A REVIEW OF PRESIDENT HAKAINDE HICHILEMA’S 1 YEAR IN OFFICE
By Sean Tembo – PeP President
PART 2: MINING
1. Although it is a sector of the wider Zambian economy, mining is so important to this nation that it deserves to stand alone when reviewing the performance of an administration in office. When Mr. Hakainde Hichilema was in opposition, he was not clear about the specific reforms that he would implement for the mining sector, once elected into office. He only said that he would improve the mining sector. So perhaps a good starting point to reviewing his performance for this sector is to look at the key challenges that exist and assessing what he has so far done to resolve these challenges.
2. From our standpoint, the biggest problem which this country faces with regard to the mining sector is the lack of adequate benefit. The nation does not get the full value from the minerals that are being mined. There are four main ways in which Zambia is supposed to benefit from her mining sector. That is tax revenue, forex earnings, employment creation and empowerment of local suppliers and contractors.
3) Tax Revenue – as a nation, we need to collect as much tax revenue as possible, so that we can use this money to diversify our economy into other sectors like the way Dubai used oil money to diversify the city into a tourist destination and world trading hub. However, the mines have consistently and continuously dodged from paying their fair share of tax to this country. They achieve this tax dodging using two main tricks; transfer pricing and exaggerating the cost of procured capital equipment. Instead of selling our minerals to independent third parties at the ruling prices on the London Metal Exchange (LME), they create sister subsidiary companies abroad where they sell our minerals at discounted prices using complex derivatives such as options. The end result is that the sales value which they record in their financial statements is far lower than the actual sales value. Secondly, when they buy equipment for mining, they do not buy from independent third parties at fair value, but buy from their own sister subsidiary companies abroad at inflated prices such that they claim higher capital allowances locally than what they are entitled to. A combination of these tax dodging schemes means that most mining campanies in Zambia declare perpetual tax losses for decades and therefore do not pay a single ngwee in corporate tax. Meanwhile they continue operating, they continue extracting and exporting our copper and other minerals, year after year. While mining companies and their shareholders become richer, the Zambian people, the owners of the copper, become poorer.
4. Generally, there has been very little political will among successive Governments in Zambia to address the issue of tax dodging among mining companies. This has largely been because of the huge sums of money involved. I mean, we are talking about billions of dollars in tax revenue leakages per annum here. Therefore, every President that is elected into office, ends up being offered a few hundred million dollars into an untraceable offshore account, in return to not doing anything about the tax dodging antics being practiced by the mines. Very few Presidents of Zambia have had the backbone to resist the bribes offered by mining companies. Our expectation was that President Hakainde Hichilema would have the backbone to confront the mines and make them pay their fair share of tax so that as a nation, we can also pay our bills such as buying medicines for hospitals, subsidizing fuel prices, paying farmers on time for their crops etcetera. But alas, President Hakainde Hichilema decided to do the exact opposite. He decided to give the mines a defacto tax holiday by making mineral royalty tax (MRT) a tax-deductible expense for purposes of computing corporate tax. The total effect of this defacto tax holiday is that the little which the mines used to pay previously has now further been diminished. The President’s argument is that the tax holidays will attract more investment into the mining sector. But what about the Zambian people? When are they going to begin to benefit from their minerals?
5. Forex Earnings – The second key benefit which this country is supposed to get from the mining sector is forex earnings. being the largest export sector, the mining industry must contribute the most to our forex needs, but they don’t because they don’t remit the gross proceeds of mineral sales. What should happen is that when the mines sell our minerals, which is done in a foreign currency such as US dollars, the payment for those minerals should come to a Zambian bank. If a particular mining company needs to remit payments to foreign suppliers, those payments should be made from the Zambian bank. At the end of the quarter or financial year, if the company declares a dividend, then they can pay out the dividend from the Zambian bank after remitting the appropriate withholding tax (WHT) to ZRA. That would ensure that we have abundant forex in our banking system and it would make the Kwacha to appreciate. It would also address the issue of tax evasion among the mining companies. However, what actually happens is that when mining companies sell our minerals abroad, they keep the money abroad and only bring back a few dollars at month-end to meet their local obligations. Late Former President Michael Sata tried to change this, but l guess he died too early. Currently, President Hakainde Hichilema has not expressed any appetite to change the status quo. He seems to be happy to use Bank of Zambia foreign reserves to mechanically support the Kwacha. When you look at the quarterly BOZ reports, you will note that about US$200 million has so far been used to support the Kwacha exchange rate in the past 10 months. But the question is; why deplete our foreign reserves to support the exchange rate when we can make the Kwacha to stand on its own by compelling the mines to remit the gross proceeds of their mineral sales back to Zambia?
6. Employment Creation – being the largest sector in our economy, the mining industry has a duty and obligation to employ our people, but most of the high value jobs are given to foreigners and only low level jobs are given to citizens. Even when Zambians are employed, they are given a fraction of the salaries given to expatriates. Most of our Mining and Meturlagy graduates from UNZA and CBU end up selling hardware at Town Center because the mines cannot employ them. If the particular mining company is from Canada, then the majority of it’s senior personnel will be from Canada. If the mining company is from India, then the majority of it’s senior personnel will be from India. And so on and so forth. But if mining companies based in Zambia cannot employ Zambians, then who will? All that needs to be done is for the Immigration Department to give these mining companies employment quotas. If their annual turnover is less than US$100 million then they can only employ two expatriates. Turnover of between $100 million and $400 million they can employ three expatriates and so own and so forth. Why should an Engineer from South Africa be given a job when an equally qualified UNZA engineer is selling K5 cabbages at Soweto market due to lack of employment? We expected President Hakainde Hichilema to address this matter but with his romance with the mines blossoming, it is unlikely that he would ask them such awkward questions.
7. Support to Local Suppliers & Contractors – Zambian suppliers and contractors are sidelined in preference to foreign suppliers and contractors, mostly from the country of origin of the particular mining owner. This suffocates our economy. As the biggest sector of our economy, mining is supposed to support other sectors such as manufacturing. When our mines were owned by Government through Zambia Consolidated Copper Mines (ZCCM), Ndola was a manufacturing hub of the nation. That is because the industries in Ndola were supported by the mines. But now, there is no manufacturing hub in Zambia because the mines buy their supplies from abroad, usually from their countries of origin. Most have even shamelessly relocated their supply chain centers from Zambia to Johannesburg, Toronto, New Delhi and Shanghai.
8. Indeed, what these mining companies are doing to Zambia is not investment but exploitation. They first exploited this country by buying our mines for a song. They have continued to exploit us by refusing to pay a fair share of tax, by refusing to bring back the dollars after selling our minerals, by refusing to employ our people and by refusing to support our local suppliers and contractors. After violating this country in every way possible, we hoped that the new President would stand up to the mines and demand what is due to us. But alas, he decided to romance with them. As part of the romance, President Hakainde Hichilema has further decided to gift the mines with a defacto tax holiday. Instead of the mines struggling with complex tax dodging schemes, the President has essentially legalized tax dodging. How happy the mines must be. And how sad the Zambian people are.
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SET 13.08.2022