Guy Scott on Boom and Bust on the Copperbelt
Dear MineWatchZambia readers.
Sorry to have been away or so long. I have taken a break from blogging to concentrate on other projects. Nonetheless, I am breaking radio silence today to bring you two bits of news.
The first is that I have posted a powerpoint presentation on Boom and Bust on the Zambian Copperbelt that I have been trawling around British Unversities at my academia website http://oxford.academia.edu/AlastairFraser/Papers#d84853. Comments very welcome.
The second is that I have just read an excellent article on the recent revisions to the Mining Tax regime in The Post by PF General Secretary Guy Scott (it's written in a personal capacity).
While he disagrees (as do I) with the Government's recent moves to cut the Windfall Tax at a time when it's not operating anyway, he offers an interesting speculation on what Government negotiators might have been thinking. I was utterly bemused by their moves before I read this, so I'd be interested to know what others make of it.
"Zambia and recession – part 5 Written by Dr Guy Scott
There are more than 100 countries with higher GDP than Zambia. A hundred years of GDP at Zambia’s current level would roughly equate to the size of President Obama’s first (and it is only his first) stimulus package. Given our tiny quantum of economic clout it can safely be said that Zambia will have no role to play in saving the world from recession. Our job is to look after ourselves, perhaps with a now-and-then concerned glance at our neighbours since we do not want unrest across our borders.
There are several ways in which the recession impinges upon Zambia. But first, how long will this thing last? Ben Bernanke, the Chairman of the US Federal Reserve Bank (the “Fed”), is talking about a turn-around within the current year and recovery in 2010. However, the logic of recovery (which is “bubble” logic not “classical” logic) demands the prior restoration of confidence in the minds of consumers and investors. Even if Bernanke thought, as an economist, that the recession might last for several years he would not loudly say so. Part of the job he has, along with many other people, is to create an expectation of recovery that will hopefully become self-fulfilling. (Actually, if you read his statements carefully, you will discover that a “full” recovery is likely to take more than two or three years; so he is covering his professional reputation). Every responsible owner keeps his or her car insured. This is not because they want it to crash or be stolen; nor is it because they expect it to crash or be stolen; it is because they know that it might just, through no fault of their own, crash or get stolen. They hope for the best; but they insure against the worst. With the recession, our leaders may hope for the best, but they must also plan for the worst. Things may get even worse, and the bad times might last long. Now, can we sustain ourselves through a long night if we have to?
The most obvious indicator of hard times in Zambia is the slump in the world copper price; this is accompanied by layoffs of mineworkers and a slowdown in industries servicing the mines. Hard on the heels of all this we will see a drop in tax revenues, and a virtual cessation of new productive investment once unavoidable pre-slump commitments have been fulfilled. Government (particularly Minister of Finance Situmbeko Musokotwane) has been expressing some joy in the fact that current (slumped) copper prices are nonetheless higher that those that preceded the onset of the copper boom three or four years ago. Against this correct observation, however, must be placed the fact that Zambia’s copper output expansion has involved increasingly expensive and capital-intensive extraction – exploiting more and more low-grade or hard-to-access ore. Furthermore, actual extraction is turning out in several new mines to be significantly below projections. So, many mining operations are not actually viable at current price levels of c. US$3,300 per tonne (versus over US$8000 in the middle of last year). The mining industry will shrink, as it has already started to do, unless prices rise.
The Minister of Finance (and National Planning, note) has brought to Parliament a proposal that the mining industry should be relieved of the Windfall Tax and given 100 per cent capital allowances. The windfall tax is a tax introduced to direct some of the excess earnings created by runaway prices into the pockets of Zambians. It was a feature of last year’s budget, following vocal concern by the opposition and some NGOs that Zambia was not receiving her fair share in the boom. Now the windfall tax does not cut in until prices exceed US$5,500 per tonne so it is of no direct short-term relevance in the present market situation. The same goes for capital allowances. These are allowances deductible from profits for the purpose of computing profits tax; in the absence of profits the allowances are meaningless. Why has government made the tax adjustments outlined in the previous paragraph? The logic is funny; indeed it seems to be a form of bubble logic, designed to create an upbeat future scenario rather than directly affect the present. The deal runs like this: If the government promises that it will make life easier and more profitable for the mining companies in the rosy future when prices have recovered then the companies will soldier on, through the dark night, warmed by visions of earnings beyond the dreams of avarice in the good times to come. So the tax breaks are a kind of trick to build hope and confidence, but who is tricking who?
The big problem that emerged during the copper boom was that government had not foreseen the possibility of such a thing when it negotiated “development agreements” during the very hard times of privatisation around the year 2000. The companies managed to get tax concessions galore against the fact they were making no money with which to pay tax anyway. The companies had the whip hand; government’s negotiators – or “negotiators” – were so relieved at being able to unburden the State of the loss-making mines that they completely overlooked the prospect of boom time. What would happen if copper prices went through the roof? Nobody thought; and no provision was made for Zambia to share fairly in any windfall. It subsequently took a lot of campaigning to get an equitable taxation system into place; and now the Honourable minister is proposing to dismantle most of it.
We are almost back where we started, with the companies calling the shots, backed by the implicit threat of more layoffs and consequent political unrest if government does not wag its tail. And how solid is the deal anyway? Has the mining industry stopped laying off workers? As of the week before last it had not. Indeed it may be the case that the promise of the “goodwill” tax concessions being passed by Parliament and coming into being (if not actual effect) on April 1st has prompted some pre-emptive layoffs. (By this I mean that it will be more difficult, morally speaking, to lay off workers once the govt’s promises are actually passed into law than it is now when they are only proposals). And from the government’s side, how firm is the commitment to maintain a company-favouring tax regime once prices rise again, whenever that may be? Some pundits are saying that the future of electric vehicles and similar low carbon technology will propel copper prices into five figures – even as high as US$30,000 per tonne or nearly ten times the present level in a decade or two. Will there still be no windfall tax; will there still be 100 percent investment write offs? Is there any government, even an MMD one, that would sit back and watch our country being bled dry? It is not easy to negotiate in the dark, without a crystal ball or traditional Chienge-style computer to help you gaze into the future. Sure; but then there are people whose profession is to do exactly that though I doubt they have been utilised. My guess is that our team has not been very steely nerved or imaginative about negotiations. I would have been inclined to leave distant taxation off the table and look at ways of helping mines to keep going during the recession. We used to have in Zambia a Selective Employment Tax which embodied deductions for creating and maintaining jobs. Why not bring back such a thing if your primary worry is job losses? But I wasn’t there so I don’t know all the factors that had to be taken into consideration.
Inadvertently, the weakening of the kwacha against the US dollar has actually acted as a subsidy to the employment of mineworkers (since it now cost less in dollars to pay each of them each month). Perhaps in this case economic nature and her mysterious market workings know better than Zambia’s tax bureaucrats. We will have to take a look at the dance of the currencies next week.
Finally, some housekeeping. The views expressed in these articles are merely my own thinking-aloud as a professional economist; they do not represent official policies of the Patriotic Front. And the email address I gave last week was wrong; it is actually mano@zamtel.zm. Sorry for that."
Sorry to have been away or so long. I have taken a break from blogging to concentrate on other projects. Nonetheless, I am breaking radio silence today to bring you two bits of news.
The first is that I have posted a powerpoint presentation on Boom and Bust on the Zambian Copperbelt that I have been trawling around British Unversities at my academia website http://oxford.academia.edu/AlastairFraser/Papers#d84853. Comments very welcome.
The second is that I have just read an excellent article on the recent revisions to the Mining Tax regime in The Post by PF General Secretary Guy Scott (it's written in a personal capacity).
While he disagrees (as do I) with the Government's recent moves to cut the Windfall Tax at a time when it's not operating anyway, he offers an interesting speculation on what Government negotiators might have been thinking. I was utterly bemused by their moves before I read this, so I'd be interested to know what others make of it.
"Zambia and recession – part 5 Written by Dr Guy Scott
There are more than 100 countries with higher GDP than Zambia. A hundred years of GDP at Zambia’s current level would roughly equate to the size of President Obama’s first (and it is only his first) stimulus package. Given our tiny quantum of economic clout it can safely be said that Zambia will have no role to play in saving the world from recession. Our job is to look after ourselves, perhaps with a now-and-then concerned glance at our neighbours since we do not want unrest across our borders.
There are several ways in which the recession impinges upon Zambia. But first, how long will this thing last? Ben Bernanke, the Chairman of the US Federal Reserve Bank (the “Fed”), is talking about a turn-around within the current year and recovery in 2010. However, the logic of recovery (which is “bubble” logic not “classical” logic) demands the prior restoration of confidence in the minds of consumers and investors. Even if Bernanke thought, as an economist, that the recession might last for several years he would not loudly say so. Part of the job he has, along with many other people, is to create an expectation of recovery that will hopefully become self-fulfilling. (Actually, if you read his statements carefully, you will discover that a “full” recovery is likely to take more than two or three years; so he is covering his professional reputation). Every responsible owner keeps his or her car insured. This is not because they want it to crash or be stolen; nor is it because they expect it to crash or be stolen; it is because they know that it might just, through no fault of their own, crash or get stolen. They hope for the best; but they insure against the worst. With the recession, our leaders may hope for the best, but they must also plan for the worst. Things may get even worse, and the bad times might last long. Now, can we sustain ourselves through a long night if we have to?
The most obvious indicator of hard times in Zambia is the slump in the world copper price; this is accompanied by layoffs of mineworkers and a slowdown in industries servicing the mines. Hard on the heels of all this we will see a drop in tax revenues, and a virtual cessation of new productive investment once unavoidable pre-slump commitments have been fulfilled. Government (particularly Minister of Finance Situmbeko Musokotwane) has been expressing some joy in the fact that current (slumped) copper prices are nonetheless higher that those that preceded the onset of the copper boom three or four years ago. Against this correct observation, however, must be placed the fact that Zambia’s copper output expansion has involved increasingly expensive and capital-intensive extraction – exploiting more and more low-grade or hard-to-access ore. Furthermore, actual extraction is turning out in several new mines to be significantly below projections. So, many mining operations are not actually viable at current price levels of c. US$3,300 per tonne (versus over US$8000 in the middle of last year). The mining industry will shrink, as it has already started to do, unless prices rise.
The Minister of Finance (and National Planning, note) has brought to Parliament a proposal that the mining industry should be relieved of the Windfall Tax and given 100 per cent capital allowances. The windfall tax is a tax introduced to direct some of the excess earnings created by runaway prices into the pockets of Zambians. It was a feature of last year’s budget, following vocal concern by the opposition and some NGOs that Zambia was not receiving her fair share in the boom. Now the windfall tax does not cut in until prices exceed US$5,500 per tonne so it is of no direct short-term relevance in the present market situation. The same goes for capital allowances. These are allowances deductible from profits for the purpose of computing profits tax; in the absence of profits the allowances are meaningless. Why has government made the tax adjustments outlined in the previous paragraph? The logic is funny; indeed it seems to be a form of bubble logic, designed to create an upbeat future scenario rather than directly affect the present. The deal runs like this: If the government promises that it will make life easier and more profitable for the mining companies in the rosy future when prices have recovered then the companies will soldier on, through the dark night, warmed by visions of earnings beyond the dreams of avarice in the good times to come. So the tax breaks are a kind of trick to build hope and confidence, but who is tricking who?
The big problem that emerged during the copper boom was that government had not foreseen the possibility of such a thing when it negotiated “development agreements” during the very hard times of privatisation around the year 2000. The companies managed to get tax concessions galore against the fact they were making no money with which to pay tax anyway. The companies had the whip hand; government’s negotiators – or “negotiators” – were so relieved at being able to unburden the State of the loss-making mines that they completely overlooked the prospect of boom time. What would happen if copper prices went through the roof? Nobody thought; and no provision was made for Zambia to share fairly in any windfall. It subsequently took a lot of campaigning to get an equitable taxation system into place; and now the Honourable minister is proposing to dismantle most of it.
We are almost back where we started, with the companies calling the shots, backed by the implicit threat of more layoffs and consequent political unrest if government does not wag its tail. And how solid is the deal anyway? Has the mining industry stopped laying off workers? As of the week before last it had not. Indeed it may be the case that the promise of the “goodwill” tax concessions being passed by Parliament and coming into being (if not actual effect) on April 1st has prompted some pre-emptive layoffs. (By this I mean that it will be more difficult, morally speaking, to lay off workers once the govt’s promises are actually passed into law than it is now when they are only proposals). And from the government’s side, how firm is the commitment to maintain a company-favouring tax regime once prices rise again, whenever that may be? Some pundits are saying that the future of electric vehicles and similar low carbon technology will propel copper prices into five figures – even as high as US$30,000 per tonne or nearly ten times the present level in a decade or two. Will there still be no windfall tax; will there still be 100 percent investment write offs? Is there any government, even an MMD one, that would sit back and watch our country being bled dry? It is not easy to negotiate in the dark, without a crystal ball or traditional Chienge-style computer to help you gaze into the future. Sure; but then there are people whose profession is to do exactly that though I doubt they have been utilised. My guess is that our team has not been very steely nerved or imaginative about negotiations. I would have been inclined to leave distant taxation off the table and look at ways of helping mines to keep going during the recession. We used to have in Zambia a Selective Employment Tax which embodied deductions for creating and maintaining jobs. Why not bring back such a thing if your primary worry is job losses? But I wasn’t there so I don’t know all the factors that had to be taken into consideration.
Inadvertently, the weakening of the kwacha against the US dollar has actually acted as a subsidy to the employment of mineworkers (since it now cost less in dollars to pay each of them each month). Perhaps in this case economic nature and her mysterious market workings know better than Zambia’s tax bureaucrats. We will have to take a look at the dance of the currencies next week.
Finally, some housekeeping. The views expressed in these articles are merely my own thinking-aloud as a professional economist; they do not represent official policies of the Patriotic Front. And the email address I gave last week was wrong; it is actually mano@zamtel.zm. Sorry for that."
posted by Alastair Fraser at
01:11
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