Home > Thematic Areas > Minerals and Development > Experience of Mining Fiscal Reform and Renegotiation of Mining Contracts: THE CASE OF ZAMBIA

 

Mining has always been the mainstay of Zambia’s economy. It accounts for 10 per cent of the Gross Domestic Income, over 70 per cent of foreign exchange earnings, 30 per cent of government revenue, and 8 per cent of formal employment. It is the second largest formal employer after the government. Because of its importance to the economy, successive Governments have implemented different fiscal regimes to secure its growth and improve its contribution to the country’s economic and social development. Given the centrality of mining to the Zambian economy, fiscal reform and the contestations that accompany it have always been a major feature, especially during the post privatisation period.

From 1970 to 1997, the Zambian mining industry was state-controlled. This followed the partial nationalisation in 1969, when the government, through the Matero reforms, purchased a majority of shares in the mining companies. Following nationalisation, the government adopted a fiscal regime to enable the mines play a greater role in the economic and social development of the country. For instance, in 1970 the government abolished mineral royalty and replaced it with mineral tax, which was based on profits at 51 per cent on copper, 13 per cent on lead, zinc, amethyst and 20 per cent on gold. This happened because the government was the major shareholder and had control on industry decisions.

The onset of nationalisation unfortunately, coincided with a global economic recession and a slump in copper prices in 1975. This led to a spiral of falling export revenues, a lack of capital for reinvestment in mining operations and declining production volumes. The privatization of an underperforming mining sector became inevitable.

Following the change of government in 1991, and the subsequent liberalisation of economic policy, the fiscal regime was re-designed to attract Foreign Direct Investment (FDI). The new fiscal regime brought in tax incentives seen as necessary to attract private sector investment.  The incentives were negotiated by the government with individual mining companies and enshrined in Development Agreements (DAs), which in effect overrode existing mineral sector legislation. The incentives in the DAs included stabilisation of the fiscal regime for 15 years, and significantly, arms-length provisions that allowed the mines to export mineral products and retain foreign exchange, including hedging of earnings.  The stabilisation clauses meant that the government would have to forego tax revenue over a period of time. However, the justification was that the country’s current need for revenue should not compromise future revenues and other benefits, such as a boost in employment generation which was expected from increased new investments.

Soon after the privatisation of the mines in the early 2000s, metal prices began to rise exponentially around 2003 and the performance of the industry improved. Copper prices reached a peak of US$9,000 per metric tonne in 2008. Despite the dip during the global economic and financial crises of 2008-2009, prices strongly rebounded by the end of 2009. Some economists believed that metal prices were experiencing a super cycle, a prolonged, upward price trend normally, lasting ten or more years (AUC and UNECA 2011). As a direct result, copper production, which had declined to 250,000 tonnes per annum in 2000, rapidly increased to over 600,000 tonnes in 2005 and 833,000 tonnes in 2011. A combination of the above trend in copper prices and increased output translated correspondingly to high copper export earnings, which reached a record of US$6.7 billion in 2011 (36 per cent of GDP), up from US$0.6 billion (14 per cent of GDP) in 2003 (Simpasa et al, 2013). Notwithstanding the increased production and rising metal prices, revenue collection from the mining industry remained low. While this was mainly attributed to the generous tax incentives granted to the mining companies under the DAs, it deepened contestations that the country was not benefitting from its immense resource wealth. Following public demand and advice from international financial institutions, such as the World Bank, Zambia, like many other mineral-rich African countries, reviewed the fiscal regime. This started in 2007 with the amendment of the Mines and Minerals Act of 1995, which sought to stop the Minister from signing DAs with mining houses. In 2008, rather than re-negotiate the DAs, the government abolished them altogether by repealing the 1995 Mines and Minerals Act and revising all taxes for the mining sector. Further changes in later years were made to the taxes to address the challenges the industry or the government was facing. In all, some eight changes have been made to the fiscal terms for the mining sector since 2007.

This report reviews the fiscal reforms introduced in Zambia in the last twenty years. It briefly outlines key aspects of mineral taxation in Chapter 3 before describing the fiscal regime changes, the driving motives for these changes and their outcomes in Chapter 4. Chapter 4 also evaluates the extent to which the reforms achieved the intended purpose, the processes followed; and the contestations that arose from the changes, particularly the influence of industry on policy outcomes. Chapter 5 presents the perceptions of stakeholders about the fiscal changes outlining weaknesses in the approach and the perceived reasons for the divergence between the objectives of the reform and the outcomes achieved. Chapter 6 provides a reasoned analysis of the reforms against the conceptual framework and best practices, and argues that some reforms were unnecessary and exposed government’s incapacity for policy and regulatory design. The chapter further provides recommendations to address the observed weaknesses introduced by the fiscal reforms.

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