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«Southern Africa Resource Watch Resource Insight Issue 8 August 2009 Resource Insight is published by the Southern Africa Resource Watch. Southern ...»

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Southern Africa Resource Watch

Resource Insight

Issue 8 August 2009

Resource Insight is published by the Southern Africa Resource Watch. Southern Africa

Resource Watch (SARW) is a project of the Open Society Initiative for Southern Africa

(OSISA).

ISSN: 1994-5604

Key title: Resource Insight

Southern Africa Resource Watch

President Place

1 Hood Avenue / 148 Jan Smuts Avenue (corner Bolton Road)

Rosebank

PO Box 678, Wits 2050

Johannesburg

South Africa

www.sarwatch.org

Editorial Team: Sisonke Msimang, Claude Kabemba, Alice Kanengoni and Stuart Marr Design and Layout: Paul Wade Cover Photograph: Eric Miller Production: DS Print Media The opinions expressed in this Resource Insight do not necessarily reflect those of SARW / OSISA or its Board. Authors contribute to the Resource Insight in their personal capacities.

We appreciate feedback on this publication. Write to sarw@osisa.org or info@osisa. org To order copies, contact publications@osisa.org The Politics of Reforming Zambia’s Mining Tax Regime Contents Summary 5 Introduction 6 The State and Development 8 Mining Tax Regime in Historical Context 11

The Privatisation Process:

Role of Internal and External Actors 13 The Development Agreements of the Privatisation Era 15 Why did the Zambian Government Sign the Development Agreements? 16 Pressure from Civil Society and Opposition Political Parties 18 Subtle Resistance from the Mining Companies and Reaction of Civil Society 20 Additional Arguments and the Demise of President Mwanawasa 23 Conclusions 25 References 27 Southern Africa Resource Watch John Lungu is a lecturer at the Copperbelt University, Kitwe, Zambia.

A version of this article was presented at the Mine Watch Zambia Conference:

Politics, Economy, Society, Ecology and Investment in Zambia Oxford University 19-20 September 2008 The Politics of Reforming Zambia’s Mining Tax Regime Summary Through out the history of copper mining in Zambia, the mining companies have been the major source of revenue to the government. They have done this through the payment of royalties, corporation taxes as well as windfall taxes. The windfall tax which is the most controversial of them all was also being paid during the time of the colonial administration. The reintroduction of this tax has raised controversies because of the development agreements which the Zambian government signed with the various mining companies which have been changed unilaterally. Opposition political parties are trying to take advantage of the governments’ unilateral decision.

Whether the decision to cancel the development agreements will be reviewed, will become clearer after the Presidential by-election on 30th October 2008.

Southern Africa Resource Watch

Introduction Zambia has relied on mining for its development ever since commercial copper mining started in 1928. Resistance to colonial political rule was also actuated largely through the development of trade unionism in the mining industry. In years of good international copper prices, the copper mines provided more than 80 percent of the countries foreign exchange requirements and more than fifty percent to government revenue. Copper mining however went through a long period of slump starting about 1974 when the copper prices started going down. Despite this, the mining industry still remains a major provider of foreign exchange for the economy. Thus, even though by the late 1980’s the privatisation of the copper mines was inevitable, it still met with government resistance as it implied not only loss of control of the country’s major resource by the government but also loss of revenue for the country. This as it may, the mines were privatised. This was made possible by making changes to the fiscal regime affecting the mining companies. Through the Mines and Minerals Act of 1995, and the development agreements signed by the new mining companies the mining tax regime affecting the copper mines was altered fundamentally. This approach to economic management was rationalised by the neo-liberal economic approach of the Movement for Multiparty Democracy government.

However, five years through the implementation of the development agreements it became clear that the Zambian people were gaining very little from copper mining.

As a consequence the government came under considerable pressure from non-governmental organisations, trade unions and the opposition political parties to renegotiate the agreements. The mining companies resisted and are still resisting but the government went ahead and reformed the tax regime affecting them. This paper analyses the politics of reforming the Zambian mining tax regime, arguing that the unpopularity of the MMD government on the Copperbelt and Zambia’s urban areas stemming from the losses in revenue from privatisation, will remain a fundamental factor in the economic management of the country not only for the MMD govern

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The Politics of Reforming Zambia’s Mining Tax Regime

ment but for any government that comes into power after the presidency of Levy Mwanawasa. In order to conceptualise the future of the mining industry in Zambia it is important to understand the role of the state in economic management especially in a country like Zambia which is dependent on one major natural resource copper, for its development.





Southern Africa Resource Watch

The State and Development The word ‘State’ is used in two distinct ways. At times it refers to a set of institutions while at others it refers to an association of people. With the former definition, the ‘State’ is popularly equated with the government and the phrase state intervention used interchangeably with ‘government intervention’. With the later definition, the State is equated with the term country and thus it is possible to speak of African States and African countries (Gore, 1984:3). Both these everyday ways of thinking about the state are used in sociological and political theory. Theorists who refer to the State as ‘a system of institutions’ consider the central and local governments, the judiciary, the police and the armed forces as institutions that stand outside civil society. These institutions constrain and influence relationships between individuals and groups within that society and are in some way accountable to the members of that society (Miliband 1969). On the other hand there are other theorists who see the State as an association of people linked by a particular form of power relationship which is exercised through the state institutional apparatus (Poulantzas, 1978). As an association of people, the state differs from all other associations because its membership is compulsory upon all those who live within its territorial ambit and that it can in the last resort enforce its obligations upon its subjects (Laski, 1935). The characteristics which define the State as an association of people are then this particular type of power relationship which links members of a State; the territorial demarcation of the limits of that power; and the conditions for membership of the association (Gore, 1984). Thus the individuals and groups who are members of a State are all subject to the laws and decisions of that State. In this understanding, the actions of people and even legal persons who are subjects of a State are constrained by what is defined as legitimate behaviour in that State. And if necessary, conformity to the laws of the State can be ensured through the legitimate use of physical force. This supreme coercive power is what is known as ‘sovereignty’: it has spatial limits which define the territorial ambit of the State. With all this power, the State has an obliga

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The Politics of Reforming Zambia’s Mining Tax Regime

tion to direct its power towards organising present and future conditions of life and future relationships amongst the groups of people who form that State. Since all individuals and groups who are members of the State are subject to the laws and decisions of the State it then follows that in pursuing improvements (or development), the laws which have been promulgated by the State should be followed.

To understand the relationships that the State establishes with groups in society it is necessary to supplement the theory of the state with bargaining theory. Bargaining theory was developed by Bruno Continni (1968) in an article entitled ‘Time in bargaining negotiations’ and Wade and Curry (1971) in another article entitled ‘a model for socio-political bargaining’. There have been several other publications in the field since then (see for example Zartman W (1971) and Smith and wells (1975). However it was not until Curry and Rothschild’s (1974) work, that bargaining theory was applied in an African context. Bargaining theory was developed based on three fundamental assumptions. That contracts or relationships established are a result of negotiations between negotiating parties and that negotiations are done out of the free choice of the negotiating parties. Neither party is coerced into bargaining by forces outside their own volition. A further assumption was that the negotiating parties especially those representing the State did so in the interest of the members of the state.

However, both the theory of the state and bargaining theory fail as tools to analyse the relationships which the state enters into because of their overly simplified underlying assumptions. In reality the State can be compromised either because it is negotiating in an environment of asymmetric information or simply that its agents can betray it. The State may also be pushed into negotiations by forces outside its control. At other times some groups in society can become a lot more powerful and influential to usurp the independence of the State. Thus, the State may stand compromised by the very relationships it establishes with some groups in society. Some groups may become extremely influential that they can hold the State captive. When this happens policy will favour those groups. Corporations have the power to do this.

The result will be weak law enforcement. Secondly, conceptualising the State in this way opens up for differences in the way different groups in society perceive the way the state organises present and future conditions of life for its members. Thus opposition parties for example can play predatory roles forcing the State to make decisions

Southern Africa Resource Watch

and take action that counters the influences of these parties. Equally, civil society would assume the role of a watch dog on State actions and decisions. This understanding of the state and bargaining theory is applied in this paper. The central idea in the paper is that the state can be held captive by powerful interests in society and that the outcome of the struggles between these interests will determine the policy direction of the state. This understanding is applied to the negotiations for changing the tax regime affecting the country’s copper mines.

The Politics of Reforming Zambia’s Mining Tax Regime

Mining Tax Regime in Historical Context Zambia’s current mining tax regime is a product of the historical development of the mining industry. After independence in 1964, Zambia embarked on its first negotiations to change the tax regime affecting the mining companies. This was necessitated by the fact that during the colonial era and the early years of the independence period, mineral royalties accrued to the British South African Company. This was because the British South African Company held the mineral rights, (Kaunda, 1969).

However, in 1969 the Zambian government through the Matero reforms obtained majority shareholding in the mining companies. Mineral rights also reverted to the state. Time was then opportune for the government to start negotiations for a new mineral tax structure with the mining companies guided by nationalist ideals. The government embarked on changing the tax regime affecting the mines to enable it raise adequate revenues for infrastructure development. The post-independence mineral tax structure had three major components: the royalty tax of 13.5% based on the London Metal Exchange copper price, the export tax of 40% if and when the copper price exceeded US$300 per long ton at the London Metal Exchange and an income or corporation tax of 45% (Curry, 1984:39; O’Faircheallaigh, 1986: 54).

While the first two taxes where revenue based, the corporation tax was a profit based tax. Thus the two methods of taxing mineral revenues are historical.

O’Faircheallaigh (1986) concludes “this three-fold tax regime produced a total effective tax rate of 74.4%” (O’Faircheallaigh, 1986: 56). After nationalisation, the government changed the tax regime affecting the copper mines since now the government had become the majority shareholder. The new tax structure became effective in 1970. The mineral royalty and the export tax where replaced with the mineral tax of 51% and a corporation tax of 45%. Although these measures raised the much needed revenue for the government, the mining companies argued that such high taxes on production and profit discouraged investments and growth of the industry (Curry, 1984). With high revenues obtained from the mines, the government had no

Southern Africa Resource Watch

incentive to enter into any agreements until problems in the industry started surfacing. The falling copper prices and the rise in input costs resulted in foreign exchange shortages for the country. It was at that point that the government started negotiations with the copper mining companies. In the budget speech of 1976, the Finance Minister stated that “in order to encourage higher foreign investment in the country, I have decided that investors will be allowed to remit either 15 percent paid-up capital of their companies or 50 per cent of their profit whichever is less” (Curry, 1984:46). While the government made all these changes to the tax regime affecting the mining companies and nationalised the industry, this did not go unchallenged.



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