Major Breakthrough for Mining Campaign

Zambian President Levy Mwanawasa has outlined long-awaited reforms to the tax regime for mining companies. In his speech to the official opening of the second session of the Tenth National Assembly on Friday Mwanawasa announced that legislation will be brought to the house in the next month that will replace the existing Development Agreements held by mining multinationals.

The new system should bring in an extra $400 million to Government revenues in the coming financial year 2008/09, as well as introducing new measures to assure transparency and more effective regulation. Opposition lawmakers, impatient with repeated announcements of the intention to reform the system responded with cries of "Bring them tomorrow...bring them tomorrow."

The Lusaka Times offers a description of the ceremony itself and plenty of excerpts from a wide-ranging speech.
The Post also provide a detailed summary in a news item.

The new regime needs to be debated and approved by Parliament, but campaigners will be pleased that the Government is proposing a more comprehensive solution than merely raising ‘mineral royalties’ paid by companies. A new windfall tax and a variable profit tax will be introduced. The President said the variable profit tax had been designed to work in periods of both high and low prices and for high and low cost mining projects. The Post reports, “The development moves Zambia into the median position in international comparisons at 47 per cent effective tax rate for mineral resources.” The Lusaka Times reports, “The President assured mining companies that the new regime will still be immensely profitable to them and the mining industry in Zambia will continue to be attractive to investors.”

Mwanawasa told lawmakers that in recent years the price of copper on the international market had risen over 400 per cent and that, as a result, the mining companies re-couped their initial capital investments quickly and are now making huge profits. The Post quotes him saying, "To illustrate the point of the effect of mining companies paying taxes at concessional rates, the companies only paid a paltry US$142 million in company taxes and mineral royalty to the treasury from the total earnings of US$4.7 billion in the 2005 and 2006 financial year… If the current prevailing prices and production forecast hold, the mining companies under the development agreements tax regime will earn an estimated income in excess of US$4.0 billion in the 2008/9 financial year while they will only pay an estimated US$301 million in taxes to the treasury... Assuming that current prices and production forecasts hold, we anticipate that the country will earn in excess of US$400 million in additional revenues in 2008 when the new fiscal regime is implemented by all the mining companies."

Mwanawasa recognized that the current regime meant Zambia earned far less from mining than any other comparable country, with an average effective tax rate at 31.7 per cent, eight per cent lower than the next lowest country in the world, Peru at 39.2 per cent. President Mwanawasa said it had been brought to his attention that even if the mining companies were to move to a revised tax regime introduced in last year's budget for companies that did not already hold Development Agreements, the country would still not get fair returns on its mineral resources.

It appears that the new regime will involve significant revision, and possibly the complete cancellation of existing Development Agreements. The President said, “It has been concluded that the development agreements in their current form and in the current circumstances are unfair and unbalanced, and further, the development agreements no longer meet their stated purpose of providing maximum benefits to the Zambian people and an appropriate return to the mining companies." Reuters report that Mwanawasa said: “There will no longer be any need for special agreements with investors in the mining sector and eventually all the sectors… It will have a modern licensing system based on transparent procedures (and it) will provide for transparency in the accounting and utilization of mineral revenues.”

Reactions to new proposals

The Post’s editorial on Saturday concluded, “There are two reasons to celebrate. First, that it is the beginning of the end of a regulatory and tax framework for mining that clearly benefits large-scale mining to the detriment of the country. And second, that citizens are now able to impose their views on those who govern and an industry increasingly distant from the concept of great politics in which the public task evolves strategic vision... In the beginning the government was uncomfortable with altering anything in their agreements with the mining companies. Of course, this is for understandable reasons. The government tried all means to close the subject, claiming that an increase in royalties and other taxes would be a break on investment. But the evident injustice of the mining sector’s level of contribution, and above all common sense, inspired many citizens to agitate for an increase in royalties and other taxes. Others, just by expressing their opinion, contributed to breaking the wall that had been built to block any discussion of this subject. Finally, in the face of civic opinion and parliamentary pressure, Levy’s government has decided to put forward legislation providing for an increment in the level of royalties and other taxes on mining. By this decision, the existence of company obligation and the legitimate right of Zambia to demand reasonable payment has been acknowledged.”

In my view, this editorial hits precisely the right note. We'll need economists to pour over the detail of the proposals and comment on the significance of the Government's claims about marginal rates of tax and expected revenue increases - I hope some of that debate can happen on the pages of this blog (just hit comment at the bottom of this post to send in your thoughts). And yes, we have been waiting a long time for this. But for the moment let's congratulate the hard working Zambian campaigners and MPs who have pressured the Government to take action, and the Government for having the wisdom to change their position as the facts on the ground changed.

Of course, the battle to secure maximum benefit to Zambian workers and communities from mining is not over. The same Post editorial notes “When a mine closes, in addition to the environmental impacts, another direct consequence for the population of the area is a substantial loss of income and indirect services due principally to the fact that mining does not generate other enduring local activities or initiatives. We therefore hope that the money that will be collected from increased royalties and other taxes will be allocated to the financing or co-financing of investment in production projects that articulate mining with the economic development of each area in order to ensure the sustainable development of urban and rural areas.”

The Sunday Post carried an article that reflected the frustration of Zambian trade unionists that it has taken so long for the measures to be announced.

Zambian Congress of Trade Unions General Secretary Leonard Hikaumba said unionsts were tired of listening to government pronouncements that are not implemented. Hikaumba also raised the question of the terms of service of workers: “We should also make sure that equitable distribution of revenues from the mines encompasses workers… We want to see a significant improvement in the conditions of service for workers.”

Federation of Free Trade Unions of Zambia president Joyce Nonde is quoted as saying that said the new tax regime is too little too late, when the country has already been swindled: “We hope they will act swiftly now. We have had a lot of times when things have been promised without the government having the intention to act.”

The Post on Saturday also reported the following reactions: United Nations resident coordinator Aeneas Chuma: "It is important to realise that the mining agreements were obsolete and it is important to have a regime that is consistent with international standards."

Reform Party president Pastor Nevers Mumba said there was need to set up strong regulations to ensure that safety was not compromised: "Many of the accidents that we've had on the mines are that there's been a compromise on safety."

European Commission head of delegation Derek Fee: "It's important for Zambia to increase revenues from the mines and the important thing is get the economic growth to be felt by the people.”