A comment on some key issues that require our attention when debating current and future Development Agreements

With this blog entry I would first like to commend Professor Lungu and Mr. Fraser on an excellent report which I read with great interest. It has provided me with valuable insights into the social and environmental issues facing the Copperbelt today, covering several topics that I aim to explore further when I begin my PhD field study in Zambia in July. Having read the report and the companion blog, I would in particular like to comment on the following two themes:

The gap between DAs’ content and outcomes with regard to social and environmental services
When the new investors failed to provide social services, the assumption on the Copperbelt was that mining companies had taken on assets without associated social responsibilities (p.16). However, your report indicates that development agreements (DAs) do in fact indicate significant investor responsibilities in these areas. The problem thus appears to be one of *enforcement*, rather than *content* of rules.

Greater transparency with regards to the DAs would clearly have facilitated enforcement. Stakeholders with an interest in the behaviour of mining companies, but without direct involvement in the formulation of the DAs (local communities, NGOs, ECZ to name a few), would then have been able to put pressure on the companies.

An interesting question is thus why the DAs were kept from public scrutiny for so long. Why did the Zambian government not make the DAs public in order to harness the power of civil society to support the government in monitoring the DAs? It would, for example, be interesting to know if withholding the DAs from public scrutiny was a *conscious decision* by the Zambian government. Was this move perhaps an additional incentive for would-be investors (protecting them from wider scrutiny)? Alternatively, did a capacity-constrained Zambian government, knowing that it would face difficulties in monitoring implementation of the DAs, chose to lower its own profile by not making DAs public? Or was the culture of secrecy perhaps something that the mining sector actively solicited? Exploring these questions can help us understand where mining companies, government and civil society should focus their efforts in increasing the transparency of the Zambian mining sector.

With regards to the present debate about DA renegotiation, it is clear that the mining companies have not followed *their* end of the bargain. Sure, due to lacking capacity the government has not enforced these rules (e.g. in relation to provision of social services). However the lack of enforcement capacity should not give the mining companies free reign. If it can be established (ideally through an independent comprehensive review of the more ‘visible’ social and environmental DA clauses) that companies have failed to adhere to their side of the bargain, the Zambian government may be able to push for renegotiation without risking its legitimacy as a government that provides attractive and fair investment conditions.

Transfer pricing and tax avoidance
Another topic I believe needs to be brought into the debate concerns issues of tax avoidance. As the topic of mining companies’ profitability reaches centre stage, we must also look at *how* firms arrive at their reported profits. Granted, the DAs generally allow companies to deduct investments, carry forward losses etc. However there are other ways, not allowed under DAs, whereby mining companies in Zambia may be trimming their tax bill. Chief among these is so called transfer pricing, which occurs where an inter-company transaction is conducted at a price above the market (or ‘arms-length’) rate. For example, the mining company in Zambia may buy inputs from its home-country at a significantly above-market price, thus incurring high costs that enable it to pay fewer taxes. For further information about the issues of tax avoidance, please see the following report by the Tax Justice Network:

http://www.taxjustice.net/cms/upload/pdf/Development_Journal_-_CSR_to_the_Bottom_Line_-_SEP-04.pdf

How can the Zambian people ascertain that such practices are not used to reduce mining companies’ tax payments? Probing companies with regard to their intra-firm transactions may be a sensitive issue. However it should be in a company’s own interest, if it has nothing to hide, to cooperate with such an initiative, as it will lend credibility to its wider stance on the payment of taxes.

It would be interesting to hear some more ‘on-the-ground’ perspectives on the above issues.

Kind regards,
Dan Haglund
Doctoral candidate
Dept. of Economics and International Development, University of Bath
d.haglund@bath.ac.uk