3333333333MANAGEMENT OF MINERAL ECONOMIES
BY DR. MPANDE M. M.
UNIVERSITY OF ZAMBIA
SCHOOL OF MINES
BACKGROUND PAPER ON PROBLEMS OF THE ZAMBIAN MINING INDUSTRY FOR
THE DECEMBER 2009 EAZ PUBLIC DISCUSSION FORUM ON “MINING TAXATION”.
THE CURRENT DEBATE IN ZAMBIA
By Dr. M. M. Mpande, PhD
Introductory Remarks
Every society determines its political economy and therefore its status. Most
economies start developing with one sector in which they have a comparative
advantage. The course of development is dependent on how they effectively
manage this one sector and create public savings which are used for
diversification from that resource sector to develop manufacturing and
industrialization from a developed agricultural sector. In case of Zambia, this has
not taken place.
An historical analysis of development shows that development has to do with
social and cultural dimension adopted by leadership.
1. The social and cultural dimension
2. The Economic and policy dimension
3. The global environment and dominance of American-style capitalism
4. Equity in pricing of public resources and infrastructure in Zambia (the case of the electricity
sector, transport, industrial raw materials, skills, technology and human resources.
• Solutions to the crisis
THE SOCIAL CULTURAL DIMENSION
• Improvement of societies and the journey to industrialization is not set by:
o Geographical location
o Obtaining religion
o Cultural traits
• Societies cannot develop in the absence of responsible leadership and an empowered citizenry,
rational approach to problem solving, a spirit of public service and a non threatening environment in
which people can speak their mind.
• The key lies in organic nationalism by which citizens’ obligations are well defined and generally
accepted while the organs of government remain relatively insulated from societal pressure.
• This is what can be alluded to as the phenomenon of “embedded autonomy” in which politicians
reign and technocrats rule.
• No formula exists but in explaining differing economic performance of societies, one most important
variable is the proper administrative organization and competence of the government of the day.
THE ECONOMIC AND POLICY DIMENSION
The figure below outlines whether the existing social and economic structure of government can deliver
development. If the structure is such that the state is on negative feedback loop, no development is likely
to occur. This is the case of Zambia compared to Chile or Norway, both of them mineral resource rich but
with strong governments and leadership structures and are on a positive feedback loop.
The Nature of Mineral Economies
• The predominance of the minimal resource curse affecting poor mineral rich nations which can be
explained from
(1) The rigidity of the minimal production functions which inhibits growth of economic linkages in
non industrial economies with nothing to impart in the minimal production process.
(2) Only taxes if they are captured by government get into the national economy.
(3) Most governments do not act as beneficial arbitration but manage the economy on a negative
feedback loop with various constraints to development the case of Zambia.
(4) Investment ideology in vogue is not contributing too new development agenda: is corrosive
and parasitic.
THE NEED FOR EQUITY IN PUBLIC-PRIVATE PARTNERSHIPS IN EXPLOITING NATURAL
RESOURCES IN POOR COUNTRIES
The Case of Zambia
• Zambia has experienced two long term copper booms over the century and has remained poor and
increasingly abused as at the moment by all indicators.
(1) In colonial times RSJ and AAC discouraged indigenous ownership of mineral rights which has
led to lack of an investing middle clan.
(2) Externalization of financial returns amounting to siphoning of economic benefits, can be
explained by the fact that while colonial companies invested only £8 million they externalized
£1 billion up to 1964.
(3) Nationalization further led to a massive public pay out of over half a billion dollars.
(4) The total retained value from mining has been less than 15 percent over the whole investment
period.
(5) The situation has not been helped by haphazard and inconsistent tax policies which have led
to a situation where the mining industry is acting as a parasite on the country’s revenue
earnings as shown in the table on tax revenues.
Table 1: REVENUE FROM MINING SECTOR
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
K'Billi K'Billio K'Billio K'Billio
TOTAL on n K'Billion K'Billion K'Billion K'Billion K'Billion K'Billion K'Billion K'Billion n K'Billion n
Company 1
Tax 8.24 0.01 0.25 0.36 0.37 1.54 2.29 0.86 0.28 0.14 1.09 60.12 602.63
Withholdin
g Tax / - - - 0.01 0.04 0.08 - - 0.50 1.66 2.73 - -
Dividends
Mineral
Royalty 28.90 16.70 18.80 17.10 13.30 3.80 6.60 2.50 8.10 4.40 31.50 58.80 67.50
Export
duty - - - - - - - - - - - - -
Windfall
Tax - - - - - - - - - - - - -
Domestic ( (2 (3 (5 (70 (6 (6 (1,
VAT - - - (2.13) (5.07) 95.06) 67.61) 95.29) 01.82) 2.32) 46.16) 14.84) 288.75)
Mining ( (2 (3 (4 (69 (6 (3 (
Revenue 37.14 16.71 19.050 15.34 8.64 89.64) 58.72) 91.93) 92.94) 6.12) 10.84) 95.92) 618.62)
% of Tax
Revenue 6.75 2.30 1.996 1.41 0.67 -5.15 -10.57 -13.76 -13.89 -15.28 -11.06 -6.26 -7.55
Table 2: Total Tax Revenue Collections from 1995 to 2008
1995 1996 1997 1998 1999 2000 2001* 2002 2003 2004 2005 2006 2007
Total Tax 7 9 1,0 1,2 1,7 2,4 2,8 3,5 4,5 5,5 6,3 8,
Revenue 550.50 25.20 54.40 90.30 89.60 39..50 48.60 48.60 49.50 54.30 21.80 29.60 193.80
Table 3: PAYE Paid By Employees In The Mining Sector - Post Privatisation.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
PAYE from
Mining 1 2 2 2
Sector - - - - 8.61 28.01 43.34 99.22 21.53 17.41 52.02 89.95 436.38
Note:
1: information on PAYE and Domestic VAT for mining sector relates to post privatisation period
WHO IS THE CURRENT NET INVESTOR IN EXISITING RUNNING PROJECTS
Imagine a new running project in north Western Province producing 170,000 tonnes of copper, some
amount of gold and silver. The area has no infrastructure and will require a public ruling line of 640 km at
K5 billion 1km and electricity up grading costing $5 billion, 100 graduate engineers, 500 technicians.
The economic parameters are that copper alone will sell at $5,000/tonne over 20 years. Costs of
production is estimated to be $2,500/tonne. Revenue per year will be 170,000 x 2,500 = 4.250,000,000 or
$85 billion over 20 years. The company borrowed the capital to invest in the mine and will therefore not
pay substantial taxes even if it were making profits because it has a 10 year tax holiday.
The Zambian economy will forego the anticipated mining revenue and bear all the infrastructural costs.
• As a result of such investment, the net debt for the Zambia economy will not reduce and revenue to
invest in education, health and infrastructure will not materialize.
• The mining industry is the dominant sector in the economy but over the last 20 years has been
contributing less than 2% to government tax revenue and pays less than 1/4 the cost of electricity
charged to other consumers. Zesco is insolvent and cannot invest in new power projects. The
expected power supply requires doubling of capacity to invest to 3,000 Mega Watts. There is no
money in key industrial chemicals, consumables, higher education, technical skills.
The question is what happens to Zambia?
