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Sunday, 23 May 2010

Eight reasons for rejecting higher mining taxes..

Today, we turn the tables and present the most cogent arguments that could be made, if I was hired as a “spin doctor” for Rupiah Banda and help argue against relatively higher taxation than at present (It is taken for granted in the post below that higher taxation would mostly likely involve restoration of the Mwanawasa mining fiscal regime, with windfall taxation at its heart ). I offer eight reasons that can be put forward for rejecting higher mining taxes - offering both the central argument to substantiate the reason and then the counter-argument (response). Effort has been made to be impartial but also succinct. One can write an essay on each of the arguments, but for ease of access I have tried to summarise them. I’ll leave it to the reader to expand on them and decide whether the “argument” is stronger than the “response”. By nature of the "title" and this introduction, I have shifted the burden of proof onto those seeking change.

Reason 1 : High taxes would reduce competitiveness

  • Argument: Increasing mining taxes when are other countries are not changing their tax systems, with the exception of Australia, would make Zambia uncompetitive in this important area. Zambia is a small country and we not exactly renowed as an attractive place to invest. It is because of the mining revival that we are now having investment in excess of $3bn annually. We have also seen that countries that have imposed windfall taxes have lived to regret. For example Mongolia once raised its mining taxes only to find itself in a quagmire with investment drying up! We must also remember that low taxation is the bedrock of attracting foreign direct investment (FDI). It is therefore critical that we see mining in the overall context of Zambia’s successful FDI policy. No one doubts that low taxation is critical component to that.
  • Response: The argument is based on false premises for several reasons. First, Zambia’s taxation threshold has enormous scope for increasing taxes without harming competitiveness.  Zambia has one of the lowest tax regimes in the world. Prior to 2008, the effective tax rate stood at around 32%, with the Levy Patrick Mwanawasa (LPM) changes it was intended to rise to 47%. LPM put it best : "with
    these new measures, the Zambian tax regime still remains competitive and moves Zambia into the media position in international comparisons at 47% effective tax rate. The effective tax will not adversely affect the companies' viability as their returns will remain well within the international norms". In short Zambia was to tax more than Tanzania but less than resource rich nations Botswana, Mozambique and Angola. It is therefore wrong to suggest that reintroducing the windfall tax for example would significant damage it’s competitiveness. Secondly, there’s no concrete evidence that FDI is driven by lower taxes per se. Although tax competition is used usually to justify the level of tax, it is clear from literature that the key driver of foreign direct investment tends to be political stability, cheap / diverse labour and, most importantly, prevailing global economic forces. Zambia’s mining industry is booming because the prices of commodities are high and will continue to be high for some time, aside from few fluctuations because of the long term global imbalance between demand and supply. Of equal importance is that the investors are confident of the political ambiance in the country.  Third, the argument is structurally predicated on the idea that growth in mining must necessarily be driven by external investment – this need not be the case. Many economists believe that although FDI has a role to play in development, what matter is the structural transformation of the production side of the economy. To do that requires government investment in technologies and other supporting industries, which won’t happen without access to mining revenue. Indeed, without government revenue there can be no tangible and accelerated diversification. Finally, there’s a broader point also to be made – the current low mining taxes may be attracting “wrong investors”. Many of the investors Zambia has attracted in the mining industry have been nothing short of short term vultures (term used is "infestors"), whose primary interest is to come into the country to siphon resources on the cheap and vacate premises when the going gets tough. Poorly designed incentives coupled with a friendly regulatory structure continues to undermine Zambia. A strong starting point in rectifying these problems is appropriate and fair taxation.
Reason 2 : High windfall tax would harm exploration
  • Argument: The biggest challenge for Zambia is to discover and exploit the vast minerals we have. To do that we need exploration, this is a costly and uncertain exercise. It is undertaken only if there’s a strong possibility of finding something and being able to earn a return on it. Relatively higher taxes, especially in the form of revenue windfall systems, are a disincentive to exploration. As a country we are in a hurry to develop and achieve middle income status by 2030. We must incentivise investors to undertaken exploration activities because that would guarantee a better future for our children. 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. Not only that 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 would also benefit from wider catalytic impacts. 
  • Response: There are three problems with this argument. First, it treats mining taxation in very general fashion. We must distinguish the principle from the application. It is not true that any mining taxation reform would lead to lower exploration activity. Different incentive or taxation structures can be developed that would allow the people to benefit from current mining activities while incentivising future exploration. Secondly, it predicated on a highly uncertain future. The investments that would be disincentivised, if the argument is to believed, are those taking place from 2020 and beyond. However, given the current configuration of the taxation system, as we have seen in Lumwana’s case, no significant revenue would begin to accrue from any such unknown investment until 2025 and beyond. In short this is an argument about an unknown and distant future. Finally, the argument again presupposes that only foreign firms can do “exploration activities”. There’s a strong case for government to assume a greater role in exploration activies to narrow the information loss between investors and government. This would also help reduce the sort of problems we have seen where Lumwana has huge uranium deposits off the back of a copper investment. More exploratory and geological exploration would put the Zambian people in the driving seat of their resources.
Reason 3 : Higher mining taxes will compromise safety and harm environment
  • Argument: Increased taxation will not have the desired social effect because it mainly leads to mining companies pushing the costs on workers and local communities. Principally mining safety and environmental damage would get worse as foreign firms seek to maintain their profits. Indeed the service conditions of workers may also be affected. We would be robbing Peter to simply pay Paul! The worker and the local community must come first. Higher taxation would not make things easier for these groups. Quite the contrary it will make it worse! 
  • Response: There’s some truth in that argument. Increasing taxation will always create perverse incentives for mining companies. However, this is not an argument against increasing taxation per se. Rather it is an argument for why taxation must be part of a broader strategy that takes safety and environment into account. Indeed such a strategy much also bring into line how any windfall revenues are managed to empower local people and avoid the “Dutch disease”. Its therefore simply wrong to suggest again that higher taxation per se would be the source of these potential difficulties. We can have both high revenue and a good environment if careful thought was given to these issues. 
Reason 4 : The profit variable tax does the same job as windfall tax
  • Argument: People who argue constantly for the windfall tax have a poor grasp of taxation issues or basic economics. It is quite obvious to everyone that the removal of the 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. Infact it is better because it ensures that mining companies are not being driven out of business by explicit accounting for cost of investment.
  • Response: This argument demonstrates complete ignorance of the common wisdom of tax collection. Although many would agree that theoretically the profit variable tax can go some way in capturing the necessary revenue from higher copper prices, a windfall tax is easier to implement. It is also easier for the public to check how much revenue government is getting in its coffers. With a profit variable tax it is an accountant's job! Multi national corporations love profit variable taxes because it is easy for them to hide their profits through inflated costs and so forth. Simply put, the mining companies have smarter accountants than the Government. This is why the mining companies pushed for removal of the windfall tax. They knew they'll pay very little. It is also the reason why all the donor partners have concluded the status quo is not desirable, with some calling it "depressing”. Simpler taxation mechanisms are key to improving collection.
Reason 5: The “certainty principle” favours the status quo
  • Argument: The long-term outlook for copper mining in Zambia is still very uncertain following the period of government led ownership prior to liberalisation. . Investors don't have sufficient confidence that government is committed towards an open investment policy. Constantly changing the fiscal regime whether for good reasons or not does not inspire investor confidence. What we need is certainty and stability that reduces the risks to long term investment. Having undertake reforms in 2008 and 2009, we need a period of calmness to settle things down. We perhaps can come back to this issue in 2015 or beyond. We must learn from successful countries like Chile, Australia and Canada who don’t arbitrary change their mining taxation regimes.
  • Response: The point regarding certainty is perfectly valid, but it misses the more fundamental question – what drives certainty? Certainty is derived from ensuring that you have a mining settlement that has the full buy-in of all Zambians. Otherwise, every government that comes along will constantly alter its mining policies. This calls for a Zambian solution, not an MMD or PF or UPND solution. The approach to mining policy must therefore be necessarily consultative and transparent. It is not just about the level of taxation but "how" you get these stable mining policies The mining companies need to realize it’s in their long term interests to push for transparency - deals made under the table are not sustainable. The approach should be consultative and transparent. These are the foundation of “rule of law”. At present there’s no rule of law in this area because government has acted without the people’s consent.  It should also be noted that the suggestion that other countries are not changing their taxation regimes is blatantly wrong as can be found here
Reason 6: ZCCM-IH is doing its job – its about empowerment not revenue
  • Argument: It is disingenuous to claim that Zambia does not benefit from mining because we are also owners of these mining companies! ZCCM –IH is a state owned venture and it owns 20% plus shares in joint venture with foreign mining corporations e.g. FQM’s Kansanshi and Vendata’s Konkola . Therefore as the transnational companies soar in their mining profits ZCCM-IH gains significant windfall. A "them Vs us" approach does not therefore quite reflect reality on the ground, where ZCCM - IH is  a big player with assets over $1bn. When you attack mining companies, just remember you are also an owner of those investments! For example, recently we saw huge dividends of around $18m to the Zambian people by KCM.  
  • Response: It is true that ZCCM-IH does have interests in many of these companies, but it hardly possesses a controlling interest stake in any of the key joint investments. More worryingly it’s been clear for a while that ZCCM –IH has not been receiving meaningful dividends from its jointly owned projects. The $18m hardly qualifies as "huge". A fact which led to rumours last year that government was planning to convert these financial liabilities into equity, thereaby raising substantially its stake in the mines. That the government recognised this possibility is a clear testament that the ZCCM-IH model has not worked. Indeed, what seems to concern many people is that ZCCM - IH is not "empowering" ordinary Zambans. If ZCCM-IH was owned by ordinary Zambians a potential argument can be constructed that some money does filter back to ordinary Zambians via the "theoretical dividends". ZCCM-IH is currently listed in Lusaka (alongside London, and Euronext Stock Exchanges), with the government owning 87.6% shareholding, with the remaining 12.4% held by private equity holders largely abroad. Unfortunately the whole venture is not very transparent! According to foreign private equity holders in ZCCM-IH the company has never published its financial report for nearly 4 years! Its inventories are also not formalised! Remarkable for a listed company! It is hardly the sort of company one wants to appeal to as the reason for not increasing mining taxation. On the contrary, it beggars belief that many Zambians do not even realise that ZCCM-IH is a huge part of the reason Zambia is not benefiting from its vast reserves of copper.
Reason 7 : We are already benefiting through employment
  • Argument: Investment in Zambia has grown significantly, as much as $5bn has been invested in the mines. Without the current fiscal regime Zambia would never have the sort of investment it has had. Indeed part of the reason why Lumwana was built was due to the favourable regime, For 25 years, Zambia had no new mines opening, now we see plenty of new ventures being proposed under the visionary policies of the MMD led government over the two decades. Significant jobs have been created from new investment opportunities. Zambia may not be benefit as much as we all would like from mining taxes but it is benefiting significantly from new jobs. As His Excellency President Rupiah Banda has helpfully reminded us "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”. 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. Any appraisal of Zambia's mining policies must account for the huge benefits we have got from this extraordinary ramp up in job creation. Our approach must be to continue allowing more money to come into the economy to create jobs. 
  • Response: The argument as formulated is misleading for three reasons. First, without doubt Zambia has significantly increased foreign direct investment to the mining sector. But the fundamental question again is what has driven this investment? As the response to Reason 1 suggested its broader issues related to political stability, cheap / diverse labour and, most importantly, prevailing global economic forces. Secondly, the employment argument is easily rejected because the counter-factual is all wrong. The so called jobs created by the MMD led government of the last two decades are essentially the jobs they destroyed through the disastrous privatisation project of the early 1990s. But suppose we can allow the argument that these are new jobs how far does the argument go? Not very far because the real central question of course relate to the “quality of jobs”. The argument regarding job creation treats jobs as homogeneous and an end in themselves. The goal of government is to provide a conducive environment where individuals can create value adding jobs and thereby foster wealth creation. Pointing to jobs built on casualisation is not wealth creation.
Reason 8. We have corporate social responsibility!
  • Argument: There are many companies doing very good social responsibility projects. For example First Quantum Minerals has done much rehabilitating roads in Ndola. Similar Konkola Copper Mines is working to empower the Luano Community in Chingola through an innovative goat draft project - an interesting alternative to microfinance. Lumwana recently pledged to spend K4bn on the local area, including plans to launch a multi-million Kwacha programme to diversify its local economy in Solwezi away from dependence on mining. These are great initiatives that should be supported through lower taxation.
  • Response: Corporate Social Responsibility (CSR) is a positive undertaking but it is at best a distortionary second best scenario. The ideal scenario is that government should tax mineral resources sufficiently in a way that profits local people and does not impact negatively on the environment and safety of workers. The government is currently not pursuing the ideal and therefore our efforts should be directed at ensuring it does. The more serious problem with the  argument is that it ignores the real manace of CSR. Such initiatives, though spun as “social projects” are essentially "bribes" to keep local people quiet. Firms do not engage in "social responsibility", they practice "shareholder responsibility". The projects mentioned in the argument should therefore be rightly seen as a small price that mining companies have decided to pay local people in Ndola and Solwezi lest they become agitated at the lack of development in the area and demand the Government to do more to tax the mine (which would be bad news for the shareholders).
I have set out the above arguments and responses for three reasons. First, I wanted to bring all the arguments / counter-arguments together in one place for ease of reference. Secondly, I believe both sides have reasonable arguments to make and what we need is actually dialogue rather than speaking past each other. Thirdly, often in economic analysis it’s not black or white – the question is how one weighs up the pros and cons. If this post helps people approach other issues in similar manner, then we would have progressed how debate ought to be had. I trust that readers will find these arguments and responses useful. More importantly, it is hoped that I have tried to make the best possible "argument" and the best possible "response". Where a "reason" appears to be missing, this should be cited and it can be added provided it is distinct from the above eight reasons. If its not added, I will respond explaining why I don't think that particular reason is distinct.

30 comments:

  1. " To do that requires government investment in technologies and other supporting industries, which won’t happen without access to mining revenue. Indeed, without government revenue there can be no tangible and accelerated diversification. "

    I agree completely. The mines exist to capitalize the rest of the economy (agriculture, manufacturing, infrastructure), not to create temp jobs.

    " Indeed, what seems to concern many people is that ZCCM - IH is not "empowering" ordinary Zambans. "

    Or even the few Zambian citizens who are their shareholders.

    Not only do they not receive divdidends for their shares, but there is no capital gain through a rise in share prices, there is little opportunity to actually sell those shares because of the lack of volume, and the State still owns 87.6% of shares, which means they can be dumped on the market at any time. (KPN-QWEST comes to mind. KPN owned 44% of shares, QWEST owned 44%, leaving only 12% of shares to be freely traded. Shareholders are in constant threat of being punished by major shareholders selling their shares.)

    And the non-payment of dividends (on top of the non-payment of taxes) is most likely a fraud, committed against the shareholders of ZCCM-IH, by all the mining companies part owned by ZCCM-IH.

    And the MMD want more companies to start listing on the LUSE? For what purpose?

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  2. Cho,

    I wish if the government can grasp Reason #4. A decision is needed on that point. I agree with your response. Strangely Levy understood this better than RB. Somehow Levy was making calculated moves. To attract investors he went with almost zero taxes. When they came, invested and started making profits, he was ready to tax them. If he was alive he was going to review the whole package. That's being clever. Somehow RB is hesitant, scared, and not sure of what could happen if he tampered with the tax regime. Hestance is a sign of political weakness. But unfortunately, none of his backroom boys either, has confidence to the level of Penda or Magande. We need a strong M of Finance.

    I would have liked today Magande to be in the seat of Musokotwane. Because I think we tried very hard to convince him about this thing. He was adamantly sure that everything was fine - his way. Today he is the one interested in Windfal Tax. And we are so unlucky that the Zambian technocrat is so unconcerned. They are not being useful in any way. They behave and act like politicians. Too bad!

    Please make sure that the M of Finance, and Diaspora Desk get your input. Don't rely on them reading it from your site. Cheers! KBM

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  3. Reason 5: The ‘certainty’ principle favours the status quo.

    Your main argument against this principle is that we need “a mining settlement that has the full buy-in of all Zambians. Otherwise every government that comes along will constantly alter its mining policies.” But when have all Zambians ever agreed about anything, and what would prevent them from later changing their minds?

    Agreements between businesses, being legal contracts, are binding on both parties, either indefinitely or, if there is an agreed time-frame, for the term of the agreement. That is essential to the rule of law, and also to secure property rights which are a part of it. Governments tend to regard themselves as able to disregard agreements (eapecially on taxation) by simply changing the law. But that ignores the rule of law, and it destroys investor confidence, upon which long term investment and development depend. A country which wants such development has to enter into agreements which will be binding for specified periods. If it later thinks it made a mistake, it has to abide by that mistake for the agreed period.
    We can always discuss whether or not existing tax regimes are desirable. But if governments are prepared to change such regimes unilaterally, they must not expect long term investment.

    You point out that other governments make unilateral changes. True enough, but that does not prevent it from being a damaging mistake of a kind which Zambia can ill afford.

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  4. Hi Cho,

    I too have read your punch-counter-punch arguments about mining taxes. Quite intriguing, I must say.

    Two things surfaced on my mind as I read the last line:

    1. The case about the mines being of benefit to the regular Mpezeni was handled with tact in your response to this notion of Corporate Social Responsibility (CSR). I would add that CSR has become the norm. MNC, especially, work hard to make their contributions known in the communities where they generate their revenues. Other than using it as PR tool, some companies are making it an essential part of their business, which should go without saying. Some feel it pays, in the long-run, to actually be an integral part of the community.

    This means that CSR cannot substitute expected benefits from the mining companies.

    2. You make a strong case, almost an indictment, against the government regarding filing requirements for listed corporations. I don't have a contribution here but a straight question:

    Don't we have an equivalent of Securities and Excahnge Commission (SEC) in Zambia to regulate the activities of the LuSe?

    The regulatory aspect of interest in this case is as mentioned (supra) to create the filing standards and making sure that every publicly traded company adheres to those set standards. The referenced standards would mention specific items that are operational and also financial in nature, required to be disclosed in periodical reports.

    In closing, the article should provoke some robust debate. I would be particularly interested in seeing how other important issues, resting on the periphery, are going to be reeled into the fold. Personally, I am looking forward to a day when our government's sources of revenue would be directly linked to specific operational and developmental applications, dollar for dollar, so that there would be known consequences for any adjustment to the tax regime.


    Thanks for sharing.

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  5. Thanks for all the comments on this thus far. If I might take each comment in turn.

    ”And the non-payment of dividends (on top of the non-payment of taxes) is most likely a fraud, committed against the shareholders of ZCCM-IH, by all the mining companies part owned by ZCCM-IH” - MrK

    There’s a strong case for ordering a full scale enquiry into the operation of ZCCM-IH. At the very least the Auditor General’s Office should look into. The problem is that despite these difficulties, I bet you no single Zambian has every written to Madam Chifungula asking her to undertake an audit into ZCCM-IH. Until we start being proactive nothing will change. Her email address : aochifungula@ago.gov.zm . I am compiling a list of all email address of government officials which will be available to anyone who wishes to lobby them.

    ”Please make sure that the M of Finance, and Diaspora Desk get your input. Don't rely on them reading it from your site.” KBM

    Thank you for your suggestion. I will look into this.

    ”Your main argument against this principle is that we need “a mining settlement that has the full buy-in of all Zambians. Otherwise every government that comes along will constantly alter its mining policies.” But when have all Zambians ever agreed about anything, and what would prevent them from later changing their minds? “ - Murray

    The point is not that they would not change their minds, but that they would send a more robust message to mining companies that the taxation policy has full buy-in. Tax policy of course can always change, but I think an “all party agreement” on taxation after comprehensive engagement would secure those things for a long term. We need to try that and if it fails then we can find ways of doing things different. The status quo is too dictatorial and unsustainable, a point acknowledged by mining companies. See
    Achieving stable mining policies.

    "We can always discuss whether or not existing tax regimes are desirable. But if governments are prepared to change such regimes unilaterally, they must not expect long term investment. You point out that other governments make unilateral changes. True enough, but that does not prevent it from being a damaging mistake of a kind which Zambia can ill afford." - Murray

    I think you are referring to Development Agreements. A point I have repeatedly noted that the Mines and Minerals Development Act 2008 abolished such agreements. The article is talking about taxation policy. Any government around the world can unilaterally increase or decrease taxes. Your argument would be valid if Zambia had no tax policy but was working with Development Agreements. But even then, one must consider the legality of such arrangements. As an academic point, I would say your conception of rule of law is too narrow. Justice is both procedural and outcome. How agreements are reached matter. But that is another topic that we can discuss. It is not relevant here for the reason stated above.

    "Don't we have an equivalent of Securities and Excahnge Commission (SEC) in Zambia to regulate the activities of the LuSe?" - Anonymous


    Yes we do. The website : http://www.sec.gov.zm/
    But I think they suffer the same problem that other Government regulators do - the challenge of regulating a company owned by Government. The Zambia Competition Commission have previously complained of the same and are seeking some change in the law (e.g. here)

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  6. Cho,

    I don't know about a full audit of ZCCM-IH, but she has been aware of the non-payment of dividends to ZCCM-IH for years.

    UPDATED: 16:13, June 16, 2007

    From China's People's Daily:

    Several Zambian mining joint ventures fail to declare dividends

    A total of eight mining joint ventures did not remit dividends to the Zambian government between 2003 and 2005 despite huge profits, local press reported on Saturday.

    According to a special report by Zambia's top auditor Anna Chifungula, the firms that defaulted on dividends declaration are: KonKola Copper Mines (KCM), Mopani Copper Mines (MCM), NFC Africa Mining, Chambeshi and Chibuluma Mines, Cyprus Amax Kansanshi, RAMCOZ and AHC Mining Municipal Services, Daily Mail reported.

    The Zambia government owns shares in the eight miners through the Zambia Consolidated Copper Mines Investment Holdings (ZCCM-IH), which derives its income from its subsidiaries and associated companies as well as from sales of cobalt/copper.

    Source: Xinhua

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  7. Cho,

    I just thought of something. The argument against taxation is often that 'the mines need the money for re-investment'.

    However, how much of their profits (over $2.4 billion a year) is actually re-invested and put into capital expenditure in Zambia, by existing mining firms (not new foreign investment).

    My guess is that most of the money is actually expatriated.

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  8. Cho

    Your distinction between Development Agreements and taxation policy does not strike me as valid. The most important aspect of our Development Agreements was the promise of tax stability for a fixed period. Their abolition broke that promise.

    My whole point was that stable investment depends on stable taxation. Agreements, of whatever kind, have to be kept. Governments are not above the law, and they cannot break it with impunity.

    Note: The rule of law and legislation are, of course, quite different things.

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  9. Murray,
    There is one major point you are missing. Zambia in 1991 joined the world of a liberal socio-economic order i.e not only do we now have a market economy but also a liberal political system in which power may change from one party to another. It would therefore be unfair and illiberal to tie an incoming govt to the tax policies of a previous regime. Governments are sovereign and therefore should have the powers to alter the tax arrangement anyway they see fit. After all most political campaigns in Europe and US, for example, to a very large extent centre around the issues of taxation and how taxes impact the economy. It is therefore not appropriate to expect issues of taxation to be settled with one stroke of a pen by whatever sitting govt. What people including mining companies should be concerned about is whether or not a capitalist economy is the accepted order in Zambia. Parliament and whatever govt is in place should be able to determine the 'proper' levels of taxation. It should never be a closed issue otherwise we will cease to be a democracy. It is for this very reason that the so called Development Agreements were done away with. It will be folly for RB govt to enter into a 20 year DA with an investor when his term of office is only 5 years! Let every investor whether local or foreign be directed by the tax code as legislated by parliament. That is the practice in all democracies!

    ReplyDelete
  10. From this article on the internet:

    "The development agreements include stability periods, ranging from 10 to 20 years, during which time the contracts cannot be modified without mutual consent. And since the agreements were created as part of a privatization process overseen by the World Bank and the IMF, they hold international legal status, meaning the Zambian government cannot modify the agreements, even through legislation. Development agreements are also secret, not available for public viewing or scrutiny."

    http://www.broadcastermagazine.com/issues/story.aspx?aid=1000217745

    Also, according to another web page, a development agreement is subject to international arbitration if the provision is written into it:

    "The Mine and Mineral Act (1995) - which greatly simplified licensing procedures, places minimum reasonable constraints on prospecting and mining activities, and creates a very favorable investment environment, whilst allowing for International arbitration to be written into development agreements, should this be deemed necessary."

    http://www.zambiamining.co.zm/mining-legislation.htm

    I do not work for the mines.

    ReplyDelete
  11. Frank,
    Is it your view that agreements entered into by one regime can be deemed wrong by subsequent regimes and so done away with? Doesn't the question of legality come in. Just because Zambian economists could not correctly forecast the increase in copper prices during the negotiations for the privatisation of the copper should not be blamed on the investors. Besides, if you reading "Selling the Family Silver" by Francis Kaunda, there is indication that the sale agreements with the investors have what is called "Price participation schemes" in which the Zambian government gets a cut if the price of copper goes beyond a certain point. For example, the deal with First Quantum for the sale of Nkana and Mufulira indicates that government gets an extra 2 percent of the copper price if the price goes above $0.85 per pound.
    The argument here should therefore be whether or not the price participation schemes are respected and how much the Zambian government is getting rather than encouraging unilateral moves by either party.
    Even the Mines and Minerals Development Act of 2008 which abolished the mining agreements was resisted by mining firms with threats to take the matter before international courts if implemented. How much would Zambia risk losing if these mining firms went through with there threats and Zambia lost the case?
    I think Cho's argument is too one sided.

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  12. Cho,

    The finance minister just dug himself a deeper hole, telling the world that a tax on profits is the same as a tax on revenues.

    Zambia still has windfall tax, says Musokotwane
    By Chiwoyu Sinyangwe
    Mon 24 May 2010, 04:01 CAT

    FINANCE minister Dr Situmbeko Musokotwane has insisted that Zambia still has a windfall tax regime to cater for abnormal taxes by mining companies.

    Dr Musokotwane said the government did not abolish the windfall tax as outlined in the 2008 mining fiscal regime but only refined it to align the tax to profit being made by mining companies and not revenues.

    “When you tax the revenue and not the profit, you are basically closing the mines,” Dr Musokotwane said during the recording of the Ministry of Finance public relations programme, Cultural Remodeling last Saturday.

    Read more...


    General,

    Frank,
    Is it your view that agreements entered into by one regime can be deemed wrong by subsequent regimes and so done away with?


    That is what the Blair government did with regards to the Willing Buyer, Willing Seller clause of the Lancaster House Agreement.

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  13. General;
    Yes Sir; any agreement entered into by one regime can be deemed wrong by a subsequent regime if that particular agreement was entered into secretly over the heads of peoples' elected representatives i.e parliament.

    General please look at Kafue 001 contributions above and educate yourself of those DAs and tell us whether that is the way you want the country to be governed. It is very creepy. No executive should have the express permission to enter into agreements without the consent or seal of approval from Parliament. We are not an absolute monarchy. Heads of State or govts in other democracies do sign deals with other nations or organisations, however these always have to be ratified by their legislatures. A good example of this is the recent agrrement between US's Obama and Russia's Medeved to further reduce their nuclear arsenal. You know what? Their legislatures will have the final say.

    All I am asking for dear General is transparency and a very important seal of approval from our legislature on things that touch on the wellbeing of our country. No more secret agreements otherwise we will continue to be short changed. Besides; agreements that involve the participation of elected representatives stand to be more legitimate and to last longer than secretive ones.

    Finally, please let us stick to the issue at hand and not raise red herrings like the so called Lancaster Agreement!

    ReplyDelete
  14. Murray,

    What we agree on:

    Abolishing the DAs broke a promise and in a way government violated some notions of rule of law. I have never ignored this argument. If anything we run a series of posts that kept a watching brief on mining companies threats against the government.

    We also agree that NOW the issue of DAs is not the issue because the counterfactual has no DAs (although some are being created illegally by some members of government. Its shame better minds in Zambia have failed to point out the illegality being pertuated by individuals at the Ministry of Finance and the Mines Ministry - more on that in the future). We are talking about whether government should increase or reduce taxation. Not whether they should abolish DAs. I believe your failure to acknowledge this distinction has somewhat distorted this discussion.

    What we seem to disagree on:

    I hold, alongside a quiet majority of rural Zambians, that taxation policy is an agreement between Government and the People, as Frank right notes - this is why tax policy must be done through Parliament. DAs are agreements between the govt and mining companies. Although both are "contracts" they have important differences especially when procedural justice is considered.

    Simply put govt is not breaking the law by raising PAYE or any other mining tax. But it may be illegal if it was mere about breaking a signed DA. But even that needs a HUGE qualification as I have said countless times on this website. Principals of justice demands that the procedural and outcome be both just. If government signed the DAs without standard norms of fairness on ordinary Zambians (e.g if Parliament was not involved, or evidence of corruption is demonstrated) in terms of "justice" (both the Rawlsian and Senian forms) breaking the law by repealing the DAs may be a smaller wrong than keeping it and wronging it's citizens.

    I feel you have not fully appreciated the force of this point that has full command from the literature on justice. Justice is not just an outcome, it is also procedural. Your arguments unfortunately focuses on the outcome. I am very happy the World Bank and the IMF have too in their new literature began to recognise the procedural aspect. Much harm has been done in the past by the old "rule of law" literature that ignored the procedural dimensions.

    I trust my explanation makes it much more clear where I stand. I am always happy for people to disagree with me, but I want them to understand what I mean.

    ReplyDelete
  15. More information on international arbitration:

    http://en.wikipedia.org/wiki/International_arbitration

    http://en.wikipedia.org/wiki/Convention_on_the_Recognition_and_Enforcement_of_Foreign_Arbitral_Awards

    ReplyDelete
  16. Reason 4: The Musokotwane Critique

    " This argument is covered in the Eight reasons for rejecting higher mining taxes under Reason 4 : The profit variable tax does the same job as windfall tax . The standard response as set out in that post is sufficient. "

    The minister goes even further than saying that the variable profit tax does the same job as the windfall tax on revenues - he is saying that the variable profit tax IS the windfall tax.

    Indeed this country still has windfall tax but windfall tax on profits which is called variable income tax. What we rejected was windfall tax on revenues"

    He is saying that the two taxes are the same. Except that he one is on profits and the other is on revenues.

    From: Zambia still has windfall tax, says Musokotwane
    By Chiwoyu Sinyangwe
    Mon 24 May 2010, 04:01 CAT


    ...

    “When you tax the revenue and not the profit, you are basically closing the mines,” Dr Musokotwane said during the recording of the Ministry of Finance public relations programme, Cultural Remodeling last Saturday.

    In other words, the mines are making so little profits, that if you just tax revenues without regards to profits, they would just have to close up shop.

    The thing is, that minister Musokotwane in Februari pointed to Zambia's dependence on copper as the cause for the 'economic volatility'. ("Zambia’s dependence on copper as the only large medium source of economic growth and foreign exchange earnings has led to tremendous economic volatility over the last decade.")

    Source: “Musokotwane links economic volatility to excessive dependence on copper”. (Wed 17 Feb. 2010.)

    And yet, minister Mwale defends the non-taxation of the mines, with the notion that 'we need more exploration'.

    So what is it, diversification into agriculture and manufacturing or more dependence on copper?

    An interesting interview with dr. Mudenda (national planning) (also here):

    Mining companies are being dishonest, says Dr Mudenda
    By Amos Malupenga
    Sunday February 17, 2008 [03:00]

    ReplyDelete
  17. Cho

    My thinking on taxation as it affects investment is purely practical. Investors are discouraged by lack of stability. A country that has not entered into internationally enforceable 'development agreements' can make changes in taxation as often as it likes, and each government can overturn the decisions of its predecessor, regardless of the effect on investment. My concern is not with legality as such, with all its pros and cons, but simply to consider what is in Zambia's long term interests.

    ReplyDelete
  18. Cho,

    I just wanted to inform you that the email address supplied for Ms Chifungula isn't working. I tried to contact her yesterday as suggested by you but my email bounced back.

    To other bloggers, I'd like to echo Cho's call for us to abandon our passive activism and take up the challenge to be the change we want to see. I am not advocating that we all need to agree, but let us all make our opinions and thoughts known to those in government and opposition.

    ReplyDelete
  19. Frank,
    I don't now where the Lancaster Agreement issue is coming from as I didn't raise it in my post. Your response only tackles one aspect of my post and its a typical Sakism (to borrow Cho's phrase). Because the British are doing it then we should also do it.
    Why is it that no one wants to talk about the price participation scheme as this was the gist of my post. Shouldn't the issue be either implementing the price participation scheme if it has not yet been implemented or renegotiating it to higher amounts?
    To ignore this points is really because people would rather ignore facts to justify their positions. If for you this is the red herring, then let us agree to disagree.
    Again I refer you to Selling the Family Silver where the sale of mining assets is outlined. It may be a one sided view but it will give you an indication of what transpired and why all is not as it seems.
    Peace

    ReplyDelete
  20. Reason 6: ZCCM-IH is doing its job – its about empowerment not revenue

    Some informations about zccm-ih and foreign companies...

    eg Kansanshi


    The minority Interest is the benefit after amortization for the others shareholders in kansanshi mining...
    There is only one shareholder with first quantum minerals... ZCCM-IH...



    Kansanshi ZCCM-IH Minority interests (20 percent shares of Kansanshi)
    First Quantum Minerals (80 percent of shares of Kansanshi)


    Minority interests 2004 0

    annual report 2005
    http://www.first-quantum.com/i/pdf/2005AR.pdf
    page 45
    Q1 0
    Q2 3,3
    Q3 6,8
    Q4 10,2

    Minority interests 2005 20,264

    annual report 2006
    http://www.first-quantum.com/i/pdf/2006AR.pdf
    page 70

    Minority interests 2006 65,697

    annual report 2007
    http://www.first-quantum.com/i/pdf 2007AR.pdf
    page 74

    Minority interests 2007 105

    annual report 2008
    http://www.first-quantum.com/i/pdf/2008AnnualReport.pdf
    page 62

    Minority interests 2008 79,9

    FQM Consolidated Financial Statements december 2009
    (non-controlling interests = ZCCM-ih)
    http://www.first-quantum.com/i/pdf/2009-Dec-31-FS.pdf
    page22
    Minority interests 2009 57,5
    Dividends 2009 -3

    2010
    Q1 30,3 30,3
    http://www.first-quantum.com/i/pdf/Q12010FS.pdf
    page14

    Total des MI dûs à ZCCM-IH au May 31 2010 358,661
    Dividends may 2010 -18,1

    Amount million U.S.$ (after taxes and amortization) 337,561 337,561



    To resume :

    Dividends paid to zccm-ih : 3+18,1= m$21,1
    amount of zccm Minority Interests : m$358,661

    21,1/358,661= 5,88% a crumb in fact !


    So do the Zambian people really benefit from copper through ZCCM-IH ???

    In 2009, KANSANSHI Mining gave the first dividend to ZCCM-IH.. only 3 M US$... then 18,1 m$ last week
    21,1 m us $ for 358 m us $ part for zccm-ih !! scandalous not else !
    In the same time, First Quantum Minerals rent this money (zccm-ih money) for 0%... with this money FQM developp its business in others country... and zccm have no money to give to maamba colleries, Ndola lime or to take over Munali... a shame!!


    read also FQM - Conference Call Tuesday, August 11, 2009 page 13/14

    very very interesting...

    a question raised by an analyst at BNP Paribas in this conference on the debt of mine due to ZCCM-IH said that there was no discussion with the grz for the payment of this debt...

    why so much indulgence????


    http://www.first-quantum.com/i/pdf/Q2_2009_Transcript.pdf



    "...ZCCM-IH is doing its job..."

    It’s a joke, isn’t it ?

    ReplyDelete
  21. Murray,

    On that point we certainly agree. It is after all Reason 5: The “certainty principle” favours the status quo set out above.

    The "response" that argument is one which you see to have a problem with - namely certainty demands consensus. Unless PEOPLE buy into the approach you risk uncertainty.

    Mining policy in Zambia should be a non-partisan issue according to the counter-argument. The argument is that mining is so important to our survival it must be above politics. We need a national policy forged after extensive consultation. That is what guarantees stability.

    It is that argument you must challenge.

    ReplyDelete
  22. Whisper,

    It's most unfortunate that email address is not working.

    I shall find her working email address. In the meantime here are the two addresses for the Auditor General
    auditorg@ago.gov.zm
    auditorg@zamnet.zm

    They should be able to provide her direct email. At the minimum you should get a response from her directly.

    The telephone & Fax
    Phone: +260 211 254615
    Fax: +260 211 250349

    I am glad you have taken up this challenge. By the way all her reports are now on the AOG website. Link on the left hand side bar.

    ReplyDelete
  23. all these informations about Minority interest for ZCCM-Ih from KAnsanshi mining are there :

    http://forum.aboutzccmih.com/viewtopic.php?f=27&t=1728

    ReplyDelete
  24. This is where youthfulness and attendant zeal exposes iself and fails. Certainly relative truths seemingly parallel meet in experience and age. Wisdom is the preserve of the aged!

    What appears practically an economic equation if seen through wisdom's eyes ends up as a social/political item all reduced to expedient down to earth measures that expel comfortable theory.

    ReplyDelete
  25. Now if only ZCCM-IH shareholder meetings would be lobbied like this, maybe people would start paying attention to the fact that ZCCM-IH is not receiving dividends from most of it's companies, and that what it does receive is pitiful. Also see Antonia Juhasz home page The Bush Agenda.

    From: The True Cost Of Chevron

    Houston, TX - Antonia Juhasz, lead author and editor of The True Cost of Chevron: An Alternative Annual Report was forcibly dragged from Chevron's annual meeting yesterday as shareholders and their proxies chanted, "Chevron Lies, People Die."

    CEO John Watson abruptly ended the meeting.

    Juhasz was released from jail this afternoon at 1:15 pm CDT after being arrested in Chevron's annual shareholder meeting yesterday morning around 10:00 am CDT and kept overnight.

    She and other True Cost of Chevron Network members were there to share their stories of human rights and environmental abuses due to Chevron's operations.

    The other four arrestees from the network, Juan Parras of Houston, TX; Reverend Ken Davis of Richmond, CA; and Mitch Anderson and Han Shan of San Francisco, CA, were released early this morning at 3:30 am CDT. They were arrested after being barred from the meeting.

    "As a Houstonian, I am proud to be part of this global network. Chevron cannot silence the truth about its operations in Houston or anywhere else," stated Parras.

    ReplyDelete
  26. Cho,

    I have been following this debate with curiosity. I may offer my contribution tomorrow. Thanks!

    KBM

    ReplyDelete
  27. KBM,

    Look forward to hearing your thoughts :)

    ReplyDelete
  28. A QUESTION OF FAIR PLAY

    After reading some of the comments and exchanges posted on the Zambian Economist’s discussion on ‘taxation policy’, I feel that I can make my six-pence contribution.

    First, I am happy that we are having this conversation. Kudos to Chola Munkanga (Cho) of Zambian Economist for sparking this discussion. And secondly, I hope that somebody in government is monitoring this talk – because embedded in this debate is the concern some of us have about the exploitation of non-Zambians of our resources.

    The main point to be made here is that – while we accept that foreign investors are entitled to walk away with a return on their investments – it is equally legitimate for the owners of the resources to get some benefit from their natural resources. In other words, there must be some fair trade-offs between the two sides. The investor should not, for whatever reason, be allowed to get away with too large a share. There should be a way of sharing or apportioning these benefits equitably or fairly.

    This should be the central theme to the whole concept of taxes, and hence our interest in wanting to scrutinize them.

    The bottom guide line is quite simple. Depending on which way the pendulum swings (due to say – demand, commodity prices, world economy etc.): - in a situation where genuine losses are made, companies should be permitted to write them off or given time and chance to recover them. On the other hand, in a situation when companies make genuine (nothing hidden) exorbitant profits – they should pay a fair share on it to the owners of resources. Emphasis here is on the word g-e-n-u-i-n-e.

    The difficulty we face is – how and who is going to ensure that this objective is reached in a process which takes place amicably? It is in that process when government policies, its actions, its contracts and international agreements etc., come in. Before I proceed, I am known to be pro-Western investments versus Chinese or those from socialist countries like Bulgaria.

    Now let me raise some specific views and/or misgivings. First, Murray talks of “Rule of Law” (R of L) being violated in the event of international agreements being reviewed. In my own opinion, this R of L is just a new construct or conditionality invented by the West to exploit less developed countries (LDCs). Were it not so, then we should have been seeing the level of Corporate Social Responsibility (CSR) matched on a one-by-one with the Rule of Law. They want us to be committed to this R of L, when they aren’t committed to the CSR. Therefore at the very least, this rule of law is predatory. Where ethics and morals conduct count, the investors should in fact have more burdens.

    Then comes the argument that – once agreements are reached into, you cannot amend them even if you are a government. This fails – on Cho’s point that you need to have “all party agreements”. There are many who believe that this was not the case with mining investors. Hence, that’s why we think that – “how agreements are reached at matter” is a strong argument. A responsible government cannot just stand by and let resources hemorrhages continue unabated.

    It is easy to assume that the Zambian side was the weaker part, thus, not forceful, and compromising in fear of the talks breaking down. People forget that Pres Levy Mwanawasa was talking to new mining investors after Anglo-Americans had suddenly pulled off. That was a tough time. Therefore, being soft and very accommodating, explains why Zambians even failed (or forgot) to enclose an exit clause in the agreements. An exit clause could have avoided – “respect of the agreements” discussion....(to be continued)

    ReplyDelete
  29. (cont..)

    Again Murray and others worry that unilateral changes would discourage the long term investments flow. That would not necessarily be the case, if a new discussion was re-opened up guided by frankness and new facts. A situation where investors are acting like Kings is not acceptable.

    In any case, every where in the World, governments retain their right to changing their mind or amend statutes. This is analogous to printing money even if you have nothing to back it up with. Without this power, Idi Amin or our next door Robert Mugabe could have folded a long time ago. The point is that – a government does not need permission from anyone to adjust its policies. Why should they? I am sure people like Murray are happy when our Ministers become intimidated.

    What we need is to enter into contracts with humble and honest investors – not business vampires or Cow Boy Capitalists. When copper prices skyrocketed, what is wrong in government seeking for ways to increase its revenue portfolio? After all, government needs more money to fix infrastructures such as roads on which companies rely to make more money.

    Therefore if investors are looking for long term stability – here again I have to side with Cho’s view that – having secure agreements good for a long time – one needs to have “comprehensive engagement of ALL parties”. Artificially ‘good’ contracts, which are in essence unfair and cheatful or rely on backdoor strategies to take advantage of the weaker (or ignorant) party, are not useful.

    Maintenance of the stability of taxes being discussed can only exist when both parties are transparent and honest to each other. For it is not simply a question of attracting investments which is at issue, but a search for trusted development co-partners. Those prepared to share fairly – the revenues or benefits accruing from those investments are welcome. Whenever we suspect that this doesn’t hold, that’s cause for worry.

    And because companies have this inherent habit to cheat – that is why they pay big bucks to accountants, again I have to agree with Cho that – the choice we make between the profits variable taxes as opposed to windfall tax, should be made guided by this principle. We have to go with a regime which gives us a higher probability for not being cheated combined with a possibility to earn a larger revenue sum. Ordinarily this would not be a hard choice, given full disclosure and absence of cooking books. But because the world is the way it is, we’ve to do our best in facing the reality. Provided of course we rely on the best minds we can find. As Cho guessed, mining accountants are probably craftier than the government ones. So we’ve to think very carefully.

    Someone also talked about relying on transparency and LuSe regulatory regime. No matter how comprehensive these regulations might be, by themselves, would not be sufficient to protect us from cheaters. Wall Street which has got a more developed and water tight system, still more has a problem. It is not easy to inspect and verify all companies’ actions and activities.

    In short, I am of the view that – unless our government revisits this mining tax issue comprehensively, and seriously, Zambia’s interests will be short changed. For, the whole purpose of having governments is to look after the interests and concerns of its citizenry. In LDCs like Zambia, we cannot afford to be guided by the principle preached in the West – especially the conservative doctrine, that corporations can only function normally in an environment of reduced or no taxes at all.

    We need to strike a balance, and that should be the heart of this discussion. Thanks!

    Kaela B Mulenga
    May 31, 2010

    ReplyDelete
  30. Rio Tinto Says Australian Mining Tax Divorced From Commercial Reality

    | Respond to Editor | Print

    By Alex Wilson
    Dow Jones Newswires



    MELBOURNE -(Dow Jones)- Rio Tinto Ltd. (RTP: 45.49, 0, 0%) renewed its attack Wednesday on the Australian government's planned mining tax, which it says is divorced from commercial reality, penalised efficient operations and would slow investment and cost jobs.

    In a letter to shareholders, Chairman Jan du Plessis said the company supported tax reform that would enhance the competitiveness of the Australian economy, but that the proposed resource super profits tax wouldn't achieve that.

    "The government's proposal will penalise efficiency, discourage competitiveness, curtail investment and limit jobs growth," he said. "It has been developed in a vacuum and is divorced from the day-to-day realities of business."

    Du Plessis said the company was particularly concerned at the application of the new tax to existing projects, which he said would undermine the stable tax and regulatory environment needed for commitment to mining projects that could take decades to pay back the investment.

    "The government's current proposals, arrived at without consultation, have now significantly destabilised that investment framework...As a result, there has been a considerable increase in the perceived risk of investing in Australia, threatening to make Australia a much less attractive place in which to invest."

    Copyright © 2009 Dow Jones Newswires

    ReplyDelete

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