katondo street journal march 2016

8/18/2019 Katondo Street Journal March 2016

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PERSPECTIVE

The rise and fall of the mineralroyalty regime in Zambia

Fundanga et. al. look at the botched2015 mineral royalty regime.

THE BRIGHT SIDE OFDARKNESS

When load shedding was introduced, we were told that if demand is allowed to ex-ceed supply the whole electricity system could become unstable and collapse, plung-ing the country into darkness and taking hours or even days to restore. And, we werealso told that this was going to be a temporary measure. However, it has been oversix months; it looks like load shedding is going to be with us for some time. We allknow why load shedding is bad for business. On the ip side, it may actually be agood thing.

NEWS ON THE STREET

Policy rate remains unchanged at 15.5%

AT its quarterly Monetary Policy press brieng, theBank of Zambia (BoZ) kept its policy rate at 15.5%against a backdrop of a sharp rise in ination nowabove 20% and a further deterioration of the currentaccount as export earnings declined largely due todepressed copper prices. Kwacha volatility has sig-nicantly reduced. However, liquidity remains tight,interest high and the demand for government secu-rities low.

Mining Indaba takes place in the face of mas-sive job losses in the sector

AMID an estimated 70, 000 job losses in the South-ern African mining sector, and a further 50, 000 jobslosses if nothing drastic is done, the Investing in Af-rican Mining Indaba™, the world’s largest mininginvestment event, took place in Cape Town, South

Africa from 8th to 11th February 2016. Mines Min-ister Christopher Yaluma and Opposition UPNDPresident Hakainde Hichilema were guest speakers.

Farmers to supply cassava to Kalumbila mine

IN a bid to reduce the importation of starch usedin mining operations, First Quantum’s Kalumbilamine has empowered about 860 farmers from across

various communities in the area who have taken upcassava growing which they will sell to the mine. Cas-sava starch powder can be used as a re-agent in theprocessing of chalcopyrite, a copper sulphide intocopper concentrate.

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Economic and Financial Commentary Vol. 1, Issue 8 March 2016 Lusaka, Zambia

WORD ON THESTREET

Deal with unemployment, notcasualisation

The Labour Minister hasbeen championing the ban of

casualisation of workers. It is now

law. Is it the right policy response?

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COVER STORY


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There are positives to loadshedding

As you enjoy a lukewarmdinner by candle light andyou are unable to wash yourhands from the tap because

the water has run out, it is not ourintention to take cheap shots at ZESCO.I am sure Mr Victor Mundende, theZESCO Managing Director, and histeam have been having a rough timeduring the more than six months thatthey have subjected us, their electricitycustomers, to never-ending loadshedding, except of course for thefour days we were given some reliefduring the festive season.

Granted, there may be some thingsthat they have put in place to mitigateload shedding, like importing about150 MW from Mozambique and therecently reported intent to importabout 300 MW from South Africa. But

we do not seem to have beneted from these imports. We gure ZESCO has beenprioritising supplying power to the copper mines up north, considering the fact thatZambia’s mining output actually increased in 2015, albeit by a small margin of 2, 000metric tonnes, compared to 2014. They have also been giving us free energy-savingbulbs to replace the inefcient incandescent ones.

ZESCO can only do so much. While they are busy racking their brains about howto turn around this crisis, we think we needn’t look much to ZESCO for solutions.

Why have faith in a company that, quite frankly, has a very poor reputation atproviding electricity to just 25% of the Zambian households? Are we going tocontinue ranting and raving and let ZESCO literally pull us back into the dark ages?

Are we going to let load shedding continue to take a toll on our production and

productivity? We are not convinced that load shedding will end when the water levelsat Kariba Dam rise because structural inadequacies have not been comprehensivelydealt with. There

are also issues of pricing. We covered cost-reective tariffs in the February editionof Katondo Street Journal. While on thattopic, we would like to hear your views andencourage you to answer the question inthe insert.

Since ZESCO cannot manage to providea service to the current customer base,let alone stick to a simple load sheddingschedule, we do not see how they will cope

with taking up the 45% of households inthe urban areas and 95% of the householdsin rural areas that still do not have access to

electricity in the future.It is time to ease up on that hospital bill,

which may be brought about by rantingand raving at those poor customer serviceassistants. It is time to consider non-ZESCO alternatives. It is time to reduceour dependence on ZESCO and face thestark reality that our lives will never be thesame again. It is time to invest in alternativeenergy. There are a number of emerging small enterprises that are looking to llthis gap. It is an emerging industry that will, in the short to long term, contributesignicantly to the economy. It is time to remove barriers to the growth of this newindustry. If the law says that all independent power producers (IPPs) have to selltheir power to ZESCO, then by all means this legislation needs to be reviewed tolet the IPPs generate, transmit and distribute power independent of ZESCO. Therejust may be a bright side to all this darkness.

WORD FROM THE EDITOR

Aisha Nalishebo

What is cheaper:

cost reective

tariffs with reliable

supply or below

cost tariffs with

massive load

shedding? Send

your answers to

[email protected].

Who We AreKatondo Street Journal (KSJ) is named after

Katondo Street, a thoroughfare in the CentralBusiness District of Lusaka.

What We Are About At KSJ, we cover business and nancial analyticsin Zambia. We focus on the people, innovationsand ideas behind Zambia’s most dynamic andentrepreneurial companies. We also analyse

business and nancial data to inform decisionmaking by business leaders.

Our tag-line “The Business Highway” providesa fast-paced route for businesses to showcase,

network and grow.

......................................................................

Editor-in-Chief: Aisha Nalishebo

Photography:Humphrey ZimbaSpecial Projects:

Frazier MuliloDesign:

Xel Creations......................................................................

KSJ’s Economic & Financial Commentaryis distributed to subscribers by e-mail

and is available on www.ksj.co.zm.

For advertising and other enquiries please email:[email protected]

© March, 2016. All Rights Reserved

QUOTE OF THE MONTH

“If you don’t build your dream, some-one else will hire you to help them build

theirs.”

Dhirubhai AmbaniFounder, Reliance Industries

..................................................................................................................................................................................................................................................................KATONDO STREET JOURNAL


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THE BRIGHT SIDE OFDARKNESS

COVER STORY

The continued load shedding has really taken a toll on the daily lives of the 53% urban households and 4.5% rural households with access to electricity inthe country. A bride’s wedding cake is spoilt by the lack of refrigeration facilities. Companies have had to shift their working hours from the normal timesto when electricity is available. A student with an assignment due the next day is unable to use her computer to google and research for her assignment. Anew-born baby may be lost due to that incubator in a hospital that could not be switched on. The impact on government revenues is enormous as it has toimport electricity and subsidise it for use in the mines. It has become increasingly clear that most of the measures that Government instituted to minimisethe effects of load shedding have still not taken effect. The respected Engineering Institute of Zambia conducted their own assessment and came up with

some practical recommendations for mitigating the load shedding. Unfortunately, it is our considered view that the measures espoused by the EIZ remainlargely ignored.


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According to a load shedding re-port done by EIZ, the technicalexperts’ team recommended sev-eral short, medium and long termmeasures. We consider some ofthe short term recommendations

which we think need to be insti-tuted by those responsible (Min-istry of Energy, Energy Regula-tion Board and ZESCO).

Bringing on board new pow-er plants. Substantial expansionin quantity, quality and access to

electricity infrastructure servicesis fundamental to rapid and sus-tained economic growth. Yet,for the past couple of decades,there has been no major invest-ment in the electricity sector. Thecountry’s rapid economic growthmeant that the increased demandfor electricity was largely ignored.

In their report, EIZ recom-mended that power projectsunder construction must besupported and expedited e.g.Maamba Coal power plant andItezhi-tezhi Hydroelectric PowerStation. Itezhi-tezhi should havecome on stream in December2015 and the Maamba Coal plantby the end of the rst quarter.

Together, these two power plants would add about 360MW ofpower to the national grid. Whatis going on with regard to theseprojects? Mines Minister Christo-pher Yaluma was recently quoted

by Bloomberg that the MaambaCoal plant will come on stream

by June 2016.Use of energy-efcient

equipment. EIZ ‘encouraged’customers to use energy ef-cient equipment such as energyefcient bulbs. ZESCO has beendistributing free energy efcientlamps. With a target of 1 millionbulbs, they have so far distributed480, 000 bulbs. This is expectedto save 200 megawatts of elec-tricity. We think they need to domore and speed up this process.

Taking a leaf from Kalumbilamine which has engaged over650 small scale farmers to growcassava and produce starch whichis used in the mining operations,ZESCO needs to identify andrope in privatesector rms thatcan produce

energy savingbulbs, to cutdown on theirimport bill. Fur-ther, they can puttheir meter read-ers to good useby having themconduct door-to-door checksand pull downall the non-ef-cient bulbs cur-rently in use andreplace them with efcient ones.

We could save the 200 MW pow-

er within a month! The 200 MW will be more than we are current-

ly importing from Mozambiqueat high cost.

Use of gas for cooking. TheEIZ recommends that customersin low density and medium densi-ty residential areas should be en-couraged to switch to LiqueedPetroleum Gas (LPG) or othersuitable gas for cooking.

Towards the end of their reign,the MMD government issued anumber of prospecting licencesfor oil and gas in various parts

of the country. Now is as gooda time as any to review these li-cences to determine what the sta-tus of these explorations is.

We also understand that LPGis produced as a by-product at

INDENI. Thisoffers an oppor-tunity for the pri-

vate sector to setup LPG kiosksin suburbs andbecome distrib-utors. LPG is acleaner and saf-er alternative tothe environmen-tally-degradingcharcoal and re-

wood which arenow commonlyused by mostpeople.

Migrating to hybrid solargeysers. The EIZ urged Gov-

ernment to issue a statutory in-strument directing that all new

housing estates use hybrid solar water geysers for heating wa-ter and that existing householdsshould be given a xed period tomigrate to hybrid solar geysers.

To our knowledge, this has notbeen heeded to. Our good neigh-bour, Zimbabwe, has banned theuse of electric water geysers innew housing construction andgiven users ve years to migrateto solar-powered water heaters.

This is expected to save up to 400megawatts of electricity in Zim-babwe.

Last word. The energy crisishas made the investment in en-ergy infrastructure all the moreurgent. For the rst time in 20-30years, the country has investedin new power plants, one a coalplant, to reduce the risk of justusing hydroelectric power whichcurrently accounts for 99% oftotal electricity installations in thecountry. The use of energy-ef-cient bulbs provides an opportu-nity to the private sector to startmanufacturing these bulbs locally.Using gas for cooking may helprenew the interest in prospectingfor oil and gas. The setting up ofgas kiosks in the communities willprovide opportunities for smallrms to supply this service andhelp create jobs. And migratingto hybrid solar geysers promotesthe use of green technologies.

The current load shedding willhelp change the way we do things

in the country and is likely to ac-celerate the increase in the num-ber of households with access toelectricity.

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“Installing energy-

efcient bulbs could

save 200MW …

more than we are

currently importing

from Mozambique

at high cost”


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WORD ON THESTREET“WORST YEAR EVER” ON KATONDO STREET

K atondo Street is best known forforeign currency trading. Thetroubled copper industry put alot of pressure on the Zambian

Kwacha in 2015. We had an in-depth discus-sion with a number of traders on Katondo

Street with regard to how their businessesperformed in view of the high currency de-preciation during 2015 and what lies aheadin 2016 and beyond. Most traders called

2015 “the worst year in the history of ourbusiness on Katondo Street”.

How was business in 2015? We faced alot of challenges. We experienced low salesdue to the low supply of forex as most ofour clients preferred to hold on to foreign

currencies. The rapid depreciation of theKwacha was too much for our kind of busi-ness causing it to completely slow down.

The year 2015 was the worst year in the

history of our business on Katondo Street. What do you think business is going to

be like in 2016? This is only February, soit is too early to make any judgement espe-cially that it is an election year.

What are your coping strategies? In times

of low forex sales, we normally diversifyinto other businesses like curio sales, gro-ceries and other fast selling items.

On Casualisation: Shouldn’t We Be Dealing With Unemployment Instead?

Employment insecurity now pervades many workplaces. Labour and Social Security Minister Fackson Shamenda recently announced that President Lungu s igned into

law the amendment to the Employment Act No. 15 of 2015 Cap 268 of the laws of Zambia which makes it illegal for any employer to engage an employee on a casualbasis for any job of a permanent nature. The move has been welcomed by many stakeholders especially the labour movement and civil society organisations. But is it theright policy response? We examine the evidence.

The Employment Act, Cap. 268of the Laws of Zambia, de-nes a casual employee as “anyemployee the terms of whoseemployment provide for hispayment at the end of each dayand who is engaged for a periodof not more than six months’.

We broaden this denition byincluding workers deprivedof many rights and benets,including lack of entitlementto paid annual leave, paid sick

leave, paid public holidays, no-tice of dismissal and redundan-

cy pay. It is a form of employ-ment that can be regarded aslargely unprotected because itmisses out on many types ofsocial protection developed forpermanent employees.

Using the 2014 Labour ForceSurvey, we dene casual em-ployees as paid temporary/casual employees who do notcontribute to any social security;or are not entitled to paid leave,paid sick leave or paid maternity

leave; or do not have a writtencontract or oral agreement).

Based on this denition, there were 319, 000 people who arein casual employment in 2014.

Working on the assumptionthat employees working in theformal sector but are not enti-tled to standard labour legisla-tion and entitlements to certainemployment benets can besaid to be casually employed,

we use the difference betweenformal sector employment andformal employment to validate

our earlier results. This givessimilar results (315, 000).

Casualisation is largely a malephenomenon and concentrat-ed among young people. Ofthe 319, 000 casually employedpeople, 224, 000 people (or70%) were males. About 35%of all casuals were aged lessthan 25 years. Admittedly, stu-dents may probably account fora high proportion of casuals inthis younger age group. None-theless, an even higher propor-tion (37%) of all casuals is to

be found in the 25–34 year agegroup.

MY TWO CENTS

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By Frazier Mulilo


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For each age group in 2014, we compare the incidence of casualemployment with the unemployment rate. It shows that variations inthe incidence of casual employment by age are closely associated with

variations in the unemployment rate. The association between unem-ployment and casual employment would appear to add weight to theargument that casual employment is largely an involuntary arrange-ment for many workers. In other words, casual employees share morein common with the unemployed than they do with the employed.

Unsurprisingly, casuals are mostly concentrated in agriculture, con-struction, trading, activities of households as employers and transport.In Zambia, agriculture is predominantly seasonal, so is construction.

This may suggest that casual staff would be employed to cover busyperiods in the business cycle and then laid off. This means that theirjob tenure would be short term and the worker would return to beingunemployed or perhaps to being a full time student.

It is no mere coincidence that casualisation is highly correlated withunemployment. High unemployment favours employers who casual-

ise their workforce, since anyone who leaves can easily be replaced.Shouldn’t government be looking at bringing down the unemploymentrate before enforcing casualisation legislation? Or is it casualisationthat is causing the high unemployment among young people?

Government’s main focus should be to cultivate more productivepermanent jobs as part of a broader diversication strategy. The struc-ture and dependence of the economy on one commodity export hasdire consequences whenever the price of copper collapses internation-ally. Therefore, diversication of the economy is very cardinal.

Presently, companies are experiencing a myriad of challenges whichinclude load shedding, yoyo electricity tariffs, volatile exchange rates,and a somewhat hostile government policy framework. To add to that,they have just been slapped with sanctions for short-term employ-ment. All these constitute ingredients of major macro crisis that canonly result in further higher rates of unemployment.

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FACTS & STATS

National Maize Balance Sheet for the 2015/2016 Agricultural Marketing Season

MAIZE

AVAILABILITY

(i) Opening stocks (1st May 2015) 1,345,401

(ii) Total production (2014/15) 2,518,221

(iii) Total availability 3,963,622

REQUIREMENTS:

(iv) Staple food requirementsHuman consumption 1,501,896

Strategic reserve stocks 500,000

(v) Industrial requirements

Stockfeed 245,630

Breweries 110,000

Grain retained for other uses 40,000

(vi) Losses 130,911

(vii) Structural cross border trade 200,000

(viii) Existing FRA export commitments 358,417

(ix) Total requirements 3,086,854

A. Surplus/decit ((ix) - (iii)) 876,768

Potential commercial exports (876,768)

Food and import requirements -

Source: CSO Monthly Bulletin

The President an-nounced in late Januarythat Zambia is likelyto face a maize decit

of up to 200, 000 metric tonnes. To plug the decit, Government was considering either askingfarmers to grow irrigated maize;or mop up local stocks in remoteparts of the country; or importthe maize from South America.

Hardly a week later, Minister of Agriculture, Hon. Given Lubin-

da, announced that the countryhad sufcient stocks of maizeamounting to 1.3 million metrictonnes – enough to last up to atleast August.

The decision of whether to im-port or not is not something thatshould not be taken lightly. Con-sidering that there are conictingnumbers coming from govern-ment, the best arbiter should be

the National Food Balance Sheetfor the 2016/2017 agriculture

marketing season, produced af-ter the Ministry of Agricultureand the Central Statistical Of-ce carry out the 2015/16 CropForecasting Survey (CFS). Thosenumbers are currently not avail-able as the CFS will only be con-ducted probably toward the endof March or in April. So we con-sider the maize balance sheet forthe 2015/16 agricultural market-

ing season to give us a perspec-tive of what the estimates were

the current marketing season.Based on the 2015/16 Food

Balance Sheet, the annual maizeconsumption is estimated at1.5 million metric tonnes. Thistranslates to a monthly maizeconsumption of about 125, 000metric tonnes. IAPRI, the localagricultural think tank, agrees

with the Minister as they reportedin their quarterly bulletin that the

country had enough maize stocksto last up to August 2016.

TO IMPORT OR NOT TO IMPORT?THAT IS THE MAIZE QUESTION


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PERSPECTIVETHE RISE AND FALL OF THE MINERAL ROYALTY REGIME IN ZAMBIA

By Odd-Helge Fjeldstad, Caleb Fundanga and Lisa Rakner

Zambia has a long history of disputed changes of the mining tax regime with damaging effects on the working relations between Government and the mining sector. Ashared assumption has been that prot-r elated taxes such as the corporate income tax (CIT) should be a main component of the mining tax regime. In the 2015 Budget,the Government abolished the CIT and instead increased the royalty rates substantially. A few months later, the new tax regime was reversed - the CIT was reintroducedand royalty rates reduced. Fjeldstad, Fundanga and Rakner examine these dramatic changes in mining taxation. They argue that a more constructive public-privatedialogue is essential to ensure a sustainable tax framework and taxpayers’trust in the tax system.

S

ince the 2006 elections,mining taxation has be-come a central part of apolarised debate in Zam-

bia. There is a strong perceptionamong many Zambians, mediaand civil society organisationsthat international mining compa-nies deprive them of their wealthand that Government’s distribu-tion of wealth is unjust. Thesesentiments create political mo-bilisation and election campaignsthat depict the government elitesas compromised by the mining in-dustry for personal gain. Duringthe period 1992-2011, the Move-ment for Multiparty Democracy(MMD) was the ruling party. Itbecame increasingly unpopular in

the mineral-rich Copperbelt. Themain opposition party, the Patri-otic Front, capitalised on this andmarginally lost the 2006 electionsto MMD. PF’s campaign, in addi-tion to its pro-poor rhetoric, fo-cused on reducing personal taxesand increasing mining taxes and

won the support of urban work-ers who considered the MMD tohave sold out the country to mul-tinational companies. After the2006 elections, MMD changedthe mining tax regime in the 2008budget. Corporate income tax

was increased from 25% to 30%,

mineral royalty increased from0.6% to 3% of gross sales value,

and a windfall tax was triggered atdifferent price levels for differentbase metals. In 2012, the royaltyrate was further increased to 6%

by the new PF government.In November 2012, the then

Deputy Minister of Finance stat-ed that “Zambia loses betweenUS$1.5-2 billion every year dueto tax evasion and avoidance,mainly in the mining sector”. Themining industry disputed this andclaimed that Zambia received areasonable level of tax revenuefrom the sector. These positionsreect a deep-rooted distrustbetween the Government andthe mining companies. The lackof trust creates an unsustainablesituation as the country’s mineral

resources are being depleted, andmust be seen in relation to thepoorly implemented privatisationof the Zambian mines.

The state-owned mining com-pany, the Zambia ConsolidatedCopper Mines (ZCCM), wasprivatised in the late 1990s. The1995 Privatisation Act permit-ted the government to enter intoDevelopment Agreements (Das)

with specic companies. Insteadof a uniform tax regime, theDas were unique to each com-pany. The individual agreementsallowed companies to carry for-

ward losses for 15-20 years. Thegovernment agreed not to amend

any of the individual tax agree-ments negotiated for a period ofup to 20 years. The individual-ised, secretive nature of the Das

meant that there were no mean-ingful consultations, open publicdiscussions or disclosures of theterms. The inability of the gov-ernment to earn revenues fromthe mines prompted national andtransnational civil society organi-sations and opposition parties topressure the government to rene-gotiate the agreements.

Prot-related taxes such asthe CIT are supposed to delivera signicant share of the totalgovernment revenue from theresource production and export.However, royalty contributed

21% of the total revenues fromthe mining sector in 2013, com-pared to only 16% for corporateincome tax, which is less than thepersonal income tax paid by theemployees of the mining compa-nies in the form of PAYE (17%).

The largest revenue stream fromextractives was from VAT onimports (27%). However, as ex-porters, much of the VAT paid

would be refunded to the miningcompanies.

According to the Mineral Val-ue Chain Monitoring ProjectBaseline Report, only wo mines,

Kansanshi and Chibuluma, outof nine major copper mines,

have consistently paid CIT inrecent years. The others have re-ported losses or marginal prots.

The administrative challenges of

taxing prots in the extractiveindustries and the relatively lowrevenue yield from CIT, led theGovernment to make the un-precedented step in 2014 to abol-ish CIT and substantially increasethe royalty rates.

In the October 2014 BudgetSpeech, the Minister of Financeannounced that mineral royaltieson the norm value of base metalsproduced, would increase from6% to 20%for open pit mining,and to 8% on the undergroundmining. Ad valorem royalty ratesfro copper vary between 0% and

8%. The new rate in Zambia foropen pit mines was way abovethis range. The corporate incometax rate applicable on the miningoperations with an exception ofmineral processing, was revisedfrom 30% to 0%. Variable prottax, of up to 15% when the tableincome exceed 8% of gross sales,

was abolished. These changes,effective from 1 January 2015,changed the mining tax regimefrom a prot based tax system tos revenue based tax system. Theroyalty regime aimed at closingthe loopholes companies had

used to evade corporate incometax.

Prof. Odd-Helge Fjeldstad Dr. Caleb Fundanga Prof. Lisa Rakner


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Major tax reforms benet fromtransparent and thorough consul-tations between the Governmentand taxpayers. Experiences showthat such consultations may helpidentify undesirable implicationsof drafted proposals and contrib-ute do the legitimacy of the newtax regime. Consensus among keystakeholders is a prerequisite fora sustainable tax framework.

Consultations of any substancebetween the Government and theindustry on the new mining taxlegislation were largely missingor dysfunctional. Most were tak-en by surprise by the new royaltyrates and were only made awareof them when the Budget wasannounced by the Minister of Fi-nance in October 2014. The newregime coincided with a signi-cant drop in copper prices. Whenthe new mining act was passed in

Parliament on December 2014,the Canadian-owned

Barrick Gold Corporation,owner of the Lumwana open pitmine, issued a statement that thecompany would suspended itsoperations.

Media reports following Presi-dent Michael Sata’s death in lateOctober 2014 indicate that themining companies had alreadystarted to renegotiate the newtax regime. As expected, shortlyafter the presidential bye-elec-tion, in April 2015, Governmentannounced it would revert to the

previous corporate income struc-ture and reduce the mineral royal-ty rate from 20% to 9% for openpit mines, and from 8% to 6% forunderground mines. This change

was enacted on 1 July 2015. Un-surprisingly, it was generally wellreceived by both the industry andtax practitioners. Lumwana mineresumed its operations. The 2016Budget maintains the currentenacted tax regime, which mightreect that no immediate furtherchanges of the mining tax regimeare being prepared.

The rise and fall of the roy-

alty regime, follows a pattern inZambia that once a new govern-ment is in place, one can almostbe certain that mining interestscome to the fore. Underlining theindividualised negotiations andinternational business inuenceover State House, it was the Pres-ident himself who announcedthe revocation of the mining actin 2015.

Recommendations for a more sustainable mining tax regime

The choice of tax bases in ex-

tractive sectors varies betweencountries. For Zambia, it is im-

portant to secure stability, pre-dictability and transparency inthe mining tax regime. Experi-ences with the rise and fall of themining tax regime provide somelessons for policymakers.

1. The tax regime should be predictable for investors. The erratic and frequentchanges in the mining tax re-gime, especially since 2009,have damaged the credibilityof the mining tax regime inZambia, and have had nega-tive impacts on trust relationsbetween Government and theindustry. Stability does notimply that changes cannot bemade, but these should be

well prepared and based onconsultations with key stake-holders.

2. Consensus among keystakeholders is a prereq-uisite for a sustainable taxregime. The absence of realand substantive consultationson major tax reforms havecontributed to underminetrust between the industry andthe Government.

3. There is need to establishclear, unambiguous rules with few exemptions andequal treatment of companies. The original MiningDevelopment Agreements inZambia were damaging in thisrespect, establishing differ-

ent tax regimes for individualmining companies.

4. The tax system should besimple to understand andimplement for both tax ad-ministrators and taxpayers.

The royalty regime proved tobe difcult to administer sinceit implied different royaltyrates between open and un-derground mines. The royaltyrates did not take into consid-eration that some deep shaftsproduce high-grade minerals,

which can be extracted at rel-atively low costs, while some

open pits produce low-grademinerals, which are relative-ly costly to extract. For somemines, it was also difcult toassess what share of the ex-tracted minerals came fromopen and deep shafts, respec-tively.

5. Zambia should revamp itsmineral revenue model andmove towards a nationalmodelling team anchoringtransfer pricing, costs and pricing monitoring, and au-dits into this. This may helpdevelop better mechanisms

for information and datasharing between key public

nance management agencies,and, thus, contribute to devel-op more reliable data for reve-nue projections and tax policydesign.

Revenues from extractive resourc-es are volatile. This is somethingZambia has experienced manytimes. As a series of short livedand varied attempts at changingthe mining tax system since theprivatisation in the late 1990shave shown, diversifying publicnances by broadening the taxbase is important for budget sta-bility. In this perspective, a broad-based tax system that includes themajority of enterprises and citi-zens is essential for accountablestate-citizen relations. A ‘good’natural resource tax regime isone that does not undermine –or strangle – the developmentof the ordinary tax system. Thetax debate in Zambia is mainlyabout mining. There is need for abroader approach to tax reform.One needs to think holistic aboutthe tax system, since the differentsegments of it interfere with eachother; the way extractive sectorsare taxed, including exemptions,tax holidays, abusive tax avoid-ance, impacts on other taxpayers’behaviour, etc. If the most re-sourceful taxpayers do not con-

tribute with tax revenue throughexemptions and other measures,this will affect the tax behaviourof other taxpayers, including do-mestic companies. Building a ro-bust tax regime in Zambia is notonly about administrative capaci-ty. It is largely about politics andbuilding accountable state-citizenrelations. To achieve this will re-quire strong and sustained citizenengagement around taxation.

Prof. Odd-Helge Fjeldstad is Ex- traordinary Professor at the AfricanTax Institute, University of Pretoria;Research Director of the Internation- al Centre for Tax and Development(ICTD); and Senior Researcher atChr. Michelsen Institute (CMI) wherehe coordinates the research group on taxand public nance management.

Dr. Caleb Fundanga serves as Pres- ident at the Institute for Finance and

Economics and Executive Directorat the Macroeconomic and Financial

Management Institute of Eastern andSouthern Africa (MEFMI). He alsoserved as Governor at the Bank ofZambia.

Prof. Lise Rakner is a Professor atUniversity of Bergen, Norway. Sheholds an adjunct position as Senior Re- searcher at the Chr. Michelsen Institute(CMI), Bergen.

“BOMAIYANGANEPO”

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katondo street journal march 2016

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