Navigating Zambia’s mining industry

It’s a love-hate relationship between Government, the Mines

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WALA CHABALA writes

A love-hate relationship is probably the best way to define the rapport that exists between the government and the mining sector.

It is a love relationship because the government must adore it when the players in the sector pay their statutory dues whether in form of mineral royalties, Pay-As-You-Earn (PAYE) or income taxes. It is reported that more than 30% of government revenues were derived from the mining sector in 2019. The government must also love it in the event that any dividends are declared and paid by any one of the mining entities in which it has shares through ZCCM Investment Holdings.

That tens of thousands of people on the Copperbelt and North-western provinces earn their living working in the mining sector has to elate the government enormously, as must the fact that apparently up to five indirect and induced jobs are created for every one job in the mining sector.

The government cannot but love it when mining companies procure from local suppliers and in the process inject hundreds of millions of Kwacha into the local economy per year, with the attendant externalities into the provincial and national economies.

And ultimately, it must put a big smile on government whenever those foreign exchange earnings flow in from the export of minerals, as it indeed must love it when more foreign direct investments flow into the mining sector to contribute to the growth of the sector and in turn to that of the economy of the country. Close to 80% of the country’s foreign earnings per year come from exports of minerals and several billions of dollars have been invested in mining operations over the last few years.  

But there is a flip side to the mining sector that the government cannot help but hate.

The government must hate it when some mining business has to be dragged to the courts to prove that it was involved in under-pricing its copper, no doubt to get benefits of transfer pricing on one hand, while minimising the amount of tax paid in the country on the other hand. Surely such conduct, unearthed after conducting some audits, cannot endear the mining businesses to government.

If the government were to hate that the multinational corporations that own most of the mines can afford to hire the most sophisticated and expensive tax advisors and lawyers because after all, these are paid for from the tax they avoid paying to the Zambian government, this should be fathomable. No government, let alone the government of Zambia, through its tax authority, can afford to hire the same level of tax expertise, especially with the constrained revenue base due to the tax arrangements of some of the mines. And no government loves to be in that position.

It should be understandable if government was to hate it when the mines know that the major reason government turned to increasing mineral royalty as a means of taxing them is because the mines resort to complex tax structures to avoid paying taxes on profits in the country. And when the mining sector appears to mock the government that it is because it is poor at tax administration that it chose to burden the sector with simple mineral royalty tax, this cannot augur well.

And to compound these issues, the government must passionately hate it that some of the mining companies would resort to mis-reporting the assays of the minerals they are due to export out of the country to try to minimise the mineral royalty tax that would fall due to the government.  

It also cannot augur well when some of the mining operations threaten to discontinue operations due to revision of taxes. The only communication that this sends to government is that such entities have managed to recoup substantial enough returns from their hefty investments, despite not having been declaring profits, to be prepared to walk away.

And no sane person would blame the government if it hated the fact that despite some institutions, both locally and internationally, having quantified the illicit financial outflows from Zambia into billions of dollars annually and specifically identifying the minerals sub-sector as being involved, that despite eminent persons like the Secretary General of the United Nations, Mr António Guterres, and the former President of South Africa, Mr Thabo Mbeki, lending their voices to the issue of tax evasion and illicit financial outflows, yet the member organisation representing mining houses fails to cover in its policy prescriptions for economic recovery how the mines will clean up their acts regarding this.

The government must not be amused when it is reminded of the hefty debt burden that it shoulders, together with the unbearable cost of servicing the same, by entities that would have made the government’s burden much easier and lighter if they had allegedly not been involved in illicit financial flows amounting to billions of dollars per year.

Indeed, the Chamber of Mines in publishing a policy brief for a post-COVID Zambian economy entitled the Road to Recovery seems to either be completely oblivious to these dynamics of the relationship between government and the mines, or it has just deliberately chosen to completely ignore them. Unfortunately, whichever the case, it is very likely that government would take the policy prescriptions in its report with a lot of skepticism. It is said that he who comes into equity must come with clean hands.

Surely, given the adverse impact of COVID on economies, with Zambia projected to have its GDP grow -5.1% in 2019, it would have been a greatly welcome gesture if the Chamber of Mines were to bring an offer from the parent companies of the mining businesses to refund some of the gains they have enjoyed from illicit financial outflows, tax structures, transfer pricing, etc. For by that one measure alone, several billions of dollars could be returned and retained in the country and that would further go a long way to mitigating some of the adverse impact of COVID on the economy of Zambia, naïve as this may sound.

Truly, the Chamber of Mines would cement its relationship with government on the love side if it were but to bring to the table one or two owners of mining companies to not only commit to paying back a few billions of dollars to go towards the costs of mitigating the impact of COVID-19, but to also further commit to start 2021 on a new footing of no illicit outflows, no adverse tax structuring, no mis-invoicing, no transfer pricing, etc. Undoubtedly, that would go a long way to turning around the fortunes of the Zambian economy post-COVID.

Over and above addressing the issue of ill-gotten wealth, going forward, the Chamber of Mines would do well to put in its policy prescriptions for its members to embrace more environmentally and socially beneficial business practices such as impact investing and shared value strategies. Such practices if implemented would potentially ensure that the mining businesses avoid engaging in some of the dark sides of their trade, as well as promoting value-addition to the minerals in the country. Furthermore, the mining businesses would do well to follow the Circular Economy approach in their operations which would ensure that they conducted their businesses more sustainably across the board.

Finally, while the Chamber of Mines seeks to have access and dialogue with the government over relief measures during and post COVID, it would be a very welcome gesture for them to also host engagements with civil society organizations, church mother bodies, and indeed the public at large, to answer to some of the dark sides of mining practices and to commit to pursuing more fiscally beneficial business conduct among its members. Taking cognizance of some of the above dynamics, and indeed pursuing, if not implementing some of the measures, would not but set up a completely different basis for engagement and relationship between government and the mines, weighing more on the side of love.   

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