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Sunday, 22 November 2009

Mining Reflections: A People Betrayed

We continue our monthly reflections on important areas where significant gaps remain. This month our focus is on the mining question. New political calls to revist the the current fiscal regime in face of rising global prices has again thrust this important sector at the forefront of public discourse. Two key features stand out in this “new debate” : the lack of significant public anger on the raw deal. Aside from a few calls by foreign organisations and several members of parliaments, there are appears limited anger at our current predicament. Zambians have either accepted the “new system” or are tired from the last agitation; and, there’s glaring confusion and general lack of clarity on what the big questions are regarding mineral development in Zambia. Where such “big questions” have been defined by Government and other political players, they appear shaped by foreign forces, with little understanding of what is at stake for the ordinary Zambia. In the next series of posts I will attempt to define the scope of our present challenge by restating some facts and removing some common misunderstandings, with the aim of moving us to develop a unique Zambian approach to what is a big Zambian issue. But before we get there we must understand that our challenge is big because our people currently stand betrayed by those we have elected to lord over us.

In January 2008 President Levy Patrick Mwanawasa (LPM) announced that Zambia was breaking away with the huge stones that had been hang its neck during the Chiluba Administration. The Development Agreements (DAs) were going to be abandoned and instead LPM would put in place a new fiscal regime. Following advice from expensively hired foreign consultants, the President concluded what everyone already knew : Zambia’s “average effective tax rate of 31.7% is 8% lower than the next lowest country in the world.....clearly Zambia’s mining fiscal regime to investors and provides the lowest revenues to the Government”. Zambia was about to take a unilateral step to cancel the DAs and put in place a fair taxation system for the mines that reflected the importance of mineral wealth to our people.


What preceded that statement was a round of international campaign highlighting the unfair nature of the existing fiscal regime, principally led by Christian Aid, Scottish Catholic International Aid Fund (SCIAF) and Action for Southern Africa (ACTSA). Between them they published two significant reports - For Whom the Windfalls? Winners and Losers in the Privatisation of Zambia's Copper Mines and Undermining Zambia’s Development - that forcefully highlighted the scandal and made the world listen. The NGOs argued that Zambia was blackmailed into privatising the nationalised copper industry by the IMF/ World Bank who threatened to withhold debt relief and other aid, as a result less than one penny in every British pound was going to our country, where health and education programmes have collapsed for lack of resources.

The mining companies were feeling the heat, and so was the IMF / World Bank who were forced to join the change camp, concluding emphatically: “[we] commend the Government for taking steps to reform the fiscal regime of the mining sector while preserving Zambia as a competitive, credible, and attractive investment destination, but advocate the inclusion of an additional revenue-sharing mechanism that would capture a higher share of mineral rents for government during period of abnormally high international prices for minerals. Such a device is currently not part of the proposed reforms”. The message was simple : we can’t keep on providing debt relief and aid when you are not willing to use the resources at your disposal.

A significant change in momentum. The NGOs had won the debate largely through high quality reports, workshop and good internet lobbying (on-line petitions, etc). It should never be forgotten that the push for a fair share was a fight fought on our behalf by NGOs whose primary aim was the pursuit of justice, fairness and defence of the poor. Without the support of these NGOs I am pretty sure that nothing would have changed. With their support LPM was embolden and the reforms became irreversible, for a season.

Under the LPM changes the corporate tax rate for mines was set at 30%, mining royalties on base metals at at 3% of gross value (up from 0.6% in most DAs), and withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors in the mining sector were set at a rate of 15%. While many of these measures, especially the increase of royalties had largely been anticipated (having been the subject of previous negotiations), two additional elements - the setting of a windfall tax on base metal revenues and the profit variable tax – took the mining companies by surprise. The windfall tax, was to be triggered at different price levels for different base metals, with . For copper, a price between US$ 2.50 – US$ 3.00/lb, attracted a windfall tax of 25% ; between US$ 3.00 and 3.50, 50%, and 75% for prices above US$ 3.50/lb. At the time of the changes, copper prices were around the US$ 3.60 level, sufficient to trigger the maximum windfall penalty.

The reaction of the mining companies was total uproar, , threatening our country with legal action and all manner of bullying tactics. The full force of these tactics where probably best illustrated when against all expectations, the Patriotic Front President Michael Chilufya Sata (MCS) wrote to LPM demanding the removal of the reversal of the new fiscal regime: “we [Patriotic Front] are not in favour of variable tax or windfall tax based on gross revenue. We therefore suggest that these two taxes be abandoned.....". LPM stood firm, but in many ways the PF pressure, whether motivated by real politick or foreign lobbying, illustrated a fundamental problem in the implementation of the new regime – poor consultation. In typical single mindeness and undemocratic tendencies of LPM, there was no consultation with anyone. Like the DAs before it was all done behind closed door, the only difference is that this time the push was in favour of the people. As good as the intention was, unfortunately the lack of consultation was now leaving a gap that mining companies could exploiting by lobbying other people to their cause.

The other problem with the implementation was the lack of clarity on how the new profit variable tax was meant to operate with regards to the windfall tax. This confusion was later going to be used by the mining companies to build new momentum to reverse the entire regime and exact new concessions in face of a new global recession. Even as LPM's government was forging ahead, new seeds were being sown for reversal.

Fast forward to November 2008. LPM has died and Rupiah Bwezani Banda (RBB) is now Republican President. His narrow ascendancy was greeted with cheers by the mining companies and their supporters, predicting gleefully: "It appears that the onerous tax rates enacted into legislation in Zambia earlier this year are likely to be significantly watered down. And this should enable the country's copper producers to regain a stable economic footing.." It wasn’t long before the global downturn was going to be used by RBB to justify removing the windfall tax "We must ensure that we do not kill the goose that lays the golden egg. There is little point in taking in a few million dollars in tax if thousands of jobs are lost as a result". The ministerial chairs were going to be shuffled round to pave way for the changes – out went the Minister of Finance Ng'andu Magande and the Minister of Minerals Kalombo Mwansa was moved to Home Affairs.

In January 2009, with a new team in place, barely nine months after its introduction, RBB abandoned the LPM changes following what the UK’s Financial Times described as ‘intense lobbying’ of the government by large, foreign owned copper mines. The President gave in with concessions galore, which included scrapping the ‘windfall tax’ which fell due when copper prices exceeded a certain level. In fact, prices had fallen below this level in October 2008, so no further tax was liable. However, companies were keen to get rid of the tax, arguing that it penalized high cost mines because it was levied on the overall value of copper produced, not on profits. The government allowed hedging income to be included as part of mining income for tax purposes. A serious setback to our people as it is relatively easy to demonstrate a loss on hedging (and move any profits offshore), allowing companies to further minimise their tax payments. The government allowed companies to write off 100% of any investment against tax as depreciation in the year in which the expense occurs – well beyond the international norm.

Unilateralism was once again employed only this time, in act of betrayal of the Zambian people to remove a tax that was not binding at the time, but which mining companies knew soon would be a big bon for them when base metals prices resumed the upward trend. What was left is the standard corporate tax, a mineral royalty of 3 per cent of gross value, and a variable levy on profits. Currently the price of copper is over $3.00 [see graphic below] and showing an upward trend. It wont be long before windfall tax would have beennearing its maximum application (current it would be at 50% application).
RBB has defended the government’s position by noting that “the removal of windfall tax will not lead to loss of government revenue as the variable tax still captures any windfall gain that may arise in the mining sector". An assessment that demonstrates the gap in his knowledge. As I indicated in my previous interview with the Post, everyone knows that although a tax on profits is only excellent in theory, ZRA can never have the internal capacity to effectively force the mines to comply. These are massive mining companies with the best tax lawyers – they will continue to make our people look foolish as we endless chase for revenue. It is bread and butter work for international tax lawyers and accountants to minimise tax liabilities by minimising the paper profits of their employer.

Unsurprisingly the cautious joy many of us felt with the LPM fiscal regime has now given way to feeling of despair. But currently this empty despair because it is not founded on genuine anger for the injustice that currently prevails. It is despair that is not moving us to actively define proper alternatives and lobby government to act. Must we wait for foreign NGOs to agitate on our behalf again? For those of us who are now back to full agitation for a better deal for our people, the story of the last 24 months highlights some important problems which characterises our current approach to mining, which any new mining reforms needs to appropriate reflect. In the next nine posts in this series, I will offer nine separate undeniable propositions on what is fundamentally wrong with the status quo. The do-nothing is not an option, and I plan to show why.

10 comments:

  1. Cho,

    This is a great post. I am looking forward to the follow-ups.

    The only way Zambia's economy is every going to grow is when mine revenues are used to capitalize other economic sectors.

    No FDI is going to have the same impact.

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  2. I agree with Cho that

    1. We want the best possible deal for Zambia
    2. There are ways in which the present deal could be improved so as to increase Zambia’s share of the revenues from mining.

    But I don’t agree that “to do nothing is not an option”. That sounds like a flat contradiction. But it is not. We need to understand that when a deal is done it is done. If we can change any deal on the ground that we, or our predecessors, made a mistake, or that the situation has altered, then no one will want to enter into any deal with us because they will have no assurance of permanence – at least for an agreed period.

    This is an aspect which is commonly overlooked, but which is essential to the making of contracts. Of course, if we never want to make an agreement which will bind us as well as binding the other party, then we can go ahead and make whatever changes we think will benefit us. But such conduct has consequences, which we should first recognize and accept.

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  3. Murray,

    I understand your concern.

    I have yet to offer a coherent package of alternative proposals on the way forward.

    At present I am merely defining the scale of the challenge.

    The "do nothing" is not an option because in my view it looks worse than all conceivable alternatives that I am yet to articulate. But I realise that I am only beginning to demonstrate why I despise the status quo. I hope the next nine propositions will help make my case. Then after I will articulate a coherent set of alternative proposals and how to bring about change that is socially optimal.

    It make take a series of posts, so stay with me!

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  4. Let the courts decide whether the mining agreements and tax regulations are legal. That is their jurisdiction. And I do not work for the mines.

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  5. Cho,

    It is bread and butter work for international tax lawyers and accountants to minimise tax liabilities by minimising the paper profits of their employer.

    In the process of minimizing paper profits, don't they also minimize dividend payments, defrauding their shareholders?

    Unsurprisingly the cautious joy many of us felt with the LPM fiscal regime has now given way to feeling of despair. But currently this empty despair because it is not founded on genuine anger for the injustice that currently prevails. It is despair that is not moving us to actively define proper alternatives and lobby government to act.

    I have previously proposed that taxes are collected only as a percentage or revenues/turnover. So for instance all taxes were abolished except royalty tax (on turnover), and that was raised from 3% to 20%, if push came to shove all the government would need to do was collect 1 out of 5 of loads of ore leaving the mines - very easy to monitor and collect.

    No more interpretation of what profits are, no running around to seeing what the company really earned but is hiding in some tax shelter, etc.

    Murray,

    But I don’t agree that “to do nothing is not an option”. That sounds like a flat contradiction. But it is not. We need to understand that when a deal is done it is done. If we can change any deal on the ground that we, or our predecessors, made a mistake, or that the situation has altered, then no one will want to enter into any deal with us because they will have no assurance of permanence – at least for an agreed period.

    The problem is that most of these deals were done in a corrupt way and all of them were done secretly. There is no reputation that is salvaged by living up to a deal that was done corruptly, and in a way that cheats the Zambian people out of the 'rent' for their mineral resources.

    Nor is any reputation salvaged by honouring the stealing of money from the people of Zambia, most of whom live on $1,- per day.

    And this is especially true, when we are dealing with mining companies who care about nothing, other than maximizing profits. This capitalist ideal does not exempt them from obeying the law, or funneling money to politicians so that mining companies have a louder voice in parliament than the Zambian people do, or doing all they can to exempt them from paying taxes or expatriating as much money as they can from the Zambian economy.

    Their corrupting influence has real world implications, and is killing people.

    ReplyDelete
  6. I appreciate the points made by Cho and Kr K. However, they do not remove the need to respect contracts.

    Cho may suggest any number of desirable changes to the present mining agreements, or to the law of the land. Alas, it is too late. The party to a contract, whether an individual or a government, cannot make unilateral changes without destroying their own credibility. For a government to do this, even by act of parliament, amounts to destroying the rule of law. Change by unforced mutual agreement is, of course, another matter.

    Mr K mentions corruption and tax evasion. Proof (not just suspicion) of corruption can certainly justify annulment. Tax evasion should be treated as a breach of the law.

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  7. Murray,

    I am not sure I fully understand your argument or your specific conception of 'rule of law'.

    Let us be clear - there are no DAs at present. The only instrument for change is tax policy. For example it can amend the Mines Act 2008 as it did earlier this year.

    The Constitution empowers govt to set tax policy.

    All govts around the world have this power vested in them. It is not a violation of rule of law to levy taxes. Are you saying if Gordon Brown changes corporate taxes it weakens the UK's rule of law?

    To say amending the Mines Act 2008 is a violation of rule of is totally without any philosophical basis. On the contrary it is a violation of rule of law for a govt to fail to meet obligations 'towards it's citizens. RBB is undermining all principles of justice when he bends no hear to the cry of the poor.

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  8. Thanks, Cho, for pointing out that the development agreements no longer exist. Cancelling them was of course a breach of the rule of law, even if it was done by act of parliament.

    Yes, tax policy can be changed. But it breaks the law if done retrospectively. And it breaches the rule of law if a government raises taxes after entering into a contract which promises stability for a set period.

    As for moral obligations towards the poor, they may indeed have to take precedence over other considerations. I am not saying that contracts with foreign investors or anyone else must be sacrosanct, but simply that breaking them, even if it is necessary, has serious consequences. This is often overlooked.

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  9. Murray,

    We are reaching some convergence, but differences remain.

    I don't share your assessment that :

    "Yes, tax policy can be changed. But it breaks the law if done retrospectively. And it breaches the rule of law if a government raises taxes after entering into a contract which promises stability for a set period."

    A government acts in line with "rule of law" when it acts in accordance with laws of the land.

    The constitution clear gives the power to government to change and alter tax policy as it sees fit. The investors know that but they still choose to remain in Zambia. If Zambia tomorrow decided to levy a highly punitive tax, there's no reason why we should regard that as a breach of"rule of law" because it is government acting within the laws of the land.

    Also I am worried at your narrow definition of the implicit scope of "social contract". In my view we should always remember that the social contract is not between ZAMBIA and FOREIGN INVESTORS, rather it is between the GOVERNMENT and its PEOPLE.

    By that definition government always acts in accordance with rule of law when it continues to uphold the social contract.

    In my propositions to come, I will expand on this more and clearly demonstrate that taken together the government has and continues to act against the principles of natural justice.

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  10. Cho

    I have not expressed my position about changes clearly enough. It is really very simple. We need to distinguish 'what' from 'when'.

    'What' is complex. There are countless possible changes to most situations, with arguments for and against.

    'When' is simple. Changes to agreements (be they explicit or implicit) should be made,either by agreement or at set times known in advance. To chop and change whenever a party with the power to impose a change decides to do so destroys confidence and trust, which are essential to positive relationships.

    ReplyDelete

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