Zambians unite to condemn mining companies

The editorials of Zambia's two main newspapers, The Post and the Times of Zambia today both discuss the threat made by representatives of the major mining houses that they will take legal action to try and block reforms of the mining sector. Both roundly condemn the investors. Since one is an independent newspaper that often acts as the most vibrant and diverse outlet for free thinkers in Zambia, and the other is a government propaganda organ, their agreement is an unusual event. Various papers also report endorsements of the Government's position. The lead story in The Post drew quotes from Michael Sata, firebrand leader of the opposition Patriotic Front, and a range of other prominent Zambians, including business consultant Trevor Simumba and Joyce Nonde, President of the Federation of Free Trade Unions of Zambia (FFTUZ). The Times of Zambia interviewed the President of the Mineworkers Union of Zambia (MUZ) Rayford Mbulu, University of Zambia (UNZA) head of mining engineering department Mathias Mpande. An interview with Professor John Lungu, co-author of the For Whom the Windfalls? is reported in the Daily Mail.

The unity of opinion from all these diverse voices suggests how badly the mining companies have misjudged the political mood in the country. Reader responses on other websites including rumbustuous exchanges on The Lusaka Times site suggests blogger opinion is heavily in favour of the Government and against the mining companies. The strength of public opinion on the issue is likely to both embolden the Government and make it near impossible for them to compromise or perform any sort of u-turn. The companies' strategy looks to me to have been something like the following:
1) Negotiating at privatisation to take on as few social and environmental responsibilities on the Copperbelt as possible, maximising profits, minimising contributions to the Zambian people, exchequer, workers and wider economy.
2) Acting surprised when local residents, workers and newly unemployed workers protested the new situation of insecure employment, unpaid pensions and increased pollution.
3) Suggesting that the Government sort it out, and that it wasn't their problem.
4) Offering overblown PR about limited 'social responsibility' activities, like sponsoring football teams that in many other countries would be thought of as advertising.
5) Once the Government suggested, before, during and after the 2006 election that they should re-negotiate mineral royalties, that they weren't interested in talking since they held contracts (with a few notable exceptions, particularly Derek Webbstock at LCM, who has always shown an understanding of Zambian public opinion and politics).
6) Saying, once the new regime was announced as a unilateral Government initiative: 'we are ready to negotiate' in the context of also saying 'we'll sue', thereby drawing down on their own heads the anger of the media and a range of social constituencies - an anger that itself means the Government now can't compromise.

In other words, their entire strategy has backfired on them appallingly. Shareholders writing on this and other websites to criticise the Government's approach should think carefully about how the managers of the companies they control have behaved from the original privatisation process onwards, and what contribution they have made to the outcome they are so aggreived at now.

So, what have the actors said, in detail?

• "We don't consult tax payers. The position in the mine stands," Finance Minister Magande told The Times. He told The Post: “Government is mandated by the Constitution to implement laws to govern the affairs of the country and everyone should abide by those laws. If any one defaults on tax, the relevant law enforcement agency will take up the matter... Our laws apply to everyone in the country so if they decide to go to court, we won’t stop them but we are going to meet them in court. You mean as government we should not allow you (Zambians) to benefit equitably from the resource that your forefathers safeguarded for you?” “The assertions by mining companies that government should have used instruments within the development agreements should not arise because government has done away with those agreements, maybe the questions you should be asking is, when is government going to implement the law?”
  

• Perhaps the most interesting of the points made is by Dr Mpande, who told The Times that the Development Agreements (DAs) that the Government had entered into with the mines after privatisation were illegal. He said that at the time the agreements were entered into, the Mines and Minerals Act did not have provisions for such agreements. Dr Mpande who is a former deputy Mines minister, said the amendment to the Mines and Minerals Act to facilitate DAs was only done when it was observed that the law had been contravened. He said the Act was amended after the DAs had already been signed, a move that was illegal. "There was an amendment to cover the illegality. This was a fraud to the Zambian people," he said.
• MUZ President Mr Mbulu told The Times, "The Government has made a right decision. The communities where these companies have been operating from have not benefited from the mines. This is a timely decision," he said. He said Liberia recently concluded the negotiations without taking legal action while Uganda, Tanzania, Nigeria, Guinea and the Democratic Republic of Congo (DRC) were in the process of re-negotiating.
  
• Michael Sata told The Post “This government should be as bold as Dr Kenneth Kaunda. We don’t need to nationalise the mines but if they don’t want to pay, they must get out of the country. We shall go to Chile and get people who know how to run the mines,” Sata said. “We shall back government and fight them and make sure that if they don’t pay tax, it will be impossible for them to run the mines.... They know that they have contributed enough to the MMD and if they threaten to take legal action, they feel some cowards in government will back down,” said Sata. “Why should they refuse when unborn babies are subsidising them? Who are they?”
• Simumba said the mines should not play games because the government had powers to do anything within the constitutional mandate regarding the mining sector. “The mines should not behave funny and play games. Besides, they do not follow regulations regarding pollution and the mines should know that they operate on the basis of licences and failing to comply may result in withdrawal of those licences.”
  
• Joyce Nonde said “For the past 15 years, Zambians have not been happy with the operations of the mines and the mines should not continue being rude and pompous by embarrassing the government through legal threats because they pay taxes in their home countries,” said Nonde.
• Professor Lungu said, “What Government has done is commendable, these taxes cannot be postponed, the new taxes are in line with the international practice…times have changed... As a result of the inadequate resources from income tax, Government was forced to borrow from bilateral and multilateral institutions to finance development programmes... Individual workers have been paying more than the corporations. Why should Government borrow when the money can be sourced locally?" Professor Lungu also poinbted out that the revitalisation of the mining sector has so far been dependent on Zambian Government support for the industry. “The investments that the Government has pumped into the mines through tax exemptions since the privatisation era could equal the investment that the mines have put in,” he said.“The decision to increase the mine taxes is commendable, brave and right because if Government did not get enough tax from its principal resources, where can the money come from?" Prof Lungu said he did not expect the mine owners to think of leaving because they had invested a lot and that they were not being threatened by nationalisation.
• The Post editorial, headlined, 'Brook no nonsense from the mines' describes the mine investors as "fortune seekers who have come with no other intention but to rape our nation. The behaviour of these corporations doesn’t seem to have changed in any way from that of the British South African Company ... the world is changing, and they shouldn’t think what is happening in Venezuela and other Latin American countries will not happen here. There is a new global awakening. We haven’t yet fully caught up with it but this awareness is coming. They can’t continue to blackmail our government whenever it wants to do something that is in the interest of the people and the country.... It is good that our government is starting to wake up and do that which needs to be done to ensure that our people benefit from the natural resources of their country. And on this score, the government deserves the support of all; the support of the unions, the entire civil society and of all our politicians. These taxes, which are very modest in our view, should not be reduced in any way. The government should continue to have the power to set and collect taxes as it deems fit. The government should treat the mining corporations like all other businesses operating in the country and should brook no nonsense from them. Those who want to go can go. They certainly can be replaced."

• The Times of Zambia editorial notes the wide range of people speaking out to support the Government and says: "we can only add to the chorus that Government stands firm in its resolve to ensure that Zambians benefited from the abundant natural resources.Our appeal would be to the mining companies to see sense. Taking Government to court is not the best solution to the problem. The fact is the situation has changed and the Development Agreements disadvantaged Zambians. This is the message that the mining companies should take to their shareholders whom we feel will have no objection, but abide by the new Government demand."

Mine owners unite and threaten to sue

After weeks of anonymous briefings and delays, mining multinationals have finally declared their position on Zambia's proposed new tax regime. The Times of Zambia, The Post, The Daily Mail and the Lusaka Times all provide details of a hearing of the expanded parliamentary committee on estimates at which seven major mining companies, and their collective body the Chamber of Mines, were represented.

At first glance, the companies position is surprisingly confrontational: they claim they are ready to sue. A second look reveals something more subtle. The mining companies adopted two positions. Firstly, they claimed their Development Agreements are still legally binding, and that any challenge to them would result in the companies taking court cases in London or Johannesburg, depending on where the agreements were signed. Obviously it's true that the DAs are currently legally binding, as the text of legislation to override them has not yet been presented in Parliament. But it should be in the next few days unless the Government gets an appalliing dose of cold feet. Secondly, the companies said their doors are still open for a negotiated settlement. That tells us two interesting things to start with a) they have finally accepted that, against their wishes, there will be changes from the status quo and, having been unwilling to negotiate previously, are now trying to water down the proposals or call the government's bluff before legislation is put to the house. b) either I or they are unclear about how this would be legally resolved. Johannesburg or London? According to this Wikipedia page, "ICSID proceedings do not necessarily take place in Washington, D.C. Others possibles locations include the Permanent Court of Arbitration at The Hague, the Regional Arbitration Centres of the Asian-African Legal Consultative Committee at Cairo and Kuala Lumpur, the Australian Centre for International Commercial Arbitration at Melbourne, the Australian Commercial Disputes Centre at Sydney, the Singapore International Arbitration Centre, the GCC Commercial Arbitration Centre at Bahrain and the German Institution of Arbitration (DIS)." (for more on ICSID and useful link, see yesterday's blog) So maybe the settlement they are hoping for would not be through ICSID. What then?

Remember that Government evidence presented by James Mulungushi to the same committee said that said section nine of the Minerals Act was being proposed for amendment by repeal and replacement and that Attorney General Mumba Malila also told the expanded committee on estimates that the DAs could not stop the Government from making a Law, and that in the event that the mining companies dragged the Government to court, the State was ready to proceed and defend its position. So now we are all just waiting to see if the bullying tactics work and Government announces it needs to go into consultations, or whether the Government will follow through on its clearly declared intentions to introduce new legislation, and sticks to the system outlined by the Finance Minister in his budget announcement. The Daily Mail report ends noting that the mining company presentations angered MPs on the committee who said the companies were issuing threats, not discussing solutions. The Mail also reports that, in an interview later, Minister of Finance and National Planning, Ng’andu Magande, said Government was not obliged to consult anyone over tax changes. He said the new mine tax will be implemented and Government was ready to meet opponents in court.

The committee is chaired by Itezhi-Tezhi member of Parliament (MP) Godfrey Beene. The Chamber of Mines of Zambia was represented by the president, Passmore Hamukoma, an employee of Mopani Copper Mines (MCM), and general manager, Frederick Bantubonse. Apart from MCM, Konkola Copper Mines (KCM), Chibuluma Mines, Lumwana Mines, Kansanshi Mines, Luanshya Copper Mines (LCM) and NFCA Mines were all represented.

What was said, in detail
The text below is all taken from the report in the Times of Zambia, though reporting in all the papers was either identical or very similar.

Mr Bantubonse of the Chamber of Mines said the proposed tax was too severe and the action would trigger economic recession and consequences of unemployment and poverty. He threatened disputes arising from the breach of these should be settled in either London or Johannesburg depending on when the agreements were signed. Bantubonse also said President Mwanawasa wrote to all mining companies and held individual meetings with some CEOs and indicated that the Government wanted to re-negotiate the DAs. He said all mining firms with the DAs confirmed that they were willing to re-negotiate the agreements. Mr Bantubonse said at the Zambia International Business Advisory Council (ZIBAC) conference that was held in Livingstone in July last year, mining companies informed the gathering that they were ready to re-negotiate the DAs.At the same conference, Minister of Mines and Minerals Development, Kalombo Mwansa said that the negotiations would start in October last year."Mining companies were, therefore, surprised when Minister of Finance and National Planning, Ng'andu Magande, during his Budget address in Parliament announced new tax measures for the mining companies as they were still waiting for the committee to invite them to the negotiating table," he said. He said following the Budget address, the tax consultants worked through an example and found out that the effective tax rate came up to 79 per cent.

Chibuluma Mines general manager, Ed Mounsey said the taxation rate would increase from 22 per cent to 50 per cent over the life of the mine.Mr Mounsey said the investment made by the key shareholders, Metorex, would not be recouped and that there would be no dividends to Metorex and ZCCM-IH. He said the Chibuluma DA was a legally binding document both in Zambia and internationally. He said there was need for an independent review of the proposed tax changes on the viability of mines.

First Quantum Minerals (owners of Kansanshi Mine) country manager, Chisanga Puta-Chekwe said if the Government proceeded with the new tax regime the company would have problems with the shareholders. Mr Puta-Chekwe said the Government in that case would be liable for the costs to be incurred.He said his company was not against the idea of introducing the new taxation but rather the manner in which the process was conducted.

In the presentation to the committee, Lumwana Mines stated that the DAs were signed at the end of 2005 at a time when copper prices were high and when the Government was not under duress. The report states that economics of developing Lumwana were never robust and it took the mine two years to negotiate and close the financing for the project with 12 international banks. The report states that the Lumwana DA formed a key project document, the fiscal and other obligations formed the basis of the financial model."Lumwana is now at an advanced stage at a rate of $1.5 million per day. This debt financing is the largest in the history of the African continent and will take nine years from the start of production to pay back under the agreement with the banks," the report stated. The report said Lumwana had never enjoyed any windfall profits and would likely be some years before it did, depending on whether copper prices ruse or fell.

Mopani Copper Mines (MCM) submitted that the new tax regime had the potential to destablise long-term plans of expansion and recapitalisation at MCM.

KCM director of operations, CP Baid said the new tax regime was detrimental and jeopardised the ability to generate surpluses and raise funds for infusion towards growth and extension of the mine's life. Mr Baid said the tax regime was contrary to the Fifth National Development Plan (FNDP)'s spirit and fundamental requirement for sustainable development and growth of the copper mining industry which had passed through a decline phase and was now in the phase of recovery.

Anonymous investor: 'we will go ahead with international arbitration'

Miningmx.com is reporting anonymous threats by mine investors that they will challenge the Government's new tax regime through international arbitration. Development Agreements between the companies and state allow for arbitration in the case of a dispute between the contracting parties. The Zambian state has recently announced that it will unilaterally impose new taxes without consulting the companies, overriding 'stability clauses' in the Agreements that commit the Government not to alter the tax burden applying to the mines for 15 to 20 years. As discussed on minewatchzambia before, the constitutionality of these stability clauses, and indeed the Development Agreements themselves may well be open to challenge.

A senior mining executive who, rather tellingly, declined to be named, told MiningMX: “We have development agreements in place and they still have a decade to run. We will go ahead with international arbitration if this fiscal regime goes ahead, but we trust it will not come to that.” That's a pretty explosive suggestion and as direct a threat (even if anonymous) as we've had from any mining company. The addition of the 'we trust it will not come to that' phrase at the end is very suggestive. The companies are clearly trying to threaten the Government, or to secure concessions before legislation reaches Parliament. This is a political question as much as a legal one.

Mines minister Kalombo Mwansa told Miningmx that international arbitration would probably "come to nothing" and asked mining companies to accept higher taxes. The fiscal regime “won’t change,” Mwansa said on the sidelines of the Africa Mining Congress in Livingstone, Zambia. “We’ll have dialogue with the mining companies, but we will not change the fiscal regime... Nobody likes to pay tax, but that shouldn’t stop them from investing,” Mwansa said international arbitration would be the least favourable course of action. “I’d appeal to them not to do that and to not get into an antagonistic situation that will lead to nothing,” he said. “It is in their interests to work with us and stay in our good books.”

Mwansa's final comments should encourage the mining companies to think carefully before pursuing arbitration. Were it to come to it, the Development Agreements propose arbitration through the World Bank's International Centre for the Settlement of Investment Disputes (ICSID), which would be chaired by World Bank President Robert Zoellick and the membership of which would be made up of other countries that have signed the international investment convention that established the body.

So, if it came to arbitration, what might happen? Firstly, it could prove expensive for the companies (the parties to a dispute at ICSID cover the costs of the process). Secondly, the outcome might not be what the companies were hoping for. Should a case come to arbitration, the state would be well placed to raise a number of issues beyond the question of tax. Although the Development Agreements were historically kept secret between the mining companies and the Zambian Government, their publication on this website has allowed researchers to look more closely into their provisions. One effect has been to suggest significant degrees of non-compliance by the companies with the commitments they made in the agreements. New research into the situation with individual companies would clearly be very useful, as soon as possible. Details of mines safety, environmental regulations, social provisions, labour rights and even immigration law are laid out in some detail in the Agreements, but actual practice in Zambia appears historically to have been a question of the Government exercising an extremely soft touch, partly due to administrative weaknesses in the regulatory organs of the state, partly because the agreements were secret and the companies got away with telling regulators and unions that they were covered by contracts those actors didn't have access to, partly because of minority share-holding in the companies by the state, and partly because the companies and Government decided that a partnership that kept each in the other's 'good books' was in both of their interests. The implication of this historically cosy relationship, however, is that the companies have been getting away with non-compliance in many areas covered in their Development Agreements for some time. They might find themselves on the wrong end of a settlement should the arbitration process broaden out beyond tax.

However, any investor falling out with the Zambian authorities might suffer more serious problems that just those caused by the arbitrator. Firstly, they could expect much more zealous regulation. What's more, the companies operate in Zambia through a 'license to operate' that is far more than merely legal - the companies need the co-operation of the Zambian state in areas that go well beyond formal contracts - the provision of infrastructure, including roads, rail and energy sectors are fundamental to the companies. Some aspects of what the state will provide are covered in the Development Agreements - others aren't. Vast shares of Zambia's shaky electrical supplies are set aside for the mines, via arrangements between the state electricity company ZESCO and the Copperbelt Energy Corporation. These relations have been hard enough in recent times with negotiations over costs and difficulties with load-shedding shutting down the mines unexpectedly, damaging production and equipment. The Government could almost certainly make things significantly more difficult for any investor they fell out with. The same is true of labour relations. Whether through their refusal to amend Zambia's appalling labour rights legislation, through their failure to implement existing rights, or through the policing of demonstrations, the Zambian state is absolutely central to the maintenance of an unjust industrial order on the Copperbelt that the companies benefit from. In a region that is already tense (there were illegal strikes and pickets in a majority of the mines in the last twelve months) any political signal from the state that workers would be favoured over a particular company would be absolutely disastrous for that company.

Thirdly, companies refusing to accept the new fiscal regime would be taking a chance with their international reputations. The original Development Agreements are widely regarded as a scandal, and corruption cases have surrounded at least some of the negotiators on the state side. Few companies would welcome further dicussion of how they won the contracts. With the ICSID process, and some of the companies themselves already the subject of major international NGO campaigns, any legal challenge to the right of the Zambian state to make what are welcome, just and really very balanced (some would even say conservative) alterations to the mining regime, would rightly meet an aggressive popular campaign, both in Zambia and internationally. I'll sign up now to doing my bit to make it happen, if necessary! I suspect the companies will see sense, and it won't be.

New Environment Protection Fund from April

The Daily Mail reports that mines safety experts from Canada are in Zambia to validate mines safety audits recently conducted by Kitwe based organisation Citizens For a Better Environment. The two-month study will lead to recommendations on how much each company should contribute to a new Environmental Protection Fund (EPF), to be established from April.

Development Agreements to be scrapped and replaced by new mining law

Following Wednesday's report that the Parliamentary committee had objected to the poor qulity of evidence on the new mining regime offered by Finance Ministry officials, today the Times of Zambia reports that Ministry officials have been back in Parliament and have offered more detail on the legal and financial provisions by which reforms will proceed.

Acting Secretary to the Treasury, James Mulungushi, giving evidence to the expanded parliamentary committee on estimates, chaired by Itezhi-Tezhi MP, Godfrey Beene, said a new mining regulatory law will be proposed which will, among other things, remove the requirement to enter into Development Agreements. Section nine of the Minerals Act will be proposed for amendment by repeal and replacement. "The new mining regulatory regime will, therefore, do away with the requirement for Development Agreements," he said.

Attorney-General Mumba Malila, also giving evidence to the committee said, "We hope the mining companies will understand where we are coming from. We want to handle this amicably." Mr Malila said the DAs could not stop the Government from making a law and said all the good things in the DAs would be captured in the law. He said in an event where the mining companies dragged the Government to court, Government was ready to proceed and defend its position.

He said the legislative committee looking into the new tax regime in the mining sector had completed the draft report, which would soon be presented to Parliament for enactment.

Dr Mulungushi also told the committee that additional revenues expected as a result of the new measures were U.S.$415 million and the estimates were based on a projection of $3.2 per pound and annual production of about 600,000 metric tonnes. Dr Mulungushi said the Government proposed that the revenues to be raised be set aside in a special account, which would also act as some form of stabilisation fund. He said this was necessary in order to avoid serious macro-economic implications such as damage to the non-copper export sector as a result of exchange rate appreciation." Additionally, setting aside the revenues in a special account will smoothen expenditure because mineral revenues tend to be more volatile and uncertain than other revenue types," he said. Dr Mulungushi said the resources in the special account would be utilised in accordance with the normal transparent procedures in consultation with Parliament.

Dr Mulungushi said the special account would be a permanent feature in which all mining revenues should be deposited and the amounts to be utilised in the annual Budget would be determined and agreed with Parliament. Earlier, Dr Mulungushi asked the committee if it could allow his team to sit in camera, taking into consideration that the matter to be discussed was sensitive, critical and highly technical. But Mr Beene said the committee allowed the media to cover the sitting as the issue being discussed had already been brought to the attention of the public by President Mwanawasa in his address to the House and Finance and National Planning Minister, Ng'andu Magande in the Budget.

Sichinga, JCTR, Simumba, DFID all defend Government

More high-profile Zambian commentators have been weighing into the debate on the new mining taxes. Sentiments making the newspapers seem to be almost exclusively positive, with a degree of excitement in that the Government has taken what seem to be brave and principled steps to overcome the inequity of previous tax arrangements with mining companies. Several commentators are at pains to defend the legality of the moves taken by a sovereign parliament to over-ride inequitable contracts, and many are effectively campaigning to build up public sentiments designed to discourage the mining companies from taking legal action. The companies themselves are remaining stubbornly quiet, insisting that further clarifications are needed before it is clear what the proposals entail.

The Daily Mail quotes Former Public Accounts Committee chairperson Bob Sichinga suggesting that the mining companies should contribute a lot more than 9.6 per cent effective tax rate that he believes the budget generates. “Mining companies must contribute a lot more than indicated in the budget measures at US$415 million equivalent to K1,660 billion. The estimated income still falls far short against a turnover estimated at K18,800 billion,” he said. Sichinga was also quoted in The Post arguing that the Zambian constitution mandated the Minister of Finance to impose a tax regime without consulting the affected party. "What the minister (Magande) has done is the right thing and I would like to commend him for that bold decision. Article 114 mandates the Minister of Finance to impose any tax regime without consulting the affected parties," said Sichinga.

The Post goes on to note that, in its 2008 budget analysis, prominent NGO the Jesuit Centre for Theological Reflection (JCTR) stated that the revision of the mining tax regime was a progressive step in ensuring that corporate institutions start making higher contributions to the revenue side of the budget. JCTR however noted that the government needed to address other challenges such as illegal mining, casualisation of labour and inadequate regulation in the mining sector, as taxes were only a small component of the current problems. "It will also be prudent for the government to remain alive to the fact that low taxes were only a small part of the huge challenges facing the mining sector. As summarised by Fraser and Lungu in 2006, these challenges include inadequate regulation, illegal operations, impunity, casualisation of the workforce, deepening pensioner poverty, lack of linkages to local business and failure to protect the social infrastructure," JCTR stated. "We hope that the additional US $415 million to be generated from taxes on mining firms would be spread across social and economic sectors to improve service delivery and increase capital investments necessary for integral human development."

In a letter to The Post, prominent Zambian business consultant, Trevor Simumba, who has recently worked for the Ministry of Commerce, Trade and Industry also argued that "no agreement can take away the sovereign right of any country to legislate in the public interest and these taxes fall within that right. The only body with power to make laws is parliament." He added, "Worrying about investor sentiment is farfetched at a time of high metal prices. If any of the foreign multinational investors decide to contest these taxes or disinvest, I would say good riddance."

Finally, the Lusaka Times reports that the British Government not only supports the Zambian strategy, but supported the Zambian team that looked into the reforms. A statement released to ZANIS by the British High Commission and the Department for International Development (DFID Zambia) announces that the British Government is one of the two co-operating partners who have provided financial assistance to the Zambian Government to obtain its own independent technical and legal advise on renegotiating Zambia’s mining development agreements. Requests for further information on the UK position by MineWatchZambia secured a brief statement from DFID, essentially confirming the story but noting also that DFID would wait for further clarification of the precise nature of the new regime before responding to it.

Govt struggles to clarify mine taxes to Parliament

The Times of Zambia reports that the parliamentary estimates committee yesterday sent back a team led by acting Secretary to the Treasury James Mulungushi because they did not present satisfactory explanations of the new mining tax regime. Dr Mulungushi and his team were asked to prepare a fresh report that would satisfy the committee chaired by Itezhi Tezhi MP Godfrey Beene, and present it by tomorrow.

MPs complained that the report left out key details of the proposed windfall tax on copper mines. Dr Mulungushi had also said that Government plans to open a special account at the Bank of Zambia (BoZ) to keep the excess revenue from the mines and that the Government has set up a committee to plan on how the projected revenue of US$415 million would be raised. This prompted the committee to question why the projected revenue of US$415 million was not included in the national budget. The committee argued that it is only parliament that has the authority to approve any expenditure and not the executive. "As a committee, we are looking at the legal position on new mining tax and the position on the setting aside of the excess revenue and why is this money not included in the budget. We are disappointed because you have failed to give us the legal position on these important matters," Mr Beene said.

Will companies resist mining taxes?

Yesterday's Post newspaper included a report with comments from eminent University of Zambia (UNZA) Development Studies lecturer Fred Mutesa suggesting that the government and Zambian people should expect some resistance from mining companies over the new tax regime.

Commenting on finance minister Magande's remarks that there would be no room for negotiation with the mining companies, Dr Mutesa noted, “The minister is very correct in taking the position that he has announced because the final authority in matters of legislation, including the tax policy, is parliament... And in this country, it is high time that parliament played a more significant role in scrutinising the development policies. However, some resistance could be expected from the mining companies, but the mines should examine their consciences, if they have any.”

And Reuters report today some murmurings of disquiet from the companies. First Quantum Minerals Ltd have apparently said the news taxes are "unattractive" and could deter new entrants or further investment. "The new tax proposal in Zambia is exercising our minds. It doesn't look very attractive right now," Clive Newall, president of First Quantum, told a mining conference in Cape Town. "Certainly it won't be attractive for new players, and may stop new developments, which is an unintended consequence." He said First Quantum would study the tax structure before commenting further on the tax regime.

NGOs analyse legal, financial implications of Zambia's new mining tax regime

This useful preliminary analysis of the financial and legal implications of the new tax regime has been produced by ACTSA, Christian Aid and SCIAF, and can be downloaded from ACTSA's website here.

Zambia’s new mining tax regime

The Zambian government have announced a new mining tax regime, effective from April this year, which is designed to capture a greater share of windfall profits for the Zambian government. If implemented by the mining companies, this will greatly increase the amount of money available for public spending on poverty reduction. The government will be able to improve education and health services, and make investments that will create more jobs and livelihoods for Zambian citizens.

This is how new taxes will more than double existing government revenue from mining:

1. The value of copper sales, which determines how royalties and taxes are calculated by Zambian companies, will no longer be determined by the price companies claim they are being paid by their buyers overseas. Instead, it will be calculated based on the prices of copper on international commodity exchange markets. This will introduce much more transparency into companies’ profit calculations.

2. The sales tax (or royalty) on the value of the copper ore produced will increase from 0.6 per cent to 3 per cent

3. In our understanding, an additional royalty (called a windfall tax in the new tax regime) will be charged on the sales value of copper for every 50 cents increase in the price of copper per pound on international copper exchanges. This could push the ‘sales tax’ or royalty on copper up to over 5 per cent, which is closer to the average international mineral royalty rate.

4. Companies will pay corporate profit taxes of 30 per cent (up from 25 per cent) on the profits they declare after deducting costs and royalties (see above)

5. In addition to the 30 per cent corporate profit tax, companies will also pay a ‘variable’ profit tax. This means that companies, even after paying 30 per cent corporate tax, may still have profits higher than 8 per cent of their overall income, mostly as a result of the boom in commodity prices. These profits will be taxed at 15 per cent. This tax transfers a fair share of the windfall value of copper to the Zambian government. In the UK, the Labour government implemented a similar tax on North Sea oil companies.

6. Overseas consultants and companies providing services to Zambian copper companies will now be paying a 15 per cent tax on their income in Zambia, up from 0 per cent. The tax paid by such companies and individuals would now be split fairly between the country where they are resident and Zambia.

7. Mining companies will no longer be able to deduct their losses from financial deals (for example hedging of future sales) from taxable income because hedging activities will not be given the same tax treatment as mining activities.

8. Under the current tax regime, mining companies are able to deduct 100 per cent of expenditure on equipment such as machinery from taxable income every year. But as of April, they will only be able to deduct 25 per cent of such expenditure, and only once the project starts operating. Such a measure would reduce the incentive for
mining companies to keep on buying equipment to reduce their tax bill in Zambia and it will bring forward their tax payments (as they cannot deduct from their tax bill expenditures on projects that are not yet in operation).

9. In addition, mining companies can no longer deduct from the taxable income on a profitable mining site their capital expenditure on another mining site. While this will increase tax paid, it may discourage local reinvestment of profits. This is the only tax measure we recommend the Zambian government may want to revisit.

There is a very real possibility that some or all Zambian copper mining companies will take legal action against the government. According to the development agreement signed with Konkola Copper Mines, the Zambian government has to provide KCM with ‘full and fair’ compensation if it changes the tax provisions of the agreement in the 20-year period for which the contract is valid.

The report published by ACTSA, SCIAF and Christian Aid ‘Undermining Development: Copper mining in Zambia’ explains in detail why this agreement is unfair and has contributed to robbing Zambians of their rightful share of the profits from copper mining. Should the Zambian government refuse to pay compensation for the additional taxes companies will have to pay under the new tax regime, the mining development agreement says that they can request an international tribunal to decide the amount to be awarded to them. The agreement states explicitly that no other court of law in Zambia or elsewhere could resolve such a dispute.

UK NGOs urge Vedanta to accept new tax regime

The British campaign groups, ACTSA, Christian Aid and SCIAF, who were behind the 'Undermining Development?' report on Konkola Copper Mines, have welcomed the announcement of Zambia's new mining tax regime, and are asking their supporters to write to Vedanta Resources, the company that owns KCM, insisting that they accept the new arrangements and do not seek any compensation from the Zambian Government. In a moment I will also provide a link to the groups' analysis of how the tax proposals will work. This is the most detailed analysis I have seen. The text of their press release is available on the ACTSA website. I reproduce it in full here:
+++
Zambian government tell companies to pay fair share

"Two months after ACTSA campaigners called for Zambia to get a fairer deal from their huge copper reserves, the Zambian government has announced new measures which help ensure just that.

Last week the Zambian Finance Minister used his budget announcement to introduce new tax measures which, if accepted by the mining companies, would result in an additional $415 million dollars for Zambia in 2008 alone - double what it would have earned under the current mining tax regime.

Now your help is needed again.

Zambia’s biggest mining company, KCM (the focus of our recent report) has not yet responded to these proposals, but another mining company has threatened legal action if the Zambian government if it goes ahead with these measures.

We are calling on KCM to accept these new arrangements and refrain from seeking compensation. Please write to Kuldip Kaura—Deputy Chairman of KCM and Chief Executive of Vedanta, its parent company—asking him to ensure that KCM and Vedanta abide by the new tax regime and do not seek compensation from the Zambian government.

Whilst not all of the details have been announced, we expect the proposed measures to be balanced and in keeping with internationally accepted norms. The budget announcement has received international praise from informed observers; the World Bank has noted the potential of the ‘mining tax…(to be) spent on projects that will benefit poor people’. Members of Zambian civil society and Zambian academics have also welcomed the move. Leading academic Professor John Lungu has said that ‘the government has taken a brave step worthy of supporting. This money could provide a massive boost to areas such as health and education. But if Zambia is to benefit, mining companies, including KCM, must respect the new law as part of their corporate accountability practices’.

Your campaigning is working and is having a significant impact. Please keep up the pressure and help one of the world’s poorest countries get a fair deal from its natural resources.

Campaign Success
This is a huge success for both Zambian civil society and for ACTSA campaigners, who have helped push the issues of unjust taxes, enviromental damage and labour rights onto the political agenda both in the UK and in Zambia.

The government has announced that it will use the money to ‘implement vital programmes in health and education’ and the additional resources have the potential to make a huge difference. For example, it would allow the government to nearly triple its expenditure on healthcare in a country with an average life expectancy of 37 and would be sufficient to halve poverty by 2015.

The Zambian government has also committed to “transparency in the accounting and utilisation of mineral resources” which should involve making public the payments received from the mining companies and how these payments are spent. In a separate announcement, the Mines and Minerals Development Minister has also committed to improve the environmental and safety laws which apply to mining companies. These were key asks of the Undermining Development report and, if implemented, will be a historical step forward for Zambia.

However, this new tax regime is just one piece of the jigsaw and still leaves some mining companies free to pollute the environment beyond internationally accepted levels and to refuse employment rights to large numbers of workers shifted to badly paid and insecure temporary contracts, without union protection.

Please keep following the developments of the campaign by subscribing to ACTSA e-news and Mine Watch Zambia which provides regular and informed updates on the situation.

Magande: no talks with companies on new taxes

The Post today reports comments from Finance Minister Ng’andu Magande making it quite clear that mining companies will not be consulted over the imposition of new taxes in the mining sector, legislation for which is expected in Parliament this week, and that there will be no change in the other clauses of the companies' Development Agreements. For what it's worth, I think Magande’s comments are inaccurate legally (he’s effectively pretending the stability clauses written into the companies' Development Agreements never existed) but politically smart. My assumption is that they are intended as pre-emptive strikes against the companies because the Government remains nervous that one or two of them might try to make a legal issue of the reforms. See the other two posts I will put up today for a new NGO analysis of the legal and financial implications of the new regime and for details on an NGO campaign designed precisely to discourage the companies from considering any legal steps or requests for compensation.

“Do we consult you when we increase Pay As You Earn (PAYE)?” Magande asked. “If we do not consult you, why should we consult them (mining companies)? So there is no room for negotiations and all we are waiting for is for Parliament to approve and then we shall go and implement.”

Asked what happened to the team put together to negotiate with mining companies, Magande responded, “That team we constituted was the one that came up with the recommendations on the new tax regime that we have imposed on the mining companies so that we get a fair return on our resource. It was not about going to renegotiate with the mining companies because the government does not negotiate with anyone when it wants to impose tax.”

Luanshya Copper Mines (LCM) chief executive officer Derek Webbstock said many mining companies were still trying to understand the finer details of the new mining tax regime. “Government got to do something. Unfortunately, government has got to please as many people as it can,” Webbstock said. “We don’t understand some of the finer details, yet, of the new tax regime. It’s not ideal to happen this way. We will always argue on one side but there will still be people to invest.” In a separate article, also in The Post today, Webbstock is quoted suggesting that although new taxes would have an impact on the profits made by the mining firms it was not his company policy to oppose the government.

The Post's editorial, is very supportive of the Finance Minister. Here are the edited highlights of a long diatribe against the history of unequal relations between foreigners and indigenous Zambians:

"The selfishness of our friends is frightening. From the time mining started in the early 1920s in this territory, our friends have gotten away with everything, leaving nothing or very little for us.... The new Zambian, the new African will not continue to take this rubbish forever. Things must change, they have to change. This is not a relationship that can be said to be of mutual benefit; it is one of the exploiter and the exploited, it is one of servitude. There is no dignity in our dealings. It is too one-sided to be a fair deal. Can’t they see that there is something wrong with the way they deal with us?... We are happy that our government, our people are starting to realise that things must change; there has to be a sense of justice and fairness in our dealings with these brothers of ours. We are not going to drive them away because they are very much part of us, and we need them as much as they need us. But now they also have to learn to meet us on our terms – it can’t always be on their terms. They have gotten everything they have wanted for too long....

We agree with finance minister Ng’andu Magande’s determination not to change the new mining fiscal regime in response to their demands. These changes are actually too modest. If we were in government, they would be paying a bit more than Magande is asking of them. And it has to be realised that this new mining fiscal regime is not a product of arbitrariness. A very competent and honest team of Zambians was assembled to investigate this issue and come up with recommendations. And it is on their recommendations that this new mining fiscal regime is based.... We have to permanently put an end to a regulatory and tax framework for mining that clearly benefits large-scale mining to the detriment of our country and our people. And let’s ensure that all the time our people, the citizens of this country, are 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...

We cannot continue to develop the mining industry at the cost of ceding to multinational corporations practically all the income that belongs to the country and its people. Now is the moment to change these policies. Zambia needs the income from its copper for development and to protect its citizens. Mining uses a non-renewable resource, which means that there is an economic rent that belongs to all Zambians and which at present is almost appropriated by the industry....

It is this fact that justifies a new mining fiscal regime. It is the evident injustice of the mining sector’s level of contribution that inspired many Zambians to agitate for a change in the mining fiscal regime in order to address this deficiency that is generating distortions and inequalities. And as we have stated before, this is supported not only by our own lawmakers, but also by various resolutions and reports of organisations such as the United Nations and the World Bank. We hope the measure the government has decided to take will be fully supported by all our politicians in Parliament and will help the mining sector’s contribution to meaningfully increase and consequently raise the sector’s contribution to the development of the country to higher levels and lift our people out of poverty and despair."

Levy: Tax legislation in Parlt this week

The Times of Zambia reported on Friday that one mining investor has complained to the Zambian Government against the proposed new mine tax regime, and that Government will move ahead with new legislation anyway.
"There has only been one mining company which has written to me complaining about the new tax regime," he said, adding that next week a Bill would be introduced in Parliament for the House to deliberate on to ensure the proposed mining tax regime became Law. The President, who is at the African Union Heads of Summit conference in Ethiopia did not disclose which company was involved.

The Lusaka Times reports that at the same meeting the President held private bilateral talks with World Bank President Robert Zoellick. Briefing journalists shortly after the meeting Commerce Minister Felix Mutati said the meeting focused on support for Zambian flood recovery programmes. The Lusaka Times reports, "the World Bank also wanted to know about Zambia’s mining tax regime, to which President Mwanawasa explained that the mining sector was key to Zambia’s economic development and that it was imperative for the sector to contribute a fair share to the economy particularly to infrastructure development like roads. The President told the World Bank Chief that Government’s action to revise the mining tax regime was in response to public outcry that Zambians were not getting a fair share of revenue from the mining sector."

Meanwhile The Post reports today that US Ambassador Carmen Martinez, in comments that broadly seem to endorse the 2008 budget, has urged Zambians to be 'patient with poverty reduction' programme. “There has been a lot of debate on the different levels in changes of VAT and PAYE, and various other things but all in all, I think that there are some very good things in this year’s budget,” said Ambassador Martinez. “Obviously, Zambia seems to be economically getting better but any leader, in government and civil society, acknowledges that you still have too many poor people... Hopefully, this new budget will be more acceptable and address the problem of poverty. It’s a lot of work and people need to be a little more patient,” The Post reports that Ambassador Martinez also said though the Pay-As-You-Earn (PAYE) adjustments appear to be insignificant, it could help reduce poverty and bring about changes in people’s lives.

“You are not going to see change overnight, the adjustment is small but it makes a difference. I know every individual would want a wide margin adjustment but what you would like to do is to have a strong economy and you need a bigger base to collect from,” said Ambassador Martinez. “Many countries make a mistake of raising their rates so high hoping to collect large amounts from a small base but it makes sense to have a large base and collect small amounts from each individual.” The interview doesn't directly address the question of mines taxation, but I read the comments as a broad endorsement of the realtively conservative approach by Government, not sending mineral royalites or other corporate taxes over international averages, and not splurging heavily on tax cuts for workers and poor consumers. As with almost all of the comments from donors that I have found so far, it seems they recognise the rights of the Zambian Government to unilaterally impose the new tax system on the mining houses, and offer little encouragement to opponents of the reforms.

Stiffer Environmental and Safety Rules in the pipeline

It really must be a miserable time to be a manager at Mopani Copper Mines (MCM). On Friday the company found out its long-running tax holiday was to be curtailed. Yesterday a Minister raised the politically sensitive issue of delays in pension payments, placing blame that Mopani would dearly love to shift elsewhere squarely on the doorstep of the mining house. Today, The Times of Zambia report that the Environmental Council of Zambia has charged and fined MCM's mine manager and three other employees in relation to the pollution of Mufulira water system on January 2 this year.The company polluted the water supply system affecting 800 Mufulira residents who were attended to at Ronald Ross and Malcom Watson Hospitals. Mines and mineral development minister Kalombo Mwansa also announced that Government would be introducing tougher legislation to regulate both environmental and health and safety standards in the mining sector and to impose stiffer penalites on failing companies.

Dr Mwansa said the Mine Health and Safety Policy which would provide strict safety guidelines was being formulated while the Mines Safety Department was also being strengthened. In response to Chasefu Member of Parliament (MP) Chifumu Banda (FDD) who wanted to know if the Mufulira victims would be compensated, he said the victims were free to take any action they wanted although Government wanted to stiffen punishment.

All in all, I find these developments incredibly encouraging. In the 'For Whom the Windfalls?' report I predicted that Government would press the companies for more social responsibility and would re-negotiate tax arrangements. I wouldn't have predicted the tax measures would be imposed in the way that they have been. But I also suggested that local resentments against the mining firms related as much to failures of responsibility and regulation on environmental, safety and labour issues. We now hear talk of reforms and increased regultory capacity in two out of three of these areas (environment and safety) and the ECZ does appear significantly energised in recent months. We have also seen interssting Government action in relation to local supply chains. Of course delivery of new regulations will be key, and is massively overdue. Minewatchers will want to keep an eye on these proposals. Campaigners might like to remind the Minister of his commitments if the reforms are not forthcoming. And labour campaigners need to work out how to get their serious grievances onto the Governments agenda while the issue remains hot.

In other news, The Post report that FDD vice-president Chifumu Banda yesterday commended the government for the windfall tax. Banda said it was unacceptable that Zambian minerals should be enriching foreigners while 80 per cent of Zambians continued to suffer from poverty, economic exploitation and social degradation. "As FDD, we believe in joint ventures where the government of Zambia must hold not less than 50 per cent shares in any mining or any business venture of such magnitude," said Banda.

More responses to budget

The Post yesterday provided more responses to the budget, including from influential civil society activist Father Peter Henriot, Executive Director of the Jesuit Centre for Theological Reflection (JCTR) who was speaking at post budget analysis organised by the Economics Association of Zambia (EAZ) on Friday.

As discussed in a previous post there has been a dramatic shift over the past fifteen years in the burden of taxation in Zambia moving from companies to individuals. One of the themes of the budget was that the increase in taxes from the mining sector should decrease the burden of personal taxes, and thus start to reverse this process. The budget increased the PAYE threshold for non taxation from a monthly salary of K500, 000 to K600, 000 and decreased VAT from 17.5% to 16%.

While Fr Henriot welcomed the announcements on mining, he also said the adjustments in Pay-As-You-Earn (PAYE) and Value Added Tax (VAT) were not adequate to significantly reduce the high levels of poverty in Zambia.

"I think we have to ask if that is really significant in terms of addressing the needs of the people,” Henriot said. “The JCTR does the basic needs basket and in Lusaka food alone, not extravagant but just basic needs of food, for a family of six are K569, 000... Surely people who get a little bit above K600, 000 or K700, 000 still haven’t met the basic needs basic which include, not just food but also lodging electricity, water and a lot other things. It’s now K1.6 million per month,” Fr Henriot said. “Surely there might be a possibility that the PAYE adjustment is not adequate enough to adjust the question of poverty... let the government continue listening and VAT has to drop even lower.”

“We don’t have clarifications how much of the US $ 415 million will come in this year? For what will it be used, for infrastructure, for social services or agriculture or some special fund? We need to know more about that,” he said.

“It’s true we need to deal with pensions that have not been paid but to say the K577 billion will be spent on social protection when K435 billion of that goes just to paying off arrears it leaves only K141 billion, a minimal amount, to deal with social protection,” Fr Henriot said.

However, Zambia Business Forum (ZBF) past vice president Phillip Chilomo said he was worried because the government was not ‘willing’ to renegotiate the mining development agreements. “The mining industry has always been ready to negotiate with the government because the windfall gains which have come out of the mines nobody anticipated them,” he said. “We are appealing to the government that whatever happens, we need to ensure that the return on investment is satisfactory so that we don’t see another exodus of investors in the mining sector.”

Meanwhile, the World Bank, who one might have expected to object to the non-negotiated nature of the reforms seem to have decided to take it on the chin, and offer further donor endorsements of the budget in an interview with the UK Guardian

World Bank country manager for Zambia, Kapil Kapoor tells the paper, "The new mining fiscal regime makes taxes more equitable as it places Zambia in the middle point of (global mining taxation)... The resources will help the exchange rate although it will make non-traditional exports non-competitive. It therefore requires ways of how to manage exports like cotton and tobacco." Kapoor said the government should now come up with a proper structure for managing the extra revenue to better benefit Zambians. "This is a good opportunity for Zambia to invest in rural infrastructure development," he said.

The Guardian also notes that Mwilola Imakando, the head of the Economics Association of Zambia, a Lusaka think-tank, said the new taxes would create mutual benefits for investors and Zambians.

Mopani still hasn't paid up on pensions

The Times of Zambia reports today that Mines and Minerals Development deputy minister Bornface Nkhata yesterday told Parliament that Mopani Copper Mines (MCM) still has an outstanding financial obligation of K7.9 billion to Mukuba Pension Scheme. The failure of privatised mining companies to honour the pension responsibilities for former employees of the state-owned firm has been a topic of massive anger and controversy on the Copperbelt. Tensions over land and squatting of mine land for farming are explained at least in part by the poverty of pensioners and those laid off from their previous jobs in the mines.

Mr Nkhata said the financial obligation arose from an actuarial funding deficit covering the five years period from March 2000 to September 2005.

He said this when responding to a question by Kankoyo MP Percy Chanda (PF) who wanted to know when MCM would remit pensioners' contributions to the Mukuba pension scheme, and when Mukuba would in turn pay the pensioners. Mr Chanda also wanted to know who would pay the interest on pensions once finally paid. Mr Nkhata explained that although Mukuba Pensions Scheme and MCM have held discussion over the issue, the two parties have not resolved the actuarial funding to pay MCM employees their full pension.

As a result, the pensioners have commenced court proceedings against MCM for non-payment of their benefits. In turn, MCM has also instituted court proceeding against Mukuba Pension Scheme because they have raised a dispute on the actuarial deficit to be paid to Mukuba. Mines and Minerals Development minister Kalombo Mwansa said he did not want to start explaining the position of former Roan Antelope Mining Corporation (RAMCOZ) pensioners, as that would require the ministry researching.Dr Mwansa was responding to a supplementary question by Roan MP Chishimba Kambwili (PF) who wanted to know the position of former RAMCOZ employees.

Equinox still hope they're special

The Times of Zambia reports that Equinox Mineral's Lumwana Mining Company (LMC) is seeking clarification from the Government on whether changes to the mining fiscal and regulatory regime in the 2008 Budget will affect the development agreement signed two years ago. Lumwana managing director, Harry Michael told the Times, "If the development agreement is intact, then we can continue with our obligations". Mr Michael said Lumwana and the 12 international banking institutions lending to the US $762 million project were doing separate internal financial revaluations on the changes. He said with shareholders having used up their money, the project was now depending on the international banks, which were spending $1.5 million per day.

The original 'For Whom The Windfalls?' report did not discuss the situation at Lumwana because it is a greenfield development rather than a result of the privatisation of previous state assets. Do readers think they have any case for special treatment?

Donors Respond Positively to Budget

I wrote a couple of days ago, wondering if the World Bank was lining up to criticise Zambia's newly announced reforms to its mining taxes. However, in their public responses to the budget, the Bank and a number of other aid donors appear broadly positive. "Overall, the budget is good," according to the Bank

The Post reports a number of comments on the recent budget from Zambia’s major donors: the EU, the US, UK and the World Bank, none of which questioned the new tax regime for mining. The EU Head of Delegation challenged the reduction in VAT, US representatives praised the focus on social spending, while the British Ambassador appeared relieved Magande wished to continue the co-operative relationship with aid donors and World Bank country manager Dr Kapil Kapoor advised the government to ensure that revenue proceeds from windfall mining taxes are spent on projects that will benefit poor people. “Overall, the budget is good, especially that key sectors such as health and education have been prioritised, but what remains is to grow the economy and sustain it and also implementation of major projects is a positive development,” said Dr Kapoor. “But it is not clear how revenue proceeds from windfall mining taxes will be utilised and we advise the government to ensure that funds are spent on projects that will benefit poor people who are in the majority.”

We did however, also see the first negative response to the developments from the Chamber of Mines, which represents the major mining houses. Business Day reported Fred Bantubonse, spokesperson voicing concern about the changes. “If you tear up a contract today, what value has the new one got?”

In an interesting, detailed and highly critical editorial on both the general budget process and it contents, The Post still finds, “The good news is that the mines are now going to be taxed in a variety of areas and in a manner that brings substantial revenue.” The paper enters an important caveat: “in public interest it would be good if the Minister of Finance could also give us the downside - what if the price of copper is below $2.50/lb? What would be the projected revenue for the government?”

BREAKING NEWS - BUDGET ADDRESS

Edited version below of the whole thing which can be downloaded from : http://www.postzambia.com/post-read_article.php?articleId=36730

So, what do readers make of it? I look forward to the debate.

__BUDGET ADDRESS BY THE HON. NG’ANDU P. MAGANDE, MP
MINISTER OF FINANCE AND NATIONAL PLANNING
DELIVERED TO THE NATIONAL ASSEMBLY ON 25TH JANUARY 2008__

1. Mr. Speaker, I beg to move that the House do now resolve into Committee of Supply on the Estimates of Revenue and Expenditure for the year 1st January 2008 to 31st December 2008, presented to the National Assembly in January 2008....

MINING

81. Mr. Speaker, investment in the mining sector, on the back of the high global commodity prices, has been an important engine of economic growth for Zambia. This investment has involved not only the establishment of new mines but has also attracted additional investments in mineral exploration, with very promising results.

82. Sir, in 2008, the role of the Government in the mining sector will continue to be that of providing an enabling environment for private sector led investment. In this regard, as announced by His Excellency the President during the opening of the 2nd Session of the 10th National Assembly, the Government will be introducing a new fiscal and regulatory framework for the mining sector.

83. Mr. Speaker, the mining sector under this framework will begin to adequately contribute to the advancement and the social and economic welfare of the people of Zambia. At the same time, the new regime will secure an appropriate return on investment by mining companies. The additional revenues arising from the new mining tax regime will be set aside and a clear and transparent mechanism for their utilisation will be established.

84. Sir, the proposed framework will also ensure transparency in the accounting and utilisation of mineral revenues and also protect the rights of all those investing in the mining sector.

85. Sir, another major policy intervention in 2008 will be to review the Petroleum (Exploration and Production) Act of 1985. Recent developments in this area have highlighted the inadequacy of this legislation in securing our national interests in the sector. The objective is to lay the groundwork for the eventual prospecting and production of oil.

...

DIRECT TAXES

121. Mr Speaker, there has been an understandable concern that the tax burden is high. As a responsible Government, we are mindful of the burden of taxation on our workers especially those in the lower income groups. In order to reduce the tax burden, I propose to revise the Pay-As-You-Earn by increasing the non-taxable monthly threshold income from K500,000 to K600,000. The following is the proposed Pay-As-You-Earn regime:

122. Sir, this measure will give tax relief to workers in formal employment earning below K4,535,000 per month. The measure will result in a revenue loss of K64.8 billion, which will go in the pockets of the workers.

123. Mr. Speaker, currently, the interest paid on mortgage for residential property is not tax deductible. The Government fully recognises the aspiration of most families to construct or purchase their own houses. I, therefore, propose to allow mortgage interest to be deductible for tax purposes to any Zambian individual who obtains a mortgage for residential property. It is envisaged that this concession will encourage home ownership.

124. Mr. Speaker, I also propose to increase the low cost housing unit capital expenditure limit for tax purposes from K2 million and K10 million to K20 million. This is meant to encourage employers to build decent housing units for their employees, particularly, in the agriculture sector. This measure will have a minimal revenue loss.

125. Mr. Speaker, in an effort to encourage savings and streamline the collection of withholding tax on interest earned on savings and deposit accounts, I propose to reduce the withholding tax rate applicable from 25 percent to 15 percent. I also propose to abolish the exempt portion of the interest, which is not subject to withholding tax. This measure has minimal revenue impact.

126. Mr, Speaker, last year, this august House approved the proposal to increase the tax credit applicable to persons who are differently-abled from K36,000 per annum to K144,000 per annum. The Government believes that this increase was insufficient. I, therefore, propose an additional increase so that the threshold will now be K600,000 per annum.

127. Sir, I further propose to increase the allowable deduction for any employer who employs a differently-abled person from K500,000 per annum to K1,000,000 per annum for each such person employed. There will be minimal revenue loss as a result of this measure.

128. Mr. Speaker, all the above measures will take effect on 1st April, 2008.

...

CHANGES TO THE MINING FISCAL AND REGULATORY REGIME

144. Mr. Speaker, in my 2007 Budget Address to this august House, I proposed new tax measures for the mining sector. I also informed the nation that the Government would engage mining companies, with whom we had signed Development Agreements, as part of the process of introducing the new tax regime for the mining sector.

145. Sir, given the complexity of the mining sector, a team of experts was appointed to study this matter in great detail. The findings of the study show that:
(a) the Development Agreements in their current form are lopsided; and
(b) even if mining companies were to move to the 2007 tax regime, the country would still not get a fair share from its mineral resources.

146. Sir, the Government has, therefore, decided to introduce a new fiscal and regulatory regime in order to bring about an equitable distribution of the mineral wealth between the Government and the mining companies.

147. Mr. Speaker, effective 1st April 2008, the new fiscal regime for the mining sector will include the following:
(a) The corporate tax rate will be 30 percent;
(b) Mineral royalty rate on base metals will be 3 percent of gross value;
(c) Withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors in the mining sector will be at the rate of 15 percent;
(d) Withholding tax on dividend will be at zero percent;
(e) A variable profit tax of up to 15 percent on taxable income, which is above 8 percent of the gross income, will be introduced;
(f) A windfall tax will be introduced to be triggered at different price levels for different base metals. For copper, the windfall tax shall be 25 percent at the copper price of US $2.50 per pound but below US $3.00 per pound, 50 percent at price for the next 50 cents increase in price and 75 percent for price above US $3.50 per pound;
(g) Hedging as a risk management mechanism shall be treated as a separate activity from mining;
(h) Capital allowance, that is a depreciation of capital equipment, shall be reduced from 100 percent to 25 percent per year;
(i) A reference price, which shall be the deemed arms length price, shall be introduced for the purposes of assessing mineral royalties and any transaction for the sale of base metals, gemstones or precious metals between related or associated parties. The reference price shall be the price tenable at the London Metal Exchange, metal Bulletin or any other commodity exchange market recognised by the Commissioner General; and
(j) Capital expenditures on new projects shall be ring fenced and only become deductible when the projects start production.

148. Mr. Speaker, the new mining regulatory framework will be provided for in the Mines and Minerals Act. The framework will also have a modern licensing system based on transparent procedures.

149. Sir, these measures are competitive, reasonable and balanced. The expected additional revenues, in 2008, as a result of these new measures are estimated at US $415 million.
...

Resistance to windfall taxes - is the World Bank joining in?

I blogged on Tuesday about a Post newspaper business editorial responding to concerns raised by the Zambia Association of Chambers of Commerce and Industry (ZACCI) that breaking mine companies contracts would create 'anxiety' amongts investors. I suggested that the ZACCI line was part of a campaign against the Government's announcement that it will impose a new, fairer tax regime on the mines, and that campaigners should pressure the big mine companies to speak up and recognise the right of the sovereign Zambian Parliament to enact an improved tax regime, and to state that they will neither initiate any legal action in response nor withdraw any investment.

Today in the depths of The Post website I stumbled across the original article to which that editorial was a response. Published on Tuesday, the article, 'Windfall profit tax on mines will cause anxiety' includes concerns expressed by a wide-range of organisations and individuals. Here are some of them:

• As reported, the ZACCI chief executive officer Justin Chisulo said windfall taxes would create 'anxiety'.

• Equinox Minerals president Craig Williams has asked the government to grant them an opportunity to study details of the windfall taxes before they are presented to parliament.Equinox last week made an announcement that US $300 million has been lost in shares following the announcement of windfall taxes. Lumwana clearly sees itslef as a aspecial case, having not taken on a previously state-owned mine. Williams noted that Lumwana was among the major green fields development in Zambia since independence and required the largest capital investment in the nation’s history. Williams stated that Lumwana Mining Company was, in addition to the mines, building Zambia’s first modern town in a generation with over 1000 houses and state-of-the-art facilities in an area that was undeveloped land with no infrastructure or services. “These houses will be provided to our employees under a home ownership scheme so that they are empowered to own the land and house in which they live,” stated Williams."Needless to say, the company is investing on average US$1.5 million per day in Lumwana (about K6 billion) and is still several months away from producing its first pound of copper and has clearly not enjoyed any windfall profits,” stated Williams in response to a press query. “In fact to build Lumwana it has taken a debt of US$584 million, the largest debt finance for a minerals project in African history that will take nine years to repay (completed by 2018).”
• Luanshya chief executive officer Derek Webbstock said, “We accept the President’s announcement since we are not here for confrontation or to argue with government, but it is a pity that we were not consulted before hence the need to take a balanced view but we are ready to discuss the matter. It is understandable the mines are doing reasonably well,” said Webbstock.
• First Quantum Minerals president Clive Newall and Kansanshi Mines general manager Russell Alley refused to comment
  
• Economics Association of Zambia national secretary Chibamba Kanyama said the mining companies actually called for this decision from the government because they did not want to voluntarily renegotiate the agreements when the calls for higher taxes started last year

None of the is particulrly surprising. However, by far the most interesting and detailed comments are attributed to Robert Liebenthal who is described as a "former World Bank advisor for Africa". I have been trying to work out what Mr Liebenthal's current position is. He appears to have been working and publishing under the World Bank banner at least in 2007. Any information from detective-minded readers is welcome. Suffice to say, if these comments are in any sense attributable to the World Bank, I would consider them profoundly scandalous. They speak for themselves, and I quote them at length.

Mr Liebanthal is quoted as arguing that the government should make it clear if the revised tax regime for the mines was negotiated or not. And Liebenthal, in an interview, said mining companies could delay or even challenge the implementation of new taxes as the previous tax regime was entrenched in binding legal agreements. “This is why it’s important to know whether the changes were negotiated or not. Since the previous tax regime was entrenched in binding legal agreements, the mining companies may have the right to challenge these new taxes in court. Such challenges could at least delay the application of the new taxes,” Liebenthal said. “The mining companies may have the right to challenge these new taxes in court and such challenges could at least delay the application of the new taxes.” He also said it was important that the new mining regime goes beyond the changes in taxes and also incorporates all developments in the sector. “The companies might also slow down or stop new investment, including investment they were considering outside the mining sector; for example in the power sector, where there were reports that they were considering investing in the Kafue project. We need to see the whole picture, not just the taxes,” he said. Liebenthal further challenged the government to state the criteria used to come up with new mining fiscal and regulatory regime in the mining sector which would see Zambia increasing its tax from the current 31.7 per cent to 47 per cent. “It is also important that government informs us on how they arrived at these taxes. Has it resulted from the negotiations with the mining companies on the existing agreements, or did government decide it unilaterally? What account does it take of the companies needs to finance new investment and service their debt? Remember that the mining companies are also investing heavily in new capacity, and some of that money will have come from profits,” said Liebenthal.

D-Day -1: today's budget is Magande's biggest test

After the long phoney war over the taxation of Zambia's mining industry, we will finally find out tomorrow exactly how the Zambian Government intends to raise money from the exploitation of the nation's mineral resources, and how it intends to spend what it raises.

How to raise it?
Finance Minister Magande will put the meat on the bones of the President's speech that opened the session of tbe National Assembly, which included the shock announcement that the Government had given up on seeking a negotiated solution with the mining copmpnaies and would over-ride their Development Agreements, imposing new profit and windfall taxes.
The Lusaka Times suggests "Government has so far cheered a cross section of society that had over the years called on the New Deal Government to review taxes in the mining sector. Mr. Magande is expected to spell out new taxes in the sector following the conclusion of work by the mining negotiating team appointed to review and recommend taxes to be introduced."

How to spend it?
In line with calls made by Peter Sinkamba of Citizens for a Better Environment, The Lusaka Times reports that the opposition UPND has proposed the government plough back in communities where monies are operating, at least 5 percent of mineral royalties and 10 percent of windfall tax.

In an article in The Post, leading civl society activists put forward their positions:

• Federation of Free Trade Unions of Zambia (FFTUZ) president Joyce Nonde has said, “We want a budget that will translate the belief that the economy is doing well... We don’t want a budget that lets others go scot-free. It must touch all sectors of the economy; workers have been overburdened with high taxes for too long.” Nonde said workers were expecting the government to review tax measures to encourage them to save and invest in productive ventures. “We are expecting that the finance minister will reduce Value Added Tax (VAT) from the current 17.5 per cent to 14 per cent, relief on Pay As You Earn (PAYE) such that tax on the highest paid bracket will be reduced from 36.5 per cent to 30 per cent, on educational allowances and increasing the tax exempt threshold from the current K500,000 to K1,500,000... We also hope the government will reduce the 15 per cent withholding tax on rented houses to 10 per cent because resulting from the high withholding tax on rented houses, our members are complaining that has translated in high house rentals.” She also said she was expecting the government to allocate more funds to paying off the debt that it owes to pensions funds in workers’ contributions. “Government should pay the funds they owe NAPSA and other pensions bodies,” said Nonde. “Also if the minister can put a deliberate measure that if retirement packages for public service workers are not paid to pensioners within a year then their pension should be tax free because what happens is that many pensioners are paid late when their packages would have lost their value, in the meantime the government has been using their money.”
• Civil Society for Poverty Reduction acting executive director Ivy Mutwale said the expected increase from mining revenues should reflect in lessening the burden of taxation on the few people in the formal sector.And Mutwale said additional resources from the mines should reflect in the planning of poverty reduction programmes. She also said the 2008 budget was expected to reflect a correlation of the kwacha stability to poverty reduction. “The growing strength of the kwacha has not translated into meaningful tangible benefits for the ordinary Zambians,” she said. She said infrastructure development was to be backed by a realistic budget, otherwise it would be meaningless to build infrastructure and employ teachers and health personnel but fail to provide sufficient resources for them to deliver quality services.
• Millenium Development Goals Zambia campaign manager Dennis Nyati said the organisation expects to see a lot of money being allocated to the social sector and wants to see creation of employment among the youths. Nyati said he would want to see parliamentarians support President Levy Mwanawasa’s decision to increase mineral taxation because it would help in allocating more funds to the social sector.