in Part 2 of this exclusive interview, Mr Michael Phiri, Tax Partner at KPMG Zambia, zooms in on mining’s financial contribution – in the past, present and future.
The Zambia Revenue Authority (ZRA) recently revealed that 41.8% of Government’s tax revenues came from the mining sector from January-August 2022. What would you say to Zambians who are worried about the possibility of losing some of that tax income next year because of recently proposed reforms to the mining tax regime?
The purpose of these adjustments to the mineral royalty tax (MRT) structure is to grow the tax base by attracting more players into the Zambian mining sector, allowing ZRA to collect more revenue from a growing basket of taxpayers. Growing your tax base in order to get your revenues from a broader base – rather than from a shrinking base – is a progressive thing to do. Essentially, Government has to make a choice: whether to milk to death your only cow, or to allow the cow to produce other cows so you can expand your takings in the medium and long term.
We also need to look beyond the revenues contributed by mining companies, to the large number of industries that support the mines. The policies that have been implemented will facilitate the growth of companies that provide services to the mines, across the Copperbelt and North-Western Province, and encourage new Zambian-owned companies to create employment and economic opportunities. One mustn’t forget about employment creation at the mines themselves, and the payroll taxes that are being contributed.
Having worked closely with the mining sector for many years, you’ve seen the previous tax regime drive a few major mining and exploration companies out of Zambia. What has been the impact of these losses?
It’s really a shame to have seen big players leave the country, and there are many forgone benefits that Zambia has suffered as a result of our previous tax regime. As the Secretary to the Treasury Mr. Felix Nkulukusa recently indicated, in 2015 when the mineral royalty tax regime was changed, in excess of $3 billion in investment pledges that were on the table did not materialise. There were smelters that couldn’t be built, and companies that had to let go of their assets here in Zambia. They weren’t able to reach a bankable position where they could invest funds in Zambia and get an appropriate return on those investments, so the only option they had was to sell their equipment and exit the country.
One of the investments that Mr Felix Nkulukusa was alluding to is Kansanshi’s expansion, [the S3 Project]. In 2015, stakeholders pleaded with the Government to adjust the MRT rate to allow companies like Kansanshi access to some of their funds so they could reinvest in their operations, in mineral exploration, and in opening up new areas to extend the mine’s life to ensure continued copper production in future. At that time, we had already estimated that production at Kansanshi would be so low by 2023 that it would be uneconomical to continue operating.
Now, seven years later, this investment has been made, but the effect of this delay is being felt. We will struggle to reach 800,000 tonnes this year because of decisions that were made that impacted the sector. By now, production should have been growing, not declining – and all of this could have been avoided.
Where might we be now, had these investments come to fruition?
These forgone losses are real, and to start reaping benefits from the projects that are coming on stream now will take a long time. New mine developments take three to four years to develop, in the case of open cast mines. When it comes to new greenfield developments that are planned from scratch, you’re talking about a seven-year horizon – especially if you have to sink shafts. Underground mines do not become productive in less time than that.
That said, let’s not cry over spilt milk. The conditions are now becoming more attractive for potential investors. Projects are becoming bankable, so we can expect production to grow in the next 7-10 years, when we’ll start to see the impact of the bold decisions that have been made now.
Is encouraging investment in mining a viable way out of the debt trap and the ‘high tax, low investment, low production’ economic cycle that the country is in?
Yes. The move to attract investment in the mining industry – and in other industries – is going to unlock opportunities to get us out of the current debt trap. When you look at how Zambia found itself in this debt trap in the first place, it’s because we weren’t generating sufficient resources to be able to service our debt. By investing in new mines and enabling existing mines to be revived, we are creating opportunities for Government to earn revenues that will help when Zambia’s restructured debts become due in future. Unless we grow our industrial base and identify new revenue streams, we’ll be in a debt trap forever. This is a no-brainer.
You have referred to the 2023 Budget’s drive to get small-scale and artisanal mines brought into the tax bracket as a “win”. Why is this?
Artisanal and small-scale mining has become something close to an underground operation in Zambia in recent years and, as a result of this secrecy, its growth has been stifled. Now, the Government is encouraging those who are engaged in artisanal and small-scale mining to make their businesses transparent by giving them a very favourable tax rate, which is a win for miners. It’s also a win for Government because the formalisation of small-scale and artisanal mining means that these revenues can be used to benefit the economy.
Does mining still have the potential to revive the economy?
Absolutely. Mining is the key contributor to Zambia’s foreign exchange earnings, as well as job creation, so we can expect the industry to continue to be our backbone for a long time. Exchange rate fluctuations have stabilised and inflation is almost in the single digits. Zambia has also seen a relatively peaceful transition of power from the opposition to the ruling party. The plans to dismantle debts in the next 3-4 years are creating credibility, which will encourage investment. Policies are predictable, there’s transparency, and there’s a fight against corruption. The stability and economic transformation that the new Government has set in motion are making Zambia an attractive destination for investment once again.
In case you missed it, find Part 1 of our post-Budget interview with Michael Phiri here.