Lusaka paying for its indecision

The Patriotic Front's Edgar Lungu, centre, inspects a guard of honour after being sworn in as president of Zambia in Lusaka on January 25. He has ordered ministers to reach agreement with mining companies on a tax regime. Picture: Moses Mwape

The Patriotic Front's Edgar Lungu, centre, inspects a guard of honour after being sworn in as president of Zambia in Lusaka on January 25. He has ordered ministers to reach agreement with mining companies on a tax regime. Picture: Moses Mwape

Published Mar 29, 2015


While Zambia see-saws over its mining tax regime, the DRC has overtaken it as a copper source, writes Victor Kgomoeswana.

Johannesburg - The African week went by pretty quickly for me, especially with the Monetary Policy Committee (MPC) of the SA Reserve Bank leaving interest rates unchanged.

I need to pay off those debts, while the current rates last.

This MPC meeting happened while African finance ministers and a number of central bank governors met in Addis Ababa, continuing on that long road towards the alignment of Africa’s fiscal and monetary policy landscape.

Back in South Africa, Eskom gave us another grim reminder of the power crisis hovering above and leaving most people whispering in the dark, even as unions are calling for the axing of the chairman of the power utility.

Egypt also had to ration its electricity supply due to a fuel shortage. How’s that for Cape to Cairo?

Our cricket team bowed out of the semi-finals, setting up their opponents for a final clash with Australia – although I would plead with my fellow South Africans to stop using the C-word this time around.

Tanzanians are making headlines for their decision in parliament to restrict the importing of labour. Nigerians went to the polls, and my toast of the week will take us back to Nigeria.

However, this week I am writing a Letter from Zambia, which is where I was for four days as part of an economic a mining briefing hosted by Stanbic Zambia. My visit brought home yet another issue that is holding back the African growth narrative: indecision and lack of clarity on policy.

Come back home, Lungu!

One of the newspaper headlines on Friday simply called on President Edgar Lungu to cut short his visit to China, which he undertook on Thursday, to come back to solve the challenges facing Zambia. This was about, among other thing, the perennial mining royalty tax standoff. For more than 10 years, the Zambian government has not been able to say how it intends to tax mining.

Mining is the mainstay of the Zambian economy, but how big a deal is it to the Zambian economy?

I heard many conflicting estimates, first in Ndola and Kitwe in the Copperbelt, then in Lusaka. However, the African Development Bank estimated that mining contributed 86 percent to the foreign direct investment inflows and 80 percent of export revenue in 2013. That is not small change!

Zambia is not a new mining economy, with some of the investors in Zambia’s copper, lime, cement and emerald mining going back several decades with the land of Kalusha Bwalya and Chris Katongo.

What is the stand-off about?

Taxation, royalty tax, windfall tax maybe, income tax, the list of variations goes on – and has for a long time too.

Headlines in Zambia are about contradictory statements made by ministers of the Lungu administration. When I arrived on Tuesday, the main story in most newspapers, on radio and on television was about the confusion caused by Mining Minister Christopher Yaluma and Finance Minister Alexander Chikwanda. In October, Chikwanda announced a new taxation regime that was a radical shift from what had been.

First, it proposed an 8 percent mineral royalty on underground mining (20 percent for open cast), a 30 percent income tax and whole lot of other things, but the mining industry beef with this was the royalty. This week, Yaluma was quoted as saying that the mining companies could pay their royalties in instalments or defer them, to which Chikwanda said: hogwash!

The industry is seething. The attitude of some companies is that they would simply refrain from paying royalties, while others are saying the indecision has led to their producing less due to uncertainty.

This translates into some companies paying only 17 percent of the royalties they should be paying. The bottom line of the reports in the media and comments from the industry players was: the government is making less tax revenue from the industry under the new tax regime. The reluctance to invest is equally intense as is the rethink of some of the companies’ continued involvement in Zambia.

“No one can simply stand by while a guy walks into his business and says ‘I would like 20 percent shareholding in your company topline, and I am not paying anything for it’,” said Stefan (not his real name), who is in charge of finance at one of the mining companies. He was fuming at the significant hike in royalties.

“These guys want to push us out of mining. They keep on doing this, we will just shut down and leave, and the people of the Copperbelt will suffer, because Kitwe is copper mining and nothing else. Without copper mining, it does not exist.”

This is the story I heard in the Copperbelt towns and in Lusaka during my four-day stay in Zambia.

Why the sudden change in policy? The answer lies in the lack of trust the government shows in dealing with the mining sector.

“Everyone you meet in the streets of Zambia will tell you that the mining company is stealing money from Zambia. But if you ask them how much they are stealing, nobody knows – they simply are convinced they are stealing,” commented a respected opinion-maker in Zambia.

He was referring to the tendency to change the tax regime to make as much as possible from mining. A few years ago, we will recall, the government burnt its fingers with a decision-then-reversal to impose a windfall tax on the super profits made by the mining industry when the copper prices were sky-high.

The current prices of around the $5 000 (about R60 000) mark, Stefan told me, do not justify the $7 000 or so that it costs to mine a ton of copper. “I am making a loss of $20 million a month. How long can I tell my investors to hold on?”

From what Stefan was saying and how he was saying it, one could tell that he had bought into the story of Zambia as a mining investment destination. The raging uncertainty, though, left him visibly despondent.

What about the Chamber of Mines, I asked him.

They are equally despondent, he said. Well, not quite. The president of the Chamber of Mines, Jackson Sikamo, is more optimistic that the two sides are moving closer to finding common ground on a tax regime that would suit both the Zambians and the mining industry.

Meanwhile, he is concerned that with the vacillation in the country’s regulatory and policy stance, the Democratic Republic of Congo (DRC) has overtaken Zambia to become the top copper producer.

Will the investors leave Zambia for the DRC, one of the reporters asked me. My take is that they will not. Here are my quick reasons.

Zambia is a much more balanced economy to invest in; its democracy is stable, infrastructure more advanced than that of the DRC and it’s an easier country to get around. It is also not a new kid on the copper mining block; it has attracted and continues to attract investors.

Of late, Africa’s richest man, Aliko Dangote, has invested billions in his cement operation, which should be commissioned in 2016.

On a balanced scorecard, Zambia is a lot more attractive than the DRC. This does not mean the indecision can carry on for ever, or that the top spot will remain the DRC’s for ever. Indications are that there is a chance that a settlement will be reached.

As I write this, the headline that brought a loud cheer from the industry and other commentators was that the president had instructed the ministers of finance and mining to resolve the impasse.

Does that mean resorting to the old taxation regime?

Lungu instructed them to resolve the impasse by April 8. Perhaps he will achieve what his predecessors have not been able to.

There is a catch.

Lungu’s predecessors did not fail to resolve this for lack of trying. They just found themselves juggling a hot political potato.

It is easier, before an election, to whip up the emotions of voters in one’s favour by promising to reclaim from the mining industry what it owes the people of Zambia.

After all, mining is one extractive industry that has robbed Africa of its pride, peace, stability and wealth for years.

It has fuelled civil wars, corrupted leaders, denied Africa its rightful capital inflows by continuing to export raw minerals instead of beneficiating them.

It is tempting, therefore, for any aspirant head of state to promise too much, including the unrealistic taxation regime. The late president, Michael Sata, did so and failed to deliver. Will Lungu fall into the same trap as campaigning for next year’s election gains momentum? I won’t hold my breath.

The solution lies in a sincere Zambian conversation that puts the interests of Zambians first. Zambians in this case include the investors, the people of Zambia, the politicians, the workers and all who stand to gain (or lose), whatever the outcome of the stagnation. It has carried on far too long.

My toast of the week is from West Africa

The Tony Elumelu Foundation, alongside Google, are my toast of the week: the first for its announcement of the winning 1 000 start-ups that are to benefit from the foundation’s $100m fund to support enterprises from 52 African countries over the next decade with the goal of adding $10 billion to Africa’s GDP.

The second, Google, for launching an Ebola-resistant tablet, which allows doctors working in Ebola-stricken countries to operate and dispense information without risking infection.

* Victor Kgomoeswana is author of Africa is Open for Business, anchor on CNBS Africa’s weekly show Africa Business News, and anchor of the daily Power Hour on PowerFM. He writes in his own capacity.

** The views expressed here are not necessarily those of Independent Media.

Sunday Independent

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