Dear Mine Watch Zambia,
Thank you for the 2008 New Years wishes and reflections, and plenty of recent and informative postings.
I wanted to add my two cents on something you discussed in the posting of 22 Nov 2007. You discussed some comments made by Minister Magande re the how the mines will only be making “maximum profits” in about ten years time, suggesting that collection of taxes will be more important then. Reflecting on Magande’s comments, you rightly point out that it seems strange that he is not associating the higher production (forecast to 1m tonnes by 2010, up from 500k tonnes in 2006) with increases in taxation, asking “the big conceptual question: what is the link between production levels and taxation?”.
I think it is an important relationship to keep in mind in debating the development impacts of private investment into the Zambian mining industry. Of course production levels have a direct link through royalties, but there is also the link between production and corporation tax. The latter exists because companies must invest (in machinery, capital equipment) to generate this extra production. When they do so DAs provide for companies to deduct this investment from profits in the year it is incurred (rather than depreciating the investment over its life span), technically a ‘capital allowance’. Any new investment in production will thus put pressure on the tax base – essentially the DAs imply that productivity-enhancing investments defer tax payments into the future. Of course there is a lag between an investment and a subsequent ramp-up in production capacity, but the point is that very high projected increases in production capacities are not necessarily related to increases in mines’ tax bills in the short term.
This is in particular the case where much new investment is currently underway. You noted in the blog posting (22 Nov 2007) that companies have largely recovered their investments. Although this must be true of their original investments, it would appear many are still investing. For example, KCM has earmarked $1050m in investment in the new smelter at Chingola (about a third of this sum) and the Konkola Deep Mining Project (about two thirds). However of this $1050m, only $300m has been invested to date (Dec 2007). This means that they these investment projects will continue to minimise taxes payable. Similarly, under current projections (including the recently inaugurated West Ore Body project), NFCA only expects to start paying corporation taxes in five years time, due to the aforementioned capital allowances as well as the ability to carry forward losses from one year to the next.
It is understandable that much investment is underway at incumbent as well as new mines, as mining companies seem keen to take advantage of high copper prices. Technically speaking, high copper prices have a direct link with the payback time of an investment (a key consideration when assessing new or add-on investments). This means that in the current climate, companies are more likely to take an investment decision sooner rather than later.
To illustrate, in an interview with the Company Secretary of the new Chambishi Copper Smelter, I asked about the speed at which this project has emerged in the Chambishi Special Economic Zone. He told me that this type of a facility, a very modern blister-producing facility that normally takes four years to complete, but that they are aiming to have it done in two years. In Zambia the Chinese are famous for moving quickly, but I still asked how come they had this urgency? He said “copper prices are high … and we don’t know if they will stay like that”.
Personally I’m hoping that they do “stay like that”. So it is a bit disconcerting to see the oil price push towards the $100-level, given that a rising oil price may eventually trigger a recession (and drop in demand for copper). Of course China and India are driving a significant share of the demand for copper, but on the other hand there are already concerns of over-heating in the Chinese economy… Anyway, let’s all hope for a stable political and economic environment in Zambia for 2008, and that we soon see some concrete public announcements on the progress of DA renegotiations!
Dan Haglund
PhD candidate
University of Bath
dan.haglund@gmail.com
1 comment:
Dan Haglund wrote:
This is in particular the case where much new investment is currently underway. You noted in the blog posting (22 Nov 2007) that companies have largely recovered their investments. Although this must be true of their original investments, it would appear many are still investing.
And they will still be 'investing' (really, expanding their mining operations), until the price of copper collapses because demand is saturated or recedes.
This of course does not change the fact the state is still not receiving it's 25% corporate tax, or sharing in the profits.
There is a very real danger that Zambia will be left with huge mining operations, but a collapsed copper price. And nothing to show for it, except rusty machinery.
One benefit of having huge mining areas, is that the government can control the supply of copper to international markets. No one ever made money saturating an existing market, to the point that the price collapsed. Especially when there are such huge investments in capital goods involved.
Somewhere, somehow, 'development', and 'economic growth' have been replaced by an indefinite expansion of mining operations. This is not the point of having a mining industry.
The government should be collecting profits from the mines now, while prices are high. They could even use some of the money to help lock in these high copper prices on the financial markets, using instruments such as futures and options. Just to ensure against a drop in price.
None of that is happening now.
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