Presentation to the Public Discussion Forum on Mining taxation in Zambia 22 June 2010 By Frederick Bantubonse General Manager

Agenda/Content Background Life cycle of mines Contributions to the economy

Background Pre-nationalisation – 1900s to 1970s –High international commodity prices –Rapid development of infrastructure, e.g. Rail, south-north road, Kariba dam etc. –Rapid development of towns & townships

Nationalised Mine Assets s –Little or no investment in mining sector –Existing mines run down requiring significant investment –Insufficient national reserves for investment

Privatised mining assets 2000 to date Privatisation –Attracted FDI now over US$ 4 billion by 2008 –Plant rehabilitation, new processing facilities and new mines. –Production up from 257,000mt in 2000 to over 650,000mt in Investment –International metal prices start to increase - rose by 269% on average at its peak –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

2yrs -20yrs Mine Exploration years 2 Mine Development 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 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)

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 projects All this with significant challenges: -High cost of doing business -Poor transport & telecommunications network

Contributions to the Economy 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 contributions This 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

Metal Sales No.DescriptionTonnes (000) A1 Copper sold Taxes and Duties No.DescriptionUS $ 000 C1Corporate Tax98,193113,70915,419 C2Royalty Tax19,46966,89250,730 C3Variable Profit Tax000 C6Export Levies22,32632,61622,396 C7Customs / Import Duties20,45715,5979,243 Local Authorities C8. Property Rates3,1523,3855,633 C9. Personal Levies C10PAYE97,913106,629106,803 C11Windfall tax035,8441,737 TOTAL261,599374,757212,033

Investment No.DescriptionUS $ 000 E1 Capital Expenditure on Property, Plant and Equipment 891, , ,999 E2Exploration expenditure 2,863 20,377 53,271 TOTAL 894, , ,270

PAYE Source: Zambia Development Agency

PAYE 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. Source: Zambia Development Agency

VAT %age of VAT contribution decreases temporarily because of significant capital investment Source: Zambia Development Agency

VAT VAT contribution by sector 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 The benefits of FDI can multiply and accelerate growth and development providing appropriate environment and framework is created by government

Exports-2004 to 2006 Source: Zambia Development Agency

Exports to 2006 Source: Zambia Development Agency

Employment Generation (new jobs) Source: Zambia Development Agency

Employment Generation (new jobs) Source: Zambia Development Agency

Thanks you