Presentation to the Public Discussion Forum on Mining taxation in Zambia 22 June 2010 By

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

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

3. 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

4. Nationalised Mine Assets1972-1990s • Little or no investment in mining sector • Existing mines run down requiring significant investment • Insufficient national reserves for investment

5. 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 2009. 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

6. The mine Cycle Production 1 Mine Exploration - 7-10 years Mine Development- 5-10 years 2 Mine Operation 2-20 years 3 Mine Closure 2-10 years 4 Time 7-10yrs 5yrs -10yrs 2yrs -20yrs 2yrs -10yrs 1 2 3 4

7. 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

8. 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)

9. 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

10. 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

11. 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

12. Tax statistics • Current focus in Zambia when assessing mining contributions is on: - Corporate tax; - Variable profits tax; - Mineral royalties; - Export levy.

13. However in reality need to take a/c of: - PAYE - VAT - Customs duties - Fuel levy - Duty on diesel - Property taxes

16. PAYE 2004-2006 Source: Zambia Development Agency

17. PAYE 2004-2006 • 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

18. VAT 2004-2006 Source: Zambia Development Agency %age of VAT contribution decreases temporarily because of significant capital investment

19. VAT 2004-2006 VAT contribution by sector Source: Zambia Development Agency

20. 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

21. 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

22. 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

23. Strategy and policy • The benefits of FDI can multiply and accelerate growth and development providing appropriate environment and framework is created by government

24. Exports-2004 to 2006 Source: Zambia Development Agency

25. Exports- 2004 to 2006 Source: Zambia Development Agency

26. Employment Generation (new jobs) Source: Zambia Development Agency

27. Employment Generation (new jobs) Source: Zambia Development Agency

28. Thanks you