Debunking the Government's case for low mining taxation

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.

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.

Zambia’s situation is even bleaker for non-copper industries, where we continue to lose substantial revenue. For example, Zambia has the world’s second largest emerald deposit in the world (after Colombia) and also boasts of Africa’s biggest amethyst and aquamarine fields. But one wouldn’t know this from looking at the government coffers and the economic plight of our people. Zambia gets very little from this enormous wealth. At the heart of this problem is that the industry remains unregulated and without any element of state production. Zambia’s current policy of simply providing licenses without regulation has led to emergency of foreign dominated emerald cartels. Ordinary Zambians have failed to get a foothold in the industry because it is simply cheaper and more immediately rewarding for many Zambians to allow foreign production (by charging the "fee") rather than develop the mine themselves. To successfully develop these mines not only do you need credit, but also access to established supply chains. The foreign investor has all these things in abundance and crucially they are able to harness the economies of scale that are associated with pooling licences together. Bizarrely the more attractive gemstone becomes the more foreign investors push out the locals! Unfortunately for Zambia these foreign operators keep their revenues abroad. The gemstone industry (estimate over billions of dollars) is a classic example of wealth lost from Zambia. The same desperate picture emerges for other lost opportunities such as manganese^[5] and uranium^[6].

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?

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.

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.

Zambia needs a much smarter and more human approach to the mining reforms not one steeped in greedy and intellectual ineptitude. The Banda administration’s case for low mining taxation is demonstrably intellectually bankrupt. But equally, more money to central government will not improve our local economies, and it won't certainly translate into better pay and working conditions for workers. The alternative approach set out in this essay may not be perfect, but does provide a point reference on what the debate should focus on, having already demolished the government’s case for the status quo.

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?”

[2] http://maravi.blogspot.com/2009/09/windfall-tax-is-easier-to-implement.html 

[3] http://www.zambian-economist.com/2007/10/undermining-zambias-development.html

[4] http://www.zambian-economist.com/2008/11/exit-magande-in-mwaanga.html

[5] http://www.zambian-economist.com/2009/02/luapula-manganese.html

[6] http://www.zambian-economist.com/2007/06/more-equinox-salt-for-that-wound.html

[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

[9] http://www.zambian-economist.com/2007/04/quantum-leads-now-government-must.html

[10] http://www.zambian-economist.com/2009/09/empowering-luano-community.html

[11] http://www.times.co.zm/news/viewnews.cgi?category=12&id=1252389576

[12] http://www.zambian-economist.com/2010/04/economic-impacts-of-mfezs.html

[13] http://news.bbc.co.uk/1/hi/world/africa/6267754.stm