Does the Extractive Industry Contribute to Development the case of Zambia'

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Does the Extractive Industry Contribute to
Development? the case of Zambia.

• By
• John Lungu

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1.0 Introduction

• This is the big question. It is possible but
  requires effective management of the industry and
  how far local beneficiation activities can be
  established.
• Need for balance between taxation and incentives
  to private companies extracting the resource
• For most of Africa and Zambia mineral resource
  extraction is slowly becoming tragic even though
  it has not been so in history

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Introduction (continued)

• Although Africa has resources in form of minerals
  and oil, most of its people remain poor.
• Zambia has precious stones and copper and other
  base metals. While production has been rising
  overall poverty still stands at 64 (rural
  poverty is 80)
• Exploitation of the countries mineral wealth is
  not yielding the required investment in both
  economic and social infrastructure. Why?

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Introduction (Continued)

• Answering this question requires an understanding
  of the role of mineral extraction in the economic
  history of the country.
• This paper is structured as follows
• a) the importance of the mining industry
• b) taxation in the mining industry (history)
• c) management of the copper mines
• d) the privatisation era
• c) conclusion

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2.0 The importance of the Mining Industry

• Relied on since 1928. Initially provided the
  country with more than 80 of foreign exchange
  and more than 50 of government revenue
• The mines were developed by private companies but
  these provided both economic and social
  infrastructure
• Provided housing, schools health facilities, road
  infrastructure, water supply and youth training
  schemes

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Importance of Mining (continued)

• Copper prices were good until 1973. A combination
  of high oil costs and a declining copper price
  became a challenge of the 1970s. With all the
  problems, the industry still played a significant
  role in the economy. It contributed to the
  national treasury through taxation and the
  provision of foreign exchange while also
  providing social services which supplemented
  government efforts

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3.0 Management of the mining Industry

• In Zambias history, management of the extractive
  industry has undergone three phases
• a) Private ownership from 1928 to 1969 under AAC
  and RST
• b) 1969 to 1996-2000 the mines were operating
  under state ownership (nationalised)
• c) 2000 to now back to private ownership
• These patterns of ownership has also determined
  the benefit flowing from the sector to the
  communities

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4.0 Mining Taxation in History

• Before independence the following regime operated
• a) Royalty 13.5, export tax 40 based on LME
  prices as copper prices exceed 300 per ton and a
  corporation tax of 40. The private mines paid
  these to the colonial government and to the
  Zambian government after independence to 1970
• Total effective tax rate was 74.

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Taxation (continued)

• After 1970 (period of nationalisation), the tax
  regime was changed. Govt replaced the export tax
  with a mineral tax of 51 and a corporation tax
  of 45. The measured raised government revenue
  but were detrimental to investment
• Despite nationalisation the mines still had
  foreign interest and taxation was always
  controversial

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5.0 Privatisation of the mines

• A combination of poor copper prices, high oil
  costs, losses and lack of investment and pressure
  from the IFIs forced the government to privatise
  the mines.
• After privatisation seven private firms owned the
  mining assets (Binani, Anglo vaal, AAC, First
  Quantum, Glencore and first quantum, Metorex, NFC
  mining). Ownership has kept on changing. What has
  fundamentally changed is the social response of
  the companies. Why?

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6.0 Development agreements era

• Privatisation came with many incentives mineral
  royalty of 0.6 (3). Carry forward of losses for
  the entire stability period (15-20 years), 100
  capital allowance, 25 corporation tax (30)
  exemption from paying customs duty, VAT and
  import taxes.
• Development agreements also did away with social
  provisions. Govt would provide these even though
  it would get next to nothing from the sector. The
  sectors contribution during this time are well
  tabulated. Investment went up.

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7.0 Opposition fro Civil Society

• The rising copper prices and the increased
  investment in mining did not correspond with
  developments in the communities. Social provision
  declined and infrastructure deteriorated. Civil
  society questioned the arrangements. The result
  was a change in the tax regime Increase in
  corporation tax to 30, introduction of windfall
  tax and variable tax, reduction of capital
  allowances to 25, royalty tax back to 3 and
  recognition of LME prices for tax purposes.

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8.0 Mines Resistance

• The mining companies objected and some refused to
  pay the taxes. As a result, the targeted K415
  billion was not collected (K324 billion). The
  recession of 2008 also affected the collections.
• With the new President a new tax regime has been
  negotiated as follows royalty tax 3, windfall
  tax has been removed, capital allowances (100)
  have been restored and the corporation tax has
  been retained at 30

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Other Measures

• Taxation of the extractive industry alone would
  not translate into development. It may help build
  infrastructure. Other things need to be done
• Need to establish value adding industries based
  on copper and cobalt. This will help in enhancing
  foreign exchange earnings as well as create
  employment
• There is need to re-examine the ownership
  patterns of the mines to provide for local
  participation. From the development agreements it
  was envisaged to float shares on the LUSE. This
  has not happened. This may also stem some capital
  flight . This can also help stabilise the local
  currency as some earnings from copper and other
  industries are banked locally
• Export of concentrates must be discouraged so
  that the mines account for other bi-products of
  copper such as Gold

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9.0 Conclusions

• The new tax regime seems to have pacified both
  government and the mining companies
• It has however meant that government wont receive
  as much from the industry for social and economic
  infrastructure provision and will continue
  depending on donor support for provision of these
  services. In essence donor support may be the
  substitute for the subsidies to the mines.
• Thus there has been total change fro the colonial
  private corporation and the current ones in the
  way they are treated. The AAC and RST contributed
  significantly to national deveolpment

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Conclusions (continued)

• The contribution of the extractive industry to
  development depends on the balance struck between
  their taxation and the incentives government
  extends to them.
• Development is also dependent on the corporate
  responsibility of the corporations
• The mines have provided employment but obviously
  not to the same levels of the past and so
  standards of living have also declined
• There is also need to take other measures as just
  discussed in the previous slides

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Conclusions (continued).

• Thus a balance is required between incentives and
  taxation of the extractive industry
• THANK YOU