Zambia to revise “unfair and unbalanced” mining tax rates set by World Bank

7 February 2008

While the World Bank has expressed its support for the move, calling the new fiscal regime "more equitable," critics counter that the Bank was responsible for insisting on rock-bottom tax rates in 1998 that have deprived the government of much-needed revenue as copper prices soared.

Agence-France Presse (AFP) reports that during an address to Zambia’s parliament last month, President Levy Mwanawasa announced the cancellation of tax breaks for mining companies operating in the country’s lucrative copper sector. Calling the present rates “unfair and unbalanced,” the president proposed a new tax regime “in order to bring about equitable distribution of the mineral wealth.” While Zambia’s major copper companies are yet to comment on the new tax regime, AFP reports that the new corporate tax rate is “still lower than the level in other copper producing countries.”

This is not the first time Zambia has attempted to get a fair share of copper revenues. In March 2007 the European Parliament denied an appeal by Zambian civil society and the government for a modest royalty increase from the abysmally low 0.6 percent on copper projects backed by the European Investment Bank (EIB). However, Zambia’s finance minister announced last month that the royalties will finally be raised to three percent effective April 1.

Meanwhile, the World Bank has expressed its support for the move. In an interview with Reuters, the Bank’s country manager for Zambia, Kapil Kapoor, hailed the proposed increase, adding that “the expected revenue would create opportunities to invest in infrastructure, particularly in poor rural areas.”

Many observers, however, have criticized the Bank and the International Monetary Fund (IMF) for pushing Zambia to introduce investor-friendly measures to increase investment in the sector in the late 1990’s. A recent report by Action for Southern Africa (ACTSA) and Christian Aid details how the Bretton Woods Institutions required Zambia to privatize its copper mining company in 1999 as a condition for accessing much-needed debt cancellation.

The Bank’s insistence on making Zambia more “competitive” by offering generous incentives to mining companies, like the low tax rates Mwanawasa has now terminated, has resulted in millions of dollars worth of lost revenue over the past seven years, during which the price of copper more than quadrupled. Observers such as Third World Network’s Thomas Akabzaa point to a “race to the bottom” instigated by the Bank, where African governments compete for foreign investment by adopting increasingly loose tax policies. In the case of Zambia, the country’s mining code was revised as part of a World Bank reform program to offer better terms than Ghana. Zambia’s program, in turn, was used as justification to lower mining taxes even further in Ghana.

The World Bank’s backing of Zambia’s revised tax regime comes as the price of copper has dropped for the first time since 2001, in response to the pronounced slump in the U.S. housing market, China reining in its economy, and other producers such as the Democratic Republic of Congo increasing supply.

The mining industry in Zambia is also being heavily criticized for its lax safety practices, which have resulted in the repeated poisoning of water supplies in the country’s heavily-populated Copperbelt region. The UN news agency IRIN reports that during the first week of 2008, a pump malfunction at the European Investment Bank (EIB)-backed Mopani Copper Mine caused the release of untreated water; almost a thousand residents of Mufulira town sought medical attention after being poisoned. While no one was killed, the incident prompted demonstrations, which were suppressed by police. Similar recent incidents at nearby mines have poisoned fish and crops.

Because of the importance of mining to the national economy – even at the low royalty rates, it provided 80 percent of Zambia’s foreign exchange -- the government has been reluctant to crack down on safety violations. Such failures are evident in the finding that the Copperbelt city of Kabwe, home to 300,000 people, is ranked the most polluted city in Africa and the fourth most polluted site in the entire world. But the Mufulira poisoning prompted the government’s environmental agency to pledge that “we will now be forcing all mining companies to follow the law to the letter.” 

Resources

• Zambia president axes copper mine tax breaks, Agence-France Presse, January 11, 2008 (Zibb website)
• Zambia: European Parliament backs EU policy on poverty purge, Times of Zambia, February 24, 2007 (AllAfrica.com)
• World Bank welcomes higher Zambia mining taxes by Shapi Shacinda, Reuters, January 29, 2008 (Reuters website)
• Undermining Development? Copper Mining in Zambia, ACTSA, Christian Aid and SCIAF, October 2007 (ACTSA website)
• African mining codes a race to the bottom by Thomas Akabzaa, African Agenda, November 2004 (Choike website)
• Copper may post first drop since 2001 on U.S., China by Claudia Carpenter and Millie Munshi, Bloomberg, January 21, 2008 (Bloomberg website) 
• Zambia: Mining companies accused of environmental negligence, IRIN, January 8, 2008 (IRIN website)