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Friday, 18 February 2011

Intellectual Poverty (Maxwell Mwale)

"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.

10 comments:

  1. I agree with comments by Zambian Economist. The Minister sounds like an illiterate who has been made to believe that windfall taxation will lead to flight of mining investment. That's bankrupt thinking and retarded. It's a pity that one gets an impresion that Zambia has no well-grounded economists to advise government appropriately.

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  2. " 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 doesn't care what rubbish he says, because he is bought and paid for by the mines. He got his, and that is all there is to it.

    He is not a serious figure, engaged in a serious argument.

    If there ever was a case against foreign ownership in Zambia, this in itself would be enough.

    This is the truth: you can either have democracy, or you can have foreign ownership of key industries like mining.

    But you cannot have both.

    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.

    How about specifying the minerals that can be in mined in the contract?

    That way any other materials would not be subject to the contract and can be dealt with individually.

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  3. Specifying what can be mined is impractical because in some cases the deposits have found together or in the same ore body.

    So in one mine's case what I know is that they were illegally shipping gold deposits until an employee reported them to govt. Nothing was publicly said, but they started reporting it. Zambia loses huge revenues through such actions.

    In Lumwana's case with uranium, they have been stock piling it. Atleast so we are told.

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  4. Hi Cho,

    Specifying what can be mined is impractical because in some cases the deposits have found together or in the same ore body.

    I'm not saying specifying what can be mined, but specifying what is subject to the development agreement or similar contract.

    So for instance if diamonds and asbesthos are found together (they always are), then the diamonds would be subject to the agreement, but the asbesthos would belong to the state.

    If they dig for copper, and then hit on gold, the gold would belong to the state. If they would mine it and sell, that would be theft and they would lose their license and go to jail.

    They could sell it at cost to the state, which could then sell it at market price internationally. They wouldn't profit from it, but it could lower their costs because of economies of scale.

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  5. The government would not want that because they would see that as indirectly owning production process.

    The best way is for government to control exploration.

    In my view all exploration should be done by government through hired contractors. Once it discovers the deposits it auctions them.

    The government should do REINVESTMENT. Set up a company that exclusive mines and sells copper and all its proceeds simply go into exploration and not a penny to the exchequer. What it then does is auction.

    A bit like in Iraqi with the oil wells.

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  6. In my view all exploration should be done by government through hired contractors. Once it discovers the deposits it auctions them.

    The government should do REINVESTMENT. Set up a company that exclusive mines and sells copper and all its proceeds simply go into exploration and not a penny to the exchequer. What it then does is auction.


    Why would that be better? And why wouldn't the state want to be directly involved in mining itself? Is one reason why ZCCM-IH isn't receiving dividends to prevent ZCCM-IH funding it's own mining activities? Is that why the ministers involved were so keen on giving back the dividends by buying more shares?

    Also, it would mean that exploration would be in the hands of private companies and out of the control of government. It would be in it's interest to underestimate the deposits, if it is going to have to pay for them later.

    Also, with the government directly mining deposits, it could build reserves of minerals and precious metals and gemstones, which could act as a basis for the currency.

    If all gold that was found in Zambia belonged to the state, it could put a solid foundation under the Kwacha.

    I don't think Zambia can afford to be so generous in giving away even cent of profit, because it will need everything to diversify the economy.

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  7. I think they should try both - reinvest and mine on it's own, to see which model is more profitable.

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  8. Cho,

    Check this out. The South Africans have just created a huge parastatal mining company called AEMFC or African Exploration Mining and Finance Corporation. Set up by the CEF (see this article from 3 years ago). Read about the CEF, which is state owned. Odd how when South Africa was white controlled, nobody objected to parastatals or state ownership.

    This could be the real deal, considering the carping from the Chamber of Mines about 'unfair advantages' for the state mine. :)

    King Zuma's mines
    2011-02-20 19:04
    Jacques Dommisse, City Press

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  9. Hey don’t laugh at me for thinking aloud. If we so care much about theft of unlicensed mining, I propose that government can come up with something similar to FRA. Call it Mineral Reserve Agency (MRA). That way no one can steal and no one will export independent of government watchful eye. And why should we be exporting ore instead of processed metal? Who decreed that we can’t build enough smelters and factories in metal fabrication and electronics? Our folly is the limit to whatever greatness we can attain and so much of it has been exhibited by the Minister. But like discussants have already pointed out, it’s not ignorance on the part of the Minister but his choice to ignore truth and this itself could likely be induced.

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  10. Potpher Mbulo,

    Hey don’t laugh at me for thinking aloud. If we so care much about theft of unlicensed mining, I propose that government can come up with something similar to FRA. Call it Mineral Reserve Agency (MRA). That way no one can steal and no one will export independent of government watchful eye.

    I have always thought that all ore in Zambia should be sold through a national commodities exchange - including maize.

    That way there is a clear overview over how much is sold and at what price. It would also make it impossible for middlemen to rip off farmers. Higher prices would be one key factor that would encourage production.

    ZAMACE already exists. Let's funnel all commodities that are mined or grown in Zambia through that exchange. It would increase transparancy and make taxation much easier.

    ReplyDelete

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