Presentation to Economic Association of

Zambia Forum on Mining tax in Zambia

2 December 2009
By
Frederick Bantubonse
General Manager
Agenda/Content

• Brief history of mining sector investment in

Zambia
• The Life Cycle Assessment
• Total Tax Contribution
• Non measurable benefits
Brief History
• Phase 1 – 1960s and 1970s
– High international commodity prices
– Newly independent governments
– Nationalisation of mines
– Surplus revenues from copper
 Phase 2 – Zambia 1972-1990s
Nationalised Mine Assets
– Little or no investment in mining sector
– Existing mines run down requiring significant
investment
– Insufficient national reserves for investment
Phase 3 –Post Privatisation 2000 to
2008
Privatisation
– Attracted FDI now over US$ 4 billion by 2008
– Plant rehabilitation & new processing facilities and mines.
– Production up from 257,000mt in 2000 to over 500,000mt in
2008.
Investment
– International metal prices start to increase - rose by 269% on average at
its peak
– Increased demand from China and India
– All new investments in Zambia by “junior” mines
– “Junior” mines perceived to be more risky by institutional investors –
therefore expect higher returns
– Financing for junior mines more difficult to obtain
 Zambia FDI- 1994- 2007
900

800

700
Value (US$'Millions)

600

500
S
400

300

200

100

FDI inflows to 0Zambia exhibited a fluctuating but general increase and favourable
1994 a
tread over more than 1995 1996 1997
decade. FDI,1998 1999
which 2000 at
stood 2001
less2002
than2003 2004 2005in2006
USD100m 2007
1994,
reached a significant USD 800 million in 2007 Year
 2008
• 2008 GRZ introduces new tax regime and
mining law.
– Exploration declined
– Projects put on hold
– Metal price on international market collapses
to below US$ 3000/tn
 2008- continued
• Copper prices slump in September 2008 from a
all time high of US $8,800 to below US $3,000
• Risk of financial support being withdrawn
• All mining companies face uncertain future
• Particularly difficult times for mining companies
committed to significant capital expenditure
• High cost mines went into care and maintenance
 Current position
• Copper prices rebound
• However long term outlook still uncertain:
– Insufficient investor confidence
– Insufficient liquidity in capital market
– Financial houses risk averse
– Borrowing still difficult and expensive
– Uncertain political outlook
 Life cycle assessment
• On average it takes between 15 to 25 years for a
mine to establish itself and realise regular
returns
• For e.g. Lumwana Mining, Ore body discovered
around 1962
• Took 8 years to develop the mine
– Define ore body, produce bankable feasibility,
financing, construction and finally operations
– All this time the company was incurring costs with no
revenue
 Life cycle assessment
• Early years predominantly characterised by
exploration activities
• Significant investment which may or may not be
realised
• This is followed by bankable feasibility study
• Organising and raising finance
• Significant upfront investment – to build new mines
• Modernisation and rehabilitation
• Depletion and closure (few years to 100 years)
 The mine Cycle
Production
1 Mine Exploration - 7-10 years

2 Mine Development- 5-10 years

3 Mine Operation 2-20 years

4 Mine Closure 2-10 years

Time

7-10yrs 5yrs -10yrs 2yrs -20yrs 2yrs -10yrs

1 2 3 4
 Life cycle assessment –
development phase
• Significant capital expenditure required
not just on mining operations but on:
– Infrastructure development
– Support to local industry
– Employment and training
– Community development projects
All this with significant challenges:
- High cost of doing business
- Poor transport & telecommunications network
 LONG TERM APPROACH
ESSENTIAL
• It takes time before a country can realise
tax revenues from mining investment
• Empirical studies show that on average it
will take at least 15 years after
commencement of operations before a
country will reap reasonable tax revenues
• The major benefits accrue from
investment and only a small amount is
realised from tax revenues
 Total Tax Contribution
When considering the taxes received by a State
there is need to take account of all contributions
This should include:
– Obvious and easily identifiable and measurable
taxes;
– Expenses of business that are not allowed relief
(hidden taxes);
– Expenditure incurred on infrastructure and social and
community welfare projects for the mining community
 Tax statistics
• Current focus in Zambia when assessing
mining contributions is on:
- Corporate tax;
- Variable profits tax;
- Mineral royalties;
- Export levy.
However in reality need to take a/c
of:
- PAYE
- VAT
- Customs duties
- Fuel levy
- Duty on diesel
- Property taxes
 PAYE 2004-2006
Sector 2004 2005 2006
K'Millions K'Millions K'Millions
Manufacturing 38,404 34,302 46,615
Agriculture 6,077 9,444 13,386
Mining 167,117 144,144 180,103
Tourism 18,536 22,917 29,465
Other 43,316 82,372 64,093
Total 273,450 293,179 333,662

Mining % contribution to PAYE 61% 49% 54%

Source: Zambia Development Agency

 PAYE 2004-2006
200,000

180,000

160,000

140,000

120,000
20
K'Millions

100,000 20
20
80,000

60,000

40,000

20,000

Source: -Zambia Development Agency

Manufacturing Agriculture Mining Tourism Other
• The mining sector clearly has the greatest impact, in value terms. This is not surprising,
given both the magnitude of investment and salaries Sector
and employment levels in the sector.
 VAT 2004-2006
Sector 2004 2005 2006
Manufacturing 108,038 121,566 184,413
Agriculture 4,589 7,629 7,192
Mining 359,776 338,807 317,853
Tourism 53,494 56,579 60,496
Other 71,740 7,971 140,656
Total 597,637 532,552 710,610

Mining % contribution 60% 64% 45%

Source: Zambia Development Agency

%age of VAT contribution decreases temporarily because of significant capital

investment
 VAT 2004-2006
VAT contribution by sector

400,000
350,000
300,000
250,000
K'Million

200,000
150,000
100,000
50,000
-
Source: Zambia Development Agency
Manufacturing Agriculture Mining Tourism Oth

Sector
 Corporate and variable profits tax
• Given that most mining companies have had significant investment
costs there will be little contribution to corporate and variable taxes
despite the increase in prices because:

- of accelerated capital expenditure;

- increased operational costs in earlier years;
- increased finance costs in earlier years;
- significant carry forward tax losses (2000 to 2004)

• The above coupled with boom bust cycle since the 1960s means
that there has been insufficient time for mining companies to
establish and realise significant AND consistent returns
 Total tax contribution
Investment in non mining operations:
– Infrastructure
– Mine hospitals
– Schools
– Health care programmes – e.g. malaria
control, HIV, etc
– Training academy
– Community development projects
– Township development
 Major benefits of attracting mining
investments
• Attracts more FDI in terms of suppliers and
subcontractors
• Increased FDI brings about – increase in
employment, skills base, increased capital
investment, increased technology
• Money into the economy
• Increase in foreign exchange reserves
• Strengthens Kwacha – reduces import costs
• Corporate social responsibility programmes
 Strategy and policy important
• The benefits of FDI can multiply and
accelerate growth and development
providing appropriate environment and
framework is created by government
 Exports-2004 to 2006

Sector 2004 2005 2006

K'Millions K'Millions K'Millions
Mining 347,259 3,128,154 3,598,888
Non Mining 183,588 306,497 377,238
Total contribution 530,847 3,434,651 3,976,126

Mining % contribution 65% 91% 91%

Source: Zambia Development Agency

 Exports- 2004 to 2006
4,000,000

3,500,000

3,000,000

2,500,000
K'Millions

2,000,000

1,500,000

1,000,000

500,000

Source: Zambia
- Development Agency
2004 2005 2006
Employment Generation (new jobs)

Sector 2004 2005 2006

Manufacturing 4,577 4,691 4,838
Agriculture 2,448 3,575 4,028
Mining 5,574 6,266 18,375
Tourism 1,843 1,957 1,742
Other 1,535 1,680 2,466
Total 15,977 18,169 31,449

Mining % Contribution 35% 34% 58%

Source: Zambia Development Agency

Employment Generation (new jobs)

20,000

18,000

16,000

14,000
No. of Employees

12,000

10,000

8,000

6,000

4,000

2,000

Source: Zambia
-
Development Agency
Manufacturing Agriculture Mining Tourism Other
Thank You