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.
Copyright © Zambian Economist 2015