Zambia's bumpy road to reform

IT HAS not been a great month or so for Zambia’s mining industry. Mining Journal reports.

Staff Reporter

Given the “vision” for the immediate future spelt out by the country’s Mines Minister Christopher Yaluma at an Australian conference at the start of September, it's the sort of month Zambia can ill-afford as it looks to double the sector’s contribution to GDP over the next five years.

Apart from the ongoing battle with lower commodity prices and weaker demand, Zambia, like a lot of African nations, has the challenge of increasing the flow-through benefits of mining to treasury coffers and communities at the same time as it tries to woo – and sustain – foreign investment in the country's abundant mineral reserves.

Zambia’s coal industry is viewed as a key growth sector and despite being one of the smallest producers of the commodity in southern Africa, coal output is forecast to experience rapid growth from the 281,000 tonnes it produced in 2012 to production of more than 2 million tonnes by 2017.

In a country report on Zambia, KPMG notes that while this level of coal output growth is not expected to affect global coal production, “it could alleviate a large part of Zambia’s current electricity deficit as the majority of coal production could be utilised for power plants expected to be constructed in the near future”

Ongoing argy-bargy between the Zambian government and some of the country’s big miners over tax receipts and, previously, windfall taxes, reached a flashpoint in the past week when Glencore-owned Mopani Copper Mines suspended parts of its planned $US800 million ($A904.8 million) Zambian copper expansion after the government withheld $200 million in tax refunds.

Reuters reported the government was withholding $600 million in VAT refunds owed to mining companies even after Finance Minister Alexander Chikwanda said in August a requirement for companies to produce verification certificates from countries importing materials from Zambia would be waived.

The latest spat will almost certainly be resolved, but the inconsistent signals that continue to arise from government disputes with big miners such as Glencore, Vedanta and First Quantum would be troubling outside investors. Mopani produced 120,000t of copper in 2012 and has tabled plans to lift output to 170,000t within five years.

Meanwhile, Vedanta-controlled Konkola Copper Mines (KCM) experienced flooding at its Nchanga underground mine in September and accused Zambia’s power utility Copperbelt Energy Corporation (CEC) of causing it. The flooding resulted from power restrictions "introduced without notice" by CEC, KCM said.

"In recent years KCM has yielded to an increase in tariffs amounting to over 100% without receiving a corresponding upgrade of service from CEC," the company said. "These increases have resulted in KCM having one of the highest power tariffs in the Zambian mining industry."

Power supply was restored and KCM and CEC will now lock horns over financial claims and counter-claims against each other that would hopefully "be resolved through the appropriate dispute resolution mechanism", KCM said.

Policy options

Dr Sarah Tzinieris, principal Africa analyst at Maplecroft, said it was notoriously difficult for governments to clamp down on transfer pricing and mispricing, even though the widespread practice of aggressive tax planning was acknowledged by private and public sector actors alike.

"Governments therefore may seek to achieve a more equal distribution of revenues for the public purse through increasing royalties, taxes and other forms of ‘soft’ resource nationalism," she said.

"In Zambia, the government has previously threatened to withhold VAT refunds from mining companies although it is now backtracking on this – presumably due to companies warning that they will stall more than $1.5 billion in investments. Another tactic has been to raise base metal royalties.

"The problem for the Zambian government, however, is that so few companies are declaring positive earnings to the revenue authority, so widening the fiscal net is not just a straightforward matter of increasing taxes.

"The government appears to be considering other policy options to achieve a greater equilibrium between profits for mining companies and the tangible impacts on socio-economic development.”

It had commissioned a study of the mining sector, the Zambia Local Content Initiative (ZMLCI), which was being financed by the World Bank and DFID, the UK’s development agency.

"Introducing more stringent local content requirements for companies – including, for example, inputs, workforces and suppliers – would enable more mining revenues to trickle down to local communities," Tzinieris said.

"Nonetheless, compared to other mining-reliant economies in sub-Saharan Africa – such as Ghana and Botswana – Zambia continues to lag behind in terms of engaging mining companies in economic empowerment initiatives."

While the government’s decision to backtrack on its threat to withhold VAT refunds would boost investor confidence in the Zambian mining sector, the move also reflected "the relative weakness of the government in the face of powerful mining interests", Tzinieris said. "In the future, companies might be emboldened to push for further tax concessions and other investment incentives.

"Although the finance minister indicated in June 2014 that the government was considering ways in which to improve tax collection, whether this will translate into a windfall tax, higher corporate tax or another levy still remains unclear. Above all though, mining companies will be hoping for greater clarity over the future fiscal regime.”

Increased price stability for base metals this year has provided a financial boost to the Zambian mining sector.

Given the events of the past year, with tensions over possible tax hikes and VAT refunds, the government will remain under pressure to provide policy continuity to the mining sector.

While in Perth, Minister Yaluma said Zambia’s new Mineral Resources Development Policy was aimed at facilitating the development of a mining industry that generated benefits for the Zambian people, and rewards for investors.

"The mineral potential of Zambia is not fully exploited," he said. "We realise that to unlock this potential, foreign direct investment is required on one hand and support of the local communities on the other hand. Hence the policy that ensures fair benefits for the local communities and rewards for the investors."

Revision of Zambia’s Mines and Minerals Development Act (2008) had “reached an advanced stage”, Yaluma said.