Last month’s Ecologist investigation, ‘Conned for her copper: Zambia pays the price for aid’, highlighted how countries rich in natural resources can remain extremely poor, through little fault of their own.

Khadija Sharife’s article drew from a report published by Scottish aid agency, SCIAF. Since we published the report, things have moved fast.

Taxing issues

When Scotland’s oil fields came on stream in the 1970s, no-one questioned the fact that companies would have to pay taxes to exploit that natural asset. Yet in many developing countries, for a complex set of underlying reasons, substantial discoveries of valuable natural resources often do not lead to better-funded governments, and to reduced levels of poverty.
 
In this depressingly familiar case, SCIAF found that in the financial year 2006/7, for every  $1 billion worth of copper dug out of the Zambian earth and sent across its border crossings to build the world’s infrastructure, the Zambian people, via their government’s tax revenues, ‘benefited’ to the tune of a paltry $6m.

At SCIAF we came up with a two-pronged approach aimed at improving the situation. In a Zambian context we contributed through the media to the debate there about the need for a new and fairer tax regime. One was duly announced, yet at first it was by no means clear that it would be accepted by mining multinationals that stood to pay the extra bills.

We also looked for a ‘hook’ closer to home, a way in which a Scottish-based organisation like SCIAF could help to bring about the change that we sought. Thankfully we found one; Zambia’s biggest mining company, KCM, accounts for around half of the Zambian copper industry. It is owned by a UK-based mining multinational, Vedanta Resources plc. And one of Vedanta’s biggest investors was the Scottish financial services firm, Standard Life Investments.

It took pressure from thousands of SCIAF campaigners writing to Standard Life, as well as national media coverage highlighting the situation, but it seemed to work. To their credit, Standard Life Investments proved to be willing to listen and took our representations seriously. In the end a conference call with the CEO of Vedanta Resources saw the company agree to accept the new tax regime in full, a precedent that helped to set the tone across the sector.

New money?

The new taxes were expected to net the Zambian government an additional $415m per year, a sum equivalent to almost 200 per cent of the Zambian national healthcare budget. These revenues were to be funnelled each year into a ring-fenced fund and used to finance big-ticket projects within the National Development Plan, supporting things like health, education and national infrastructure. A fantastic outcome.

Then came the credit crunch. Much has been made of the impact of the financial crisis on the City of London and Wall Street but, far from the world’s spotlight, its effects have been felt hardest in places like Zambia. In mid-2008 the copper price was around US$9000 per tonne. As the economic crisis unfolded the price plunged to below US$3000 per tonne in the space of just 6 months. Profits dried up, jobs were threatened, and the heady rewards promised by this new copper tax regime became compromised in two ways.

First of all, the amount of tax due to be paid was directly related to copper prices. Of course, this could mean a welcome windfall if prices continued to rise, but as prices plummeted it simply meant less income.

Secondly, the general environment facing copper companies changed. Instead of prices being so far above costs that new taxes could be easily absorbed, the price fell to levels that called into question the very viability of some forms of production. 

This remains a dynamic situation (the copper price has rebounded to around US$6000 per tonne, for example) but, as it stands, one of the new tax measures has been scrapped completely. Others remain in place, although there are some question marks as to the level of compliance with some of those obligations. It seems clear, however, that the tax regime remains more favourable to Zambia than the one it replaced.

SCIAF plans further research into the situation.  This experience has shown us, once again, how campaigning really can make a positive difference. By standing up for justice, people can directly help to bring about significant positive change. It has also reminded us that power lies not only in the hands of governments, but also in company board rooms, in investment management companies, and in the hands of the customers of such companies.

Despite the unfortunate and unpredictable effects of the credit crunch, we know that many millions of extra dollars have already been paid by copper multinationals to the Zambian government, reflecting a fairer price for the right to extract that country’s key natural resource. This is progress. People in places like Zambia don’t want aid. They just want a fair deal.

Chris Hegarty is Advocacy Manager for SCIAF

Useful links
'Undermining Development' report by SCIAF

See also

• Conned for her copper: Zambia pays the price for aid
• World Bank shackling developing world to a high-carbon future
• World Bank breaks own rules on lending to palm plantations
• UK companies linked to Vedanta's planned Indian mine