By Kalima Nkonde
The recent massive retrenchments by the different Mining houses should raise red flags to all well meaning Zambians. It should be a tipping point to unite us and debate about the role, contribution, commitment to Zambia’s social, political, economic and development agenda by the various Mining houses that we have invited as partners in development! The debate should not be politicized as it revolves around national interest and sovereignty.
There is no question that Zambia has not benefitted from the Mining operations as much as other countries like Botswana and Namibia have done. The Batswana have benefited from mining and carried out development projects from mining revenue without going into unsustainable debts like we have recently done. As Sir (Dr) Ketumile Masire, the second former President of Botswana noted in his memoirs, “The African Democrat”.
“We learnt from the experience of other countries that possessing minerals did not automatically lead to economic development. We needed to secure the benefits of our underground diamond wealth for our people. Our financial negotiations on mining projects emphasized getting the best possible terms for Botswana in exchange for granting mining leases,” He said.
He was basically diplomatically referring to Zambia, when one reads between the lines.
Mining Contribution to Zambia
It has been a concern by many of us that Mining houses appear like they want to have things their way all the time! They seem to be more powerful than the State; they call the shots and literally hold the nation at ransom! Our country’s over dependence on copper, the lop sided development agreements that were signed with Mining houses, the wanton corruption by government officials, have left us vulnerable as a nation. We are at the mercy of these Multinational Corporations. The Minister of Finance, Mr. Alexander Chikwanda did allude to the fact that Zambia has not benefited from its mineral wealth during his statement to parliament on 25 February, 2015.
”Sir, despite Zambia being endowed with vast mineral resources, the country has not realized maximum benefits from the sector’s potential to support growth and enhanced socio economic development. This is against the backdrop that the sector has been experiencing high copper prices in the recent past. It is worth noting that the various changes in tax policies in the last 10 years with a view to optimize benefits from the mines have not yielded the desired results. The House may wish to note further that the contribution of the mining sector revenue as a percentage of GDP remains low at 4 percent. Similarly, the contribution of the mining sector to the national budget has remained minimal even after the Government doubled the mineral royalty rate from 3 to 6 percent”, he said.
In Namibia, mining revenue contribution to government revenue is about 25%, whereas Botswana mining contribution to government revenue is 45% and Zambia’s mining contribution to Government revenue is a paltry 12%!
As a nation, we should engage in a robust debate so that we engage the Mining Houses to embrace policies that will result in a win – win situation. At the moment, the Mines are not contributing to the country as there are supposed to in areas of foreign exchange, employment, taxation (Government revenue) and infrastructure development. I will touch on each of these areas to kick start the debate.
The foreign exchange issue will come as a shocker to most Zambians. In theory, Zambia earns 70% of foreign exchange from copper exports! In reality, a substantial part of the money does not hit Zambian bank accounts as foreign exchange! The money does not come back! Substantial forex remains in Europe, American, and Asia or basically in foreign countries! We only get may be less than 42% of foreign exchange from mines which comes to pay wages, little tax, rent, sub contractors, and other local costs! That is one of the reasons the kwacha is weak! We do not have sufficient forex on the market as mines do not bring back to Zambia all the export proceeds they earn from exporting copper! This is confirmed by an International Monetary Fund (IMF) country report.
“Care is needed with the interpretation of the export shock in the case of Zambia. Given that not all the copper export proceeds return to the country because most mines are foreign owned. Staff estimates that at least 40% of exports do not return to the country.” The IMF report noted.
It is very difficult to understand how Mining Houses are allowed to retain over 40% of revenue as ‘dividend’ on monthly basis! The normal situation is that subsidiaries of multinationals are supposed to bring the export proceeds to the host country “Gross”. They would pay for revenue and capital expenditure and dividends would be declared if they made profit! This is what happens in Zimbabwe, South Africa, Namibia or Botswana etc.
Can Zambians wonder why our kwacha has tanked? The mines have a bigger influence on our currency as they decide how much to bring back and how much to buy on the market!
The measures that the PF government attempted to partially address the forex issue and illicit foreign exchange transfers through SI55 and adjusting the VAT rule 18 – which I personally support in principle-given my experience in South Africa were well meant. But the problem was the process that was followed in the formulation of the policy. There was no proper consultative process with stakeholders so as to fine tune it and get them to buy into it. There were also no proper public relations done in selling the policy for public support.
The mines employed an estimated 62,326 workers, before retrenchments. But half of them were sub-contractors who can qualify to be called temporary employees. The Mines’s total contribution to formal sector employment if sub contractors are included is 7%. The permanent and pensionable employees of the mines were roughly 31,163 and these are the jobs that qualify to be called quality jobs and this is just makes up 4% of the formal sector employment of 847,000 as per last Central Statistical Office (CSO) Zambia labour force survey 2012 report. In the light of the recent experience where mining houses have retrenched so many miners at the drop of the hat, as well as the fact that the mines contributes about 4% only to formal employment, the mines’ contribution to employment creation is rather exaggerated . It is also a fact now that mining jobs are not secure jobs!
There is also speculation that retrenchments in the mines could have had political overtones as the Mining houses and the PF government have not been the best of friends because of the long standing VAT dispute, the royalty tax issue and Statutory Instrument number 55 (SI55). The Mines are said to feel that they owed the government nothing to keep Zambians in employment. This is confirmed by Association of Mine Suppliers and Contractors’ President Augustine Mubanga.
“For us, to describe 2015, it has been a very bad year because we started on a very acrimonious note where the mines objected to the increment in royalty taxes. So, from January,2015 up to June, the mines were hitting back by not giving business to local suppliers and contractors as way hitting back at government,”
He was quoted as saying in the Post Newspaper of January 8,2016.
Taxation (Government Revenue)
There is no doubt that the Zambian Government has not been receiving sufficient revenue from the mining houses because whatever policy they have attempted to implemented has been resisted and overturned! It gives the impression that mining houses are more powerful than a Sovereign state! The cases in point are the Windfall tax which President Mwanawasa negotiated and accepted by mining houses but President Rupiah Banda inexplicably reversed! There is the Rule 18 for VAT which makes sense to technical people like me but was reversed. Then came the Royalty tax which although the principle was correct, the increase was rather astronomical and unreasonable but it was reversed to another extreme of reverting to the original instead a negotiated middle of road rate.
Most of the attempts to revise tax legislation where prompted by the fact that mining houses were said to be involved in sophisticated tax avoidance scheme like Minister of finance noted in his statement to parliament on February,26,2015.
“Before the introduction of the 2015 tax regime, the tax system was vulnerable to all forms of tax planning schemes such as transfer pricing, hedging and trading through “shell’ companies which are not directly linked to the core business. Further, provisions on capital allowances and carry forward losses eliminated the potential taxable profits. Mr. Speaker, the tax structure was simply illusory as only two mining companies were paying Company Income Tax under the previous regime as most of them claimed that they were not in tax paying positions.”, he said.
The Minister of Finance’s statement is essentially saying that the Mines have been getting away with murder in avoiding tax and all these roads you see which have been built using borrowed money would have been built from revenue from the mining companies if the MMD and PF had been smart! In addition, the miners numbering between 10,000 to 15,000 who were retrenched in 2015, do not deserve to be have lost jobs as Mining Houses had made so much money when copper prices were high.
And keeping our people for another two years or so while waiting for prices to recover, would have not broken the Mines’ banks. Unfortunately, our people have been complicity to the whole scheme. Most top Government have been compromised to agree to some policy reversals, signing the lop the sided development agreements and giving generous concessions to Mining houses.
Zambia’s current infrastructure projects are financed by debt and not mining revenue like other countries. Most Mining Houses have no interest in developing infrastructure even in the areas they operate! Chingola, the once cleanest town in the 60s, 70s and 80s is full of potholes and dirty! Most of these Mining houses do not support hospitals, schools, social amenities etc.
The normal understanding is that mining towns are supposed to be well supported by the biggest employer and beneficiary. It has always been like that! Go Jwaneng or Orapa in Botswana and you will see what De Beers has done to transform the once back ward villages! One really asks the question, are we not better off to keep our copper underground unexploited rather have it exploited without living any positive developmental legacy?
Should we not rather concentrate on agriculture, energy and tourism where we have massive comparative and only engage with mining investors who can agree with our terms?
Lessons from Botswana
We should learn from other countries like Botswana. According to their Oxford University educated and former President, Festus Mogae, it is because of Botswana’s good governance and appropriate laws that diamonds have been a vital source of revenue for building infrastructure and essential services such as roads, hospitals and schools.
“ For our people, every diamond purchase represents food on the table, better living conditions, better healthcare, safe drinking water, more roads to connect remote communities and much more,”
He once said in 2006. The same cannot be said about copper’s contribution to the Zambian economy.
The government of Botswana has had such good bargaining power with regard to the country benefiting from their mineral wealth in negotiations with the powerful De Beers to such an extent that they clinched a deal where De Beers Diamond Trading company moved from London to Gaborone in 2013 which means the buying and selling diamonds is now done in Gaborone!
“We believe it will be great catalyst for Botswana and Southern Africa- much bigger than anything that has happened before in Africa. It will lead to a massive inflow of expertise, technology, people and business sense. Some of the world’s experts from China, India, Europe and Israel will be coming here,”
Varda Shina, CEO of the Diamond trading company in Botswana was reported as saying.
In conclusion, it will be folly for Zambia to take on the mines at the moment as they literally control our economy and most of our people are highly compromised. Let us be smart and aggressively invest in agriculture, tourism, manufacturing and energy. In five years’ time, we would have reduced our dependence on the mines and then we can renegotiate the lop sided development agreements, on a take it or leave it basis as we would have gained some bargaining power!
The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator. He has lived in the diaspora in England, South Africa and Botswana for over 25 years.