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Tuesday, November 22, 2022

Zambia’s Copper amid the Energy Transition ‘A new dawn for mining or repeating past mistakes?’

Columns Zambia’s Copper amid the Energy Transition ‘A new dawn for mining or...

By Mukupa Nsenduluka and Anna-Sophie Hobi

Copper is critical to the climate and energy transition agenda. Despite mining copper for close to a century, Zambia, the copper-rich nation has not benefitted from its mineral wealth as poverty and inequality remain widespread. The energy transition has increased the price and demand for copper globally. The big question remains: Will Zambia leverage the copper price boom for domestic revenue mobilization to address its current economic challenges? In reflecting on this, we sketch out critical issues on corporate tax abuse, tax incentives and the prospects for value addition in Zambia’s copper mining sector.

Copper and the energy transition

COP27 is currently underway in Egypt, and the need to address the climate crisis has never been more urgent. Discussions at the COP27 have spotlighted the strategic role of copper and other critical minerals in transforming the world’s energy systems and making the energy transition a reality.

Minerals such as copper are critical to green technologies. For example, electric vehicle (EV) batteries contain almost six times more copper than fuel powered cars. Moreover, this metal is essential for the electrification of products ranging from solar cells and cables to EV charging points.

Developed countries have set high ambitions to decarbonise their economies to reach the Paris Agreement targets. The European Union (EU), for example, wants to become emission-free by 2050 while ensuring economic growth. To achieve this goal, the International Energy Agency revealed that over 40% more copper would be needed in the next two decades.

Since time immemorial, copper has been the backbone of Zambia’s economy. Zambia is the world’s seventh-largest producer of copper and has 6% of the world’s known copper reserves. The country remains highly dependent on mining despite fluctuating international copper prices. Today, the ‘metal of electrification’ contributes to about 77% of Zambia’s total export value, yet, the mining sector as a whole contributes roughly to a third of the nation’s revenue.

The socio-economic cost of corporate tax abuse

Water is the lifeline of all human existence. Access to water and sanitation services is a basic human right that should be enjoyed by all. This is not the case for copper-rich Zambia, where about 4.8 million people lack reliable access to clean water, and 6.6 million have inadequate sanitation facilities.

One of the major factors contributing to this is the corporate tax avoidance or profit shifting in Zambia’s mining sector. Multinational companies operating in the mining sector often shift profits to lower-tax jurisdictions. Their aggressive tax planning schemes have undermined Zambia’s domestic revenue mobilisation (DRM) efforts to enable the provision of clean and safe water for its citizens.

A 2021 study by Oxfam estimates how much the Glencore Group via its subsidiary, Mopani Copper Mines PLC, one of Zambia’s leading copper producers was engaging in profit shifting. The findings reveal that until March 31, 2021, the mining company, which earned nearly US$6 billion in total revenue, just paid about US$28 million in income taxes over the 8-year period, from 2011 to 2018. The report further shows that Zambia should have been receiving up to US$102 million yearly in taxes from Mopani. This was more than half of Zambia’s national water supply and sanitation budget in 2020.

These funds, lost through corporate tax abuse, could have financed development projects on improved access to safe water and sanitation services, education, health, social protection and economic diversification.

Is the current mining fiscal regime too investor-friendly?

Craving change, Zambians elected President Hakainde Hichilema in August 2021. Hichilema’s “new dawn government” promised economic growth, job creation and war on widespread corruption.

The President also pledged to take advantage of the rising demand for copper to remedy the country’s economic problems alongside a new agreement with the IMF to tackle the debt crisis. Although the deal approved in September 2022 promised to restore macroeconomic stability and attract foreign investment in the mining sector, it equally included tough austerity measures. These include reduced public spending, removal of subsidies on fuel and electricity as well as expanding the value-added tax base which would disproportionately impact the poor.

It’s within this context that heightened copper demand and the energy transition are being touted as a blessing. Early this year, President Hichilema announced plans to more than triple copper production from about 800’000 tonnes to 3 million tonnes by 2031.

To make its mining fiscal regime more attractive and competitive, the government continues to give tax incentives to foreign investors. In last year’s budget for instance, Zambia changed its mineral royalty regime, reintroducing the fiscal instrument as a deductible expense for income tax purposes. This resulted in a revenue loss of about US$192 million (3.2 billion kwacha equivalent) in tax expenditures.

In the more recent 2023 budget speech, the Minister of Finance, Dr. Situmbeko Musokotwane proposed another mineral royalty change that will result in a revenue loss of about US$ 168 million (2.8 billion kwacha). The changes to mineral royalties for both years is a projected total revenue loss of about US$ 360 million (6 billion kwacha). This much-needed revenue foregone could help meet Zambia’s competing public service delivery needs and debt-servicing obligations.

There are two things worth pointing out here. First, is whether there was a cost-benefit analyses conducted to evaluate the extent to which revenue foregone would result in meaningful economic opportunities to citizens. Additionally, is whether there is a monitoring and evaluation mechanism in place to assess if increased investment to the sector can indeed be attributed to the awarded tax incentives to determine their effectiveness.

Extensive research has shown that while fiscal policy helps attract foreign investment, mining investors particularly consider other factors when making investment decisions. These include political stability, geological quality of mineral deposits, infrastructure, cost of labour, a country’s susceptibility to tax avoidance as well as social, legal, and environmental factors. Awarding unjustified tax incentives without proper cost benefit analyses, monitoring and evaluation only disadvantages host governments’ and undermines their domestic revenue mobilization efforts.

Moreover, with the ambition to expand copper production, caution must be taken to not exacerbate existing sector challenges and risks for corporate tax abuse and illicit financial flows as well as the broader socio-economic and environmental injustices, given that these factors could significantly erode the country’s tax base.

New dawn; new battery deal

Zambia envisions a departure from being a supplier of raw copper in paving a way to remedy its economic crisis. In April 2022, the government signed an agreement with the Democratic Republic of Congo to cooperate in manufacturing electric batteries. With this agreement to add value to its copper, Zambia could earn more tax revenues while creating local economic opportunities linked to other sectors such as manufacturing, processing, agriculture, banking, transport, and logistics.

This signal of political will for regional value chains presents a good starting point to align with the African Union Agenda 2063 frameworks, including the Africa Mining vision (AMV) and African Continental Free Trade Area (AfCFTA). The deal promises to unlock the potential of forward and backward linkages in the mining sector beyond copper to other critical minerals such as manganese and cobalt. Going forward, drawing lessons on value-addition, industrialization, and diversification from the success story of the world’s largest copper producer, Chile, will be extremely crucial.

Immediate action should be taken by the government to ensure the mistakes of the past are not repeated. Mining policy should continue to be strengthened. Furthermore, tax administration capacity, including mineral testing capabilities, should be enhanced, and Zambia should continue to reflect on the efficacy of certain tax incentives and tax treaties. While the road ahead for the copper industry looks bright, Zambia needs to ensure that, as the nation’s mineral wealth is exploited, it at least has the public funds to show for it.

Finally, the importance of the watchdog role that citizens, mine host communities and Civil Society groups play in holding the government and mining companies accountable cannot be overemphasized. This will particularly be more critical as investments in copper mining projects intensify. If the new battery deal, as well as broader sector reforms on the mining fiscal policy and social and environmental injustices are well implemented and managed, copper could set Zambia’s economic recovery on an upward trajectory.

About the authors: Mukupa Nsenduluka is a Tax and natural resource justice campaigner. She is currently the Policy Officer – Tax & Natural Resource Governance at the Tax Justice Network Africa.

Anna-Sophie Hobi is a Social Anthropologist and PhD student at the Norwegian University of Life Sciences, researching batteries and energy futures.

1 COMMENT

  1. Even of if you increase the current copper production 3 fold , it will be the same story…………

    The problem is the Zambians mindset towards hard work, and……….

    Taking a casual approach towards stealing, which………….

    Incidentally it seems to be perpetrated in tribal coordination………..

    Only change in the education system away from the western system will fix this………..

    Patronisim, hard work and loyalty needs to be indoctrinated into the Zambian education system like the Asian system……

    Only then will zambia change……..

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