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Tuesday, 1 June 2010

A Question of Fair Play (Guest Blog)

Resident contributor Kaela B Mulenga has written a detailed response to our discussion on Eight reasons for rejecting higher mining taxes. The full piece is reproduced below for ease of access, as it was entered in two separate parts. This is also part of our on-going efforts to deepen the level of dialogue to allow both room for those who provide few lines of comments and those who follow the historic analytic traditions of carefully weighed and detailed responses :


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) 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 Sanderson's 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....

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

6 comments:

  1. 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.

    Just to add, it was not the Zimbabwean government which unilaterally reneged on it's obligations under the Willing Buyer, Willing Seller clause of the Lancaster House Agreement, but the British government of Tony Blair, through his secretary Claire Short, when she wrote:

    I should make it clear that we do not accept that Britain has a special responsibility to meet the costs of land purchase in Zimbabwe. We are a new Government from diverse backgrounds without links to former colonial interests. My own origins are Irish and as you know we were colonised not colonisers.

    It was the obligation of the British government to finance the land purchase part of the Willing Buyer, Willing Seller land reform program. The Zimbabwean situation was a case of the BRITISH government not living up to it's obligations.

    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.

    And look at the nearly non-payment of dividends by the existing companies held by ZCCM-IH. Or at the lack of liquidity in the market.

    I say do away with all the mining taxes, except royalty tax in revenues/turnover, and raise it from 3% to 20%.

    Revenues (trucks with ore) are much easier to monitor that 'profits' - so let's tax those.

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  2. Kaela condemns the Rule of Law as ‘predatory’ and describes it as ‘just a new construct or conditionality invented by the West to exploit less developed countries.’ As this is a major misunderstanding, I hope I can be permitted to quote in full a passage from ‘The Road to Serfdom’ written by F A Hayek in 1944.


    “The Rule of Law was consciously evolved only during the liberal age and is one of its greatest achievements, not only as a safeguard but as the legal embodiment of freedom. As Immanuel Kant put it, “Man is free if he needs to obey no person but solely the laws”….The idea that there is no limit to the powers of the legislator is in part a result of popular sovereignty and democratic freedom. It has been strengthened by the belief that so long as all actions of the state are fully authorized by legislation, the Rule of Law will be preserved. But this is to completely misconceive the meaning of the Rule of Law. The rule has little to do with the question whether all actions of government are legal in the juridical sense. They may well be and yet not conform to the Rule of Law. The fact that somebody has full legal authority to act in the way he does gives no answer to the question whether the law gives him power to act arbitrarily or whether the law prescribes unequivocally how he has to act.

    “To say that in a planned society the Rule of Law cannot hold is not to say that the actions of the government will not be legal or that such a society will necessarily be lawless. It means only that the use of the government’s coercive powers will no longer be limited and determined by pre-established rules. The law can, and to make a central direction of economic activity possible must, legalize what to all intents and purposes remains arbitrary action. If the law says that such a Board or Authority may do what it pleases, anything that Board or Authority does is legal – but its actions are certainly not subject to the Rule of Law. By giving the government unlimited powers the most arbitrary rule can be made legal; and in this way a democracy may set up the most complete despotism imaginable.

    “The Rule of Law thus implies limits to the scope of legislation: it restricts it to the kind of general rules known as formal law, and excludes legislation either directly aimed at particular people, or at enabling anybody to use the coercive power of the state for the purpose of such discrimination. It means, not that everything is regulated by law, but, on the contrary, that the coercive power of the state can be used only in cases defined in advance by the law and in such a way that it can be foreseen how it will be used.”

    The above passage explains why the Rule of Law is essential to protect citizens from arbitrary actions by governments. Kaela may say that foreign investors should not be protected, as they are not citizens. That position is fine if foreign investors are not wanted. But even the most developed countries welcome them, since they contribute to prosperity. If we want to benefit from FDI we need to treat foreign investors fairly, while of course requiring fair treatment from them.

    Taxes can of course be changed annually, or even more often. But when a government enters into an agreement, on taxation or anything else, with any investor, local or foreign, for a set period of time, that agreement has to be honoured. Breaking it, without legal redress, defies the Rule of Law, with disastrous consequences, as explained by Hayek 66 years ago.

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  3. Murray,

    Taxes can of course be changed annually, or even more often. But when a government enters into an agreement, on taxation or anything else, with any investor, local or foreign, for a set period of time, that agreement has to be honoured. Breaking it, without legal redress, defies the Rule of Law, with disastrous consequences, as explained by Hayek 66 years ago.

    Your position would be more credible if you held foreign corporations to the same standards.

    You cannot talk about the 'rule of law', when the same foreign corporations are evading taxes like crazy. Which would land ordinary people like you and me in prison, because it is a crime. Because they are evading taxes by underreporting their profits, they are also defrauding their shareholders out of dividends.

    So unless your position is that it is only wrong for the government to break the law, but not for corporations...

    And Hayek and Friedman are why we are in the global mess we are in today. Deregulation of financial markets has led to the creation of hundreds of trillions of dollars in financial instruments, when the entire global GDP is about $60 trillion.

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  4. MrK says tells me "Your position would be more credible if you held foriegn corporations to the same standards". I do of course hold them to the same standards. What is wrong for one is wrong for all.

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  5. Hi!

    RULE OF LAW DEBATE

    I was monitoring to see if there would be other salient points from other contributors. Since there is none so far – I have to say that MrK answered Murray satisfactorily when it comes to our main point of difference. Namely, the use of Rule of Law (R of L) as an ultimate arbitral can only apply IF ‘foreign corporations are also held to the same standards’ as MrK explains.

    The R of L principle breaks down when corporations – are suspected to be evading taxes, or simply keep on committing acts considered crime. Cooking books with an intent to defraud (although they don’t see it that way) the State is unacceptable.

    Indeed, Hayek or Milton Friedman should not be hailed for weakening the global regulatory regime. That’s the beginning of the problem. Overly trust in companies and stock brokers to regulate 'themselves' is what caused the recent economic melt down. Further, fraud schemes coming out of Wall Street and indirectly endorsed by Business Schools as smart business behavior, has to be fought. [To see what I am talking about, please read, “Guide to The End of Wall Street as we know it”, by Dave Kansas].

    Earning of big bonuses and/or self paying themselves through deceit, or due to the ignorance of investors is unethical. But in the eyes of Murray & co., there is nothing wrong with that.

    In my stead, let me also add that we are no longer prepared to continue being cheated. To maintain that the Rule of Law is the best model under which the World economic activities should be conducted, is as fake as teaching us that ‘competition’ is good. But then turn around and say that ‘subsidies’ are okay only in North America & Europe but not Africa and else where. Moreover, anyone who follows closely WTO discussions such as those at Dobra meetings knows well that Africa & other 3rd World countries are the victims of the unfair global economic system.

    That is why the position we are advancing on R of L is that – regardless of the philosophical postulations, even those by ‘biggies’ like Manuel Kant or the correctness of its theoretical underpinnings, is useless to us in a practical sense. Primarily this is because no body can ensure that it is applied fairly. The West led by USA often times break international protocols with impunity. Does anyone remember Pres GWB? The West – USA in particular, can butcher people, steal, extort or cheat under the disguise of self defense.

    Moreover, we have not settled the question of – under whose laws & rules should that R of L principle be applied against? We believe for instance, that the process of making those ‘rules & laws’ is flawed and unfair to us. Anytime we try to persuade the Developed Countries (DCs) to consider our interests – time and again the West in concert disregards our (LDCs) request or ways of doing things.

    In their eyes our traditional laws and customs, or living in tandem with nature – is often described by them as primitive, backward or uncivilized. But then what is so civilized about producing say, grain (often using subsidies), which you cannot sell (prohibited by price) or cannot give away to the needy (because they’ve no income to buy or may be because you strategically want to starve them to death)? Tons and tons of grain end up being burnt each year. What is so fair and good about that? (cont....)

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  6. (cont....)

    Thus, Murray has no serious grounds to complain about any discrimination or that foreign investors in Zambia are being treated unfairly. On the contrary. The West badly treats African governments daily. So I reiterate my stand – because the Rule of Law is not being applied uniformly it is of no consequence to us. And since so far, it appears that it is impossible to do so – Murray must be talking about a ‘utopian society’. We will join that utopian society, when the rule of – ‘what is good for the goose is also good for the gender’, takes root. For now, I for one favor our countries to continue holding on to the power of arbitration. Whenever they set business conditions or policies – ALL investors and interested parties must be prepared to either take it or leave it.

    The ‘disastrous consequences’ Murray predicts if R of L is defied, assumes that investors can only come from the West. He forgets that any vacuum created by the exodus of Westerners can be easily filled by local shareholders, Chinese or other non-West sources. China, South Korea, Malaysia, Singapore, and Middle East would love that scenario.

    Since the worm is already out of the can – ideas such as Murray’s or others like it, only aim at conditioning or keeping us (LDCs) open for exploitation. The real disaster would befall the West IF LDCs changed their way of doing business or dumped the economic model and principles from the West.

    Therefore, African governments cannot and should not relinquish the powers of a ‘Sovereign State’. Neither is it in their interest to write in stone agreements to pre-determine future actions. There should be room for flexibility. That means, as the situation warrants it or new facts and information emerge – governments have a right and free to review matters, regardless of all the beauties contained in that Rule of Law. Over to you!!

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