By Chola Mukanga
The sustained resurgence in mineral prices has heightened the debate
around mining taxation policy in Zambia . The clear public demand for
a new mining policy has unfortunately been met by a government eager to encourage
mining revenue flow into foreign bank accounts, rather than in the pockets of our
people barely surviving on less than $1 a day. Unfortunately, the genuine anger
by many people with the status quo has sadly
not been accompanied by a strong intellectual platform to allow ordinary
citizens make the case for change. Instead of offering leadership, the “Zambian
intelligentsia” continue to allow government to dictate the debate with
intellectually inept arguments for the status quo.
There has been no coherent vision of what people
really want the mining industry as whole to achieve. It is particularly
noticeable that most of the arguments have tended to begin and stop with the
call for the restoration of the “windfall tax”. This higher revenue only approach has led to glaring
confusion and a general lack of clarity on what the big questions are regarding
mineral development in Zambia .
There’s no vision of what mining should be delivering and how this sits with
the economy as a whole. Where such a “vision” has been touted, it is usually
been done by misguided political cadres through the government run press,
occasionally supported by foreign interests.
This has left our people not only deprived of what is rightly due to them[1], but also ignorant of how we should move forward.
Eliminating this confusion necessarily demands a
clear debunking of the government false arguments for low mining taxation. We
must first restate why Zambia
finds itself in this bleak position and then cumulatively deconstruct the
pro-mining companies’ stance of the current government. With the platform laid,
it is then feasible to offer a bold and uniquely Zambian framework on how a new
administration can ensure that mining plays a full role in the economic emancipation
of our people.
A People Betrayed
In January 2008 President Levy Patrick Mwanawasa (LPM) announced that Zambia
was breaking the huge milestones hung around her neck by the Chiluba administration.
Mining Development Agreements (DAs) was
going to be abolished and replaced by a new fiscal regime. Following advice
from expensively hired foreign consultants[2], LPM agreed with
general opinion that “Zambia ’s
mining fiscal regime to investors and provides the lowest revenues to the government”,
than the next lowest country in
the world. Zambia
was going to take unilateral action to cancel the DAs and put in place a much
fairer mining taxation system.
What preceded that decision was a round of high
profile international campaign which stressed the injustice of the existing
fiscal regime, principally led by Christian
Aid and other NGOs. These
organisations published significant reports[3]
that forcefully highlighted the scandal to the world. Soon, the IMF and World
Bank were forced to join the change
camp, concluding emphatically: “[we] commend the Government for taking steps
to reform the fiscal regime of the mining sector while preserving Zambia as a
competitive, credible, and attractive investment destination, but advocate the
inclusion of an additional revenue-sharing mechanism that would capture a
higher share of mineral rents for government during period of abnormally high
international prices for minerals. Such a device is currently not part of the
proposed reforms”. The message was simple: the international community
was not ready to sustain significant aid payments when Zambia was pandering to foreign
companies and failing to utilise resources at its disposal.
It looked like the tide had turned. The NGOs had won the debate largely
through high quality reports, workshops and internet lobbying. It should never
be forgotten that the push for a fairer share was a fight fought on our behalf
by NGOs whose primary aim was the pursuit of justice, fairness and defence of
the poor. Without the support of these NGOs nothing would have changed. With
their support LPM was embolden and the reforms became irreversible, for a
season.
Under the LPM changes the corporate tax rate for mines was set at 30%, mining royalties on base metals at 3% of gross value (up from 0.6% in most DAs), and withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors in the mining sector were set at a rate of 15%. While many of these measures, especially the increase of royalties had largely been anticipated, the introduction of a windfall tax on base metal revenues and the profit variable tax – took the mining companies by surprise. The windfall tax was to be triggered at different price levels for different base metals. For copper, a price between US$ 2.50 – US$ 3.00/lb attracted a windfall tax of 25%; between US$ 3.00 and 3.50, 50%, and 75% for prices above US$ 3.50/lb. At the time of the changes, copper prices were around the US$ 3.60 level, sufficient to trigger the maximum windfall penalty.
Under the LPM changes the corporate tax rate for mines was set at 30%, mining royalties on base metals at 3% of gross value (up from 0.6% in most DAs), and withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors in the mining sector were set at a rate of 15%. While many of these measures, especially the increase of royalties had largely been anticipated, the introduction of a windfall tax on base metal revenues and the profit variable tax – took the mining companies by surprise. The windfall tax was to be triggered at different price levels for different base metals. For copper, a price between US$ 2.50 – US$ 3.00/lb attracted a windfall tax of 25%; between US$ 3.00 and 3.50, 50%, and 75% for prices above US$ 3.50/lb. At the time of the changes, copper prices were around the US$ 3.60 level, sufficient to trigger the maximum windfall penalty.
The reaction of the
mining companies was total uproar, threatening Zambia with legal action and other
bullying tactics. LPM stood firm, but the pressure also illustrated a
fundamental problem in the implementation of the new regime. In typical single
mindedness that characterised LPM’s tenure, there was no public consultation.
Like the DAs before it was all done behind closed doors, the only difference is
that this time the proposed reforms were in favour of the people. As good as LPM’s
intention were, the lack of consultation left a gap that mining companies exploited
by lobbying other people, especially opposition politicians to their cause. The other problem was the lack of clarity
on how the new profit variable tax related to the new windfall tax. This
confusion was later going to be used by the mining companies to build new
momentum to reverse the entire regime and exact new concessions in face of the
global recession. Even as the LPM administration was forging ahead, new seeds
were being sown for a future reversal.
Fast forward to November 2008. LPM has died and Rupiah Banda (RB) is the
country’s fourth president. His narrow ascendancy was greeted with cheers by
the mining companies and their supporters, predicting gleefully: "It
appears that the onerous tax rates enacted into legislation in Zambia
earlier this year are likely to be significantly watered down”. It
wasn’t long before the global downturn was going to be used by RB to justify
removing the windfall tax, “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". The ministerial
chairs were going to be shuffled accordingly to pave way for the changes –
out went the Minister of Finance Ng'andu Magande and the Minister of Minerals
Kalombo Mwansa was moved to Home Affairs[4].
In January 2009, the new
administration reversed the LPM changes following what the UK ’s Financial Times described as ‘intense lobbying’ of the government
by large, foreign owned copper mines. Windfall taxation which at the time was
not binding due to low commodity prices was scrapped. The government also
allowed hedging income to be included as part of mining income for tax
purposes. A serious setback to our people as it is relatively easy to
demonstrate a loss on hedging (and move any profits offshore), allowing
companies to further minimise their tax payments. It went further and allowed
companies to write off 100% of any investment against tax as depreciation in the
year in which the expense occurs – well beyond the international norm. These
changes were an act of betrayal of the
Zambian people. Government removed a tax that was not binding at the time, but
which mining companies knew soon would be a big boon for them when base metals
prices resumed the expected upward trend. What was left is the standard
corporate tax, a mineral royalty of 3 per cent of gross value, and a variable
levy on profits.
The betrayal goes unabated. In
November 2010, it was announced that following the acrimony of the new fiscal
arrangements with mining companies, the government has carved a new development
agreement. Mining companies were
offered a new fiscal stability period as part of the deal for them to pay
legally mandated tax revenues owed to the Zambian government from previous
windfall taxes. The then Finance Minister Dr Musokotwane was on hand to declare
“it has been agreed that a fiscal stability for a period of ten (10 years)
be given to companies that will accede to the new tax regime. The stability
will apply to corporate income tax, capital tax allowance, mineral royal and
profit variable tax”. This action is against the spirit of the Mines and
Minerals Development Act 2008 which calls for greater parliamentary say in
such arrangements. There continues much
secrecy regarding new DAs and the status of existing ones (e.g. Lumwana). To
many Zambians, it is bad enough that new DAs are being signed, what is shocking
is that they remain secretive.
Despite all these concerns, the Banda
administration continues to
defend its intellectually bankrupt position through employing a range of
incomplete and often incoherent arguments. The cautious joy many Zambians felt
with the LPM fiscal regime has now given way to feeling of despair and anger,
especially given the strong commodity prices. The strength of this anger stems
from an acute recognition of the injustice of the status quo particularly in
relation to all the revenue. Billions of dollars are being lost due to
ineptitude and unwillingness to act decisively for the poor.
It is the serious nature of this issue that we must now examine the arguments
government has advanced in an effort to woo the masses. A closer examination
reveals a series of broken arguments for the current fiscal regime that do not
appear to hold water under serious scrutiny.
Broken Arguments
Argument
1: Zambia
is earning enough tax revenue from its mineral wealth
The government’s most utilised argument, which is
also implicit in its current posture, is that Zambia earns enough from its
mineral wealth, consequently there’s no need to increase mineral taxation. In
that vein the latest MMD manifesto does not propose to increase any mining
taxation because it is content with the status quo.
The reality is that nothing could be further from
the truth. Zambia ’s level of
mining revenue collected under
existing obligations is pitiful. In 2009, Zambia earned only a paltry $50m in
mining royalty revenue with the figure rising to around $270m when non-mining
taxation such as company taxes and PAYE are included. $50m is peanuts compared
to the $5bn earned by the industry that year.
This low revenues stand in sharp contrasts to experiences from
comparable resource nations. Botswana ’s
Debswana model of 50% government ownership in diamond mines is well known. An
even better example that puts Zambia
to shame is a neighbour recovering from a prolonged civil war. The rapid
development of diamond mining activities in Angola has been heavily trailed in
the last few years, but what is not often reported is the remarkable difference
between its non-oil mineral framework and Zambia’s, which is allowing the
Luanda government significant revenues. Typically, a diamond mining company in Angola
has to take on a large number of associated Angolan personnel at the
exploration stage; thereafter the developer is expected to fund 100% of the
capital expenditure although owning only around 40% of the mine. The rest of
the equity is held by the Angolan government through Endiama and by nominated
private Angolan investors all of whom are entitled to a “free carry.” Once
completed, the developer has priority over revenues until the capex outlay is
recovered but may still get only about 80% of the initial revenues because of
profit share agreements with the Angolans. It is therefore no surprise that Angola is benefiting greatly and growing at a
faster pace than Zambia .
These resources are paving the way for significant investment in
infrastructure.
It should be clear from the above discussion that the failure to collect
sufficient revenue is largely a political issue. A failure by the current administration
to seek a better return for their people. However, it should be noted that even
when Zambia
has taken steps to earn more revenue, it has been impended by other additional
factors. Three are particularly worth noting.
First, the refusal by mining companies to comply with their tax
obligations under Zambian law. There have been many instances of mining
companies refusing to pay taxes even where ZRA has correctly identified their
obligations. In 2008, Zambia
earned over $3bn from copper exports, but of the $421m that should have made
its way into our Treasury, only $200m was actually collected.
Secondly, the inability of ZRA to overcome asymmetric information
problems. Mining companies are more knowledgeable than ZRA on the exact nature
of the mining costs. Although in theory Zambia should be benefiting from a
profit based system, it is unable to do so because profit based systems are
difficult to implement. Multinational corporations prefer profit based taxes
because it enables them to hide their profits through inflated costs and other
things. This is why the mining companies successfully lobbied for the removal
of the windfall tax. They knew they'll pay very little. Simpler taxation
mechanisms are key to improving collection and it is now commonly understood
that where information is incomplete and the political economy challenging,
such systems are better than profit based taxes.
Third, many mining companies have erected sophisticated mechanisms of
tax avoidance by channelling their profits through offshore companies. In
recent times we have seen Glencore sanctioned by the EU for Mopani’s suspected
tax evasion activities in Zambia .
This is effectively robbing a beggar.
Argument
2: ZCCM-IH is cashing in on the non-tax revenue
When confronted
with the full evidence of paltry mining tax revenues dripping in the treasury
the government’s repertoire is that ZCCM-Investment Holdings (ZCCM-IH)
generates sufficient non-tax benefits. The argument is that it is entirely disingenuous to claim that Zambia
does not benefit from mining because the Zambian state also owns these mining
companies through ZCCM-IH shareholding. ZCCM –IH owns 20% plus shares in joint
venture with foreign mining corporations e.g. FQM’s Kansanshi and Vendata’s
Konkola Copper Mine. As transnational companies soar in their mining
profits ZCCM-IH gains substantial windfall and so does the Zambian people. In
other words, a "them versus us" approach, the government argues, does
not t reflect reality on the ground, where ZCCM - IH is a big player with
assets over $1bn. The current low mining taxation is allegedly intended to
benefit ZCCM-IH. Some have even gone as far as to praise the recent “huge
dividends” of around $18m by KCM to the Zambian people as proof.
What are we to make of this? It is certainly true that ZCCM-IH has interests
in many of these companies, but it hardly possesses a “controlling interest”
stake in any of the key joint investments. More worryingly it has been clear
for a while that ZCCM –IH has not been receiving meaningful dividends from its
jointly owned projects. To suffering Zambians, $18m hardly qualifies as
"huge" when in 2010 alone, the mineral industry made over $8bn in
revenue. Indeed it is well understood that government has considered in the
past converting financial liabilities into equity, in order to raise its stake
in the copper mines. That the government recognised this possibility is a clear
testament that the ZCCM-IH model is not working.
What rightly concern many people is that ZCCM - IH is not
"empowering" ordinary Zambians. If ZCCM-IH was owned by ordinary
Zambians rather than government a potential argument can be constructed that
some money would eventually filter back to ordinary Zambians. ZCCM-IH is
currently listed in Lusaka (alongside London , and Euronext
Stock Exchanges), with the government owning 87.6% shareholding and the
remaining 12.4% held by private equity holders largely abroad. Unfortunately
the whole venture is not very transparent! According to foreign private equity
holders the company went for many years without publishing a single financial
report. Its inventories are also not formalised, which is quite remarkable for
a listed company. It is hardly the sort of company one wants to appeal to as
the reason for keeping mining taxation low.
Argument 3: Low mining taxes encourage Zambia ’s competitiveness
It is sometimes
argued by government, and effectively by mining companies in 2009 that low
mining taxes are vital especially that other countries continue to keep their taxes low. The government believes at
the heart of the mining revival is ensuring that taxes are kept as low as
possible, a policy which has led to over billions being invested annually in
the industry. Mongolia
is often cited as an example of a country which imposed higher mining taxes
only to find itself in a quagmire with investment drying up. Low taxation is
the bedrock of attracting foreign direct investment (FDI). It is therefore
critical that we see mining in the overall context of Zambia ’s successful FDI policy.
This argument is well crafted, but also patently misguided because it is
based on several false premises. First, Zambia ’s taxation threshold has
enormous scope for increasing taxes without harming competitiveness. Zambia
has one of the lowest tax regimes in the world. Prior to 2008, the effective
tax rate stood at around 32%, with the LPM reforms it was intended to rise
to 47%. Zambia
was to tax more than Tanzania
but less than resource rich nations Botswana ,
Mozambique and Angola .
It is therefore wrong to suggest that we need to maintain the status quo to
remain competitive.
Secondly, there’s no concrete evidence that FDI is driven by lower taxes per se.
Although tax competition is usually touted as the key to FDI, it is clear from
literature that the key drivers of FDI tends to be political stability, cheap and
diverse labour and, most importantly, prevailing global economic forces. Zambia ’s
mining industry is booming because the prices of commodities are high and will
continue to be high for some time, aside from few fluctuations because of the
long term global imbalance between demand and supply. Of equal importance is
that the investors are confident of the political ambiance in the country.
Thirdly the government’s argument is structurally predicated on the idea that
growth in mining must necessarily be driven by external investment – this need
not be the case. Although FDI has a role to play in development, what matters
is the structural transformation of the production side of the economy. To do
that requires government investment in technologies and other supporting
industries, which won’t happen without access to mining revenue. Indeed,
without government revenue there can be no tangible and accelerated
diversification[7].
Finally, the current low mining taxes may be attracting “wrong investors”. Many
of the investors Zambia has attracted in the mining industry have been nothing
short of short term vultures (the colloquial term is "infestors"),
whose primary interest is to come into the country to siphon resources on the
cheap and vacate premises when the going gets tough. Poorly designed incentives
coupled with a poor regulatory structure continues to undermine Zambia .
Slightly higher taxes can help screen out poor investors.
Argument 4: Low mining taxations encourage exploration
The Ministry of
Mines has repeatedly argued that the biggest challenge for Zambia
is to discover and exploit its vast mineral wealth and not rely on taxing existing
mines. This requires mineral exploration which by nature is a costly and
uncertain exercise. Exploration is undertaken only if there’s a strong
possibility of finding something and being able to earn a return on it. Low
taxation helps minimise the expected costs which incentivises greater
exploration activities. Government believes there’s significant need to incentivise
investors to undertaken exploration to guarantee opening up of more copper
mines, which would in turn create more employment for Zambians. This would
eventually lead to greater collection of personal income tax from mining
companies, with other sectors benefitting from wider catalytic impacts.
Though the argument has some merit, it suffers from three fundamental
problems. First, it treats
mining taxation in a generic way. It is important to 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 Zambians to benefit from current
mining activities while incentivising future exploration. It not an either/or
situation.
Secondly, the government’s argument is predicated on a highly uncertain future. The
investments that would be incentivised, if the argument is to be believed, are
those taking place from 2020 and beyond. However, given the current
configuration of the mining fiscal regime, no significant revenue would begin
to accrue from any such unknown investment until 2025 and beyond, as we have
seen in Lumwana’s case. Simply put, this is an argument about an unknown and
distant future. In the meantime many Zambians continue to wallow in poverty.
Finally, the argument presupposes that only foreign firms can do “exploration
activities”. 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.
In sum, based on this argument alone, there’s no reason why mining taxation
should be kept at current levels to attract mining investment.
Argument 5: Low mining taxation is vital for safety
and better environment
The argument is that low mining taxation helps achieve the desired
social effect because it prevents mining companies pushing the costs on workers
and local communities. Mining safety and environmental damage would get worse if
taxes were higher than at present because foreign firms would be keen to maintain
their profits at all costs. Higher taxations may also affect service conditions
of workers leading to a situation where we would be robbing Peter to simply pay
Paul! The government believe low mining taxation ensures that workers and local
community come first!
There’s some truth in that argument. Low taxation can create positive
incentives for social responsible practices by companies in general. However,
this is not an argument for keeping taxes low per se. Rather it is an argument
for why taxation policy must always be part of a broader strategy that takes
safety and the local environment into account. Indeed such a strategy much also
bring into line how any tax revenues are managed to empower local people and
avoid the “Dutch disease” problem. It’s therefore simply wrong to suggest again
that low taxation is necessary to achieve safety and a better environment. We
can have both high tax revenue and a good environment if careful thought was
given to these issues.
Indeed, the experience in Zambia is that low taxation has
been accompanied by poor environmental conditions. Zambia suffers from what many have
termed an “ecological debt” . Nothing illustrates this more than the
shocking events of 2006. The day is November 6, 2006, women and children living
on the banks of the Kafue have just been
awaken by the Zambian sun. What do they see? A strange sight! The wonderful Kafue River
has turned turquoise. Our precious investor Vedanta has accidentally discharged
its toxic waste into it. Panic sets in Chingola, where 100,000 who draw water
directly from the river are now deprived of drinking water for at least two
days. In the next few weeks thousands flock for hospital check-ups after eating
fish from the river. Analyses of the Kafue ’s
water later show that it contained 38.5mg manganese, 10mg copper and 1mg cobalt
per litre: concentrations 1.7 times, 10 times and 10.7 times higher
respectively than the limits set by the World Health Organisation. With a pH of
1.5, the Kafue has become a river of acid.
A few weeks more, a Vedanta employee admits the company’s
responsibility, only to be sacked on the spot. Reports abound that the company
is threatening to withdraw advertising from Times of Zambia if
the incident is reported. Will the editors curve in? Surprisingly not, as
public pressure leads the Environmental Council of Zambia to
call Vendanta to book and halt to its mining activities. The company
reluctantly pays $2.5m. Then business starts up again. The price of copper
continues to rise, and with it, the pollution unabated and our people suffer
quietly. An unauthorised visit by a foreign investigative reporter two years or
so later to the massive Vedanta site during the rainy season revealed a vision
from Dante’s Inferno: 3km from the mines, the pollution control dam was
overflowing, spewing copper-coloured water, reeking of acid, into a tributary
of the Kafue .
The stories are endless and Vendata is not alone. In January 2008 acid waste from Chingola’s mines reached the ground water at Mufulira, around 40km away. More than 800 people in the township adjoining the Mopani Copper Mines (MCM) complained of diarrhoea, abdominal pain and vomiting. The mine is co-owned by the Swiss group Glencore and the Canadian company First Quantum Minerals (FQM), and the joint venture was set up with the help of the European Investment Bank.
Mufulira’s mining townships for years have borne the full brunt of the environmental damage. Kankoyo, home to 30,000 people, is an eye sore on an otherwise fertile and verdant landscape. Only two things grow in Kankoyo: avocado trees and cactus. In exchange for this damage the economic input consist of open sewers, dilapidated shacks with tin roofs corroded by acid rain, abandoned pharmacies, and grocers’ shops with broken windows. That is the legacy of the mining companies. When the mines eventually close, is this all they'll leave behind?
The stories are endless and Vendata is not alone. In January 2008 acid waste from Chingola’s mines reached the ground water at Mufulira, around 40km away. More than 800 people in the township adjoining the Mopani Copper Mines (MCM) complained of diarrhoea, abdominal pain and vomiting. The mine is co-owned by the Swiss group Glencore and the Canadian company First Quantum Minerals (FQM), and the joint venture was set up with the help of the European Investment Bank.
Mufulira’s mining townships for years have borne the full brunt of the environmental damage. Kankoyo, home to 30,000 people, is an eye sore on an otherwise fertile and verdant landscape. Only two things grow in Kankoyo: avocado trees and cactus. In exchange for this damage the economic input consist of open sewers, dilapidated shacks with tin roofs corroded by acid rain, abandoned pharmacies, and grocers’ shops with broken windows. That is the legacy of the mining companies. When the mines eventually close, is this all they'll leave behind?
Our people living in
mining communities are humble and peaceful people. Their only crime is that the
creator has endowed them with a precious gift - the minerals below their feet.
It cannot be denied that they do not enjoy these precious gifts and continue to
pay a huge price. It is a situation which would never be allowed in any society
that values its citizens.
Argument 6: The “certainty principle” favours the
status quo
The government has often postulated that the long-term outlook for
copper mining in Zambia
is still very uncertain following the period of government led ownership prior
to liberalisation. Investors do not have sufficient confidence that the Zambian
state is committed towards an open investment policy. Maintaining an existing
low taxation system is therefore vital to inspire confidence. It is therefore
argued that that what Zambia
needs most is certainty and stability which fosters long term investment rather
than higher revenues today. Many who hold this position believe that Zambia
can come back to this issue in 2015 or beyond. Moreover, Zambia must learn from successful resource
economies like Chile , Australia and Canada who don’t arbitrary change
their mining taxation regimes.
But does this argument for low taxation stand up to scrutiny? The need
for certainty is certainly valid, but it misses the more fundamental question –
what drives certainty? Certainty is derived from ensuring that you have a
mining settlement that has the full buy-in of all Zambians. Otherwise, every
government that comes along will constantly alter its mining policies. This
calls for a Zambian solution, not an MMD or PF or UPND solution. The approach
to mining policy must therefore be necessarily consultative and transparent. It
is not just about the level of taxation but "how" you get these
stable mining policies. The mining companies need to realize it’s in their long
term interests to push for transparency - deals made under the table are not sustainable.
The approach should be consultative and transparent. These are the foundation
of “rule of law”. At present there’s no rule of law in this area because
government continues to act without peoples’ consent. It should also be
noted that the idea that other countries are not changing their taxation
regimes is blatantly wrong as set out previously on Zambian Economist[8].
Argument 7: Zambia is already benefiting
through employment
Investment in Zambia
has grown significantly, with over $5bn invested in the mines in recent years,
with more in the pipeline. For some in government this could not have been
achieved without the current fiscal regime. Indeed, the government argues, it
is beyond doubt that the reason Lumwana investment occurred after being dormant
for many years was due to the favourable regimes. These investments have in
turn led to substantial job creation. In short, although Zambia gets little revenue from
mining taxes it is apparently benefiting significantly from new jobs. No one
has expressed this more forcefully than President Banda when he noted, "there
is little point in taking in a few million dollars in tax if thousands of jobs
are lost as a result”. He has even gone as far to suggest that employment
rose from 22,000 jobs in 2000 to 48,000 jobs in 2009 in the mining sector
because of new investments. From the Banda administration perspective, any appraisal
of Zambia 's
mining policies must account for the allegedly huge benefits she receives from
what is seen as an extraordinary ramp up in job creation.
The argument as formulated above is misleading because it is built on
wrong presupposition. It is certainly true that FDI has increased, but the
question is why? The answer is that it is the broader issues related to
political stability, cheap / diverse labour and, most importantly, prevailing
global economic forces. But more worrying is the “employment argument”
itself for several reasons. First, the counter-factual used in the government’s
case is all wrong. The so called jobs created by the MMD government of the last
two decades are essentially the jobs they destroyed through the disastrous
privatisation project of the early 1990s. Secondly, even if we accepted jobs
have been created, the question is have workers benefited? The quality of these jobs has been largely poor,
as demonstrated by the tragic loss of lives in Chambishi incident. The safety record of Zambia ’s new masters is certainly appalling,
especially for Chinese firms.
A large contributor to
the poor safety environment is casualisation - the situation in which a dual
labour market develops: a core of permanent workers with a periphery of workers
on fixed - term contracts, or contracted as self-employed individuals.
Casualisation diminishes safety in two ways. First, it provides the employer
the incentive to undertake dangerous and reckless mining activities because the
contracted labour is not fully tied to the mining company. The expected cost to
the employer when something goes wrong is therefore diminished. With a large
pool of unemployed labour in Zambia ,
casualisation has found a natural home in mining companies. Secondly, casual
labour by its nature is less tied to the firm and therefore has minimal
incentive to undertake mining activities that are safe for all employees in the
long term. The most common accident in the mines is "rock fall".
These usually happens by casual labourers going mad developing [digging new
seams] and leaving people exposed without support in roof sheets. Most of the
development work in mining is done by casual labourers.
Casualisation has also
led to poor wages. This has occurred through two complementary routes. The
opportunity to have casual workers has provided an incentive to mining
companies to get rid of contracted workers and hire casual employees. This has
often led to reduction in contracted workers and reduced their bargaining
power. Mining union power is being eroded as casualisation amplifies - the
wages of contracted workers have therefore remained stagnant. The other impact
is that casualisation has reduced the opportunities for long term contracted
work. The overall result is that the quality of employment from additional
mining investment is generally poor.
Causal workers have no long term pension benefits to
speak of. This is clearly a concern because as we have noted many of these
casual workers tend to be ex-miners. Without long term pension security there's
no transfer of wealth across generations and many people become again dependent
on the state. The modern day mining worker is a casual worker living and
working for today to support his family, but no security for tomorrow.
The “new jobs” also comes with poor labour rights. This is particularly
pertinent for many employees of Chinese mining companies who are known to have
been denied union rights. Their conditions are probably worse than for those
working for Canadian, Swiss or South African multinationals.
These issues undermine the argument for low taxation in exchange for new jobs. When the issue of jobs is raised, Zambians must surely ask - of what quality? Our mining workers can now be added to the list of losers from the current mining policy, alongside mining communities and the country as a whole.
These issues undermine the argument for low taxation in exchange for new jobs. When the issue of jobs is raised, Zambians must surely ask - of what quality? Our mining workers can now be added to the list of losers from the current mining policy, alongside mining communities and the country as a whole.
Argument 8: Low
taxation is okay because we have corporate social responsibility!
In recent times the argument for low taxation has been buttressed by the
social responsibility responsibility (CSR) argument. Government has recently
pointed to the “social projects” by First
Quantum Minerals[9], Konkola
Copper Mines[10] and Lumwana[11]. The government believes these initiatives
would not progress without lower mining taxation.
Unfortunately, though CSR is a positive undertaking it is at best a
distortionary second best scenario. The ideal scenario is that government
should tax mineral resources sufficiently in a way that profits local people
and does not impact negatively on the environment and safety of workers. The
government is currently not pursuing the ideal and therefore its efforts should
be directed at ensuring it does. The more serious problem with the argument is
that it ignores the real menace of CSR. Such initiatives, though spun as
“social projects” are essentially "bribes" to keep local people
quiet. Firms do not engage in "social responsibility", they practice
"shareholder responsibility". The projects flouted by mining
companies should therefore be rightly seen as a small price that mining
companies pay local people in Ndola
and Solwezi lest they become agitated at the lack of development in the area
and demand the Government to do more to tax the mine (which would be bad news
for the shareholders).
The other problem is
that the impact of CSR has been pitiful. We have seen throughout that many
mining communities are simply not benefiting from the status quo and its
“corporate responsibility”. In fact the situation is even worse. The people are
not just neutral to the existence of the mines in their areas. Local mining communities
are currently suffering because of the mines. Or to put it even more starkly -
mines are doing more harm than good to our local communities. This becomes evident
when we address the basic economic question:
does the benefit of new mining activities to local communities, as
currently delivered, outweigh the costs?
The most obvious benefit
that any mining investor can give local communities is local tax revenues.
These taxes can either be compensatory or predicated on local “exogenous
rights” (i.e. taxes that recognise the pre-eminence of local rights with
respect to the mining resource in question). Mining companies’ contribution
through local taxes is essential for Zambia because it represents the
only legislated benefits to local people. Unlike in developed countries,
Zambian local councils have no alternative value capture mechanisms and their
power remains stunted in terms of engaging investors for local benefit. Local
taxes are the only way local people capture development benefits from mining in
a legally enforceable way.
At present local tax
revenues are essentially negligible. There is currently no automatic mechanism
for diverting resource revenues to the ground, which has meant many mining
communities do not see direct benefits of new local investments. Figures
released under the EITI process show that in many cases less than 2% taxes by
mining companies are local - assuming all of it goes to the local people. The
current injustice has not been lost on many parliamentarians who continue to
call for a better settlement through the establishment of mining communities
development funds (MCDFs). Some warn that should government fail to establish
MCDFs, people living in mining communities would have no option but to start
agitating for it.
Normally the problem of
poor local taxation would not be a significant problem if local communities are
in some way integrated in the local economic system with the mines. The usual
way of doing this is through the activities of the mines having sufficient
linkages to local business. The reality is directly the opposite, a fact which
has forced the government in recent years to initiate its own policies of
empowerment.
The benefits of having
local mines in the areas have not accruing to local economies because many
mining companies simply feed suppliers, manufacturers and markets outside the
country. The many local suppliers that used to exist prior to the privatisation
process of the early 1990s have all but withered away. This is partly due to
the fact that foreign companies come with their own supply chains. Undoubtedly
the larger problem is that local companies are currently unable to compete on
quality and price with foreign suppliers. This can only be remedied by
significant input from government to provide a system of incentives and
resources that would tilt the balance. A proper starting point is development
of a robust industrial policy designed to support local suppliers and to build
a local manufacturing base processing copper.
No industrial policy has
emerged as yet, but there have been some promising signs of government taking
proactive steps which a future visionary approach may build on. The move by LPM
to increase tax on copper concentrates has helped incentivise mining companies
to provide more smelting facilities, though the energy deficit has been a
drawback. The LPM era also saw the emergence of the export led model spearheaded
by the rise of Multi Facility Economic Zones (MFEZs) which is theoretically
designed to allow local mining communities to benefit from additional
investments. That remains to be seen and many unanswered questions persists on
the general policy around MFEZs which go beyond this current essay[12].
What is clear is that not enough has been done to directly empowerment local
communities per se. It is therefore difficult to argue that local mining communities
benefitting from mining activities or CSR.
Towards A New Approach
A careful review of the
above arguments reveals that the government position suffers from intellectual bankruptcy.
Zambia ’s
current mining taxation framework is inadequate. The question therefore is how Zambia
should proceed. We believe the starting point is to step back and refocus the
solutions on people.
Justina Mumba after her
son Thomas perished in Chambishi famously remarked, “they came to make profit, not to look after the lives of the people who
were giving them profit"[13].
Her words underscore the human side to the mining debate that has so often been
ignored in the deliberations of mining taxation. It’s very easy in all this to forget that
there's a human aspect to every debate, especially this one, and the dangers of
ignoring it may lead to poor policy conclusions. As Alfred Marshall said "when an economist reasons rapidly and with a light heart, he is
apt to make mistakes at every turn of his work". To avoid such
mistakes it’s crucial that the mining debate considers those who it impacts on
most. These are the mining workers and the local community.
As we have discussed
above, mining after all is done by real people - real Zambian men and women who
are working daily to bring back the resurgence in mining activity. A
Marshallian heart like approach to the mining debate therefore requires first
and foremost a recognition that any solution must seek to deliver a favourable
outcome to the Zambian miner and the local community. And that community embody
not just the people but the culture and wider environment.
The issue of taxation cannot
therefore be dealt with in isolation from other issues such as poor working
conditions and lower wages of miners. That approach is heartless and crucially
carries a number of dangers for Zambia .
First, in the absence of stronger legislation in this area, 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. Secondly, lack of
effective protection of workers’ rights and poor wages may lead to greater
discontent at the work place, which could eventually lead to the disruption in
mining activities. This could in turn lead to lower productivity and damage in Zambia 's
international reputation as an ideal place to invest. Finally, the lack of
better working conditions and poor wages for workers reduces the public
acceptability of investment. People simply aren't able to believe that the
mining activities serve any purpose other than to enrich the foreign companies.
Given these dangers it’s
imperative that the government response to the current agitation takes a more
holistic approach. We have termed this the "human approach" to the
mining debate. It should not just focus on the revenue that country needs to
get from the mining companies, but should be an overall package that would
deliver a fair outcome for workers and the surrounding local community. A human
response should seek to ensure that people who are most affected by mining
operations are the focus of a new set of mining reforms, with revenue taxation
pursued within that framework.
This should essentially
encompass a three staged approach:
Stage 1
Identify all the key
areas that government is seeking a fair outcome on. These should at least cover
three broad areas, with scope to include others. These are the welfare and pay
conditions of the mining workers; the local environment; and, the local
economy.
Stage 2
Identify a range of
solutions that the mining companies can implement to ensure that the areas
identified in stage one are properly addressed. The ultimate aim here is to
match the "failures" of the current system with appropriate and level
headed solutions. For example, for the pay conditions of the workers the
Government could suggest "stock/share options" combined with a higher
minimum wage.
On the question of the
environment, the approach should be based on regulations and not financial as
others have argued. There are some like the Wildlife and Environmental
Conservation Society of Zambia (WECSZ) who continue to support the introduction
of an environmental tax on mining companies in the country. This is a flawed
approach because there are other non-tax based measures that could be used –
taxing mines to leverage investment or achieving environmental goals is not the
appropriate way to proceed, nor is it fair, if not extended to other polluters.
Finally on the issue of
local economy, the government could reach an agreement with the mining
companies where by a framework is agreed on how they could leverage private
sector investment into local infrastructure. The model that is needed is
similar to the framework that the UK has adopted under Section 106 of the Town and Planning Country
Act (1995). This UK
legislation basically makes it a conditional that any new investment in any
local area of the UK
should be conditional on providing some minimum level of investment in schools,
transport and other things, if the local authority deems necessary. If we have
a similar and more robust act in Zambia, it would mean that when mining company
or another investor come calling we can ensure not only do they invest in their
relevant activity but they also tie that new investment to providing schools,
adequate transport schemes and so forth. The advantage of such a system is that
it relieves pressure on local resources and helps tackle local poverty by
linking the investment to the local needs. From an economic stand point, it
also helps raise the costs of reneging by the new investor by making it that
much costly for him/her to cut and run, like others have done in the past!
These are just a few of
the examples of how the three issues of the workers, the environment and local
economy can be tackled. Other examples could also be explored.
Stage 3
Having considered Stage
2 the government can then set an optimal tax that extracts the appropriate
revenue from the mining companies if deemed necessary.
The current flaw in the current
debate is that government starts with defending its position on mining as
already optimal, which has wrongly focused the discussion on Stage 3 without
sufficient attention paid to those that are immediately affected by the mining
industry. The "human approach" framework outlined in this essay ensures
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 and in an
efficient way should come before the struggle for revenue. 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.
Chola Mukanga is an economist and founder of the Zambian Economist which provides independent economic perspectives on Zambia's progress towards meaningful development for her people
Copyright: Zambian Economist, 2013
www.zambian-economist.com
Facebook Page:
www.facebook.com/zambian.economist
[1] This issue is therefore not
just a question of economic policy, but it is about justice. We must therefore
always begin with the question, “what is rightly due our people?”
[7]
http://www.zambian-economist.com/2011/03/five-questions-on-zambias.html
[8] World of Mining Taxation,
Zambian Economist (May 2010) http://www.zambian-economist.com/2010/05/world-of-mining-taxation.html
[11]
http://www.times.co.zm/news/viewnews.cgi?category=12&id=1252389576
very interesting !
ReplyDeletewe understand MMD arguments are a swindle
only one reason...
those crooks are bought and paid for by foreign mining companies
RB, Musokotwane and their gang take us for retards...
PF Chairperson for mines Wilbur Simuusa asked those crooks for an explanation
ReplyDeletefrom The Post
Explain stance on mine tax, Simuusa tells govt
By Gift Chanda
Thu 28 July 2011, 13:59 CAT
GOVERNMENT should clearly explain why Zambia is reluctant to push for increased benefits from mining companies through taxation and increased shareholding, says Wilbur Simuusa.
Commenting on Namibia’s plans to raise corporate tax in mining companies other than diamond producers in the next financial year, it was scandalous for President Banda’s government to remain adamant on calls to raise revenue from mining companies when other governments in the region push for increased benefits from their mining sector.
On Monday, the Namibian government said it plans to raise the tax on mines other than gem operations to 44 per cent from 37.5 per cent.
Diamond mines are taxed at a 55 per cent.
“This government has really failed the people. They are still adamant on increasing benefits from the mining companies. They are adamant for example on windfall tax when other countries in the region are moving that direction,” said Simuusa, a mining engineer.
“Countries like Namibia, South Africa and Zimbabwe have continued their push for increased benefits from the mining companies through taxation and increased shareholding but our government is adamant. They should explain why they are going in the opposite direction.”
Simuusa said while other countries were advocating increased stakes in foreign-owned mining companies, President Banda’s government was selling its “minority” shares in the name of attracting investment.
Recently, Zambia’s state-controlled mining company, Zambia Consolidated Copper Mines Investment Holdings Plc, agreed to sell its 2.28 per cent stake in Equinox Minerals Limited to Barrick Gold Corporation for more than US$160 million.
“All right thinking governments in the region are going in the correct direction, which is increasing government’s stake in the mining companies but our government is going in the other direction. To me it is scandalous and this will be a campaign issue,” he said.
Simuusa said Zambians should not allow the government to continue depriving them benefits from the mines.
To be honest i think is endemic of a larger problem in neo-liberal economics, where even in nations where corruption is not so evident, the government introduces tax breaks for the rich and for corporations because it sees them ( or uses this reason as an excuse ) as the 'job creators' . Meanwhile, the bulk of the population, whose spending power is the real driver of a stable economy, are overtaxed. So this not just a problem of corruption, it also a problem with the current dominant trend in economic thinking and it's disproportionate influence on policy makers. I am sure that unfortunately the IMF and World Bank wholeheartedly support low taxation on Zambian mines.
ReplyDeleteMike Te the PF politician you are quoting was arguing from from a point of ignorance when he referred to the namibian situation. i must state from the start that i don't believe that high taxes for the business community is the answer to our problems.there is a lot other things that can be done to ensure zambia gets the maximum benefits. the nambian example give has no support from the larger business community its simply political decision that is riding on the beliefs that too much is being stolen by the business. the same sentiments are expressed by politicians in SA. these sentiments are not based on evidence in both those countries. so the PF politician should not make you believe that the the countries in question have proof that their is need to change course. No no. and zambia should not use them as an example.
ReplyDeletei am amazed that no one is talking about moving money from the mine owners to their workers. we are just talking about getting the money to the gov. we need to press the mines to give a better deal to their workers.let them get medical cover, transport, better separation benefits,safer working enviroment
Aaron,
ReplyDeleteYou clearly have not read the essay.
If you had you would know those issues about environment, jobs etc are covered.
The model proposed at the deals with your points.
Please let us not waste time commenting from ignorance. Mike Te has read it and is aware of that.
Mark,
ReplyDeletelow mining taxes principally benefit foreign shareholders and do not drive the Zambian economy...
you are wrong about IMF and World Bank
Enforce taxation on mines, claimed World Bank
http://www.postzambia.com/post-read_article.php?articleId=18698
IMF urges govt to raise revenue collections
http://www.postzambia.com/post-read_article.php?articleId=7053
Zambia is not benefiting from its copper, affirmed EU.
http://www.zamnet.zm/newsys/news/viewnews.cgi?category=10&id=1282026079
Why requests are so timid and there is no sanction?
The war for precious commodities (rare elements, oil, copper, gold, nickel...) has begun between Mzungus, Wachina and Wahindi to control african wealth
Wachina have no qualm and Mzungus are afraid that Wachina manages to get ahead of them
And shady leaders like Rupiah and their gang take advantage of this situation to line theirs pockets !
Aaron
ReplyDeleteYou should read this accurate essay, very well built and well-argued before speaking, it's too obvious ! LOL
by the way you dislike the Namibian example, no problem and Chile ? LOL
The MP Wylbur SIMUUSA made a very interesting speech to parliament on Sept. 29
http://www.parliament.gov.zm/index.php?option=com_content&task=view&id=1259&Itemid=86&limit=1&limitstart=6
“...Therefore, Madam Speaker, if we want to boast about the increased production, as I have said before, the reckless policies of this Government must be reversed.
Madam Speaker, I was one of the people who were against the complete privatisation of the mines. I advocated that we retain one unit, the Nchanga Mine. That way, it would have competed with the Kansanshi Mine, First Quantum Minerals and Fox Dodge. By working on a par with these mines, we would have assessed whether we can truly boast about increased production because, at least, that would have been our production.
Madam Speaker, one of the countries we use as a benchmark is Chile. It has declared about US$30 billion as revenue from mining. Of that US$30 billion, US$15 billion, which is 50 per cent, came from the National Copper Corporation of Chile (CODELCO). For those who can remember, CODELCO was one of the mines that wanted to buy Nchanga Mine during the privatisation period, but it is State-owned. It is a parastatal owned by the Government, but it contributed US$15 billion to its country’s tax revenue. Therefore, Chile can boast about increased production and that is what we are talking about.
Mr D. Mwila: Hear, hear!
Mr Simuusa: These are the policies that this Government should implement if it wants to boast about increased production. I challenge it, although it is too late because it is on its way out, ...
Laughter
Mr Simuusa: Anyway, let me challenge it. Maybe, in the few remaining months ...
Laughter
Mr Simuusa: … it can start an operation whose production it will compare with mines such as the Konkola Copper Mine (KCM) because only then can it boast about increased production.
Madam Speaker, as it is, I join my colleagues in bemoaning the gross failure by this nation to acquire benefits from these mines because of its bad policies.
Madam Speaker, I will give you another example. If the Government wants to get benefits from the dividends, the vehicle that should be used is the Zambia Consolidated Copper Mine-Investment Holdings (ZCCM-IH). This is the vehicle that we have created to get dividends from all these mines in terms of share holdings. However, I have noticed that the ZCCM-IH has not produced annual reports for 2005 and 2006.
Madam, are we serious as a nation? This is gross incompetence. How can we let a company that is supposed to be our watchdog and one that is supposed to be deriving benefit on our behalf not produce an annual report? This way, we do not even know our losses or profits. I would like the hon. Minister of Mines and Minerals Development to explain why that has been allowed. Why should we allow such a situation to prevail after it was said on the Floor of this House that if we are to benefit, the shareholding in the ZCCM-IH has to be increased?
Enforce taxation on mines, claimed World Bank
ReplyDeletehttp://www.postzambia.com/post-read_article.php?articleId=18698
wow, if even the IMF is saying higher taxes are needed, i'm stunned ! I know the World Bank has become a bit less blinkered in its neo-liberalism lately...There seems to be no solution now other than to leave it to the voters to judge the current government. Lets hope the elections run smoothly and the people get the government they want...
ReplyDeleteMark,
ReplyDeleteIt were the IMF/World Bank who insisted that Zambia privatise the mines, making the country and economy miss out on at least $20 billion in profits, since 2004.
I am sure they have an eye on their own liabilities, because if I was president, I would take them to court for misrepresentation, for giving information about the markets that they had no earthly way of being certain about - Edith Nawakwi stated that the WB told her that 'copper prices would not rise during her lifetime'. That was when they were $2,000/per tonne, today they are over $10,000 per tonne.
So the IMF/World Bank lost Zambia a lot of money. I'm not surprised they are trying to patch things up a little by saying the government should collect more taxes.
Did you know that out of 2.7 billion US$ dollars which the Zambian mining sector produced in 2010 only 2.8% (77 million US$ dollars) was paid in taxes towards contribution to the national reserves?
ReplyDeleteDid you know that out of my total Gross Payable Earnings on my Net Salary, I paid 32.5% Pay As You Earn towards the national treasury?
Did you know that apart from 32.5% in income tax, I paid VAT (16%), fuel levy, exercise duty, a host of other taxes I don’t know, and that sums up to say I pay practically more than 50% in taxes on my earnings?
Did you know that despite the fact that the world over, the practice is that individual citizens on average pay more tax relatively than multinational companies but a 50% comparison to 3% is unheard of and unacceptable?
Did you know that these mines virtually don’t do any meaningful corporate social responsibility? I mean they don’t do roads at the mining townships; they don’t sponsor enough football teams.
Did you know that if windfall tax was not repealed, we would have the mines contribute effectively 8.3% (600 million US$ dollars) in 2010 towards the national treasury?
Did you know that our national budget deficit which is donor funded is far less than 600 million US$ dollars?
Did you know that we don’t need donors if windfall tax was to be reintroduced?
Did you know that our leaders are just…… I don’t know?
But here is what you should know: The massive countrywide projects which the GRZ is undertaking, most of the money is from areas of windfall tax of 2008. The mines obligated paying windfall tax in 2008 and it’s only now that they are paying the nkhongole (tax arrears or tax debt) of the 2008 short window. Imagine if the window was not close, we would by now doing huge project such as dual carriage way from Livingstone all the way to Northwestern Province. We would be making the Zambezi and Kafue River navigable for sizable cargo ships . We would be doing the Batoka power Station on the Zambezi River.
I’m certain that if you know that if we put enough pressure on our government through advocacy and demand prudency in dealing with equity and equality, we can cohere and coerce GRZ to do the right thing?
Hi Potpher Mbulo,
ReplyDeleteDid you know that out of 2.7 billion US$ dollars which the Zambian mining sector produced in 2010 only 2.8% (77 million US$ dollars) was paid in taxes towards contribution to the national reserves?
Did you know that out of my total Gross Payable Earnings on my Net Salary, I paid 32.5% Pay As You Earn towards the national treasury?
It is the same thing across the globe. Instead of standing for 'less taxes', the rightwing, 'free trade' governments all over the world have shifted the tax burden from the corporations to working people.
Very little of the 'donor aid' comes from corporations, it comes from workers in the West. 'Donor Aid' is a scam, that gets working people in the West to pay the taxes that western corporations are not paying in Zambia. It really is that simple.
Don't wait for mrs. Goldman Sachs, Dambisa Moyo to put it that way though. I think she never discussed raising taxes on corporations.
The same in Zambia. Working people are paying the taxes that corporations should be paying on Zambia's resources, which belong to the opele
We have to put working people first again. End Supply Side Economics, get back to Demand Side Economics.