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PF and the mines

Copperbelt Patriotic Front chairman Nathan Chanda says, “We find threats by Konkola Copper Mines to downsize its operations as a result of the new tax regime as total blackmail to the government. But these reasons being advanced by KCM are not genuine. KCM should be truthful and stop issuing threats of job cuts. We, the ruling Patriotic Front party on the Copperbelt, will not accept such empty threats. If KCM has failed to run the mine, it is better they pack and go. In the past few months, we had stated that if KCM is not interested in running the mine, let them go. We find the tendency by the mining companies to use threats and blackmail to the government as myopic thinking. The best KCM can do is to hand over the mine to government if they are making losses. No normal investor can hold onto a company, which is making losses. When the mines, in particular KCM, are making profits, they remain mute. Now that there is need to pay taxes, which will benefit the government and the Zambian people, they want to issue threats. Such unethical behaviour will not be allowed on the Copperbelt. It is a timely warning to KCM and other mines not to arm-twist and blackmail the government. We, the PF on the Copperbelt, will not leave the issue of KCM to the President alone to handle. We will stand by him and his government’s policy decisions.”

Taxing mining is a complex issue and it is easy to get lost in the detail. But the consequences are fundamental for development and human welfare. In Zambia, as elsewhere in Africa, while energy companies might be somewhat undertaxed, mining companies typically are greatly under-taxed. Indeed, it is only a slight exaggeration to say that with a few significant exceptions, notably Botswana’s diamond mines, mining in Africa is barely taxed at all. One reliable source indicates that contemporary African governments collect about 55 per cent of the total value of energy production in tax revenue, but only 3 per cent of the value of mining production.

The government of Zambia has changed its mining tax regime nine times in the last 12 years. This was sometimes motivated by high world copper prices and at other times by concerns that the mining companies will reduce production if taxes are not reduced. In the last resort, government can often credibly threaten that mines would be taken over by the state or given to a different investor, leaving the original investor with huge losses and debts.

Mining taxation is increasingly becoming a heated issue in Zambia and lies at the heart of resurgent resource nationalism. Without an effective mining tax regime, mining cannot promote sustainable development since the sector is an enclave economy with large costs.
Our capacity to effectively tax large mineral extraction and utilise the revenues is a key element in building a legitimate state.

The efficient and effective taxation of mining would be a valuable public good. The truth is our mining sector is taxed badly, and is likely very much under-taxed. While turnover in the mining sector has been increasing by a reasonable factor, tax revenues earned by our government increased only by a relatively very small factor.

We would be collecting more taxes if we were levying the same implicit rate of tax on mining as the Australian government. Even if the world market prices of mined commodities were to increase substantially, improvements in the taxation of mining are likely to be slow and difficult.

There are a set of structural characteristics of mining that result in mining projects and mining taxation typically becoming highly politicised and enmeshed in controversy, confrontation, uncertainty, large-scale rent-taking and a range of illicit practices.

Very large ‘rents’ (super-profits) can be earned from control of mineral resources. This creates incentives for politicians, criminals and predatory business people to find ways to obtain a share of these rents and for all the parties involved to give, seek and take bribes of various kinds.

Mining projects typically involve high up-front investment costs and long exploration and development phases lasting up to a decade before any revenue is earned. This leaves investors vulnerable to policy change or
political extortion once they have made substantial investments.

World market prices for minerals are unstable, and tend to fluctuate in long ‘super-cycles’ that are of very different and unpredictable lengths. This generates major uncertainties about the likely long-term profitability of individual mining projects. In terms of both volume and product quality, the likely output of individual mines is often hard to predict in the early stages of exploration or extraction. That again increases uncertainty about long-term profitability.

Most mining projects are developed and operated by large transnational mining companies, almost entirely for export markets.

The companies may have considerable scope to reduce their tax bills through the use of transfer mispricing and other tax avoidance practices.

Listening to the utterances of our politicians in the ruling Patriotic Front, it’s very clear their understanding of the mining sector is low and this is inhibiting their ability to come up with more efficient and effective taxes. When negotiating mining contracts (for exploration, extraction, and final decommissioning), large transnational companies typically have much more relevant geological, engineering, economic and financial information and expertise than our government.

Listening to what is being said by our Patriotic Front politicians, it’s clear that we lack stable, robust and transparent political institutions for reconciling competing interests and reaching authoritative public policy decisions.

How should mining be taxed?

Mining is different from most economic activities in that it can generate a substantial rent – an
income that exceeds the cost of extraction (plus a reasonable profit) – because of the potential
inherent value of the pre-existing subsoil asset.

There is a consensus that in principle the rent belongs to the country in which extraction takes place, as a compensation for the loss of a non-renewable resource. In principle, a high proportion of this rent could and perhaps should be taxed away by the host government, as the representative of the country and its people. In principle, that would not discourage private investment in exploration and mining production, provided only that investors are rewarded for the high levels of economic and political risk associated with mining.

By contrast, various estimates suggest that the revenues that our government is getting from mining are far below the rents derived from it.

Taxing mining is not intrinsically different to taxing other economic enterprises. It is, however, especially challenging for our government because various economic, political, physical and organisational features of the industry interact to produce adverse consequences, notably high levels of information asymmetry, rent-seeking, conflict and policy instability; and incentives for power holders and mining companies to deal with one another in ways that undermine revenue collection for the public treasury.

There is a broad consensus today that it is better to legislate than to contract in extractives when it comes to main terms. Overall, fiscal, labour, environmental and social terms should be set in legislation and be subject to regular legislative and electoral scrutiny and control. It is possible to define and establish fairly efficient and robust mining fiscal regimes that can deal effectively with wide variations in product prices and in the costs of production among different mines.

It is high time for our government to become more active in geological survey work, and to use competition and auctions in the allocation of exploration and production rights. This can increase the flow of information, give the government more leverage, and allow them to strike deals that are more advantageous to the public treasure.

While there is scope to tax mining more effectively through policy reforms, it is also important to improve the operational capacity of our ministries of finance, ministries of mines, the Zambia Revenue Authority and supportive regulatory agencies; and persuade government leaders to uphold and respect the mandates and expertise of these institutions, and not to assert personal control.

Transparency and accountability loom large here.

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