Copper boom, new tax rules.

Zambia is renowned for religiously implementing World Bank privatisation reforms to the letter, including that of its lifeblood--the copper mines. Amid an outcry of poor workers' pay and increased pollution in mining towns, foreign mining companies have been selling the country short while generating huge profits from its minerals, thanks to flawed tax rules. But as Reginald Ntomba reports from Lusaka, things are about to change as the government puts its foot down declaring the era of long tax concessions is over.

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Mining has been the prime mover of Zambia's economy for over 70 years, contributing about 70% of the country's total foreign exchange earnings. In recent years, mining has been generating between 6% and 9% of Gross Domestic Product (GDP) and currently contributes about 40,000 jobs to the formal employment sector. In the 1980s and 1990s, however, the sector took a dive due to lack of investment, poor management and declining metal prices.

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Under considerable pressure from the World Bank, IMF and other donors, the Zambian government was forced to privatise its copper mining industry as a condition for debt relief. This pressure, however, contributed to the government having a weaker bargaining position during negotiations with the private mining companies.

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With the privatisation in full swing, there was soon increased investment. Coupled with growing global demand, for copper, it soon began to look like the bad patch was over and the good times were back. Production in the mining sector began to soar and Zambia is indeed currently experiencing a copper boom and a resurgence of the country's mineral fortunes. For example in 2007 copper production was over 500,000 tonnes and the government predicts it will hit a million tonnes when other large-scale mines are fully operational. The government's long-term vision is to have "a vibrant and well-organised mining industry contributing in excess of 20% to GDP".

But while copper prices have dramatically risen to record levels on the world market and the companies are reaping massively from the high prices, there is little to show for it in the mineral-rich nation due to inequitably long tax concessions given to mining companies. When Zambia decided to privatise its mines, copper prices were low and it was difficult to attract buyers. The former mining conglomerate, the Zambia Consolidated Copper Mines (ZCCM), was sucking as much as US$1m a day from the treasury to keep the mines running. Finding buyers was therefore urgent.

But finally, the mines were sold for what critics called "a song" plus overly generous tax concessions of between 15 to 20 years, ostensibly to cushion buyers from low copper prices. It is common knowledge that the buyers took advantage of the government's extreme anxiety to drive a hard bargain. At the time, the companies argued that they needed tax breaks to recapitalise the mines and they had predicted copper prices would take time to recover. Thus, they convinced the government to sell the mines on terms less favourable to the country. But copper prices rose much quicker than anticipated and the government was locked out and lost out.

The government had been under pressure to act in the interests of a fair share of the nation's wealth by revising the taxes as mining companies were now making huge profits. For instance, according to treasury figures, in the 2005/06 financial year, mining companies earned a whopping $4.7bn but only paid a measly $142m in taxes.

Now, the government has responded by demanding "more equitable" distribution of the wealth, saying the agreements were "unfair and unbalanced". The government has abolished preferential tax rates for the mines and will no longer sign any such agreements with mining investors--whom it wants to abide by the new taxes. Mineral royalties are up from 0.6% to 3%. The government has further increased company tax for the mines from 31.7% to 47%, a measure it hopes will raise $400m additional revenue in the 2008/09 financial year which it wants to use to build infrastructure and invest in the social sector. A windfall tax has also been introduced for specific margins of profits.

"Zambia's mining fiscal regime is extremely generous to investors and provides the lowest revenues to the government. This to a large extent has been the source of the public outcry," President Mwanawasa told Parliament in January when he announced the changes. The government's move did not come as a surprise going by the amount of pressure it was under and given the realisation that the country was being ripped off by the multinational companies.

The increased taxes sent cheers across the board, with civil society and the opposition saying the move was long overdue. Development experts have argued that if the country could maximise revenue from the mines, it would not be dependent on donor aid.

In a report examining the record of Zambia's largest copper producer, the Konkola Copper Mines (KCM), an aid agency, the Scottish Catholic International Aid Fund (SCIAF), found that KCM foreign owners were "short changing" Zambia with royalty fees of just 0.6% instead of the 5-10% industry average in developing countries. Whilst legal, this rate of royalty implies that, in 2006/07, the Zambian government would have received mineral royalties of only $6.1m from KCM, while the company extracted copper ore worth over $1bn. In addition, in 2007, KCM made a net profit of $310m, which is more than Zambia spent on healthcare.

"It is vital that Zambia is given a fairer share of the profits from its main natural resource to help combat crippling poverty in the country ... evidence suggests that Zambia is drowning in poverty whilst a rich mining company is running away with its greatest natural resource. Vedanta/KCM might have fine words to say on corporate social responsibility, our report shows that on the ground there's a lot of work to be done. We urge Vedanta/KCM, whose presence in Zambia does have many positive benefits, to give the Zambian government and its people a better deal," said the report entitled Undermining Development: Copper Mining in Zambia.

Big names in the Zambian mining trade include India's Vedanta Group which runs the biggest mining outfit in the country--the Konkola Copper Mines (KCM); Canada's First Quantum Minerals, Swiss firm Glencore International AG, and South Africa's Metorex Minerals Group. Australia's Equinox Minerals Limited operates the Lumwana mine in the north-west of the country. The mine, which will be commissioned in the middle of this year, has a life span of 37 years and will be Africa's largest. Another Australian firm, Albidon, has invested $100m to develop a nickel mine south of the capital, Lusaka, which is also expected to start operations this year.

Last year, the government held discussions with the mines on how to change the tax structure so that it benefitted the country. The mining companies said they were not opposed to negotiations, itself an admission that the agreements were tilted in their favour. Without saying whether the two parties had agreed, the government went ahead and announced the changes, which on going to press were awaiting approval by Parliament.

As expected, mining companies are less enthusiastic and said they were still digesting the news. However, much as Zambia is demanding economic justice, it is doing so from a weak legal position. The agreements signed with the mining companies are legally binding and override Zambia's laws. They cannot be contradicted by future legislation, as the provisions cannot be changed for between 15 and 20 years. Any dispute arising from the agreements can only be referred to the international arbitration process. If the mines, which appear to be relying heavily on the agreements, seek legal redress, the government plans may hit a hitch. But the government is determined, whilst also not oblivious to the legal implications.

In addition to demanding an increased share of the revenues, the government wants individual Zambians to own shares in the large-scale mining companies and has since earmarked a review of the operations of the ZCCM Investment Holdings, a firm managing government shares in the mining companies. This is in line with its recently adopted Citizens Economic Empowerment (CEE) Act, which aims to stimulate more local participation in the economy.

Apart from paying 'peanuts' in taxes, the mining firms have dealt a heavy environmental blow in the mining towns, with their industrial discharge polluting the source of drinking water for the local communities. In 2006 the Vedanta-run KCM polluted the Kafue River and several residents of Chingola, a mining town, were admitted to hospital for drinking contaminated water. About 2,000 of the town's residents have since sued the company. This year, Mopani Copper Mines polluted the water supply system and 800 residents of Mufulira, another mining town, were hospitalised.

Unless the Zambian government begins to act as it has done with tax concessions, the country will continue to receive a raw deal for its infinite riches, and meanwhile remains classified as the ninth poorest country in the world, according to UN rankings.