Presentation on mining, communities, and sustainable developmentPublished by MAC on 2010-02-23
Source: Africa Files (2010-02-02)
Mining, communities, and sustainable development
Presentation by Dr Camillus Kassala, Cape Town
2 February 2010
We are an Interfaith platform representing religious civil society organizations from Southern Africa, particularly from the Democratic Republic of Congo (DRC), South Africa, Tanzania and Zambia.
The umbrella leadership organizations are: the Council of Churches Zambia (CCZ), the Fellowship of Christian Councils in Southern Africa (FOCCISA) and the Tanzania Interfaith Committee which draws members from BAKWATA (National Council of Muslims in Tanzania), CCT (Christian Council of Tanzania) and TEC (Tanzania Episcopal Conference).
Moved by religious beliefs and conviction, we have committed ourselves to that faith-based civic responsibility to advocate for socio-economic and environmental justice in the communities we serve. We hold the fundamental principle of the supremacy of humanity over materiality, which means that the source, the agent and the object of any economic activity including mining, is the human-person. Faith or religion is both a sociological and anthropological datum which has both political and socio-economic existential dimensions, not only among civic categories but also corporate citizens including mining companies and organizations.
Motivated and guided by the principle of supremacy of humanity over materiality, we are working towards the realization of integral and authentic socio-economic development through the promotion of socio-economic justice. This endeavor and struggle is a faith-based ethical imperative, and imperative which compels us to advocating against economic marginalization, social destitution and political peripherization - things which easily lead to social unrest, political instability, and breakdown of the nascent and fragile African democracies and / or even civil wars.
Purpose of the Presentation
This presentation has a threefold purpose:
a) To share with you and critically analyze the local communities' experiences which question the ultimate rationale of mining activities in terms of authentic Africa socio-economic development,
b) To point out and discuss the policy implications for our national governments, and
c) To suggest, recommend and urge our governments through you to take certain and definite measures that will make the mining sector a true socio-economic blessing and not anonymous curse against the developmental aspirations of the African people.
We are of the opinion that it is because of the very constraints referred to before that the imperative for the supremacy of humanity (i.e. Political integrity and socio-economic justice) over material (i.e. unrestrained profit maximization for materialistic happiness) is in order.
Background / context
The experiences, policy implications and the concomitant measures which we are obliged to look at together concern hotly and critically contested issues in the two areas of socio-economic justice and political integrity in the four countries chosen as representative cases.
These issues are:
a) Taxation regimes,
b) Environmental impacts,
c) Corporate Social Responsibility,
d) Governance: Local, Regional / Provincial and National levels
The first affirmation that we can make concerning African taxation regimes as regards mining and / or mineral extraction is that these regimes are such that the main beneficiaries of the mining boom in Africa are a handful of African political elites, the shareholders of the mining companies, the engineering, construction, and management consulting firms servicing the global mining industry, and the financial institutions backing these ventures.
This is so because these tax regimes are characterized by the following:
Revenue is foregone through tax evasion and avoidance Despite the four main functions that taxation serves in society (i.e. Revenue for development plans, redistributive revenue to achieve equitable development, repricing goods and services by the government to achieve social and environmental goals, stronger political representation as a consequence of citizens paying taxes), and despite the many types of taxes to raise revenue (e.g. Import, export, VAT, sales, income, local government, company profit, stamp duty, capital gains, withholding etc.), very unfortunately - with the exception of South Africa - mining taxation has been single-mindedly focused on encouraging mining companies to invest in exploration and extraction.
This is due to excessive tax concessions or tax subsidies and secret mining contracts characterized by tax breaks which often contradict national laws. As a result African governments have failed to collect significant budget revenue despite higher production and prices.
Lower tax rates and tax exemptions
Mining companies in the case countries enjoy the following concessions:
- No VAT on imports / exports sales,
- No custom duties on imports / exports,
- Lower corporate income tax (CTI) rates,
- Lower withholding tax rates,
- No windfall / additional profit taxes,
- Lower royalties.
An empirical scrutiny of each of each the concessions reveal the following facts:
- The trade liberalization for most of the African governments has come at a huge loss to the dramatic fall of import duties since the 1990's - only 30% of the revenue could be replaced. It could be argued, therefore, that a modest import duty would replace the revenue lost through VAT refunds or exemptions without deterring investment. Given that mining companies hardly declare taxable income, such duties are the most important source of mining revenue to the government.
- As regards to corporate income tax, greater tax incentives don't necessarily lead to more Foreign Direct Investments (FDIs) in the natural resource sector. The global consulting firm McKinsey report shows that tax holidays only detract value from investments that would be made. Even if the International Monetary Fund (IMF) believes that tax incentives narrow the tax base of low income countries unnecessarily and also complicate tax administration and are a major source of revenue loss and leakage from the taxed economy.
Some examples will illustrate this point. In South Africa gold mining companies pay no tax if their declared profit falls below 5% of revenue. Such a low rate on corporate income tax is paralleled by the low rate of withholding taxes which stands at 12.5%, compared to Mexico, Chile and Greenland tax rates of 35% and 30% in Western Australia and Arizona and 20% in Poland and Zimbabwe. This shows how much revenue governments forgo due to low withholding taxes.
- Regarding windfall taxes, many mining companies are unwilling to share the rents of mining activity with governments by pushing for windfall tax rate be reduced from 25% - 12.5%, and the variable profit of 15% to be abolished as was the case with the Zambian government in April 2008 when it amended it mining tax laws.
- Finally, it is the royalties which have been the most contentious forms of income for governments. Despite the companies' arguments for calculating royalties on profit basis rather than on the sales value, it can be argued that the distorting effects of such calculated royalties are much less serious in practice than in theory for all but the most marginal, grade-sensitive mines.
Moreover, royalties are an easy tax to monitor and collect, provided legal frameworks set out clear principles to guide mineral sales value calculation. The need for this is brought about by the fact that mining companies have very complex accounting structures and also are able to hide profits through transfer pricing. On top of this add the fact that many African authorities don't have the know-how or resources to cross-check and audit the declared profits.
Perhaps by way of correctly concluding this point on tax rates, let me refer to the Tanzanian case as an example of the staggering loss of much needed revenue.
AngloGold Ashanti Geita mine produced 308 000 ounces of gold in 2006 with yielded gross profit of US$93million between 2002 and 2007. But AngloGold Ashanti has paid only US$1million in corporate income tax, and has announced to pay further corporate income tax only in 2011 - a full 11 years after starting operations. Also Barrick Gold reported a net income of US$97million between 2004 and the first half of 2007 but has not yet started paying corporate tax. The government has managed to earn only US$17.4million a year in royalties (2002 - 2006) because it charged royalties at 3% of the net back value of gold exports, despite the fact that in the same period the companies exported around US$2.9billion!
If these royalties were to be increased to 5% (as recommended by a Presidential Commission) government revenues would stand at US$25million per annum or at US$145million over the five years. If this amount of money was spent, it could have paid for more than 3million people to be provided with education, infrastructure and water as per government's budget of 2007/2008.
Manipulating tax base allowances
These are still serious problems with the way in which mining companies in Africa receive tax relief for the expenditure they incur on the cost of creating their mining operations. This has the consequences of suggesting that companies are making profit but as tax is due, and, and that of continuing tax deferral for many years, thus reducing the potential returns to African governments.
The contentious question here is:
Should tax subsidies, said to be a necessary measure to attract new investors, given to compensate for operational costs due to little and undeveloped infrastructure? We are of the opinion that this can be acceptable if and only if these subsidies form part of a well-designed industrial mining strategy that aims to link mining activity to the transformation of the rest of the economy. The case in point here is South Africa: In 2007 mining companies which operate in most of expensive conditions because of underground mining, declared taxable profits of US$672billion and paid out US$127million to the government. On the contrary, in Tanzania where industrial mines have operated for only 10years, only one company has declared a small taxable income of US$1million!!
Tax avoidance by mining companies
Despite the Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises on not seeking or accepting exemptions related to taxation not in the statutory or regulatory frameworks mining companies in Africa enter into confidential agreements with governments to acquire special tax rates and concessions outside the statutory framework. These are included in Mining Development Agreements (MDAs) which are deemed to be legal commercial contracts and override national laws and national tax regimes.
Many African countries have MDAs with investors because the World Bank (WB) told them that their existing mining tax regimes are not conducive to private investments. As a result, high level politicians have made secret tax deals with individual mining companies which took advantage of the opportunity by pushing for as small a tax burden as possible.
The following examples from DRC, Tanzania and Zambia will illustrate the point.
i. Tanzania has had six MDAs with larger scale industrial miners over the last ten years. The gold mining companies sought significant exemptions from local government taxes, withholding taxes and fuel levies. In the substantive laws, local government taxes are charged at 0.3% of the turnover value, but the MDAs stipulate that companies can only pay not more than US$200 000 a year, an amount that local governments have not been collecting. The MDAs also exempt companies from paying withholding taxes on interest to related parties e.g. parent companies / associates - though the 1998 law stipulates payment on withholding tax on the loans.
As regard to fuel levies exemption, it has been estimated (Bomani Commission) that Tsh39.8billion in 2006/2007 and Tsh59billion in 2007/2008 are amounts which have been foregone by the government to six large scale mining companies. MDAs have also set stamp duties at 0.3% which is less than one-tenth of the 4% rate stipulated in the law.
ii. In Zambia the MDAs, negotiated in 1998 after the privatization of Zambia Consolidated Copper Mines (ZCCM), offer huge tax exemptions to mining companies. Konkola Copper Mines (KCM) and Mopani Copper Mines (MCM) managed to get a deal whereby the pay only one-fifth of the royalty stipulated in the law which stood at 0.6%. A further concession allows the companies to defer royalty payments if their cash operating margin is below zero. Companies also pushed for a reduction in corporate income tax rates from 30% (per law) to 25% and an exemption from the 10% withholding taxes (per law).
What were the consequences of these in terms of government revenues?
In 2006 the Zambian Minister of Finance in his budget speech estimated that the country would earn less than US$11million from copper royalties. This is compared to 1992 earnings at US$200million from copper mining taxes, but in 2004 the country earned only around US$8million in budget revenues despite copper production of 400 000 tones with average copper prices at US$2.868 per ton. Between 2002 and 2004 the government collected only US$3million in royalties. If the companies had paid the 3% royalties on gross sales as per the Mining and Mineral Act, the government would have earned an additional US$63million - revenue which could have been used to finance its national development strategy.
iii. Finally, in DRC, Ernst & Young studies and audits of MDAs signed since 1996 found that the state-owned mining firm got nothing of the profits made by its venture with private mining companies due to the terms of mining contracts. Hence, in 2007 the Parliamentary team which investigated the contracts (signed 1996 - 2003) denounced high-level political interference in the deals. This led to a review of all mining contracts in 2007, which showed that none of the mining contracts complied with the law.
The contracts entitled companies to complete exemption from any income tax and royalty payments, received reduced tax rates or deferral of tax payments for at least five years. Out of the reviewed 61 contracts, 39 were to be renegotiated and 22 were cancelled. The culture of secrecy and private tax deals in contracts is systematic - and has taken systematic proportions - across all African countries and is embedded in mining companies' was of doing business.
Mis-invoicing and tax evasion
A recent report by Global Financial Integrity of the United States Centre for International Policy, estimates that between 2002 and 2006 about US$10billion left Africa every year as result of transfer mis-pricing, i.e. by under-declaring the value of the companies exports or overstating the prices of their imports.
One of the reasons for this to happen is the critical fact that African mining tax authorities do not have the requisite skills to audit the complex accounts of large multinational mining companies. That is: there is a lack of the ability to monitor and regulate fictitious high operating costs or inflated local costs, and therefore mining companies exploit this weakness in law, financial and accounting capacity.
b) Environmental Impacts
Most mining and industrial activity in Africa is still conducted unchecked by any environmental considerations despite the EIA reports which do not tell what is happening on the ground. This has led to accumulation of consequences now unfolding at a deeply perturbing rate. A number of reports on EIA effectiveness reports that, for example acid mine drainage (AMD) formed when exposed ores come into contact with water and air; releases heavy metals and sulphates. This AMD poses a threat to the local communities' limited water resource, human health, animal husbandry and food security to both humans and animals.
We are going to highlight the following environmental impacts, which we believe are critical concerns for sustainable and integral development of the African communities both in the Urban and Rural Areas:
i. Waste dumping
ii. Participation in EIAs
iii. Environmental Rehabilitation
i) Waste Dumping
All methods of mining affect air, land and water.
In Africa, the most severe pollution is acid mine drainage (AMD) because it can contaminate surrounding soil, ground water and surface water. The formation of acid mine causes particulates which can be composed of noxious materials such as arsenic, cadmium and lead. These particulates affect human life adversely by contributing to illnesses related to the respiratory trait but they can also be ingested or absorbed through the skin.
Waste dumping also causes physical disturbances which may contribute to the decline of wildlife and plant species. These types of disturbances are worsened by water-pollution which include acid mine drainage, metal contamination and sediments which affects fisheries, swimming, domestic water supply, irrigation and other uses of streams and rivers.
ii) Participation in the EIAs and poor EIAs by corporations
Since most of mining companies are from English-speaking countries; EIA reports are yet to be explained in the languages the local people will understand. For this reason, many corporation give misleading or misguiding EIA reports which cannot be understood or corrected by the local communities. Involvement of the people lacking and the lack of the government's proper and effective oversight or supervision has led to mining becoming a poor environmental performer because of degradation associated with operations and the legacy of abandoned mine sites, toxic waste, acid rock drainage and a generally ugly-looking landscape.
iii) Environmental rehabilitation Programmes
With the exception of South Africa the remaining case countries do not have rehabilitation programmes, which are being executed.
c) Corporate Social Responsibility
Perhaps it is fair at this point to point out that when it comes to CSR issues there are hopeful signs that many companies have established CSR programmes, foundations and or trusts to focus on the issue. However, in Sub-Saharan Africa, governance gaps are still quite large. It is also important to note that significant contributions to CSR in Africa by international initiatives including those of Oxfam, Australia and Canada. The major obstacle to the implementation of these initiatives in Southern Africa have been weak governance capacity, corruption and even armed conflict.
These obstacles have been experienced through false and unfulfilled promises caused by superficial consultations and misinformation/lack f information on key issues like employment, economic livelihoods and local cultural values. Also such obstacles have expressed themselves in terms of forced evictions, lack of respect for human rights and dignity. However, we believe that CSR in Africa will depend much on community participation, appropriate knowledge transfer and meaningful ploughing back into the local communities. This belief is encouraged by the fact that Anglo Ziwele Empowerment Initiative in South Africa has managed to do exactly that by using ventures like ScanMin Africa, Springbock Trucking Company, Lang Leather and Tyre Corporations through the provision of skills development programmes and strategic knowledge transfers.
Although mining sector developments are driven by global trends; they take place in national and sub national contexts. Many of the African countries which host mining companies are more focused in collecting rents for distribution for supporters regardless of the political and ethical imperatives despite the fact that mining companies which have been accomplices to corrupt politicians have had their failure or successes determined by the degree of governance involved. At the local level governance issues have been taken over by the mining companies at the expense of the national and regional levels and vice versa. Quite after, it is a matter of corrupt governance more than weak governance.
This raises the question: Does a company have an ethical obligation to undertake a political economy analysis in order to determine who will reap most the benefits of the mining investment?
Thanks to EITI which tracks payments and receipts of fiscal revenues to ensure that all payments go into government revenues - more and more governments are now feeling the pressure to ensure that the revenues will be used well. At the regional level, governance issues are about the handling of mineral reserves crossing national boundaries; for that reason regional integration endeavors should consider well the implications of these for large mining companies in terms of promoting regional cooperation. All in all, the following challenges are still bedeviling government commitments by both companies and governments' governance policy implementation frameworks and delayed or deferred follow-ups and monitoring, lack of political will and interference from outside during policy formulation processes.
At the beginning of this presentation it was pointed out that the interfaith CSOs are aware of the technical, budgetary and political constraints that our African governments are victims of. However, it is precisely because of these constraints that the critical prioritization between 'people' and 'profits' becomes an imperative choice dilemma. Because of that, we suggest, recommend, and urge you, who are democratic representatives of our people to receive, deliberate about and sincerely consider the following:
Formulation of policies, laws and regulations which are people-centred, which would engage mining investors to learn the rules and regulations dealing with the local communities, their customs, culture, language, mining experiences, local protocols and to inform these communities the plans, applications and the potential environmental problems and concerns and their respective mitigation measures. Revisiting and responding effectively and efficiently to the allegations of crimes against human rights - which are very well documented by respectable independent research organizations and to put to task the responsible companies through the use of and with the help of relevant bodies.
To ensure that companies registered on stock exchange implement the international financial reporting standards (IFRS's), this will require them to report on their financial operations and remittances to government and other structures. In this way we, the citizens and our representatives in the parliaments can monitor the financial flows between percent companies and subsidiaries and detect tax avoidance practices.
To collaborate with the UN Economic Commission for Africa to develop and publish user friendly guide on mining taxation; and to require mining companies by law to use EITI reporting template in their annual financial reports. African governments should stop the practice of granting tax exemptions to mining companies in mining contracts: all tax rates and terms should be legislated in the substantive law and confirmed in mining development agreements.
African Parliaments should pass laws requiring mining development agreements to be ratified by parliaments and made public - here we congratulate Ghana and Sierra Leone for doing that.
African governments should insist upon bilateral and multilateral donors to scale up their financial assistance for governments to improve their capacity to monitor and audit the accounts of mining companies and review their mining tax regimes, on the condition that the African governments are free to use the funds to buy legal and other technical assistance from any service provider through just (inter) national tendering processes.
Countries must develop Citizen Charters on Mining so to provide guidance towards the development of the communities parallel to SIAs
Commitment to sustainable and integral development is not only the right, responsible and ethical approach to managing the earth's natural resources and safe guarding the health of the planet for future generations but also it makes sound business sense. Hence we believe that where information is shared, truly and adequately and consultative dialogue promoted; there can be minimal misunderstanding and unnecessary confrontation.
We therefore, believe you will give serious considerations to the recommendations and we are confident that is implemented they will produce sweet and nourishing fruits from the African tree of socioeconomic justice.
By way of closing this presentation: it has been said, "Give to God what belongs to God and Caesar, what belongs to Caesar." We of the Inter Faith civil society organizations are asking you to give what belong to your electorates and people of Africa, that which is sustainable, integral, empowering, people-centered and automatically African development.
Selected / Sourced Bibliography:
1. "Breaking the Curse: How Transparent Taxation and Fair Taxes Can Turn Africa's Mineral Wealth into Development", Open Society Institute of Southern Africa, Johannesburg; Third World Network Africa, ACCRA; Tax Justice Network Africa, Nairobi; Action Aid International, Johannesburg; and Christian Aid, London (2007).
2. Linda Starke (ed.) (2002), "Breaking New Ground: Mining, Minerals and Sustainable Development: The Report of the MMSD Project, Earthscan, London (UK)
3. Hinde, C. (ed.), (2010), Mining Journal, Aspermont UK: Albert House, January 22, p.2
4. The Policy Gap (2008) - Series: A Focus on Mining in Malawi, South Africa and Zambia, Platinum Mining Industry, CSR Review.
5. Mining Review Africa (2010), "A World of Experience, Edele Elof. South Africa, pp 10-11
6. "Breaking the Curse" (2010), African Analyst Quartely, vol. 1, pp 34 - 52, (Shikana Media: South Africa)
7. Furter, e. (2009), "Business Culture and Governance Require Introspection", Miners Choice, vol. 2, no. 7, July. Centurion: South Africa
8. Cloete, K. (2010), "Africa on the Map: The 2009 Global Economic Symposium", Africa Decisions, Issue no. 1, Highsbury Safika Media: South Africa, p. 26 ff.
9. Guest, P. (2009), "Fragile States Back on Global Agenda", This is Africa - A Global Perspective, Financial Times Business, December Issue, p. 43
10. Ngwenya, T. (2009), "Joy Empowers Community", Joy Mining, Joy Global Inc. Company: www.joy.com, p. 25
11. Higgiuson, S. & Wheeler, A. (2010), "Environmental and Legal Issues: E.U. & North America, Mining Market Review, Willis Publishers: London, p. 58 - 62
12. Glaser, A. (2010) (ed.), "Poland's KGHM Packs its Bags", Africa Mining Intelligence, no. 218, January 13, p. 3 - Indigo Publications
1. Mr John Capel
Executive Director: Benchmarks Foundation
2. Malcolm Damon
Director: Economic Justice Network of FOCCISA
3. Dr Camillus Kassala
Facilitator: TEC Justice & Peace Commission
4. Sheik Suleiman Lolila
Secretary General: National Muslim Council of Tanzania
5. Rev. Moses Lucas Mwale
President: Council of Churches in Zambia
6. Dr Leonard Mtaita
Secretary General: Christian Council of Tanzania
7. Mr Moreblessings Chidaushe
Regional Advisor: Economic Justice Programme
8. Mr Mvuyisi April
Programme Officer: Accountable Governance Programme
9. Ms Sofia Svarfvar
Policy Officer: Economic Justice Network of FOCCISA
10. Mr Evans Rubara
Policy and Advocacy Advisor: Council of Churches in Zambia
1. The New SA Minerals Royalties Law, which will be effective from 1 March 2010, stipulates that a minimum of 0.5% royalty will be paid and then up to a maximum of between 5% and 7% (Mining Review: Africa Issue 1, January 2010 p.17)
2. See the report ‘Breaking the Curse: how Transparent Taxation and Fair Taxes can turn Africa's Mineral Wealth into Development', and published by Open Society Institute of Southern Africa, Johannesburg (2008)
3. See African Analyst Quarterly, Vol. 5 Issue 1, 2010 pg 43
4. For example, Africa Mining Intelligence, issue no. 218 of January 13, 2010 reports that in November 2009, a contract signed in 1996 by Societe' de Development Industrielet Minier du Congo (Sodomico) and a Polish company KGHM was annulled. According to the Commission, the USD5,000/month farming-out lease KGHM paid to Sodomico was insignificant.
5. See for example SA's Joy Mining Machinery and Rio Tinto's programmes in Zimbabwe and Madagascar apart from SA itself.
Draft Inputs onto the AMP Statement
As civil society, we believe the policy objectives of the AMP and the AU Ministers of Mining and that of African governments should start to consider:
1. Economics is there to serve the people, and in recognizing this principle, it must also be noted that the community in the starting point of economic life, and thus should shape policy development thus mineral resources extraction must be done in a people - centered humane developmental approach, that is based in transparency and accountability, and that enhances people's dignity and livelihood development;
2. Policy development around mineral resources to move away from the popular, yet failed mechanism of trickle-down to one that is more holistic, by recognizing that minerals under the ground belong to all and should first and foremost benefit the communities surrounding mining, and contribute to the overall development of the country, this means reviewing all country mining agreements, policies and regulations to ensure the sustainable development of Africa;
3. In order to achieve this, continual dialogue with civil society organizations, non- governmental organisations and community based organizations is vital to achieve a more sustainable and developmental path that meets the needs of African people.