With the Mining Indaba just a week away, it's important to highlight the issues that miners are facing on the ground. This article from www.postzambia.com explains some of the contentious issues in the mining sector, in this instance in Zambia.The paper highlights the debates around wind-fall taxes, tax incentives and salary disputes. 

This situation is threatening the stability of the local mining sector this year as the miners press for salaries that correspond with the current increase in international metal prices, according to Mine Workers Union of Zambia (MUZ) president Rayford Mbulu warned last week.

Last week, copper prices continued to rise although prices slipped on Thursday after a hefty rise in inventories but strike threats at mines supported prices.

Copper for three-month delivery on the London Meta Exchange (LME) fell almost by US $58 to US$7,452 after LME stocks rose 5,400 tonnes to 119,600 tonnes, still less than three days of global consumption.

A strike vote at Codelco, one of the world’s biggest copper mines in Chile, was causing fears over global supplies.

Thousands of miners at Chile's state-owned copper producer planned an indefinite strike over wages from the beginning of January. Copper prices have risen over fears that a walk-out would bring the mine to a standstill.

Most analysts contend that although inventories and possible reductions in global consumption might affect the future rise in copper prices, industrial disruptions that threaten supply might sustain the current high price for the red metal used mostly in the construction sector.

And Mbulu explained that whereas the mine workers felt the effect of the global financial crisis through loss of jobs after international commodity prices depressed, the employees had nothing to show for the current resurgence in international copper prices.

He said despite the mine workers contributing highly to most of the country’s wealth, they remained among the lowest paid employees.

“I think time has come for the miners to get what they deserve for their toil and sweat,” Mbulu said. “This year, unless we get meaningful remuneration packages, we may not take the situation kindly because we have been taken for the ride for too long. The problem in the mining sector is that the relationship that exists between the workers and employers in the mining sector is similar to that of the horse and the rider where the mine owners want to ride on the backs of the miners and make huge profits…and this as MUZ, we shall not allow the miners (workers) not to be get reward for their sweat.”

Mbulu questioned why the mining companies continued to always come up with excuses when it came to paying their obligations to the country’s institutions and workers.

He said the mine owners did not even show appreciation for the economies of scale they enjoyed in mining other metals like cobalt, by-products of copper, while in some cases, some mining firms produced other products like acid which they sold for profits.

“We don’t expect any excuses this year because copper prices have gone up and they are expected to go even higher than the current US $7, 500 a tonne band…so, we don’t expect any mediocrity for this year,” he said. “So, we need to be rewarded reasonably, we need lucrative wages. The problem is that these mining companies will always continue to find excuses of not paying the workers.”

Mbulu also condemned the abolishment of the windfall mining tax last year which he said had not worked to the benefit of the country.

“Even this fuel increase which has been announced, the mine owners have not been affected because their fuel imports are excluded from taxes but for the miners, they have to pay the high fuel prices,” said Mbulu. “But for them (foreign mine owners), for those that have finished, they are now re-investing…so, no one of them is talking about to say ‘now we have finished the investments so we will pay according our obligations profitably’. But like I have put, we will not allow the workers to remain the poorest in the country while when it comes to contribution to gross domestic product, they are highest contributors, foreign exchange earnings, they are the highest contributors...”

And Standard Chartered Bank head of Research for Africa Razia Khan has said Zambia must be tactical when giving out tax incentives so that mineral wealth benefits all citizens.

Khan also advised the government to revisit the issue of mining windfall taxes and resolve it amicably, saying the matter could be politicised during the 2011 general elections thus sending conflicting signals to investors.

But finance minister Situmbeko Musokotwane has maintained that the government will not reintroduce windfall taxes because not all mining companies were making profits.

There has been considerable pressure from many stakeholders stating that the government must reintroduce the windfall taxes in order for the country to maximise benefits from the sector especially that copper prices have improved on the international market trading at over US $ 7,500 per metric tonne from the level of US $ 2,900 per metric tonne recorded in December 2008.

The pressure is mainly as a result of the government’s apparent failure to include revenue projections from the mines in the 2010 budget, which also replaced windfall taxes with the profit variable tax regime.

She said Zambia was not the only country where the ‘windfall tax’ issues were being debated, saying Tanzania was considering the matter while Nigeria would soon be renegotiating the 50 year-oil agreement with Shell.

“Depending on how these issues are handled, it might have a negative impact, since investors will be weary on the risk associated with imposition of taxes on their investments hence countries such as Zambia must be tactical and the thinking of its government should be long term when giving incentives so that mineral wealth is beneficial to all citizens as well as the investors,” Khan said. “So how can Zambia benefit from the mines?

Everything should start with long term plans including taxation policies that should be monitored through mid-term reviews and these plans should be acceptable by all, that is citizens and investors hence there will be less controversy.”

She said the perception among investors was that the windfall tax was a disincentive to their investments.

“This perception is still high with threats that it might be reintroduced hence affecting investment plans especially that this issue can be politicized in 2011 (elections year) and it should be arbitrated harmoniously,” said Khan.

“No one knows how far this debate will go or what will be the impact on the general investments for the country hence the need to resolve the issue amicably by involving all concerned players and this issue also highlights the importance broadening the tax base to involve various economic sectors in order to reduce dependency on a single sector such as mining.”

And Dr Musokotwane said reintroducing windfall taxes would result in closure of mines thus causing unemployment.

“Although copper prices have improved on the international market, it is not possible to reintroduce windfall taxes because not all mining companies are making profits,” said Dr Musokotwane.

Meanwhile, UK-based Zambian economist Patrick Mulenga has observed that mining companies must only use the windfall gains for their ‘expansion projects’ after the government has deducted its fair share through the windfall tax.

Mulenga, a University of Sussex economics lecturer, observed that windfall gains needed to be shared between the country and investors because no company incorporated windfall gains in their revenue projection.

Mulenga said for direct investment purposes, companies would not plan the windfall gains with any level of confidence.
He explained that the advantage of the windfall tax was that it was transparent and not likely to be subjected to ‘tax engineering’, since everybody would be aware of the increase in the price of copper compared to the price projected in the operating budgets.

“Mining companies must only use the windfall gains for their ‘expansion projects’ after the government has deducted its fair share in the form of the windfall tax,” said Mulenga. “It is an open secret that windfall gains that were made in Zambia have built universities in India but our own leaders and lawmakers continue to use weak legal excuses to deny a fair share for the Zambian people.”

Source: www.postzambia.com 

By Chiwoyu Sinyangwe, Kabanda Chulu and Fridah Zinyama