FISRT Quantum general manager Rudi Badenhorst (Third from left ) briefing Finance Minister Alexander Chikwanda (next) on the progress of the Trident Kalumbila mining Project in Solwezi when the visited the mine
File:FIRST Quantum general manager Rudi Badenhorst (Third from left ) briefing Finance Minister Alexander Chikwanda (next) on the progress of the Trident Kalumbila mining Project in Solwezi when the visited the mine

By Kalima Nkonde

The recent massive retrenchments by the different Mining houses should raise red flags to all well meaning Zambians. It should be a tipping point to unite us and debate about the role, contribution, commitment to Zambia’s social, political, economic and development agenda by the various Mining houses that we have invited as partners in development! The debate should not be politicized as it revolves around national interest and sovereignty.

There is no question that Zambia has not benefitted from the Mining operations as much as other countries like Botswana and Namibia have done. The Batswana have benefited from mining and carried out development projects from mining revenue without going into unsustainable debts like we have recently done. As Sir (Dr) Ketumile Masire, the second former President of Botswana noted in his memoirs, “The African Democrat”.

“We learnt from the experience of other countries that possessing minerals did not automatically lead to economic development. We needed to secure the benefits of our underground diamond wealth for our people. Our financial negotiations on mining projects emphasized getting the best possible terms for Botswana in exchange for granting mining leases,” He said.

He was basically diplomatically referring to Zambia, when one reads between the lines.

Mining Contribution to Zambia

It has been a concern by many of us that Mining houses appear like they want to have things their way all the time! They seem to be more powerful than the State; they call the shots and literally hold the nation at ransom! Our country’s over dependence on copper, the lop sided development agreements that were signed with Mining houses, the wanton corruption by government officials, have left us vulnerable as a nation. We are at the mercy of these Multinational Corporations. The Minister of Finance, Mr. Alexander Chikwanda did allude to the fact that Zambia has not benefited from its mineral wealth during his statement to parliament on 25 February, 2015.

”Sir, despite Zambia being endowed with vast mineral resources, the country has not realized maximum benefits from the sector’s potential to support growth and enhanced socio economic development. This is against the backdrop that the sector has been experiencing high copper prices in the recent past. It is worth noting that the various changes in tax policies in the last 10 years with a view to optimize benefits from the mines have not yielded the desired results. The House may wish to note further that the contribution of the mining sector revenue as a percentage of GDP remains low at 4 percent. Similarly, the contribution of the mining sector to the national budget has remained minimal even after the Government doubled the mineral royalty rate from 3 to 6 percent”, he said.

In Namibia, mining revenue contribution to government revenue is about 25%, whereas Botswana mining contribution to government revenue is 45% and Zambia’s mining contribution to Government revenue is a paltry 12%!

As a nation, we should engage in a robust debate so that we engage the Mining Houses to embrace policies that will result in a win – win situation. At the moment, the Mines are not contributing to the country as there are supposed to in areas of foreign exchange, employment, taxation (Government revenue) and infrastructure development. I will touch on each of these areas to kick start the debate.

Foreign Exchange

The foreign exchange issue will come as a shocker to most Zambians. In theory, Zambia earns 70% of foreign exchange from copper exports! In reality, a substantial part of the money does not hit Zambian bank accounts as foreign exchange! The money does not come back! Substantial forex remains in Europe, American, and Asia or basically in foreign countries! We only get may be less than 42% of foreign exchange from mines which comes to pay wages, little tax, rent, sub contractors, and other local costs! That is one of the reasons the kwacha is weak! We do not have sufficient forex on the market as mines do not bring back to Zambia all the export proceeds they earn from exporting copper! This is confirmed by an International Monetary Fund (IMF) country report.

“Care is needed with the interpretation of the export shock in the case of Zambia. Given that not all the copper export proceeds return to the country because most mines are foreign owned. Staff estimates that at least 40% of exports do not return to the country.” The IMF report noted.

It is very difficult to understand how Mining Houses are allowed to retain over 40% of revenue as ‘dividend’ on monthly basis! The normal situation is that subsidiaries of multinationals are supposed to bring the export proceeds to the host country “Gross”. They would pay for revenue and capital expenditure and dividends would be declared if they made profit! This is what happens in Zimbabwe, South Africa, Namibia or Botswana etc.

Can Zambians wonder why our kwacha has tanked? The mines have a bigger influence on our currency as they decide how much to bring back and how much to buy on the market!

The measures that the PF government attempted to partially address the forex issue and illicit foreign exchange transfers through SI55 and adjusting the VAT rule 18 – which I personally support in principle-given my experience in South Africa were well meant. But the problem was the process that was followed in the formulation of the policy. There was no proper consultative process with stakeholders so as to fine tune it and get them to buy into it. There were also no proper public relations done in selling the policy for public support.

Employment

The mines employed an estimated 62,326 workers, before retrenchments. But half of them were sub-contractors who can qualify to be called temporary employees. The Mines’s total contribution to formal sector employment if sub contractors are included is 7%. The permanent and pensionable employees of the mines were roughly 31,163 and these are the jobs that qualify to be called quality jobs and this is just makes up 4% of the formal sector employment of 847,000 as per last Central Statistical Office (CSO) Zambia labour force survey 2012 report. In the light of the recent experience where mining houses have retrenched so many miners at the drop of the hat, as well as the fact that the mines contributes about 4% only to formal employment, the mines’ contribution to employment creation is rather exaggerated . It is also a fact now that mining jobs are not secure jobs!

There is also speculation that retrenchments in the mines could have had political overtones as the Mining houses and the PF government have not been the best of friends because of the long standing VAT dispute, the royalty tax issue and Statutory Instrument number 55 (SI55). The Mines are said to feel that they owed the government nothing to keep Zambians in employment. This is confirmed by Association of Mine Suppliers and Contractors’ President Augustine Mubanga.

“For us, to describe 2015, it has been a very bad year because we started on a very acrimonious note where the mines objected to the increment in royalty taxes. So, from January,2015 up to June, the mines were hitting back by not giving business to local suppliers and contractors as way hitting back at government,”

He was quoted as saying in the Post Newspaper of January 8,2016.

Taxation (Government Revenue)

There is no doubt that the Zambian Government has not been receiving sufficient revenue from the mining houses because whatever policy they have attempted to implemented has been resisted and overturned! It gives the impression that mining houses are more powerful than a Sovereign state! The cases in point are the Windfall tax which President Mwanawasa negotiated and accepted by mining houses but President Rupiah Banda inexplicably reversed! There is the Rule 18 for VAT which makes sense to technical people like me but was reversed. Then came the Royalty tax which although the principle was correct, the increase was rather astronomical and unreasonable but it was reversed to another extreme of reverting to the original instead a negotiated middle of road rate.

Most of the attempts to revise tax legislation where prompted by the fact that mining houses were said to be involved in sophisticated tax avoidance scheme like Minister of finance noted in his statement to parliament on February,26,2015.

“Before the introduction of the 2015 tax regime, the tax system was vulnerable to all forms of tax planning schemes such as transfer pricing, hedging and trading through “shell’ companies which are not directly linked to the core business. Further, provisions on capital allowances and carry forward losses eliminated the potential taxable profits. Mr. Speaker, the tax structure was simply illusory as only two mining companies were paying Company Income Tax under the previous regime as most of them claimed that they were not in tax paying positions.”, he said.

The Minister of Finance’s statement is essentially saying that the Mines have been getting away with murder in avoiding tax and all these roads you see which have been built using borrowed money would have been built from revenue from the mining companies if the MMD and PF had been smart! In addition, the miners numbering between 10,000 to 15,000 who were retrenched in 2015, do not deserve to be have lost jobs as Mining Houses had made so much money when copper prices were high.

And keeping our people for another two years or so while waiting for prices to recover, would have not broken the Mines’ banks. Unfortunately, our people have been complicity to the whole scheme. Most top Government have been compromised to agree to some policy reversals, signing the lop the sided development agreements and giving generous concessions to Mining houses.

Infrastructure

Zambia’s current infrastructure projects are financed by debt and not mining revenue like other countries. Most Mining Houses have no interest in developing infrastructure even in the areas they operate! Chingola, the once cleanest town in the 60s, 70s and 80s is full of potholes and dirty! Most of these Mining houses do not support hospitals, schools, social amenities etc.

The normal understanding is that mining towns are supposed to be well supported by the biggest employer and beneficiary. It has always been like that! Go Jwaneng or Orapa in Botswana and you will see what De Beers has done to transform the once back ward villages! One really asks the question, are we not better off to keep our copper underground unexploited rather have it exploited without living any positive developmental legacy?

Should we not rather concentrate on agriculture, energy and tourism where we have massive comparative and only engage with mining investors who can agree with our terms?

Lessons from Botswana

We should learn from other countries like Botswana. According to their Oxford University educated and former President, Festus Mogae, it is because of Botswana’s good governance and appropriate laws that diamonds have been a vital source of revenue for building infrastructure and essential services such as roads, hospitals and schools.

“ For our people, every diamond purchase represents food on the table, better living conditions, better healthcare, safe drinking water, more roads to connect remote communities and much more,”

He once said in 2006. The same cannot be said about copper’s contribution to the Zambian economy.

The government of Botswana has had such good bargaining power with regard to the country benefiting from their mineral wealth in negotiations with the powerful De Beers to such an extent that they clinched a deal where De Beers Diamond Trading company moved from London to Gaborone in 2013 which means the buying and selling diamonds is now done in Gaborone!

“We believe it will be great catalyst for Botswana and Southern Africa- much bigger than anything that has happened before in Africa. It will lead to a massive inflow of expertise, technology, people and business sense. Some of the world’s experts from China, India, Europe and Israel will be coming here,”

Varda Shina, CEO of the Diamond trading company in Botswana was reported as saying.

In conclusion, it will be folly for Zambia to take on the mines at the moment as they literally control our economy and most of our people are highly compromised. Let us be smart and aggressively invest in agriculture, tourism, manufacturing and energy. In five years’ time, we would have reduced our dependence on the mines and then we can renegotiate the lop sided development agreements, on a take it or leave it basis as we would have gained some bargaining power!

The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator. He has lived in the diaspora in England, South Africa and Botswana for over 25 years.

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16 COMMENTS

    • Ba LT,

      Can you please put me in contact with the author of this article?
      He has touched on a topic that is of interest to me. You have my email address

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  1. Job losses in the mines could have to a large degree been averted had we had skills in PF govt able to negotiate win-win situation with the mines. Edgar Lungu and his colleagues have made the operations on mines extremely difficulty with inconsistency taxation and with holding VAT refunds to mines. Simply put, there is no expertise in PF to deal with complex multinational cooperate issues. HH has tried to advise but his efforts are always thrown away

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  2. The problem is that we are divided as a nation and the investors are taking advantage. If only we can speak the same language and avoid politicking and politicizing matter that are national in character then and only then our Country will move forward.

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    • The opposition will always oppose but in Zambia they are ignored when the ruling party formulates its agenda. The blame for failure cannot be shared. It’s PF that has failed Zambians.

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  3. The whole lot of the president is to blame for this. What did he go to do in the Copperbelt and he is the only president who never took a strong stance to prevent these mining companies from laying off people. If he doesn’t care, the mines won’t either, that’s why they keep laying off people because the head of the state doesn’t care about them. We as ordinary people can’t do much and the only thing we’ll do is most likely manhandling those mine owners, which is not the right thing. You the author is supposed to be writing to the people in power, we vote for them to protect our interests and we pay them money to do their job. You cannot be appealing to ordinary citizens who barely have any rights to those mines.

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  4. These are private businesses, they exist to make money for their shareholders. It’s amazing how many Zambians don’t understand this. We need enough shares in these companies and then appoint professionals to represent us on the boards. Instead we appoint characters like Frank to be chairperson of a company like Zesco and are surprised when it’s limping. Look at Zamtel it’s now a basket case after all that promise under lap green.

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  5. the writer has explained a lot of theoretical issues. when i read the first sentence, i could tell that he was speaking from a hypothetical point of view. the major issues affecting the mines are low commodity prices on the international market. this morning copper is trading at $4486.50/ton.
    Power shortages which have hit the mining industry harder than any other business. ideally mining firms were supposed to ramp up on production to pay off the loses from low prices but that has been defeated by power constraints. some sections have been closed in order to service the critical sections. where do you think affected employees will go? thank god they have been redeployed to viable areas/sections but bear in mind that most are excess labour, thats a fact. another mine has been forced to…

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  6. …as usual good article tho im not comfortable with the comparison to other countries….the value of Diamonds are far more than Copper…the leader are simply better than ours….that’s why they are internationally honoured…unlike ours…the other thing Kalima is that your articles comes out like you are narrating a film I have watched before or a novel I have read before…..
    …even at the time of LPM and RB the mines just brought back part of revenue to pay out local expenses but still the kwacha was not as bad as current….so all fingers are pointing to the kind of leadership in the driving seat as being the PROBLEM….if we have to address anything as a people…its the political leadership….

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  7. This is the key – get shares in the companies that actually pay the dividends. From the Enough Project:

    ” According to a profile on the DeBeers on Business Insider, “Diamonds from Botswana were considered valuable enough to give the government of the country a 15 percent share in De Beers in 1969. All rough-diamond mining and distributing is done by Debswana, making it the biggest non-government employer in the country. ”

    In other words, they own 15% of De Beers, the largest diamond miner in the world.

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    • And check out the Royal Bafokeng Holdings, which is owned by the Royal House of the Bafokeng.

      Google: Royal Bafokeng Holdings

      The Bafokeng of South Africa have a very good deal. They own 13% of Implats.

      ” RBH holds an aggregate stake of 13.2% (83.11 million shares) in Implats, made up as follows:

      * A holding of 1.3% which dates back to 1999 when agreement was first reached with Implats regarding Implats’ flagship operation, Impala Platinum, which mines land owned by the RBN; and
      * A holding of 12.1% in Implats, in terms of the agreement on the ‘Royalty transaction’, which became effective March 2007. ”

      In other words, other than just giving in to the mines more and more, they actually negotiated a deal that was good for their own people, rather than the mines and their…

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  8. My dear writer when u propound such articles make sure u even at all cost put up the viable solutions to the said vices….developed countries are good at both theory and practical…we know that prices of most metals has gone down…..diamond is not a metal but a stone, and the reason for this downfall is simple China isn’t buying due to high supply…this is simple economics more supply low prices and vice verse, hence the optimistic view is that in future the demand will be high and so the prices will be high….the other side is that government sometimes should be reserving some money in time of huge harvest so that in time like this that money is offloaded again to keep the equation balanced

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  9. Our government spends like a drunken sailor so to speak. Unnecessary by-elections, huge government and lavish expenditure (satellite phones, first lady galivanting across the country, millions of Kwacha spent to sign a half constitution when KK signed a landmark document to usher in multiparty democracy under a tree, hiring a plane at a cost of $300,000 to go to USA etc) VAT refunds are not being forwarded to the mining houses. The MMD 2011 campaign expenditure was colossal but nothing has been done to discourage that in the future. This year’s campaign cost to the taxpayers will even be more. With this scenario what leverage has any government official got to negotiate tough. It is difficult to negotiate when you are naked behind the door of someone’s bedroom. GRZ has just got put…

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  10. GRZ has just got to put it’s house in order and Zambians must start treating elected officials including Presidents as servants and not masters. Stop calling elected officials “fathers” and “mothers” because they are not. Respect them like any other human beings but make them accoutable/answerable to you as a people. Do board members call chief executives they employ “mother” or “father” just because they manage the company on their behalf?
    The way to do this is by having a constitution which provides for the separation of powers, which Zambia has just been denied, and most of you are celebrating. It is like dancing hard at a wedding where someone has just married your fiancé. It is really disgusting. Will you ever get that fiancé back????

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  11. How much VAT does the government owe the mines? Why was it NOT being paid? Do Zambians know how Government actually spends taxpayers money? How much of tax revenue has been spent on road construction vis a vis borrowed funds? These are the kind of questions our MPS should be asking in Parliament. But do they know what to ask or don’t they just care? I think it is both for many of them. Look at the qualifications and the motive for getting into parliament or state house!!!
    Yes, the question to ask government is “does the government care for the national interest?” going by the way it has been spending public funds. By the way how much progress have we achieved at the 2 universities in Muchinga province?

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