97390 ZAMBIA ECONOMIC BRIEF Making Mining Work for Zambia The Economic, Health, and Environmental Nexus of Zambia’s Copper Mining Economy JUNE 2015 ISSUE 5 © 2015 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved This report was prepared by the staff of the Macroeconomic and Fiscal Management and Energy and Extractives Global Practices of the World Bank Group. The findings, interpreta- tions, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Directors or the countries they represent. The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC. Cover design: Zeria Banda and Musa Mwamutanda Photos: John Gladston and Martin Lokanc Contents Foreword   v Acknowledgments   vi Executive summary   vii Section 1 Recent Economic Developments   1 Recent global and regional developments1   1 The state of the Zambian economy    4 Economic outlook, risks, and policy challenges    11 Section 2  Making Mining Work for Zambia    13 Mining and the Zambian economy    14 Analysis of mining taxation    17 The environmental-health nexus   24 The legacy of lead and the human cost of previous mines    26 Mining environmental governance   28 Conclusion: making mining work for Zambia    29 Annex A Economic Data   31 Annex B Mining   33 Mining sector employment   33 Elements of Zambia’s mining fiscal regime    34 Mineral revenue forecasts   35 The potential impact of royalties on the Roan Tract    37 Notes   40 References   42 Boxes 1 A partial resolution to VAT refunds    9 2 The return of fuel subsidies    10 3 The New Copperbelt investment boom    16 4 Potential distortionary impact of royalties on undiscovered copper potential in Zambia   23 iii ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Figures 1 Energy prices fell sharply, while prices of copper and other commodities remain low   1 2 Global growth remains soft    2 3 Growth in Africa is expected to slow    2 4 The region’s major currencies have lost value against the U.S. dollar    3 5 Currency depreciation pushed up inflation in some countries    3 6 Sovereign bond spreads rose in December 2014 and remain elevated    4 7 Copper production and prices, 2005–2014    5 8 Evolution of the kwacha since mid-2014    5 9 Interest and inflation rates, 2013–present    6 10 Current account, 2005–2014   7 11 Budget trends since 2010    8 12 Contributions of the mining industry to the Zambian economy    15 13 Forecast of production and revenue by instrument, 2014–2030    20 14 Stylized investment, employment, and tax profile of a mining operation    21 B15 Forecasts total fiscal take by instrument under the 2014 fiscal regime    37 B16 Forecasts of total fiscal take by instrument under the January 2015 fiscal regime   38 B17 Comparison of future revenue by regime under current price projections    38 B18 Comparison of future revenue by regime if prices rise    38 Tables 1 Evolving features of Zambia’s mining fiscal regime since 1997    19 2 Blood lead levels in children in Kabwe, by community    27 3 Estimated annual costs of lead exposure in Kabwe    28 A4 Growth by main sectors, 2000–14    31 A5 Government fiscal operations   32 A6 Balance of payments, 2009–14    32 B7 Direct and contract employment by operation    33 B8 Features of mining taxes, 1997–2015    34 B9 Mineral taxation rates around the world    34 B10 Summary of tax status and cost positioning by company    35 B11 Impact of high royalties on undiscovered copper potential in Roan Tract    39 iv Foreword I am pleased to share the fifth Zambia Eco- spending to support inclusive growth will nomic Brief with a focus section on mining. require tough choices in the months and This Brief is part of a series of short economic years ahead. updates produced twice a year by the World This Brief focuses on mining. Zambia is Bank. Each Brief includes two sections: the blessed with abundant deposits of copper World Bank’s assessment of recent economic and other minerals. Increased copper pro- developments and outlook in the short to duction has contributed much to Zambia’s medium term, and its analysis of a specific high economic growth rates. Recent geo- development topic or theme. Previous Briefs logical analysis suggests that the deposits of covered opportunities for human develop- copper in Zambia are larger than previously ment, jobs, trade, and financial inclusion. estimated. A new wave of investment in min- Many economic indicators are positive. ing is needed to realize the potential of this Zambia continues to grow faster than many wealth. of its neighbors, even though the growth rate Making mining work for Zambia will also dipped in 2014. The authorities have suc- require careful thinking about the poli- ceeded in keeping inflation in single digits cies and institutions that govern the mining for the past five years. The value of Zambia’s industry. What tax policies will attract long- copper has increased despite sharply falling term investors and ensure that they pay their world prices. fair share in taxes? What laws and regula- But Zambia faces challenges. The ris- tions are needed to keep people safe from ing fiscal deficit makes the economy more health and environmental hazards? What are vulnerable at a time when world financial the opportunities for mining companies to markets are becoming more turbulent. High spend more of their procurement budgets on levels of spending on government salaries goods and services provided by Zambians? and on farm and fuel subsidies leave little We hope that the findings of this Brief space for the government to expand cash will stimulate a healthy debate around these transfers and other poverty reduction pro- questions so that Zambia can make the most grams. Reducing the deficit and rebalancing of its mineral wealth. Kundhavi Kadiresan Country Director for Zambia The World Bank v Acknowledgments The fifth Zambia Economic Brief has been Mando, Wisdom Mulenga, Hellen Mungaila, prepared jointly by the Macroeconomic Mupu Mupuwaliywa, Mofya Mwanalushi, and and Fiscal Management and Energy and Kelvin Ng’andu. Hellen Mungaila and Deb- Extractives Global Practices of the World bie Sturgess provided administrative sup- Bank Group. The team was led by Philip port. Kundhavi Kadiresan, Country Director, Schuler and Martin Lokanc, and included Zambia; Mark Thomas, Practice Manager, Gerard Kambou, Ruma Tavorath, Sanjay Macroeconomic and Fiscal Management Srivastava, and Sridar Kannan. Peer review- Global Practice; and Praveen Kumar, Pro- ers were Bryan Land, Dilek Aykut, and gram Leader, provided overall guidance and Carter Brandon. Useful comments were also advice. received from Robert Conrad, Ejaz Ghani, The report was edited and laid out by Vijay Pillai, Robin Mearns, Magda Lovei, and Bruce Ross-Larson’s team at Communica- Brian Mtonya. Zeria Banda led the dissemi- tions Development Incorporated, including nation activities with support from Kunda Joe Caponio and Elaine Wilson. vi Executive Summary The state of the Zambian economy falling in 2016. Low commodity prices, a After several years of strong economic per- more stable exchange rate, and adequate formance, Zambia now confronts several local harvests would help contain inflation- important challenges that must be managed ary pressures and boost real disposable carefully to ensure sustained and inclusive incomes. The resulting pick-up in private growth in the future. On the one hand, the consumption, coupled with increasing cop- economy grew by an estimated 5.5–6.0 per- per exports, should help strengthen growth cent in 2014, somewhat above the average prospects. for African economies. Monthly copper pro- duction increased by an average of 8 percent Restoring fiscal prudence during the second half of 2014, reversing Curtailing the growth in government spend- the sharp slide in early 2014. Inflation fell to ing and gradually reducing the deficit are 7.2 percent in March and April, helped both major challenges in 2015. If fiscal policy is by falling world oil prices and by the Bank not managed carefully, the country could of Zambia’s monetary tightening. In the first slip into conditions of low GDP growth, high half of 2015, the authorities adjusted several inflation, and currency depreciation. Pre- key economic policies to respond to serious liminary data show that the 2014 budget defi- problems: revising rules on VAT refunds in cit was 6.0  percent of GDP on a cash basis. February, announcing a new mining fiscal Arrears in payments to contractors, suppli- regime in April, and raising fuel prices in ers, and to the pension fund were equivalent May so that the government could recover to around 2.5 percent of GDP accumulated import costs. in 2014. Government debt grew to 35 percent On the other hand, the kwacha has come of GDP from 20 percent in 2011. under renewed pressure. It lost 17 percent of When the 2015 budget was prepared, the its value against the U.S. dollar from Decem- authorities targeted a deficit of 4.6 percent of ber 2014 through the end of March 2015. GDP in 2015 as the first step along a path of Since then it has recovered somewhat, but gradual deficit reduction. But by early 2015 it foreign exchange markets remain volatile. had become clear that, if the budget were not Interest rates have been rising since Septem- quickly adjusted, the deficit would more than ber 2014, due in part to increased govern- double—due to arrears carried over from ment borrowing and in part to steps taken by 2014, new arrears triggered by subsidized the Bank of Zambia to tighten credit. fuel prices, reduced revenue caused by lower Over the medium term, growth should copper prices, and higher interest payments hold steady in 2015 and then accelerate to caused by rising interest rates. The cabinet around 6–7  percent per year in 2016–2018. has now authorized the finance ministry to Although inf lation is expected to rise cut spending by K5 billion, increase revenue, towards the end of 2015, it should resume and seek new sources of financing. Even after vii ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA including these measures, however, the defi- environmental and public health risks. Ulti- cit is still projected to reach around 7.6 per- mately, the government sets the rules and cent of GDP in 2015. regulations that can either encourage the Getting back onto the path of deficit mining companies to mitigate these risks or reduction will require considerable disci- shift costs onto the general public. Mining pline and dedication, particularly given the firms make choices about procurement that likely pressures to increase spending in an influence the industry’s overall contribution election year. Wage bill negotiations should to the Zambian economy. Mining companies adhere to the goal of containing real growth could take the initiative to nurture local sup- in total personnel spending. Greater selec- pliers’ ability to meet the mining companies’ tivity in launching capital projects would large and diverse input requirements. also make an important contribution. Fully How can Zambia use its mineral resources implementing cost recovery in fuel pricing is to help the country achieve its economic an immediate priority. Reducing costly farm development ambitions? In addition to subsidies (e.g., of fertilizers and maize) would detailed conclusions, this brief highlights five create fiscal space to expand the coverage of key messages: cash transfers targeted at the poor. Finally, 1. Expectations must be rooted in the real- enhancing the government’s systems for cash ity of Zambia’s specific conditions. Much management, revenue administration, and of the copper being mined in Zambia is public procurement would increase the effi- either costly to mine or has only recently ciency of government spending. been placed in production. This implies lower economic profits, compared to min- Making mining work for Zambia ing operations in other countries, and Zambia’s rich mineral resources are one of therefore lower tax revenue than some the country’s most important assets. During have been expecting. The more recently the past four years, copper has accounted for developed mines need time to mature and an average of 66 percent of total exports, the will become major taxpayers in the future. mining industry has contributed 11 percent Improved capacity to forecast would also of GDP, and mining companies have paid make expectations more realistic 16 percent of the taxes and other revenue that 2. Tax revenue is expected to grow sig- the government has collected. On the basis nificantly, and predictable policies will of estimates from the 2012 labor force survey, encourage further long-term investment the mining industry accounts for 21 percent and growth. Without continued invest- of formal private sector employment in Zam- ment in mine extensions and scale econ- bia. The large capital investments made over omies, Zambia’s copper production will the past fifteen years boosted annual copper soon peak. As output falls, so will taxes, production by 350 percent between 2000 and jobs, and other economic activity. The 2013. As prices have come down from their design of the mining fiscal regime plays highs in 2011, capital investment is slowing a leading role in facilitating investment and along with it will come a reduction in the that can sustain future growth. With con- temporary employment associated with the tinued and expanded supply, there are investment. Nonetheless, the mining sector’s opportunities to continue and increase fiscal contribution is expected to increase employment and to stimulate backward and with the extension of mines and expan- linkages that have not yet been realized. sion in supply will come continue operating 3. Laws and regulations should set the rules employment and opportunities for further of the game so that private companies backward linkages. internalize the environmental and social As the country looks to the future, Zambia costs of mining. Enforcement of cur- faces important choices on how to manage its rent environmental standards should be mineral wealth. There are trade-offs in the strengthened so that mining companies design of a mining fiscal regime. For exam- mitigate pollution and undertake cleanup. ple, high royalty rates can generate revenue 4. Mining companies need to play their part in the short run but reduce total collections in areas of environmental management over the long run. Mining inevitably entails and local content. Performance in the viii areas of environmental stewardship, provi- 5. Improved capacity remains core to the sions for future cleanup, and and degree solution of both fiscal and environmental of procurement from Zambian producers issues. Zambia has a good fiscal and legal has been lackluster. If mining companies framework but its capacity to operational- put as much effort into tackling these ize many of its policies is weak. Without issues as they have into overturning the solid tax administration, risk assessment, recent royalty and VAT tax issues, Zambia auditing, environmental monitoring, would go a long way towards having solu- and regulatory capacity, even the best- tions to these problems. designed policies will not work. ix SECTION 1 Recent Economic Developments Recent global and regional ample supply, and lackluster demand. In the developments1 near future, prices of copper are expected to There have been major changes to the global rebound, remaining below the peak enjoyed economic environment in Zambia over the in recent years, although above long-term past year. Between June 2014 and March 2015, historical levels. world oil prices fell by more than 45 percent, Global economic growth has been some- while the gradual decline in commodity what weaker than expected. While the prices persisted (figure 1). The plunge in oil sharply lower oil price is reflected in a signifi- prices was driven by increases in the produc- cant pick-up in retail sales and falling infla- tion of unconventional oil, weakening global tion across major oil importing economies, demand, a significant shift in OPEC policy, global growth has remained soft (figure 2), unwinding geopolitical risks, and an appreci- with increasingly divergent trends between ation of the U.S. dollar. The price of copper, oil importers and exporters. Prospects Zambia’s key export, has also continued fall- among Zambia’s main trading partners were ing from its late-2010 peak, although prices mixed around the turn of the year. Notably, remain well above historical levels. From growth in China slowed in the fourth quarter June 2014 to January 2015, copper prices fell and, for 2014 as a whole, reached 7.4 percent, by 15 percent, reflecting weak demand from as projected. Recent data point to further China, the world’s largest consumer of met- softening in the Chinese economy. Real GDP als. Copper prices have remained weak in grew 7  percent (year on year) in the first the first quarter of 2015 on the back of con- quarter of 2015, the slowest pace since 2009, tinuing U.S. dollar appreciation, generally as strong retail trade only partly offset the Energy prices fell sharply, while prices of copper and other commodities Figure remain low 1 150 Index (2010 = 100) 100 50 Energy Agriculture Copper Metals and minerals 0 2010 2011 2012 2013 2014 2015 Source: World Bank 1 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Figure Global growth remains soft 2 4 3 Percent 2 1 Quarter-on-quarter, seasonally adjusted annualized rate Year-on-year growth 0 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 Source: World Bank. Figure Growth in Africa is expected to slow 3 15 Sub-Saharan Africa, excluding South Africa Sub-Saharan Africa Developing countries, excluding China Zambia 10 Percent 5 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: World Bank. weakness in the real estate sector and manu- major regional trading partners, prospects facturing activity. Global growth is expected remain weak in Zimbabwe but are generally to gain some momentum in the second and favorable for the Democratic Republic of third quarters of 2015. Divergences across Congo. major economies are expected to narrow Diverging monetary policy in major econ- this year, as growth levels off in the United omies is becoming increasingly apparent, States while recovering in the Euro area. Oil- with implications for African economies’ importing emerging economies are expected exchange rates and rates on sovereign bond to gather strength in 2015. issues. The European Central Bank launched Grow th prospect s in Sub - ­ S aharan its quantitative easing program in March, Africa as a whole are also weaker than ini- and the Bank of Japan has maintained its tially forecast by the World Bank in Janu- commitment to aggressive policy easing, in ary 2015. 2 Economic activity in the region both cases contributing to maintaining favor- is expected to slow in 2015, with real GDP able financing conditions globally. The U.S. growth averaging 4.2 percent, from 4.6 per- Federal Reserve is expected to move in the cent in 2014 (figure 3), a downward revi- opposite direction later this year, however, as sion of 0.6  percentage points relative to it starts normalizing policy interest rates— the World Bank’s January forecast. This possibly raising rates as early as September. reflects a reassessment of prospects among While global interest rates remain at his- the region’s oil and commodity exporters torically low levels, the expectation of diver- as sharp terms-of-trade changes are caus- gent monetary policies has already led to a ing adjustments. Economic activity in South significant appreciation of the U.S. dollar, Africa, Zambia’s largest trading partner in increased volatility in financial markets, and the region, expanded at a firmer pace in renewed pressure on emerging and frontier the fourth quarter of 2014. Among other market currencies. 2 Partly reflecting conditions in the United Zambia and several other countries in the States and partly as a reassessment of country region (figure 6), suggesting that investors risks and vulnerabilities, the region’s major are discriminating among the region’s fron- currencies have been losing value against tier markets based on their economic out- the U.S. dollar since mid-2014 (figure 4). look.3 The spreads also became more volatile. The kwacha depreciated by about 20  per- The sovereign spreads for Ghana, Angola, cent between end-2014 and mid-March 2015 Gabon, and Nigeria, which are dealing with before recovering some ground in April. the oil-price shock, have remained consid- Currency depreciation is partly offsetting erably high, well above the peak of the 2013 the disinflationary impact of lower world “Taper Tantrum” caused by concerns about oil prices on domestic prices. Cheaper fuel rising U.S. interest rates. The spreads for prices helped lower inflation and improve Zambia’s two Eurobonds have also remained current account and fiscal deficits in several elevated, reflecting investors’ concerns about net-oil importing countries in the first quar- soft copper prices and uncertainty over gov- ter of 2015, allowing central banks to keep ernment policy, although they have narrowed interest rates on hold or to raise them at a in April and May. slower pace than otherwise. Inflation rates fell slightly in Zambia during the first quar- Implications of falling oil and commodity ter of 2015, after more than one year of gen- prices erally steady albeit low increases in inflation As mentioned above, recent sharp swings rates (figure 5). in commodity prices have had a significant In this context, sovereign bond spreads impact on many countries in Africa. Most rose sharply in 2015 for bonds issued by notably, the plunge in oil prices has created Figure The region's major currencies have depreciated against the U.S. dollar 4 10 Change since January 2014 (percent) 0 –10 –20 –30 –40 Angola Nigeria Ghana South Africa Kenya Zambia –50 Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May 2014 2015 Source: Bloomberg. Figure Currency depreciation pushed up inflation in some countries 5 Year-on-year in ation rate (percent) 20 Sub-Saharan Africa Ghana Nigeria Zambia Kenya South Africa World 15 10 5 0 2010 2011 2012 2013 2014 2015 Source: World Bank. 3 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Figure Sovereign bond spreads rose in December 2014 and remain elevated 6 1,000 Africa region South Africa Ghana Zambia Nigeria 750 Basis points spread 500 250 0 Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May 2014 2015 Source: Bloomberg. severe budgetary and balance of payments economic growth has been relatively high, problems for oil exporters like Angola, and the authorities have succeeded in keep- Chad, Gabon, Nigeria, and the Republic of ing inflation under control. The kwacha Congo. On the other hand, it has benefited remains susceptible to periods of volatility, oil importers by drastically reducing their however, and depreciated rapidly in early import bill. 2015 before rebounding in April and May. To assess this impact, the World Bank has The main challenge for the economy is examined the estimated changes in coun- strengthening control over fiscal policy— tries’ terms of trade—that is to say, the ratio curtailing growth in spending and moving of prices a country receives for its exports towards a path of gradual deficit reduction. compared to prices it pays for its imports— If not managed carefully, the country could resulting from movements in commodity slip into conditions of low GDP growth, high prices.4 The net effect of changing commod- inflation, and currency depreciation. We ity prices is an 18.3  percent deterioration now turn to these issues. in terms of trade for Sub-­ S aharan Africa as a region. This deterioration is mainly Economic growth dipped in 2014 but explained by the decline in oil and other remains strong energy commodities. The Zambian economy continues to grow at Oil-rich countries experienced the largest rates faster than the region as a whole. Pre- decline in terms of trade—which exceeded liminary estimates suggest that the economy 40 percent. Resource-poor countries, on the grew at around 5.5–6.0  percent in 2014, other hand, showed a modest gain of 1.1 per- which is a slight decline from the 6.3–6.7 per- cent in the simulations. Twelve countries in cent recorded during 2011–12 (see table A4 Sub-­Saharan Africa, including Zambia, expe- in annex A). The services sector accounted rienced positive terms of trade shocks. Most for around three-quarters of real growth of the countries in this group benefited from last year, with logistics, communications, weaker fuel prices. These benefits were partly and financial services industries growing by reduced by sharp swings in different com- more than 13 percent. Construction grew by modity prices. South Africa, Botswana, and 7.5  percent, stimulated by mining industry Zambia benefited considerably from lower investment and the government’s capital proj- fuel prices, but these gains were partially off- ects, and accounted for 15  percent of total set by losses due to declining international growth last year. The record maize harvest prices of iron ore, nickel, and copper, respec- pushed agriculture growth to 6.5 percent. tively. The net change in Zambia’s terms of The mining industry, on the other hand, trade was an improvement of 3.5 percent. contracted by 7.2 percent in 2014. Domestic copper production fell by 25 percent in 2014 The state of the Zambian economy as world prices continued their steady decline The picture of the Zambian economy is since early 2011 (figure 7). Strict require- a mixture of contrasts. On the one hand, ments for obtaining refunds of import VAT 4 Figure Copper production and prices, 2005–2014 7 Domestic production World price 300 12,000 250 10,000 Thousands of tonnes 200 8,000 $ per tonne 150 6,000 100 4,000 50 2,000 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Sources: Bank of Zambia, Ministry of Finance, World Bank. and the uncertainty over the mineral taxa- In February and March, however, the kwa- tion regime contributed to lower production cha depreciated against the U.S. dollar at a during 2014. Section 2 of this Brief analyzes much faster rate, and lost value against the the contribution of mining to the Zambian euro and rand as well. This recent decline economy in detail. stems from home-grown factors. Declining copper export revenue and expectations of The kwacha has come under renewed lower production in 2015 are major factors, pressure as both reduce the supply of dollars into the The kwacha lost 28 percent of its value mea- local foreign exchange market. Preliminary sured in U.S. dollars between the end of data from the Bank of Zambia show that August 2014 and late March 2015. In part monthly earnings from copper exports in this reflects appreciation of the U.S. dollar January and February 2015 were 32 percent resulting from stronger growth of the U.S. lower than the monthly average during 2014. economy and expectations that the U.S. Federal Reserve will raise interest rates. Inflation is under control, but interest rates Figure 8 shows that major world currencies are rising have been depreciating steadily against the Prices have been growing at a somewhat slower U.S. dollar since July 2014, and that the kwa- rate in recent months. The inflation rate fell cha was following this trend from roughly to 7.4 percent (year-on-year) in February 2015 September 2014 through February 2015. from 8.1 percent in November 2014, after hav- During this period the kwacha appreciated ing risen fairly steadily since February 2012 against the euro and held steady against the (figure 9). Food price inflation has continued rand. to rise since mid-2014. In contrast, the rate Figure Evolution of the kwacha since mid-2014 8 25 Change since July 1, 2014 (percent) K/EUR K/ZAR K/USD Fed. Major Currency Index 0 –25 July Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May 2014 2015 Sources: Bank of Zambia, Federal Reserve Bank, World Bank staff calculations. Note: The Federal Reserve’s U.S. dollar index is computed as an average of major world currencies to the dollar. Negative values represent depreciation of these currencies relative to the U.S. dollar (i.e., appreciation of the dollar vis-à-vis other currencies). 5 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA of growth in transportation prices has fallen replaced with small deficits (figure 10). The sharply to 2.7 percent (year-on-year) in Febru- most important reasons are that merchan- ary 2015 from 7.3 percent in January 2015 and dise imports have increased substantially 11.9  percent in February 2014. This reflects (growing to 32 percent of GDP in 2014 from the Energy Regulation Board’s decision in 22  percent in 2009) and the services trade January to reduce pump prices of petrol and deficit has tripled. The U.S. dollar value of diesel fuel by 23 and 28 percent, respectively.5 Zambia’s oil imports grew by 20  percent The Bank of Zambia has revised down- per year between 2009 and 2014, partly a wards its forecast for inflation during 2015 reflection of rising world oil prices, and oil to an annual average of 7.3  percent (from accounts for 13 percent of the total increase 8.0 percent forecast in late 2014) in light of in imports during this time. FDI and govern- falling world prices for oil and other com- ment road construction projects were impor- modities, the Food Reserve Agency’s maize tant in boosting imports as well. Increased sales in the domestic market, and in light of purchases of copper ore, civil engineering low inflation rates in countries around the plants, metal structures, and commercial world. Nevertheless, the Bank of Zambia vehicles accounted for an additional 32 per- Monetary Policy Committee noted at its Feb- cent of import growth. Use of foreign trans- ruary meeting that inflation would likely rise port services rose along with the rising goods later in 2015 and remain above the target of imports, and make up 57 percent of the total 7.0  percent at year’s end, fueled in part by increase in services imports. depreciation of the kwacha. It consequently In 2014 non-traditional exports (i.e., raised the policy rate by 50 basis points in Feb- goods other than copper and cobalt) ruary, and in March announced that reserve declined sharply, reversing a trend of pre- requirements for commercial banks would be viously steady growth. Falling exports of increased to 18 percent from 14 percent. cement and lime, maize and maize seed, Meanwhile, government borrowing to tobacco, and petroleum products account for finance the fiscal deficit has been pushing 58 percent of the decline in total export rev- up interest rates. After falling during the enue. Slower growth in South Africa and in third quarter of 2014, average yields at Trea- economies of other trade partners explains sury bill auctions have risen to 20.3 percent some of this decline. Domestic factors were in February 2015 from 17.6 percent in Octo- also important. Rising domestic demand dis- ber 2014. The small size of the local capital placed exports of cement and other construc- market imposes a constraint on the govern- tion materials, for example, and supply-side ment’s ability to finance any increase in the constraints resulted in a decline of tobacco fiscal deficit through domestic borrowing. exports. International trade Fiscal trends since 2010 The current account surpluses that Zambia Fiscal policy has become increasingly loose enjoyed between 2009 and 2012 have been during the past several financial years. Figure Interest and inflation rates, 2013–present 9 25 Average T-bill rate BOZ policy rate 20 Average interbank rate In ation rate 15 Percent 10 5 0 Jan. June Jan. June Jan. 2013 2014 2015 Sources: Bank of Zambia, World Bank staff calculations. 6 Figure Current account, 2005–2014 10 15 Current account balance Goods trade balance 10 Services trade balance Share of GDP (percent) Income balance 5 0 –5 –10 –15 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Sources: Bank of Zambia, Central Statistics Office, World Bank staff calculations. Government spending has grown to around institutions, compared to 43 percent in 2010 25  percent of GDP (figure 11). As higher and 19 percent in 2005, when the multilateral spending has not been matched by increased debt relief exercise was being completed. receipts of revenue and external grants—in fact, these declined relative to GDP in 2013 Fiscal outturn in 2014: Accumulation of and 2014—the government’s overall bud- arrears get deficit has widened, growing to 6.5 per- Although the budget came under severe cent of GDP in 2013 on a cash basis. A large pressure in 2014, the authorities were able increase in capital spending starting in 2012 to exercise a measure of discipline on spend- followed by the jump in government salaries ing. Reflecting strong political priorities, the in 2013 pushed up spending. Recent budgets Food Reserve Agency doubled its maize pur- have allocated somewhat more to social and chases, and the Farmer Input Support Pro- economic programs, while budget alloca- gram spent almost three times the amount tions for general services have declined. originally budgeted. Increased domestic bor- Although total revenue including external rowing and rising interest rates pushed the grants has remained essentially flat, the gov- government’s borrowing costs 22  percent ernment has enjoyed some success in increas- above budget. Spending on basic personal ing the taxes, fees, royalties, and other emoluments was 3 percent greater than bud- revenue it collects. Domestic revenue grew to geted, but since personnel costs account for 17 percent of GDP in 2012 from 14 percent half of the government’s current expenses in 2010. Collection of mineral royalty and (and close to 10 percent of GDP), this over- other non-tax revenues grew by an average spending made a large contribution to the of 13.6 percent per year on average between deficit. To keep a lid on the deficit, capital 2010 and 2014. VAT revenue also grew, even spending was cut by 37  percent and spend- if one were to deduct disputed refund claims ing on procurement of goods and services by from the values shown in figure 11.6 11 percent. Small savings were also achieved Zambia’s government debt has grown through lower spending on intergovernmen- considerably in the past several years, ris- tal grants, parliamentarians’ mid-term gratu- ing to 35 percent of GDP from 21 percent in ity, and social cash transfers. 2010 (figure 11, panel a). External debt has Higher than budgeted revenue helped to doubled as a share of GDP and accounts for keep the deficit from ballooning in the face most of this increase. There has also been a of these spending demands. Payroll tax reve- steady trend towards borrowing on commer- nue was 25 percent above budget, and collec- cial terms from domestic and international tion of company income tax from businesses capital markets, reflecting both Zambia’s outside the mining industry was 10 percent improved creditworthiness and the govern- higher than expected. VAT revenue exceeded ment’s increased financing needs. At the its budget target by K1.4 billion, mainly as a end of 2014, only 18  percent of outstand- consequence of the continuing dispute over ing government debt was owed to bilateral VAT refund requirements (discussed in the (i.e., government) creditors or multilateral December 2014 Zambia Economic Brief). By 7 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Figure Budget trends since 2010 11 a. Spending, de cits, and debt have increased 40 Expenditures Domestic debt Revenue + grants External debt De cit Share of GDP (percent) 30 20 10 0 –10 2010 2011 2012 2013 2014 b. Greater emphasis on social and c. Spending on personnel and economic programs in budgets capital projects grew substantially 40 40 Share of non-interest spending (percent) Share of spending (percent) 30 30 Personnel Capital Subsidies Interest 20 20 10 Social 10 Economic affairs General services Other functions 0 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 d. Collection of VAT and non-tax revenue increased 20 Income tax VAT Customs and excise Share of GDP (percent) 15 Nontax 10 5 0 2010 2011 2012 2013 2014 Sources: Ministry of Finance, Central Statistics Office, IMF. the end of December, the accumulated stock Making fiscal adjustments in 2015 of unpaid VAT refunds claimed by businesses Achieving steady reductions in the fiscal deficit had reached K4.8 billion (box 1) over the course of the current medium-term Spending was also controlled in part by expenditure framework, as the government restricting budget releases, however, rather announced in October 2014 with the cur- than revisiting priorities and revising min- rent budget, faces significant challenges. By istries’ spending limits. Consequently, large early 2015, it became clear that meeting the payment arrears accumulated in 2014. The deficit target of 4.6  percent of GDP would Ministry of Finance estimates that arrears on require adjustments to the 2015 budget. In road construction and other capital invest- addition to the arrears from 2014, several new ment projects total around K2.5 billion. An developments added pressure to the budget: additional K900  million is due to suppliers • The government estimate for interest pay- and farmers for expenses related to fertilizer ments increased by 41  percent to reflect subsidies and maize purchases. higher interest rates. 8 Box A partial resolution to VAT refunds 1 In an effort to combat fraudulent claims for VAT refunds, in 2013 the government tightened documentation requirements for exporters seeking refund of input VAT. Although some companies complied with new requirements, most exporters protested that meeting the additional requirements applied in 2013 was impractical. Some mounted legal challenges. Refunds fell to 26 percent of gross collections in 2014 from 50 percent during 2012–13, as shown in the figure below. 15 Refunds paid Unpaid claims 12 Net VAT receipts minus unpaid claims Billions of kwacha 9 6 3 0 2011 2012 2013 2014 Jan.–Feb. Jan.–Feb. 2014 2015 In February 2015, ZRA revised the rules to allow documents from transit countries to serve as proof of export, after con- siderable discussion with stakeholders. The amended rules address the complaints made by mining companies about the difficul- ties arising when metals shipments change hands several times before arriving in the final country of consumption. Two concerns remain. The revised requirements remain more stringent than standard practice for VAT around the world, which discourages expansion of Zambia’s non-traditional exports.1 Smaller firms lack the capacity to obtain documentation from foreign governments that international mining companies possess. High costs of receiving refunds on input VAT makes it difficult for Zambian companies to enter export markets and expand their foreign sales over time. A second concern is how to resolve the disputed claims submitted through February 2015. The stock of these refund claims was K5.76 billion as of end-February according to ZRA data. They cast a shadow over the country’s business climate. And they represent a large potential financial liability to the government—equal to 3.5 percent of 2014 GDP. This liability could be realized if, for example, firms were to resubmit their claims with the required documentation, if new court decisions were to be handed down, or if the authorities were to agree to settle some or all of the disputed claims. Prudence dictates that the Zambia should consider disputed claims as contingent liabilities in annual budget documents. It should implement any agreement to repay claims transparently and fairly. If the government agrees to honor claims but cannot repay them, it should convert these either into non-transferrable debt, which firms could carry on their balance sheets as assets, or into sovereign debt with a standard amortization allowing refunds to the firms. 1. A survey of selected exporters in the region and around the world finds that no country has such stringent requirements. See Zambia Economic Brief 4 for details. • The forecast for customs duty collections seek new sources of financing. At the next fell by 44 percent. sitting of Parliament, the ministry will pres- • ZRA reduced the forecast for mining rev- ent a revised budget that identifies specific enue by K2.3 billion to reflect lower cop- cuts. Even after these fiscal adjustments, per prices and the new mining tax regime. projections are that the budget deficit will • MOF estimates that K2 billion is needed still reach around 7.6  percent of GDP in to close the Public Service Pension Fund’s 2015, which is a significant increase over the financing gap. already-elevated levels of the past two years. • Domestic fuel prices were set too low to recover the import cost, resulting in Looking ahead to 2016: Reduce deficits and arrears in paying for imports that had manage debt already reached US$257  million by the The release of the 2016 budget proposal is end of February 2015 (box 2). only a few months away. How can Zambia The net effect of these developments was make fiscal adjustments? Public sector unions to more than double the 2015 budget defi- have already launched wage bill negotiations cit. In response, in May the cabinet autho- with the government. It is important that rized the finance ministry to cut spending these aim to limit real growth in total per- by K5 billion, increase the rates for fees, and sonnel spending and take into consideration 9 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Box The return of fuel subsidies 2 Even though the government abandoned the formal policy of subsidizing fuel prices in 2013, fuel subsidies have returned and have thus strained the budget. How does this happen? The Energy Regulation Board (ERB) sets wholesale and retail fuel prices according to a formula that marks up the landed price of each shipment of oil as it arrives in Dar es Salaam by the cost of transporting, refining, and distributing fuel in Zambia. The stated objective of ERB’s cost-plus pricing model is to ensure that all costs relevant to procurement are recovered through sales of petroleum products. On January 15, 2015, the ERB reduced pump prices of petrol and diesel fuel by 23 and 28 percent, respectively, in response to falling world oil prices. This followed more modest reductions announced in November and December 2014. Adjustment date: Apr 2013 Apr 2014 Nov 2014 Dec 2014 Jan 2015 May 2015 Petrol 9.91 10.63 10.38 9.89 7.60 8.74 Diesel 9.20 10.01 9.73 9.18 6.59 7.59 Source: Energy Regulation Board press statements. Notes: Prices are expressed as kwacha per liter. Because fuel is sold in kwacha while imports are purchased in dollars, depreciation of the kwacha during the time that a cargo of fuel is being sold on the local market means that fewer dollars accrue from each liter of fuel marketed. This in turn creates a risk that the government will not have sufficient dollars to repay the import bill. This risk materialized after the ERB reduced pump prices in January 2015. ERB’s announcement on the price change noted that the exchange rate had been holding steady at around K6.50 per dollar. Within two months the kwacha had depreciated to K7.34, however, and domestic sales did not generate sufficient dollars to repay the import bill. The PTA Bank (which finances the government’s imports of crude oil) claimed in a February 2015 letter to the Ministry of Finance that the government has accumulated arrears of US$257 million. By May, the ERB projected that the extent of under-recovery during 2015 would become much higher. The ERB raised prices on May 12, citing rising world oil prices and the need for full cost recovery. In terms of U.S. dol- lars—the currency needed to repay the import bill—pump prices are essentially the same as in January, however. The dollar price of diesel rose by 2 percent while the price of petrol is 2 percent lower than the January 15 price, even though world spot prices for crude oil have increased by 30 percent during this time. More than two dozen countries have eliminated fuel subsidies during the past two years. Can Zambia join their ranks? Zambia’s policy of full cost recovery is already in place. Implementation of this policy has fallen short, especially in providing for currency depreciation. Stronger mechanisms for monitoring cost recovery, institutional coordination, and adjusting prices between shipments are necessary. A stabilization fund that houses over-recovery during kwacha appreciation and applies savings during depreciation may be necessary. Zambia could consider an alternative adjustment model used by Namibia and South Africa. That model adjusts prices monthly in response to changing world market prices rather than only when new imports are received. This added adjustment provides greater predictability for consumers and reduces the strain on government budgets. Source: Energy Regulation Board announcements and website www.erb.org.zm. that salaries were already increased substan- maize purchases in excess of the 500,000 tially in 2013–2014. Strengthening capital tonnes originally announced and well project appraisal, approval, and monitoring beyond the level necessary to ensure food could inject greater selectivity into the public security. Full implementation of the policy of investment program. As discussions in pre- cost recovery in fuel pricing is an immediate vious issues of the Zambia Economic Brief priority. The ERB raised fuel prices in May, indicated, reduced spending on farm subsi- announced its objective to “ensure that there dies would create fiscal space to expand cash is full cost recovery in the supply chain.” 7 As tranfers to the poor. Finally, enhancement of box  2 states, this price hike seems unlikely the government’s systems for cash manage- to halt the accumulation of new arrears (let ment, revenue administration, and public alone raise funds to compensate for the procurement would increase the efficiency of under-recovery of costs during the past year). government spending. Additional price increases will be necessary. It is also crucial to adhere to stated pol- One must carefully consider how to icy commitments, particularly as spending finance the deficit and manage debt. Allow- pressures will likely build as the 2016 elec- ing net new borrowing from the domestic tion approaches. In 2014, the FRA expanded bond market to grow much larger risks drives 10 up interest rates and crowds out private Low copper prices and policy uncertainty will investment. On the other hand, relying more weigh on the export sector, while the weak on global creditors exposes the government kwacha will push up prices, keeping infla- to greater currency risk. If Zambia returns to tion above target and dampening private the Eurobond market, issuing a bond with a consumption. Beginning in 2016, the econ- staggered repayment schedule would reduce omy should gradually strengthen as prices of pressure on revenue and foreign exchange copper begin to recover from their current when the bond matures. The authorities low level, mining production expands, and should begin planning now to mitigate risks inflationary pressures from currency depre- associated with repayment of the 2012 and ciation subside. 2014 Eurobonds. 8 Should the government Reflecting headwinds from low copper establish a sinking fund to save cash needed prices, predictions are that real GDP growth to redeem the bonds, roll over the debt by will remain at around 5.6  percent in 2015, issuing a new bond, or somehow combine the increasing to around 6.2  percent in 2016 two? Developing a debt management strat- and possibly approaching 7 percent in 2017. egy that balances both the costs and risks of The main driver of gradual increase in real debt is essential to addressing this and other GDP growth would be higher gross fixed challenges. capital formation, along with the resolution In the current situation, borrowing sus- of uncertainties around government min- tainably means borrowing less. Policy mak- ing policies and a rise in FDI flows. Over the ers therefore must seek ways to curtail the medium term, low commodity prices, a more growth of government spending, to direct stable exchange rate, and adequate local har- scarce public funds towards activities that vests would help contain inflationary pres- contribute more directly to poverty reduc- sures, boosting real disposable incomes. The tion and economic growth, and also seek to resulting increase in private consumption, cut down on the use of borrowed funds for added to rising copper exports, should help government consumption. Targeting cash strengthen growth in 2017 and beyond. grants to reach the poor directly is a more cost-effective means of reducing rural pov- Risks to Zambia’s economic outlook erty than fertilizer subsidies or interventions The outlook is subject to significant down- in maize markets. Approving only those pro- side risks, domestic and external. Output posed public investment projects that have growth in China that is lower than predic- a high rate of return, are closely aligned tions would weigh on demand for Zambia’s with national development priorities, and exports, further reducing copper prices, and are ready to begin implementation, both of would severely affect Zambia’s prospects. A which will enhance the development impact protracted decline in metal prices would lead of the public investment program. Finally, to a substantial drop in export revenues. A enhancing the government’s systems for cash scaling down of operations and new invest- management, revenue administration, and ments in response to the low prices and public procurement will increase the effi- persistent policy uncertainties would reduce ciency of government spending. output in the short run, and reduce growth momentum for a longer time period. Economic outlook, risks, and policy A sudden adjustment of market expecta- challenges tions to the upcoming tightening of monetary policy in the United States could adversely Medium-term outlook affect emerging and frontier markets in Sub-­ The outlook for the Zambian economy is Saharan Africa, especially in countries that underpinned by two main trends: First, the receive substantial portfolio inflows. Zambia current low price of copper, on which the is vulnerable to a certain extent, because economy depends for revenue and foreign around 12 percent of Zambian government reserves, will pressure fiscal and current securities were held by non-residents at the account balances; second, uncertainty about end of 2014, but is less vulnerable than larger the mining fiscal regime could reduce invest- emerging markets, such as South Africa or ment and production in the mining sector. Malaysia, where foreigners hold around 30 11 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA and 45  percent of government securities, framework may be necessary to prevent cur- respectively.9 However, quantitative easing rency depreciation’s constant threat of infla- in the Euro Area should contribute to con- tion. In addition, the commodity price shock tinued attractive borrowing conditions on highlights the need for Zambia to diversify its Eurobond markets, allowing frontier-market economy away from primary commodities, governments to maintain market access. But which will require the government to imple- recent episodes of capital market volatil- ment structural reforms that will remove ity suggest that countries with large macro- impediments to private sector activity and economic imbalances would face strong improve the business environment. downward pressure on the exchange rate, Large fiscal deficits and inefficient gov- and hence an increased risk of inflation, fur- ernment spending persist as sources of vul- ther constraining policy. nerability for Zambia. Strengthening the fiscal position and restoring fiscal buffers are Policy challenges necessary to increase resilience against exog- Commodity-exporting countries’ policy mak- enous shocks. Fiscal consolidation should ers face increasing challenges. In Zambia, involve a shift in spending priorities that sup- the central bank has to weigh monetary and ports both the efficiency of public expendi- exchange-rate policy measures to support tures and long-term inclusive growth. growth against those necessary to stabilize As in other countries in the region, there inflation and the kwacha. To date it has held is an urgent need in Zambia for deep struc- to its mandate of maintaining price stabil- tural reforms to ignite and sustain rapid ity. The government needs to balance the productivity growth. Rationalizing farm sub- need to preserve fiscal space amidst falling sidies and other government interventions in resource revenues with a desire to support agriculture markets can contribute to greater activity. economic diversification, trade competitive- With limited policy buffers, the gov- ness, and rural income growth. Periodic ernment has less flexibility to respond to trade bans (e.g., on maize exports and wheat lower commodity prices by adjusting public imports), market distortions whose cause is spending. Allowing the kwacha to depreci- FRA pricing and procurement policies, and ate will provide a buffer against the impact a bias towards maize in the FISP discourage of the weaker export prices. At the same private sector investment in new agricultural time, a tightening of macroeconomic policy production and food processing. and strengthening of the monetary policy 12 SECTION 2 Making Mining Work for Zambia Zambia’s rich mineral resources are an short- versus long-term costs and benefits important asset which, with a supportive arising from the sector. investment climate, can help the country This special-focus section of the Zambia achieve its economic development ambitions. Economic Brief analyzes these issues and Although the cost of extracting copper is trade-offs facing Zambia. The Brief’s objec- higher than in many other countries, Zambia tive is to stimulate public discussion about possesses some of the world’s highest-grade mining policies, not to prescribe which spe- copper deposits and was the world’s seventh cific policies the authorities should under- largest copper producer in 2014 (U.S. Geo- take. Several broad messages emerge from logical Survey [USGS] 2015). The mining the analysis: industry generates foreign exchange, gov- ernment revenue, and jobs. With strong eco- 1. Root expectations in the reality of Zambia’s nomic growth in the last decade traceable to specific conditions. Much of the copper significant investments in Zambia’s copper Zambia mines is either costly to unearth or mining sector, Zambia has reached lower– has only recently been placed in produc- middle-income status. Despite this income tion. This implies lower economic profits, growth, however, more than 60 percent of its in comparison to operations elsewhere, people live below the national poverty line. and therefore lower tax revenue than In addition, a century of mining has imposed some have been expecting. The mines environmental and public health costs on the Zambia has developed more recently need country and its people. time to mature and will become major As it looks to the future, Zambia faces taxpayers in the future. Improved capacity important choices on how to manage its to forecast would also make expectations mineral resources. Since 2000, mining com- more realistic. panies have invested around $10  billion to expand the productive capacity of Zambia’s 2. Expect taxes to grow significantly, and mines (ICMM 2012). This investment, along predictable policies to encourage further with growing world demand, boosted Zam- long-term investment and growth. Without bia’s copper annual output by 350  percent. continued investment in mine extensions Refined copper production from Zambia’s and scale economies, Zambia’s copper pro- own mines and from imports is expected duction will soon peak. As output falls, so to approach 1.5 million tonnes by 2019 but will taxes, jobs, and other economic activ- then taper off unless there is a new round ity. The design of the mining fiscal regime of investment. There is good potential to plays a leading role in facilitating invest- attract investors; however, the challenge for ment that can sustain future growth. With policymakers is to create and implement continuing and expanding supply, there tax and regulatory policies that balance the are opportunities to increase employment 13 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA and to stimulate backward linkages that total exports, the mining industry has con- are not yet in place. tributed 11 percent of GDP, and mining com- panies have paid 16 percent of the taxes and 3. Internalize environmental and public heath other revenue that the government has col- spillovers. Regulatory requirements should lected (figure 12, panel b and panel c). On internalize the environmental and social the basis of estimates from the 2012 labor costs of mining, and enforcement of cur- force survey, the mining industry accounts rent environmental standards should for 21  percent of formal private sector become stricter so that mining companies employment in Zambia.10 mitigate pollution and undertake clean-up. The mining industry also contributes to the economy through mining companies’ 4. Mining companies should play their part. procurement from firms in other parts of Performance with respect to the degree of the economy and, to a lesser extent, through environmental stewardship, provisions for downstream processing of mining output. future clean-up, and the level of economic On the basis of ICMM estimates, in 2012 the linkages has been lackluster. If mining mining industry spent around $1.8  billion companies put as much effort into tackling on goods and services that Zambia produced these issues as they have into overturning (7 percent of GDP).11 the recent royalty and VAT tax issues, Zam- The volume of annual copper production bia would be a long way towards having in Zambia grew by 350 percent between 2000 solutions to these problems. and 2013—an average of 12 percent growth each year (figure 12, panel a). Several fac- 5. Be mindful that improved capacity remains tors have made this possible. Privatization of core to the solution of both fiscal and envi- state-owned mines in the late 1990s, record- ronmental issues. Zambia has a good fis- high copper prices, and generous financial cal and legal framework but its capacity incentives opened the door to a wave of for- to operationalize many of its policies is eign investment into both existing and new weak. Without solid tax administration, mines. Nobody anticipated the increase in risk assessment, auditing, environmental copper prices that resulted following priva- monitoring, and regulatory capacity, even tization, including global commodity trad- the best-designed policies will not work. ers and mining companies. The increase in prices was accompanied by significant sup- This section of the Brief opens by review- ply expansion as mining companies invested ing how mining contributes to Zambia’s over $10 billion in new production capacity. economy, focusing on the growth of invest- The boom has been most noticeable in the ment and output in the past decade and the Northwest Province, informally named “the potential for further growth in the future. New Copperbelt” (box 3). It then turns to an analysis of the mining Along with production and prices, govern- fiscal regime, which incorporates revenue ment revenue from mining has also grown simulations using a new model developed by (figure 12, panel c). Mineral royalty collections the World Bank. In addition to revenue con- began rising around 2006 due to production, cerns, the focus section investigates the envi- prices, and higher royalty rates. Mining profit- ronmental and public health costs resulting based taxation has increased as well, but with from insufficient attention to these aspects of a longer lag because companies defer payment mining over past decades. Findings and rec- while they continue making investments. ommendations conclude the section. The privatization process was instrumen- tal in revitalizing the sector and its attendant Mining and the Zambian economy increase in output and government revenue. However, the process also separated some of Mining has grown in importance during the the mining assets from legacy environmen- past decade tal and social liabilities that were too large Mining is a key pillar of the Zambian econ- or insufficiently quantifiable to be trans- omy. During the past four years, copper has ferred to the private sector as part of the accounted for an average of 66  percent of sale process. As a result, the privatization left 14 Figure Contributions of the mining industry to the Zambian economy 12 a. Copper production and world prices have grown sharply since the 1990s Domestic production World price 1,500 10,000 1,200 8,000 Thousands of tonnes $ per tonne 900 6,000 600 4,000 300 2,000 0 0 1990 1995 2000 2005 2010 2015 2018 b. Mining makes a large and growing contribution to Zambia’s GDP and exports Share of exports Share of GDP 100 16 75 12 Percent Percent 50 8 25 4 0 0 1990 1995 2000 2005 2010 2014 c. Mining taxes and royalties now account for a large share of GRZ revenue 30 Share of domestic revenue (percent) Tax arrears paid in 2011 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 d. Mining companies also make large payments of PAYE, VAT, and other taxes 8 Company tax Mineral royalty Employment tax 6 VAT Billions of kwacha Other taxes, fees, charges 4 2 0 2011 2012 2013 2014 Sources: Panel a: Bank of Zambia, Ministry of Finance, World Bank; panel b: Bank of Zambia, Central Statistics Office; panel c: ZIPAR 2013, Zambia Revenue Authority; panel d: Zambia Revenue Authority. Notes: Price and production data for 2015–2018 are forecasts by the World Bank and Ministry of Finance; production and export data are copper only; tax arrears paid in 2011 are excluded from panel d. PAYE stands for “pay as you earn.” 15 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA the state holding many legacy liabilities in comprising the New and Old Copperbelts ZCCM-IH, but with little financial resources (box 3). Most tax revenue (panel a) and new to adequately address them. Furthermore, production (panel b) will likely accrue from as a publically traded company listed on the the operations in the New Copperbelt, whose Lusaka Stock Exchange, ZCCM-IH has had development largely resulted from the recent little incentive to address legacy liabilities commodities boom and the equitable two- beyond levels regulators enforce. tier fiscal regime. Privatization and injec- It is helpful to consider the copper min- tion of new capital extended the life of many ing sector in Zambia as two sub-sectors high-cost operations in the Old Copperbelt. Box The New Copperbelt investment boom 3 It is helpful to classify Zambia’s copper mining sector into two distinct sectors: a new set of operations in the Northwestern Province (the “New Copperbelt,” as the public sometimes refers to it), and the aging mining operations in the existing Copperbelt Province, which are the source of much economic activity and provide significant employment opportunities in the province. Largely the result of the most recent commodities boom and equitable two-tier fiscal regime, the operations in the New Copperbelt are generally open pit and use newer, less labor-intensive technologies. Because these operations were constructed more recently, they still have large capital balances to offset profits taxes, but once these balances depreciate, the potential high profitability of these operations, in particular Kansanshi, have the potential to generate significant revenue from profits-based taxes. The older mines of the existing Copperbelt Province tend to be underground mines or dump retreatment operations. They face high production costs and are generally labor intensive. They require capital on an ongoing basis to develop new openings to sustain production, and the profitability of operations is highly sensitive to changes in costs and prices. Because these mines are marginal, they sometimes accrue operating (accounting) losses that accumulate and carry forward. Because they face higher production costs and use more inputs in production, they generate less tax revenue but offer more opportunities to stimulate backward linkages. a. Most future mining revenues are expected to come from the new Copperbelt … b. … as is most production. 1,500 1,500 Tax forecsat ($ millions, nominal terms) Copper mined (thousands of tonnes) 1,000 1,000 500 500 0 0 2014 2016 2018 2020 2022 2024 2026 2028 2030 2014 2016 2018 2020 2022 2024 2026 2028 2030 c. However, the jobs are d. … as are the opportunities largely in the old Copperbelt … for backward linkages. 10,000 12,448 Operating and capital costs ($ millions, nominal terms) 7,500 5,000 2,500 44,381 0 2014 2016 2018 2020 2022 2024 2026 2028 2030 New Copperbelt Old Copperbelt Source: Panels a, b, and d: World Bank staff calculations; panel c: derived from Chamber of Mines of Zambia (2014). 16 Although these mines generate lower tax will attract partners who will develop these revenues than mines in the New Copperbelt, deep mining projects responsibly. We turn they provide more jobs (panel c) and oppor- now to analyze Zambia’s mining fiscal regime tunities for backward linkages (panel d). and how that can help stimulate future cop- per production and capture a fair share of Unlocking a new wave of mining investment the benefits for the Zambian people. and production Zambia’s copper output, including the Analysis of mining taxation processing of imported ores, is likely to The ultimate objective of a mining taxation approach 1.5  million tonnes per year by regime is to maximize the benefits that a around 2019. In the absence of new invest- country’s citizens receive from the country’s ment, production will flatten out and gradu- mineral resources. The regime’s tax instru- ally decline over time, however. Nevertheless, ments, their established rates, and the insti- there are good reasons for optimism about tutional arrangements must not discourage the potential for additional investment to the investment that is necessary to give com- unlock new increases in Zambia’s copper mercial value to Zambia’s subsoil resources production. A recent United States Geo- and that mitigates the environmental, health, logical Survey study of undiscovered copper and social costs of mining activities. The resources in the region shows a significant taxation regime must also enable the govern- quantity of undiscovered copper in Zambia ment to collect a fair share of the country’s (Zientek et al. 2014). The study estimates that mineral wealth to support national develop- 8,400,000 tonnes of undiscovered copper ment priorities. lie in the Roan arenite tract, which extends In addition to jobs, government tax rev- through the Copperbelt and Central prov- enues from mining will continue to be the inces. This undiscovered copper is in deeper most important source of benefits for the deposits, however and, when using known economy. Since mining in Zambia is capi- technologies, it will require more effort to tal- and technology- intensive, the industry discover and more capital to develop than is likely to remain an enclave in the short existing mines. As a result, exploration of the term. The mines will continue to rely heav- undiscovered copper in Zambia is unlikely if ily on imports of capital goods and other companies observe that they cannot earn a inputs. The scope for local value addition return from the already-discovered deposits. beyond smelting and refining is limited, and As the country debates how to unlock a mines will continue to sell the bulk of their new wave of copper production, it is impor- output to foreign buyers. The fiscal regime tant to note that there is a lot of variation determines the government’s revenue take in costs to extract copper across different from the mines. It also establishes the incen- mines, and that Zambian mines generally tives and disincentives a firm faces in decid- face high production costs relative to other ing how much to invest, how many workers to mines around the world. hire, what ore to mine, and so forth. A deal Mining is a long-term business that oper- that is equitable for both the country and the ates in an environment of uncertainty— investor will inevitably be more stable than uncertainty about the quality of minerals one that is too generous to either side. Know- and where they will be found, and uncer- ing what constitutes a fair deal is, however, tainty about the direction of future world enormously difficult, even when the parties prices. Governments can add to this uncer- agree to the terms. Moreover, designing a fis- tainty where policies change in an unpredict- cal regime that will achieve the anticipated able manner and without consultation. The sharing of benefits over a long-term, volatile, long-term success of Zambia’s copper min- and inherently unpredictable investment life- ing industry will involve high-cost operations cycle is immensely complex. The challenge with long lead times to extract resources that of optimally mobilizing resource revenues lie deep underground. Zambia needs to lay requires the government to strike the right the foundations for future expansion of the balance between encouraging revenue-gen- industry today by establishing a track record erating investment and capturing an appro- of stable fiscal and regulatory policies that priate share of the resulting revenues. 17 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Zambia’s mining taxation regime has development agreements with individual evolved in important ways since the govern- mines at the time of privatization that often ment privatized the mines. The authorities contained generous terms designed mainly have changed elements of the regime in to attract foreign investment. The 2008 response to changing market conditions, Mines and Minerals Act annulled these evolving public policy needs, and as the development agreements and introduced a authorities have developed experience with variable profits tax, a windfall tax, a with- regulating private businesses after the years holding tax on services, and an export duty of state ownership. This sub-section briefly on concentrates. The corporate tax rate reviews recent changes and analyzes the rose to 30 percent. Since the annulment of medium-term prospects of the new policies the development agreements, mineral roy- that will take effect in July 2015. alty rates have steadily increased—to 3 per- Important conclusions of this analysis are, cent in 2008, 6 percent in 2012, and to 8 and first, that a variety of tax instruments are 20  percent (on copper from underground necessary to collect revenue from mines that and open-cast mines, respectively) in Janu- have different cost characteristics and are ary 2015—before being revised to 9 percent at different stages in their lifecycles. A sec- in July 2015. Zambia’s mineral royalty rates ond message is that the government should have in recent years tended to exceed the build the institutional and human capacity to global norm, even before the rate jumped implement the regime effectively. temporarily to 20 percent on open-pit mines in 2015. Most major mineral producers Evolution of Zambia’s mining taxation regime charge less than 6 percent.12 In trying to strike an optimal and equi- The goals of the changes introduced in table deal between mining companies, the 2012 and January 2015 were to generate rev- government’s fiscal take, and job creation, enue to finance the government’s develop- the government of Zambia has adjusted the ment spending priorities and to respond to mining fiscal regime several times since it the widely shared view that the government privatized the mines (table 1). As world cop- had not been receiving its fair share from per prices grew unexpectedly to record-high mining taxes.12 The attempt to rely solely levels between 2004 and 2011, the govern- on the mineral royalty in the January 2015 ment increased the effective tax rate on regime reflected concerns that profits-based mining companies to capture more of the taxes are too difficult to implement effec- economic rents that these rising prices tively. A closer look suggests that the level of generated. The government negotiated revenue collected from mines, particularly Table Evolving features of Zambia’s mining fiscal regime since 1997 1 Mining fiscal regime Key features Development agreements Agreements were made between the Zambian government and each company that bought the assets of the negotiated with individual former national company ZCCM. Each development agreement contained a fiscal stability clause. mines during privatization (1997 to March 2008) The “2008 regime” The 2008 reforms passed as part of the 2008 Mines and Minerals Act ruled that the government should not (April 2008–March 2009) enter into any special agreements for the development of large-scale mining licenses; the reforms also annulled the development agreements. The Act introduced a new tax regime with a higher tax burden: it set the company income tax rate at 30 percent; it introduced a variable income tax and raised the mineral royalty rate to 3 percent from 0.6 percent; and it set the withholding tax on services at 15 percent and introduced a windfall tax. The “2009 regime” (April In response to the mining companies’ concerns about the revocation of the development agreements, the 2009–March 2012) government reversed the lower capital depreciation allowance and some other 2008 tax measures such as the windfall tax in its 2009 budget. The “2014 regime” (April The government made further reforms to the mining tax regime in its 2012 budget. The two main changes for 2012–December 2014) the mining industry were the increase of the mineral royalty rates for copper and cobalt to 6 percent, and separate treatment of hedging and operating income for income tax purposes. The “January 2015 regime” Corporate income and profits tax rates descended to zero. The government also set the mineral royalty rate at (January 2015–June 2015) 20 percent for output from open-pit mines and at 8 percent for output from underground mines. The “July 2015 regime” The government set the corporate income and profits tax rates at 30 percent and the mineral royalty rate at (announced in April 2015) 9 percent for output from all mines. Source: Zambia EITI 2014. Note: More detailed information on the tax rates and allowances applied under each regime is in table B8 in annex B. 18 through profits taxes, has been influenced carried forward each year. We believe that by a number of additional factors: the resulting model contains the best avail- • the high cost and resulting low overall able estimates of costs, financing structures, profitability of Zambia’s copper mining and production. sector The model estimates that revenue col- • the stage of the mining operations in their lected under the new tax regime will likely lifecycle (either through the large poten- double between 2014 and 2017 as production tial capital depreciation allowances [CDA] volumes rise to just over 1.6  million tonnes that accrue immediately after start-up or per year (including copper processed from through the high cost structure of the imported concentrate). Revenue collected older, underground mines in the Copper- from all instruments—royalty, company tax, belt Province) and variable profits tax—increases during • historical fiscal incentives (tax holidays, this period. Both production and govern- royalty remission, accelerated deprecia- ment revenue level off around 2018–2021 tion) granted by government to induce and then taper off at approximately $1.2 bil- investment lion per year though a continuation of reve- • the effects of the double taxation treaty nue growth is possible if one assumes further between Ireland and Zambia: few firms investment in the sector.14 Profits taxes gen- pay withholding tax on dividends from erate a smaller proportion of total fiscal non–mining-related activities13 revenue after around 2021. As discussed in • the carrying forward of large tax “assets” annex B, the model suggests that the July that resulted either from unredeemed 2015 regime generates slightly less revenue in CDA balances, purchased by companies as 2015 than the January 2015 regime, but after- a result of the structural reorganization of wards generates more revenue. As it has the Zambia’s mining sector, or from operating same profits-based tax framework but higher losses carried forward royalty rates, the new regime generates more Some of these issues relate to the stage in revenue than the 2012–2014 regime, on the the mining companies’ lifecycle. Others stem basis of current assumptions about future from historical fiscal incentives. As compa- prices.15 nies move into a tax-paying position and as The model’s forecasts are sensitive to incentives expire in the years to come, these assumptions about world prices. Figure B20 factors will become less important. in annex B shows that revenue would con- tinue to rise over the modeled period if world Revenue outlook of the July 2015 regime prices were to be 15 percent higher than the In April 2015 the President announced a current forecast rather than slowly declining, replacement of the royalty-only regime that as projected under the base case figure 13 had come into force in January 2015 with a projects. Modeling a price decline poses chal- regime that included profits taxes plus a sin- lenges. According to current projections, the gle royalty rate of 9 percent on output from price of copper is close to the short-run costs both open-cast and underground mines. To of many mines, and in some cases lies below better clarify the implications of the new a mine’s total costs, making many mines vul- tax regime, the World Bank put together a nerable to small changes in prices. forecasting model. The model incorporates Despite these caveats, however, this model information about the tax provisions the fills a gap in the analysis of Zambia’s min- government applies to each mine, along ing fiscal regime. In contrast, many fore- with detailed financial data about the larg- casts tend to extrapolate from historical data est mining companies’ cost structures as rather than base their projections on projec- they are likely to evolve over the life of each tions of costs over mines’ lifecycles. mine. Information on cost assumptions in Looking towards the future, the model the model is presented in annex B. This projects revenue to increase significantly allows the model to simulate annual output during the next several years under the July and profit margins into the future, taking 2015 fiscal regime. This increase includes into account the effects of differing levels of growing revenue collected from profits-based depreciation, capital redemption, and losses taxes, which proved disappointing in the 19 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Figure Forecast of production and revenue by instrument, 2014 –2030 13 Royalty Income tax Variable pro ts tax Withholding tax Copper production (re ned) Tax forecast ($ millions, nominal terms) 2,000 2,000 Thousands of tonnes 1,500 1,500 1,000 1,000 500 500 0 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: World Bank staff calculations. Notes: Projections for 2015 assume that the July regime is in force during the entire year. Nominal copper prices of LME-grade copper cathode used in the analysis are taken from the World Bank’s January 2015 commodity price forecast. See annex B for details. initial years after privatization for reasons production follows after the mine is commis- discussed above. Nevertheless, the growth in sioned. During the investment phase, there copper production that became possible due is job creation but no production, and there- to the boom in investment after privatization fore investors receive no cash. The employ- will begin to slow after around 2019. Along ment profile over the life of the project with the decline in production, there will normally peaks sharply during construction. be a decline in government revenue, mining At this stage, mines hire contractors because industry jobs, and foreign exchange. Produc- work is temporary and, in comparison to tion levels can increase over the long run if operations, requires specialized skills. Fol- there is a new wave of investment. We turn lowing commissioning, employment and pro- next to considerations of how Zambia’s min- duction are generally relatively stable over ing taxation regime can chart a course that the life of the mine. generates revenue for the government with- Government revenue under a fiscal regime out jeopardizing future investment. with both royalties and profits taxes also has two distinct phases: an all-royalty phase and What should a mining tax regime consider then a royalty and income tax collection for the long term? phase. As mineral royalties are derived from The size of a mine’s output, the number of the value of production, and are not linked to employees, cash returned to investors, and profitability, mineral royalty is payable from therefore the amount of government revenue the first day of operations. By comparison, all vary over the life of a mine. All will even- the profits-based tax is derived from a defini- tually decline in the absence of investment to tion of profitability, which differs from cash maintain existing mining infrastructure or flow. Under this hypothetical example, the to extend the life of the mine. The mining firm is not “profitable” for tax-paying pur- fiscal regime is important to this decision. poses because it has not yet recouped enough As in all sectors of the economy, the types of of its capital investment. Nevertheless, it gen- policy instruments, the rates at which taxes erates a flow of cash to investors. Thus, a firm are collected, their valuation base, etc., col- can be generating cash and investors can lectively establish the incentives and disin- be declaring dividends while the firm is not centives a firm faces in deciding how much to profitable or only marginally profitable from invest, how many workers to hire, what ore to a tax perspective. This difference between mine, and so forth. cash flow and profitability is common to all To illustrate this point, we first consider industries and is a feature of mining fiscal a stylized profile of a mining operation that regimes across the world. The feature is more is considering an investment to extend the apparent in mining than in some other sec- life of the mine. Any mine has at a minimum tors because of the large capital investments an initial phase of investment. A period of 20 necessary and long lead times to production PAYE tax—(in red) that peaks during the that often last several years. investment phase. These characteristics are illustrated in the Let us now turn to a case where new charts in the left column of figure 14. Cash investment extends the productive life of the flow to investors (in gray) is negative dur- mine, which the charts in the right column of ing the investment phase, rises quickly after figure 14 illustrate. A few features are imme- the commissioning of the mine, and eventu- diately noticeable. A second series of capital ally tapers off. In the bottom panel, the gov- investments is necessary in the middle of ernment collects revenue from the mineral the life of the mine, making the cash flow royalty (in teal) simultaneously with the com- to investors negative for a short period. The missioning of the mine. Profits-based tax rev- life of the mine has thereby increased, and enue (in blue) accrues only after the mining with that comes a continuation of royalty pay- firm pays off the initial investment. The gov- ments, exports, and employment. The labor ernment also collects employment tax—the profile now has two peaks, and the second Figure Stylized investment, employment, and tax profile of a mining operation 14 Hypothetical mine without extension Hypothetical mine with extension Cash ow to investors Labor pro le Tax and royalty revenue stream Royalty Tax Pay-as-you-earn 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Time Time Source: World Bank staff. 21 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA coincides with the investment for mine exten- in order to maintain profitability, holding sion. Finally, payment of income tax has been the world price and other factors constant. deferred because of the continued capital As miners preferentially extract the higher- investment. grade ore, they reduce the remaining aver- The picture of Zambia’s mining industry age grade of the ore they leave in the deposit. is naturally more complex. Mines presently Consequently, the total amount of cop- find themselves at different stages in their per available for economic extraction over lifecycles. The quality of ore varies within the life of the mine falls as the royalty rate and across mines. The cost structure of each increases. A stylized example of the poten- mine is different. As a result, the size and tim- tial distortionary impact of ad valorem royal- ing of the variables in figure 14 differ with ties on the undiscovered copper potential in each mine. In addition, the case of the hypo- Zambia is included in box 4. thetical mine is highly stylized and overly The examples of figure 14 and box 4 con- simplistic as it ignores important factors that vey two important messages. The first is that make the trade-off far more complex than a tax regime that encourages investment to what the figure depicts. Governments often extend the life of a mine delays collection of lack information from producers and thus profits-based revenue but increases the total information necessary to make long-term revenue that the government collects from decisions. Prices are volatile and unpredict- the mine over its lifetime. Given the highly able and assumptions regarding global com- capital-intensive, geographically fixed, and modity markets can significantly affect the long-term nature of the mining business, choice of optimal policy. The stylized exam- policies that introduce disincentives to capi- ple nevertheless highlights the key role of fis- tal expenditure will likely result in less invest- cal policy in determining whether a mine’s ment in, and commercial development of life will continue. Zambia’s mineral resources. The rate set for the mineral royalty is also A second message is that using both a critically important because it influences a royalty and a profits-based tax enables the firm’s decision about what grade of ore to government to collect revenue throughout extract from a mine and whether to under- the mine’s lifecycle. A mineral royalty can take new investment. High ad valorem roy- generate revenue as soon as companies com- alty rates in particular reduce the amount mission a mine. Relying solely on a royalty, of ore that can be economically produced however, requires setting the rate higher to from a mineral resource. As the royalty rate replace revenue that the government could increases, a mine operator must restrict min- have collected with other instruments, and ing to only those ores with a higher grade higher royalty rates lead companies to extract (i.e., higher percentage of copper and there- only the highest-grade ore and prematurely fore higher value per unit of rock extracted) close the mine. In addition, a flat ad valorem Potential distortionary impact of royalties on undiscovered copper potential Box in Zambia 4 World Bank analysis using the recent USGS report of the undiscovered copper potential in the Roan Tract of Zambia shows the potential distortionary nature of high mineral royalties. More details are present in table B11 in annex B. This report estimates that around 8.4 million tonnes of undiscovered copper lie in Zambia’s Roan Tract. Calculations show that the amount of copper that is profitable to mine at 20 percent mineral royalty is 21 percent lower than at a 6 percent royalty (and 24 percent lower if there is no royalty at all). At a price of $3.00/lb, setting a royalty at 20 percent increases the cut-off grade by approximately 17% to 2.62% and reduces the value of copper economically available for extraction by $7.6 billion, in comparison to setting a royalty at 6 percent. See annex B for more detail. Potential copper extraction from the Roan Tract falls as the royalty rate rises Royalty rate 0 percent 6 percent 9 percent 20 percent Cut-off grade of ore (percent Cu) 2.10% 2.23% 2.31% 2.62% Copper available above cut-off grade (millions of tonnes) 5.5 5.4 5.1 4.2 Source: World Bank staff calculations based on grade information in Zientek et al. 2014. 22 royalty does not capture more revenue for or leaching mines simultaneously. Calcula- the government during times when world tion and verification of the correct royalty prices rise and mining company profits are will require an in-depth assessment of the high. metal content of the raw ores that companies This analysis of tax policies abstracts from will likely combine in the concentrator. This real-world complexities of administering verification will be plagued with uncertainty mining taxes. These bear partial responsi- because even mining companies find it chal- bility for the lower-than-expected revenue lenging to accurately reconcile actual pro- outturn from the profits-based taxes in the duction with resource estimates (normally 2008 and 2009 regimes during a time when using mine call factors for reconciliation) world copper prices were rising quickly. We for different mining areas, all which contain turn now to the need for improved capacity their own statistical uncertainties. in Zambia’s mining taxation regime. Income tax: The administration of profits- The importance of tax administration based taxes is complicated. Causes are the capacity tax incentive schemes, offering tax holidays Effective tax administration is a challenge of varying lengths, and a suite of measures for most countries, especially in the min- that are applied to companies operating in ing sector. Aside from capacity constraints, special economic zones. Use of tax holidays which are significant, the complexity of set- for both domestic and international invest- ting taxes on mining activities adds to the ments increases the transfer (mis)pricing difficulty in effectively administering the risk. Both legislation and tax auditors’ knowl- fiscal regime. In addition, as most of the edge are necessary to identify risk points to investment into Zambia is carried out by ver- adjudicate related party transactions (espe- tically integrated multinational enterprises, cially in services, management fees, and expertise is necessary to audit related-party intellectual property assignment of cost). transactions. One general challenge is that In addition, deductions from income tax, the revenue authority may not know the tim- loss carried forward, differing depreciation ing and application of certain instruments allowances, and capital allowances compli- because these are negotiated with the min- cate the calculation and projection of profit ing authority. A number of more specific over time. implementation challenges that accompany Treaty provisions, withholding tax individual instruments follow below. schemes, and double taxation agreements also add to administrative complexity. Min- Royalties: While royalties are an essential com- ing companies seek tax efficiency on a global ponent of a mining tax regime, overemphasis scale and design corporate and financing on them and differentiation of rates by mine structures to maximize returns for share- type and between mining and processing holders. As with international tax, knowl- operations are likely to introduce unforeseen edge of treaty provisions and withholding administrative complexities. In theory, ad tax schemes are important for assessing the valorem royalties are perhaps the easiest to applicability of the domestic tax regime administer, as they are transparent and are a to multinational enterprises. Zambia’s tax function of revenue streams. Revenue author- treaty with Ireland allows companies to avoid ities can find it difficult to monitor mines’ paying withholding taxes on dividends.16 royalty payments, however, depending on the A general lack of both transparency and design of the royalty regime, e.g., on whether information for fiscal and regulatory authori- it levies the royalty on the mineral content of ties creates additional challenges for admin- underlying ores, which in turn would require istering a mining tax regime. All mining physical audits of production quantities in companies need to become more transpar- unrefined products. For example, questions ent. Transparency in the industry differs remain about the calculation and audit of the from one mining company to another. The royalty in the January 2015 all-royalty fiscal government should create the legal means regime if the same mining license operates a necessary to obtain information from com- combination of open-pit, underground, and/ panies allowing the authorities to project 23 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA fiscal revenues from the mining sector into The problems attributable to privatiza- the future. The draft Mines and Minerals Act tion, particularly separating the historical affords an excellent opportunity to effect the and environmental liabilities of the public necessary changes, which should at a mini- mining operations of ZCCM from the cur- mum require the annual reporting of long- rent operations of the private owners, are at term mine plans, costs, employment levels, the core of unattended environmental health and other relevant information in a well- risks. Neglected pollution hot spots can defined and prescribed form. increase environmental health risks through To use this information, the revenue both natural deterioration and poor devel- authorities must also possess strong abilities opment decisions.18 This part of the Zambia in financial analysis for forecasting, auditing, Economic Brief analyzes the environmen- and policymaking. It is not enough to moni- tal and health implications of the mining tor the progress of the fiscal regime; authori- industry. ties must also evaluate how the regime is likely to behave in the future under differ- Environmental impacts of mining in Zambia ent world market conditions. Furthermore, Since 2001, most of the previously state- mining has a distinctive life- cycle. The gov- owned and unprofitable copper mines have ernment therefore must understand how been revived through extensive investments revenues from Zambia’s mining sector will by new owners. Many old tailing dams have evolve in the medium to the long term as been left both unremediated and unpro- mines progress through their lifecycles. cessed by the new owners due to fluctuating copper or lead prices and low metal content. The environmental-health nexus The result has been continued environmen- In addition to balancing trade-offs across tal pollution and exposure to neighboring different tax instruments, Zambia must communities. Operating copper mines are manage the trade-off between the mining directly responsible for a number of serious sector’s contributions to exports, economic environmental impacts. We describe the growth, employment, and government rev- most important ones here. enue on the one hand, with a number of negative consequences of mining on the Air pollution: Copper smelters release sub- other: environmental damage and its cost to stantial amounts of sulfur dioxide emissions the people and the economy.17 The public into the atmosphere, which cause acid rain, health risks from mining fall disproportion- soil erosion, and crop damage. Particulate ately on the poor, and in particular its youth. matter less than 10 μm in size (PM10) origi- If the current generation of Zambians do lit- nates from smelters; a smaller amount origi- tle to permanently address these liabilities, nates from the dust that tailing dams and the financial burden will also fall on Zam- unpaved roads release into the atmosphere. bia’s children. The Environmental Council of Zambia esti- When mines were privatized in the late mated that in the early 2000s, the total of 1990s, the state-owned Zambia Consolidated sulphur dioxide emissions in Zambia was Copper Mines (ZCCM) was burdened with 346,700 tonnes/year, more than 98 percent the environmental liabilities it had accrued of which the mining industry is the source, over 70 years of mining operations in Zam- mostly the copper smelters (Environmental bia. The privatization process did not suc- Council of Zambia 2008). Areas northwest ceed in transferring the legal responsibility and west of the large Nkana and Mufulira for some of these historical environmental smelters have sulphur dioxide concentra- liabilities to new investors. In some instances tions between 500 and 1000 μg/m, which it was not even possible to quantify the exceed the Zambian guideline of 50 μg/m3 nature of environmental and public health (Lindahl 2014). liabilities. The government therefore made Over the past couple of years, some of the the strategic choice to retain a portion of existing smelters have been upgraded after the “environmental mortgage” to allow com- change of licensee or due to pressure from mercial mining and smelting operations to the Zambia Environmental Management continue. Agency (ZEMA). The 2014 upgrading of the 24 Mufulira Smelter is expected to reduce sul- concentrations of many dissolved elements in phur dioxide emissions by 97 percent. the Kafue and its tributaries. Ongoing mining activities in the Copper- Soil contamination and land degradation: When belt severely affect the waterways through they combine with moisture in the air, sul- extensive siltation. Tailing dams and waste phur dioxide emissions from the smelters dumps further enhance this siltation (Lin- convert to sulphuric acid, which damages dahl 2014). Tailing material with high cop- soils and kills vegetation downwind. These per and cobalt concentrations dominate bed emissions may also contain dust particles sediment in many places along the Kafue holding copper, nitrous oxides, and organic River. The catastrophic failure of old and acids, which can enter streams and affect unstable tailing dams is a futher risk, which aquatic fauna. Further soil contamination could cause extensive physical and ecological from mining operations, chemical and oil damage. spills may also persist, while wind-borne dust Despite the high concentrations of dis- particles (from dry tailing dams) result in solved metals in streams and heavy siltation, accumulation of metals (copper and cobalt the Copperbelt still produces potable water, and other elements) in soil. since severe pollution is mainly concentrated A century of mining resulted in high levels in hotspots. Spills from leaching plants and of soil contamination. This contamination other accidents have damaged health and continues due to ongoing operations and is well-being in neighboring communities, aggravated by closure of many old tailings however (Chingola in 2006 and Mufulira in dams. The Copperbelt districts of Kitwe, 2008). In 2006, the failure of a tailings slurry Mufulira and Chingola, and also to a lesser pipeline released highly acidic tailings into extent with Kalulushi, Chililabombwe and the Kafue River that produced high concen- Chambishi, have the highest concentrations trations of copper, manganese, and cobalt. of many elements. Surface soil samples con- The supply of drinking water supply to com- tain ten to fifty times higher concentrations munities downstream had to be shut down.20 of copper than subsurface samples in most of In another instance, following protracted liti- the Copperbelt (Lindhal 2014). Recent inci- gation, a mining company paid two thousand dents of accidental breaks in leaching tanks residents K4 million for general damages and of mining companies have resulted in over K1  million for punitive damages (Sibanda one hundred hectares of maize and vegeta- 2011). Most recently, in 2013, following com- ble crops being destroyed by sulphur dioxide plaints from farmers in the Chambishi area emissions along the Kitwe-Chingola roads on about crops that acid rain damaged with its the Copperbelt.19 sulphur dioxide fumes, one mining company had to compensate affected farmers and Water pollution and siltation: The mining oper- install online monitoring for oxides of sul- ations in the Copperbelt all lie within the phur and nitrogen.21 catchment area of the Kafue River, which provides water for domestic uses, irrigation, Pollution in food: The severe pollution in and fishing. Runoff and leakage from exist- the Kafue River is damaging aquatic ani- ing waste rock dumps and tailings dams can mal health. Several fish samples from the cause widespread negative impacts down- Kafue and various tailing dams have shown stream. The Kafue River has shown highly elevated concentrations of copper and cobalt elevated concentrations of dissolved copper compared to fish from unaffected waters and cobalt within the mining areas (Petters- upstream from the mining operations. son and Ingri 2001). Elevated concentra- When assessing metal concentrations in tions of dissolved sulfur can be traced all fish compared to guidelines values for oral the way down to the confluence with the intake, there is no immediate health risk Zambezi River. Although the contamination associated with consumption of fish from is concentrated in hotspots closer to mining the Copperbelt (Lindahl 2014). Regarding operations, secondary particles are re-sus- agriculture, however, people residing in pended and transported downstream. Most some areas in Kitwe on the Copperbelt are monitoring stations have shown elevated unable to grow backyard vegetable gardens 25 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA because the accumulation of heavy metals in that lead contamination causes immunologi- the soil and sulphur dioxide on plant leaves cal alterations in cattle blood, both in vivo leads to the risk of necrosis infection (Ncube and in vitro. Atmospheric lead pollution is a et al. 2012). major contaminator of food crops, particu- larly maize, the primary staple food crop the The legacy of lead and the human cost people often grow in their backyards (Tembo of previous mines 1993). Soils used to make adobe bricks from Zambia, and in particular the city of Kabwe, old mining areas also have the potential of has a long history of lead mining. The his- having lead levels as high as 58,900 ppm (Ike- torical mining activities led to the establish- naka et al. 2012). Finally, in Zambia, there is ment of the then Broken Hill mine and town. a cultural tradition whereby pregnant women The Kabwe Mine has experienced various ingest soil (or other substances such as dirt, changes in ownership since 1904. Over its clay, ashes, etc.), which adds to the blood lead initial life span of 88 years, the mine pro- levels and also has a secondary impact on duced approximately 1.8  million tonnes of infants. zinc, 800,000 tonnes of lead, and 64 tonnes of copper. In 1994, the mine was shut down Environmental health impacts of lead by ZCCM due to low resource prices and the Lead reduces intellectual function and exhaustion of ore reserves. increases various neurobehavioural barriers Continued and unmitigated exposure to to learning such as irritability and “distract- high levels of lead can harm health. Airborne ibility.” Literature reviews suggest that intel- exposure and direct ingestion of soil and ligence quotients (IQs) decline by 2–3 points dust are the dominant exposure pathways for every 10 µg/dL lead in early childhood. for lead with extended pathways through Additional studies have shown evidence of groundwater or surface water and irrigated lead-related intellectual deficits among chil- crops (Plumlee et  al. 2013). Studies show dren who had maximal blood lead levels less that the primary pathway of lead exposure than 7.5 μg/dL (table 2). among children in Zambia is the ingestion Investigations show that the average blood of soil and soil dust (Van Geen et al. 2012). level of children is between 60 and 120 µg/ Lesser but still significant pathways include dL. Exposure to lead has many known health the consumption of water and contaminated effects, which include neuropsychological foodstuffs. Although acute lead poisoning impacts in children and increased blood of young children is the most immediate pressure and cardiovascular disease among and severe consequence, others are also at adults, as well as chronic kidney disease, ane- risk, including older children, adult workers, mia, and gastrointestinal symptoms. pregnant women and their unborn children. Due to the long history of mining and lack Health and public services costs of remediation of the mining area follow- Exposure to environmental pollution and ing closure of the Kabwe mine, the content associated impacts on public health entail of lead in soils surrounding the mining area cumulative and long-term economic, social, is as high as 26,000 mg/kg in the most pol- and ecological costs. The public health costs luted areas. Land up to 14 km from Kabwe associated with lead exposure have been well has been found to unsuitable for agricul- documented. They range from direct eco- tural purposes (Czech Geological Survey nomic and health care costs to affected indi- 2007). A 2013 study indicated that mean viduals to the effects on provision of public concentrations of lead and cadmium in the services (Swinburn 2014). tissues of free-range chickens exceeded the maximum recommended levels for human Economic and health care costs: High lead lev- consumption. Levels in commercial broiler els can cause learning disabilities, attention chickens were lower (Yabe et al. 2013). Aver- deficit–hyperactivity disorder, mental retar- age lead concentrations in cattle from the dation, stunted growth, seizures, and coma. Kabwe area were 90.6+/-67.6 µg/kg dry These tend to reduce an individual’s cog- weight, suggesting prominent toxicological nitive abilities and lifetime earning poten- effects. Ikenaka et  al. (2012) demonstrated tial. Thus, in addition to imposing costs on 26 Table Blood lead levels in children in Kabwe, by community 2 Minimum Mean Maximum Chowa 8.9 26.1 55.0 Kasanda 10.1 34.8 79.4 Makand 14.9 45.3 87.0 Makululu 6.7 30.2 74.2 Mutwe 19.0 29.2 42.5 Railways 6.5 19.2 47.2 Riverside 14.0 34.9 72.1 Waya 6.7 30.0 62.6 Source: Estimated from the report on blood sampling in Kabwe that was conducted within the “Copperbelt Environment Project” over 2004–2009 by NewFields. Note: Values in µg/dL. the public health care system, exposure to comes an associated loss in potential tax rev- lead hampers individuals’ ability to escape enue for the government. poverty. Evidence suggests lead is the main To estimate the possible magnitude of environmental cause of damage to chil- lost earnings, the World Bank estimated the dren’s cognitive potential. However, co- expected risk of IQ losses in children less exposures to other contaminants such as than five years old in Kabwe (World Bank lead–arsenic, lead–manganese, and lead– 2015).22 Established empirical evidence indi- methylmercury can also result in synergistic cates that an individual’s IQ score is associ- toxicological effects on neurodevelopment in ated with her or his lifetime income, and early childhood. studies have further estimated that a decline of one IQ point is associated with a 1.76– Effects on other public services: Zambia’s water 2.37  percent decline in lifetime income. 23 supply and sanitation companies must spend Combining these results with assumptions funds to treat polluted water—to provide about the labor force participation rate and clean and safe water to communities living average lifetime incomes in Zambia, the esti- around the mining areas and tailings dams. mated total cost of lead exposure in Kabwe is This requirement imposes a financial burden between K250 and K580 million, as shown in on the public utilities companies, although table 3. This is equivalent to between 9 and in some cases the concentration of manga- 19 percent of Kabwe’s GDP. nese remains beyond treatable limits.24 The These estimates include the indirect excessive silting of local rivers, which kills off effects of lower educational achievement and the plant-life and fish stocks, imposes addi- workforce participation in addition to the tional responsibilities and additional costs direct effect of lower hourly wages. In addi- to water and sewerage companies in affected tion to the cost of lost income born by indi- areas around mining operations. These viduals, with every loss in lifetime earnings financial and administrative costs have not Table Estimated annual costs of lead exposure in Kabwe 3 Low estimate High estimate Mid-point estimate Source Lifetime income loss (percent of income) 1.76 2.37 2 Schwartz 1994 and Salkever 1995 Lifetime income (U.S. dollars) 45,000 60,000 52,500 Estimated based on Zambia Institute for Policy Analysis & Research 2013; WDI 2014 Total cost of estimated IQ loss: millions of U.S. dollars 47 107 77 Estimation millions of kwacha 252 579 416 Estimation percentage of GDP in Kabwe 8.5% 19.4% 13.9% Estimation Source: World Bank estimates. Notes: This estimate assumes a labor force participation rate of 80 percent of the population aged 15–64, which is the rate modeled by the ILO. The report on the 2012 labor force survey released by the Central Statistics Office estimates labor force participation rates of 74 percent in Central Province and 75 percent nationwide, suggesting a somewhat lower total cost. 27 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA been totally ascertained, and there is always internalize the environmental costs of their the additional risk of stormwater drains over- own mining operations. flowing, flooding, and all of the associated The contributions to the EPF for which challenges and costs. each developer is responsible is guided by the Mines and Minerals (Environmental) Mining environmental governance Regulation No. 66. Although calculations of A history of unsustainable mining practices the EPF contributions depend on mine clo- adds to the challenges of poverty, economic sure costs reflected in the approved environ- growth, and human development that Zam- mental impact assessments, the full value of bia faces, through increased environmental environmental liabilities measured in these degradation and the associated health dam- assessments is not currently provided by min- ages and socioeconomic implications. ing companies through the EPF. The state- Zambia has a reasonable set of environ- owned mining company ZCCM-IH is among mental acts, regulations, and institutional the companies that have failed to provide for mechanisms to mitigate, monitor, and man- their full environmental liabilities. age environmental pollution from individual A primary reason given for compliance projects. The Environmental Management failure is that the magnitude of some liabili- Act establishes ZEMA as a statutory body ties of cash deposits and bank guarantees within the Ministry of Land, Natural are too onerous for some companies and Resources and Environmental Protection are beyond the scale of local Zambia banks. and establishes the mandate to prevent and However, failure to comply with the EPF is control environmental pollution and envi- also attributable to governments’ leniency ronmental degradation. A new Environmen- in enforcing the requirements of the Act. tal Management Act, which was signed into The latter results from an underling ten- law in May 2011, provides for more stringent sion between, first, enforcement of the EPF penalties for non-compliance than the previ- requirements, which would fully internalize ous Environmental Protection and Pollution the costs of environmental degradation with Control Act. The responsibility to monitor license holders (but in some cases may force and enforce environmental, health, and closure of operations) versus, second, keep- safety aspects of mining activities lies with ing open the option to develop old mine the Mine Safety Department as empowered workings (either formally or informally) at under the Mines and Minerals Development some point in the future, which would in Act. One of the main tools for internalizing theory generate the associated income and the negative environmental costs of mining is jobs. One cause of this tension is that the full through the Environmental Protection Fund rehabilitation of mine tailings can hinder (EPF). However, the urgency for improved the economic viability of potentially feasible management of environmental health risks is tailings resources. The government is thus not yet matched by current regulatory capac- reluctant to eliminate possible opportunities ity and there are significant capacity gaps in that could generate future employment given enforcement and compliance of environmen- the right commodity prices and technology. tal regulations. Here again we see another trade-off facing the government: requiring financial provi- Fully operationalizing the Environmental Protec- sion for clean-up and risking the feasibility tion Fund: The draft Mine and Minerals Bill of ongoing producers or old mining areas, provides an opportunity to improve the effec- versus allowing ongoing environmental deg- tiveness of the EPF. The EPF is managed and radation in return for ongoing economic administered by an Environmental Protec- activity and the prospects of redevelopment tion Fund Committee consisting of both pri- of old mining areas. vate sector and government representation. It operates similarly to an escrow account: Transfer of environmental liabilities between pri- each miner’s contribution to the fund is ear- vate parties and to the state: As the law currently marked for use against environmental liabili- stands, unless private parties expressly agree in a ties on his own license areas. It is designed in binding legal agreement, environmental liabili- this manner so that mining companies fully ties are transferred along with mining licenses. 28 In some cases large, multinational mining The government has many fiscal options, companies with deep financial capacity to but the optimal choice requires a holis- address current and historical environmental tic assessment. One must strike a balance liabilities have transferred licenses to smaller between the short-term immediate rev- companies with limited financial capac- enue needs of Zambia against its long-term ity. Smaller companies are interested in the objectives. Attracting long-term investment licenses as they often see speculative value requires policy stability. Investors value sta- in reprocessing old mine tailings. This pat- bility and therefore are willing to pay for it tern poses a significant risk to the state since, though higher taxes. There is no guarantee many of these environmental liabilities are of stability, however. It must be established not provided for under the EPF. As a result, through a track record and different types should these smaller companies abandon of fiscal instruments, such as profits-based their properties and associated liabilities, taxes, which are better suited to building that the liabilities and responsibility for clean-up record. could become a burden of the state. It is important to undertake the analysis To avoid obliging the government to necessary to establish a fiscal regime that assume unfunded environmental liabilities, will be sustainable in the long run. An ideal the law should require that cash deposits and review of the fiscal regime should be inclu- bank guarantees required under the EPF sive and yield unambiguous fiscal policy. It be received in full prior to the issuance or should include consultation, have its basis in transfer of a mining license. Where a domes- robust analytics (financial models), and have tic bank guarantee is not possible to obtain production assumptions that mining compa- due to the size of liabilities, the government nies corroborate. should relax restrictions and permit fulfill- Mining companies, on the other hand, ment of this obligation through international must be more transparent. The government bank guarantees or by the parent companies should create the legal means necessary to of investment grade organizations. Where obtain information from companies and to the liability has not been provided in full, it allow its authorities to project fiscal revenues should remain with the large parent organi- from the mining sector into the future. The zation, which has the financial capacity to draft Mines and Minerals Act affords an remedy the liability. excellent opportunity to effect the neces- sary changes. Furthermore, the authorities Conclusion: making mining work for should strengthen the financial modeling Zambia capacity to utilize information accessible Similar to many other resource-rich devel- from the previous recommendation for (i) oping countries, Zambia faces several trade- auditing, (ii) forecasting, and (iii) policy-set- offs in setting its mining fiscal regime and ting purposes. mitigating the negative environmental and Unsustainable mining practices have health effects of mining. Some trade-offs added to Zambia’s challenges of poverty, involve the optimal extraction of the nation’s economic growth and human development, finite sub-soil wealth, while others relate to through increased environmental degrada- an issue of fiscal receipts today versus tomor- tion and the associated health damages and row, or creating the incentive for mines to socioeconomic consequences. mitigate environmental spillovers today ver- In accordance with global good practice, sus paying for clean-up and suffering poten- mining companies must fully internalize the tial lost incomes in the future. In all cases environmental and social costs of their oper- the decision boils down to optimizing the ations. The draft Mine and Minerals Bill pro- social value of mining to Zambians over the vides a significant and timely opportunity to long term. Some of this is intuitive, but the improve the effectiveness of one of the gov- trade-offs and process for decision making ernment’s key instruments for doing so, the are surprisingly complex—especially when Environmental Protection Fund (EPF). considering that future generations of Zam- Zambia’s environmental liabilities are bians do not yet have a voice with which to large. In some cases large, multinational min- influence the debate. ing companies that possess deep financial 29 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA capacity have transferred licenses and associ- lead in offering solutions. Their participa- ated liabilities to smaller companies with lim- tion in environmental stewardship, includ- ited financial capacity. To protect the state ing providing financial resources for future from having to assume these unfunded envi- clean-up, and in establishing linkages to ronmental liabilities, the law should require Zambian inputs suppliers has been lacklus- that compliance with the EPF become a pre- ter. In general the large mining companies requisite to the issuance or transfer of min- have capacity and should apply it to maintain eral rights. their social license to operate. If they refuse Finally, mining companies must do their to, they risk government intervention to set part. In some instances they should take the this policy trajectory for them. 30 ANNEX A Economic Data Table Growth by main sectors, 2000 –14 A4 (percent, unless otherwise indicated) Average annual Contribution growth 2014 to growth 2005–2010 2011 2012 2013 Preliminary in 2014 Primary sector 7.6 0.6 1.7 –0.6 –1.0 –0.2 Agriculture, forestry, and fishing –1.8 8.0 6.8 –7.4 6.5 0.6 Mining and quarrying 20.8 –5.2 –2.7 5.9 –7.2 –0.7 Secondary sector 5.8 8.5 10.3 8.4 6.2 1.4 Manufacturing 4.6 8.0 7.2 4.5 5.2 0.4 Electricity, gas, and water 2.8 8.2 4.1 5.9 2.3 0.0 Construction 7.3 8.9 13.6 11.4 7.5 0.9 Tertiary sector 9.8 7.8 7.1 8.6 8.1 4.5 Wholesale and retail trade 7.0 7.5 4.0 5.2 6.8 1.2 Restaurants, bars, and hotels 3.8 7.9 –2.6 2.2 6.9 0.1 Transport, storage, and communications 24.1 13.7 12.8 12.4 13.1 1.2 Financial institutions and insurance –0.3 4.9 12.0 12.2 13.2 0.6 Real estate and business services 8.0 2.9 3.7 3.1 3.1 0.2 Community, social, personal, and other 14.5 8.4 9.4 12.8 7.4 1.2 GDP 8.7 6.3 6.7 6.7 6.0 GDP less mining 7.4 8.0 8.0 6.8 7.5 Memorandum items: GDP at current market prices 115,352 128,370 144,722 166,480 GNI at market prices (millions of current kwacha) 109,727 126,654 138,510 157,139 Sources: Government authorities, IMF, and World Bank staff estimates. 31 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Table Government fiscal operations A5 (percent of GDP) 2014 2012 2013 2015 2016 2017 Actual Actual Budget Prelim. Budget MTEF MTEF Total revenues and grants 19.1 18.4 18.6 19.3 18.8 17.8 18.3 Tax revenues 15.0 14.7 14.7 15.8 13.4 12.8 13.2 Income taxes 8.0 6.8 6.5 7.0 6.2 6.2 6.3 Value-added taxes 3.7 5.1 4.9 5.8 3.5 3.6 3.9 Excise and customs duties 3.3 2.9 3.4 2.9 3.7 3.0 3.1 Non-tax revenues 2.4 2.2 3.1 2.7 4.7 4.3 4.3 of which (o/w) Mineral royalty 1.1 1.2 1.3 1.0 3.1 3.4 3.6 Grants 1.7 1.5 1.2 0.8 0.6 0.7 0.7 Expenditures 22.3 25.1 24.2 24.8 23.4 23.1 22.8 Expense 16.2 18.8 18.3 19.4 17.8 18.1 17.9 Wages and salaries 7.3 8.2 9.3 9.6 8.8 8.9 8.5 Goods and services 3.6 3.3 3.5 3.1 3.5 3.1 2.9 Interest payments 1.4 1.5 2.0 2.3 1.8 2.7 2.9 Grants, subsidies, transfers 4.2 6.2 3.6 4.5 3.8 3.5 3.7 o/w Fertilizer subsidies 0.7 0.8 0.3 0.9 0.7 0.5 0.5 o/w Strategic food reserve 0.2 1.6 0.6 0.9 0.5 0.5 0.5 o/w Fuel subsidy 0.7 1.3 0.0 0.2 0.0 0.0 0.0 Acquisition of nonfinancial assets 6.2 6.3 5.9 5.4 5.6 5.0 5.0 Overall balance (cash) –2.9 –6.5 –5.2 –6.0 –4.6 –5.3 –4.6 Financing 2.9 6.5 5.2 6.0 4.6 5.3 4.6 External (net) 3.7 0.4 1.1 5.3 2.9 3.5 2.8 Domestic (net) –0.8 6.1 4.1 0.6 1.6 1.8 1.7 Sources: Government authorities, IMF, World Bank. Note: 2015 figures are based on the approved budget; 2016 and onwards are from the Medium-Term Expenditure Framework (MTEF). Table Balance of payments, 2009–14 A6 (millions of U.S. dollars, unless otherwise indicated) 2014 2009 2010 2011 2012 2013 Preliminary Current account 714 1,377 958 1,248 –218 –401 Merchandise trade balance 958 2,774 2,299 1,595 1,648 1,625 Goods exports 4,372 7,483 8,754 9,521 10,843 10,220 Copper 3,179 5,768 6,660 6,294 6,911 7,619 Nontraditional exports 953 1,260 1,690 2,852 3,558 2,272 Goods imports 3,413 4,710 6,454 7,926 9,195 8,595 Petroleum 536 618 530 931 1,083 1,421 Services trade balance –143 –317 –428 –344 –1,058 –794 Balance on primary and secondary income –101 –1,080 –913 –3 –808 –1,233 Capital account 237 150 151 223 278 51 Financial account 601 1,564 970 1,268 277 –698 FDI and portfolio investment inflows 350 350 350 350 350 350 Overall balance of payments 342 –65 109 171 –247 331 Memorandum items Current account (percent of GDP) 4.7 6.8 4.0 5.0 –0.8 –1.5 Gross international reserves 1,758 1,896 2,167 3,044 2,684 3,078 in months of prospective imports 3.7 3.0 2.8 3.3 3.1 3.8 GDP (millions of current U.S. dollars) 15,323 20,265 23,725 24,956 26,865 27,029 Sources: Bank of Zambia, Central Statistics Office, IMF, World Bank. 32 ANNEX B Mining Mining sector employment Table Direct and contract employment by operation B7 Direct Contract Other employees labor (expansion Operation Ownership (as of 2014) (2014) (2014) project) Total Mopani First Quantum 16.9%, Glencore 73.1%, ZCCM-IH 10% 10,000 10,000 20,000 Konkola Vedanta 79.4%, ZCCM-IH 20.6% 7,000 9,000 16,000 Lumwana Barrick Gold 100% 1,882 2,054 3,936 Kansanshi First Quantum 80%, ZCCM-IH 20% 4,781 3,731 5,407 13,919 Albidon 63 63 Lubambe VALE 40%, Africa Rainbow Resources 40%, ZCCM-IH 20% 1,200 1,000 2,200 Chibuluma Jinchuan Group 90%, ZCCM-IH 10% 602 345 947 Chambishi Metals CNMC 85%, ZCCM-IH 15% 741 147 888 Chambishi Copper Smelter NMC 60%, Yunnan Copper Group 40% 1,600 400 2,000 NFCA CNMC 85%, ZCCM-IH 15% 1,064 1,219 2,283 Total 28,933 27,896 5,407 62,236 Source: Zambia Chamber of Mines (Sikamo 2014), CNMC 2012, ZCCM-IH 2014 website, Wood Mackenzie 2014 (cited in Sikamo 2014). 33 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Elements of Zambia’s mining fiscal regime Table Features of mining taxes, 1997–2015 B8 Development agreement 2008 2009 2012–end 2014 January 2015 Corporate tax rate 25% 30% 30% 30% 30% on tolling income and (% of the profit base) processing of 3rd party ores. 0% on mining activities or processing of own ores. Variable Profit Tax in effect No Yes (if taxable Yes (if taxable Yes (if taxable No profits / sale profits / sale profits / sale revenue > 8%) revenue > 8%) revenue > 8%) Hedging activity considered part Yes No (30%) Yes No (35%) No of the mining business (rate) Capital depreciation allowance 100% 25% 100% 25% (from 25% (% of annual capital expenditure) January 2013) Loss carry forward 15 to 20 years 10 years 10 years 10 years 10 years (maximum years) (depending on company) Allowable debt-to-equity ratio 2:1 3:1 2:1 2:1 2:1 Mineral royalty (base metals) 0.6% 3% 3% 6% 8% underground mines; Mineral royalty (precious metals) N/A 5% 5% 6% 20% open-pit mines Mineral royalty (gemstones) N/A 5% 5% 6% Windfall tax No Yes No No No Customs duty Exempt in most Rebate Rebate Rebate Rebate cases Export duty on copper and cobalt No 15% (but with 15% (but with 10% (but with 10% (but with concentrates some waivers) some waivers) some waivers) some waivers) Export duty on all other N/A No No 10% 10% unprocessed or semi-processed mineral ores Source: ZEITI 2014. Table Mineral taxation rates around the world B9 Country Royalty rate Royalty base Corporate income tax rate Argentina 3% Net earnings 35% Australia (NSW) 4% Ex-mine value 30% Australia (NT) 18% Net value of mineral Canada (BC) 15% 2% net current proceeds + 13% net revenue Federal rate 18% in 2010, 16.5% in 2011 Canada (Sask.) 5/10% Net profits based on unit sales (B.C. 10.5% in 2010, 10% in 2011; Sask. 10%) Chile 0–5% Total sales, varies by volume 20% First Category Tax + Global Complementary + Additional tax on nonresidents China 2% + Rmb 7/tonne Ad valorem royalty + per unit charge 25% DRC 2% Net sales value 40%; 30% for mining companies Ghana 5% Gross sales 35% Indonesia 4% Net sales 25% Kazakhstan 5.7% Mineral Extraction Tax based on revenue 20%; branch profits of 15% Mexico None None 30% Mongolia 5% (base rate) Sales value 10% up to MNT 3 billion; 25% thereafter Peru 1–3% Gross sales 30% Russia 8% Value of mineral resources 20% South Africa Unrefined: 0.5+(EBIT/(gross sales*9))*100, max 7% EBIT (Earnings before income taxes and gross sales) 28%; branch profits tax of 33% Refined: 0.5+(EBIT/(gross sales*12.5))*100, max 5% US (Arizona) At least 2% Gross value 15–35% on residents/ 30% branch profits tax (Ariz. US (Nevada) Up to 5% Net proceeds 6.97%, Nev.–no tax) Tanzania 4% Gross sales 30% Zambia Up until end 2014: 6%. Between January to June 2015: Gross value 30% for mining companies + 0–15% variable profits underground 8%; 20%. From July 2015: 9%. tax; 30% for toll treating Source: Derived from own sources, Conrad (2012), and Ernst and Young (2014). 34 Mineral revenue forecasts administration and general expenses; To better understand the tax situation in concentrate freight; smelting and smelter Zambia’s copper mining sector, the World general and administrative costs; market- Bank has undertaken a preliminary analysis ing costs. of Zambia’s mining fiscal regime using infor- • Production cost (C2) includes all of net mation for five companies operating in Zam- direct costs (C1) plus, if applicable, depre- bia and subsidiaries under their control: First ciation, depletion, and amortization. Quantum Minerals Ltd. (“FQM”), Vedanta • Fully Allocated Cost (C3) include all of Resources Plc (“Vedanta”), China Nonfer- production cost (C2) plus indirect costs rous Mining Corporation Ltd. (“CNMC”), such as corporate overhead research and Glencore, and Barrick Gold. The models are exploration, royalties and “front-end” believed to contain the best publicly available taxes (excluding income and profit- estimates of costs, financing structures, and related taxes), and net interest charges production. including short-term and long-term loans and corporate bonds. Tax and cost assumptions of the model The relative sizes of these different cost Tax and cost assumptions used in the model components vary from mine to mine. This are summarized in table B10. The “C1” and has implications for profits tax collection “C3” costs shown in the table can be inter- under different rules about which costs can preted as short- and long-run costs, respec- and cannot be deducted. tively. They are the US$/lb cash costs of Also of note is that short-run costs lie refined copper including the benefit of by- above the currently projected long-run product production on a “paid copper” basis. world price. A firm’s real-world decision • Net Direct cash cost (C1) includes the whether to open or close a mine is based cash cost incurred at each processing on considerations not easily captured in a stage to delivery to market, less net by- simple model. Consider, for example, that product credits if any. That is, mining, this model considers only mines in Zam- ore, freight, and milling costs; mine-site bia, whereas an international company will Table Summary of tax status and cost positioning by company B10 Controlling (parent) mining company FQM Vedanta CNMC Glencore Barrick Gold Mining operations Kansanshi, Sentinel Konkola Copper Mines Mopani Copper Chambishi (Main, Lumwana Mine (KCM): Konkola, West, & SW); Mines (MCM): Nkana; Nchanga, and Mufulira Mine, Luanshya (Baluba Nampundwe. concentrator, smelter, Center, East, North, and South and and copper refinery in Zambia. Muliashi North). Type of activities Open-pit mining, Underground and Underground and Underground mining, Open-pit mine and undertaken concentrator, and open-pit mining (at smelting. open-pit mining; concentrator. future smelting Nchanga); various concentrating, operations. smelting processing smelting, and refinery operations. operations. Cost positioning Mid costs / mid High costs / low Mid to high costs Mid to high cost / Low High cost, low (C1 & C3). profitability: profitability: / Mid to low to mid profitability profitability: C1:$1.6–-$2.04/lb C1:~$2.65/lb profitability: C1: ~$1.84–$2.17/lb C1: $2.08/lb C3:$2.24–$2.73/lb C3: ~$3.55/lb C1: ~$1.90–$2.90/lb C3: ~$2.95/lb C3: $2.76–$3.23/lb C3: ~$2.81–$3.44/lb Estimated effective 66% (2014); 57% (2014); 44% (2014); 52% (2014); 47% (2014); tax rates 71% (avg. 2014–2019) 64% (avg. 2014–2019) 34% (avg. 2014–2019) 76% (avg. 2014–2019) 100% (avg. 2014– 2019) Summary of specific Large tax assets Large historical tax Beneficiary of tax High cost structure, High cost structure. tax issue from pre-production assets carried forward. holidays and royalty ongoing capital New investments to investments. No New investments in rebate. No withholding expenditure, and optimise mine results withholding tax mine life extension. tax payable. capital depreciation in capital depreciation payable. High-cost and low- allowances. allowances. profit operations. ZCCM-IH shareholding 20% in Kansanshi. 20.6% in KCM. 20% in Luanshya, 10% in MCM. 0%. ZCCM-IH sold 10% in Chambishi its shares in Equinox Metals Plc, and 15% as part of Barrick’s in NFCA. acquisition in 2011. Source: World Bank 35 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Figure Forecasts total fiscal take by instrument under the 2014 fiscal regime B15 Royalty Income tax Variable pro ts tax Withholding tax Copper production (re ned) Tax forecast ($ millions, nominal terms) 2,000 2,000 Thousands of tonnes 1,500 1,500 1,000 1,000 500 500 0 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Note: Nominal copper prices of LME grade copper cathode used in the analysis are taken from the World Bank’s January 2015 edition of Commodity Markets forecast. “Copper production” refers to refined copper and includes imports of concentrates from the DRC. Models are based on company forecasts for five mining companies with operations in Zambia: First Quantum (FQM); Vedanta; China Nonferrous Mining Corporation (CNMC); Glencore; and Barrick Gold. These five companies account for more than 90% of Zambia’s copper production. Figure Forecasts of total fiscal take by instrument under the January 2015 fiscal regime B16 Royalty Income tax Variable pro ts tax Withholding tax Copper production (net basis) Tax forecast ($ millions, nominal terms) 2,000 2,000 Thousands of tonnes 1,500 1,500 1,000 1,000 500 500 0 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Note: Nominal copper prices of LME-grade copper cathode used in the analysis are taken from the World Bank’s January 2015 edition of Commodity Markets forecast. “Copper production” refers to refined copper and includes imports of concentrates from the DRC. Models are based on company forecasts for five mining companies with operations in Zambia: First Quantum (FQM); Vedanta; China Nonferrous Mining Corporation (CNMC); Glencore; and Barrick Gold. These five companies account for more than 90% of Zambia’s copper production. take into account conditions in its opera- by instrument under the 2012–2014 regime tions around the world when making a deci- and the January 2015 regimes under the cur- sion about a particular mine it operates in rent assumptions about future world copper Zambia. prices. Copper output includes production using concentrates imported from the Demo- Copper price assumptions cratic Republic of Congo as well as domestic The model assumes the following world price production. of copper for 2014 through 2020. The price Several points are worth noting. Revenue increases by approximately 0.45 percent per from the company tax and variable profits year after 2020. We draw these estimates tax would have grown steadily had the 2014 from the World Bank’s January 2015 com- regime remained in place, based on the modity price forecasts. price and cost assumptions in the model. Total production is lower under the Janu- 2014 2015 2016 2017 2018 2019 2020 ary 2015 regime of high royalties than under 6,863 6,500 6,529 6,559 6,589 6,618 6,648 the 2014 regime with both profits taxes and royalties, but the total revenue collected is Revenue forecasts of the model higher in the short run. Finally, the model The figures below show the model’s forecast suggests that revenue collected under the of production levels and revenue collection July 2015 regime is higher than under either 36 of the previous two regimes from 2016 until copper sulfide minerals that form strat- around 2027. abound to stratiform disseminations in sedi- As a sensitivity analysis, an alternate sce- mentary rocks. The concentration of sulfide nario where world prices are 15  percent minerals approximately conforms to strati- higher over 2015–2030 than are currently fication of the host rocks. Subtypes of sedi- forecast was also modeled. Revenue collected ment-hosted stratabound copper deposits under the royalty-only regime flattens out are distinguished by host lithology and the around 2019, while revenue from the regimes nature of organic material in the sedimen- using a combination of profits taxes and roy- tary strata. In Zambia, two subtypes are rec- alties continues to increase. Modeling a sce- ognized as the deposits in the Ore Shale and nario where world prices are 15 percent lower the Roan Arenite parts of the Roan Group. proved challenging because this would entail The following analysis of undiscovered the world price falling below the break-even copper is limited to the Roan Arenite for- price implied by the cost assumptions used in mation, which the USGS report estimates the model for a number of mines. contains approximately 8.4  million tonnes of undiscovered copper. World Bank calcu- The potential impact of royalties on lations in table B11 show that, before esti- the Roan Tract mates for capital costs and with estimates The U.S. Geological Survey (USGS) recently of operations costs for Zambia’s existing assessed undiscovered resources in sediment- underground mines, approximately 5.5 mil- hosted stratabound copper deposits in the lion tonnes of copper could cover operating Roan Group in the Katanga Basin, Demo- costs when the royalty is set at 0 percent. Con- cratic Republic of the Congo and Zambia versely, the amount of copper that is profit- (Zientek et al. 2014). The part in Zambia is able to mine at a 20 percent mineral royalty named the Zambian Copperbelt. The Roan is 21 percent lower than at a 6 percent royalty Group contains the world’s greatest concen- and 24 percent lower than if there is no roy- tration of copper found in sediment-hosted alty at all. At a price of $3.00/lb, setting a roy- stratabound copper deposits—about 150 mil- alty at 20 percent increases the cut-off grade lion tonnes of copper—the undiscovered by approximately 17% to 2.62% and reduces copper in the Copperbelt was estimated to be the value of copper extracted from the mine slightly more. Sediment-hosted stratabound by $7.6 billion compared to setting the roy- copper deposits consist of fine-grained, alty at 6 percent. 37 ZAMBIA ECONOMIC BRIEF—MAKING MINING WORK FOR ZAMBIA Figure Comparison of future revenue by regime under current price projections B17 1,600 Total taxes and royalties ($ millions) 1,400 1,200 1,000 800 2014 scal regime January 2015 scal regime July 2015 scal regime 600 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Note: Models are based on company forecasts for five mining companies with operations in Zambia: First Quantum (FQM); Vedanta; China Nonferrous Mining Corporation (CNMC); Glencore; and Barrick Gold. These five companies account for more than 90% of Zambia’s copper production. Figure Comparison of future revenue by regime if prices rise B18 3,000 Total taxes and royalties ($ millions) 2,500 2,000 1,500 1,000 2014 scal regime January 2015 scal regime July 2015 scal regime 500 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Note: Under a base case price +15% scenario and royalty of 9%, all mines remain profitable and so the “with” and “without closure” profiles of the fiscal take are exactly the same. Models are based on company forecasts for five mining companies with operations in Zambia: First Quantum (FQM); Vedanta; China Nonferrous Mining Corporation (CNMC); Glencore; and Barrick Gold. These five companies account for more than 90% of Zambia’s copper production. 38 Table Impact of high royalties on undiscovered copper potential in Roan Tract B11 Assumptions (derived from Wood Mackenzie (cited in Sikamo 2014), Zientek et al. 2014, ARM 2014) C3 cost C3 cost C3 cost Underground mines ($/lb Cu) ($/t Cu) grade % (t mined/t Cu) ($/t milled) Chibuluma 2.18 4,806 4.02% 24.88 193.20 Mufulira 2.95 6,504 2.16% 46.30 140.48 Nkana 2.96 6,526 1.88% 53.19 122.68 Chambishi 3.34 7,363 1.80% 55.56 132.54 Baluba RLE Feed 3.44 7,584 1.50% 66.67 113.76 Konkola 3.55 7,826 1.40% 71.43 109.57 Lubambe 3.57 7,870 2.02% 49.50 158.98 Average 3.14 6,925.66 2.11% 52.50 138.75 0% royalty 6% royalty 9% royalty 20% royalty Total cost ($/t treated) 138.75 138.75 138.75 138.75 Cut-off grade (COG) %Cu 2.10% 2.23% 2.31% 2.62% Total cost ($/t Cu) 6,614 6,217 6,019 5,291 Total cost ($/lb Cu) 3.00 2.82 2.73 2.40 Price ($/lb Cu) 3.00 3.00 3.00 3.00 Royalty (%, gross) 0% 6% 9% 20% Net Price ($/lb Cu) 3.00 2.82 2.73 2.40 Price–cost (break-even) 0.00 0.00 0.00 0.00 Proportion of undiscovered copper above grade 65% 64% 61% 50% Tonnes of undiscovered Cu above cut-off grade (mn) 5,500,000 5,350,000 5,100,000 4,200,000 Copper difference (mn lbs) (from 0% royalty) –331 –882 –2,866 Value difference (mn $) (from 0% royalty) –992 –2,645 –8,598 Copper difference (mn lbs) (from 6% royalty) –551 –2,535 Value difference (mn $) (from 6% royalty) –1,653 –7,605 Source: World Bank staff calculations using data derived from USGS (Zientek et al. 2014). 39 Notes 1. This section draws on World Bank, Afri- 2  percent. See table B7 in annex B for ca’s Pulse, vol. 11 (April 2015). http:// employment at the major mines in 2014. w w w.worldba nk.org/content/d a m/ 11. Services make up almost all of this Worldbank/document/Africa/Report/ amount—ICMM estimates that mines Africas-Pulse-brochure_Vol11.pdf. spent only $87  million on goods that 2. World Bank, Global Economic Prospects firms in Zambia manufactured. The (January 2015). mines’ total procurement was $3.75 bil- 3. Spreads are measured as the difference lion. This sum includes goods and ser- between the yield on a country’s sover- vices that mines imported directly from eign international bonds and on the ten- abroad, goods manufactured abroad but year U.S. government bonds. purchased through Zambian distribu- 4. This section draws on World Bank, Africa tors, and goods and services that were Pulse, vol. 11 (April 2015). produced/provided in Zambia. 5. The Energy Regulation Board raised 12. The speech tabling the FY2012 budget pump prices in May by 15  percent to presented the higher taxes on mining as reflect rising world oil prices and cur- one means to finance the newly elected rency depreciation. Patriotic Front government’s pro-poor 6. The partial resolution of the dispute development agenda. The FY2015 bud- over VAT refund claims is discussed in get speech motivates the January 2015 more detail below in box 1. regime as necessary to finance public 7. ERB press statement, May 12, 2015. expenditure needs and, more generally, 8. Eurobonds typically require repayment to ensure that the government receives its in a single installment. The Ministry of fair share of benefits from the industry. Finance’s June 2014 debt sustainability 13. Companies that hold mining licenses do analysis projects that the ratio of debt not pay withholding taxes on dividends. service payments to government rev- Those that do not hold large-scale min- enue could rise to uncomfortably high ing licenses and do not carry out min- levels in 2022 and 2024, when Zambia’s ing activities (i.e., smelting, refining, or two Eurobonds come due (Ministry of technical services activities) must pay Finance 2014). the usual corporate tax at 35 percent per 9. Bank of Zambia, Monetary Policy State- annum. They must also pay a withhold- ment, February 12, 2015; Credit Suisse, ing tax at a rate of 15  percent on divi- Emerging Markets: Non-Residents’ dends, rentals, royalties, bank interest, Holdings in Local Currency Govern- and management and consultancy fees. ment Bonds (November 7, 2014). 14. The model aims to simulate the evolu- 10. The industry’s share of total employ- tion of revenue over the medium-term. ment, formal and informal, is around It makes no assumption about mines’ 40 major new investments in productive water, or health hazards, relocation, capacity beyond what companies had alteration of the social structure, etc. already planned at the end of 2014. 18. For example, due to poor maintenance, 15. The basis of this conclusion is the residential encroachment by tailing assumption that no mines close. The dams in Kitwe, or permitting residential modeling for mine closures is crude. development on known lead-contami- Real-world decisions about whether to nated land in Kabwe. open and close mines are more complex 19. Lusaka Times, “Sulphur dioxide emitted and are difficult to capture effectively in from smelter destroys crops,” January 16, a model of this nature. 2013. 16. As highlighted by CNMC (2012): “Zam- 20. World Information Service on Energy, bian subsidiaries are entitled freely to Nchanga [a mine], Chingola [city in repatriate to Ireland any dividends and Zambia’s Copperbelt]. any other distributions subject to Zam- 21. Lusaka Times, “Sulphur dioxide emitted bian withholding tax deductions cur- from smelter destroys crops,” January 16, rently at the rate of 15 percent. However, 2013. in the opinion of our Zambian counsel, 22. The analysis uses data collected on blood pursuant to the Convention between the lead levels in Kabwe and findings from Republic of Zambia and Ireland for the international research into neuropsy- Avoidance of Double Taxation and the chological impairment in children from Prevention of Fiscal Evasion with respect lead exposure, measured as IQ losses. to Tax on Income, distribution of divi- 23. World Bank calculations: The low and dends to CNMH, an investment holding high bounds reflect the estimated loss of company incorporated under the laws of income in Salkever 1995, weighted by the the Republic of Ireland, from its Zam- labor force participation rates in Zam- bian subsidiaries are exempt from such bia. See also Schwartz 1994. withholding tax.” 24. National Water Supply and Sanitation 17. These can occur in the form of land Council, Zambia, Annual Report, 2010. degradation, contamination of land and 41 References Attina, T., and L. Trasande. 2013. Economic Dobbs, Richard, Jeremy Oppenheim, Costs of Childhood Lead Exposure in Low- Adam Kendall, Fraser Thompson, Mar- and Middle-Income Countries. Environmen- tin Bratt, and Fransje van der Marel. tal Health Perspectives 121(9): 1097–1102. 2013. Reverse the Curse: Maximizing the Accessible at http://ehp.niehs.nih.gov/wp- Potential of Resource-Driven Economies. content/uploads/121/9/ehp.1206424.pdf. McKinsey Global Institute. 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