"When we introduced the windfall tax in 2008, we experienced a flight in mining exploration and I am sure that if we introduced the tax, we will kill the future of the industry. We are against introducing the windfall tax because we are trying to sustain the future of the mines"
Mines Minister Maxwell Mwale showcasing the intellectual poverty that has come to characterise this government in many areas. The argument he advances is infinitely foolish, but six reasons will do.
First, it is not consistent with the President's version. Mr Mwale would have us believe the reason the government abandoned the Windfall Tax in 2008 was because Zambia "experienced a flight in mining exploration". His boss gave us a different reason : "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". Mr Banda's argument was that the Windfall Tax was killing existing jobs. Which is it - jobs were being lost or we stood lose from the possibility of creating new ones through exploration? One of these two gentlemen is not telling the truth.
Secondly, Mr Mwale's "hurting exploration" reason for abandoning the windfall tax does not make any sense on its own ground. In 2008 copper prices were falling due to the global economic recession. The Windfall Tax was not triggered at low price levels. That is why it is called a windfall tax. The argument then and now is that it does not make economic sense to eliminate a tax that is not a binding constraint. The reason mining companies wanted it removed is because they knew the long trend of mining prices and that sooner or later they would be enjoying abnormal untaxed revenues. Everyone saw that the long term trend of copper was upwards.
Thirdly, his argument 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. If Maxwell Mwale does not how to do this, he simply needs to ask. I have always said that we can assembled a group of leading Zambian economists at home and abroad who can advice government on a responsible policy. Ignorance is not an excuse.
Fourthly, it is predicated on a highly uncertain future. The investments that would be disincentivised, if Mr Mwale's argument is to believed, are those taking place from 2020 and beyond. The explorations will they feed the children dying today because of poor health? Will they feed those dying in five years time? 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.
Fifthly, it is an argument based on irresponsibility and moral bankruptcy. What Mr Mwale seems to be saying is that we should mine all we have at whatever cost. All he seems to care about is digging out the copper and shipping it abroad. Is that Mwale's idea of a viable "export led model" for growth? He does not care that the copper being shipped has no added value. He does not care for the possibility that perhaps its better Zambians defer mining exploration until they are able to do it themselves and achieve a better return. He speaks of "instant" gratification, but the only man practising instant gratification is him and is grand standing of reporting new explorations. He hopes announcing those will earn party additional votes. This man would sell everything he has in his house just to brag about meaningless acquisitions. Who really is deluded with the pleasures of today?
Finally, his argument presupposes that only foreign firms can do “exploration activities”. Mr Mwale lives in a world where exploration activities should only be undertaken by foreign firms. His argument is that 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. I will write in the future on the poverty of FDI argument, but for now I would simply say the exploration argument is tunnel vision at best. There’s a strong case for government to assume a greater role in exploration activities 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.