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Monday, 12 December 2011

A Poor Statement

If this misguided statement from Mines Minister Simuusa on the current mining regime is anything to go by we are in for some problems on the mining front: 
"For now (the royalties) will stay, but if it becomes a crisis, if prices crash, we might have to review the regime... not in 2012 but for 2013, in the next budget..."
One assumes that Mr Simuusa is trying to reassure mining companies that the Government is sensitive to the global pressures. But this statement is misguided for a number of reasons.

First, it shows the current mining regime is not well conceived. A good mining taxation regime does not constant  adjustment. We were told by the Finance Minister Alexander Chikwanda that the new regime is sufficient to capture appropriate revenue. If that indeed is the case, why would the Government already be talking about possible scenarios that would require reversals? Isn't it better to design a tax regime that automatically adjusts in the low revenue years? 

Secondly, the Mines Minister appears not to understand that the big problem facing Zambia's mining taxation regime is stability. One of the things mining companies have repeatedly said is that constantly changing the fiscal regime whether for good reasons or not does not inspire investor confidence. They have always argued that certainty is paramount to deliver long term investment. Mining companies are therefore more broadly interested in a long term stable policy than the level of the taxation (provided the tax is not unnecessarily high). So what exactly is prompting Mr Simuusa to be sounding off like this?

Thirdly, it is poor policy making to speculate publicly about conditions that are not in play. Giving statements to Reuters is not a way to develop an effective mining policy. If the Mr Simuusa wanted to make it clear that the new Government plans to change policy at every whim then why not state so in fully consulted White Paper? This constant pandering to mining companies is retrogressive and an affront to our poor.

Finally, Mr Simuusa's policy statements are reckless because they encourage non-compliance of the current mining taxation regime. When a Government has just announced a new increase in a given tax and then turns round to say it is prepared to reduce it before the tax man has even started collecting it, it suggests a lack of backbone. Mr Simuusa is signalling to mining companies that Zambia is a soft target - constantly not serious about its stated position. In short Mr Simuusa needs to quickly learn that statements made in the media has repercussions for other parts of Government.

We recognise that this is a new Government still learning, but Zambia's problems are too great for permanent on the job training. 

6 comments:

  1. Well said. One general observation i have about Zambia is that our policy formulation is wrongly done at a very high level (i.e. by Ministers). There are countless numbers of technical civil service staff who have been trained at great expense, and must rightfully be given space to properly FORMULATE policy. Let your technical staff invest in a bit more research before you come up with policy positions. Ministers should ideally debate already well thought out policy pronouncements. It makes us look somewhat incompetent to see this level of flip-flopping.

    Another big challenge with the current mining policy is that we simply rely on the mines to provide us with information on the health and status of the industry. So naturally you do not expect them to say they are minting gold (literally and figuratively). There is a concept in economics called 'regulatory capture', where the regulators rely on the regulated for information on how best to regulate. That is basically what has happened to Zambia.

    My country really has a long long way to go.

    Zambian Economist editor, whoever you are, you are my soulmate.
    LSKeconomist

    ReplyDelete
  2. LSkeconomist,

    I agree especially with the regulatory capture.
    This is particularly problematic when issues of environmental damage and mining safety comes in. Dan Hugland's assessment is relevant here:
    http://www.zambian-economist.com/2011/04/policy-evolution-in-zambian-mining.html

    ReplyDelete
  3. We can go even further and compare the Minister of Mines' statement and the Minister of Finance's statement (from a week or so ago):

    Alex Chikwanda (Finance Minister)- "It would be unwise for the government to introduce a windfall tax when metal prices are unstable and are usually trending downwards"

    Wylbur Simuusa (Mines Minister) - "For now (the royalties) will stay, but if it becomes a crisis, if prices crash, we might have to review the regime... not in 2012 but for 2013, in the next budget"


    One Minister is saying that the government would like to follow an implicit variable rate royalty (what in Zambia we call a Windfall Tax) - when prices rise GRZ increases the Mineral Royalty rate, when prices fall they reduce the Mineral Royalty rate. While the other Minister is saying that the government does not want an explicit variable rate royalty, which does exactly the same thing but does it predictably and transparently.

    This suggests either poor understanding of what a Windfall Tax does (or what it has the potential to do), or some other thinking by these Ministries.

    It may be somewhat confusing to use the term 'Variable Rate Royalty' instead of 'Windfall Tax' but I hope that using this term helps in understanding essentially what a 'Windfall Tax' is.

    (I wont even go into the fact the it shouldnt matter whether a Windfall Tax is imposed if prices are falling.)

    Sources:
    http://af.reuters.com/article/investingNews/idAFJOE7B806S20111209

    http://www.dowjones.de/site/2011/11/zambia-wont-introduce-copper-mining-windfall-tax.html

    http://www.miningweekly.com/article/zambia-says-wont-re-introduce-mine-windfall-tax-2011-11-30

    ReplyDelete
  4. The refusal to institute a collectable tax, which the windfall tax is, creates the impression that when it comes to the mines, the PF have taken the mining industry's penny and sold the Zambian taxpayer out.

    Not only does it throw into question their willingness to have anyone other than Zambia's tiny middle class pay for the expenses of the political class, but it throws into doubt their seriousness in the battle against corruption.

    ReplyDelete
  5. According to the shill for the mining sector, Frederick Bantubonse, the windfall tax would have raised the effective tax rate for the mines from 31% to 80%.

    The Zambian government should engage foreign auditors- Chamber of mines
    TIME PUBLISHED - Wednesday, December 14, 2011, 4:31 pm

    ReplyDelete
  6. I dont wont to comment on those issues, but I can at least comments on the statistics, or misuse of them ...

    The Chamber has not provided us with the whole story.

    The effective tax rate (ETR) was estimated to be 80% only at very high prices and (I think) only when the windfall tax was NOT deductable against income tax. (This was changed soon after the initial proposal in 2008.)

    It is misleading to quote one ETR. The calculation depends on the price and the cost facing each mine. One must therefore present either an average ETR across many states of these variables or show a range of ETRs.

    It would also be interesting to see what the average ETR of the current tax regime is. Given the very high royalty rate I suspect it is higher than the 2008 regime with windfall tax. It is certainly riskier for the mining companies as it not as progressive.

    ReplyDelete

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