Role of IFIs in The Extractive Sector in Zambia

The Role OI International Financial Institutions (IFIs) In The Extractive Sector In Zambia
ISBN NO.978-0-7974-4607-6
AFRODAD June 2011
AIrican Forum and Network on Debt and Development
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The role oI International Financial Institutions (IFIs) in the extractive sector in Zambia
Contents
2
Contents......................................................................................................................................2
Acknowledgements.....................................................................................................................4
List oI Abbreviations..................................................................................................................5
PreIace........................................................................................................................................7
Chapter One..............................................................................................................................10
1.0 Introduction.........................................................................................................................10
Chapter Two..............................................................................................................................12
2.0 The International Financial Institutions and Extractive Industries.....................................12
Chapter Three............................................................................................................................15
3.0 Mining in Zambia - History and Minerals..........................................................................15
3.1 History.................................................................................................................................15
3.2 Minerals..............................................................................................................................16
3.2.1 Emeralds..........................................................................................................................17
3.2.2 Amethyst..........................................................................................................................17
3.2.3 Manganese.......................................................................................................................18
3.2.4 Uranium oxide.................................................................................................................18
3.2.5 Nickel...............................................................................................................................18
3.2.6 Copper and Cobalt...........................................................................................................18
3.3 Forest..................................................................................................................................19
Chapter Four.............................................................................................................................20
4.0 The inter-linkage oI National Development Strategy and the Extractive Sectors..............20
Chapter Five.............................................................................................................................23
5.0 Scope oI the main IFIs and their activities.........................................................................23
5.1 Resources-Funding.............................................................................................................23
5.2 Project Financing................................................................................................................24
5.3 Membership oI the Extractive Industry Transparency Initiative (EITI).............................29
5.4 Technical Assistance...........................................................................................................35
Concessional Royalty Ior Large Scale Mining.........................................................................35
5.5 Moral Support....................................,,,,,,,,.........................................................................31
Chapter Six...............................................................................................................................34
6.0 Aid Ilows and the impact on the extractive sector..............................................................34
Chapter Seven...........................................................................................................................39
7.0 The regulatory environment and tax revenue in the extractive sector................................39
Company Income Tax Deductions............................................................................................41
8.0 Contribution oI extractive sector to poverty reduction and economic growth...................44
8.1 Poverty.......................................................................................,........................................44
ShiIts in Poverty by Gender oI Household Head, 1996 - 2006................................................45
8.2 Growth and Poverty............................................................................................................46
8.3 Indebtedness and activities in the extractive sector............................................................46
Chapter Nine.............................................................................................................................48
9.0 Recommendations ..............................................................................................................48
3
9.1 Recommendations...............................................................................................................48
9.1.1 International Financial institutions..................................................................................48
9.2 Technical Assistance...........................................................................................................48
9.3 Ownership...........................................................................................................................48
9.4 Supply constraints...............................................................................................................49
9.5 Equity..................................................................................................................................49
9.6 Value addition.....................................................................................................................49
9.7 Tax Payments......................................................................................................................49
10 Conclusions......................................................................................,,..................................51
ReIerence..................................................................................................................................52
Acknowledgments
4
AFRODAD would like to give special thanks to Edmond Kangamugazi Ior investing
considerable time on this research project.
We would also like to thank all our AFRODAD staII Ior contributing meaningIully to this
research. Many thanks goes to Nchimunya Siakanomba, Ingrid Naess-Holm, Jonathan
Zinyandu, Collins Magalasi and Fanwell Bokosi. By publishing this report, AFRODAD hopes
that it will be useIul and that it will make positive contribution to ensuring transparency and
accountability Irom all actors in the extractive sector oI Zambia. Special Thanks goes to
Norwegian Church Aid Ior Iunding this research study.
5
AAC
AIDB
AFRODAD
BoP
CDC
CEP
CO2
CoP
CPS
DAC
DFID
DPO
EC
EDF
EFA
EITI
EMIS
EMP
EPDF
ERIP
ERIPTA
ESAC II
ESAF
FDI
FNDP
FRA
FTI
GDP
GIZ
GRZ
HDI
HDR
IEMP
IFIs
IMF
KCM
LME
MCS
MDG
MFEZ
MMD
Lis t oI abbreviations
Anglo American Company
AIrican Development Bank
AIrican Forum and Network on Debt and Development
Balance oI Payment
Commonwealth Development Corporation
Copper belt Environmental Project
Carbon dioxide
Community oI Practice
Country Partnership Strategy
Development Assistance Committee
Department Ior International Development
Development Policy Operation
European Commission
European Development Fund
Education Ior All
Extractive Industry Transparency Initiative
Education Management InIormation System
Environmental Management Plan
Education Program Development Fund
Economic Recovery and Investment Project
Economic Recovery and Investment Promotion ReIorm Program
Economic and Structural Adjustment Credit
Enhanced Structural Adjustment Facility
Foreign Direct Investment
FiIth National Development Plan
Fiduciary Risk Assessment
Fast Track Initiative
Gross Domestic Product
Gemology Institute oI Zambia
Government Republic oI Zambia
Human Development Indicators
Human Development Report
Interim Environmental Management Plan
International Financial Institutions
International Monetary Fund
Konkola Copper Mines
London Metal Exchange
Mining Cadastre System
Millennium Development Goals
Multi-Facility Economic Zones
Movement Ior Multiparty Democracy
6
MMMD
MSDP
MTENR
NBS&AP
NGO
OECD/ DAC

PRGF
PWYP
RMC
SAF
SAP
SWAp
UK
UNAIDS IATT
UNCTAD
UNDAC
UNDAF
UNDCF
UNDP
UNESCO
UNFPA
UNHCR
UNICEF
UNIDO
UNIP
UNITAR
UNRISD
USAID
USD
ZCCM
ZDA
ZMK
ZRA
Ministry oI Mines and Minerals Development
Mining Sector Development Program
Ministry oI Tourism, Environment and Natural Resources
National Biodiversity Strategy and Action Plan
Non Governmental Organisation
Organisation Ior Economic Cooperation and Development / Development
Assistance Committee
Poverty Reduction Growth Facility
Publish What You Pay Campaign
Reserved Minerals Corporation
Structural Adjustment Fund
Structural Adjustment Programs
Sector Wide Approach
United Kingdom
Joint United Nations Programme on HIV/AIDS Inter-Agency Task Team
United Nations ConIerence on Trade and Development
United Nations Disaster Assessment and Coordination
United Nations Development Assistance Framework
United Nations Capital Development Fund
United Nations Development Programme
United Nations Educational, ScientiIic and Cultural Organisation
United Nations Fund Ior Population Activities
United Nations High Commissioner Ior ReIugees
United Nations Children's Fund
United Nations Industrial Development Organisation
United National Independence Party
United Nations Institute Ior Training and Research
United Nations Research Institute Ior Social Development
United States Agency Ior International Development
United States Dollar
Zambia Consolidated Copper Mines
Zambia Development Agency
Zambian Kwacha
Zambia Revenue Authority
WEIGHTS AND MEASURES
Km
m3
MtCO2
MW
tCO2-equiv/yr
kilometre
cubic meter
million tons oI carbon dioxide
megawatt
tons oI CO2 equivalent avoided per
year
7
International Financial Institutions (IFIs) have provided signiIicant Iunding to most AIrican
Governments and the private sector Ior the development oI extractive industries. The IFIs have
also provided states and mining Iirms with advice, technical assistance, and risk insurance to
promote extractive industries. The IFIs support investments in extractive sectors because they
generate high rates oI return, and boost both exports and government revenues in the host
country. While it is not disputable that the extractive industries generate government revenue,
what is surprising is that in most cases the economy as a whole and mostly the poor in particular
tend not to beneIit Irom the revenue.
SpeciIically on Zambia the study sought to provide clarity on the role that IFIs have played in the
extractive sector by sharing country experiences and developing plans Ior lobbying
parliamentarians to take a greater participation in the matter and Ior IFIs to stop leveraging
vulnerable countries simply Ior the consumption oI AIrican resources.
Zambia was selected Ior the research on the bases oI;
(I) Its richness in extractive resources,
(ii) Its programmes with IFIs and has accepted loans and technical assistance in order
to develop some aspects oI their extractive sectors.
The report begins by discussing the history oI activity in the main extractive sectors oI the
country and in which IFIs are involved and tries to link the exploiting oI the extractive sector in
Zambia to the nations development agenda. The report also identiIies and describes the IFIs
involved in the Zambia extractive industry detailing the nature and scope oI their involvement.
Chapter six details the aid Ilows, technical assistance, and procurement Irom the IFIs and makes
the all important link as to how they impact the identiIied sectors. Chapter seven oI the report
goes on to analyze in detail the regulatory environment and tax revenues governing those
previous investments in the main sectors and makes a determination as to whether they had been
appropriately exploited. The report rounds up by giving an assessment as to the extent these
sectors have contributed to poverty reduction and economic growth at the same time determining
the level oI indebtedness in the near Iuture, thereby establishing the linkage between this
indebtedness and activities in the extractive sector.
One oI the main conclusions oI the report was the need Ior greater transparency on the part oI
IFIs, extractive Iirms, and the host governments in order to make the extractive sector pro-poor.
Disclosure oI the Iinancial transactions surrounding the extractive sector is one aspect to
improving economic governance. Concrete and actionable policy and regulatory
recommendations that ensure poverty reduction and economic growth conclude the report.
PreIace
8
AFRODAD urges the Zambian government to address issues raised in this report and implement
recommendations.
9
As many developing countries that are resource rich, Zambia has not Iully beneIited Irom its
natural resources and having been mining Ior the past 100 years, majority oI these natural
resources are depleting. Zambia's dependence on the IFI's has had some costs incurred as the
reIorms carried out in order to receive aid and in order to render the extractive sector more
attractive have Iailed to Ioster signiIicant economic growth or achieve poverty reduction.
The report discusses the role oI International Financial Institutions in the extractive sector oI
Zambia and Iocuses mainly on the World Bank and International Monetary Fund as they have
signiIicant inIluence in the extractive sector, especially the mining sector, by Iinancing the
Zambian Government through various channels with signiIicant policy inIluence. Since the late
1990's the World Bank and International Monetary Fund have used their development Iinancing
and lending activities to inIluence policy and also push Ior structural adjustment programmes
(SAPs) that were supposed to promote economic growth. However, contribution oI Zambia's
extractive sector, especially mining to the local economy has not perIormed as expected.
Moreover, these two institutions have been criticized Ior pushing Zambia into implementing
measures that have proved detrimental to the growth oI the extractive sector and the economy as a
whole because the government has not received a Iair share oI revenue Irom mining activities.
The IFI's have also constantly called Ior transparency and accountability in the extractive sector
with much emphasis on governments. In past experiences, through their development Iinancing
and lending activities, the World Bank and IMF have been able to inIluence developing country
governments while remaining completely unaccountable to the people or their representatives in
the legislature. For most oI their history, IMF and the World Bank have operated behind the
scenes, virtually dictating policy reIorms to developing countries. This report concludes that
transparency and accountability in the extractive industry should be Irom all stakeholders, the
International Financial Institutions, the Zambian Government and extractive Iirms in order to
make the extractive sector pro-poor.
Executive Summary
10
1.0 INTRODUCTION
Copper mining has been an inextricable part oI Zambia's 20th century economic history and will
most likely continue to be the principal driver oI economic growth, employment and Ioreign
exchange generation Ior the next Iew decades. Zambia is classiIied as a Low Income Country
(LIC) according to the World Bank, with an estimated GDP per capita (PPP) oI US$1400 in 2007.
The country's economic activities are dominated by the mining sector, speciIically copper and
cobalt mining. Zambia's copper industry has increased its production tremendously to over 520
000 tons oI reIined copper in 2007 becoming the ninth most important producer oI copper and the
Iourth important producer oI cobalt worldwide. 2
Zambia is blessed with a rich endowment oI mineral resources such as copper, cobalt, gold,
manganese, gemstones, emeralds, uranium and now has high prospects oI oil deposits in almost
all the provinces. Overall, Zambia's mining sector contributes about 5.1 to the GDP and 64
to the balance oI trade. The extractive sector accounts Ior approximately 80 oI the export
values oI which 90 are Irom copper exports.3
The extractive industries ; oil, gas, Iorest and mining produce essential inputs (energy, metals,
timber and minerals) Ior both the domestic and global economy. Demand Ior these raw materials
has been increasing as these are essential contributors to value addition and production.
Naturally, Zambia should expect to gain more revenue Irom extractive industries through taxes,
royalties and bonuses.
Extractive industries can contribute signiIicantly to Zambia's economic development and
provide opportunities Ior Ioreign investment and private sector development. These industries
can also generate the much needed government revenues, Ioreign exchange earnings and
employment. This, however, can only be achieved iI the right decisions are made on the
management oI these natural resources. Experience shows that Aid (technical or Iinancial) was
given to Zambia by the International Financial Institutions (IFIs) to pursue their perceived 'right
programmes' so as to address its underdevelopment in various sectors regardless oI the national
plans that were in existence.
This has been experienced since the 1980s when the World Bank (WB) and the International
Monetary Fund (IMF) started using the leverage that came with Zambia's massive debts and its
inability to Iund government revenues Irom mining income. From the moment Zambia accepted
its Iirst conditioned loan Irom the IMF in 1973/4 and entered its Iirst World Bank structural
adjustment programme in 1983, the IFIs have pushed the country to adopt tightly policed,
Chapter One
1.Bhorat & Westhuizen (2009), Economic Growth, Poverty and Inequality in Zambia: 1996 2006,
2.Strmer.M & Buchholz. P (2009), Government Revenues Irom the Extractive Sector in Sub-Saharan AIrica A Potential Ior Funding the United Nations
Millennium Development Goals? Federal Institute Ior Geosciences and Natural Resources
3. ibid
11
economic liberalisation policies.4
4. Lungu J and Fraser, A (2006), For whom the windIalls. Caritas, Zambia,
12
2.0 THE INTERNATIONAL FINANCIAL INSTITUTIONS AND EXTRACTIVE
INDUSTRIES IN ZAMBIA
The World Bank and the IMF remain the dominant drivers and gatekeepers oI donor policy in
Zambia. Their assigned position gives them an added role as instrumenters and modelers oI
governance policies at national and global level. In many instances they have been accused oI
putting pressure on the AIrican development agenda through their conditionalities, using
development aid as a leverage to impose the neo-liberal paradigm oI liberalisation.5
One would expect that Zambia is making huge amounts oI money Irom mining but it is not. In the
early 1990s the IFIs became Iixated on removing mining Irom state ownership. Aid
conditionalities mandating Ieasibility studies and the sale oI mines were in almost every IFI's
credit loan Irom 1991 onwards. In 1999 major donors withheld US$ 530 million oI aid to Zambia
because the government was reluctant to sell the mines. The Iinal straw came when the donors
made it clear that there would be no relieI Ior Zambia's crippling debt burden without
privatization. According to the then Finance Minister, Ms Edith Nawakwi, the IMF and WB told
the government that 'Ior the next 20 years, Zambian copper would not make proIit. (Conversely, iI
we privatize) we would be able to access debt relieI, and this was a huge carrot in Iront oI us - like
waving medicine in Iront oI a dying woman, we had no option'.6
International Financial Institutions (IFIs) and donor countries use diIIerent tools to speciIy
conditionalities in a given area and the guidelines speciIy how each oI these is to be used in an
attempt to achieve the 'right' balance. The tools consist oI PerIormance Criteria (PCs), structural
benchmarks, program reviews and prior actions 7. These conditionalities have, to a considerable
extent, made aid ineIIective in Zambia. Zambia has been Iorced in many cases to make
detrimental decisions and give up its sovereignty oI making decisions on its development plans in
the hope and eIIort oI receiving aid. 8
Over time, the World Bank and IMF have come to be viewed as the holders oI expert knowledge
in development and economic policy respectively. The combination oI their perceived expertise
and Iinancial clout gives these institutions signiIicant policy inIluence in developing countries.
Worryingly, this clout is increasing as other donors look to the World Bank and IMF to assess
whether a country is perIorming well enough to receive their Iinancial support 9. During the
1980s and 1990s the IFIs took advantage oI their inIluence to Iorce countries to implement
structural reIorms, including privatization and trade liberalization, despite widespread
condemnation oI the harmIul eIIects oI these policies on poor people. OIten recipient
governments had to Iorce these policies through the legislative branch to ensure access to IFI
5. IMF staII paper, June 2004 ,pg 5. Fund ConditionalityA Provisional Update. IMF
6. Glennie, J (2008), The trouble with Aid- why less could mean more Ior AIrica. International AIrica Institute, the Royal AIrican Society and the Social
Science
Research Council.
7. ibid
8. ibid
9. Action Aid et al, April 2005.P3 Kept in the dark-A brieIing on parliamentary scrutiny oI the IMF and World Bank
Chapter Two
13
resources. At independence in 1964 Zambia, with per capita income oI US$750 10, inherited a
very strong economy, which was predominantly based on mining. However, less than 10 years
later in 1973, copper prices on the international market started plummeting sharply while
petroleum prices increased, leading to rapid deterioration oI the balance oI payments position.
Consequently, the immediate reaction oI Government was to run down reserves and borrow
abroad on commercial terms. This marked the beginning oI the debt crisis. As a move to correct
the situation, Government has attempted various initiatives which have included:
a) Structural Adjustment Programmes promoted by the WB in conjunction with the IMF to try
and address the economic imbalances
b) Approaching the Paris Club creditors Ior help to Iund coordinated and sustainable solutions to
Zambia's debt burden
c) Privatization oI state-owned, loss-making enterprises e.g the mines - privatization oI Zambia
Consolidated Copper Mines (ZCCM) was a condition repeatedly attached to several loans Irom
both these institutions (the World Bank and the IMF) and was a precondition Ior Zambia to
qualiIy Ior debt relieI through the Highly Indebted Poor Countries (HIPC) initiative
d) Liberalization oI the economy and a market clearing exchange rate system as part oI the
benchmark Ior IMF support.
In 1991, the new government oI the Movement Ior Multi Party Democracy (MMD) embarked on
economic reIorm programmes which included changing the outlook oI the country's economic
and social perIormance and dismantling oI debt arrears. This opened the country's balance oI
payment and the government Iollowed the IMF and World Bank policies dutiIully.
By 2000, the debt burden still remained too high and unsustainable and as such the country Iound
it Iit to seek international intervention on its resolution. Zambia thereIore entered the Highly
Indebted Poor Countries (HIPC) Initiative in December 2000. HIPC is the global initiative that
tries to reduce debts oI developing countries to sustainable levels. Under this initiative, most oI
the bilateral creditors pledged to cancel Zambia's debt upon meeting the conditionalities thereoI.
On 8 April 2005, an important milestone Ior Zambia was marked when it reached the completion
Point under HIPC. Since then a considerable amount oI Zambia's debt has been written oII.
Resultantly, external debt service payments were greatly reduced Irom the level that would have
prevailed had the country not reached the HIPC initiative completion Point.
10. ibid
14
The two institutions have had a signiIicant inIluence in the extractive sector, especially in the
mining sector. The government oI Zambia has on many occasions involved the World Bank on
issues regarding the extractive industry sector. For instance, the government invited the World
Bank to Zambia Ior crisis talks Ior stakeholders in April 2009. The aim oI the meeting was to look
at ways oI mitigating the eIIect oI the global Iinancial crisis in Zambia. The economic crisis in
Zambia had heavily aIIected the strategic and dependable sector - the mining sector. Mining
companies were having challenges with the eIIects oI the global economic crisis, including
Mopani Copper Mines, one oI the biggest copper mines in Zambia. As oI 2nd February 2009 it
was expected to lay oII 571 workers in a bid to cut down production costs due to the Iall in metal
prices; 215 Irom Nkana Mine Site while the rest were Irom their MuIulira Mine Site. These were
among mines that laid-oII thousands oI workers in a bid to cut down the cost oI production and
maintain the proIitability oI the mines.
The World Bank, in particular, has invested quite substantially in Zambia both by way oI grants
and loans under concessional terms. As oI November 2007, the World Bank invested around
US$3.58 billion in Zambia to support development projects ranging Irom mining to
inIrastructure to health within the context oI the Country Assistance Strategy (CAS) Ior
Zambia.11
11. World Bank's Board oI Executive Directors Endorses Zambia's Country Assistance Strategy
http://www.web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXR/ZAMBIAEXTN/0,,contentMDK:21776813-menuPK:375673-
pagePK:2865066- piPK:2865079-theSitePK:375589,00.HTML
15
3.0 MINING IN ZAMBIA
3.1 Histor y
In 1969, Zambia was the largest producer oI copper among developing countries and the third
largest producer aIter the US and the Iormer USSR, making up 12 oI world production. In
contrast, by 1990 Zambia produced only 5 oI world production, compared to Chile and the US
each with 18 .12
Copper and cobalt constitute over two-thirds oI Zambia's mining production and exports, and the
mining industry currently contributes an estimated 90 to the country's Ioreign exchange
earnings, and attracts Ioreign direct investment worth US$2.4 billion annually.13
Its prime metals are mainly copper, lead, zinc, silver, gold and cobalt. Zambia is rich with semi-
precious and precious gemstones, and has the second largest deposits oI high quality emeralds in
the world 14. In recent years the gemstone industry assumed a more signiIicant role in terms oI
mine tax revenue. For instance, it is estimated that the global value oI rough emeralds is in excess
oI US$1 billion a year, oI which Colombia accounts Ior 50 oI world production, Zambia about
20 and the remaining 30 shared between Brazil, Zimbabwe and Pakistan. In Zambia the
gemstone industry accounts Ior over 300 small-scale miners.15
Copper mining has been a signiIicant economic activity in Zambia since the development oI the
Iirst copper mine in 1928. By the time Zambia gained independence in 1964, copper mining was
the backbone oI the country's economy and a powerIul Iorce in shaping the Copperbelt Province
where the mines are concentrated. Copper mining and processing led to rural-urban migration
with anticipation oI getting jobs and better access to inIrastructure, housing and a range oI social
services. Throughout the 1970s and 1980s, the copper industry was the second largest employer
aIter the Government and generated about 85 oI Ioreign exchange earnings, 30 oI
Government revenues and 15 oI GDP.16 The Government oI Zambia gained control oI the
copper mines in 1973. In 1982, it created the state owned Zambia Consolidated Copper Mines
(ZCCM).
Copper mining, however, went through a long slump Irom about 1974 when the prices started
going down and this was compounded by the increase oI oil prices. By the late 1980s the
privatisation oI the copper mines was Ioreseeable because oI the increasing running cost oI the
mining companies.
12. Ibid
13. Southern AIrica Resource Watch (2009), Impact oI the Global Financial Crisis on Mining in Southern AIrica
14. World Bank (2004, June 25), Project appraisal document Ior Support Ior Economic Expansion and DiversiIication (SEED).
15. Lungu. J (2009), The politics oI reIorming Zambia mine tax reIorm regime. Southern AIrica Resource Watch
16 Ibid
Chapter Three
16
Concomitantly, the government external borrowing started increasing which ultimately became
more diIIicult and the percentage oI the resources being generated by the copper industry going to
the government's budget reduced. Investment in the copper industry reduced and the lack oI
reinvestment led to declines in productivity and Irequent production problems. It Iinally
compromised ZCCM's Iinancial sustainability. A middle-income country in 1969 with one oI the
highest GDPs in AIrica, Zambia Iell into a spiral oI poverty and underdevelopment with huge
debts. Today, it is one oI the 25 poorest countries in the world ravaged by chronic Iood insecurity
and the HIV/AIDS epidemic.
The privatisation oI the copper mines was unavoidable because oI the alleged increasing running
cost oI the mining companies and the increase in the national debt burden. Lacking the resources
to revitalize the copper industry, the Government decided in 1995 to privatize ZCCM assets in
anticipation that it would increase the eIIiciency oI the copper industry, attract Ioreign investment
to the mining sector; thus have multiplier eIIects oI boosting the private sector and consequently
save thousands oI jobs.
ZCCM was transIormed into an investment holding company, ZCCM-IH, which became a
minority shareholder with a 10 - 20 share in the newly privatized mining, processing and
power companies in the Copperbelt. Privatization was essentially completed in March 2000 with
the conclusion oI deals with Konkola Copper Mines (KCM), involving Anglo American, the
International Financial Institutions (IFIs) and the Commonwealth Development Corporation
(CDC). The second deal was with Mopani Copper Mines (MCM) and involved Glencore
International and First Quantum.17
ZCCM's privatization was expected to mark a turning point in Zambia's economic reIorm but was
however compromised by Anglo American's decision in January 2002 to withdraw Iinancing
Irom the Zambian copper industries, speciIically Irom KCM and the Konkola Deep Mining
Project (KDMP).
3.2 Minerals
Zambia has world class copper and cobalt deposits. There are also about 50 known deposits oI
iron ore; numerous small deposits oI manganese ore all over the country; about 150 occurrences
oI tin-tantalum, especially in the Tin Belt in southern Zambia and lead-zinc ores at the Upper
Roan Group oI the Copperbelt. Furthermore, there are over 300 known occurrences oI gold
spread all over the country and small amounts oI diamonds, mainly in kimberlites, can be Iound
in the north-east oI the country.18
17. ibid
18. Strmer M & Buchholz. P (2009), Government Revenues Irom the Extractive Sector in Sub-Saharan AIrica A Potential Ior Funding the United Nations
Millennium Development Goals? Federal Institute Ior Geosciences and Natural Resources
17
3.2.1 Emer alds
Prospecting Ior emeralds has a long and evolved history in Zambia. Beryl was Iirst recorded by
the Rhodesia Congo Border Concession Company at Miku in 1928. The Iirst claim was pegged in
1953 by Rio Tinto (RTZ) in the KaIubu Area. The area remained dormant until 1966 when Miku
Enterprises Ltd took over.19
The area was mapped out by the Geological Survey Department during the period 1967 and 1968.
Mindeco small mines took over the area by order oI the government. Illegal prospecting and
indeed mining and sale oI emeralds began in 1972 and by 1978 several deposits had been
identiIied by illegal miners.
As a result oI illegal mining, the entire region was declared a Restricted Area by the
government, by which time many Iortunes had been made and lost. This dramatic turn oI events
Iirmly put Zambia on the international scene, as Iar as emeralds are concerned.
The extensive illegal mining coupled with the realisation that substantial amounts oI revenue
were being lost (estimated at US$ 50 million) led to the setting up oI a Commission oI Enquiry in
1979, which led to the Iormation oI a White Paper and the Iormation oI the Reserved Minerals
Corporation(RMC).20
3.2.2 Amethyst
Small scale and artisanal mining plays a certain role with about 10 tons oI illegally mined tin
tantalum concentrate in the south oI the country. There is also artisanal mining in gemstones with
a production oI 1100 tons oI amethyst and good quality emeralds. The government has actively
promoted gemstone mining and processing by setting up a gemstone exchange and a training
center Ior polishing.21
The most signiIicant deposits are in Mwakambilo Hills near Lake Kariba, 90km south east oI
Kalomo, where commercial production was started by Northern Minerals in 1956. Northern
Minerals were later joined by other operators, prominent among them a German company known
as International DGC Mining in Mwakambilo, producing the Iamous Kalomo No.6 deep
purple variety.22
In the early 1980s government partnered with Northern Minerals and changed its name to Kariba
Minerals - which is the largest amethyst mine in Zambia. At one time employment levels were in
excess oI 500 and though the current levels are lower it is still the largest employer in the
Mapatizya Amethyst mining belt.
19. Ibid
20. Ibid
21. Ibid
22. Ibid
18
3.2.3 Manganese
Although current mining activity is on a small scale, manganese deposits are known to occur
throughout the country and the estimated reserves are approximately two million tons oI medium
to high grade ore (45 to 60)23. Increase in demand Ior manganese, especially Irom China,
Europe and America, has resulted in an increase in the exploration and mining oI the mineral. The
mineral is basically used Ior battery manuIacturing as well as an alloying element. Other minerals
being mined in Luapula include iron and copper, malachite and precious and semi precious
stones like Quartz and Citrine.
Manganese mining in Luapula began beIore the country got its independence. The mining was
mostly concentrated in areas surrounding Bahati, which is about 20km to the north west oI Mansa
town. Mining oI this mineral came to a virtual standstill Ior a long time until the opening oI Mansa
Batteries Limited in the early eighties when large scale mining resumed.
3.2.4 Ur anium oxide
Production in Zambia has been limited to only 120 000 kg which was produced Irom the Mkana
Mine between 1957 and 1959. However, there have been numerous exploration activities since
then and Ioreign companies, as well as the Zambian government, are considering plans to
develop new uranium mines in Zambia.24
3.2.5 Nickel
Nickel has only recently been discovered in Zambia. The Iirst ever nickel mine in Zambia,
Munali Mine, owned by Albidon Zambia Ltd (a subsidiary oI Australian-based Albidon Ltd),
commenced production in April 2008 and in October 2008 an exploration company established
the presence oI nickel at Kawako in North West Zambia.25
3.2.6 Copper and belt
Copper and cobalt constitute over two-thirds oI Zambia's mining production and export. To date,
mining and development activities have mainly been centred in Copperbelt and North Western
province. Further, exploration oI copper since the 1930s has led to the discovery oI many other
metalliIerous and non-metalliIerous resources. Outside the Copperbelt, little exploration has
been carried out, apart Irom regional base metal, gold and diamond prospecting. Copper mining
has dominated the mining industry Ior the past 50 years and despite the discovery oI other mineral
23.Southern AIrica Resource Watch (2009), Impact oI the Global Financial Crisis on Mining in Southern AIrica
24. Ibid
25. Ibid
19
resources, it is still likely to play a major role in the Iuture.
3.3 Forest
Forests in Zambia cover about 49.9 million hectares (66 oI land cover). The oIIicial
contribution oI the Iorestry sector to GDP has been given as 5.2 . Round wood production
estimates Irom Iorests results in the value-added by the Iorestry sub-sector oI approximately
USD12 million per annum while revenue Irom indigenous Iorests represents 4.7, plantations
7.3 while the contribution Irom other modiIied indigenous Iorests accounts Ior 86.
Timber exports Irom indigenous Iorests make up 10,159.2 m3, constituting 82.6 compared to
only 2,139.9 m3 Irom plantation tree species. Wood Iuel will continue to have the largest share oI
wood removal in the country with over 7 million m3 removed every year.
23.Southern AIrica Resource Watch (2009), Impact oI the Global Financial Crisis on Mining in Southern AIrica
24. Ibid
25. Ibid
2006 2007 2008 change
2008
Copper in Tonnes) 508,360 565,550 569,891 0.8
Cobalt (In Tonnes) 4,650 4,414 3,453 (21.8)
Gold (Kgs) - - 1,800 -
Source: Economic Report (2008), Ministry oI Finance and National Development
20
4.0 THE LINK BETWEEN ZAMBIAS NATIONAL DEVELOPMENT STRATEGY AND
THE EXTRACTIVE SECTOR
In the implementation period oI the FiIth National Development Plan (FNDP), the overall goal
Ior the mining sector was: To create a conducive, stable, predictable and competitive policy,
legal and regulatory Iramework that will attract and retain investment Ior the development oI the
sector.26
The strategic Iocus Ior the mining sector is to promote both large and small-scale mining by
strengthening the institutional Iramework support and improving the policy and regulatory
Iramework. The FNDP recognized large-scale mining as having an important role to play in the
national economy because it has the potential to:27
1) Generate Ioreign exchange and other revenue to supplement the national budget and Iree
resources that can be allocated Ior poverty eradication,
2) Contribute to economic development through the provision oI basic inIrastructure and other
social services,
3) Facilitate skills and knowledge development in order to increase the stock oI human capital;
and
4) Facilitate the development oI the service input sector, downstream processing and
beneIiciation industries and centres oI knowledge creation and innovation.
Small-scale mining was also considered as having a greater potential in employment creation and
poverty reduction and could:
1) Create employment, especially in rural areas where jobs are scarce
2) Enable the exploitation oI what would otherwise be uneconomic reserves and
3) Provide Ior the creation oI micro-industries in rural areas.
Zambia has been mining Ior the past 100 years but there is little to show Ior it. The situation has
persisted due to the weak transparency and governance in the extractive industries and also
inadequate democratic scrutiny as several key aspects oI mining in Zambia remain shrouded in
secrecy.
For instance:
1) To date the Zambian government does not know the true operational cost oI the mines
2) There is inadequate knowledge oI the estimates oI mineral deposits in the ground and the
estimated value oI Zambia's Iorests remain unknown
3) There is no analysis and scrutiny being done on the mining companies' balance sheets,
4) There has been a number oI labour law, health, saIety and human rights violations by
mining companies without any Iollow ups Irom the law enIorcement agencies,
26 FNDP Midterm review, 2009, Ministry oI Finance and National Planning
27 Ibid
Chapter Four
21
5) There has been environmental pollution which has aIIected thousands oI people and the
mining companies are not made to account Ior their action,
6) There has been emphasis on taxing and regulating copper mines at the expense oI other
extractive industries like those involved in precious minerals, uranium mining, platinum as
well as manganese mining, Iorgoing huge revenues in taxes,
7) The development agreements signed between the mining companies and the government tend
to give the mining companies huge concessional incentives which tend to disadvantage and rob
the country oI revenues and dehumanise the communities where the companies operate.
As such Zambia has experienced a high level oI misappropriation oI Iunds and corruption in the
extractive industry increasing over the past years.28
The links between extractive industries, environmental degradation, pollution, human rights
abuses, increase in corruption and poverty has become the Iocus oI growing concern in Zambia.
For example, communities dependent on their environment Ior subsistence, through agriculture
or Iishing, have been vulnerable to environmental damage through pollution (air, water and land
pollution) which has been the case Ior the Copperbelt and North Western Province where the
mining companies are operating.
Taking the case oI the Copperbelt, the whole diversity oI the KaIue River and the land has almost
permanently been altered. The areas had large mammals such as hartebeests and hippos, which
have since completely disappeared due to the pollution oI both the water and land. 29
Worldwide Iorested land is declining and there is the universal presence oI the so-called
Persistent Organic Pollutants (POPs) which are a product oI industrial experiments in
biochemistry.30 Although many individuals beneIit Irom activities that lead to biodiversity loss
and ecosystem change, the Iull costs borne by society oIten exceed the beneIits.31
One oI the main Iactors accounting Ior the poor governance oI copper mining in Zambia is the
lack oI popular participation and consultation with decision-makers. DiIIerent stakeholders have
noted that communities do not participate in decision-making processes and civil society, by and
large, is not adequately actively advocating on the detrimental impacts oI extractive industries.
This lack oI involvement and advocacy eIIorts, due in part to a lack oI knowledge and awareness
oI the complexities involved, limits the contribution extractive industries could bring to national
development and poverty eradication.
There has been increasing public discontent in the Copperbelt as individuals and communities
seek methods to better inIluence the management oI their natural assets Ior example the protests
in MuIulira.
28 Edmond Kangamungazi , (2009), tax avoidance and inequity
29 ZCCM-IH, 2005
30 Schneider, 1990
31 Caritas Zambia, (2009), Environmental Justice research report .
22
In addition, the people oI the Copperbelt sent a strong message during the election oI October
2006 by voting opposition candidates into almost every urban Parliamentary seat Ior the region.
The opposition candidates ran on the platIorm oI deporting Ioreign investors, increasing
corporate taxes and limiting Ioreign ownership oI mines.32 To avoid Iurther discontent, improved
mechanisms Ior dialogue and engagement between individuals/communities and private and
public institutions are being sought.
32 Zambian President Proposes Increased Mining Taxes Daily News. January 15, 2008
http://www.northernminer.com/issues/ISArticle.asp?id78758&issue0115200
23
5.0 SCOPE OF THE MAIN INTERNATIONAL FINANCIAL INSTITUTIONS AND
THEIR ACTIVITIES
5.1 Resource-Iunding
The IFIs have been Iinancing the Zambian government through various channels over the years.
For instance, the IMF assistance in the extractive sector came in 2008 - 2009 through increased
resource allocations that partly enabled the Zambian Government to avoid expenditure cuts in
social areas and inIrastructure during the Global Financial Crisis. The assistance was in the Iorm
oI enhanced Special Drawing Rights (SDR) allocations in the exchange oI 400 million SDR.
The IMF has also been helping Zambia meet its resource gaps in its national budget by, Ior
instance, helping source Ior additional resources to invest in inIrastructure such as the Mongu/
Kalabo Road. Also, through the Copperbelt Environment Initiative, the World Bank spent over
$40 million in the period 2003 to 2008. The Copperbelt Environment Project (CEP) initiative was
proposed to help the government deal with environmental liabilities and requirements associated
with the privatization oI mining assets, with an emphasis on liabilities related to public health and
saIety. The Copperbelt Environmental Project (CEP) Iormed one oI a series oI measures Iunded
by the World Bank, to Iacilitate the successIul and sustainable privatization oI Zambia's mining
assets.
Source: World Bank (2003), Copperbelt Environmental Project
Source oI Finance 2003 2004 2005 2006 2007 2008
Total Financing required
Project Cost .1 9.3 8.9 7.4 6.5 5.2
Investment Cost .2 .8 1.0 1.0 .8 .6
Total Project Cost .3 10.1 9.9 8.4 7.3 5.8
Total Financing .3 10.1 9.9 8.4 7.3 5.8
Financing
IBRD/ IDA .2 9.8 9.5 8.0 7.0 5.5
Government .1 .3 .4 .4 .3 .3
General .0 .0 .0 .0 .0 .0
Provincial .0 .0 .0 .0 .0 .0
Co-Financiers .0 .0 .0 .0 .0 .0
User Fees/ BeneIiciaries .0 .0 .0 .0 .0 .0
Other .0 .0 .0 .0 .0 .0
Total Financing .3 10.1 9.9 8.4 7.3 5.8
Chapter Four Chapter Five
24
5.2 Project Iinancing
The World Bank has also been involved in project Iinancing, Ior instance, the Support Ior
Economic Expansion and DiversiIication (SEED) project, with a total project cost oI US$28.15
million 33. The project objective was to reduce the vulnerability oI the Zambian economy to
shocks by supporting the diversiIication oI its sources oI growth. This was to be achieved by
improving sector speciIic policy and regulatory Irameworks and strengthening the capacity oI
Government agencies to implement them. The development objective was also supported
through selective public investments that stimulate private investments and by creating the
conditions Ior increasing the contribution oI gemstone, agribusiness and tourism sectors to GDP
and export revenues. This project will come to an end in 2011.
33 The Word Bank
Estimated Disbursement (Bank Financial year FY/US$m)

FY

2005

2006

2007

2008

2009

Annual

1.00

1.00

1.00

1.00

1.00

Cumulative

1.00

2.00

3.00

3.50

4.00

Source: World Bank (2004)

SEED project appraisal document

Source: World Bank
Appr oval Date 29- JUL- 2004
Closing Date 30-NOV-2011
Total Project Cost ** 28.15
Region AIrica
Major Sect or (Sector ) () Industry and trade (Other industry) (50)
Public Administration, Law, and Justice (Central
government administration) (15)
Industry and trade (Agro-Industry) (15)
Energy and mining (Mining & other extractive) (15)
Agriculture, Iishing, & Iorestry (General agriculture,
Iishing & Iorestry sector) (5)
Themes () Biodiversity 914)
Rural markets (29)
Export development & competitiveness (29)
Other Iinancial & private sector development (14)
InIrastructure services Ior private sector development
(14)
Envir onmental Categor y B
SUPPORT FOR ECONOMIC AND DIVERSIFICATION PROJECT
25
Some oI the key perIormance indicators oI the project include:
Adoption oI a National Mining Policy and improved regulatory Iramework
10 average growth in amethyst production in the Mapatizya region and
Increase in revenue collections at the Livingstone and Kitwe Mine Bureaux
Under this component the World Bank proposed to spend US$ 5million on Gemstone Sector
Development.34
The project (SEED) has basically two components which include:
1) Strengthening transparency and governance in mining
2) Strengthening the supply chain
a) Strengthening transparency and gover nance in mining 35
This included :
I. Formulation oI a Mining Sector Strategy - The government was to be assisted, under this
component, to develop international best practices - a Iormal policy oI Mining Sector
Development - with emphasis on the gemstone sub-sector. This included a review oI all existing
minerals policies, a comparative study and on-site review oI international and regional practices
and assessment oI Zambia's speciIic characteristics and needs.
ii. Adjustment and completion oI the legal Iramework -.The Mining Act oI 1995 prior to its
revision in 2008 was prepared with the support oI the World Bank (Economic Recovery and
Investment Promotion ReIorm Program (ERIPTA) project) in 1995. This project was to Iund
consulting services to: (i) update the Mining and related laws on the basis oI the Mining Sector
Development Program's (MSDP) diagnostic review and recommendations; and (ii) prepare
sector regulations, Iocusing on equal access to resources, promotion oI commercial sectoral
development and support Ior small and artisanal mining, harmonization oI the tax regime, trade
liberalization and export promotion.
iii. Strengthening oI Public Mining Institution -. In Zambia, Mining Bureaus, responsible to the
Ministry oI Mines and Mineral Development (MMMD), are already established and their
mandates and responsibilities correspond to modern practice. However, they are under-Iunded
and under-staIIed and have diIIiculties in IulIilling their Iunctions. The project was expected to
support the Iollowing activities oI the Kitwe and Livingstone oIIices:
a) Institutional InIrastructure and Capacity Building. Emphasis was to be on
developing the proper regulatory Iramework and the provision oI
technical assistance Ior capacity building, including training; modernization

34 ibid
35 Ibid
26
and upgrading oI inIrastructure in the Kitwe and Livingstone oIIices
through incremental costs oI regional Iield work programs, and retention oI a
geologist and gemmologist to support small and artisanal miners on a pilot
basis.
b) Training Centre - A training centre, training materials and Iormal
program Ior artisanal and small scale miners was to be established, staIIed
and Iunded in a suitable location to supplement the rural on-site Mining Sector
Development Program (MSDP), the International Labour Organization's
(ILO) downstream gemstone processing training Iacilities in Ndola and adhoc
diploma courses oIIered by the University oI Zambia. Also this was to include
the rehabilitation oI buildings.
c) The program intended to provide managerial, technical and Iinancial
training to inIormal miners to Iacilitate saIer and more environmentally
benign practices, enhanced mineral processing, classiIication, certiIication
and value addition, access to credit and more mechanized mining and
processingmethods, and accelerate the transition to the Iormal mining sector.
iv. Mining Cadastre and Registry System - Activities under this sub-component include: I) the
organizational setting Ior the mining cadastre at regional levels; ii) deIinition oI the regional
cadastral Iunctions and procedures, including interaction and interIace with central oIIices Ior the
collection oI data, data capture, veriIication and transmission oI applications; iii) interIace with
and collection oI data Ior the modern computerized central Mining Cadastre System (MCS)
provided by the EU under the MSDP project, including the supply oI hardware, soItware and
programming, survey and Iield equipment and vehicles; iv) implementation oI the operating
procedures, including digitization oI existing inIormation; v) training oI staII in technical and
legal aspects oI mining title administration and operation oI the regional MCS interIaces; and vi)
strengthening oI the technical capacity at the regional levels, in terms oI data processing,
topographical and oIIice equipment. To allow the incorporation oI GPS instruments, some
technical veriIications and deIinitions will need to be carried out at the start oI the Project.
b. Strengthening the supply chain
The second component was the strengthening oI the supply chain. The SEED project was
expected to support/promote and establish the sustainability oI small-scale and artisanal mining.
Geographically, it Iocused on the Ndola rural (emeralds) and the Kolomo/Mapatizya
27
(amethysts) areas. It aimed to raise awareness and induce small-scale and artisanal miners to
improve their technical and environmental perIormance and moderate the impact oI their
activities on associated communities. Support included: (i) raising awareness on regulatory
matters and mineral rights, and promoting the organization oI such miners in small groups and or
cooperatives; (II) conducting pilot programs aimed at promoting integrated management,
improving technical approaches and perIormance, reducing environmentally adverse eIIects,
enhancing the living conditions oI the miners and related communities, and increasing Iiscal
revenues; (iii)designing and delivering extension services by the DGSM, including technical
guidance on mineral reserves and development oI pilot training centres Ior small-scale mining;
and (iv) executing saIety campaigns to improve conditions at small-scale, artisanal mining areas.
Under this component there was also;
I. Communities and artisanal and small-scale mining - This component provided Ior the design
and implementation oI assistance programs aimed at promoting small-scale and artisanal mining
integrated with downstream products. These programs were multi-disciplinary and included:
a. execution oI a baseline study on small-scale and artisanal mining in Zambia;
b. (small-scale enterprise organization, management and accounting, including
assistance to encourage the miners to Iorm cooperatives, improve their access
to micro-Iinance, and identiIy potential private partners interested in
partnerships or joint-venture operations;
c. legal and Iiscal matters and assistance to regularize inIormal operations and
to enIorce updated mineral law and regulations;
d. dissemination oI eIIicient, saIe and environmentally acceptable technologies
Ior small-scale mining;
e. design and implementation oI campaigns Ior environmental sensitization,
awareness and controls; (vi) establishment oI pilot training centres Ior small-
scale and artisanal miners and Ior increased output oI downstream products;
and (vii) support Ior campaigns to improve health conditions and prevent
malaria and HIV and AIDS in communities related to small-scale and artisanal
mining.
II. Establishment oI a gemstone institutional Iramework: creation oI a gemstone
certiIicationprogram, creation oI a one-stop-shop Ior gemstone exports, and oI a gemstone
exchange. This activity started with Iunding Ior a Ieasibility study, which included: technical
assistance to set up a private sector exchange Iacility, establishment oI a Gemmology Institute oI
Zambia (GIZ) and oI a national program Ior the certiIication and quality control oI gemstones.
The Gemmology Institute would be run by the private sector under a management contract and
28
would house gemstone evaluators, promote international standards Ior cutting and polishing oI
gemstones and provide training to local Iirms. The certiIication and quality control oI Zambian
gemstones was to be supported by partnerships with international gemstone evaluation services
and laboratories as well as academic institutions. The Gemmology Institute was also expected to
coordinate a national training program Ior gemstone cutting. The component was expected to
Iund a one-stop-shop Ior gemstone exports to simpliIy marketing channels and to Iight
smuggling and Iiscal evasion. It would take the lead in certiIication, evaluation, export and visa
services Ior unprocessed and processed gems, as well as Ior jewellery.
Other projects that have been Iinanced by the IFIs have included:
Pr ojects Iinanced by Bank and/ or other d evelopment agencies

Project

Sector issues

ERIPTA Credit 28750

The objective oI the Economic Recovery and Investment Promotion Technical
Assistance Credit Project wa s to support the implementation oI the Economic
Recovery and Investment Promotion ReIor m Program which aim ed

to: (i) downsize
the parastatal sector by privatizing ZCCM and other parastatals; (ii) revitalize the
mining sector by strengthening the capacity oI the Ministry oI Mines and Minerals
Development; and (iii) promote private sector busi ness by improving the legal
Iramework governing business activity.

Mines Township Services

Credit 33860

The main objective oI the Mine Township Services Project wa s to Iacilitate the
completion oI the privatization oI ZCCM by supporting the provision oI eIIicient and
reliable water supply services, waste water services and solid waste management in
Iive mine townships during a transitional period Iollowing the privatization.

Environmental Support
Project Credit 29610

Environmental Support Project development strategy oI poverty reduction within the
Iramework oI economic growth and protection oI the environment and national
resources. The program aimed to mainstream environmental and natural resources
management in Zambia' s development

IFC Konkola Copper Mines
Plc (KCM) Investment
8570

The project involved the purchase and a two-year rehabilitation program oI the
mining and processing Iacilities oI the Konkola, Nchanga and Nampundwe divisions oI
ZCCM

Environmental
Management in the Mining
Sector

CIDA

-

the project goal wa s to strengthen the technical and managerial capacity oI the
Mines SaIety Department and to a lesser extent other key institutions such as the
Environmental Council oI Zambia (ECZ), ZCCM-IH and the University oI Zambia School
oI Mines and the Copperbelt University to execute statutory mandates to regulate,
monitor and enIorce environmental management by mining companies in Zambia.

IPPP II (Industrial Pollution
Prevention Programme)
Phase II

SFT -

Norwegian Pollution Control Authority. The overall objective oI the Air

Pollution
Control Component was to control air pollution so as to provide Ior a clean and
healthy ambient air Ior the people oI Zambia arising Irom the reduction oI emissions
Irom point sources oI air pollutants and local noxious and green house gases.

Rehabilitation oI the Nkana
Metallurgical Complex

Supported by Department Ior Intemational Development (DFID)

Source : World Bank (2003) environmental copperbelt project

Projects Iinanced by Bank and/ or other development agencies
29
5.3 Membership oI the Extr active Industr y Tr ansparency Initiative (EITI)
The World Bank internationally is the secretariat Ior the multi-donor trust Iund, and part oI this
Iund supports the Iollowing initiatives: Extractive Industry Transparency Initiative (EITI ) -
initiative on transparency on revenues collected Irom oil and gas and minerals; EITI value
chain disclosure (Irom licensing to government spending) and Global Extractive Initiative (GEI )
Iormation oI a global hub Ior knowledge resource.
The EITI is a global standard Ior transparency in the extractives sector. It centres on the
reconciliation oI company payments with government receipts and disclosure oI inIormation to
the public. The goal is to identiIy potential discrepancies between payments and receipts and
investigate and address the underlying causes.36
The EITI is an international initiative with its own independent board and secretariat. EITI
implementation is also supported by the International Financial Institutions as well as other
development agencies such as the AIrican Development Bank, DFID and other bilateral donors.
The World Bank, the International Monetary Fund and the AIrican Development Bank (AIDB)
all attend meetings oI the EITI Board as observers and participate in the EITI ConIerences. 37 The
World Bank Extractive Industries Advisory Group was Iormed to help the Bank identiIy and
promote good practices in oil, gas and mining extractive industries and to Iollow up on
implementation oI the agreed recommendations oI the Extractive Industries Review. The
Advisory Group achieves this by serving as a Iorum where stakeholders could gain better
understanding and perspective on sustainability issues within extractive industries. With
representatives with diverse backgrounds in government, industry, civil society, academia and
Iinance, including strong representation Irom developing country regions dealing with extractive
industry issues, the Advisory Group produced a number oI recommendations Ior the Bank's
eIIorts to both reduce poverty and promote sustainable development through the extractive
industries sector. The Advisory Group's valuable work continues to inIorm the World Bank's
actions and eIIorts in this Iield.38.
The Government oI Zambia announced its adherence to EITI principles in 2008. Thus the
country became a candidate country in July 2009 and was expected to complete the validation
process by May 2011 so that it could graduate Irom an EITI candidate country to an EITI
compliant country. However, Zambia has not yet graduated to an EITI compliant country and has
appealed the May 2011 deadline as it is still in the process oI meeting the EITI requirements to
attain the status.
36 EITI Guide Ior Legislatures (2009), National Democratic Institutes, Revenue Watch and USAID.
37 Ibid
38 Ibid
30
In Zambia the World Bank plans to Iocus on three main thematic areas: revision oI the 2008
Mining Law, enhancing revenue collection by linking it to physical audit veriIying production
and metallic content and creating a robust system Ior mineral rights allocation.
However, a recent review by Global Witness and the Bank InIormation Centre which Iocused on
how the IMF and World Bank use their leverage to promote extractive industry transparency,
Iound that the World Bank engagement with transparency is neither consistent nor
comprehensive across resource- rich countries.
The World Bank has so Iar administered about $320 000 since Zambia became a candidate oI
EITI in April 2010 . This Iund has been in support oI establishing the Zambia EITI secretariat.
The EITI is both part oI the World Bank's response to its own Extractive Industries Review and
also one oI the many tools identiIied in the Bank's recent Governance and Anti-Corruption
Strategy. In this context, the Bank also works with governments on EITI issues as part oI broader
Bank-supported programs on extractive industries reIorm, natural resource management and
good governance/anti-corruption. In Iebruary 2011, Zambia launched its Iirst EITI report.
Ideally, the extractive industries are supposed to help support the creation oI employment,
promote investment through revenue generation and improve social and economic conditions oI
the country. This is why there is a consensus among UNCTAD, UNECA and the IMF that the
paramount development beneIit oI mining in AIrica is the potential to generate public revenue
through a transparent tax and budget system 39. The World Bank maintains that iI multinational
mining companies can commit to sustainable development as part oI its bottom line, then the
transIer oI skills, technology and capital Irom mining can 'revolutionise' the impact oI mining on
economic and social development.
The IFIs have been providing technical assistance to Zambia in the mining sector. For instance
the World Bank sponsored the 'Mining Sector Technical Assistance Project. Credit 2269-ZA'.
The objectives oI this project were to support the Government in implementing an eIIective
strategy Ior the mining sector. SpeciIically in the short term: improving the eIIiciency and
productivity oI the mining sector so that it could generate the resources needed to support the
recovery and diversiIication oI the economy. In the long term: (i) supporting the development oI
new copper mines by private investors; (ii) ensuring the systematic phasing out oI depleted
operations; (c) supporting the development oI non-copper mining exports, especially gemstones;
(iv) helping strengthen environmental protection in mining.40
Tax incentives shrink the tax base oI low income countries unnecessarily as in Zambia. This has
39 ibid
40 World Bank (2003) , Copperbelt Environment Project
31
been attributed to lack oI adequate skills to negotiate and create models that would be beneIicial
to the country leading to mining companies negotiating Ior tax holidays. It states that 'tax
incentives in sub-Saharan AIrica are now used more widely than in the 1980s, with more than
two-thirds oI the countries in the region providing tax holidays to attract investment. Such
incentives not only shrink the tax base, but also complicate tax administration and are a major
source oI revenue loss and leakage Irom the taxed economy. For instance in Zambia, due to VAT
preIerential treatment, the government lost the Iollowing amount oI revenues:
The concessional royalty rate oI 0.6 was exempt Irom payment Ior the Iirst Iive years oI
operation Ior both Konkola and Mopani Copper Mines. This meant that Konkola was expected to
start paying the royalty Irom 2005 and Mopani Irom 2009. The revenue loss increased Irom K27
billion (US$15 million) in 1998 to K166 billion (US$35 million) in 2004. This is in contrast to a
paltry K 4 billion realised as royalty tax Irom mining operations.
5.4 Mor al support
When the government unbundled ZCCM it remained with the burden oI the environmental
liabilities aspects which investors took no interest in. It has been said that reaching an agreement
1998 1999 2000 2001 2002 2003 2004
US$ million 14.77 13.58 14.13 14.12 16.12 18.88 34.68
K million 27,363.74 32,423.66 43,952.39 50,974.78 69,425.24 89,372.90 166,084.81
VAT PreIerential treatment
Type oI Tax Expenditure: VAT zero rated and exempt goods
Commencement Date: UndeIined
Expiry Date: UndeIined
Source: compiled Irom Zambia nat ional budgets Irom 1997-2003
1998 1999 2000 2001 2002 2003 2004*
K billion
247.57 476.82 501.94 578.68 1,097.51 787.60 1,242.48
Concessional royalty Io large scale mining

Source: compiled Irom Zambia nat ional budgets Irom 1997-2003 and Kangamungazi, E (2009), tax avoidance and
contr act equity
Type oI Tax Expenditure: Concessional rate
Commencement Date: 2000 Ior Nkokola, 2004 Ior Mopani and Luanshya 2003
Expiry Date: UndeIined
32
on how to treat the environmental liabilities was critical to reaching sale agreements Ior some oI
ZCCM's mining assets. This was especially true in those cases where international investors,
such as Anglo American Company (AAC), were associated with multilateral, bilateral
institutions such as the International Finance Institutions (IFIs) and the Commonwealth
Development Corporation (CDC). The donor community, including the WB, took up the aspect
oI environment to help the government mitigate the challenges it was Iacing. Some donors
notably the IMF, World Bank, DIID; members oI the UN Iamily ( UNCTAD, UNDP and
UNECA), as well as AIrican political leaders themselves through NEPAD's AIrican Mining
Partnership, are increasingly aware that AIrica's mineral riches could be turned into a Iorce Ior
development rather than a curse 42. They are, to diIIerent degrees, supporting the eIIorts oI
AIrican governments to integrate mining into their development strategies and to increase their
tax takes Irom mining. UNECA is also leading a pan-AIrican study that will collect inIormation
and analysis on the mining regimes oI all AIrican countries. 43
42 ibid
43 ibid
33
6.0 AID FLOWS AND THE IMPACT ON THE EXTRACTIVE SECTOR
Several AIrican countries, including Zambia, have received aid Irom IFIs and because oI this
these countries have carried out reIorms in their legislation in the extractive sector in order to
render these sectors more attractive.
In 2005 aIter Zambia reached the HIPC Completion Point, the debt stock dropped Irom almost
US$500 million, as can be seen Irom below. Without HIPC, Zambia would have paid US$ 606
million in debt service in 2001 alone. With HIPC in place Irom 2001 up to 2005, Zambia was only
required to pay US$ 170 million, US$ 160 million, US$ 220 million and US$ 210 million oI debt
service respectively.
AIter attaining the Completion Point under the HIPC Initiative, Zambia was granted debt relieI
worth oI US$3.8 billion. Around 60 oI this debt was owed to the IFIs. However, the US $3.8
billion debt write-oII only occurs over a 20-year period.44
With the advent oI the Multi Lateral Debt RelieI Initiative (MDRI) which Zambia is also part oI, it
extended debt cancellation to all post-completion HIPC countries that meet the criteria
established by the individual MDRI trusts. To qualiIy Ior MDRI relieI Irom the IMF or the World
44 Statement by JCTR on Zambia's attainment oI HIPC -2005
Chapter Six
Debt Service Projections : Pre and
Pos t HIPC
0.0
100.0
200.0
300.0
400.0
500.0
2
0
0
5
2
0
0
8
2
0
1
1
2
0
1
4
2
0
1
7
2
0
2
0
2
0
2
3
Yea rs
m
i
l
l
i
o
n
s
(
U
S
$
)
Total debt
se rvice beIore
HIPC
Total debt
se rvice a Iter
HIPC
Sour ce: Hon. Felix Mutat i (The t hen Deputy Minister oI Finance and nat ional Planning) at
Economic Association oI Zambia meeting on Post HIPC evaluation 2007
34
Bank's concessional lending arm (the International Development Association) HIPC countries
had to demonstrate their perIormance in three areas - macroeconomic perIormance;
implementation oI poverty reduction strategies and public expenditure management systems -
have not deteriorated since Completion Point.
Sour ce: Kangamumgazi, E (2008), aid eIIectiveness and the Paris declaration
Gover nments Debt
Total Gover t Debt
Multilater al
200 2001 2002 2003 2004 2005 2006
344,83 3,313 3,855 3,703 3,872 3,715 390,4
2,390 3,092 2,614 2,245 2,748 408,1 285,5
5,837 6,405 6,469 5,948 6,620 4,123 696,7
6,310 7,123 7,140 6.495 7,080 4,528 1,516
Multilater al
Bilater al
Total Gover t Debt
Total Exter nal Debt
35
Statistics have shown that decades oI development aid to AIrica do not seem to have helped the
continent advance its development agenda.
As noted in the World Development Report oI 2000. 'iI aid that went to Zambia between 1964-
1994 had gone to promote investment and iI the investment had been as important to growth as
initially predicated, the country's per capita income would have been more than US$20 000 in
1994 and not US$600'. The Iact is that the majority oI Zambian people have become poorer (per
capita income oI $1000 in 1964) despite having received large amounts oI aid.45
The above statistics indicate that Aid has been on the rise since 2001 and made a signiIicant leap
in 2005, which can be largely attributed to the attainment oI the HIPC Completion Point.
However, data shows a signiIicant drop in 2006.
Between 2004 and 2006, gross external Iinancing under the base case scenario oI the World Bank
45AFRODAD (2004). Reality oI aid-AIrica Edition 2003/4. High Gloss Printers,Harare, Zimbabwe.
Source: Kangamumgazi, E (2008), aid eIIectiveness and the Par is declar ation
ODA and Gr ants to Zambia
36
is estimated at US$3.17 billion. These resources were meant to Iinance: US$1.86 billion in
current account deIicits; a US$270 million increase in international reserves and the remainder
Ior scheduled debt repayments.46
Most oI the aid received has been in the Iorm oI project Iinancing as indicated above in the role oI
IFIs in the extractive sectors. The IFIs have been very instrumnetal in the design oI the extractive
industries policies and legislations with regrads to technical expertise and Iunding. The Support
Ior Economic Expansion and DiversiIication (SEED) and the Economic Recovery and
Investment Promotion ReIorm Program (ERIPTA) projects are a case in point.
6.1 Debt cancellation and its impact on the extr active sector
Zambia has beneIited Irom the enhanced HIPC and MDRI initiatives as a result oI which external
public debt had declined to less than 10 oI GDP by the end oI 2007, down Irom 86 in 2005.
The Low Income Debt Sustainability Analysis jointly undertaken by the IMF and World Bank
states that Zambia's risk oI external debt distress is low and that total public debt is sustainable
under all scenarios analyzed. 47
As with many commodities exporting Low Income Countries (LICs), the global Iinancial crisis
has mostly aIIected Zambia's extractive industry sector, through the Ialling demand Ior copper
and the 60 Iall in the copper price Irom its mid-2008 peak. Copper and cobalt typically
represent 80 oI Zambia's export earnings. The current account deIicit (including grants)
deteriorated to 5.8 oI GDP in 2008 compared to 2.4 in 2007, and is expected to rise to 7.1 in
2009. It is especially the high cost mines that had either shut down or had started to lay oII
workers, with estimates oI direct job losses ranging Irom 8000 to 13000, even though some oI
these were planned despite the Iinancial crisis. Trickle down eIIects are being Ielt by the suppliers
and contractors working Ior the sector, which could push up the number oI laid-oII workers.
The Iall in copper export earnings, coupled with declining Ioreign demand Ior government
securities and outIlow oI portIolio investments, resulted in a steep depreciation oI the Kwacha
against the US dollar in the last quarter, reaching 4882 in December 2008 against 3250 in June
2008. The real eIIective exchange rate (i.e. taking into account major trading partners and
inIlation) depreciated by 30 over the same period. In early March 2009, the same US$/ZMK
rate was at 5600. This is putting pressure on Ioreign exchange reserves, as the Bank oI Zambia
tries to limit the exchange rate volatility. While importers are suIIering, the weaker exchange rate
represents a boost to the competitiveness oI exporters (both the mines and non-traditional
exporters), should encourage diversiIication. The growth oI non-traditional exports was
sustained at nearly 13 in 2008.
46. World Bank (2004). Report No. 27654-Za- Memorandum oI the President OI The International Development Association to the Executive Directors on a
Country Assistance Strategy For The Republic OI Zambia. Country Department, World Bank
47. ibid
37
The Iinancial sector coped relatively well immediately Iollowing the eruption oI the global
Iinancial crisis in October oI 2009, as most banks were adequately capitalized and liquid, but the
deterioration oI assets is expected as the economy slows down. Recent pressures in the inter-bank
market, as well as the increase in government's paper interest rates signal the reduced appetite oI
Ioreign investors Ior GRZ bonds, as well as some eIIects oI the credit crunch. Credit growth has
already decelerated as banks have adopted a more cautious approach to lending. The lack oI
adequate Iacilities by the Bank oI Zambia to deal with signiIicant liquidity pressures adds to the
need oI more proactive bank supervision.
Under the IMF PRGF agreed in May 2008, mining taxes were expected to represent nearly 4 oI
GDP over the period 2008-2010. This was not achieved. In 2008 mining revenues represented
just 1.7 oI GDP, compared to 3.2 anticipated in the PRGF. This was mostly due to Ialling
copper prices, but administrative challenges in implementing the new tax regime and the Iailure
oI some mining companies to comply with the new regime also contributed to the lower-than-
expected revenue. The mines appear to have used the Iinancial crisis, and the Iear oI Iurther job
losses, to pressure GRZ into reversing several oI the changes to the Iiscal regime. The 2009
Budget removed the windIall tax and reinstated a number oI tax incentives (including the 100
capital allowance and allowing hedging losses to be oIIset against mining income, an open
invitation to transIer price). It is clear that the Iiscal regime needed revision, as the simultaneous
application oI the variable proIits tax and the windIall tax created an unsustainable tax structure
and high copper prices could have resulted in marginal tax rates in excess oI 100.
However, GRZ could have made the modiIications in many diIIerent ways, and CSOs are not
convinced that doing away with the windIall tax altogether was the best way to proceed. The
windIall tax (reIined version, e.g. making it deductible) would have been easier to collect, and it
is doubtIul whether ZRA currently has suIIicient capacity to eIIectively enIorce the remaining
variable proIit tax. The 2009 Iiscal Iramework has been revised in light oI the above
developments. As a result, domestic borrowing is expected to increase to 1.9 oI GDP, Irom
1.4 in 2008. According to the Zambia chambers oI mines, the mining industry total contribution
to the Zambian treasury in 1992 was more than $200 million. The average copper price in 1992
was US$ 2280 a tonnes and Zambia produced over 400 000 tonnes. Contrast with 2004, the
copper price had risen to US$ 2868 a tonne, Zambia again produced over 400 000 tonnes but
government revenue Ior the mining sector were slightly more than US$8 million. II royalties oI
3 oI the value oI production had been paid over the period oI three years, the total revenue
would have been more than US$66 million Ior this period.
38
That is US$63 million more than what was actually collected. In just three years, the government
has lost the equivalent oI one-third oI the total addition Iunds it needs to provide universal basic
education in Zambia by 2015.
39
7.0 THE REGULATORY ENVIRONMENT AND TAX REVENUE IN THE
EXTRACTIVE SECTOR
7.1 Regulator y envir onment
Zambia's current extractive sectors legislation are too weak and inadequate to ensure that Zambia
derives maximum beneIits. For instance, the current regulatory instruments do not place an
adequate public disclosure requirement on mining companies except to selected government
agencies.
Mining in Zambia is governed by the Mines and Minerals Act. The government in 2008 enacted
the 2008 Mines and Minerals Development Act which was necessitated by some oI the
provisions in the 1995 Mines and Minerals Act that were discovered to be inconsistent with the
spirit oI the Republican Constitution. For instance, the 1995 Act contained provisions in Section
9 which enabled a mining investor to contract a Development Agreement with the Government
on any terms and such contracts, according to the said provision, were outside the law. As such
these Development Agreements were powerIul tools that were being used by the mining
investors to insert whatever clauses they deemed Iit to protect their investments.
Though the Act is in existence, its implementation and enIorcement still remains a problem Irom
the government side and the investors have taken advantage oI this. This is in addition to some oI
the weaknesses that have been identiIied within the Act.
There is also instability in the legislation governing the mining sector. There have also been many
changes in the mining sector tax regime annually, apart Irom the changes in the Mines and
Minerals Act. The Income Tax Act, Value Added Tax Act and the Customs and Excise Act also
endured recent changes. As a consequence oI these Irequent changes to the tax law, there exists a
strong argument that the mining regime lacks stability and predictability. These changes come
with both domestic and international costs to Government.
7.2 Tax revenue
Overall, the process oI diversiIication appears to have spread within the mining sector itselI with
some sign oI diversiIying away Irom copper into other base metals. However, the pace oI
diversiIication away Irom the mining sector has been slow. Tax has long been under-emphasised
in development policy as it is seen as either too technical or political, although, an eIIective tax
system is crucial in raising revenues and addressing inequality.
Chapter Four Chapter Four Chapter Seven
This allows taxes to play a key role in determining and strengthening the relationships between
the state and its citizens in issues oI development.
The privatization and restructuring oI the mining sector has made it more attractive Ior Ioreign
investments. Taxes and Iees charged on mineral production have been Iavorable in terms oI
royalties and taxes, while incentives, tax holidays and rebates have been created speciIically to
encourage investment in the mining industry.
A new Iiscal regime Ior the mining sector came into eIIect on the1st oI April 2008. The new
regime, which superseded existing development agreements, was received with mixed reaction
Irom mine owners and Civil Society Organisations. They were, however, introduced to
substantially increase the government share oI mining proIits and rents.
The changes include:48
i. An increase in the mineral royalty to 3 (Irom 0.6 per cent) with an initial collection estimated
at ZMK 29.1 billion at the end oI May.
ii. Introduction oI either a variable proIit tax when the proIit ratio is above 8 or a graduated
windIall tax (levied on production value) when world copper prices exceed $2.50 a pound. On
windIall tax, the government estimated to raise US$ 415 million (ZMK 1.3 trillion)
iii. An increase in the corporate income tax to 30 (Irom 25 )
Some mining companies paid the new mining taxes - Kansanshi Mining Plc paid US$19.35
million Ior the 2007/2008 Iiscal year and was expected to pay US$107 million by 14 April 2008.
The poor perIormance in revenue collection (see table above) was attributed to non-payment oI
windIall and company tax by some mines. In particular, only three mining companies paid
windIall tax while two companies paid company tax under the new regime 49. All the mining
companies, however, paid mineral royalty tax under the new regime, introduced in April 2008.
40
48. Ministry oI Finance and National Planning, 2008 Budget speech,
49. Ibid
**The mineral royalty represents 24 percentage oI the new 3 percent tax rate
2008
Preliminary
Variance
o I
Variance
2008
Es timate
Additional Mining Revenues
917.4 319.5 (597.9)
(65.2)
1. Company tax*
2. WindIall tax*
3. Mineral royalty**
300.5
502.1
111.8
22.2
126.1
171.2
(278.3)
(376.0)
56.1
(93.6)
(75.9)
19.1
Source; Ministry oI Finance and national Planning
* Company tax repres ents 5 percentage points oI the new 30 percent rate
41
In 2008 the mining companies did not pay ZMK597.9bn (US$132.9m) hoping that the
government would reverse the introduced tax regime - to date they have not paid this amount.
The government hoped to increase its revenues substantially over the medium term. According to
the International Monetary Fund (IMF), all mining revenues in excess oI what would have been
collected under the old regime will be saved in a separate government Mining Resource
Account held at the Bank oI Zambia. This would be used as a stabilization Iund to smoothen
expenditures over time.50
When Zambia privatised its mining companies in 2000, under heavy pressure Irom the IMF, a
consortia oI companies negotiated a deal that meant they paid very little tax on the value oI the
minerals extracted by the mines.
The idea behind the 2000 privatisation was that it would increase investment in the mining sector,
thereby boost production and increase government tax revenue. The mines companies were
enjoying very huge proIits Irom their operations in the country even as Zambia's main non-
renewable resource was being depleted at an escalating rate. Despite having very low local
production costs, Zambia's poverty levels increased and its revenues Irom the mining sector keep
on reducing.
Considering Zambia's regulatory environment it has not ensured the best way oI exploiting the
natural resources to the beneIit oI Iuture generations. The mineral resources oI a nation are owned
by its citizens. II Zambia's natural resources are going to be exploited, then the citizen-owners
should have an equity share together with the investor-exploiters. This element oI Zambian
ownership oI its natural resources is captured under the current tax regime, through resource rent,
under the variable proIit tax and the windIall tax. It was, however, threatened by the removal oI
the windIall taxation element. One oI the major voids in Zambia's tax laws beIore April 2008 was
50.ibid
2004
9,790 (loss in revenue) K million
Type oI Tax Expenditure: Concessional income tax deductions
Commencement Date:undeIined
Expiry Date:UndeIined
Sour ce: Kangamungazi, E (2009), Tax avoidance and cont r act equity
Company income tax deductions
42
the lack oI resource rent on exploiting the mineral resources. The sole purpose oI the variable
proIit tax and windIall tax was to give resource rent to the owners, the Zambians.
The windIall tax captured signiIicant tax revenue during high copper price periods. Since there
are only two elements oI consideration i.e. the selling price and cost oI production, it is easy to
administer and it is a low cost approach on tax administration. From the design, the variable proIit
tax would take eIIect in any particular mine but aIter the company tax oI 30 and when the
company revenues become twice the cost oI production then the windIall is eIIected at graduated
levels at 25 oI copper price at $2.50/lb to $2.99/ lb and 50 at $3.00/lb to $3.49/lb, and at
75/lb at any price at $3.50/lb and above, respectively. This is the general parameter with no
intersection. Where possible overlaps were anticipated between variable proIit tax and windIall
tax, allowable deductions were provided Ior.
The IMF cautioned, however, that the marginal eIIective tax rate might be too high when world
market prices are high. It has thereIore proposed to make the windIall tax, like royalties,
deductible Ior the purpose oI calculating taxable proIits or even to replace the windIall tax by a
progressive proIit-based variable tax. This would take into consideration the diIIerent cost
structures across mines. The Zambian authorities argued, however, that they consider the
windIall tax a more eIIective way to capture a sizable share oI the rent when prices are
exceptionally high and that current income tax provisions do not allow taxpayers to deduct other
tax payments.51
Removing windIall taxation was a long term cited position oI the mining companies to take the
beneIit at a Iuture date when the trigger positions are supposed to come into play. The two
variables windIall and variable tax have no overlap or intersection. The elements oI
consideration particularly the trigger in both variable proIit tax and windIall tax are diIIerent and
provide Ior both low and high cost mines to operate eIIiciently and improve in technology to their
advantage. II this is the principle then the argument that the variable proIit tax will capture some
element oI windIall taxation is not true. The government is not getting the expected revenues
Irom the mining sector.
43
It has been noticed that due to the above non payment - iI one in a given tax system does not pay
his or her taxes, someone else will have to pay it in the long run. This creates a Iinancing gap,
causing Government to borrow today and raise taxes to oIIset the borrowing tomorrow.
Sour ce: Republic oI Zambia (2006, 2007, 2008, 2009, 2010) Estimates oI Revenue and Expenditur e

2007 Actual

2008 Estimates

2008 revised

2009 Estimates

Mineral Royalty

67,503,453,250.00

72,000,000,000.00

66,899,574,420.00

154,441,018,485.00

Company Tax

-

300,500,000,000.00

22,229,813,598.00

-

WindIall tax

-

502,100,000,000.00

126,017,221,141.00

-

Mineral Royalty

-

114,800,000,000.00

171,258,295,898.00

-

2005 Actual

2006 actual

2007 Estimates

2007 revised

2008 estimates

Mineral Royalty 38,864,752,308.00 58,724,000,000.00 77,335,876,000.00 67,503,453,250.00 72,000,000.00
44
8.0 CONTRIBUTION OF EXTRACTIVE SECTOR TO POVERTY REDUCTION AND
ECONOMIC GROWTH
8.1 Poverty
Zambia has two main challenges ,that is, high poverty levels and low growth rates. Despite strong
economic perIormance in recent years, rural poverty has not abated. Zambia is ranked 70 out oI
the 84 countries on the 2010 Global Hunger Index. This index measures proportion oI
undernourished in the population (); prevalence oI underweight in children under Iive years
() and under-Iive mortality rate (). According to the Central Statistical OIIice's 2006
estimates, 64 oI the Zambian population, or approximately 7.5 million people, live below the
national poverty line.
As poverty in Zambia is predominantly a rural phenomenon, 80 oI rural people were said to be
poor while only 34 oI urban dwellers were reported poor in 2008. Although Zambia is more
urbanized (35 ) than most AIrican nations, two-thirds oI its people are small-scale Iarmers.
Zambia is still one oI the least developed countries in the world (number 164 out oI 182 countries
on the2009 Human Development Index).
Source: Mr Kapile ( World Bank r epresentative- Zambia) at the International ConIerence on the Global Cr isis and its
impact on the mining industry in Zambia
Entering a Period oI Uncertainty
Zambia: Annual GDP Growth ()
Copper Exports in Million US$
Chapter Four Chapter Four Chapter Four Chapter Four Chapter Eight
45
Zambia is endowed with rich mineral deposits which have not been Iully exploited. It is rich in
copper, cobalt, gold, manganese, gemstones, emeralds, and uranium that are supposed to
contribute to poverty eradication. This can be done through contribution to equitable and
sustainable development, promoting sustainable livelihoods and quality job creation,
inIrastructure development, environment management and corporate responsibility.
Poverty has been increasing yet the country is rich in mineral resources. Mulenga & Van
Campenhout (2008) Iound that Iollowing the major structural adjustments (which included
large-scale privatization oI the copper mines) many urban households migrated back to rural
areas in search oI employment opportunities.
The table above shows changes in poverty levels according to the gender oI the household head.
At the US$1.25 a day line, all individuals experienced a decline in their levels oI poverty
according the headcount rate as well as the poverty gap and poverty gap squared. In the case oI
male-headed households, the headcount rate declined Irom 63 to about 52 , while Iemale
headed households experienced a slightly smaller decline in their headcount rate Irom 66 to
56 .
CSO: ShiIts in pover ty by gender oI household head, 1996 - 2006
11

1996 2006
Change in the
Headcount Rate

Headcount
Rate
Pover ty
Gap
Headcount
Rate
Pover ty
Gap

Food Poverty Line
Male Headed 27.12 9.62 28.09 10.65 0.97
Female Headed 34.18 13.23 33.67 14.12 -0.51
Moderate Poverty Line
Male Headed 43.38 17.44 42.50 18.15 -0.88
Female Headed 50.19 22.06 48.67 22.41 -1.52
40th Percentile Poverty Line
Male Headed 37.96 14.45 38.48 15.84 0.52
Female Headed 45.63 18.74 45.18 19.88 -0.45
$1.25 a Day Poverty Line
Male Headed 62.94* 29.74* 51.53* 23.19* -11.41*
Female Headed 66.27* 34.46* 56.26* 27.56* -10.01*
46
Increased copper production, high international copper prices and additional debt relieI through
the HIPC and the Multilateral Debt RelieI Initiative (MDRI) have improved Zambia's external
position signiIicantly but this has not translated in signiIicant poverty reduction. There has been
enormous improvement in the current account balance (including grants) Irom a negative 4.4
oI GDP in 2005 to a positive balance oI 3.0 in 2006.
These improvements in the external situation have resulted in a much-needed increase in
international reserves, which stand now at Iour months oI imports. The main source oI this
improvement is the exceptional rise in copper prices since 2003 by approximately 300 .
However there are 7.5 million people (64 ) in Zambia who live in poverty, despite the presence
oI mineral resources. With good governance and transparency the exploitation oI these mineral
resources can generate large revenues that can cultivate and help in sustaining growth and
poverty reduction.
Since 2003, with dramatic increases in the world price oI copper, the Zambian economy has
experienced unprecedented growth. This growth, through the copper boom, should result in
increased development and contribute to poverty eradication. In reality, however, development
Growth and pover ty trends, 1991-2004
Sour ce: Centr al Statistical oIIice
Inidence (PO)
GDP per capita
Depth (P1)
Sever ity (P2)
47
has been limited. Zambia continues to be the twelIth poorest country in the world, the average
liIe expectancy is only 40.5 years and 63.8 oI the population lives on less that US$1 a day.52
Moreover, as a result oI industry growth, communities near the mines are experiencing increased
suIIering rather than improved quality oI liIe. They carry the burden oI the adverse social and
environmental impacts oI the industry, which undermine development and perpetuate poverty.
Even iI the growth rate has been positive i.e above 5 , it has not translated into poverty reduction
and improved livelihoods Ior the Zambian people. But high growth rates are not the sole
requirement; such growth must occur in such a way as to create the jobs that will liIt people out oI
poverty and reduce inequality. Zambia can use this sector by not only achieving the MDGs but
also socio-economic development which at the moment cannot be achieved. The presence oI
extractive industries has, to a large extent, not beneIitted the Zambia people.
52. UNDP's Human Development Report Statistics: http://hdrstats.undp.org/countries/datasheets/ctydsZMB.html, 29/1/2008
48
9.0 RECOMMENDATIONS
9.1 International Financial Institutions
The IFIs should support the use oI mutual negotiations and partnerships in aid relationships as
opposed to conditionalities which in many times are detrimental to the country and its citizens.
9.1.1 There is need to evaluate the Support Ior Economic Expansion and DiversiIication(SEED)
and the Economic Recovery and Investment Promotion ReIorm Program(ERIPTA) projects, to
assess their speciIic impact in the extractive industry sector oI Zambia.
9.2 Technical assistance
The extractive industry is a complicated sector that needs considerable investment in skills
development and technology. Because oI challenges being experienced in managing Zambia's
natural resources, Zambia has relied on technical expertise, advice and experience sharing in
issues relating to extractive industries Irom IFIs and other development agencies. However, the
IFIs should not take this opportunity oI giving advice to Zambia in setting the IFIs agenda which
comprises the policies and developmental goals oI the country.
9.2.1 There is need to work towards creating a pool oI knowledgeable people in Government to
negotiate better terms in regard to Extractive Industries Investments.
9.3 Owner ship
The Government oI Zambia should put in place mechanisms that allow its citizens to participate
meaningIully in the ownership and control oI their mineral resources. The minerals are Ior all
Zambians and not Ior Iew individuals. Local people/communities participation should include
but not limited to involvement in equity, management, public ownership and supply chains oI
extractive industries.
9.3.1 BeIore receiving aid, the Zambian Government should ensure that aid is aligned to existing
development plans instead oI making parallel programmes. They should not make parallel
programmes to the existing development plans but should compliment the accomplishment oI
the programmes and projects.
9.3.2 The Government oI Zambia should not undermine the contribution oI parliament and civil
society in inIluencing the decisions oI 'accepting' or 'rejecting' an investor, so that investors that
Chapter Four Chapter Four Chapter Four Chapter Nine
49
compromise the development oI the country can be avoided and also to embed the spirit oI
transparency and accountability.
9.4 Supply constraints
The investment in inIrastructure needs to be scaled up signiIicantly especially along growth
corridors. The tax revenue Irom the extractive industry needs to be used to Iinance inIrastructure
development - a social Iund needs to be established. Poor inIrastructure and inadequate access is
resulting in signiIicantly increased cost oI doing business, making it diIIicult to integrate the rural
population with the rest oI the economy. The gravity oI impact will depend on how the country is
Iirmly integrated in the world and domestic economy and how diversiIied its production structure
is.
9.5 Equity
The government should consider taking up equity in mining. This will help to reduce heavy
dependence on Ioreign investors and allow the emergence oI a local private sector.
9.5.1 Environmental rehabilitation Iunds which are intended Ior disasters and social decline due
to mining activities should be strengthened and have stringent access conditions to avoid abuse.
9.6 Value addition
The government, through the Zambia Development Agency, needs to start promoting investment
that leads and emphasises on value addition. The objectives should Iocus on key exploitable
resources and to promote value addition on the same.
Recommended Resource Goal
1. Gemstone Value addition
2. Copper Value addition
3. Manganese Ferro-alloy
4. Iron Ore Steel Production
5. Marble Stones Tiles
9.7 Tax payments
The mining industry should be attuned to the international economic situation in order to derive
maximum advantage Irom Ioreign trade by careIully anticipating technology and demand
50
changes in the international market Ior minerals and metals. The strategies oI export need to be
kept in view oI the mineral inventory position and oI the long term needs oI the country.
9.7.1 Royalties are a depletion allowance and should be paid regardless oI proIit levels - they
should be a non-claimable allowance by the mining companies. Royalties should be based on
gross sales rather than levels oI proIitability.
51
10.0 CONCLUSIONS
Transparency and Accountability in the extractive industries should involve all stakeholders. The
government should not only be accountable to donors as is the case. Accountability should also
be Irom international Iinancial institutions to the Zambian citizens. Recipient countries should be
able to contribute in determining the policies oI these important institutions. It should be
emphasised that any aid given to Zambia by the IFIs should be people centered: and should strive
to empower the government and the citizens through ownership and participation iI it has to be
eIIective and help improve people's lives, more especially in the extractive sector. The
relationship between a donor and the recipient country should be that oI partnership and not oI
stewardship.
There is a lot oI potential that remains untapped in the extractive sector. There is need to make
strategic decisions in the sector iI it is to signiIicantly contribute to sustainable development and
poverty reduction. Zambia needs an extractive industry strategy that Iocuses on the long-term
needs oI the country and its citizens. Capacity in the government ministries directly involved in
the mining sector tax, license compliance and environmental management should be
strengthened to enable them to eIIectively monitor mining activities in the country. The sector
should also be developed to capture opportunities beyond general mining activity.
Chapter Four Chapter Four Chapter Four Chapter Ten
52
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