Editorial: Vari­able roy­alty tax causer of Zam­bia’s debt con­cerns…

Vari­able roy­alty tax regime was adopted when cop­per was a lows and min­ing pro­duc­tion costs at ‘al­leged’ highs

Zambian Business Times - - FRONT PAGE - For any en­quiries and com­ments please con­tact the ed­i­tor on ed­i­tor@zam­bi­abusi­nesstimes.com

There are grow­ing con­cerns be­ing raised by tech­nocrats, eco­nom­ics and fi­nance schol­ars, and the gen­eral pub­lic that the coun­try is slowly slid­ing into a debt trap. Some crit­ics of the cur­rent govern­ment have pro­nounced that the coun­try has al­ready landed into a debt trap and it’s only a mat­ter of time be­fore the govern­ment de­faults on its debt obli­ga­tions.

These con­cerns are valid and needs well-mean­ing ci­ti­zens to weigh in so that the na­tion avoids go­ing through mean­ing­less cy­cles in com­ing to a de­ci­sion on how to avoid slid­ing into a sit­u­a­tion where the coun­try

There are grow­ing con­cerns be­ing raised by tech­nocrats, eco­nom­ics and fi­nance schol­ars, and the gen­eral pub­lic that the coun­try is slowly slid­ing into a debt trap. Some crit­ics of the cur­rent govern­ment have pro­nounced that the coun­try has al­ready landed into a debt trap and it’s only a mat­ter of time be­fore the govern­ment de­faults on its debt obli­ga­tions.

These con­cerns are valid and needs well-mean­ing ci­ti­zens to weigh in so that the na­tion avoids go­ing through mean­ing­less cy­cles in com­ing to a de­ci­sion on how to avoid slid­ing into a sit­u­a­tion where the coun­try de­faults on its debt re­pay­ment obli­ga­tions, an even greater risk of los­ing con­trol of the cur­rently and rel­a­tively sta­bi­lized macro-eco­nomic fun­da­men­tals.

As the Zam­bian Busi­ness Times, we want to state from on­set that we are not op­posed to debt con­trac­tion as this of­fers a vi­able route for fund­ing de­vel­op­ment and may be the only op­tion to fund large in­fras­truc­tural projects. Debt con­trac­tion and ap­pli­ca­tion to well se­lected and im­ple­mented sec­tors of the econ­omy would ac­tu­ally lead to more na­tional in­come gen­er­a­tion and in ef­fect more tax rev­enue col­lec­tion that could then be used to fund other eco­nomic and so­cial needs as well as re­tire and set­tle the very future debt re­pay­ment obli­ga­tions.

How Zam­bia has found it­self in this debt re­pay­ment ‘distress’ sit­u­a­tion

The cur­rent debt sit­u­a­tion is more of a self-in­flicted wound. The cur­rent govern­ment in its 2015 na­tional bud­get an­nounced the in­creased min­eral roy­alty taxes to­gether with mas­sive in­fras­truc­tural projects that would be funded from the in­creased tax in­flows. Ac­cord­ing to the 2015 bud­get de­liv­ered by then fi­nance min­is­ter Alexan­der Chik­wanda, the govern­ment was ex­pect­ing to raise ZMW5.7-bil­lion (about US4570 mil­lion) from in­creased min­eral roy­alty taxes.

A fur­ther look at how the Link Zam­bia 8000 Road Project and var­i­ous other in­fra­struc­ture de­vel­op­ment ini­tia­tive cur­rently be­ing un­der­taken shows that they were en­vis­aged to be fi­nanced from debt that would be re­paid from in­creased min­eral roy­alty taxes in the short term. This makes this tax rev­enue gap that was cre­ated on drop­ping the min­eral roy­alty tax as the main cause of the cur­rent weak na­tional rev­enue pro­jec­tions and ques­tion be­ing asked on the coun­try’s debt service ca­pa­bil­ity.

This huge rev­enue and debt fi­nanc­ing gap for the cur­rent govern­ment is com­ing from the lost or for­gone tax rev­enue from the change in min­eral roy­alty tax rev­enue thresh­olds. The higher bands of 8% for un­der­ground mines to 20% for open cast mines to the cur­rent bands vari­able bands. (4% when cop­per prices trades be­low USD4,500/mt, 5% for when it trades be­tween USD4,500/mt - USD6,000/mt and 6% for prices above USD6,000/mt). This was a sig­nif­i­cant de­cline of 10% -12% which has cre­ated a fund­ing gap that would have plugged the fi­nanc­ing deficit needed for in­fra­struc­ture projects.

It is easy to blame it on civil ser­vants, cit­ing that govern­ment op­er­a­tions and emol­u­ments alone are con­sum­ing over 70% of the na­tional bud­get. The ele­phant in the room is that there has been a huge rev­enue loss from the scrap­ping of a fixed min­eral roy­alty rev­enue tax method­ol­ogy.

It's pub­lic knowl­edge that teacher- to-pupil ra­tio in govern­ment schools is still higher than the best prac­tice, let alone the doc­tor-to-pa­tient or nurse-to-pa­tient ra­tios. These two min­istries have the high­est head­count in govern­ment, so it’s a fal­lacy to put the cur­rent lack of fis­cal space for ex­tra funds to fund in­fra­struc­ture on our hum­ble teach­ers and health work­ers, the prob­lem is point­ing to low rev­enues and di­rectly to the dropped min­eral roy­alty tax bands.

This per­haps ex­plains why the Zam­bia Rev­enue Author­ity is work­ing in over­drive to pick up all sorts of rev­enues within a short space of time. They have been re­port­ing that they are bust­ing and ex­ceed­ing their an­nual rev­enue col­lec­tion tar­gets but their ac­tions point in the op­po­site di­rec­tion. One need not be a tax ex­pert to tell that tax bur­den on or­di­nary ci­ti­zens is def­i­nitely on the as­cen­dance.

Even toll gate charges on Zam­bian roads are high rel­a­tive to other ju­ris­dic­tions when com­pared to fron­tier African coun­tries. There seems to be an ur­gent drive to col­lect as much rev­enue as pos­si­ble from both tax and non-tax rev­enue av­enues. But the risk here is that trans­fer­ring all the tax bur­den on the or­di­nary cit­i­zenry is likely to back­fire as net in­comes avail­able for con­sump­tion con­tinue to shrink.

What ZRA would have col­lected had a fixed min­eral roy­alty tax not been re­placed

The min­eral roy­alty tax is a rev­enue tax. It is cal­cu­lated as a per­cent­age of rev­enue gen­er­ated on gross sales value be­fore cost of pro­duc­tion and other op­er­a­tional costs are net­ted off. This tax is prefer­able to less com­plex coun­tries such as Zam­bia whose tax rev­enue au­thor­i­ties and ex­per­tise can­not match the com­plex tax plan­ning struc­tures im­ple­mented by multi­na­tional min­ing com­pa­nies, a typ­i­cal sit­u­a­tion we see with the ZRA.

Tak­ing an av­er­age an­nual cop­per price per ton of US$6,500 and mul­ti­ply­ing this at the pru­dent pro­jected pro­duc­tion lev­els of 850,000 met­ric tons of cop­per for 2018, the to­tal an­nual cop­per rev­enues would come to about US$5.5 bil­lion. Ap­ply­ing the lower min­eral roy­alty tax thresh­old ( be­fore the drop) of 16%, ZRA would have col­lected about US$884 mil­lion.

Forget about the 20% or so own­er­ship of ZCCM-IH own­er­ship in the mines which de­pend on de­clared net prof­its. This usu­ally amounts to al­most noth­ing due to trans­fer pric­ing and very com­plex com­pu­ta­tions for ac­count­ing for costs of pro­duc­tion and op­er­a­tions, lead­ing to the lo­cal in­vest­ment hold­ing com­pany re­main­ing with lit­tle to noth­ing to get as div­i­dends. Min­eral roy­alty tax is much more straight forward to levy and col­lect.

With the above in­flows in tax rev­enue, would the coun­try have strug­gled to service the cur­rent US$9.37 - bil­lion debt? Would the coun­try have trou­ble even pay­ing off the first Eurobond of US$750mil­lion due in 2022? Just how much di­ver­si­fi­ca­tion would the coun­try have funded with the an­nual min­eral roy­alty tax rev­enue of US$884 mil­lion? With the pro­duc­tion lev­els now be­ing pro­jected to cross 1-mil­lion tons per an­num in the next two to three years, more tax rev­enue to fund di­ver­si­fi­ca­tion and in­fra­struc­ture de­vel­op­ment would be for­gone.

To put the above pro­jec­tion into con­text, the wind­fall tax regime (a form of cal­i­brated min­eral roy­alty tax based on cop­per price bands) that was ear­lier in­tro­duced in the cop­per min­ing sec­tor by then Pres­i­dent Levy Mwanawasa in 2008 (MHSRIP) was en­vis­aged that the state would re­al­ize an av­er­age US$415 mil­lion per an­num. In 2008, the an­nual cop­per pro­duc­tion ended the year with about 575,000 tons.

Rev­enue lev­els de­ter­mine sources of debt re­pay­ment.

When Zam­bia started tap­ping the in­ter­na­tional cap­i­tal mar­kets to con­tract Eurobonds (USD de­nom­i­nated debts from in­ter­na­tional debt mar­kets), there was grow­ing praise both lo­cally and in­ter­na­tion­ally on the coun­try’s eco­nomic prospects. Whether this was just a fad or trend at the time re­mains plau­si­ble as more fron­tier African na­tions such as Kenya, Ghana, Nige­ria had de­buts rais­ing sim­i­lar dol­lar debt with over-sub­scrip­tions be­ing the or­der of the day.

But con­cen­trat­ing on the Zam­bia sit­u­a­tion, the coun­try then had very lit­tle to worry about. It has just come from a sit­u­a­tion where there was lit­er­ally no debt on its books af­ter reach­ing agree­ment for debt write off from its lenders (HIPC ini­tia­tive com­ple­tion point as it was re­ferred to).

More­over, the newly in­stalled Pa­tri­otic Front (PF) govern­ment at the time was also in the process of im­ple­ment­ing el­e­vated lev­els of min­eral loy­alty taxes to Zam­bia’s vast cop­per min­ing in­dus­try. This ac­tion was seen to be fur­ther boost­ing the rev­enue prospects and in ef­fect the sources of funds to be used to re­pay and re­tire these debts that were be­ing con­tracted.

Zam­bia’s econ­omy is un­der­writ­ten by cop­per. The coun­try is cur­rently the sec­ond largest pro­ducer in Africa to its north­ern neigh­bor, the Demo­cratic Repub­lic of Congo - DRC and sixth (6th) largest glob­ally. Zam­bia and the DRC share per­haps one of the rich­est cop­per min­er­al­iza­tion vein of Cen­tral Africa, run­ning through Zam­bia’s Cop­per­belt and North-West­ern prov­inces to the DRC’s Katanga re­gion.

The ef­fect of cop­per pro­duc­tion and in­ter­na­tional cop­per prices on the Zam­bian econ­omy is so per­va­sive such that the metal ex­ports ac­count for well over 70% of the coun­try’s ex­ports val­ues. The other more vis­i­ble ef­fect of cop­per on or­di­nary Zam­bians has been the steep cor­re­la­tion of in­ter­na­tional cop­per prices on the for­tunes of the lo­cal econ­omy with the cop­per prices di­rectly cor­re­lated to the lo­cal unit, the kwacha per­for­mance.

Other ar­eas that de­pict this mas­sive im­pact of cop­per min­ing in­dus­try in Zam­bia was the rev­e­la­tion that en­ergy con­sump­tion and there­fore the en­ergy sub-sec­tor of elec­tric­ity is al­most 85% con­sumed by the cop­per min­ing in­dus­try with its sup­port in­dus­tries and mine staff house­holds.

The need to fund eco­nomic di­ver­si­fi­ca­tion from cop­per min­ing in­dus­try has been there from 1964.

Zam­bia’s over de­pen­dence on cop­per has been a hall­mark of its econ­omy from the time the coun­try gained po­lit­i­cal in­de­pen­dence on Oc­to­ber 24, 1964. The song of di­ver­si­fi­ca­tion has been echoed from 1964 to date with lim­ited suc­cess of na­tional al­ter­na­tive rev­enue gen­er­a­tion sources.

The drive to­wards di­ver­si­fi­ca­tion has been ham­pered by sev­eral fac­tors which in­clude the scanty and some­times er­ratic rev­enues from cop­per min­ing in­dus­try, the se­lec­tion of agrar­ian and low value sec­tors as the next best al­ter­na­tive sec­tors for di­ver­si­fi­ca­tion. Cop­per in­dus­try value chain de­vel­op­ment needs to be ag­gres­sively pur­sued. There is need to get more cop­per to be lo­cally pro­cessed in Zam­bia to cre­ate higher value jobs.

Com­pa­nies like Zam­bia Metal Fabri­ca­tors - ZAMEFA and Neelka­nth Ca­bles need to be en­cour­aged to grow. The coun­try needs to at­tract more up­stream cop­per man­u­fac­tur­ing and pro­cess­ing com­pa­nies to start pro­cess­ing a big­ger share of the cur­rent raw cop­per ex­ports. Multi­na­tion­als such as Glen­core par­ent to Mopani cop­per mines, First Quan­tum Min­er­als - FQM par­ent to Kansan­shi and Kalum­bila mines in North west­ern province should be en­gaged to sup­port the lo­cal­iza­tion of pro­cess­ing of cop­per into fin­ished goods right here in Zam­bia.

Dif­fer­ent mines in Zam­bia have dif­fer­ent costs of pro­duc­tion, there is need to have a more com­plex tax­a­tion regime and min­eral roy­alty sys­tem that would lead to the coun­try get­ting its right­ful share, to at­tain a win-win sit­u­a­tion for the lo­cal econ­omy, leav­ing enough for gen­uine min­ing com­pa­nies to make re­turns on their in­vest­ments.

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