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Thursday, 23 January 2014

Chikwanda is Wrong

It appears that Finance Minister Alexander Chikwanda is addicted to intellectual and moral error. Here is what he said recently in the Post on mining companies and borrowing :

"...we are putting in place measures to generate enough revenue so that we can avoid borrowing. Of course, some people are saying windfall taxes for the mines but that is a 'fetish' which some people want to hang on to whether it is logical or not. We do understand that contribution of the mining sector is very low at five per cent but we shouldn't just look at taxes; there are other factors like having the mines generating 70 per cent of foreign exchange and creating jobs. Ideally, we want to see the mines contributing about 10 per cent and ZRA is being strengthened to ensure efficient revenue collection." (The Post)
This is economic bumbling. Such language does not mean anything, but designed to fool the economic illiterate. Of course people are easily fooled because his statement has gone unchallenged for over a week! So, what do we make of the latest Chikwanomics?

Before I answer that question let me just say that it is appalling to see Chikwanda using bad language about Zambians again. He starts off by saying that people demanding the windfall tax have a "fetish". A fetish is defined by most dictionaries as "a form of sexual desire in which gratification is linked to an abnormal degree to a particular object, item of clothing, part of the body, etc".

I don't think this is an acceptable use of language by a minister. There's no sexual gratification or unbridled excitement involved in those who have demanded it. Now if people start insulting him and call him all sorts of names, he will turn round and say he is 80 years old and a grandad. He will also say people don't have any respect for his office. When it is clear that this use of language is very demeaning to others. We must learn to disagree honestly and respectfully.

Let's get back to the question, it is again clear Chikwanda has no understanding of basic economics, and that is no insult because not everyone wishes to understand economics. He says that mining companies already benefits ordinary Zambians through "foreigh exchange" earnings. How is that a benefit to anyone? In what meaningful economic sense is foreign exchange an end in itself to ordinary Zambians? In what sense does it result in an increase in social welfare to qualify as a benefit?

This is a old way of thinking from UNIP times. It seems that in Zambia 'earning Forex' has, since the 1980s' "Forex shortage", been seen as a 'benefit'. But we need to get over such economic folly and recognise that foreign exchange is not additional income. It is part of total money supply held in a different currency. To have forex you give up your Kwacha, so your total remains the same. It is embarrassing that this even needs explaining!

As if that is not bad enough, he then says the other benefit is that mining companies are "creating jobs". This logic is actually borrowed from President Banda who once forcefully said, "there is little point in taking in a few million dollars in tax if thousands of jobs are lost as a result". According to our politicians any appraisal of Zambia's mining policies must account for the allegedly huge benefits she receives from job creation.

That posture is misleading because it is built on incomplete understanding of the value of jobs in an economy. New jobs are only valuable if the jobs created are strictly additional to the national economy. The mining jobs he is referring are increasingly simply diverted from elsewhere. This happens largely due to skills shortage which leads to the same workers moving to better jobs, or more common in Zambia we import workers while Zambian graduates languish without jobs or end-up not working in an area they specialise in.

This is clear because we continue to see not only expatriates come in from abroad but also workers from urban areas move to North Western province to take newer jobs, without corresponding reduction in urban unemployment. We also continue to see that mining is becoming more mechanised so the jobs impact will continue to be limited. One wonders what price Chikwanda is willing to pay just to have a few non-additional jobs that may not last for long!

But even when such jobs are additional we must then ask : are workers benefiting as they should? The truth is that the quality of a large portion of mining jobs has been largely poor. This is demonstrated by the constant tragic loss of lives. One of the unspoken tragedies over the last decade is how many of our people continue to die due to the general disregard for lives by many mining companies. It has stopped becoming news.

Which brings us to the "quality" dimension. It is not just any job creation that matters, but a high quality mining job. In Zambia many of these "mining jobs" are full of casualised workers. Casualisation has come with poor wages. This has occurred through two complementary routes.

First, 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. Secondly, 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 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 meaningful union rights. 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. It is development Jim, but not as we know it!

In light of the above, it is amazing Chikwanda is now content with borrowing and meekly asking mining companies increase contribution to 10% of revenue from a depleting resource. And he hopes to achieve this by ZRA "being strengthened". Quite staggering. Chikwanda says it is unfair to ask more from mining companies than 10%. I say it is a crime to require anything less. When are we going to end this soft bigotry of low expectations?

Chola Mukanga | Economist
Copyright © Zambian Economist 2013


  1. 'Fetish' does not need to refer to an unusual sexual desire. The word's etymological origins are more closely linked to another meaning, which is that of an object with mystical properties. Examples of such things can of course be found in many of Zambia's museums as examples of practices of witchcraft.

    It is evident that this is the use being made by Chikwanda here.

  2. The Post :

    " EDITH Nawakwi says finance minister Alexander Chikwanda is misleading President Michael Sata on debt sustainability following the government's path of 'reckless' borrowing.
    And Nawakwi who is FDD leader says the country is experiencing the worst farming season since independence owing to the late delivery of inputs.
    In an interview following Chikwanda's statement during ZNBC's Sunday Interview that Zambia will not slide back into a debt trap, Nawakwi said Zambia's debt would be unsustainable if the government continues on the binge of borrowing from the commercial window."

  3. The Post :

    " EDITH Nawakwi says finance minster Alexander Chikwanda is misleading President Michael Sata on debt sustainability following the government's path of 'reckless' borrowing.
    And Nawakwi who is FDD leader says the country is experiencing the worst farming season since independence owing to the late delivery of inputs.
    In an interview following Chikwanda's statement during ZNBC's Sunday Interview that Zambia will not slide back into a debt trap, Nawakwi said Zambia's debt would be unsustainable if the government continues on the binge of borrowing from the commercial window."

  4. The PF media "The Post" (Editor) :

    "..On October 4, 2013, our government issued Statutory Instrument number 89 to waive export duty and allow First Quantum Minerals to export concentrates. This is difficult to understand for a government that wants to go and borrow hundreds of millions or billions of dollars on the international money markets..."

    "What is the purpose of us borrowing such huge amounts of money when we are allowing legitimate export duties not to be collected from First Quantum Minerals? And why should First Quantum Minerals be exporting concentrates at a time when we have adequate refining capacity? Who can say they really know the other minerals other than copper that those concentrates contain?.."

    "Again, there is something seriously amiss here; there is something stinking here. Is this a product of oversight, incompetence or outright corruption ?"

    >>>> BOTH, MY FRIENDS !!!! :-((

  5. Hi Cho, MikeTe


    The Cash Cost per pound is the total amount of costs to the company to procude a pound of copper.

    In all cases I have seen, Cash Costs per pound are lower than the $2,50 at which the Windfall Tax even starts.

    Company, Cash Cost

    FQM: KCM, $0,90
    Konkola, $1,00
    Katanga Mining, $1,69

    Oz Mining (gold, Australia), $1,15-$1,25

    In other words, when they say that mining companies will become unprofitable because of the Windfall Tax, they are lying. In fact, the price at which the Windfall Tax kicks in could easily be lowered from $2,50 to $2,00, (or$1,70 in the case of Katanga Mining) and they still wouldn't go broke because of taxation.

    1. Oh dear, oh dear. You haven't thought about this have you? Windfall tax is not THE ONLY TAX....

      OK: once more, (read slowly it might help):

      , if Windfall Tax was brought back using today's tax regime:
      If the price of copper is between $2.50 - $3.00 per lb then overall tax rate = 72%
      If the price of copper is between $3.00 - $3.50 per lb then overall tax rate = 97%
      If the price of copper is above $3.50 per lb then overall tax rate = 122%

      Think of that. I make $100 of profit, I have to pay $122 of tax! This equals mine closure, loss of tax revenue, loss of jobs.

      Now...that wasn't so difficult was it?

      Fred M

    2. Fred M,

      You should mind your language before posting here.

      Show some respect to others. It is not necessary to insult. We have a very strict policy about comments.

      There's very little that you will say that people on this website have not considered. So have some humility when you comment.

    3. Fred M,

      And you haven't thought about this, have you 'm'dear': taxes can be introduced, AND repealed.

      So when you have a tax that, say, starts at $2,00 per pound, and captures most of the profits made, why have any other taxes on the mines?

      Including PAYE, which some of the mining companies have failed to pay to the state, although they did take it out of the miners' salaries.

      Simplicity means there is less room for corruption, and is much cheaper to monitor and collect.

      Now that was not very difficult, now was it? :/

  6. But that's just it isn't it Chola...they clearly haven't considered it or they wouldn't post such flawed arguments.

    Odd. I don't see any insults.

    I have bags of humility...centered on exposing policies that will deny Zambians of wealth, jobs and development.

    Fred Member

  7. Can anyone produce a comparison table containing tax on copper mines in Chile and tax on copper mines in Zambia. I mean not the tax paid but the tax regime the companies in these respective countries are under. I would exclude PAYE as that should be a given. It has to be paid. Basically I mean tax on profit and also any levy on export etc.

    This table would be useful in showing if the respective tax regimes in these major copper producing countries are significantly different.

    Sorry but I cannot produce it myself. But it seems clear that there are significant commenters or is it commentators with enough talent and expertise to produce the table.

  8. Chile has three taxes levied on miners, all charged on profit (or adapted profit). If you moved Kansanshi to Chile, its effective tax rate would be about 40%, whereas in Zambia its 42% - but with the important proviso that Kansanshi also pays a revenue-based royalty at 6%.
    No export levy that I'm aware of in Chile because normally, you don't want to impede monetisation of production - its in the interests of the mine and the State.
    Kansanshi is one of the 5 most heavily taxed mines in the world - Zambian rates are very high - but few other mines pay anything other than MRT.
    Agree with MrK above - if you take the other taxes out, Windfall Tax is only a stepped royalty. However, not a single article or blog has mentioned taking taxes away, just adding another one. Thats what Late President Manawasa did, and thats how you end up with those horrific tax rates.
    If that was me, I'd never sell copper at any price higher than $2.99999/llb.

    1. Thanks for the percentages and Mr Mikete's comment also.

      40 and 42percent are neither here nor there in difference. So the major difference is MRT. So why does Zambia levy this and Chile not is really the question? It is because they are ... ? Suggestions, please, if the blogger allows with his permission.

      It would seem to me that there is something different between Chile and Zambia. Better managed economy? So doesn't need a levy? Or is it not just that Chile thinks it fair but Zambia wants more than what another nation thinks is fair?

      Perhaps Mr MikeTe would elaborate on the looting.

      Perhaps you could elaborate on the other 4 mines and why it would seem even in Zambia Knasanshi is paying basic 42percent and mrt while the others are only paying mrt.

      While the above is somewhat dated if it still applies as seems reasonable to assume Chile, contrary to the statement above, does charge mrt as do most countries in the world.
      So my original comment is unfair on Zambia in that it is only doing what other countries do.
      The real problem, according to the irin article, seems to be the initial development agreements which have allowed miners with these agreements to hold onto tax conscessions, low mrt (0.6percent) and so Zambia has missed out on the commodity boom.
      Perhaps this also answers the question as to why some miners in Zambia are only paying mrt i.e. they are the old miners with development agreements.
      However I still think Chile is a better managed economy.

    3. I think there are some answers in the DRC v GRZ analysis below. in 1973, Chile and Zambia were neck and neck for copper production at 700+thousand tonnes per annum. In 2000, Zambian production was 200 thousand tonnes. So, Chile has a mature copper industry, with new start ups which don't pay much tax effectively covered by mature mines that do.
      In 2000, Zambia pretty much had to start again. The required huge investment to reinstate existing mines which had been allowed to deteriorate. One result of this is that huge investment gives huge tax losses and therefore tax paying is substantially deferred.
      The other reason for the MRT is this - in his first Budget, Hon Chikwanda said very bluntly that he was doubling the MRT because it was relatively easy to collect - only three moving parts - whereas (he said) the ZRA currently had neither the capacity nor the capability to enforce the Profit Tax (and VPT). They are working on capacity improvement but its slow progress.
      Kansanshi pays so much tax because its an efficient, open-pit mine which didn't have much residual infrastructure to replace. FQM have been the biggest taxpayer in Zambia year on year for a while (excluding PAYE), as they were in DRC.
      On the comparison with DRC, some of the complaints are valid, but you need to do a little more digging around Gecamines. Its frustrating that ZCCM could be much more, though. Agreed!
      In Oil & Gas, its basic for the State oil company to have done exploration, and then to auction off those licences to bidders who can demonstrate capacity, capability and financing capability. Contrast this with the way that the Zambian oil licences were dealt with.

    4. Don't know enough about the Chilean economy to comment! Their first tier mining tax(equivalent of Zambia's MRT) is based on adapted profit. The MRT is based on revenue. The impact is therefore very different, especially at low profit or high cost. Its a regressive tax - the impact is worse as profitability gets lower.
      I don't know for sure, but the mines I think are mostly paying MRT at 6% - certainly, before the ZRA stopped publishing their collection figures in 2013, the back calculation looked like 6%.
      The issue with other taxes (PT & VPT) is accrued costs of reistatement, expense of running eg underground mines & then (probably) transfer pricing.
      Kansanshi pays a the full rate, and would be better off in Chile, the new FQM mine, Sentinel, will also pay a lot of tax very quickly after production commences.

  9. @Anonymous
    Concerning mining, you will find a comparaison between Zambia and DRC here

    the most mismanaged and corrupt country is not the one we think.
    And I am very curious to know what the defender of looters Fred Member's views are on these matters.... >;-))


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