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Wednesday, 17 November 2010

Mining Taxation Debate (A Response to Henry Kyambalesa)

Hon Hamududu  recently observed that government had not given a coherent rationale on current mineral taxation, "It’s not that they don’t have an explanation, they do....The problem is that they are simply not making their argument clear when they talk about the new tax regime and the variable corporate tax which they claim is better than windfall tax".  Many of us have longed for a clear and coherent defence of higher mining taxation.  I was therefore delighted to see Henry Kyambalesa's defence of the current mining taxation. I welcome this intellectual "exchange of ideas" on the most important economic question facing our country.  Our children will judge us on how best it was handled.

I am afraid to say that based on his latest narrative, Kyambalesa is on the wrong side of the argument and without merit.  But let me start  with where I think we are in agreement. We fully share the basic premise that more government revenue is not a panacea :

"...additional tax revenues will just be swallowed up by expenditures on the increase in the number of parliamentarians from 158 to 280 members that is recommended by the National Constitutional Conference, and on repayments of loans secured to buy the controversial mobile hospitals and the like!
This argument is not new and indeed it has been made on this website many times. Any additional revenue without a clear framework for how such money would be spent will clearly lead to mismanagement. However, I disagree that this is a reason for not pushing for higher mining taxation. If we applied Kyambalesa's principle around the world no government would ever increase any taxes because it is the nature of the bureaucratic beast in any country to waste public money. The basis of mineral taxation is that it is an exogenous right of Zambians through their government to earn a sufficient return on it. That is to say mineral taxation is a justice issue, it is not a public management issue. These resources under our feet were given to us exogenously by the Creator and we need to do what we can to retain some value from them rather than subsiding Vendata or First Quantum. That Kyambalesa misses the "justice" angle of this debate is extremely surprisingly.

What Kyambalesa should be proposing is a better financial allocation mechanism. There is a need of a new approach to the mining question, which I have termed the "human approach". The essence of this approach is that we should not decouple revenue discussion from development. In particular, I propose that any fiscal regime  must ensure that those who are most affected by mining operations are put central to gaining the benefits from its expansion. These are mostly the workers and the rest of the local population. Delivering economic gains to them in a fair and efficient way should come before the struggle for larger national share. Let us empower the workers in the mines through innovative solutions and let us ensure the local economy have the appropriate funding for much needed infrastructure such as local roads, housing and schools. This form of revenue transfer will assuage the concerns that Kyambalesa has - it will bring in greater local accountability whilst minimising unintended consequences. The current fiscal regime does have a mechanism for some local transfer of mineral royalties but this has not been implemented to much disgust by copperbelt based MPs. A better mechanism is needed. The key point here is that this is not an argument against higher mining taxation, it is an argument for good government.

Another area I think where we may be on the same page is on the danger of "transfer pricing".  There of course ways this issue is handled and government continues to ensure that such matters are taken care of.  But even here, Kyambalesa actually ignores a more relevant problem. The real problem is that we need to ensure that higher taxation does not lead to costs elsewhere. The issue of higher mining taxation cannot therefore be dealt  in isolation from other issues such as poor working conditions, lower wages of miners and environmental protection. That approach would be heartless and carries a number of dangers for Zambia. In the absence of stronger legislation in these areas, an arbitrary higher tax on mining activities for example could lead to the mining companies extracting revenues through other means. Most notably through lower wages or spend less on safety or cause more damage to the environment. In this vein, it is my hope that when the windfall tax is restored this would be accompanied by wider safety and environmental legislation.

Now let me turn to the three most flawed arguments put forward in Kyambalesa's narrative.

First, there's the argument for the legitimacy of old Development Agreements (DAs) :
But since the 20-year development agreement signed between mining companies and the Zambian government is still valid (my emphasis), it may not be possible for Zambia to devise a new taxation regime for mining companies without losing its credibility in the eyes of potential foreign investors...."
This is a confusing statement riddled with much in innacuracy. We should be clear that  the DAs are not valid under Zambian law. That is because the Mines and Minerals Development Act 2008 ("MMD Act 2008" here after) abolished the DAs. Unless we all become familiar with the law, we risk misleading others. Incidentally the word DAs not DA. There were more than one with different timescales.

Secondly, there's the "threat of legal action" :
".....Besides, there is a risk of legal action by mining companies against the government if it seeks to institute changes to the terms of the contract. It is always a good idea to honor contractual obligations. "
Kyambalesa's argument here falls completely flat when one considers that the basic premise of "a valid DA" is not in play. As I point out above DAs were abolished by the MMD Act 2008.  Whether we move to higher taxation or not it is simply a matter of taxation policy. Any government around the world can unilaterally increase or decrease taxes. Kyambalesa's argument would be valid if Zambia had no tax policy but was working with DAs. But even then, one must consider the legality of such arrangements. As an academic point, I would say those who use "rule of law" to defend the now abolished DAs have a poor conception of rule of law. Justice is both procedural and outcome related. How agreements are reached matter. So even in that hypothetical world, old DAs always carry little import.

Finally, there's the misguided "lets wait for two decades"  argument :
We still have 17 or so years to think about negotiating a new contract with mining companies. We can start thinking about negotiating a contract which will increase the mineral loyalty from 3% to 5%, reduce variable profit tax from 15% to 13%, leave the other tax provisions at current rates, and without the contentious windfall tax.
This is a very poor argument against doing nothing. No! We don't have another 17 years. Many of our people are living on less than $2 a day. How many lives can be saved from a higher taxation regime now? What guarantee is there that in 17 years the copper prices will be at this level? We can make a real difference to our people now if we upped the level of mining taxation. How many Zambians die before they reach the age of 5, let alone 18? Is Kyambalesa willing to many lives lost through abject poverty while hoping for a future higher prices?The issue of reducing poverty through getting a fair deal for our people is not a laughing matter that can wait for two decades before it is resolved.

To sum, I think Kyambalesa's concern about government management are germane. We need to ensure government does what it was elected to do - serve the people. But there's no better way to do that than ensuring the current injustice in form of little mineral taxation is removed. I have not read anything in Kyambalesa's piece that suggests the status quo is ideal. I hope he will reconsider his position and side with logic, or perhaps a better defence?

1 comment:

  1. Cho,

    In addition to the comments I made under HK’s article – I want to re-iterate, that on major points, I have the same point of view as yours. HK has no convincing reasons why: a) Zambia is not entitled to earn more money from copper when the prices are good; and b) Zambia should defer charging for its resources to some unspecified time in the future. Besides the price fluctuations, who knows if copper will still be useful then? It could be obsolete before then.

    To support the bureaucrats’ reluctance in taking on international investors is preposterous. Zambians are entitled to economic benefits from the sale of their resources. Why should investors enjoy all the benefits of high prices? To diversify into other non-copper sectors and for building infrastructure necessary in a functioning economy, we need money. And money should come from copper when the going is good. We need to go back to KK’s “spend and share era” from today’s “sink or swim era”. Elites in Zambia can afford to wait – because, they’ve been enjoying ALL the resources coming Zambia’s way in the last forty years. Not the poor Phiris and Tembas.

    To argue that – “you don’t want more revenue because it will be squandered or spent on increased expenditure”, is a silly argument. Where is your financial discipline? Are you saying that our financial managers are allowed to waste as soon as they see more money? Besides, to say that – “if you tax them more, they would squeeze you out somewhere else” – say in low wages, poor safety etc., is the same thing as admitting that Zambians are either unsophisticated or stupid. Where would your watch dogs be?

    You see – to expect that foreign companies (in for making a quick buck) would 100% be honest in their dealings with you, is utopia. You see, even if you wanted to – you cannot legislate companies to be more responsible. You have to bite them from behind IF you want them to do what they are supposed to. They won’t do it on their own accord. Thus, I don’t know why any body would honor or worship foreign exploiters. In developed economies where people are more awake and make everybody accountable – companies try to take a moral and ethical responsibility in becoming part of the holistic solution. But when they are in our backyards, they don’t care. This is the more reason why we should tender our possessions more carefully. Food for thought!


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