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Tuesday, 9 October 2007

A case for low mining taxes?

Reuters reports that Fred Bantubonse, the Zambia Chamber of Mines executive director disputes the logic of increasing mineral royalties from 0.6% to 3.0%:

Bantubonse said allowing foreign mining firms to continue operating under existing conditions would guarantee the opening up of more copper mines, which would in turn create more employment for Zambians. "The best is to allow more money to come into the economy to create jobs. We have seen that employment has risen from 22,000 jobs in 2000 to 48,000 jobs in the mining sector because of new investments," Bantubonse said.

Bantubonse said the government would collect more taxes through personal income tax and land tax the councils collect from the mining firms, while the tourism and services sectors had also benefited from higher investments in the mines.

Bantubonse’s statement really strike at the heart of the debate: what is the best way for Zambia to tackle poverty – is it through allowing foreign mining companies to create more employment or to collect more direct mining revenue, and then use that revenue to deliver public services? The answer is not as easy as it seems.

Bantubonse is right that additional employment should create a broader tax base in the long term. However, the additional jobs cited by Bantubonse are masked by foreign employees from abroad. As
Herman discussed earlier this year, where jobs are being created for Zambians, these are often low quality. In addition, there’s little evidence on the ground of any technological transfer from the mines to local firms / sectors. Technological diffusion is critical for long term empowerment and local development.

The problem is that giving more revenue to Government is not necessarily a robust solution either. More money in Government coffers won’t do the nation any good unless we have transparency. We need a much smarter approach to the mining issue than just a revenue hungry approach. More money to central Government alone will not improve local economies, and it won't certainly translate into better pay and working conditions for workers. So we are stuck between two unwelcome alternatives.

9 comments:

  1. The article can be found here:

    The problem is the focus on creation of jobs, instead of revenue sharing, tax collection (from the mining companies, although they have no scruples about collecting taxes from employees), or spending costs in the local economy and on local suppliers.

    Obviously, this is not working, because nothing of permanence is created. These jobs will disappear when the mines are exhausted. And it is an outrage. And I'm not even talking about the quality of these jobs, or the government's refusal to enforce labour laws.

    The fact that central government is bloated and inefficient however is no excuse.

    We can do both - agitate for much more efficient government, and for a full role for the mines in the economy. Now, we have the worst of both worlds, with no contribution of the mines and an aloof government. And the two issues are not connected - these mining deals would never have survived an open debate in parliament or the press, and the government knows it.

    More money in Government coffers won’t do the nation any good unless we have transparency.

    Even with an inefficient government, more revenues could lower taxes for working people and Zambian businesses.

    So I say we need it all.

    Also, is Bantubonse's claim that the 0.6% taxation is absolutely necessary to attract mining companies even true, when the international standard is 3.0%? Where else would they go for their copper? And remember that copper prices are at historic highs.

    "The best is to allow more money to come into the economy to create jobs. We have seen that employment has risen from 22,000 jobs in 2000 to 48,000 jobs in the mining sector because of new investments," Bantubonse said.

    26,000 extra jobs, in a workforce of 4,903,000 - that is a 0.53% increase in employment, in exchange for $1,600,000,000. A quick calculation - that is a loss to the nation of -$61,538 per job.

    (The latter are rough numbers - I estimate the loss to Zambia from the fact that copper/cobalt exports were 3 bn and Equinox stated it's profits at 60% of turnover. It is rough, but try find an honest disclosure of profits for the industry.)

    So I don't believe him. I need more than his assurances. Who are all these apparatchiks who are defending these horrible deals? Can he prove he hasn't been bribed? Because his arguments make no sense to me.

    Also, no one is talking about enforcing price participation.

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  2. This is what Bantubonse said a year ago:

    Chamber of Mines Anticipates Increased Contribution to Govt
    All Africa Global Media
    Lusaka, Apr 18, 2006
    (The Post/All Africa Global Media via COMTEX) --

    " Bantubonse acknowledged that contributions to the government treasury have been low following the privitisation of the mines owing to the development agreements between the investors and the government.

    He said this was exacerbated by the operating losses incurred in the first years after privitisation.

    "However, the direct contribution to the treasury will now increase following good performance by most mining companies and the improved metal prices," he said.

    On the development agreements, Bantubonse said contrary to popular belief, there were no wholesale concessions. "As the mines were heavily loss making prior to privitisation, concessions were necessary.

    The only significant concessions were the reduction of royalty from two per cent to 0.6 per cent and a four-year exemption from import duties," Bantubonse explained.

    "The latter was limited to an agreed amount in any one year. Most of the concessions have either expired or will expire soon, except for the stability periods of 15 years to 20 years, during which the government has committed itself not to adversely change tax laws." Bantubonse said large-scale mining, especially underground mining, has long gestation periods.

    He said in Zambia, the need for re-capitalisation on one hand and low prices on the other extended the turn around period.

    "However, the situation has started to improve, thanks to increased copper output, reduced costs and higher prices," Bantubonse said. "Notwithstanding the increased prices, the accumulated losses will have to be wiped out before real profit can be realised.

    "Since privitisation, there has yet to be a return-on-investments for the shareholders."

    Bantubonse revealed that meaningful profits have only been recorded for 2004 and 2005 adding that the losses in the mining industry have reduced drastically since privitisation, mainly due to the injection of fresh investment funds.

    "In fact there was a profit in the year 2001. However, the collapse of metal prices and increased production costs resulted in further losses in 2002 and 2003," he observed.

    Bantubonse said all new mine owners have sought ways to augment production through cost effective open pit mining with ores that are predominantly oxide and therefore treated for leaching.

    He said new mine owners have also examined low-grade stockpiled material for processing in addition to malachite purchases while plans were under way to reclaim refractory copper ores at Nchanga.

    Bantubonse said the current upward trend in copper prices encouraged hope for the future of Zambia's mining industry. "This has attracted other investors into the industry. New mines are being opened and much exploration for minerals is being undertaken," Bantubonse said. "

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  3. What Fred Bantubonse said in the past. Again, a lot of reinsuring that somehow the mines would pay their fair share, just not right now. It seems from the first post that he is now saying that the mines will only contribute workers wages to the economy. Maybe he is just going through the motions to show he really earned his bribe. Who knows? From previous articles:

    Magande quiet on mine contracts
    By Kingsley Kaswende
    Friday March 30, 2007 [02:00]

    " On the other hand, mining firms are not prepared to renegotiate, the Chamber of Mines of Zambia (CMZ) recently said. CMZ general manager Fred Bantubonse said development agreements were legal documents which both parties entered into voluntarily. “If authorities come up with a harsh fiscal regime, the impact may come later than now when investors decide not to invest,” Bantubonse said. "


    Bantubonse urges govt to honour contracts
    By Fridah Zinyama
    Wednesday May 23, 2007 [04:00]

    " Appearing before the parliamentary committee tasked to look at economic issues chaired by Kabwata member of parliament Given Lubinda, Bantubonse said the mining houses should be given enough time to realise profits from their investments as mining was a long-term business. "

    " “We would like to reiterate that mining is a long-term business and that government efforts should be directed towards growing the economy,” he said. "

    " Bantubonse said the Zambian Income Tax Law allowed for capital allowances and carrying over of tax losses. “The effects of these two items has accounted for the mining sector’s low contributions to government treasury during this capital intensive period,” he said. “Thus as soon as these carry over losses and capital allowances are liquidated the mining companies will be in a tax paying position.” "

    " He said the mining companies’ contribution to the treasury would then be enhanced. Last week, a World Bank adviser Paul Collier said the government had made a tactical error in imposing a tax-free-regime on the copper industry and should quickly impose a windfall tax so that the people of Zambia could benefit from their resources. Collier said the government should quickly impose a windfall tax before the boom in copper prices subsided. "

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  4. MrK,

    There's probably an interesting distinction Bantubonse is making in his utterances.

    That is between existing mines and NEW MINES. He seems to be suggesting that we need to keep the taxes low to encourage NEW MINES to be set up.

    In that sense he would agree with your assessment that increasing the royalties from 0.6% to 3.0% would not make the existing suppliers leave! Infact you can even increase to much more and they would never leave! The companies are "sunk" in Zambia. They have invested too heavily to simply pack up and go.

    Can you imagine Lumwana packing up and going after a $700m investment? It would have to be a ridiculous increase for them to leave and take the $700m loss.

    The question therefore is whether increasing the rate to 3% would make Zambia less competitive in attracting NEW investment? As you correctly note there's still scope for increasing the rate.

    A more interesting question I think is what should Government policy be on NEW MINES? In particular, I know that ZCCM-IH (the Governmnent arm) has plans to open a new mine down the line. The Mines Minister was even hinting that his Ministry is doing exploration in Southern Province. If that is the case, might we see Government now entering into owning minings with cheaper extraction? The costs of extraction varies from place to place. It might be possible for Government to own mines which are much cheaper to extract. Plans are underway to boost the capacity of the Ministry to do more extensive exploration.

    My personal preference is that Public Private Partnership should be explored in these instances. The question of course is: if Government can enter PPP, why not local authorities?

    We await to see the Draft Mining Policy. It might shed more light on Government's

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  5. In that sense he would agree with your assessment that increasing the royalties from 0.6% to 3.0% would not make the existing suppliers leave!

    Why would existing suppliers leave, because all of a sudden they would have to pay the existing, world standard tax rate?

    Where would they leave to?

    And another thing. People keep talking about Zambia's 'competitive advantage'. Well the copper mines are Zambia's competitive advantage. No place in the world produces as much.

    So again, where are they going to leave to?

    No, this is all about a small number of people, who have taken bribes to sell out Zambia's interests to the mining companies, and now they are protecting their investment.

    And until the government is open to the people about the mining agreements, who signed them and why, that is my working hypothesis.

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  6. Cho,

    On the issue of the 3% tax:

    The report makes a number of interesting claims.

    1) The Post notes, “the IMF strongly recommended that the government increases the mineral royalty tax from 0.6 per cent to a maximum of three per cent.” The word maximum is worth noting. MPs and others have been asking the Minister of Finance where the widely discussed 3% figure came from and why it cannot be higher. Typically it is suggested that this is towards the lower end of regional and international average royalties, so it would increase revenue but keep Zambia ‘competitive’. Whether you accept this argument depends on why you believe mining firms come to Zambia: to exploit high grade copper deposits or to take advantage of tax incentives? Some regional royalties are as high as 20%. We may now have an answer as to how the 3% figure appears to have been set in stone.



    From the same article, on the exemption of current mining companies from the increase of royalties to 3%:

    2) The Post also quotes the IMF stating that, "The mission recommends that existing development agreements should be respected and appropriate legal advice taken before any initiative is contemplated that might amount to an invitation to contract parties to revise any terms of their agreements." This explains where the exemption for existing contract holders in recently announced revision of the Mines and Minerals Act comes from.

    http://www.minewatchzambia.com/2007/04/imf-behind-exemptions-to-mineral.html

    On the mine development agreements:

    Corruption In Zambia: Is it inevitable? Can we stop it?

    The recently published and well researched study of the privatisation of Zambia’s cooper mines, For Whom the Windfalls, points to the potential for corruption at the highest levels. Was it only free market ideology that kept tightly secret the Development Agreements signed between the GRZ and the purchasers of the mines, or was it because their very terms -- so advantageous to foreign investors and so disadvantageous to Zambians – had been facilitated by high level corruption? Surely we need to know more about all this!


    http://www.jctr.org.zm/publications/AFLPresentation/AFLcorruption07.pdf

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  7. MrK,

    Thanks for the JCTR link!

    "Whether you accept this argument depends on why you believe mining firms come to Zambia: to exploit high grade copper deposits or to take advantage of tax incentives? Some regional royalties are as high as 20%."

    Surely the answer is both!

    I think what is needed are two separate things.

    A policy on existing mines.
    A policy on new mines.

    I am more worried about new mines as Zambia has plenty of new mines to come.

    What are the terms for Lumwana - do you know?

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  8. It seems like the mining agreements may be in violation of agreements signed by OECD countries. Maybe that is part of the reason why the government is so secretive about these deals - they are illegal. :) Or at least in direct violation of international agreements.

    Whatever the weaknesses of Zambia’s negotiators, there is no excuse for massive multinational investors to blackmail one of the world’s poorest countries to provide special concessions from its national laws. Many companies are signed up to the Organisation for Economic Co-operation and Development (OECD) guidelines on investment, which are designed to promote good corporate citizenship. These state clearly, “Enterprises should refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to environmental, health, safety, labour, taxation, financial incentives or other issues.” (43). However, the Chamber of Mines of Zambia is quite brazen about the companies’ lobbying effort, stating, “The investment climate that prevailed in the country at the time was not attractive to Foreign Direct Investment (FDI) and since by necessity mining operations are long-term the new investors demanded, as a matter of prudence, for special conditions in the purchase conditions.” (44).

    http://www.sarpn.org.za/documents/d0002403/5-Zambia_copper-mines_Lungu_Fraser.pdf


    This is an article from the Equinox website itself. It is not the development agreement itself, but describes parts of it. Certainly plenty of concessions were given, to the point of the state not seeing much of anything.

    Key concessions agreed within the Development Agreement include a corporate tax rate of 25% and a mineral royalty of 0.6% of gross product for the stability period. Capital expenditure can be deducted in the year incurred and losses can be carried forward for up to 10 years. There has also been a deferral of payment of various customs and excise duties and imposts, and a confirmation that there will be no withholding tax payable on the remission of profits or restrictions on the repatriation of capital.

    http://equinoxminerals.com/files/document/54_Lumwana_Development_Agreement_Signed__-_19-12-2005.pdf

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  9. Here is what I think. Because concessions are against the OECD agreements, a willing negotiator could reduce the 'stability period' from 10 years the time that has elapsed (like 2 years, for instance). I think that could get past a lot of the exemptions given to these mining companies.

    ReplyDelete

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