Creating win-win situation from mines

PRESIDENT Lungu wants to see a shift in the mindset of the nation from the belief that the country can only obtain higher growth from copper within the mining sector at the expense of other precious minerals.

ALTHOUGH the President, in his address to the First Session of the 12th National Assembly, talked of moving the economy from its current heavy dependence on copper, to one based on agriculture, livestock and fisheries and their entire value chain, he also emphasised that mining will continue to play a key role in the economic growth of the country.
“As part of our industrialisation and job creation agenda, mining will continue to play a key role in our economic growth and diversification to maximise benefits from this sector,” President Lungu said.
“Zambia possesses higher comparative advantages in mining, which has to be diversified away from copper to other precious minerals to include oil and gas exploration so as to mitigate the changes in the prices of copper.”
Mr Lungu wants to see a shift in the mindset of the nation from the belief that the country can only obtain higher growth from copper within the mining sector at the expense of other precious minerals whose prices at the international market are equally competitive.
Within the spirit of promoting an integrated approach to development, he also wants to see Government promoting an environment aimed at encouraging a productive relationship between the mines and mine suppliers to contribute to the growth of medium and small-scale entrepreneurs and also maximise on the job creation prospects.
“In addition, Government will put in place measures to strengthen mechanisms for monitoring production and export of minerals so as to improve tax collection from mining activities in the country,” he said.
“This will be done in a manner that will promote a partnership that will result in a win-win situation through transparency and accountability on both government and the private sector.”
The key thing here is having a win-win situation in the mines through transparency and accountability on both government and the private sector.
This has not always been the case in the Zambian mining sector.
Those who have followed the history of mining in Zambia agree that indeed while copper has always been the mainstay of the Zambian economy, it has also always given its people their biggest headaches.
“Apart from the sorry tale of neglect and oppression of the people of Zambia during the colonial period, the concept of the Federation of Rhodesia and Nyasaland that caused so much disruption in the progress of independence and set back the country’s progress by a decade would not have been attempted without the copper mining industry to excite the greed of the white settlers,” Andrew Sardanis writes in his book Zambia: The First 50 Years.
“It provided the financial backbone which was used to develop a white dominated society that was determined to subjugate the owners of the land for its long-term benefit, which it intended to drag out for decades if not centuries.
“Even in its final moments, when the Federation had lost the battle for existence, its Prime Minister floated the idea of dismembering the country and amalgamating Barotseland and the Copperbelt with Southern Rhodesia and Katanga in order to prolong the white domination of the wealth of the region.”
Mr Sardanis, who served as chief executive officer of the Industrial Development Corporation (INDECO), also says although Zambia has built a reputation of being a high cost producer of copper, based on his knowledge of the industry and the still relatively high grades of the ores, he has had difficulty in swallowing this accusation.
“…But in the course of my research, I have found the reason. Some mining companies inflate their production costs in order to avoid paying taxes. Despite the privileges and tax advantages they have secured, some new mining groups are hell-bent on siphoning huge sums out of Zambia,” says Mr Sardanis, who also sat on the Zambia Consolidated Copper Mines (ZCCM) board at one time.
He cites the case of 2009 when the Zambia Revenue Authority (ZRA) commissioned Grant Thornton and ECON Poyry, a Norwegian consulting and engineering group, to do a pilot audit of the operational costs, revenues, transfer pricing, employee expenses and overheads of some mining companies.
The investigating team came to the conclusion that the reported numbers relating to all those items were in doubt.
“The most disturbing finding of the team was a significant problem of pricing, caused by long-term contracts with the parent company. It also found that the hedging pattern was not normal and surmised that this was done deliberately in order to move taxable revenue out of the country,” Mr Sardanis says.
“The winners of the Zambian mining bonanza do not seem to have the slightest appreciation of our generosity but proceed to use every trick in the book to minimise their tax liability to the country.
“We’ve enough examples of tax evasion to conclude that there is plenty of income we can generate by plugging the loopholes in the reporting of the mining industry. And we can do it on our own although we must understand that we shall encounter strong reaction from the companies and vigorous public relations campaign against the exercise.”
Mr Sardanis suggests that in order to silence them and preclude accusations of persecution that will inevitably be made, there is need to engage international consultants to carry out the exercise.
“We could and we should have got more income from the existing mines during the last few years when the market was buoyant… But the long-term solution to our reliance on copper must be the diversification of our economy,” he says.
“The subject comes up regularly and is immediately followed by suggestions to increase the value of our copper exports by converging a proportion into productions such as cable, sheets, etc. It sounds a good idea but we should not rely on it.
“Copper exported in any form other than raw material would encounter heavy transportation cost, and import tariffs. And starting up cable factories requires huge capital investments and expertise.
“Such factories exist in abundance in the developed world and China, the major consumers of copper and other primary materials. As a rule, manufacturing takes place where demand is and it is unrealistic to expect cable manufacturers to translocate to Zambia.”
He believes it is more economic and efficient for them to expand or diversify from their existing base rather than start from scratch in a landlocked country some 2,000 miles from major ports and many thousands from the markets.
“Adding value to copper does not diversify the economy of course. We’ve to look to the other sectors for diversification with the full knowledge that we’re likely to create a copper equivalent, and we’re going to generate huge amounts in export earnings,” he says.
“But we can raise the standards of living of our people through increased local production and conserve foreign exchange through import substitution. And the resulting prosperity will attract investment in the manufacture of consumer products that cater for the needs of the local market, as well as that of our nearest neighbours.
“And we can make a start by banning salaula (second-hand clothing), which killed our garment industry that was employing many tens of thousands of workers. But agriculture must remain our priority.”
Of course, salaula is a topic for another day, but the point is that it has not been a win-win situation between Government and the private mining companies.

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