Monday, October 07, 2013

Deferring mineral royalties
By Editor
Fri 13 Sep. 2013, 14:00 CAT

Deferring mineral royalties will certainly leave government in a tight cash situation. It is therefore a decision that has to be taken carefully.

The mining companies are asking for this, arguing that the drop in copper prices has greatly diminished their capacity to pay such royalties. But there are others like former finance minister Ng'andu Magande, who feel that the mines "can't just be crying foul every time the price goes down by a dollar.

And it's only that we started taxing the mining companies on a wrong note. We were too kind to them and so, if we want to change the situation, they will go on and say you are not fair. For me, the current copper prices are reasonable and the mining industry must also be adjusting to accommodate the movement in market prices."

It cannot be denied that this government has bent over backward to listen to the cries of the mining companies. And most of their requests have been responded to favourably. For instance, the mining companies were very opposed to windfall taxes and the government gave in to their wish. And today, when there are windfall profits, the mining companies take everything. But they are not ready to take all the losses when prices are not favourable and they want to pass the burden to the government.

No one wants to see any mine closed as a result of cash problems because the government is over-milking them. If there are legitimate problems the mines are facing, the government has a duty to listen to them and seek some accommodation. But the government should not be the only burden-bearer. There is need for both the government and the mining companies to share the rewards and the risks equitably. This was the essence of the windfall taxes they rejected. They didn't want the government to share in the windfall profits but they want it to take a share of their 'windfall losses'. This is not fair. And if all taxpayers were treated in this way, the government would be collecting very little money from taxes. This is so because every sector or industry has its own problems. Prices of products and inputs change continually across many industries but this does not result in changes in the way they are taxed.

What's good for the mining companies is good for other sectors as well. Important as the mining sector may be to our economy, it only accounts for 11 per cent of our gross domestic product and contributes just eight per cent of our total revenue.

Concessions being extended to the mining industry need to be examined carefully if the government is to increase its revenues and meet its development targets. The negotiating capacities don't seem to be equal.The mining companies seem to be represented by the best experts available in this country and others from outside. Most of the people the government is supposed to rely on are advisors of mining companies.
There is need for government to strengthen its negotiating capacity when it comes to dealing with mining companies. This is the only way we will maximise revenue from our mining sector.

In saying all this, we are not in any way suggesting that the government should not entertain the cries of mining companies. We are simply saying that the government should be in a position to discern what is legitimate and what is not from the complaints of the mining companies. We need to favourably address legitimate complaints of these companies because if we don't, they will close. The government needs to dialogue with the mining companies in a more efficient, effective and orderly manner.

If we play around with income from the mines, soon the government will have difficulties servicing its loans, and we will run back into serious debt problems. Government is borrowing money, and rightly so, for infrastructure development on the basis of the expected revenues from the mines. If money from the mines is not flowing in the quantities expected, there will be problems. It is therefore important for the government to be very clear on what mining taxes can be negotiated away and on what can't.

If the government is not getting enough revenues from the mining sector, desperation will soon set it and the government will have no choice but to start borrowing heavily from the local market. This, of course, has serious disadvantages to the growth of the economy because it inhibits the private sector from accessing finance. The government crowds out the private sector in the local market. And when this happens, other taxes also will start to drop. Here discipline, and a lot of it, is required. So how we manage the mining taxes is of crucial importance to the economic progress of our country. And government needs to be given time to negotiate with the mining companies and come up with a win-win tax system.

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