, and is fundamental to the development of growing economies such as Zambia. However, the introduction of the higher mineral royalty tax rates is forecast to halve the Foreign Direct Investment associated with the industry.
The Zambia Chamber of Mines and its members urge the Government to undertake further consultations and conduct a thorough analysis to fully understand the serious financial and social impacts which will be caused by the introduction of the 2015 Budget in its current form. Whilst these consultations and analysis are conducted the Chamber of Mines recommends that the current two tier taxation system remains in place.
The 2015 Budget will adversely impact tens of thousands of lives, and we ask Government to pause whilst it reconsiders its implementation on 1st January 2015.
Zambia Chamber of Mines