Economist Herryman Moono says Zambia should forget about nationalizing its mining industry but instead focus on fiscal policy.
Mr Moono who is an Oxford trained Economist and former National Secretary of the Economics Association of Zambia warned that until Zambia gets the fiscal policy around its minerals right, the huge revenues from the mines will never benefit the Zambian people.
“What we ought to understand is that Zambia has been mining Copper for almost a hundred years now, and it will be mining Copper for the next 100 years or so. With that in mind, we should clearly have the incentive to get the taxes right now to benefit our future 100 years in time,” Mr Moono said.
Mr Moono was reacting to a suggestion by EAZ President Lubinda Haabazoka that Zambia should seriously consider nationalizing its mining assets in order to increase the benefits from its minerals.
Below is Mr. Moono’s statement
I have seen sentiments attributed to my senior and President at the Economics Association of Zambia where he argues for a form of nationalization where government takes over the running of mines premised on the Chilean model of Codelco, the Chilean state owned copper mining company that was formed in 1976 from foreign-owned copper companies that were nationalised in 1971.
I would like to vehemently disagree with him on his argument for both historical and practical reasons. As this is a social media post, however, I shall not bore you with much technical and historical details.
Nonetheless, I will share with you the premises of my arguments.
To start with, let us understand that government can participate in the mining sector in a variety of ways:
1. Manage the resource on behalf of the population—State Owned Mines (The Kaunda way – Nationalisation)
2. Impose and administer the general tax regime—No participation at all (USA, Canada)
3. Take equity positions in some, or all, mining operations—Semi-participation (e.g., Debswana in Botswana, ZCCM – IH, Zambia)
4. Use state enterprises as operating companies—ZCCM, ZIMCO (similar to (1) above)
The nature of the participation will have a revenue implication for government. In the case of Zambia, it is a mixture of (2) and (4) where the government taxes the mines but still hold a minority share through ZCCM-Investment Holdings, which, until recently fell under the Investments and Debt Management Department of the Ministry of Finance headed by the Minister of Finance, but would now fall under IDC (Please correct me if I am wrong).
Prior to privatisation, the mines where government properties and the tax regime that applied should be differentiated from one that ought to apply if the mine is foreign owned. Post privatisation, however, the Mineral Fiscal regime has not been buoyant enough to capture the new changes in ownership and the subsequent revenues generated under foreign ownership (Tax buoyancy is an indicator to measure efficiency and responsiveness of revenue mobilization to changes in output in the economy).
Now that the mines are owned by foreign companies which are mostly registered abroad in tax havens, the only way the government and the nation can benefit from the mines is to carefully craft a mineral tax policy that will maintain and attract investment in the mining sector while generating sufficient revenue for the country. Investment in mining can be by locals or by foreign nationals.
However, given the high investments and running costs of mining, very few, if any, local firms engage in mining. Access to financing and the lack of a local industrial class has contributed to the lack of local participation in the mining sector.
Consequently, foreign firms – Chinese, Indians, Americans, Canadians, and Australians – who have easy access to financing in their countries have been the key players in the Zambian mining sector.
Zambian mining players have focused on providing support services along the supply chain – a weaker participation in local content – as well as thuggery mining, aka “Jerabos” and recently, the access to the black mountain premised on politically expedient ‘local empowerment’ which has killed many, and empowered a few.
With that, the high GDP contribution from the mining sector should be understood clearly—revenues captured from Copper Mining DO NOT ACCRUE TO Zambia! Not at all.
Only on paper when we calculate GDP figures and growth. What accrues to Zambia are the taxes and royalties and the PAYE that mining employees remit to ZRA. When we say that Zambia’s Copper exports accounts for 70% of all exports, we must bear in mind that the exporters are not Zambians, and the receipts of these exports do no accrue to Zambia.
Recently, the Chinese ambassador to Zambian said that the trade balance between Zambia and China showed that Zambia exports more to China than Zambia imports from China. On Face value this looks good. However, what he didn’t say was that when you dissect the composition of Zambia’s exports to China, they are mostly by Chinese firms or other foreign firms, and therefore, the proceeds of these exports do NOT accrue to Zambia. It would have made economic sense to Zambia if Zambian firms were the exports.
To illustrate this closer to home:
Imagine you own a farm, and you sublet part of it to a Zimbabwean farmer – since Zimbabweans are more hardworking and dedicated workers! When he has a bumper harvest and exports his maize to South Africa and banks the revenues in Zimbabwe, would you say your farm is doing well? Would you tell your children that we are now doing well because our land is producing more maize? Only if you are stupid, of course! The only way you can gain from the harvest is if the farmer pays well his dues. And that is what we need to do with our Copper.
What we have to do, and this has been proposed many times since privatisation, is that we devise a clear and transparent Mineral tax system and enhance the capacity in ZRA to effectively monitor Mineral output on which tax will be imposed.
In fact, since tax is just a proportion of revenues (Revenue = Price x Output), and since Price is set at the London Metal Exchange (Zambia is a small price taker) and is known to everyone, our government’s role is simplified:
Just monitor output and effect the tax rates!
The reality, however, is that the mines can afford the best tax lawyers and highly trained and highly paid accountants and economists, and these, when matched with ours at the negotiating table, we end up with the Anil Agarwal deal of KCM where we were mocked as a country as having no capacity to negotiate. And when it comes to negotiations, I must admit, Zambia has been on the losing end.
Just look at the profiles of the people who sat with the Chinese President when the Zambian delegation met the Chinese delegation (forget the fact that we had no writing pads), you will be amazed at how serious Chinese negotiating teams are – they get the best who can get the best value for their country out of the other camp’s country.
What is needed is to deliberately train, even at high cost, Zambians to be experts in mineral policy formulation and taxation at the ZRA and Ministry of Finance, and not entirely rely on the WB or the IMF (which is not the sole depository of knowledge as the Former Minister of Finance stated).
We also need not fear to take time and discuss what exactly we want to achieve from our resources, and engage with the mines, taking a leaf from the exceptionality of Botswana in renegotiating with DeBeers to form Debswana. We do not have many mines that we can fail to monitor their activities, we have rather been too reluctant to initiate the obvious proposals to improve our benefits from the mines, and when in crisis like now, we begin the political expediency talk of ‘Zambians should run the mines in order to benefit.’.
Until we get the fiscal policy around our minerals right, the huge revenues from the mines will never benefit the Zambian people.
What we ought to understand is that Zambia has been mining Copper for almost a hundred years now, and it will be mining Copper for the next 100 years or so. With that in mind, we should clearly have the incentive to get the taxes right now to benefit our future 100 years in time.
As long as successive governments shun reforms, which must be consistent and adhered to, not even nationalization will benefit us. I know that many of our colleagues think of the ‘good old days of ZCCM’ when they would have their laundry done by a branch of ZCCM and had all things going well for them even when the country was running down.
We cannot have a company that can rival Codelco today. What we need, however, is that the politics takes a strong fiscal stance that former Chilean Minister of Finance, Prof. Andres Valesco took prior to the 2008 Global Financial Crisis: Reduce your expenditures even if you have surpluses – save for the rainy day, no matter how politically unpopular this might be.
In conclusion, the PF have an enormous challenge and opportunity to redeem the country from the curse of abundance. The following would be worth considering:
•Enhance capacity in the ZRA and Ministry of Finance and the Ministry of Mines to adequately monitor, evaluate and appropriately tax mineral exports.
•Adequately mandate ZCCM-IH (through IDC) to be active in the monitoring process with the ZRA.
•Enhance governance systems, organizational and institutional capacity in sectoral ministries, in the ministries of finance and planning and Ministry of Mines.
•Promoting mineral resources revenue stabilization and reducing fiscal imbalances through greater fiscal discipline, certain level of fiscal conservatism and increased capacity for forecasting and managing mineral revenues.
•Fight corruption, real or perceived to enhance the country’s governance image.
On the basis of the above, I submit my dissenting view to Dr. Haabazoka’s argument.