Saturday, January 12, 2008

Distributing mining wealth through taxes

Distributing mining wealth through taxes
By Editor
Saturday January 12, 2008 [03:00]

It is pleasing that the intense debate that has been taking place in Zambia has resulted in a change of policy towards the mining industry in terms of taxes. The question has been: who is benefiting from mining? This question was increasingly being raised in Zambia, a country where the exploitation of mineral resources constitutes a significant element in the national economy.

The nature of the challenge is clear. It is to create a situation in which the Zambian people have a direct share in the wealth produced by exploitation of their mineral riches in a way that translates into improvements in their quality of life and level of wellbeing. This is an appropriate reciprocity for the reduction in natural capital resulting from exploitation of non-renewable resources, an exploitation that can generate significant negative impacts.

And with President Levy Mwanawasa’s announcement of an increase in taxes to be paid by the mining industry, there are two reasons to celebrate. First, that it is the beginning of the end of a regulatory and tax framework for mining that clearly benefits large-scale mining to the detriment of the country. And second, that citizens are now able to impose their views on those who govern and an industry increasingly distant from the concept of great politics in which the public task evolves strategic vision.

As Levy correctly observed, Zambia’s development has been intrinsically connected with mining. The institutional and regulatory model that arose after privatisation of the mines resulted in the arrival of significant foreign capital and an expansion of production. However, this has happened at the cost of ceding to multinational corporations practically all the income from this resource that belongs to the country and its people. Now is the moment to revise these policies. Zambia needs the income from its copper for development and to protect its citizens. The country cannot wait any longer.

Mining uses a non-renewable resource which means that there is an “economic rent” that belongs to all Zambians and which at present is appropriated by the industry. It is this fact that justifies an increase in the royalty and other taxes. In economics there are many theoretical debates but also in some cases a strong consensus, one of which is to charge the “economic rent” corresponding to resources.

In the beginning the government was uncomfortable with altering anything in their agreements with the mining companies. Of course, this is for understandable reasons. The government tried all means to close the subject, claiming that an increase in royalties and other taxes would be a break on investment. But the evident injustice of the mining sector’s level of contribution, and above all common sense, inspired many citizens to agitate for an increase in royalties and other taxes.

Others, just by expressing their opinion, contributed to breaking the wall that had been built to block any discussion of this subject. Finally, in the face of civic opinion and parliamentary pressure, Levy’s government has decided to put forward legislation providing for an increment in the level of royalties and other taxes on mining. By this decision, the existence of company obligation and the legitimate right of Zambia to demand reasonable payment has been acknowledged.

This demonstrates that the state, by constitutional provision, has a dual role as tax collector and owner of resources. As owner of the resource, the Zambian government must charge a reasonable price or fee when authorising a third party to make use of it. In short, natural resources are part of the capital of society and the state has a responsibility to collect a competitive return on that natural capital.

Of course, a great variety of positions had arisen for and against increasing royalties and other taxes on mining. However, what emerges as indisputable is the principle that it is just and necessary for the state, as owner of the minerals, to impose a reasonable charge or compensatory fee for the exploitation of these non-renewable and scarce resources. And it is good that Levy and his government have realised the urgent need to address this deficiency that is generating distortions and inequalities.

This charge is supported not only by our own laws but also by various resolutions and reports of organisations such as the United Nations and the World Bank, according to which the Zambian government, under the principle of sovereignty, can charge what it considers to be reasonable or appropriate for the use of a non-renewable and finite natural resource. Also, as the state is the owner of the resources in the ground, the concessionaire uses them in lieu of the state. So the state, as owner, has the right to a reasonable payment of royalty and other taxes which must be paid by the concessionaire.

Taking into account the current technological advances in the mining industry, it is probable that in less than two decades, mineral ore reserves currently being exploited will be almost exhausted and what remains will have a lower mineral content, which in view of high production costs will make extraction uncompetitive or unprofitable.

When a mine closes, in addition to the environmental impacts, another direct consequence for the population of the area is a substantial loss of income and indirect services due principally to the fact that mining does not generate other enduring local activities or initiatives. We therefore hope that the money that will be collected from increased royalties and other taxes will be allocated to the financing or co-financing of investment in production projects that articulate mining with the economic development of each area in order to ensure the sustainable development of urban and rural areas.

We hope the measures the government has decided to take will help the mining sector’s tax contribution to meaningfully increase and consequently raise the sector’s contribution to the development of the country to higher levels.

Again, these responses by the government demonstrate the need for our people to take a keen interest in all the affairs of their country and put demands on government to do what they think it should do. This also demonstrates the need for a responsive government, a government that favourably addresses the concerns of its people. It is only in this way that meaningful development can come to our country and its people. If not, we may end up with a kind of development that has all sorts of very favourable economic statistics but without, in any meaningful way, lifting the people out of poverty and despair.

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1 Comments:

At 4:23 PM , Blogger MrK said...

This is of course fantastic news. :)

It shows a few things:

- That governance is not something that can be relegated to elections once every 5 years. It shows that the people can and must influence their government on an ongoing, in fact never ending, basis. That no matter how highhanded or arrogant, the government continues to be the government of the people, no matter how long they have been in power, and no matter how long they still have to remain in power. The influencing of government policy is a continuous undertaking.

- the Zambian government, under the principle of sovereignty, can charge what it considers to be reasonable or appropriate for the use of a non-renewable and finite natural resource.

It is puzzling and absurd that the state itself would ever claim otherwise. It are only international treaties, such as made with recognized international bodies like the UN, WTO, and other states, that supersede national/federal laws. Business contracts can never supercede either the constitution, or state law, or even local laws. For the state to have claimed that these agreements were binding over and above labour and environmental laws was I think absurd. It raises the suspicion of collusion and corruption. If there is any lesson for the state to learn - tell the truth from the beginning. It saves so much embarassment to the government, and prevents so much aggravation of the citizenry.

- Also, as the state is the owner of the resources in the ground, the concessionaire uses them in lieu of the state.

In other words, the state never gave up it's rights to the minerals at all. This would sound a very optimistic note for all the mining concessions that have been given away, but which have not been exploited. The state can simply demand that exploitation starts within a defined period, and take back concessions of companies that fail to use them. It also means that the state can revoke the license of any company that refuses to pay a certain amount of it's profits or turnover to the state, and I think that a lot of future revenue can be made that way. Leonard Hikaumba of the ZCTU is right when he points out that it isn't just copper that should be our concern, but gemstones, other industrial metals and of course nowadays, uranium and even oil as well.

These resources must be exploited for the benefit of either the local or national economy, which means that significant amounts of profit and tax must go to local go national government.

- Again, these responses by the government demonstrate the need for our people to take a keen interest in all the affairs of their country and put demands on government to do what they think it should do.

And the government should embrace the input of the ordinary citizen with open arms, instead of seeing it as a challenge to it's authority. It is in fact the best way for the government to ensure that it remains popular enough to be re-elected next time. The government should be in an open and continuous debate with it's own citizenry. I think organisations and forums can be created, that both facilitate a flow of information from the government to the people, and from the people to the government. And I think that media like newspapers and radio (and internet) have a very active role to play in that.

- If not, we may end up with a kind of development that has all sorts of very favourable economic statistics but without, in any meaningful way, lifting the people out of poverty and despair.

Economics 101 - the economy consists of Land, Capital and Labour. No government can neglect any of these three elements and hope to have economic growth.

The biggest economic revolution Zambia is going to see, is when the millions of officially unemployed start receiving living wages from the jobs that they do. That in essence means, that they do work where they a) produce more than they consume and b) keep most of what they make.

The only way that is going to happen, is when farmers own enough land to move them out of subsistence farming and into commercial farming and most of the company profits go to pay salaries.

This is not throwing away money. This is creating demand in the economy by increasing income. It is non-inflationary, because it increases production at the same rate, or does not impede production.

It is demand side economics, the exact opposite of supply side economics ('trickle down', where giving huge incentives to the rich is supposed to make them invest more and 'create jobs'; with the provision that it is tailor made to local economic characteristics, but that is the essence of it.

We must improve the people's individual incomes, in order to create a market for locally made or produced consumer goods. And to prevent inflation, we must stimulate productivity to the same degree.

This means that local farmers have more than enough land and capital goods to produce surpluses, beyond what they need to survive. This is how Africa's wealth is going to be tapped. Raw materials and agricultural produce, leading to increased incomes - which in turn can stimulate the real demand for locally manufactured goods.

So my theory would be:

a) stimulate production and
b) make sure more of the profits go to salaries

 

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