presentation to economic association of zambia forum on mining tax in zambia 2 december 2009 by...
TRANSCRIPT
Presentation to Economic Association of Zambia Forum on Mining tax in
Zambia2 December 2009
ByFrederick 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
0
100
200
300
400
500
600
700
800
900
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Val
ue
(US
$'M
illi
on
s)
Series1
FDI inflows to Zambia exhibited a fluctuating but general increase and favourable tread over more than a decade. FDI, which stood at less than USD100m in 1994, reached a significant USD 800 million in 2007
2008
• 2008 GRZ introduces new tax regime and mining law.– Exploration declined– Projects put on hold– Metal price on international market collapses
to below US$ 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• Risk of financial support being withdrawn • All mining companies face uncertain future• Particularly difficult times for mining companies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)
2yrs -20yrs
1 2 3 4
1 Mine Exploration - 7-10 years
2 Mine Development- 5-10 years
3 Mine Operation 2-20 years
4 Mine Closure 2-10 years
7-10yrs 5yrs -10yrs 2yrs -10yrs
The mine Cycle Production
Time
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 projectsAll 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 contributionsThis 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 2006K'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
• The mining sector clearly has the greatest impact, in value terms. This is not surprising, given both the magnitude of investment and salaries and employment levels in the sector.
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Manufacturing Agriculture Mining Tourism Other
Sector
K'M
illio
ns 2004
2005
2006
Source: Zambia Development Agency
VAT 2004-2006
Sector 2004 2005 2006Manufacturing 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%
%age of VAT contribution decreases temporarily because of significant capital investment
Source: Zambia Development Agency
VAT 2004-2006
VAT contribution by sector
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Manufacturing Agriculture Mining Tourism Other
Sector
K'Million
2004
2005
2006
Source: Zambia Development Agency
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
Sector 2004 2005 2006K'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%
Exports-2004 to 2006
Source: Zambia Development Agency
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
2004 2005 2006
Year
K'M
illio
ns
Mining
Non Mining
Exports- 2004 to 2006
Source: Zambia Development Agency
Employment Generation (new jobs)
Sector 2004 2005 2006Manufacturing 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)
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Manufacturing Agriculture Mining Tourism Other
Sector
No
. of
Em
plo
yees
2004
2005
2006
Source: Zambia Development Agency
Thank You