Low revenue from the mining sector in Zambia and Tanzania: fiscal design, technical capacity or political will?
The developing world and Sub Saharan Africa (SSA) in particular, is witnessing a renewed global race for its resources. From mid-2000 to recent years, the real price has multiplied several times for key minerals, despite a recent slowdown. This change is most likely part of what could be characterised as a fourth super cycle in mineral prices.
The questions asked by many observers linked to this potential historic opportunity are at least two-fold.
First, to what extent did resource rich but poor countries particularly in SSA benefit in recent times from the increased extraction of these non-renewable resources? Secondly, what were the reasons for success or failure?
Through a case study of Zambia and Tanzania using recently available Extractive Industry Transparency Initiative (EITI) data and a benchmarking of seven major mining countries over the period 1998-2011, a recent report tries to provide some answers.
Answers to these questions are fundamental for reasons that many commentators have already elaborated, but in a nutshell, the special concern with mineral resources is that it is a non-renewable resource. This means that its extraction and sale represent a transformation from a pre-existing physical asset into a financial one. In this process, there is often substantial inherent economic rent that in principle belongs to the nation who owns to resource. If the management of this transformation is not effective, the country could stand to increase its economic output in the short term while actually reducing its national wealth. This is exactly what has happened in many countries in SSA in recent years.
The first element that the increased extraction of minerals in any country (including SSA) increases its output and wealth is to establish and secure interest effective revenue sharing mainly through taxation and/or government ownership. Without this in place the other elements such as fiscal rules and effective public investment are not so important in this context.
In our https://www.ictd.ac/en/publications/low-government-revenue-mining-sector-zambia-and-tanzania-fiscal-design-technical” style=”color:rgb(67, 117, 88)”>study, we find a clear confirmation that the government revenue instruments for mining established in the two case countries in Zambia and Tanzania as well as in most major mining countries in SSA, failed by a large margin to deliver what could have constituted an effective “benefit sharing” of revenues.
The estimated forgone government mining revenue is particularly large for Zambia where it has surpassed net total development aid in recent years despite several amendments to the fiscal regime. The best achievers in the sample are not surprisingly, Botswana and Chile, and in both cases, for most years the contribution of government ownership interests surpasses tax, a somewhat controversial but not entirely surprising discovery that deserves further research.
Examining the EITI data for Zambia and Tanzania, it is clear that employee and gross-based (production and/or sales) corporate taxes have dominated the total government mining revenue collected, although for Tanzania the trend is changing. The same picture has been confirmed in global private sector reports of mining and taxation.
A related observation is that even well-established, more developed mining countries such as South Africa in particular, but also Australia to a smaller extent, are also underperforming in terms of government mining revenue collection. The fundamental difference in these countries however is the extent to which one may argue that there are extensive local-national benefits or multiplier effects both through the dominating ownership of the mines by national private companies and the national related industries. Still, controversies surrounding tax regimes for mining in these countries recently speak to the relevance of the issue.1
So what is the explanation or the main factors behind the inability to collect what could constitute an effective “benefit sharing” of the revenues from mining?
We examine briefly the importance of the fiscal design (tax and ownership), technical capacity and political will in particular in with reference to our two case countries.
Overall we find that the fiscal design, and in particular the mining tax regime did not vary so much with what is found in most countries, including in Chile and Botswana. Among the factors that did diverge were: higher capital allowance, no ring fencing of investment, lower royalty rates and a lack of progressivity in key tax instruments. When this was combined with a lack of or an ineffective (in the case of Zambia) government ownership interest, it led overall to an inability to capture significant resource rent. For a recent comprehensive guide to optimal resource taxation including a discussion of the much debated but fundamentally misunderstood windfall taxes, see the Publish What You Pay (PWYP) Norway report.
An equally important factor behind the low government mining revenue was the lack of technical capacity to enforce the fiscal regime for mining in the case countries.
Until recently, Tanzania and Zambia under-invested in building institutional and organisational expertise in mining specific technical, financial and tax audit and collection. This had led to wide spread tax base erosion through a mix of tax avoidance and evasion with the end result of low government mining revenue collected.
Tanzania has in recent years (2010 onwards) managed to fix some of these problems through new government institutions, such as the Tanzania Mineral Audit Agency (TMAA), carrying out solid technical audits and more rigorous tax audit exercises and enforcement, leading to a doubling of mining tax revenue collected from 2011 to 2012. In Zambia, a well-staffed mining tax unit has been established in the tax authority and more comprehensive tax audits are being undertaken. However, so far the results in terms of government mining revenue collection are positive but limited in relative terms.
A final note is with regard to the underlying importance of political will related to the issue of ensuring effective collection of government revenue from mining. It is clear from our assessment that how a country tackles: i) the choice of contractual or concessionary regime, ii) management of exemptions and incentives and iii) ownership interest, tax policy and enforcement, in practice is an expression of the political economy and the priorities of different interest groups and individuals.
It is not by coincidence, for example that developing countries, and in particular in SSA, choose to enter into some of the most complex contracts or agreements, even when they more often than not have a clear disadvantage due to their low level of information and capacity to negotiate these effectively to their benefit from an overall country or societal view. Much can therefore be gained by improving the level of governance and aligning individual and group interests with larger social interests, however this is the underlying challenge of most development conundrums.
Olav Lundstøl is a Senior Country Economist at the Norwegian Embassy in Tanzania.
This blog is based on the ICTD working paper written together with Gael Raballand (World Bank) and Fuvya Nyirongo (Consultant).