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Thursday, 21 May 2015

Begging for Infrastructure

President Lungu recently met FQM senior management officials as part of the tour of the open pit mine and copper smelter in Solwezi. He urged the mining company to partner with GRZ to “deliver local roads” and “light up Solwezi Airport” which is restricted to day flights due to inadequate infrastructure at the airport. President Lungu said, “we have to do 21kms of roads here in townships, come on board to help improve roads including the airport. Expand your corporate social responsibility to non-traditional areas. ..”

The call for the private sector to contribute towards investment in local roads and airport infrastructure is certainly welcome. Government is spending significant sums on the current roads programme through borrowing, and that does not even include “township roads”. Not only is the programme insufficient to upgrade all roads, it is also an extremely expensive and unsustainable undertaking to maintain some of the roads that are being upgraded. So one can see why President Lungu appears to be begging the mines to help.

Unfortunately, the latest request is predicated on the false notion of “corporate social responsibility” (CSR). There's no such as thing as "social responsibility" because mining companies are motivated purely by profit and will always act in the interest of their shareholders. If using an existing road is cheaper than building a new one, then they use the existing one. The same goes for local schools and hospitals. When they occasionally provide a new school or fund the local football team, they may appear to be socially responsible but their true motivations is always those of the company.

Properly understood, most CSR projects are essentially "bribes" to keep local people quiet. The CSR projects are a small price that mining companies pay to local people in case they become agitated at the lack of development in the area and demand the government to do more to tax the companies. It is therefore baffling that government continue to perpetuate this huge negative distortion to governance and development that CSR brings.

In any properly functioning society, the ideal scenario is that government should tax mineral resources in a way that profits local people and does not impact negatively on the environment, wages and safety of workers, whilst ensuring that the tax system is still attractive to investors. Zambians are are not interested in mining companies running our townships. They want investor to pay reasonable taxes  so that we can decide how to best use that money to develop the country and improve the living conditions of our people. Constantly begging for donations through CSR from investors is not a sustainable way to develop the country. 

Surely, it is time for ordinary Zambians to realise that the current situation simply allows government to evade responsibility for doing what it should be doing in the first place. What Zambia truly needs is to have a robust and transparent taxation regime that is fully consulted on with all members. Such a tax system should get value for money from the mines (and other investors) and must be accompanied by a clearly defined development control policy that ensures that mining companies pays for the “social costs” they impose on communities.

So how would this development control policy work? Essentially, what we are talking about is new legislation that makes it a condition that any new major investment in any local area provide some minimum level of investment in schools, housing, transport and other things, if the local council deems necessary. It is true some investors do provide these things already, but what we are talking about is setting a legal expectation for meeting these social costs within an optimal tax arrangement.

Mining companies will already have told President Lungu that they pay enough taxes, a point the Lungu government (and the opposition) now seem to champion. So don’t expect the government to latch on this idea any time soon because mining companies will see this as an attempt at “another tax”. But that misses the point entirely. We are not suggesting taxation needs to go up per se. Rather that any optimal tax must necessarily include a strong development control policy to internalise social costs.

It is unfortunate that development control policy is not part of the government’s current investment policy. There is actually a very strong case for new legal requirements on major investors (e.g. mining companies, countless shopping malls builders) to contribute towards infrastructure development. It is good economics. Investors do not just bring benefits to the local areas, they also bring costs. A key cost is that it puts a strain on local social infrastructure and services(e.g. roads, policing, schools). These pressures are a form of “externalities” which need to be mitigated by ensuring investors contribute towards this cost.

The other reason is that it helps eliminate perverse incentives in other areas. If we take transport as an example, there's no doubt that many mining companies are free riding inter-urban roads and therefore require a lot of persuasion to invest in alternative modes (hence partly why our railway system continues to decline). If government believes that a good railway system is needed, it should start by tilting the incentives away from roads by ensuring that major investors are paying their way for its use.

Empirically, CSR has been shown by Nyborg & Zhang (2011) there is a trade-off between CSR and wages. CSR may actually simply be a "fool's game" where locals are conned into believing that they are gaining a school when in actual fact they are getting poor wages in return. The obvious way to prevent this of course is through some form of sectoral minimum wages or better still state mandated "reinvestment projects" tied to a stronger planning and local taxation policy as suggested above.

One of the tragedies of the recent discussion over mineral royalties has been a complete absence of real economics. When we look at the aggregate level of mining investment (there are some exceptions) we miss a cardinal point that very little of that amount is spent on transport infrastructure beyond the immediate requirements of a particular mining venture. Most of this investment will rely on existing transport infrastructure to make their business work. The toll roads system is partly designed to address this issue, but it is set too low to tilt the incentives. In any case it is inadequate because it not set to reflect long run marginal costs.

Perhaps the most important reason for going down the stronger development control route is that it would actually make for a better investment climate. The real challenge facing foreign investment in Zambia is how to ensure that such investment is deemed to deliver a win-win situation for everybody. This is not really about tax revenues, it is about changing the narrative in a way that the public agrees that such investments are not exploitive. Here, it may be better to see beyond government demands and look directly to what people actually want from foreign direct investment. The government does not always represent the people.

Governments wants revenue, the people simply want good houses and better schools. If new investors are mandated to contribute to infrastructure provision (where they are proven to contribute significantly to demand), it would strengthen the bond with the people. At the very least, local people would appreciate that the firms are contributing in a direct way and are not simply exploiting the existing system. Public acceptability of foreign investment is critical in signalling Zambia as an attractive and secure place to investment.

AUTHOR
Chola Mukanga
Copyright © Zambian Economist 2015

3 comments:

  1. What I don't understand is - why does Zambia need 'foreign investment' at all? The copper is already Zambian. They don't need foreign capital to buy it for them.

    Why can't the government go to China, get a development loan, and just sell it's own copper? Why does it have to be sold by GlencoreXstrata, Anglo-American De Beers, Rio Tinto?

    Do they 'make the government an offer they can't refuse', as the mob used to say? Silver or lead?

    Saudi Arabia owns it's own oil compay, Saudi Aramco. Why shouldn't the Zambian state own ZCCM again, and do it's own development? No conditionalities, no borrowing, no World Bank/De Beers 'Eurobonds', no World Bank/De Beers privatisation. No offshoring. No more uncheckable corruption.

    Why doesn't Zambia have it's own mining industry again?

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  2. Oh dear, oh dear MrK. Nothing like a lurch left, in this case back to the dark-ages (aka the nineteen eighties).

    Fred

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  3. Oh dear, oh dear. Dr Mukanga, I agree with probably about 30% of what you have written here; its an important 30% and well written none the less. It’s an important 30% but the remaining 70% is so far off the mark; possibly dangerously so. Its sweeping assumptions are its undoing of course. “Where is the evidence?” comes the roar from the readership.

    Are you aware how much FQM spent on the rehabilitation of the current Solwezi airport over the past three years? I say this as on my travels recently I photographed a big bill board at the airport telling you. There is no point installing lights there unless GRZ make it a point of entry (Customs and Immigration).

    Same bunch: I read recently that FQM have paid $3bn in tax over the past decade (I have checked this with the EITI data and it looks about right) – shouldn’t some of that cash go towards runway lights? Same with respect to roads. I heard FQM has been maintaining the Chingola – Solwezi road for ages but were asked not to any more as it was giving the contractors an excuse not to.

    ” The same goes for local schools and hospitals. When they occasionally provide a new school or fund the local football team, they may appear to be socially responsible but their true motivations is always those of the company.”

    Maybe living in London you’ve not seen the myriad of schools and clinics that have actually been built in the North Western Province and Copperbelt? I have seen them whilst visiting these areas as part of the research undertaken my upcoming post-doctoral paper. You almost cuff these initiatives off as trifles. They’ren’t. They are significant social contributions that are filling the gap that should as you rightly point out be filled by government.

    “Properly understood, most CSR projects are essentially "bribes" to keep local people quiet.”
    Sorry. This comment is just so wrong and demonstrably so. If you spent time in the rural areas around the mines you would see first-hand that local people don’t keep quiet and they play an integral role in the prioritisation of these projects – Solwezi is a strong example. Bribery is certainly an issue in Zambia but I think most know that it doesn’t involve local people!

    "Surely, it is time for ordinary Zambians to realise that the current situation simply allows government to evade responsibility for doing what it should be doing in the first place. What Zambia truly needs is to have a robust and transparent taxation regime that is fully consulted on with all members." Absolutely Dr Mukanga…excellent point.

    "Empirically, CSR has been shown by Nyborg & Zhang (2011) there is a trade-off between CSR and wages. CSR may actually simply be a "fool's game" where locals are conned into believing that they are gaining a school when in actual fact they are getting poor wages in return." Not in Zambia. This just does not carry water. Sorry. Go and visit the large mining companies, compare their wages to those across all sectors in Zambia and do a fact finding tour of their CSR projects. It will very quickly be clear to you that this is no “fool’s game” and the only people being conned are the Zambians being deprived of proper health and education by their own government which you correctly point out earlier in your article.

    Fred

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