IMF behind exemptions to mineral royalty hike

++Apologies for the length and technical nature of this entry, the original article is very detailed. You will need a subscription to read it in full, so for those without I quote extensively.++

As previously discussed in this blog, The Post newspaper claims to have access to IMF documents on taxation in the mining sector that have heavily influenced the Ministry of Finance’s approach to mineral royalties and the renegotiation of Development Agreements (DAs). Another report today contains further details, as well as naming the documents.

The paper claims the reports were prepared by the IMF Fiscal Affairs Department at the request of Finance Minister and that they are titled, "Fiscal regime for copper mining", November 2005 and "Fiscal arrangements for the mining sector - a further review" August 2006. (I cannot find either document on the IMF’s huge website, though an eager reader might be able to hunt them down, and please forward them. It is surprising what the IMF do paste on the site – there is just do much there that it is hard to find the documents. I have also asked both the IMF mission in Lusaka and The Post to share them, and if successful, will post them here.)

The report makes a number of interesting claims.

1) The Post notes, “the IMF strongly recommended that the government increases the mineral royalty tax from 0.6 per cent to a maximum of three per cent.” The word maximum is worth noting. MPs and others have been asking the Minister of Finance where the widely discussed 3% figure came from and why it cannot be higher. Typically it is suggested that this is towards the lower end of regional and international average royalties, so it would increase revenue but keep Zambia ‘competitive’. Whether you accept this argument depends on why you believe mining firms come to Zambia: to exploit high grade copper deposits or to take advantage of tax incentives? Some regional royalties are as high as 20%. We may now have an answer as to how the 3% figure appears to have been set in stone.

2) The Post also quotes the IMF stating that, "The mission recommends that existing development agreements should be respected and appropriate legal advice taken before any initiative is contemplated that might amount to an invitation to contract parties to revise any terms of their agreements." This explains where the exemption for existing contract holders in recently announced revision of the Mines and Minerals Act comes from. It also contradicts suggestions made by mining executives and reported in ‘For Whom the Windfalls?’ that the IMF changed their position on exemptions following meetings in October 2006. It appears that defending corporate interests was already the preference of the IMF in August, and that they felt renegotiation could only proceed with the agreement of the companies. At the same time, the IMF suggests that, “If revision of terms for existing investors, by mutual agreement, becomes possible, the mission recommends that any revisions should be consistent, as far as possible, with the revised fiscal terms for new projects. In particular, royalty should not exceed three percent of netback value; and additional payments to government should take the form of a proportional tax when a specified rate of return has been achieved.” Thias raises another issue. The Government’s view that the only issue for re-negotiation would be the royalty rate is reported in ‘For Whom the Windfalls?’ What then is the ‘proportional tax’ being discussed here, and does it open up hopes for a more ambitious renegotiation? Again, comments are welcome.

3) Despite its role in demanding the legislation that allowed them to be negotiated, and its defence of their legal inviobility, the IMF implicitly recognises that the existing DAs are unfair, saying no further contracts should be signed under the same terms. The IMF argues that Zambia should wait until “the scope of the agreements has been narrowed, and the revised fiscal terms for new projects can be incorporated…. The Mines and Minerals Act (section 9) should be amended as soon as possible to provide that the minister does not have scope to vary fiscal terms, or exempt royalties, or to include fiscal matters other than fiscal stability in development agreements.” This last section is interesting (at least to historians of the negotiating process). The IMF seems to be suggesting that the problem with the DAs flows not from the original IMF-planned legislation, but from an amendment in 2000. The Post report, “The IMF noted that when the Mines and Minerals Act was enacted in 1995, it provided clear powers for the making of mining agreements. However, the mines minister had no authority to vary fiscal terms other than royalty terms in a development agreement but after enactment of the 2000 amendments to the Mines and Minerals Act, development agreements could override any existing law or regulation.” This is an odd claim given that most of the Development Agreements were negotiated and signed before 2000. Chambishi Metals, NFC, Kansanhi and Chibuluma all signed between 1997 and 1998. KCM (the first time around under Anglo-American) and Mopani signed in March 2000. Minewatcher doesn’t know anything about this amendment. However, it is my understanding that all of the Development Agreements override existing laws and regulations. Information and views from readers would be welcome.

4) The IMF reports also discuss other potential sources of revenue for Zambia – price participation and the ZCCM-IH minority holdings in the mining companies. They note that neither mechanism is as yet performing to the benefit of Zambia and suggest that the financial structure of ZCCM-IH should be reviewed. These are issues that a number of readers have picked up on and suggested are not sufficiently considered in ‘For Whom the Windfalls?’ I would welcome further discussion and clarification of the issue on this site.

5) The mission developed simulation models showing the impact on profits of the three largest mining enterprises in Zambia: KCM, Mopani, and Kansanshi in case of price fluctuations. It found that Kansanshi and KCM would yield the highest returns, with Mopani currently less profitable. The simulations suggested that KCM and Mopani would be vulnerable to sudden falls in price and proposed that the state’s share of the take from mining should be designed to respond to both high and low world copper prices.

6) Finally, The Post also claims, “officials in the Ministry of Mines and some cabinet ministers who were approached, said they never saw any such reports from IMF tabled before them for their consideration.” It seems perfectly possible the Cabinet have not seen the documents. Certainly they have never been shared with Parliament. Obviously someone in the Finance Ministry has seen them, given that they formed the basis of the 2007 budget. Perhaps what is implied is that the report is not openly available for inspection within the Ministry, or that internal procedures were not followed? This is an interesting example of how IMF influence is strong but completely untransparent. Everyone following this issue has known for some time that the Government is hiding behind (sorry, should that be ‘basing its position on’) ‘expert’ recommendations from the IMF. Unless the basis for such recommendations are open for inspection and challenge for Cabinet, Parliament and civil society, the effect of IMF interventions is to close down democratic debate.

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