Zambia - The Windfall Tax Story

The issue of windfall tax in Zambia has always been a hot one. Many political ideas have revolved on windfall taxes from the government to the opposition. It is strange that this simple perspective of taxing has been such a hot topic in this country. More so, having implemented it for some time.

So Why the Fights?

Windfall tax is expected to generate a lot of financial rewards for the country in the light of higher copper prices that were witnessed. It is expected to bring in a lot of money to drive the economy. On the other hand, the politicians in the control say it is not possible to introduce a windfall tax. 

The fight got so heated up that some headlines would summarize it. For example it is quoted that those who were calling for windfall tax are lunatics. Check here and here.

Windfall Tax

So what is a windfall tax? The few definitions I came across will sum up as:

"A tax levied by governments against certain industries when economic conditions allow those industries to experience above-average profits." 

"A windfall profits tax is a higher tax rate on profits that ensue from a sudden windfall gain to a particular company or industry."

My favourite for simplistic issues is the last one from Wikipedia because it sums up all elements of the windfall tax and will have all you need for parameters of this discussion. 

Zambia and Windfall Tax

The mining sector in Zambia has an interesting tale. It is booming when the prices are high. However, most if not all mines are in loss making position. So the Corporate Income Tax (CIT) is never paid. On the other hand, mineral royalty (which is deductible) is paid and claimed back.

So the mineral royalty does actually hit the collection point for the nation, but it merely comes as a deposit and is later taken away when one address the issues of their tax position.

Therefore a windfall tax in this position has one element which many have missed - if you are not profitable, you can't pay it! Even when you are profitable, you need to be facing 'windfall profits' or higher than normal profits for the windfall tax to apply! So for a country with a sector that is 90% in loss making position, how then will you apply a windfall tax?

Any economist with the information on the profitability of the mines will find it interesting to call for a windfall tax. Why? How do you get "abnormal profit tax" when the mines have no "profit" in the first place.

The people needed to be told the truth about this. The assumption that everyone talking about windfall tax knew what they were talking about is wrong. people merely voice out what they want regardless of what the situation is on the ground. You need critical issues on the ground for any windfall tax to be implemented. Those parameters are what is missing. 

Where is the Profit?

If the mines had the so called profit position, they would pay taxes. If they made abnormal profits, they would then be a reason to introduce the windfall tax. The lack if profits makes it impossible to have a windfall tax.

Whey mines have no profit is a bigger issue to address and one that will make a good reading and analysis for the future of this country. Many have declared that mines cheat and use tax avoidance schemes to dodge any form of taxation. This has created a bad relationship with government leading to lack of trust between the two. This has led to push and pull issues being done in a way to be better than the other.

If it is true that a lot of cheating has been happening, then the mines will be responsible for this sour relationship and the misery that many people have been exposed to due to lack of resources. On the other hand, we need to ask ourselves as to why mines would go on for decades in a loss-making position. What did we do wrong in the sector? Was the privatization the greatest mistake we made? Can it be corrected?

Where are the profits for a sector that is doing so well in terms of the prices? Calling for a windfall tax without addressing any of this issues is doing the same thing we have been doing all these years and expecting a different result. Albert Einstein once quoted:  ” The definition of insanity is repetitively doing the same thing over and over and expecting different results”. (I have no idea where he was quoted, but that may link well with the lunatic link above). So instead of doing the same thing over and over, we need to do things differently.

One way of doing this differently is to over-look the issue of us sharing in the profits that will never come from the mines. Instead, lets charge them rent on our minerals. What they do with them is not our problem, but pay us for the minerals anyway. This rent is the simplest thing one can use. When you get into a house and rent, the landlord does not care when and how much you are paid, you just pay for the house at the end of the month or at the beginning of the month. If you earn no income in that month, it is not the landlord's fault. This is what is attempted in the 2015 Budget where a royalty will be charged but no CIT. 

The method avoids the chasing of profits on the mines, the transfer pricing issues, etc. It merely requires you to make a payment when the minerals are extracted from the ground. You dig, you pay principle.

Of the two methods, the issue is that both parties (govt andd mines) want to benefit. One method can benefit both, but the lack of trust makes that impossible to carry on. So all these are no alternatives to the issue of sharing the benefits.

Sadly, windfall tax has no effect in the Zambian context at this current situation when there is no profit. So extra or abnormal profits cannot be applied.

Fight Tax Evasion/Avoidance ... Don't Give Aid

A lot of African people have stood up and said no to Aid. For obvious reasons, Aid has been around for decades with little to no hope of seeing Africa move a step closer to development and provide for its people. 

In extreme cases, people have even claimed a reduction in living standards as statistics show that African people have become poorer in the time of Aid. From 11% poor to 66% is a scary statistic. 

"Despite a deluge of Aid between the years of 1970 and 1998, poverty on the continent skyrocketed from 11 percent of the population to 66 percent, which means over six hundred million Africans are now impoverished." (Guernica)

This is under the claim that over 1 trillion dollars have been sent. A figure nicely fought by pro-aid people like Owen Barder that the figure is less than trillions of dollars! "since aid began in the 1960s donors have given a grand total of $502 billion to sub-Saharan Africa, which is worth about $866 billion in today’s prices. (Table 29; excludes debt relief.)". But is it really trillion dollars or no does not bother me. The fact that it has not worked will not make a point for it because the figure is $200billion less to be regarded as a failure! Will it make the point more true if they said 'despite the 500billion to 800billion of aid, there is nothing to show that aid is helping Africa (oh sub-Sahara Africa?' I think the substance that aid has failed to improve the lives of the continent is priority in considering this issue even if you disagree on the figures. I think the case that this policy should be re-looked at is a good one and one that should be taken on for people truely interested in seeing the growth of Africa and an improvement of people's life. Surely, there is no transparency on aid (even recognized by the OECD - "The current lack of transparency and predictability of aid have been recognized as key bottlenecks in making aid more effective."), will a $200billion not be spent through back door "help"? If you really want the $1 trillion to show up somewhere before you indicate that aid has failed.

My alternative to aid has been fairness in trade and the West not stealing the resources from Africa. After all, it is common knowledge that the West benefits more from Africa and only send Aid as a personal action to sleep at night. 

By calculations that need not be very complicated and require a lot of resources, just qwids (1) I have created a graph of aid inflows into Africa from 1960 to 2012.

Now we see how much aid has been increasingly off-loaded into Africa and one would expect a corresponding effect on eradicating poverty. The simple graphic data I could find is on a working paper by Dr. Mark Perry (University of Michigan) from this post.

Not much improvement from the '70s to warranty a fight to maintain the status quo. Obvisoiusly, updated data is needed and I am working on it.

On the other hand, data from different sources shows the same dismal result - aid is not helping at all. "Helping Africa is a noble cause, but the campaign has become a theater of the absurd – the blind leading the clueless. The record of Western aid to Africa is one of abysmal failure. More than $500 billion in foreign aid – the equivalent of four Marshall Aid Plans – was pumped into Africa between 1960 and 1997. Instead of increasing development, aid has created dependence.....
The more aid poured into Africa, the lower its standard of living. Per capita GDP of Africans living south of the Sahara declined at an average annual rate of 0.59 percent between 1975 and 2000. Over that period, per capita GDP adjusted for purchasing power parity declined from $1,770 in constant 1995 international dollars to $1,479. The evidence that foreign aid underwrites misguided policies and feeds corrupt and bloated state bureaucracies is overwhelming."(CATO Institute). I think Andrew Mwenda and Dambisa Moyo are on to something that can clearly be seen although fought by the likes of Bono and Bill Gates. Aid is not doing Africa any good.

Tax Problems

I believe this is an area where Bill Gates and the team can help Africa and not handouts! There is a lot of out flows in revenues from Africa which can have far better impact on development prospects and eradicating poverty than aid. I would have loved to show how good Bill Gates' company was doing on that front, but this is not helping. I wouldn't want to think of the effect on Africa itself.

So if Africa and the West got together and fought this battle and seriously on disclosure, more results would come out than what Aid has done so far. Maybe as a result of recent fights by the West, Africa may actually benefit! 

"Rich countries have promised much but delivered little meaningful support to African countries on tax evasion, said a report ahead of a G8 meeting chaired by David Cameron.

The UK prime minister has made tax and transparency key subjects for next month's summit at Lough Erne, Northern Ireland, but this year's Africa Progress Panel report, Equity in Extractives, criticises the rich countries in the Organisation for Economic Co-operation and Development (OECD) for their failure to strengthen disclosure standards.

Africa loses twice as much in illicit financial outflows as it receives in international aid, the panel said. It is unconscionable that some companies, often supported by dishonest officials, use unethical tax avoidance, transfer pricing and anonymous company ownership to maximise profits, while millions of Africans go without adequate nutrition, health and education, the panel added."(Guardian)

I have said it before on this blog, no help is coming out of the West on this issue. It has more contribution than Aid will ever have. Most importantly, it would kill the dependence that Aid has created.

Edited:
You may wish to read the latest developments on this topic here (Give us access to information on tax havens and tax avoiders, African leaders tell David Cameron ahead of G8 Summit.)

2013 budget briefs

I will, from time to time, be using my mobile phone to blog as I only seem free on the phone (android phone's blogger app works wonders). My first blog starts with what I consider three best thing to come to the Zambian economy.

Many will talk about what the budget has not addressed for their political needs, but I'll look at what it has and what these mean for the economy.

1. Duty Free for Capital Goods and Equipment
2. Development of Water Ways
3. Revenue Collection of Statutory Bodies

Duty Free for Capital Goods and Equipment
No country can ever talk about development without investing in capital goods and equipment. I believe this is the rationale used to come up with such a move. Therefore, it is expected that the country is aiming at repositioning itself as a manufacturing and industrial nation. There is great belief in investment in manufacturing. I believe this year's budget will address some of the things I have been complaining about all this time. The need to move from a "mall" oriented country to an industrial base ready to produce whatever the country desires and more. So the removal of duty on capital goods and equipment will bring re-energized approach at manufacturing - at least thats what I expect.
 
Truly, thats one thing that has been lacking for some time in Zambia. We need to focus on development ideas that put manufacturing in the fore front. We can't expect job creation from gov, but we can push the private sector in implementing desirable outcomes in job creation.

I strongly believe this is a measure that has come timely for this country to pick up on developmental side of our economy.

Development of Water Ways
How bad is our water ways? Have you ever seen how people using rivers and lakes for transportation purposes?

I think Government's initiative to look at water ways is welcome. I actually want to be able to move in yacht with no worries, not those banana boats that are all over. I actually look at using that in the same way as bunji jumping! Its for dare devils!

Seriously, this is an opportunity for those involved in tourism and live in areas close to lakes and water bodies to invest in boats and yachts so that value addition is brought to our water ways and a livelihood created for people through tourism activities on our water bodies. after all, we have the largest chunk of fresh water bodies in SADC. Its about time we used them to bring money and jobs for our people.

So we can now all go out there and get the gear for some water fun.

Revenue Collection of Statutory Bodies
No one single matter has been on my mind for a long time like this one. I always think its better for a family with four salaries to utilize better use for its income to budget together so they can contribute little from the three. when however, one contributes and the rest choose how to use the money, that is actually far from planning. 

But that's how things were in government. You have people making money and hiking their pay while the rest of Government has to share the little money they had. We ended up with massive buildings for a board, when Ministries don't even have a coat of paint on their walls. What kind of government would allow that?

We should harmonize this situation and allow government to run effectively. You can't expect government officials to operate effectively when they are paid low and an authority under them has officers getting over K70million, more than 10 times more than their principle officers. That is a recipe for not only corruption, but failure of the system.

This measure as far as I'm concerned, will make this government produce better than expected results.

Conclusion
Overall budget proposals so far are great. I think, with proper implementation of this, we expect changes in our economy in years to come. We just need to organize our manufacturing sector and develop water ways to improve people's livelihood and encourage tourism.

Zambia-China Relation

There has been alot of debate on Chinese investments in Zambia and the negative/ positive results this will achieve. I have not had a good time to look at alot of these investments and loans that Zambia gets from China. So I will reserve my comments on the topics for now. I would have done a good service to myself had I taken my reading on China - Zambia relation and come up with a good academic paper on the issue, I may look at that and see how it goes in the near future.

Anyway, this appeared like good reading. I came across it as I searched for that elusive bi-lateral agreement between Zambia and China of 2003! I copied and paste, then informed the author, not good, but better late than never right???

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Zambia: From the World Bank to China and Back

By Peter Bosshard*


African governments have often praised Chinese investment as the panacea for their infrastructure sectors. Zambia’s experience demonstrates that it is not. A Chinese hydropower project on the Kafue River has brought up the whole conundrum of financial problems, environmental impacts, hydro dependency and delays that is typical for large dams. Mining is the mainstay of Zambia’s formal economy, and consumes a lot of energy. When the copper sector started booming in 2002, finding new sources of energy became a necessity.

Since the mid-1990s, the Zambian government had tried to attract funding from the World Bank and private investors for the Lower Kafue Gorge Dam, a 750 megawatt hydropower project on a tributary of the Zambezi River. In December 2003, the government signed a Memorandum of Understanding to build the dam project with Sinohydro, a large Chinese hydropower developer. China Exim Bank was supposed to provide 85 percent of the funding. “After the World Bank dragged its feet on the project for years, we reached an MoU with the Chinese within three weeks”, Israel Phiri, a Zambian government official, announced triumphantly in 2004. Lower Kafue Gorge seemed to become a symbol for the fast pace of Chinese dam building around the world.

Or so Zambia’s government hoped. During the next few years, it repeatedly issued promising statements about the progress of the project. First, construction was supposed to begin in 2004. Later, construction was supposed to start in 2006. In January 2007, the country’s energy and water minister announced again that Lower Kafue Gorge was “coming through very well”, and that Zambia would negotiate a construction contract for the project very soon. The government also kept signing agreements for other hydropower projects left and right. Yet on the ground, nothing happened.

The reasons for the delays seem to lie in the problems of Zambia’s electricity sector. According to a recent report by the International Monetary Fund (IMF), the country’s state-owned electricity utility is “a troubled company, beset by inefficiencies and high costs”. One third of all customers are unmetered, and staffing costs and distribution losses are very high. Tariffs are low by regional standards, but at $500-600, connection fees are unrealistically high for the large majority of the population. The IMF report proposes to steeply increase electricity tariffs for all consumers. The government in turn argues that the World Bank’s push for privatizing the electricity sector was unrealistic, and the main cause for the electricity shortage.

Unlike the IMF, China officially attaches no strings to its loans and grants. Yet in February 2007, a senior OECD official observed that China Exim Bank “does not hesitate to discuss changes in project-related governance to ensure loan repayment (e.g., pressure to raise electricity tariffs to finance hydropower projects), while claiming that it does not specify firm conditions”. China may be dragging its feet over Lower Kafue Gorge for the same reasons as the World Bank five years earlier.

Sinohydro also interfered with the environmental impact assessment for the project. The dam would have serious impacts on the Kafue Flats, a wetland of international importance with two national parks. Anabela Lemos and Daniel Ribeiro, two experts on the Zambezi, report that Zambia’s power utility chose the project site after a balanced assessment of economic, social and environment factors. However, Sinohydro told the utility that this was not how they did things in China and that they wanted the site to be assessed only according to economic factors. In the end, the original site was selected, but, Lemos and Ribeiro say, “the role of the Chinese dam builders in trying to focus only on the economics of the project does not bode well”.

On February 26, a representative of Zambia’s power company announced that her utility was now discussing a $600 million financing package to boost power generation with financiers from Japan, India and western countries. The first priority was on the Lower Kafue Gorge Project. The World Bank’s International Finance Corporation was undertaking a feasibility study for the project. The IMF estimates that completing the dam would take six to eight years, with mobilization of finance as “a central challenge”. Five years after Zambia turned from the World Bank to Sinohydro, Lower Kafue Gorge seems to be back to square one.

While the government chases its dream of multiple new dam projects, the country’s existing power infrastructure is falling into disrepair. According to the IMF, more than a quarter of Zambia’s power plant capacity is currently being repaired because of neglected maintenance. In mid-February, the failure of a generator caused widespread power outages. Maintaining infrastructure is just as important as building new projects, but less prestigious and often neglected.

Meanwhile, the country’s power sector strategy with its focus on large projects has left poor people in the dark. A full 98 percent of rural people and 60 percent of urban dwellers don’t have access to electricity. In July 2007, the power utility began to ration electricity supply to residential consumers in order to service the growing mining industry. And the proposed new hydropower projects will not be used to expand power supply to rural areas, but to serve the mining companies and export power to other countries.

I am not an expert on Zambia’s power sector, but supporting mining companies through large dams seems to be a highly questionable development strategy. If the copper boom fades away in another five or ten years, Zambia will be straddled with an overcapacity of expensive power plants. If Zambia guarantees the mining sector a secure supply of power from additional hydropower projects but climate change reduces the stream flow in the Zambezi Basin, the government will have to cut out residential consumers from power supply altogether in order to fulfill its guarantees to the mining companies.

It seems to me that mining companies could take care of their own power supply by developing their own projects (as long as they follow the state’s social and environmental guidelines), or by negotiating power purchase agreements with foreign suppliers. Rather than taking on huge risks for a few private companies, the state and international financial institutions should concentrate their resources on expanding access to electricity in poor areas, particularly in the countryside. This will not require risky and potentially destructive dam projects, but support for decentralized, renewable energy technologies.

*Peter Bosshard is the policy director of International Rivers. His blog appears at www.internationalrivers.org/en/blog/peter-bosshard