PROCESS REENGINEERING/REFORMS IN ZAMBIA’S MINING SECTOR

THE mining sector in Zambia is poised for significant growth over the next decade, driven by increasing demand from Asian countries such as China and its neighbours.

The government’s efforts to liberalise the sector are effective in attracting foreign capital, but much remains to be done before the Zambian economy can fully take advantage of recent increases in mineral prices.

The industry has been maintained by the cost-effective exploration and extraction of minerals, with most of this being carried out by foreign investors.

Mining plays a key role in the country’s economy, contributing about 12 percent plus or minus to the gross domestic product (GDP), and employing as many as 80, 000 workers directly.

This article looks at the current state of the mining industry in Zambia, also looking at how a process reengineering can be initiated to fully profit from the industry efficiently

The mining sector is one of the fundamental pillars of the economy, but it has been crippled by not so strong mineral policies, quite weak policy and regulatory frameworks, and poor infrastructure and security issues.

The first step to rebuilding the mining industry is to determine what future Zambian gold and copper will be used for (non-energy use), create a conducive environment to attract investment as well as encourage the development of local mines through improved legislation.

A Historical Context

The historical evolution of the mining industry led to Zambia's current mining tax system. Following its declaration of independence in 1964, Zambia started its first talks to alter the tax laws that affected mining businesses.

This was necessary because mineral royalties accrued to the British South African Company during the colonial era and the early years of the independence period. This was because the mining rights belonged to the British South African Company.

However, the Matero reforms of 1969 allowed the Zambian government to acquire the majority of the stock in the mining firms. Also returned to the state where the mineral rights. It was then appropriate for the government to begin talks with mining corporations over a new mineral tax structure, guided by nationalist principles.

To be able to obtain enough money for infrastructure development, the government set out to change the tax laws that apply to mining. The post-independence mining tax structure included three main elements: a royalty tax of 13.5 percent based on the copper price at the London Metal Exchange, an export tax of 40 percent if and when the copper price at the London Metal Exchange exceeded US$300 per long ton, and a 45 percent income or corporate tax.

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

In 1970, the new tax system went into force. Instead of the mineral royalty and export tax, a 51 percent mineral tax and a 45 percent corporate tax were implemented.

The mining industry stated that these measures inhibited investment and the expansion of the sector because of the high taxes placed on production and profit, even if they increased the government's need for money.

The government had no motivation to sign any agreements due to the substantial earnings it received from the mines until issues in the sector started to emerge. The country experienced a scarcity of foreign currency as a result of declining copper prices and rising input expenses. At that point, the government began discussions with the copper mining firms.

The Finance Minister said in the 1976 budget statement that he had "determined that investors will be able to remit either 15 percent paid-up capital of their enterprises or 50 percent of their earnings, whichever is less, to attract bigger foreign investment in the country."

The government's decision to nationalise the mining industry and make all these changes to the tax code that affect mining corporations was met with opposition.

Although the under-representation of the "Bemba group" in government served as the primary driving force behind the creation of the opposition party United Progressive Party (UPP), UPP also represented a distinct political direction from UNIP.

The United Progressive Party, in contrast to UNIP, was a party that supported the right and opposed nationalisation. It also emphasised that people, rather than the state, benefitted from copper mining. The party became well-liked as a result, not just in Northern Province but also on the Copperbelt. However, the celebration did not last long when Kaunda announced a one-party state.

The nation's economy deteriorated starting in 1973. By 1989, there had been numerous urban food riots and industrial disturbances, which had made the ruling UNIP party and Kaunda unpopular.

In 1990, the Movement for Multiparty Democracy (MMD) was founded and ZCTU leader Frederick Chiluba on ticket in 1991 won the elections.

The MMD pledged to liberalise the economy and privatise state-owned businesses in its manifesto. The MMD's rise to power secured the reintroduction of neo-liberal methods of economic administration.

As a result, the State had to reconsider the nation's development strategy due to the reality on the ground, pressure from donor nations and international financial organisations, and a shift in political thought. The privatisation of the mines was essential to the nation's development goal because the nation's economy has historically been dependent on copper mining. At the time, it was believed that privatising the copper mines would bring in foreign capital for the industry.

Tax regimes post-privatisation

To maintain a steady supply of tax revenue for the duration of the mine, Zambian tax authorities have employed a variety of tax instruments based on the needs and performance of the mines at the time. To maintain stability, these adjustments have occurred too frequently.

Every time a new political government came into power, new tax policies were implemented, which contributed to Zambia's progress. As a result of their difficulties in creating an efficient fiscal framework for the mining industry to make sure that Zambians benefit from the nation's mineral wealth, has given the Zambian government a reputation for unstable tax regimes.

In 1992, the Privatisation Act was passed, and its implementation began with state-owned businesses without affecting the privatisation of mines until much later.

Considering that the post-privatisation period was a period of economic recovery marked by numerous tax vacations and tax exceptions for machinery, it is obvious that revenues during that time were insignificant.

However, that was perceived as the mining not contributing fairly to taxes to support economic development. The reform of the mineral sector, the use of presumed pricing for the royalty and the income tax for some producers, better mineral prices, and greater monitoring all contributed to an increase in revenue after 2005 (when corporate taxes started to rise).

Since then, several tax structures have been tested, but the mineral royalty tax appeared to be the most reliable with the fewest complaints from the mining industry.

The taxes regimes; 1 Development Agreements

These were negotiated with individual mines after Zambia Consolidated Copper Mines (ZCCM), a state-owned mining firm, was privatised in the late 1990s, the 1995 Privatisation Act gave the government the ability to sign Development Agreements (DAs) with particular businesses.

Depending on the negotiated pricing, the DAs varied from firm to company. The agreements were designed to address issues related to legacy, environmental responsibilities, and the general status of each mine.

These agreements let businesses carry losses forward for 15–20 years to provide a period of stability. Even while the government agreed with specific miners not to change any of the individual tax deals made for a period of up to 20 years, they immediately came under pressure from opposition parties and civil society organisations to renegotiate the agreements.

2 The Mineral Royalty Tax of 2008

In his 2008 budget presentation, Finance Minister Mr. Ng’andu Magande proposed significant changes to the fiscal and regulatory framework for the mining industry during the presidency of President Levy Mwanawasa.

In 1998 and 2000, the government changed the mining tax structure as the first step in the process. Then the royalty rate was lowered to 0.6 percent, the corporate tax rate was lowered to 25 percent, and the customs and excise exemptions were increased.

The fiscal adjustments were made to raise the estimated effective tax rate for a hypothetical large-scale copper mine from 31 to 47 percent. A fee was added on top of (or maybe in place of) a royalty and any other normally applicable taxes. The corporate income tax rate was raised from 25 percent to 30 percent.

Mineral Royalty Tax (MRT) taxes are typically low – between one and six percent – and are levied on production. Tax is paid immediately through capturing tax revenue at production, even though the mine may still be several years from profitability – or may even be making a loss.

Royalties are acknowledged non-negotiable taxes, which do not respond to conditions on the ground be it market conditions, the cost profile, profitability, or distinct circumstances of different mines. This is an aggressive tax system as it can affect the most vulnerable companies struggling to survive.

3 Corporate Income Tax April 2009 to March 2012

Corporate Income Tax (CIT), often known as the tax on profits, is typically established at a higher rate than MRT: between 25 and 35 percent. When the mine is in production and making money, it collects tax revenue. Considering that MRT is also being paid at the same time, this kind of tax specifically targets the mine when tax receipts are at their peak. Profit taxes are considered progressive since they target profits; as a result, they benefit the government by taking advantage of high commodity prices while also forcing profitable businesses to pay higher taxes on their earnings.

Since it targets earnings, the profit tax is regarded as progressive. The majority of mining businesses reported losses or negligible earnings, which created difficulty with the CIT implementation because relatively little money was collected.

4 2012 regime

Following the change in government in 2011, the first budget of the new administration introduced additional tax reforms in 2012. Hedging and operating income were again to be treated separately for income tax purposes, and the mineral royalty tax was increased from 3 to 6 percent, effective April 2012.

5 2014 – 2015 -

The Patriotic Front's minister of finance stated in the October 2014 Budget Speech that mineral royalties on the average value of mined basic metals will rise from six to 20 percent for open-cast mining and eight percent for underground mining.

Copper ad valorem royalty rates vary per nation, often falling between zero percent and eight percent. Zambia's corporate tax rate was lowered to zero percent as of January 1, 2015, and the revenue-based mineral royalty rate for open-pit mines was raised from six percent to 20 percent.

The Zambian government amended the tax and royalties system that went into effect on July 1, 2015, by passing new legislation on August 14. These alterations the reestablishment of corporate tax to 30 percent with variable profits tax of up to 15 percent.

6 2016 Tax regime

The government made additional adjustments to the corporation tax and mining royalty regime in 2016. These modifications took effect on June 1 of that year and included the elimination of the variable profits tax of up to 15 percent that applied to mining profits. The corporate tax rate on mining profits remained at 30 percent.

According to the monthly average copper price, mining royalty rates were cut from nine to a sliding scale of four to six percent, and the 10 percent export duty on ores and concentrates for which Zambia has no processing facilities were suspended (e.g. nickel).

In July 2016, the Zambian government implemented this tax by implementing an MRT with a sliding scale that changes between four and six percent depending on the commodity prices on the London Metal Exchange (LME).

7 Sales tax on the mining sector-2019

The 2019 sales tax ideas are meant to address the issue of value-added tax ( VAT) refunds that primarily benefit mining and exporting companies. The government has been unable to make the required payments, which have risen to almost K1.4 billion every month due to the disputed nature of VAT refunds.

The most challenging public treasury management issue of our day, refunds have been a drain on public resources. The system was too vulnerable to fraud cases, according to the government, as mining businesses exaggerated the costs of products and services and submitted two claims on one receipt. Therefore, it was crucial to implement the suggested alterations to find a solution.

Since 2008, the country's confidence in tax administration has not much improved due to frequent changes in the mining tax regime, which have also harmed ties between the mines and the government.

Process Reengineering (BPR) In The Zambian Mining Sector

As earlier stated, mining is a vital industry in Zambia, contributing over one-quarter of total exports. However, many challenges confront mining that need to be addressed by all stakeholders within the mining community.

The mining sector has lost its competitive edge in the global markets. The challenges have been identified as;

• Changes in tax regimes

• Inadequate information systems,

• Poor financial management

• Lack of workforce skills.

BPR offers a holistic approach as it will help examine processes and also involves combining the analysis of existing processes with new approaches to improve their performance.

When applied to mining in Zambia, BPR helps companies meet cost reduction targets, increase efficiency, improve product quality and add value to customer experience. BPR can be used in the mining sector of Zambia to streamline business operations and reduce waste on mining projects through:

• Process monitoring;

• Continuous improvement of production activity;

• Use of lean manufacturing techniques;

• Installation of a GIS-based information system for improved decision making

The process reengineering of the country’s mining sector is a response to the need to augment and diversify its currently unstable economy. Through this process, the government has reorganised the operations of existing extractive industries and introduced new ones that are projected to result in more sustainable development, especially concerning foreign investors.

With the national economy seemingly stagnating, a process of reengineering the industry is crucial to make it competitive and responsive.

The goal of this initiative is to increase productivity without compromising environmental protection standards and to diversify employment opportunities for Zambians.

It also helps in identifying bottlenecks and drivers of changes in process, performance (outputs), and value. Recognising best practices from other industries and organisations.

Backward engineering (for example by using best practices in another organisation) often leads to better results than forward engineering as organisations learn best practices from other industries and organisations.

Apart from processes and practices, the mining industry in Zambia requires process reengineering in how tax policies are formulated.

Engaging a Process Reengineering of Tax regimes in the mining sector would be aimed at simplifying tax procedures through better coordination of existing structures and by reducing transaction costs.

The objective would be to provide improved tax compliance through enhanced integrated systems for reporting, accounting, administration, and collection of taxes to facilitate Government revenue generation through improved efficiency.

Tax regimes involving procedures and administration of the tax policy in this sector would also be reviewed. This is so because of changes that occur anytime there is a change in government, as every new government comes in with its agenda. Some of the challenges that are faced by the mining industry due to changes in government are:

• Unclear legislative and regulatory contexts;

• Lack of consistent interpretation by courts;

• Uneven implementation across various institutions;

• Difficulty in assessing tax liability when there is uncertainty about valuation methods and treatment of mineral resource rents arising from export sales.