Extractive Industries: Taxation and Revenue Seminar

By Annette Nabayi, 30 September 2021

Overview

Social inclusion in the mining sector has become a focal point for researchers. Analysts suggest the need for a progressive taxation system in the mining industry rather than regressive taxation to help lessen the gap between the rich and the poor, to ensure gender equality, and improve working conditions.
Low-income countries are beginning to formulate policies related to tax revenues sourced from the mining sector. While some countries have embraced the practice, they evidence political challenges hence the tax revenue remains below the rate demanded for Sustainable Development Goals. The challenges impede realisation of basic achievements such as the diversity of lifestyle, work conditions, and gender in the mining sector that are crucial for social inclusion.
In this blog, I will explain various proposals made by researchers on the taxation of the mining sector and its redistributive policy.

Emerging Scholarship

Caremento explains the diversity of lifestyle in Zambia’s mining sector.[1] He researched Asymmetries of Power and Capacity: the Zambia Revenue Authority (ZRA) as an Instrument of Resource Nationalism. He noted the performance of the Zambia Revenue Authority (ZRA) that has increased the mining royalty rate in 2014 and lessened the 30% corporate income tax for mining firms of Privately Owned Enterprises (POEs). He argued that the performance of ZRA has been thwarted by the Lungu administration as his context was that ZRA emerges as POE and that the notable mineral gas is controlled by POEs. Also, he argued that policy inconsistent triggered by the previous political settlement, the executive and cabinet dismissing technocratic recommendations, and consistent asymmetries of power, knowledge, and skills amid mining investors, and ZRA disregarded the need for diversity of livelihood in Zambia mining sector.  The challenges experienced by ZRA about copper mining in the country entail policy issues such as the structural influence of foreign mining investors, Zambia’s political settlement, asymmetrical degree of abilities between Zambia and large scale mines, tax incentives to POEs, ring-fencing as well as administration issues such as transfer pricing. Alexander mentioned that his paper was still under review by the Journal of Southern African States (JSAS).

Maina focuses on how less attention on working conditions, gender issue, and diversity of lifestyle to low levels of production in the mining sector.[2] In her study, she linked less attention to elements such as fewer changes in legislation, less contribution to GDP, the need for legal reforms, and how previous studies emphasized the need to enhance governance in Kenya’s and Tanzania’s mining sectors. She argued that legal reforms that target the diversity of livelihoods, gender, and working conditions of the miners influence the production volumes, mining revenues, and issuance of a license in the mining sector. Presently mining activities in Kenya and Tanzania contribute 0.8% and 2.7% respectively. Some of the key mining legislation policies in Kenya include the Minerals and Mining Act of 2016, Country Mining Vision of 2017, Mining Regulations of 2017 while Tanzania’s mining guidelines entail Mining Local Content Regulations 2018, Tanzania’s Extractive Industries (Transparency and Accountability) Regulations 2019, and many more. Her analysis relied on the Difference in Difference (DID) technique to note the causal effects of policy interventions on gender, working conditions, and diversity of livelihoods in the mining section as the main challenge evidenced during the research includes data availability.

Rojas described the diversity of livelihoods and working conditions aspects on Trade Mispricing in Mineral Exports from Peru, Zinc and Copper Concentrative.[3] She relied on the subject of Illicit Financial Flows (IFFs) to describe the concept of trade mispricing in Peru. The analysis targeted commodity trade-related IFFs through trade mis-invoicing and abusive transfer pricing[4]. Trade mis-invoicing defines the false report of value, quantity, nature, or exported goods and services between independent parties which implies tax fraud while abusive transfer pricing defines manipulation of prices within MNCs. The statistics applied were recent from 2003 to 2017 as the technique used to understand mispricing or the abnormal prices entailed partner to country trade, price filter, and IQR, free-market price filter, country-based approach through the disaggregated data, and the quantifier analysis through price filter.


Concluding Remarks

While reviewing policies formed in the SDGs, social inclusion has been regarded because of the influence of social exclusion. Social inclusion includes the technique of enhancing the terms of participation in society for individuals who are disadvantaged based on sex, age, disability, gender, class, ethnicity, origin, religion, or various status through improved opportunities, access to resources, and demands and observing human rights. The diversity of livelihoods can be attained by allowing people in a society to live their lives in a variety of ways. Analysts cite ethnic and social diversity as elements that would ignite diversity of lifestyles and social inclusion. Some aspects such as corruption and discrimination affect the diversity of livelihoods adversely since they restrict access to services. In the mining sector, governments should regard social cohesion and inclusion, housing infrastructure, migration and demographics, and diversity and employers in mining communities.
The mining and gender aspect demands that the effect of mining on men and women should be similar. The international organization suggests that the developing countries have dismissed the presence of women in the mining sector through protective legislation that impedes women from working in underground mines, the society’s model of women as home caretakers, and marginalization of gender issues. The mining and work conditions describe the need to note physical work environment, psychosocial work environment, safety, and socially sustainable development from the working area. The mining section worldwide should determine, analyze, and describe framework and indicators of gender equality, exceptional working conditions, and diversity of livelihoods pertinent to the mining context.

The focus on the mining industry worldwide and its influence in attaining the SDGs ignites the need to understand social inclusion. The sector relies on elements such as gender, diversity of livelihoods, and working conditions to perform indicators such as no bribery and corruption, formation of employment, equal opportunities, equal wealth distribution, and health and safety. The need to define social inclusion as an adjunct to environmental or economic concerns should also regard the need to present it as an independent field of study. Therefore, the need for papers and policies on social inclusion in the mining section.

References

[1] Caramento, A. (2021). Asymmetries of Power and Capacity: the Zambia Revenue Authority (ZRA) as an Instrument of Resource Nationalism. JSAS. Presented During the Seminar.

[2] Maina, A. (2021). Natural resources governance: An empirical study of the effect of Mining reforms in East Africa. University Of Leiden. Presented During the Seminar.


[3] Maina, A. (2021). Natural resources governance: An empirical study of the effect of Mining reforms in East Africa. University Of Leiden. Presented During the Seminar.

[4] Rojas, A. (2021). Trade Mispricing in Mineral Exports from Peru: Zinc & Copper Concentrate. Graduate Institute Of International And Development Studies. Presented During the Seminar.


Financing Instruments and their Fiscal Implications: EAC Countries Perspective

By: Annette Nabayi, 22 September 2021

Overview

EAC governments are looking towards public-private partnerships (PPPs) and bonds issuance in an effort to mitigate against their financial shortages. In this blog, I will discuss these two forms of financial access and evaluate their fiscal implications.

Public-Private Partnerships (PPPs)

PPP is a long term cooperative agreement between a private company and the national or regional government.

Some of the models applied in PPPs entail service contracts, management contracts, lease contracts, concession, build-owner transfer contracts, and privatization. The models vary in terms of contract purpose and length as well as private sector risk. PPPs are regarded by most EAC states because of the restricted fiscal space for governments to development needs, low public sector ability to enhance the degree of investment in development demands, providing better efficiency, and presenting better value for money. The PPP actors in EAC involve the G20 compact for Africa, EU, World Bank, Chinese overseas investments, AU, EAC, ECOWAS, and different national development plans. Chinese overseas investments engage with African countries through PPPs as private-public partnerships and public-public partnerships.

The effects of PPPs entail undermining democratic accountability, limited access to services by ordinary citizens, the commodification of public goods, and immense user fees and out-of-pocket expenses for public goods.  Examples of adverse influence of PPPS in EAC include Kenya’s SGR whose revenue generation has not covered the costs experienced and Lubowa Hospital in Uganda where the government is already paying for its interest rate at the hospital’s foundation. Kenya and Ethiopia are the states in EAC with high-risk debt distress while Uganda and Tanzania are low-risk debt distress.

Bonds

A bond is a loan from an investor such as a company or government. Bonds, specifically Eurobonds help EAC states to integrate with the global financial market. According to 2019 statistics by AFRODAD, Kenya among EAC states leads in outstanding Eurobonds of $4.8 billion while Ethiopia, Rwanda, and Tanzania have outstanding Eurobonds of $1.0 billion, $0.4 billion, and $0.2 billion respectively. Risks linked with bonds include interest rates varies increasing the costs, repayment is at maturity and not amortized, and bonds tend to be complex to restructure. Most EAC nations encounter corruption and lack of accountability that creates social injustice while allocating the funds borrowed in various government sectors. The governments have increased the user fees and expenses related to the infrastructure to pay the debts.

Kenya and Uganda have engaged the domestic market in 2020 and 2021 through treasury bonds, bills, overdrafts from the central bank, and many more. Uganda easily accesses treasury bonds rather than treasury bills or other market financing instruments. The difference between bonds and bills entail the length of maturity. Treasury bills tend to be a secure short term investment that presents investors with returns after short commitment of funds while bonds tend to be a secure medium or long term investment that gives an investor interest compensation every six months of the bonds’ maturity. The fiscal implications on bonds aligns with income of the investor. The investor is taxed on the period the income is received.

Way forward

PPPs and bonds are less sustainable forms of financing budget deficits for EAC. It is assumed that they tend to increase the long term debt of EAC nations as well as discarding the public sector provision of services. In most cases, PPPs and bonds tend to target profitable projects rather than the needs of EAC citizens and tend to be a relatively costly way of gaining funds hence the need for the inclusion of the private sector by the government to ensure responsible borrowing and loan contraction and the need for domestic resource mobilization. EAC governments assume the concept of risk transfer when performing the contracts. The risk transfer concept is dismissed by IMF since most EAC nations have weak ability to negotiate PPP and bonds contracts hence the anticipated influence is ambiguous. The long term service and techniques of delivery should be determined at the initial stage as a form of project constructions and decision making approach. The elements regarded include the capacity, measures, and functionality. PPP and bonds model should be regarded cautiously to ensure smaller modifications are embraced.