President Edgar Lungu’s appeals to the mines to partner with the Government to stop malpractices that deprives Zambia of revenues, could not have come at a better time.
He is echoing the words of late President Michael Sata, who told a meeting of London businessmen that the country was being seriously shortchanged from copper, “We are not getting enough from our mineral resource. He told them.
The President at one stage contemplated the possibility of suspending the issuance of mining licenses until more favourable laws were passed. He later decreed that all receipts from mineral sales should be receipted through the Bank of Zambia.
How successful these measures have been can be assessed from the concerns that still pervade the industry and the recent efforts to change mining tax.
Studies have also shown that there are no detailed rules concerning transfer pricing in Zambia meaning that companies registered in Switzerland have copper producing subsidiaries in Zambia and one such Zambian subsidiary is reported to be selling copper to its Swiss based company at below market price, and then the Swiss company sells the copper at world prices as though it originated from Switzerland. The net price difference then is taken as profit.
Many studies have shown that more and more copper is being transshipped through Switzerland where the regime is opaque with no prospect of discerning the real truth.
Our own Zambia Revenue Authority, who contracted foreign tax auditors to investigate tax avoidance and tax evasion, found huge discrepancies reported in operating costs. Production figures were underestimated and fiscal statements manipulated. This scenario means that Zambia cannot benefit from price trends. The companies are able to scheme off profits at will by inflating costs.
I short there is very little transparency in the mining industry.
Although Zambia has been mining copper for more than 100years the issue of its benefit to the indigenous community has always been doubtful.
It is a notorious fact that during the Colonial era which followed on territorial control by the British South African Company (BSA), the profits were remitted outside the territory. Zambians only benefitted from the jobs and social infrastructure established for their use. The bulk of profits were externalized.
At independence in 1964 the Government courted and finally in 1969 nationalized the mines in the hope of gaining control and therefore retaining the profits. This was not to be.
Nationalization took place at a time of volatile copper prices and with time prices virtually collapsed due to the global oil crisis.
Being the majority shareholder in the mines Government had no choice but subsidize the continued running of the mines so much that by 1992 the new Government of the Movement for Multiparty Democracy (MMD), a policy reversal was inevitable.
A gradual process of privatization commenced, but with the mines in such a poor state of repair and the copper prices still volatile Government was forced to sell at concessionary terms to attract investors. The gambit paid off, but at a cost.
It is from the era of privatization that the country has been working towards a realistic tax regime that would ensure sufficient return accruing to Zambians through taxes and indeed profits.
This has been difficult to achieve for various reasons. The first hole in the sieve is mining tax. The attempt at a uniform figure has been resisted, in some cases with very good reasons. Not all the mines have the same production costs. Some of the mines are processing ores that have very low copper content and therefore tend to be high cost.
Figures from 2008 show that unit production costs in Africa was U$160.6 per Lb compared to US$96.5 in Latin America and 138.2 in Asia.
Obviously the tax breaks offered by government have had negative effects on available resources for the country. These breaks included that there was no VAT charge for mine products: capital expenditure had a deductable allowance of hundred percent: and stability periods of between 15-20 years were allowed during which time no changes would be made to the arrangements. The mines also enjoyed excise duty rebates on electricity in addition to the low rate of mineral royalty which was in some cases set at .6 percent, at variance with the global average range of 2–6 percent and below the IMF estimate of between 5 to 10 percent for developing countries.
Although some Zambians have called for the nationalization of the mines in order to ensure that maximum befit is accrued, there is no evidence to support this proposition because this route has been traversed before with no appreciable benefits. If anything at the peak of times the Zambia Consolidated Copper Mines (ZCCM) was paying as much as US$1million a day in debt to sustain the mines. As a parastatal this debt went to the public coffers which impacted on services that Government could offer to the Zambian people.
In the year 2009 Zambia earned paltry $50million from mining from a combined revenue bill of US$5billion.
This is in very sharp contrast to other countries including Botswana which has transformed itself from mineral revenues from their diamond. Botswana one of the poorest countries on the continent transformed itself into a middle income country with a capita GDP of $16,300 in 2011 compared to Zambia which remained almost static at US$985. A lot more effort has to be undertaken by our technocrats to find ways in which they can cap loopholes through which revenues slip out of the country.
Ultimately however the Government will have to invest more in the capacity to monitor production and sales. Nothing short of vigilance will allow us earn what we deserve from our mineral resources because not all mining ventures have an interest if ensuring that local people enjoy the profits from their natural god given resources.
This is not to say that all mining houses are involved in under declaration and other vices intended to cheat Government. There are many and their performance shows it. That is why any control measures should not be overkill but must address the problem areas.