Ahead of the 2022 Budget announcement on 29 October 2021, Professor Saasa spoke to Mining For Zambia about how the establishment of “a formal dialogue architecture” could help Government realise its production goal of two million tonnes of copper per year, and ensure that Zambians see economic benefits in the short term, too.
In Part 1 of this interview, you talked about how important it is for Government to have a “dependable communications strategy,” particularly at a time when a new Administration has difficult or potentially unpalatable decisions to make. You’ve also mentioned the importance of improved communication between the public and the private sector. Please explain why this is an essential step in growing the economy, and how this approach could be implemented.
Improved dialogue as well as stakeholder consultation are, indeed, important issues that require action. If I were advising the Minister of Finance, I’d strongly recommend that we engage in open dialogue with the mines without delay. It isn’t information to feed into discussions that’s lacking, it’s the absence of a dialogue architecture to help the Government and the mining houses to reach consensus.
What are the benefits of establishing a “dialogue architecture”?
A formalised dialogue architecture would allow Government and the private sector to meet regularly and share best practices. Dialogue need not always involve discussing problems, but if you only meet on an ad hoc basis, it becomes a reactive exercise. With a new administration comes lots of decisions about what to prioritise and, at this level, the burden does not sit with Government alone. By engaging with business, these priorities can be best determined.
If there are changes to legislation that Government wishes to enact, rather than catching stakeholders unawares, why not bounce ideas off one another before announcing policy changes? Government and the private sector are partners in pursuit of prosperity; when a new regulation affects a particular sector, there should be a lot of common ground. A dialogue architecture allows you to see how you can find the common ground, and meet each other’s needs without being destructive about it.
You indicated that you expect to see two changes in particular to the mining tax regime announced in the upcoming 2022 Budget Speech: the removal of the provision that makes mineral royalties non-deductible, and an adjustment of the mineral royalty structure to a sliding scale which operates in a similar way to PAYE. Would you say that addressing these two provisions is going far enough?
If these two provisions are addressed, it would translate to substantial changes. But we also need to see a commitment to reviewing other pieces of legislation, including the Local Content Regulations and the Employment Code Act.
What would be the impact of the proposed Local Content Regulations, if they are not reviewed?
The previous Government’s proposed Local Content Regulations required, among other things, that mines had to award contracts to local suppliers in all instances, provided that their tenders for business were not more than 10% higher than those submitted by competitors. The immediate effect of this would be to inflate mining companies’ costs, and add to an effective tax rate that’s already the highest in the region! It would almost certainly create more loss-making companies and more pain for businesses. Legislation like this does nothing to incentivise the creation of a competitive, efficient, world-class local supply base in the medium to long term. It does not actually incentivise local manufacturing, but it would incentivise the proliferation of middlemen, adding no value other than to themselves.
Some suppliers might see their businesses grow in the short term as a result of effectively being subsidised, but they would not stand a chance of survival in a competitive environment. Zambia’s mining sector is currently our economic driver, but the mines will inevitably close one day. Therefore, local businesses should aim to diversify and prepare themselves for that eventuality. Suppliers that rely on subsidies and handouts close themselves off to innovation in the process; they become fragile and ever more reliant on subsidies and protection from competition. In the short term, it works, but it’s never sustainable in the long term.
Which aspects of the Local Content Regulations need to be reviewed in your opinion?
The bottom line is that local content regulations should not lead to a situation where they become nationalistic, in the populist sense, and are burdensome to the larger economy. The support of local industry is important, of course. But quality is a product of competition, and you can still protect local industry in other ways that don’t affect price or quality.
The provisions within the Local Content Regulations that are protectionist or nationalistic must be reviewed. We’re not necessarily at a stage right now where Government needs to propose changes, but it’s key that it’s democratically discussed within the next 3-4 months. Both the Local Content Regulations and the Employment Code Act have fallen short in that they were brought in without sufficient consultation with the private sector, so dialogue in these areas is an important first step.
In what way has the Employment Code Act “fallen short”?
Government has legislated a host of entitlements without paying attention to where the money to meet these ever-attractive conditions will come from. Now, we have a situation where labour has become very costly for the average employer in Zambia. If companies’ bottom lines are affected, they can’t contribute as much to the treasury and, in the case of the mining sector, they are not encouraged to invest in expansion. It’s like thinking that you can milk more out of a skinny cow without realising that your actions now will determine whether the cow is productive in the long term.
Labour input into the mining sector is crucial – and is inextricably tied to productivity – and legislation must be supportive of this. Our hopes of increasing mining output will not be realised without this. Another of the unintended implications of the Employment Code Act is that it not only disadvantages the investor, but employees themselves.
How does it disadvantage employees?
On a superficial level, the legislation is very favourable to female workers, for example, with extremely generous provisions for maternity leave. Technicalities like this were not thought through properly and are important because, by legislating more paid leave than in many developed countries, you create a level of reluctance for companies to employ women of a certain age. This is one example of an area that urgently needs review.
I strongly recommend that before the various Government departments sit down to reconsider the intricacies of a revised Employment Code Act, they consult with bodies including the confederation of employers, and the labour unions themselves in order to assemble a clearer picture of labour legislation’s implications. Efforts to appease labour must be aligned with the capacity of employers to meet their obligations. This is not the time to appease the worker at the expense of killing industry.
How important is it for mines to be thriving in order to support local suppliers?
It’s key! The first prerequisite is that the mining sector is doing well, so that demand for services is high. You cannot create opportunities if mines are collapsing under the weight of having you on board. Governments often assume that if they can protect the labour force (i.e. voters) then it secures their continuity in office.
Zambia is a member of the World Trade Organisation (WTO) and there are conditions for our membership. The WTO advocates for the fair movement of goods and services. Protectionism in today’s global village adversely affects global trade. Having said that, it’s a balancing act. Supporting small businesses in certain ways is certainly warranted, but introducing a system that constrains competition also chases away investors. Having a broad base for investment creates a win-win for everyone because there are more employers and more opportunities. That means more receipts go from investments to the treasury. Too often legislators don’t take a holistic view of this.
“Protectionism in today’s global village adversely affects global trade. Having a broad base for investment creates a win-win for everyone because there are more employers and more opportunities.”
You referred in Part 1 of this interview to Government’s hope that Zambia’s copper production will reach two million metric tonnes per annum within a couple of years. Yet Konkola Copper Mines (KCM), once one of the country’s most productive operations, is failing to meet its production targets, and now an investor is urgently needed. The prospect of Vedanta coming back might be politically difficult. What are the options, as you see it?
My hope is that the new Government removes emotion from this discussion. Tempers are high at the moment, and emotions may get the better of us. No Government should be functioning in that way; level headedness is what’s required.
Whether or not Vedanta comes back should be based on taking a very careful look at the situation. If they come back, the transgressions they committed must be admitted, and they must meet certain expectations. The lesson that the Zambian Government and Vedanta must take away is that, in anything, the process is as important as the result you want to realise, and the previous Government handled the situation very clumsily. The asset’s seizure rattled investors, despite the fact that several issues with Vedanta [KCM’s major investor] have been well-documented.
The KCM saga is, no doubt, complicated. But I believe the initial step to put Vedanta’s operations on hold was legitimate. The ‘how’ aspect is where it went wrong. Vedanta legitimately went to court, and underwent an arbitration in South Africa. Now, Zambia, the ‘victim’, has become the culprit – leaving the Zambian people as the real victims, because KCM has failed to meet its production targets. It’s not the business of Government to run mines. We’re in the third year of the saga now; by the time anyone ‘wins’, there will only be a shell left. From now on, it’s not so much about which investor comes in, it’s about how we handle the situation.
For years, the general public has been told that ever higher tax rates are the only way to achieve a ‘fair share’ from the mining sector, despite the harm this approach has caused through the drying up of investment. How do you unpick this narrative and build trust again?
It comes back to the question of dialogue and developing a transparent dialogue structure that allows for engagement on these issues in plain sight, rather than behind closed doors. We need to help Government see things differently, and show the public that Zambia will not expand its tax base, and thereby change its development course, by overtaxing the current tax base. If they continue to do that, there won’t be any expansion or investment – and that includes indigenous investment – and the economy will remain stagnant. The citizenry needs to be sensitised to this.
The previous Government opportunistically nurtured a harmful narrative around ‘foreign’ miners which led to the current impasse. Why does this narrative find such fertile ground in Zambia, and what can be done to correct it?
This comes down to resource nationalism, and has its roots in a lack of understanding of the intricacies of business. Narratives like this typically appeal to a misinformed public, for cheap political gains and popularity. I think the PF’s style of governance – that is, a failure to use knowledge and best practices to inform policy – also fuelled this. The average Zambian has come to believe that foreign mines have been exploiting Zambia’s mineral endowment, and now they must pay ‘the rightful contribution’. This perception must urgently be challenged.
One of the issues is that “the mines” are referred to as a homogenous entity which is tarnished with the same brush. Another issue is that companies are accused of stealing, without anyone claiming to know how much they supposedly stole. But, ironically, when it comes to the mining sector’s contribution to the treasury, Government is congratulated. Beyond developing a better monitoring system, Government must be able to report production accurately and take responsibility for its shortcomings.
My view is that the new Government is more informed, with less interest in encouraging the spread of disinformation along these lines; this should enable public perception of the mining sector to creep back to reality. The sector accounts for a substantial portion of employment, tax revenue, and foreign exchange receipts – and, because of that, it is a strategic sector. People need to listen a little bit more attentively to the challenges that they bring to the table. This is also where dialogue and meaningful engagement between Government and the mines comes in.
The sooner that people begin to see that mining houses are, in fact, a partner in development, the sooner the sector can become a catalyst for Zambia’s economic development.
If you missed Part 1 of this interview – in which Prof. Saasa spoke to Mining For Zambia about what measures we can expect in the Budget announcement, and how they will enable the country to realise the “new dawn” which Zambians are eagerly awaiting – you can still read it, here.
See also: New Budget for a new dawn