The Profit of Zambian Mining analysed by Kampamba Shula

The Profit of Mining

Firstly, Zambia does not benefit extensively from mining operations the way it should. All countries that depend on natural resources face the shared challenge of taxation: determining tax levels and administering tax revenues in an effective manner that balances the needs of Government and investors. Mining depletes a valuable natural asset and taxing the mining companies is a way of generating savings that can be redeployed to increase the productive capacity of the rest of the economy, and thereby help sustain the country over the long-term. Despite the revival of the industry post-privatization, the mining industry’s contribution to government revenues in Zambia has remained low.

Last year, Mining accounted for 8% of the total GDP of the country, but more than half of the export earnings. Let’s be serious, if Zambia’s main export is copper and mining accounts for only 8% of GDP something must be very wrong here.

Now such figure gives rise to the argument that mines should be taxed more, which has recently been done as the royalty tax was doubled from 3% to 6%. But this does little to solve the problem which most of the public and some policy makers seem not understand.

The problem is twofold, firstly from the lack of Zambian equity in mining companies which has allowed foreigners to take back profits from mining operations to their own countries and the lack of vertical integration of value adding activities to the minerals we produce.

Equity

We shall deal with the ownership of the mines first. Mining companies in Zambia include Mopani, Glencore, First Quantum minerals , Konkola copper mines to name a few. Zambia consolidated copper mines; a government parastatal owns 10% in Mopani. Generally after privatization of the 1990’s Zambia sold massive amounts of equity in mining operations. The intentions of privatization where genuine, the execution left much to be desired. During this phase generous tax concessions where granted to mining companies and it is only in 2007 that the Zambian people woke up to this daylight robbery.  

Civil societies and other parties where keen to be advocating for what is termed “wind fall tax”. Windfall tax which could justifiably have its own article however is not the focus currently. But just as food for thought wind fall tax is a tax on excess profits of mining companies during boom periods. The problem with windfall tax is that it is based on the premise that things are always good, which in reality is far from the truth. Copper is currently trading at about $7,000 a tonne, which is way below its excess profitable margin.

 But I digress, back to the topic Zambians have little equity in mining most of which is owned by foreigners. When Foreigners get this money they send it back to their home countries. Now this causes two problems, firstly this distorts the exchange rate market and creates high dollar demand also making borrowing in dollars expensive. Secondly, this denies Zambia from keeping profits in the country and by function gross domestic product. Now this also deserves an article on its own but I shall not go into great depth for the following reason. Recently, this month in fact, the Honorable Minister of Finance Alexander Chikwanda introduced a statutory instrument that obliges mining companies to retain profits in the country. This like any other SI will take at least 6 months to come into full effect.

Vertical Integration

Now for those that think vertical integration is a complicated term here is the break down example. Take a farmer for example who plants potatoes and goes to sell them at the market. There is no vertical integration here. But if the farmer tell his son to cut the potatoes into slices, fry them and make chips, there is vertical integration there. Obviously the farmer will be able to make more profit selling the potatoes as chips rather than as whole potatoes.

The same example applies to Zambia and its copper production. Zambia exports copper to China as a raw material. China then manufactures copper wire cables and other electronic components which it packages and sells back to Zambia. There is no vertical integration for Zambia here. But if Zambia invests in a manufacturing base where it can transform the raw copper material into copper wire cables and other electronic components, there is vertical Integration there. As with the Farmer example Zambia will be able to make more profit after vertical integration than just selling copper as a raw material.