WEEKLY POLICY ISSUE
When the PF Government introduced the new mining tax regime in the 2015 national budget, we cautioned against the move. We warned them that the failure to properly consult industry could end up doing more harm than good if the end result was mine closures and job losses.
In developing tax administration reform for the mining sector the first consideration must always be what policy will ultimately deliver the greatest benefit to the Zambian people. In this case the greatest benefit will come from those policies that increase jobs and opportunities for Zambian businesses, as well as revenues collected by Government that can then be invested in education and healthcare.
With these objectives clearly in mind proper consultation is needed to develop effective policies that complement the Government’s broader approach to economic management. This was clearly lacking in the case of the rise in royalty rates announced in the 2015 budget and has since led to one major investor publicly stating their intention to withdraw. This is an investor who currently contributes US$45 million in revenues each year, and perhaps more importantly is responsible for hundreds and even thousands of employees who have their own dependents, as well as employees hired by subcontractors who service the mine. If the increased royalty rate leads to mine closure and delays of planned investment then it will actually have an impact of reducing total revenues and the number of jobs. A situation in which no one benefits.
Increasing royalty rates in this case was not a sensible approach and is negatively impacting investment prospects. This is because no two mines have the same cost structure of production even if they had the same level of production or revenues. If you take an example of two mines, both open cast, and they produce 10 metric tons a year. From a revenue perspective under the current regime both are taxed US$12,220 i.e. 20% of 10 metric tons at a price of US$6,110 a ton. However, Mine A spends US$2,340 to produce a ton of copper and Mine B spends US$4,670 to produce a ton. This means Mine A will make gross profit of US$25,480 and Mine B gross profit of US$2,180. While the Chamber of Mines issued an early warning of the likely result of this policy the Government chose to press on regardless and now finds itself in a panic once again.
In any case the focus on increasing royalty rates is misdirected as the problem we have faced with revenues to date are largely due to collection of what is owed. The solution is not to increase the tax but rather to ensure that all taxes owed are properly recorded and collected, and that further investment is also facilitated so that revenues and jobs can both increase, and not one at the expense of the other. What use is increasing the level of tax if we are not properly collecting the existing amount? Government can also help secure greater benefits for Zambians through supporting local businesses to participate in the industry and both drive and benefit from economic growth. Job creation and stimulation of local economies and enterprises are activities that can directly benefit the people. Their benefit should not be undervalued.
Unfortunately the PF have been too arrogant and rigid to listen to differing points of view, as they have also been with farmers, nurses and teachers who have all struggled to have their voices heard under a Government that shows little interest in consultation. As the PF Government has failed to establish a wider vision of what they are aiming for, policy development has too often been left to the personal whims of ministers and State House operatives, hence all the uncertainty and U-turns which stunt economic growth and delay the delivery of benefits to the Zambian people. President Lungu has already displayed a worrying reliance on issuing directives; making manoeuvres that would cause any serious investor to question the consistency of policies and reliability of a Government.
Here is our proposal and advice to Edgar Lungu and the PF government:
(i) Before you meddle with the taxation system make sure you are collecting what is owed under the current system
(ii) Consult widely and be transparent in developing policy, also ensuring that ministers and State House are in agreement over a policy before it is announced to avoid U-turns only a few weeks later
(iii) Remember that policy consistency is essential for industry growth and industry growth will naturally deliver greater revenues, as well as creating much needed jobs and opportunities for local businesses which directly benefit the Zambian people.