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Thursday, January 6, 2022

Zambia is spending $1.3 billion on fuel and electricity subsidies every year

Columns Zambia is spending $1.3 billion on fuel and electricity subsidies every...

By Felix Nkulukusa Secretary to Treasury

In graduate school, when I was doing my MA in development economics, one of the professors, Prof Monteal, taught me about economics being the simplest subject because there is no right or wrong answer as every answer depends on the assumptions one makes.

What is interesting with big brother Mumba’s viewpoint, thou, is that he is advocating for a status quo of maintaining non-deductibility of mineral royalty for purposes of income tax in order not to lose $182 million which, in his view, then solves the problems we have.

Interesting though is that we have had this non-deductability status of mineral royalty for years now, collected the ‘$182’ million every year and we still have the fiscal challenge.

I take it the assumption here is that we can do the same now that it’s UPND in power and the results will be different.

In my view and this is the argument I made way back in 2013 when I was PS in the Ministry of Finance and I appeared on a radio Phoenix programme with a colleague from a CSO who was arguing against the removal of subsidies (am sure one can get the recording from Radio phoenix if one desires to). At that radio programme, I talked about the need for reform in fuel and electricity subsidies, arguing that these subsidies benefit the rich more than the poor.

Zambia’s subsidy on fuel is about US$67 million per month or US$800 million per year and on electricity is over US$40 million per month or US$500 million per year.

This means that the Treasury is using about US$107 million per month or US$1.3 billion per year on fuel and electricity subsidies.

What is even more interesting is that more than 60% of the fuel and/or electricity in Zambia is consumed by the mines with only less than 2% of the two products being consumed by the ordinary and vulnerable people who are genuinely supposed to be subsidised. This means that the mines are being subsidised by US$780 million every year in fuel and electricity while the ordinary and vulnerable Zambians are only getting a subsidy of partly US$26 million per year.

My argument in 2013, which is the same argument I have today, is whether it makes sense to subsidise fuel and electricity in the current structure or we should remove the subsidies on these products and use the resources to better target and support the poor people, be it in supporting or providing bursaries and meal allowances to the vulnerable pupils and students attending school, enhancing education and health services, particularly in rural areas including providing medicines and personal in health facilities to provide Premier health care treatment to the Zambian people, enhancing social protection programmes such as social cash transfers etc.

The broader question in my view is who are real beneficiaries of the current structure of our subsidy programmes? Is it the students in schools, colleges and universities, is it the poor Zambians that deserve government assistance or is it the same multinationals but speaking through the poor to try and maintain the status quo?

Should the government focus on arguing on whether or not to maintain non-deductibility of mineral royalty to retain the US$182 million or we should be fixing the haemorrhaging of over US$1billion per year in subsidies going to the unintended beneficiaries?

Let me also take this opportunity to explain in simple terms what the non-deductibility of mineral royalty means. Let us assume a mining company produces one tonne of copper which it sells at $10,000. Let us also assume its cost of production is $3,000 for operation and $2, 000 for salaries to its workers. Let us further assume that the company pays ZRA $2,000 in mineral royalty tax. The question is what is this company’s profit on which it has to pay its corporate tax at 35%?

Under the current law, which big brother Mumba is propagating, ZRA will only allow the company to deduct operational costs and salaries to be deducted from the company revenues meaning that ZRA will tell the company your profit is 5,000 i.e 10,000 less 3,000 (operating cost) less 2,000 (salaries). ZRA then charges company income tax at 35% on 5,000.

But the actual profit the company has made is 3,000 because it paid 2,000 to ZRA as mineral royalty in addition to its own costs of 5,000. Now, that tax on the 2,000 which the company paid to ZRA but ZRA refuses to recognise receipt of it for purposes of determining profit to be taxed is what is amounting to $182 million. This is the money that mining companies have paid to ZRA, charged on the money that the mining companies already paid to but ZRA as mineral royalty. In simple terms, the government is double taxing the mining companies.

Under the new law that comes into effect on 1st January 2022, the Government is now saying that if a mining company pays mineral royalty to ZRA, ZRA should allow and recognise this payment (deductibility) in arriving at the profit to be taxed.

Is the current law a good law or we should change it as is being proposed by the Government? Well, it depends as Professor Monteal says. For big brother Mumba, it’s a good law because it gives us $182million today. For me, it’s a bad law because it denies us investment that should make us reach 3 million tonnes of copper production and in turn increase our taxes from the mines from the current under $1 billion to between $4 and $6 billion depending on the copper prices.

In short, it depends on whether we need the $182 million now and forego $2 billion tomorrow or we need the $2 billion tomorrow and we can forgo the $182 million now.

35 COMMENTS

  1. Just say the IMF loan has conditionalities …
    1. Remove all electricity and fuel subsidies.
    Stop ukubwatata…

    Increase the tariffs for mining and reduce domestic tariffs and kill 2 tu nyoni with 1 mwala.

    Good luck

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  2. If fuel subsidy is $67m/m, this amounts to $2.4billion in three years! Why did we go for a loan of $39m/m amounting to $1.4billion over three years when we could have simply removed subsidies on fuel and have $2.4 billion over 3 years? Nonsense!!

    UPND is reverting to a tax system that has failed before!!!

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  3. The problem is the $2000.00 which PF made non deductible and now UPND want to make deductible is difficult to ascertain. It’s not a fixed amount. The mines always manipulate it and always declare losses instead of profits. If they declare losses, no tax is paid. And they have been this since time immemorial! It’s a bad system.

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  4. “What is even more interesting is that more than 60% of the fuel and/or electricity in Zambia is consumed by the mines with only less than 2% of the two products being consumed by the ordinary and vulnerable people who are genuinely supposed to be subsidized.”
    This is a simple fix and am sure professor Montreal would agree. Remove the subsidies on the mines and keep them on the poor 2%. How complicated can that be?
    Secondly your assumptions on the deductibles are also wrong. You are assuming that the 182m$ the mines are “paying” which they won’t now pay will be invested back in the mines to up the volumes to your projected 3MT. Wrong: I can tell you from experience with a solid extractive industry experience that more volume for the mines does not necessarily equate to more profits…

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  5. If you think we don’t know that you just trying to justify the looming increase in commodity prices, you are wasting your time. Just go ahead and increase. Just hope you won’t be putting the blame on the previous regime. It’s your decision.

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  6. Just increase! the fuel na malaiti. False promises!!!! Today you start justifying ne fima economic strategies fya fake…..Your lies as UPND are coming to the fore. Ati fuel will be K5/litre ….BUFI bwenu!

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  7. Normally that’s what happens when you know the truth about a situation but you are sugar coating words to get something. HH knew the real problems Zambia has but he chose to promise voters things he knew will not be feasible to do. PF was in the same quargimer regarding subsidies. You remove them life become unbearable for majority citizens. Other than corruption in my view PF tried to by all means to improve the livelihood of Zambians. And the truth about corruption is that it’s more in the civil service than among politicians and that’s what makes Zambia a very difficult country to lead. The only way HH will succeed in delivering development and services to Zambians is to fight corruption in civil service. Pursuing ECL and his former minister will not generate any income but…

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  8. For the whole duration of their operations in Zambia which span for over 15yrs, Glencoe and Vedanta never declared any profits, this was why the strategic shares that ZCCM-IH holds in these companies never earned any dividend thereby rendering them useless. As Chief Budget Analyst Felix dealt with this challenge. This was the reason we advocated for the increase in the mineral royalty because these companies were cooking their books. There’s no company that can remain in red for that long and still continue to operate. How do we compensate for the environment and exploitation of our resource? Now that it’s deductible mines won’t pay any tax and that’s our concern. MRT should be considered as part of the cost of production.

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  9. I talked about the need for reform in fuel and electricity subsidies, arguing that these subsidies benefit the rich more than the poor. This is a misleading statement do you know that when government remove subsidy from fuel and electricity the poor will be affected most than the rich

  10. Stop beating about the bush and just say BMW wants to hike fuel prices and electricity tariffs. Chopeti!!!

  11. The solution for domestic consumers and small business lies in solar power and battery/electric powered transport ………….

    We have good sunshine almost all year round………….

    We are still far from laying the foundations for this infrastructure because powerfull nations get a cut from high costs of fossil fuel zambia consumes ………….

    As for the hydro projects and other power projects lungu was boasting about, the owners want top price for that power as promised to them by PF………..it won’t come cheap for Zambians……….

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  12. Don’t engage in public debate over a critical policy you believe has to be implemented to right the economy. The decision to remove the subsidies or not rests with the UPND government. Stop behaving like you’re waiting for someone to instruct you to make a decision. Stop the silly debate. Remove the freebies. Chiluba removed the mealie meal subsidies in the first 100 days and no one died.

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  13. Ayatollah #9

    Good Points from you !

    The mines consume so much electricity spiking energy prices, they make huge profits and yet they get away from paying taxes. It’s on record, a video clip of Vendetta chairman boasting while addressing the Jain International Trade Organisation in India, on March 23, 2014. He says :-

    “” I bought a mine for $25 million that was worth $400 million. I make $500m profit a year. It’s been 9 years since we’ve owned the company, and since then every year it is giving us a minimum of 500 million dollar, plus 1 billion dollars, every year it has been continuously giving back. “”

  14. Ayatollah #9

    The mines have been cooking books for decades of years. HH needs to negotiate a better deal from the mines, especially that we have borrowed from IMF for consumption and not investments.

    Then again, we know Vendetta used its lobbying subdivision proxies to fund UPND campaign. So, I don’t see HH doing anything to extract more tax collections from mines that will wholly benefit Zambians. Meanwhile, subsidies will be pulled out, unless if HH introduces coupons like KK did when he forced to remove subsidies by IMF.

  15. In my opinion as poor as our people in this rich land are subsidies should not be scrapped…removal of this relief measure will further deteriorate poverty levels left behind by pf… subsidies are a way of telling people we care so in this case pf will score a point. Wake up guys borrow from the chinese not those guys who attach conditions…

  16. CONTNUED…Secondly your assumptions on the deductibles are also wrong. You are assuming that the 182m$ the mines are “paying” which they won’t now pay will be invested back in the mines to up the volumes to your projected 3MT. Wrong: I can tell you from experience with a solid extractive industry experience that more volume for the mines does not necessarily equate to more profits. Each mine has an optimal level of production from the profit stand point which is not necessarily plant capacity.
    What you should have done is to ensure the mines pay that 182m$ instead of assuming that if they do not pay then the money will be invested back in the Zambian operations. These multi-nationals have many operations across the globe and they will simply move the 182m$ to other sites.

  17. So far so good, as the government is trying to be transparent and providing some information on why they are making those decisions. We know of the looming subsidies removal, but the explaination provided does seem to make sense, why subsidise US$780 million for mining companies against US$26 million per year, on ordinary people.
    Scrape the subsidies to eliminate the US$780 million and introduce selective social support for THOSE IN NEED. Rich people should not be subsidised, therefore, the government will also be making a saving on that US$26 million.

  18. @ 9 INDEPENDENT OBSERVER

    The joke is on us. More reason why we should have or must grab these mines from this Indian/Mwenye. Its very painful to be duped like this. And who under evaluated the mine? It is the same chap in State House who promised people that I will fix the economy. He got cuts for under valuing the mines which he has hidden in Panama. He was listed among the rich people who are hiding money in tax heaven nation.

  19. Mr. Nkulukusa, you make a very powerful case like a robot with no feelings or compassion.
    1. Parliament should NEVER allow the MRT to be deductable. The Mining companies will never declare a profit either way, hence corporate tax will always be zero or the minimum they can pay. They are not here to pay taxes.
    2. It is possible to raise the electricity tariffs to the mines in order to stop the subsidy to them, while maintaining the domestic tariff or even reducing it. Electricity is unaffordable as it is. Why are you not advocating for this option.
    3. You can lift the subsidy on fuel- it is the bigger component any way . If the UPND Government is able to lower the exchange rate the reduction in inflation may to some extent moderate the the price increments that will result.

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  20. It is better to keep the existing Mining taxes and work round the issue of subsidies. Since the Government is aware that a large chunk of subsidies is going towards Mines, then let it find a way of removing subsidies to that sector and leave subsidies for everyone else.

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  21. #INDEPENDENT OBSERVER, it’s shocking that Felix wants to behave as if he doesn’t know how difficult it is to deal with the mines. He wants to mislead us into believing that those before him weren’t clever enough. As for electricity tariffs, we told LPM when he gave CEC a 20yr BSA at a flat rate because his relative who had shares in CEC was also Zesco MD. That Bulk Supply Agreement has lapsed let Zesco negotiate a better deal although I doubt it because another CEC shareholder is a Minister in Bally’s Govt. These chaps are just playing games. Soon GRZ will again borrow to fix roads damaged by the same mines that don’t want to pay tax. If Bally brings back Vedanta he’ll see what Zambians are capable of

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  22. Spaka 12 & 18

    What about me? Yes, I posted about investing into solar power last week.

    1. Well, take your solar power vision in your mind and turn into reality. There is nothing that can stop you from achieving your aspiration if you believe and take actions. Like everything in life, if you stumble into setbacks, use setbacks as learning curves and not bad luck. ++ Experience is always the best teacher.

  23. 2. Therefore, do some research about it takes to set up solar farms. Put up a business plan and go and present it to the Investors and Financial Institutions, Venture Capitalist etc. You can get the money especially if you are based in UK, GERMANY & USA. The world has so much money waiting for someone with an investment idea. We live in a a world where you do not need to go through some level of authority to get information & data. Blueprints and Information are abundantly available in this information age.

  24. 3. Our thoughts are what become our realities. Where you direct your attention, energy, belief, feelings is what becomes a manifestation. And ways, means, situations and circumstances will be provided naturally or miraculously. A TV, Radio, Phone, Car were all just imaginations. That’s why Imaginations are more powerful than Knowledge. I read one time that you are a trained engineer. We, or…. You are the individuals Zambia is waiting for.

    You can do it “AS THE MAN THINKS, SO HE BECOMES ”

  25. Ayatollah 24

    Keep preaching the Truth, Authenticity and Common-Sense . Don’t stop. We need your perceptions !

  26. #25, @INDEPENDENT OBSERVER ,
    I guess you mearnt #9 & #19, associated with solar discussion.

    I am suprised @Zambian Today, has lately not commented, as he is allergic to advise related to “Manifestation” or maybe he is now on board.

  27. ON FUEL AND ELECTRICITY SUBSIDIES THE SIMPLE ANSWER IS TO HAVE APPROPRIATE PROPORTIANE LOW TARRIFFS FOR THE GENERAL CITIZENRY AND HIGH TARRIFFS FOR THE MINES. THIS SHOULD BE DONE LIKE YESTERDAY THROUGH A STATUTORY INSTRUMENT. THIS IS NOT QUANTUM PHYSICS BUT COMMON SENSE.

  28. general kanene

    Thanks for correcting me !

    Yes it should be [email protected] Spaka & [email protected] in reference to his 2 comments. Spaka is addressing the need to go into solar power. Then he decides to ask where I am and I don’t why? So I am encouraging him to venture into Solar Projects.

    Indeed we are creators that can manifest anything we can imagine. We are a limitless source of creation by just using the power of the mind.

    Enjoy The Evening !!

  29. Stop diversions how much are we paying for a bloated cabinet, Zambia Airways, Presidential trips abroad?? Im very sure its close to 1.4 billion

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