Before taking up a position in Government as Permanent Secretary in the Ministry of Mines between 2009 and 2011, you worked for many years in the mines. How did your experience in the industry inform your approach as Permanent Secretary?
I was appointed to head the Ministry of Mines at a time when the 2008 global financial crisis had shaken the new operators. I knew that honest, open communication with investors was key, and this helped Government to persuade the new owners to weather that economic storm.
I was acutely aware that ZCCM had been privatised because of a complete lack of investment in all aspects of its operations. If a country with a new era of privatisation caused new investors to run away, it would have been a disaster! Today, there are lessons to be learned from where we were twenty years ago.
Now that you are serving as something close to a bridge between Government and the private mining sector, what learnings from that era are particularly relevant?
Partnership and a willingness to communicate constructively are essential. Ultimately, the promotion of Zambia as an investment destination must be done by Government and Industry as a team, sitting on the same side of the table, singing from the same hymn sheet. When Government and Industry have shared developmental goals, shared milestones are reached, confidence is built and much-needed FDI capital follows.
During your tenure as Permanent Secretary, you took steps to demonstrate transparency via Zambia’s registration with the Extractive Industries Transparency Initiative (EITI). What is the purpose of that initiative and what is its role in Zambia today?
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When Zambia joined the Zambia Extractive Industries Transparency Initiative (ZEITI), there was a great need for transparency in both Industry and Government with respect to payments and receipts of mining revenues. Since then, the ZEITI has dispelled several fables around the mining industries’ tax compliance. It continues to publish reconciliations of what the industry reports having paid in taxes against what the Government states it received. Damaging conspiracy theories circulated by the media about under-reporting by industry are unsupported by facts and, in 2019, Zambia was awarded at a global level for its EITI performance.
“When Government and Industry have shared developmental goals, shared milestones are reached and much-needed FDI capital follows.”
What more can be done to rectify unfounded negative perceptions, rebuild public trust, and demonstrate the industry’s commitment to transparency?
The EITI, by its very nature, is a collaborative effort, and the Government’s investment promotion machinery ought to be more vocal about its success in order to reflect the extent of the mining sector’s contribution, and the reality of its compliance.
ZEITI comprises three members: extractive companies, Civil Society Organisations (CSOs) and Government. CSOs must take the lead in publicising a fact-based narrative around the mining sector. We hope to encourage the public, through CSOs, to also take interest in accounting for how Government is utilising the revenues from the mines, rather than only stating what has been received. This is an EITI recommendation, and an area where collaboration is weak at the moment.
Whether it’s the Chamber of Mines’ ‘Road to Recovery’ report released last year, or the Zambian Government’s Economic Recovery Programme, the consensus is that we will only course correct through growing the economy. Given the indebted state of the Zambian fiscus, this requires substantially increasing private sector investment into the economy. You recently said that mining policies are “top on the list of impediments”. Can you explain?
When explorers and mine developers come here they find a fiscal regime that reduces the value of projects to below rates that potential financiers consider bankable. They are then forced to go elsewhere. Just for one example, I believe we are the only country in the world with a taxation system [the non-deductibility of mineral royalties] that amounts to double taxation.
The pace of exploration really picked up after privatisation, in around 2000. Everyone was here exploring! The fiscal regime was enabling, and companies were coming to Zambia. Now, ten years later, exploration has all but dried up. Yes, explorers come here, but when they do the calculations, they find insurmountable barriers in the form of an ugly fiscal regime.
The importance of exploration is perhaps best highlighted by the fact that, before overtaking Zambia in terms of copper production, the DRC was among the top ten destinations for exploration in the world – despite war and major conflict. Exploration is how the DRC developed a good pipeline for projects that has seen its production reach over one million tonnes of copper annually. Here in Zambia, we need to do the same thing. Let exploration companies go corner to corner, and find out what can be mined. Once the results look good, offer incentives that persuade them to open mines.
This is what I had to learn when working for Government: an exploration company will bring millions into the country at the risk that they find nothing. Investors can be persuaded to come here – and stay – if our investment climate is enabling. Without solid exploration work, there can only be a poor knowledge of the exploitable resource and a meek interest in the sector by investors – without which the mining industry cannot play a role in the country’s economy, whether it be a recovery or a continued development.
In your view, what are the biggest financial roadblocks to investment?
The non-deductibility of mineral royalties, certainly. Another is the stepped scale of the present Mineral Royalty Tax (MRT) regime, which is in contrast to the norm of a deductible PAYE-type sliding scale. [Unlike the sliding scale system that applies to personal income tax, when the copper price crosses into a new tax band – or above a threshold – the higher tax rate applies to 100% of earnings, rather than just to those above the relevant threshold.]
The current MRT tax regime, taken together, deeply discounts and negatively impacts the viability of mining in Zambia.
Over the last year, the Zambian Government has made commendable efforts to focus on the reduction of its domestic arrears. Could you comment on this, in relation to a major source of domestic arrears, namely VAT refunds?
The non-deductibility of mineral royalties and the current MRT tax regime are impediments which must be removed in tandem with the restoration of the VAT cycle. If we look away from the copper industry for a moment, we’ll see that unpaid and stalled VAT refunds are an issue that is hitting everyone. Local suppliers are giving up and being forced to shut down because their money is tied up in unpaid VAT refunds.
“The non-deductibility of mineral royalties and the current MRT tax regime are impediments which must be removed in tandem with the restoration of the VAT cycle.”
Because this non-payment hits companies’ cashflow, paying VAT refunds promptly restores the balance and gets the economy flowing properly again. For mining, injecting the sums owed back into the industry – especially at a time of high prices – boosts operations and production, which in turn will deliver more taxes. This is the virtuous cycle.
Chile, the world’s largest copper producer, saw a big drop in production during 2020 due to COVID restrictions. However, the Chilean Chamber of Mines is forecasting a strong rebound to achieve its best-ever production figures by next year. According to the Ministry of Mines, although production was down, exploration activity jumped 14% during 2020, and there are currently 19 mining projects under construction or about to commence production, at a combined investment of nearly $20 billion, creating 30 000 new jobs. Why are they getting it right, in Chile?
Chilean mining will bounce back largely because the pipeline of projects is so strong. At a recent investment conference, Juan Carlos Joblet, Chile’s Minister of Mining and Energy, despite facing pressure within Congress to increase mining royalties, said that in his view “the best way to increase government revenue from mining is to increase production and improve competitiveness.”
Well, the Minister is very correct. In Africa, there are the tales of two opposite industries. In terms of copper production, there is the tale of Zambia and the DRC. The other is the tale of Zambia and Namibia in mining investment terms. Both demonstrate the Minister’s point, that the route to increasing tax revenues and fiscal stability is through increasing production – not through overtaxing existing production.
Without a favourable, stable mining policy, the DRC’s vast mineral copper resources would have remained in the earth. Regarding Namibia, withdrawal from its proposed non-deductible mineral royalty tax has made it competitive and spurred investment expansion since its announcement in June 2020. This is less an ideological issue and more a practical decision about how to secure optimal revenue growth for the treasury. In Namibia’s case, making the said decision based on sound facts and empirical data has paid the country dividends. Zambia can do the same, and I believe that – judging by the projects in Zambia awaiting the withdrawal of the provision – there are huge gains to be made by doing so.
“The route to increasing tax revenues and fiscal stability is through increasing production – not through overtaxing existing production.”
During your time in Government, you encouraged investment in countrywide geological surveys, which paved the way for the genesis of Kalumbila mine, Lubambe mine, the Maamba coal mine power plant and the recommissioning of Munali Nickel Mine. What would you like to see happen when it comes to the current level of exploration activity in Zambia?
I would like to see at least two things happen. Firstly, Government, through the Ministry of Mines, should attract mining explorers, even if this means setting out special incentives for them. We need to know and be sure of what we have in terms of location, quantity and quality. Then, the Government should put in place measures that would encourage investors to open new mines. The benefits, in terms of job and local business creation, PAYE, social investment, and the commerce that follows the opening of a new mine all accrue to Government.
Secondly, I think we really need to encourage exploration in and around the existing older mines on the Copperbelt with a view to extending their lives.
Recently released figures on local procurement at FQM’s Kansanshi and Kalumbila mines show that the company procured US$1.65 billion (K36.3 billion) of goods and services from companies registered in Zambia in 2020, representing 85% of the total spending, with more than 2,500 locally registered businesses benefited from mine contracts in 2020 alone.
How can we build on these achievements?
A comprehensive series of studies (through external financing) has identified opportunities for local value addition and manufacturing in Zambia. Following the local content roadmap already laid out in the Government’s industrialisation policy and local content strategy will allow us to achieve these mining import substitutions in a competitive manner.
Rushing local content targets, preferential pricing margins, and punitive consequences via a Statutory Instrument without the groundwork will simply raise the cost of mining and shrink demand. We must be diligent, careful and innovative in taking the whole picture into account, and not do something unsustainable and damaging.
For Zambia, it must always be remembered that the local content issue is not new to the mining sector. A cursory look at the Copperbelt towns shows that a number of industries were developed to serve it. We need not re-invent the wheel.
Now is not the time to be putting up roadblocks when we need to build speed. We want our mining sector to bounce back, knowing how important it is for the wider economy. We have a serious task now, and it must be understood by all parties: the more we produce, the better it will be, for the Government, industry and the country.