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Tuesday, 20 July 2010

Too little, too poor and too late.

"We have asked for a special audit to be done on the mining sector and if we find someone cheating, we will deal with that...Cheating is dealt with by punishing offenders, but you cannot deal with cheating by increasing tax rates, you can't....We need a strong mining sector to help us diversify the economy"
Finance Minister Musokotwane announcing over the weekend that the government plans to conduct an audit of mining companies to determine their earnings and will punish companies found cheating over declaration of profits. One can't help but wonder why Musokotwane now appears to have a "death bed" conversion to the idea that mining companies may well be cheating, when many of us have been saying this for years now!

What is sad is that Musokotwane still doesn't get it.

First, I don't think this audit will yield anything because the point is that multi-national companies are experts in this area and I doubt if any single company would be found at fault.

Secondly, even if Musokotwane were to find any mining company at fault, I doubt he has the ability nor the will to punish anyone. These cases take years to go through courts and the threat to mining companies is just not credible. Let us not forget that there's still the little problem of the windfall revenue which mining companies have refused to pay. Now if a company can owe tax revenues to government and fails to pay, what hope is there that a government can actually punish it for complicated accounting processes? Can you imagine if an ordinary Zambian refused to pay his tax? Let us also not forget that this is the same Executive Branch that has failed to take the report of the Auditor General seriously. People let us be serious and start looking at issues with objective assessment.

Thirdly, I just don't get what economic logic he is applying when he says "you cannot deal with cheating by increasing tax rates, you can't". Who said the point of imposing windfall tax was about punishing offenders? The reason for the windfall tax is to benefit Zambians period and ensure some guarantee of revenue when prices are above a certain threshold. The issue of cheating only becomes relevant when Musokotwane argues that the profit variable tax does the same job. That is when all well meaning Zambians rightly question that logic given the underlying incentive for mining companies to cheat. Do you see how our Finance Minister Musokotwane is getting the very elementary policy questions confused? He is inventing a problem that is not central to the original argument, and then he proceeds to argue with himself. This is poor analytical thinking.

Finally, nothing illustrates more the poverty of Musokotwane's economic approach than the statement : "we need a strong mining sector to help us diversify the economy".  Contrast this with Bob Sichinga's insightful statement in the same piece that the government should reintroduce windfall tax to raise more revenue for spending in social infrastructure such as schools and hospitals. As we have said on this website many occasions ( see A mid-week rant.....on the state we are in.. and Five questions on diversification ) the key to diversification is not a strong mining sector it is strong revenues from mining.  If you can capture that revenue you can use it like Chile has done to spend on critical infrastructure (and perhaps on more mining investment) with wider catalytic effects. The key thing we need to remember it is very easy to have a strong mining economy - just reduce all your taxes to 0% (note that the converse is not true for revenue - thanks to the Laffer Curve).  The debate here is how to secure optimum revenues from mining.  Unfortunately Musokotwane is just focused on making a strong mining sector which is why he constantly focuses on reducing taxes.

30 comments:

  1. Mr. Capitalist19 July 2010 at 21:17

    So what happens if you increase the mining taxes cold turkey and one of the following happens, investors flee as they cannot make profits or Europe drags the world into a second recession (I read somewhere Portugal's credit rating has been cut)? Then what??

    Secondly, the audit is not yet ready and already you are shooting it down. Why?? We don't know who will be contracted to conduct the audit and so your ", I don't think this audit will yield anything because the point is that multi-national companies are experts in this area" argument is not convincing.

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  2. The issue of cheating only becomes relevant when Musokotwane argues that the profit variable tax does the same job. That is when all well meaning Zambians rightly question that logic given the underlying incentive for mining companies to cheat.

    It would be honest for the minister to state that the 'variable profit tax' has failed, and introduce the windfall tax, retroactively.

    Considering that he is a non-executive director of ZCCM-IH, which has not received proper dividend payments from it's companies ever, I sincerely doubt about his own integrity.

    Do you see how our Finance Minister Musokotwane is getting the very elementary policy questions confused? He is inventing a problem that is not central to the original argument, and then he proceeds to argue with himself. This is poor analytical thinking.

    Ok. :) Your bet is on stupidity, mine is on corruption.

    The debate here is how to secure optimum revenues from mining. Unfortunately Musokotwane is just focused on making a strong mining sector which is why he constantly focuses on reducing taxes.

    The problem is that the minister is bought and paid for. As such, he has no intention of ever allowing the Zambian people to benefit from the mining sector, and has every intention of being a good servant of the mining industry.

    There should be a law against this. There should be a constitutional requirement that all profits from the mining sector are invested in the Zambian economy. Or have a 51% Zambian ownership requirement, which is what is being pushed through in the much maligned Zimbabwe.

    Because not only are these revenues not taxed, not only are profits not shared, but they completely expatriated and taken out of the economy. This is why there is no economic diversification or massive job creation. This is also partly why lending rates are over 20% for ordinary people and businesses. This is not brain surgery, and you don't need a PhD in economics to understand it. But I guess if the pay is good enough, the minister will look the other way.

    And if the 'donors' were not completely complicit in this scam, they would have been withholding 'donor aid' a decade ago.

    This is also why Goldman Sachs's Dambisa Moyo's agitation against donor aid rings so hollow. Unless she wants to replace donor aid with taxes, she has no credibility.

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  3. Capitalist,

    "So what happens if you increase the mining taxes cold turkey and one of the following happens, investors flee as they cannot make profits or Europe drags the world into a second recession (I read somewhere Portugal's credit rating has been cut)? Then what??"

    Please read the post carefully. I believe I have dealt implicitly with this question by emphasising OPTIMUM revenues and reference to the LAFFER CURVE.

    "Secondly, the audit is not yet ready and already you are shooting it down. Why?? We don't know who will be contracted to conduct the audit and so your "I don't think this audit will yield anything because the point is that multi-national companies are experts in this area" argument is not convincing.

    This is a legitimate concern, but it ignored the related points. I don't believe the AUDIT because Musokotwane lacks credibility in this area. In short even if I am wrong, your statement is negated by the fact that REASON TWO is very strong.

    In general, can I offer some free but crucial advice to help improve how we debate - "we" as between me and "you" Mr Capitalist. It would save us valuable time if in the future you took time to consider the full scope of what I have written. I rarely write without deep pondering. I say this only because it does not make for productive dialogue if I am having to respond to questions which are already addressed in the post. Usually I ignore when "anonymous" people do that, but as you are a valued contributor - I want us to ensure we talk with each other rather than past each.

    I hope you take my observation in the Zambian spirit it is intended.

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  4. MrK,

    I value your flexibility in calling a spade a spade :)

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  5. Mr. Capitalist said...

    So what happens if you increase the mining taxes cold turkey and one of the following happens, investors flee as they cannot make profits

    That will never happen. All that happens is that they make a lot less profit than they are making now. Which is why I think the windfall tax is still too mild.

    If they really leave, there are the following options:

    1) We get a chinese mining management company to run the mine at cost plus 10% of profits as an incentive.

    2) We take over the mine and renationalize it to keep it in production.

    or Europe drags the world into a second recession (I read somewhere Portugal's credit rating has been cut)? Then what??

    Well in that case (or more importantly if China would crash) copper demand would drop, in which case are you not only out of all the profits that were never received or taxed, but you'll lose upto 58,000 jobs too. In that case, it won't matter who owns or owned the mines. You'll just be crying in your collective beers. (The only upside would be that if Europe crashes, they can't pay donor aid, and the government would almost be forced to tax the mines or renationalize, just to keep the government running.)

    And that is why it is so important to have a diversified Zambian economy NOW!!! (I'm not shouting at you, just capitalizing for emphasis.)

    We need to build agriculture NOW!!! We need to produce the products we consume NOW!!!

    Not after the world enters an economic ice age, but before.

    Secondly, the audit is not yet ready and already you are shooting it down. Why?? We don't know who will be contracted to conduct the audit and so your ", I don't think this audit will yield anything because the point is that multi-national companies are experts in this area" argument is not convincing.

    Previous experience, knowing who is calling for it and executing it, knowing as Cho pointed out that we already know that there are millions in unpaid Windfall Taxes outstanding that are not being collected.

    Meanwhile, they just continue expatriating our resources, taxes and profits.

    You are right though about the threat of a global economic collapse, which is why it is so important that there is a sense of urgency about diversifying our economy, and doing it in a way that connects the Zambian economy to the Zambian people, not merely distant export markets.

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  6. Mr. Capitalist20 July 2010 at 21:31

    I think you misunderstood my point. There are two problems I have with taxing the mines.

    1. It re-introduces dependence on the copper industry. An example would be to UNIP which had an opportunity to diversify the economy but did not do so. Instead UNIP decided to make people happy by giving them freebies and spending on issues that had not sustained long term economic benefits. In short UNIP spent money on freebies in order to stay in power. This brings me to the point that no govt (whether PF, UPND, UNIP, MMD, etc) with the mine revenues in their pocket is going to diversify the economy if they are facing pressure from the electorate to deliver. We all know that development takes time but if there is huge pressure to deliver on electoral promises, a govt would be tempted to ignore long term economic goals and opt for social spending that keeps people happy in order to stay in power. Case in point...Venezuela.

    2. I do not believe you can develop other industries by killing off another one. Zambia has got other sectors it can grow (Tobacco, Cotton, Tourism and Beef to name a few) and their are more creative ways of going on about it. We could look at Dr. Dambisa Moyo's recommendations with the bond market being one of them. China and the Middle have got excess cash which I am sure they would pour in Zambian bonds as long as they are assured of a return. If Ghana can raise $1 billion USD in bonds, so can Zambia.

    "In general, can I offer some free but crucial advice to help improve how we debate - "we" as between me and "you" Mr Capitalist. It would save us valuable time if in the future you took time to consider the full scope of what I have written."

    Point taken.

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  7. Mr. Capitalist20 July 2010 at 21:50

    "
    That will never happen. All that happens is that they make a lot less profit than they are making now. Which is why I think the windfall tax is still too mild.

    If they really leave, there are the following options:

    1) We get a chinese mining management company to run the mine at cost plus 10% of profits as an incentive.

    2) We take over the mine and renationalize it to keep it in production. "


    But MrK, investors look for a return whenever they make an investment. If they are not making any return or less a return than they would earn elsewhere, wouldn't that then be an incentive to leave?

    Your point on #1 seems reasonable but then again it has to do with return. If they can make a return of 12% to 15% in lets say DRC, why would they settle for 10% in Zambia?

    I have taken note of point #2 but I am extremely opposed to nationalization and renationalisation. There is only one company I support in govt hands at the moment and that is ZESCO. The only reason is because there are currently no competitors.

    "And that is why it is so important to have a diversified Zambian economy NOW!!! (I'm not shouting at you, just capitalizing for emphasis.)

    We need to build agriculture NOW!!! We need to produce the products we consume NOW!!!"


    I agree, we need to diversify the economy now. This is why we need to support govt efforts at doing this. We need to support govt efforts on MFEZ, we need to support govt efforts on farming blocks like the Nasanga Farming block etc.

    I do not believe we should grow the agric sector so we can produce what we consume. The mining industry in my view is mostly important because it accounts for 80% of all foreign exchange earnings. We need to grow industries which have capacity to export. We need to support and grow the Tobacco industry, the Cotton industry, the Beef industry, The Flower industry, The Tea industry because these have capacity to export. We need to get 4 million + tourists a year in the country.

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  8. Mr Capitalist,

    With respect to your two points.
    "1. It re-introduces dependence on the copper industry".

    I do not share this concern. The issue is not high tax revenue. It is how you manage them. Its like saying, I don't want to get a huge salary because I may become an alcoholic or greedy. There are mechanism we can develop to avoid the legitimate problem you have highlighted, including issues like the Dutch disease e.g. stabilisation funds, infrastructure investment. Chile is good case study - you will find plenty of references and discussions about Chilean model on this website. Not to be big headed, but we have been discussing these issues for a while now! A lot of good research is emerging by Collier and others on how best resource boom are managed to avoid the kind of concern you have. The big question for the next group of Zambian economic advisors to the next government or this one if re-elected, is how best we can adapt those models to the Zambian scenario.

    2. I do not believe you can develop other industries by killing off another one.

    No one said that. That is why I said we need an OPTIMUM tax and referred to explicitly to the LAFFER CURVE. An optimum tax ensures that the marginal rate of tax is set at a level that is appropriate. As i written here many times, there's significant headroom in terms of tax. Not my evidence, but one provided by this government's review of taxation in 2008.

    In short the problem is that we have many people not willing to look at the evidence. We need a rational approach to these matters. What frustrates me is that Dr Musokotwane SHOULD know all this. As a fellow economist, I really do find him quite frustrating because he appears to show zero understanding of very elementary issues. He is also afraid of talking about REAL EVIDENCE.

    I'll end here before I burn more bridges with folks at MoFNP. I know they monitor this website!

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  9. Mr. Capitalist,

    But MrK, investors look for a return whenever they make an investment. If they are not making any return or less a return than they would earn elsewhere, wouldn't that then be an incentive to leave?

    Not all 'investors' are the same. I am not talking about 'investors', I am talking about hiring a Chinese company to work for us.

    This is the problem that the MMD have, they don't look at the possibilities, they only look to make a quick firesale.

    There is no reason whatsoever that a Zambian mine that is managed by a foreign company should also be owned by that company.

    There are a lot of deals that can be made with the Chinese government, or other governments.

    I am sure there are people in China who would love to get the job, just to earn a real wage.

    Your point on #1 seems reasonable but then again it has to do with return. If they can make a return of 12% to 15% in lets say DRC, why would they settle for 10% in Zambia?

    Because that's what you negotiate. There are a lot of side deals that can be done, or conditions negotiated. For instance, not everyone in China has the money to buy a mine. So you hire an experienced management team to run your mine for you. They get a nice salary, the workers get minimum wage, and if they do really well, they get 10% of profits.

    Or you can guarantee the government in question the right to buy the first 1 million tonnes at 80% of market value. They get a discount, and if they want to they can make an instant 20% profit selling copper on the open market.

    Or the exclusive right to buy all the copper at market value so they won't be competing with other countries.

    I don't understand this air of desperation.

    Zambia has tens of billions of dollars in copper deposits, that are not available in most other countries in the world - and they still need copper wiring for their electric networks, electronics industries, etc.

    I agree, we need to diversify the economy now. This is why we need to support govt efforts at doing this. We need to support govt efforts on MFEZ, we need to support govt efforts on farming blocks like the Nasanga Farming block etc.

    The MFEZ's aren't going to see to economic diversification. At best they are places for foreign corporations to do business in Zambia on terms that are extremely deleterious tot the Zambian economy.

    What are needed are billions of dollars that are invested in agriculture, infrastructure and manufacturing. Not foreign corporations doing business in Zambia. That will never develop the Zambian economy. As an addition to Zambian business, maybe, but not instead of.

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  10. I do not believe we should grow the agric sector so we can produce what we consume. The mining industry in my view is mostly important because it accounts for 80% of all foreign exchange earnings. We need to grow industries which have capacity to export. We need to support and grow the Tobacco industry, the Cotton industry, the Beef industry, The Flower industry, The Tea industry because these have capacity to export. We need to get 4 million + tourists a year in the country.

    Aren't tobacco, cotton, beef, flower and tea the agricultural sector too? Food security is the cornerstone of a stable economy. Also, don't discount the potential for surplus food to be packaged/canned/bottled and stored or exported. Food processing and exports could easily be a multi-billion dollar industry. The beef industry can have lots of add-on industries - leather apparels and shoes, bones can be ground into high Phosphorous organic fertilizer, etc.

    What if every district council had it's own millery? That would give them extra income that would not depend on local taxes and levies. And at the same time making food processing accessable for more farmers. It would also save in transport costs because milled grain takes much less volume than whole grains, plus it creates jobs. Surplus maize can be made into bourbon, cornflakes, etc. and could be exported to neighboring countries.

    And another thing. We can get creative with agriculture. For instance, during the US's independence, it was allowed for farmers to pay their taxes in hemp, because the navy's great need for rope and sails. Why not allow farmers to pay their taxes in maize? Government silos would be filled in no time. At the same time, farmers could use the same transportation/sales/marketing channels to sell cashcrops for export.

    The farmers would in fact be getting a tax subsidy for growing maize - they would only pay the cost of inputs as taxes instead of paying wholesale value of maize in taxes. The state would be ensured of a steady supply of maize, and keep prices low for the population or put people on food support in times of crisis. Or use surpluses for export. (And there are dangers to every policy, but there are a lot of possibilities that are not being utilized.)

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  11. I don't see the point of arguing about mining taxation until the validity of the development agreements is decided. There are those who argue that the agreements are valid under International law, hence any local unilateral changes in taxation are illegal while others say that Zambian laws on taxation take precedence. A matter for the courts to decide.

    Diversification is good and government can help to a certain extent in developing industries, but at a certain point the industries need to stand on their own feet. In general, a focus on highly profitable industries will be more successful and sustainable in the long run.

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  12. Kafue001

    Breaking the development agreements should not be considered sinful, and avoided at all costs. The terms of the DAs were highly detrimental to the well-being of the Zambian people. If the government breaks these agreements, it may be termed illegal but the real effect is for the international investor community to trust them slightly less - in technical terms Zambia's sovereign risk increases.

    An a decrease in this trust (in other words an increase in sovereign risk)increases the return that investors would require for investing in Zambia. But it is highly unlikely that it would discourage all investment into Zambia (see the Fraser Institute survey on mining competitiveness).

    But a careful government should balance the negative effect of this increase in sovereign risk against the potentially large benefits from breaking the Development Agreements and gaining a fairer share of Zambia's mineral wealth.

    This is exactly what the government did, and most independent commentators (including Collier who seems to be well respected here) would support such an action.

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  13. Richard,

    New greenfield mining investments appears to have stalled due to the uncertainty over mining taxes according to this February, 2010 article:

    http://www.zambian-economist.com/2010/02/uneasy-transition.html

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  14. Kafue001,
    It would be helpful if you were to give us examples of specific greenfield projects that were abandoned as a result of the cancellation of Development Agreements. There has been a tendency by some people like Fred Bantubonse President of the Chamber of Mines including the Finance Minister Musokotwane to always cite Luanshya Copper Mines and Mopani copper Mines as examples of what would happen if windfall taxes were introduced. This is a cowardly misrepresentation of events. Luanshya and Mopani had problems in 2008 not because of the planned windfall tax but due to the collapse of or halving of copper prices on the world market. Technically, the planned windfall tax wouldnt even have been triggered at those levels of prices.
    By the way the same Musokotwane was not so long ago prematurely celebrating the difficulties the previous Australian Rudd govt was facing in introducing a 40% resource tax on the mineral extraction industry. Musokotwane also used it as one of his convienient justifications for not introducing a 25% windfall tax. Fortunately for Australia they have politicians who know why they are in public office. The incoming government of Madam Gillard did not throw away the idea of a resource tax. Instead she sat down with the mining companies and settled for a 30% instead of 40% tax. Compare this with what the Banda regime did with the 25% windfall tax. The mining companies made the usual noise as in Australia but in Zambia's case everything was thrown away. Cowardice of the highest order!

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  15. Frank,

    I am not a mining expert, so I am unable to give you examples of stalled greenfield projects, I am merely citing what the article says. Here is another article also saying that new mining investment has stalled:

    http://zambiananalysis.com/index.php?option=com_content&view=article&id=65:minings-hope-beyond-the-crisis&catid=1:latest&Itemid=128

    I do not work for the mines.

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  16. U just reminded me that trouble with our democracy and the world over is that despite that democracy is about having the legible citizens electing representatives of their opinions to sit in the National Assembly or Council Chambers where they can put forward those opinions, this concept is defeated by the fact that it all seems to boil down to political parties, and what they think as directed by their leaders. These party leaders dictate and coach the MPs or Councilors how to debate and vote over most issues, and I believe this is wrong. They should vote as demanded of them by their constituents and not their leaders. Above all, most of these political parties lack good vision.

    An example of how political parties paralyze citizen’s will is in the windfall tax. On the campaign agenda, MMD then lead by Mwanawasa promised to improve central treasury earnings by increasing revenue collection through increased mining operations among many other things. Even though they did not necessarily promise wind-fall tax, however when wind-fall tax was implemented, we saw the value of the kwacha against other currencies pick up thereby improving purchasing power with reduced inflation. We the consumers were happy as we directly benefited from these deliberate policies. We said these guys are representing us well from our constituencies. Even international observers commented well of Zambia’s economic prospects in the international media. Alas, RB come and lectured the same MPs to vote out the good innovation in the vanity of hope that government will attract more investment by beating our competitors in foreign investment attraction. This has turned out to be retrogressive. MMD leadership knew very well that Zambians were not for the idea of throwing away the windfall tax. Even under duress emanating from closures of the mines perceived to have been badly affected by the global credit crunch, one would have expected the government to negotiate a relaxation and not a demolition of a good innovation. We should have just re-adjusted the tax ratio in the bands. Moreover, windfall tax is self regulatory. It’s such that if you don’t make a profit as a mine, you don’t pay tax. Even profit itself has bands of taxation affection. (Windfall tax: 25% at the copper price of $2.50 per pound but below $3.00 per pound, 50% for the next 50 cents increase in price and 75% above $3.50 per pound) So why did the mines cry to remove windfall tax? The experts from World Bank and the donor community were urging us not to remove the wind-fall tax but our leaders never listened. It is my opinion that the mines were not crying for removal of windfall tax. Some hidden agenda must have been at play given the facts above.

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  17. As I was saying representative democracy has its short comings not because the system is bad but because the practice is bad. We people are bad. We are owe allegiance not to the nation (constituency) at large but to a grouping (political party) and worse still to an individual who sponsored our cause to be in the assembly to him we are indebted truly. This is bad.

    Look at another example: PF has about 41 MPs in parliament. 26 of these are the so-called rebel MPs and they belong to FTJ who had given then to PF during campaign and they report to Machunga. Nothing explains it better than this.

    Despite the ills of democracy, I don’t know of any other better system of representative government ever tried. Unless God himself was to sit in the driving seat of national presidency, this is the best we have. All we need to do is to put a political agenda to public scrutiny and relay this feedback to the actual assembly vote. This is our cry that leaders should listen to the views of the constituency they are representing. I believe in a continuous feedback during entire tenure of office not a one reflection of people’s views during campaigns prior to a general election. We all must join the existing political parties precisely of the pact (hahahaha) and work hard in the hope that we can solicit enough hearing of our opinions to be adopted for party manifesto.

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  18. Mr. Capitalist21 July 2010 at 18:05

    "Chile is good case study - you will find plenty of references and discussions about Chilean model on this website."

    Is it possible you could paste some of the links here so I can have a look at them?

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  19. Mr. Capitalist21 July 2010 at 18:28

    MrK

    whether you hire a company or personnel to work for the Zambian govt earning 10% of the profits, the fact still remains that they wont perform better than companies that stand to make 100% of the profits (less taxes). If you want an efficient self sustaining industry, you have to let investors earn a return (both local & foreign). The private sector still remains the most efficient system in terms of industry.

    It is true that not every "Chinese" national has the money to buy a mine but they possible know someone who has the money. All they have to do is convince a venture capitalist on the feasibility of owning a mine. This is why I came up with the concept of return, they could get hired and get 10% return (10% of profits) plus buying rights or they could buy the mine (with borrowed money or joint ventures, etc) and earn even up to 25% return depending on the market. The 10% return which will be offered to them by the govt is at least a safe return because there is less risk. In short they have nothing to lose. However if they take the 25% return (which comes with higher risk), they still stand to get a better return.

    The question is if you where an investor, which one seems more viable?

    "The MFEZ's aren't going to see to economic diversification. At best they are places for foreign corporations to do business in Zambia on terms that are extremely deleterious tot the Zambian economy."

    And who said MFEZ's are only limited to foreign corps? No one has stopped local companies from investing in MFEZ's (Farmers house is already planning to invest in the Lusaka MFEZ) the same way no one has stopped local companies from taking part in the privatization process.

    "Aren't tobacco, cotton, beef, flower and tea the agricultural sector too?"

    I never said they weren't. I was making the point that it is better to produce products we can export as opposed to products we consume. In short, production for export is better than production for consumption. Reason, Zambia's market is too small. Why produce for 13 million when you can produce for 200 million (SADC). I singled out Tobacco, Cotton, Beef, Flowers and Tea because they earn a better price than Maize. Maize is great for stable inflation and food security but not that great as a cash crop.

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  20. Mr. Capitalist21 July 2010 at 18:38

    "What if every district council had it's own millery? That would give them extra income that would not depend on local taxes and levies. And at the same time making food processing accessable for more farmers. It would also save in transport costs because milled grain takes much less volume than whole grains, plus it creates jobs. Surplus maize can be made into bourbon, cornflakes, etc. and could be exported to neighboring countries."

    I have no problem with this as long as it is done by the private sector. The miller owned and done by the private sector, the processing owned and done by the private sector, the exporting done by the private sector, the surplus maize being made into cornflakes, etc done by the private sector. I have no problem with that as long as it is done by the private sector.

    The district can benefit by charging property rates.

    "
    And another thing. We can get creative with agriculture. For instance, during the US's independence, it was allowed for farmers to pay their taxes in hemp, because the navy's great need for rope and sails. Why not allow farmers to pay their taxes in maize? "


    How much will it cost the govt to put in place such a subsidy. We need an agriculture sector that can stand on it's own two feet and not dependent on the govt. A sustainable agric sector is what we need.

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  21. MFEZ's are advantageous in that there are no physical limitations on the number of jobs that can be created, as compared to a sector such as mining where the number of jobs depends on the limited quantity of mineral being mined.

    I would suggest that the first priority for Zambia is job creation followed by a steady upgradation in skills and the type of work being performed which will lead to rising incomes for Zambians.

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  22. Mr. Capitalist22 July 2010 at 07:45

    You got featured again.

    Economist expresses skepticism about findings in govt audit of mines [Post Zambia]

    Link: http://www.postzambia.com/post-read_article.php?articleId=11782

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  23. Mr. Capitalist,

    Thanks for this.

    We shall continue to do our bit to hold these officials to account. Mediocre explanations and poor analytical thinking wont solve the deep challenges facing our people. Our problems are too great. Every minute a poor grandmother struggles to feed herself. A child roams the streets. Who will speak for them? It wont be our politicians or our MPs.

    Its 2010, but yet Zambia has worse housing conditions than pre-World War 1 Europe. I find that totally unacceptable. It is that moral outrage that spurs me on. I am of the view that we don't have to be politicians to do our bit. Much of what we need to change is INTELLECTUAL. We need to gird our people with the right analytical armour. I find that Zambians ask the wrong questions. This is why mediocre explanations by Musokotwane can go unchallenged. I want to re-educate our people. Shift their mode of thinking to begin questioning those in authority - to begin questioning - We can and must hold our leaders to a high standard. By God's grace we shall. That I am convinced of.

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  24. To Potber Mbulo

    "Moreover, windfall tax is self regulatory. It’s such that if you don’t make a profit as a mine, you don’t pay tax. ... So why did the mines cry to remove windfall tax?"

    (It is not quite correct that if the mine does not make a profit it does not pay the windfall tax, but having the graduated price bands means effectively the same thing.)

    Anyway, I suspect that a primary reason why the mines did not want the windfall tax was that it is harder to avoid that the variable profit tax.

    The two taxes try to do the same: capture windfall profits while leaving a reasonable return for mining companies. Theoretically the variable tax is better, but, being based on profits, it is easy to avoid. The windfall tax is cruder, but it is much easier for ZRA to audit.

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  25. Hi!
    Although I have been following the debate on this site, I have had no chance to respond instantaneously on specific points raised by people. Thus, my rebuttal is not in a descending or priority order. I have raised points as I can remember them. OK!
    1. The most important point is for me to agree with Richard Mbewe – that the root cause of this problem on mining taxes is the inability of our government to exercise their sovereignty power of the State. If they did, those Development Agreements (DAs) could have been cancelled. And the rest would be history. KK, Mwanawasa, FTJ, and even Sata (had he been) could have easily done so. But RB is having problems because he is a weak leader – hence, his Ministers are dancing around the issue. Imagine if it was Penza, he would have cancelled it too.

    Cancelling DAs would not scare investors at all. That is fiction. Foreign mining investors are taking advantage of this weakness that is why they’re even threatening to sue. Cowardice, as Mbulo correctly puts it, is a cancer which is killing the Zambian National hood. Zambia as a physical entity will always be there, but for whose benefit? And that is the main question. There is no difference between having Zambia being controlled by several foreign corporations and being controlled by one Nation as it was before by Britain. If RB and his Ministers like Musokotwane understood this, they wouldn’t hesitate on these issues. Although I hate Mugabe for having destroyed the economic fundamentals of his country, but at least I applaud him on this ethos.

    Underlying that problem is what Potpher Mbulo again correctly identifies as – “the ills of democracy” in Zambia. In Zambia democratic principles have run bankrupt. MMD and indeed even the opposition parties have forgotten what democracy is all about. They think it means doing nothing on what they think is right – regardless. And because leaders are so adamant, people concede and go along. Hence, people have lost power to oppose their governments. Consequently, this leads the leaders to think that they’re incorrigible. The media, including the independent ones are not helpful. The Post has lost their original “objectivity”, it is not funny. So people have no source from where they can get their awareness.

    When you lose direction on democracy, you end up where the late Milton Friedman used to say that – “put a democracy in charge of the Sahara Desert, and sand itself will become short”. This is the problem Mbulo is describing as the centralization of both political and economic power remains in the few same hands – who tend to distrust everybody else. So, we can debate all year long, until when we regain our lost free voting power, all the decisions good or bad will be in their hands.
    2. That brings me to the second important group of points. First, diversification which does not involve agriculture will not be sufficient. It is important to know that –there is no single developed country which reached its full economic maturity without going thru agricultural development stage. This includes virtually the whole of Europe, Scandinavia, Russia, China, Japan, and even USA & Canada. By-passing it, is a rare possibility especially for an African country whose technical capability is low. Technical know-how for countries like Zambia is too low to leap frog past the agrarian industrialization.

    In Zambia there is too much lip service paid to agriculture but very little real/large investments. Every president sings agriculture, but allocates the bulk of money to the Army. If you don’t believe in it like Zambians don’t because of being mining-minded, diversification will not occur. Tourism might be a good substitute for agriculture, but Zambians are too chicky to give tourism a chance to succeed, since tourism demands commitment to customer service and dedication. So if agricultural sector is your candidate, find huge investments for it. MrK’s agitation (support) for agriculture is noted.
    ...(cont..)

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  26. Like mining, foreign investors can come in huge numbers to come and exploit our good land and cheap labor then leave us penniless there after. Levying taxes would even be more difficult in agriculture than royalties and profit taxes. Who is going to keep count of what is reaped from the soil? What we grow is yet even another problem. Do you grow maize for food or Jute for fiber? Where do you ship tobacco if everyone in Europe or North America is being asked to stop smoking? There are questions to be settled.
    3. While I do share Cho’s understanding – that Hon Musokotwane is deliberately confusing the meaning and purpose of Windfall tax & Profit variable taxes – he is just probably confused and not that he is being controlled by an invincible hand outside Zambia. I don’t think someone outside is bribing him (as MrK insinuated) – although one cannot be too sure. Some element of corruption is probably evident. What I know is that Zambians can do anything to boost their ego even if it is at their own expense (causing self-inflicted wounds). But because of that, that is why it is imperative for us all to be vigilant. Leaders must know what they are talking about.
    4. Perhaps most amusing is The Capitalist’s position. In a liberalized (mixed) economy, everybody accepts the principle of allowing returns on investment – so long as it is reasonable. But the case we are talking about is exorbitant (or abnormal) profits. If they cannot earn those huge profits anywhere else in the world, how can you support that? The profits which these companies made during the copper boom peak, is just too excessive to be tolerated. In fact coming out empty-handed makes us look stupid. Anyone who has read colonial or economic history will tell you that – the colonizer often times used trickery and not force to convince the indigenous people to give up their own land. Haven’t we learnt a lesson or two? Can they use the Rule of Law & Governance to cheat us again? I ask The Capitalist to think again instead of being naïve.

    I favor capitalism myself, but not blindly. MrK knows my position. Yet I cannot be naïve like Dambisa Moyo – who after getting brainwashed at Goodman & Sachs comes out and start preaching “Bonds” – when we know that, that is to give a chance to Wall Street companies to reap Africa off. Any company which counsels you to use Bonds is looking for your resources. Should you fail to honor whatever is stipulated in that bond-paper, you forfeit your resources. Gone!! Nobody knows if the new Obama signed law is sufficient enough to protect anyone. One impact is that – these corps will just migrate to less developed countries (LDCs), where they can prey on unsuspecting, weak victims. The only point I agree with The Capitalist, is on nationalization. I am against that myself.

    Regardless of who is going to raise money for you thru Bonds – be it Chinese or not, please don’t trust it. The Chinese are doing it for two reasons. i) They know that they’ve the capacity to do it; ii) Besides, they want to eventually neutralize and possibly paralyze America. They are preparing to become the World’s largest economy – hence, the strongest Super Power. Does Zambia have those objectives? No! So, Moyo is overzealous for counseling Africans to parade to Peking. Her ‘diversification model’ consists of dropping Donor-money in favor of either Chinese aid or Bond money. Toxic advice!
    5. Finally, if we fail to diversify from mining, as the current picture indicates – there is a possibility to degenerate into the s-called “Ivory- Coast” disease – which is chaos. Although in Zambia we’ve never had such a scenario, potential dictators are lurking in the bush. As Cho once compared in this space – the benefits of dictators versus democratic executives, the fifty-percent (50%) chance of doing better under dictators may one day inflict Zambia. Developed countries like – Germany, Italy, Portugal, Spain, and Japan – were once ruled by dictators. In fact Mussolini’s Minister of Finance balanced the country’s budget for six years.

    ...(cont..)

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  27. Therefore to avoid my doomsday prediction, rather than accepting or believing that – a political party or leader can put ‘elections pressure’ on us - we must like Cho is doing, refuse to accept gentleman’s economic policies based on empty rhetoric. We need more of “Cho’s”. Cheers!

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  28. This is the best exchange of views I have read on the issue of the mining tax regime in Zambia.

    I'm totally green when it comes to economic matters but I'm determined to catch up and perhaps be able to contribute positively. Keep it up, my fellow Zambian people and always check that you're driven by love to see Zambia move forward and uplift the lives of many Zambians who are poor in our otherwise rich nation.

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  29. Mr. Capitalist,

    Whether you hire a company or personnel to work for the Zambian govt earning 10% of the profits, the fact still remains that they wont perform better than companies that stand to make 100% of the profits (less taxes). If you want an efficient self sustaining industry, you have to let investors earn a return (both local & foreign). The private sector still remains the most efficient system in terms of industry.

    Two points about this:

    1) What is your evidence that public but privately managed companies perform worse than privately owned companies?

    2) If a company is highly efficient, but pays no taxes, shares no profits and retains no money in the country, why would I care if they are efficient?

    And another thing. We can get creative with agriculture. For instance, during the US's independence, it was allowed for farmers to pay their taxes in hemp, because the navy's great need for rope and sails. Why not allow farmers to pay their taxes in maize? "

    How much will it cost the govt to put in place such a subsidy. We need an agriculture sector that can stand on it's own two feet and not dependent on the govt. A sustainable agric sector is what we need.

    It will 'cost' the government nothing. Why do you think it would? They would be receiving tax revenues where today they don't receive anything.

    And who said anything about the agricultural sector 'being dependent on the government'? Although I should remind you, there are massive state subsidies in the USA (corn for instance) and the EU (milk, wine, etc.).

    On state involvement and public ownership

    Also, may I remind you that not only are there no developed economies that did not protect their infant industries through government intervention, subsidies or outright state ownership? So why would Zambia have to develop in a different way? Do you have any proof of any economic sector in any developed country that did not benefit from government protection?

    Because if you look at China, Korea, Japan, Taiwan, most of their corporations either started out or are still state owned. The most famous Japanese and Korean corporations were started by the Japanese and Korean governments - the Keiretsu/Zaibatsu and Chaebol (LG/Lucky Goldstar, Daewoo). No one would say those corporations are 'inefficient'. ZAMTEL was just taken over by LAP Green, which is wholly owned by the Libyan government.

    We shouldn't be looking for foreign corporations to do our job for us, we should be looking toward our government and demand that they start running their parastatals properly - without state interference and sabotage. We need a proper separation between the state and the government.

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  30. Thanks Richard for the correction. It’s just difficult to write everything but thanks to you for clearly showing how windfall tax works. That aside the bottom-line is as Kaela has attested that we are in this mess because we have no power over the executive and legislature who make the decisions. To make matters worse, these two arms of government are controlled by few if not one man. If these few people are stubborn, what can the general citizenry do?

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