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SarWatch Writer
SADC Countries Should Draw Lessons From Each Other’s Experiences to Harness the Extractive Industry for People’s Benefit

The drama of the U.S election, previously lauded as the beacon of democracy, has grabbed the world’s attention as the incumbent, President Trump, has refused to accept defeat. In electoral processes, every vote must be counted to avoid backsliding on democracy. In the same way, to avoid backsliding into poverty and inequality, Africa must account for every dollar earned from her resource wealth. If revenues for Africa’s mineral wealth were well accounted for, Africa would have a fair escape route out of its totemic developmental challenges. To do this, key actors in the natural resources discourse such as multi-national corporations (MNCs) and politicians should allow for a fair playing field by not rigging the financial systems to stash profits away from tax authorities in Africa.

The recent socio-economic crisis due to the global health pandemic of Covid-19 has offered an opportune moment to discuss the role of taxation in Africa’s extractive industry.  This is due to the critical conversations that have been raised between the sector’s contribution towards domestic resource mobilization (DRM) juxtaposed against many countries’ poor provision of social services in the areas of health, education, water and sanitation in emergency situations and beyond.

Last week 18 civil societies hosted a week-long conversation on illicit financial flows under the title ‘The Pan African Conference on IFFs and Taxation (PAC).’ While the platform brought together the public, academics, politicians, tax authorities and civil societies, there is always a niggling question that must be confronted when influencing developmental processes – so, what has changed? Of course, Africa continues to still grapple with the weight of harnessing her natural resource wealth into a broad-based development dividend which can be equitably be shared and be enjoyed by all her people. Under the weight of such expectations, it is quite fundamental, therefore, to publicly share and reflect on some of the emotive but very critical discussions that took place during PAC 2020. The main idea behind this is to leverage the PAC 2020’s rich conversations for the sustenance of public discourse on what it takes to stop the perennial bleeding of natural resource revenue from the continent.

Optimizing Domestic Resource Mobilization from the Extractive Sector for Africa’s Transformation

PAC 2020 ran from Monday, 9 November to Friday, 13 November 2020, under the theme “The Africa We Want Post COVID-19: Optimizing Domestic Resource Mobilization from the Extractive Sector for Africa’s Transformation.” The global pandemic, Covid-19 has greased the pole that Africa must climb to achieve the UN’s Sustainable Development Goals (SDGs) by 2030, hence the inspiration behind the theme. Before Covid-19, Africa’s infrastructure and service delivery deficits were quite huge characterized by crippled health, education, water and sanitation services.

As a way of ensuring broader public participation during PAC 2020, country and sub-regional events were organised on the 9 and 10 November 2020. These events were the building blocks of the continental conversations which happened from the 11th to the 13th of November 2020.  With this motivation, Southern Africa Resource Watch (SARW) and Tax Justice Network Africa (TJNA) convened an online discussion on Trends on IFFs and Taxation in SADC’s natural resource sector on 10 of November 2020. Countries that anchored this discussion comprised of Tanzania, South Africa, Zambia and Zimbabwe. Janet Zhou, the Director of the Zimbabwe Coalition on Debt and Development moderated this session.

SADC has a significantly diverse and rich mineral wealth portfolio which gives the region a strategic lever for lifting the region from the development dungeons. Prices for gold and platinum are currently buoyant. Platinum mines in South Africa and Zimbabwe, for instance, declared bumper revenue in defiance of the economic spell cast by Covid-19 which disrupted production, fractured global trade, and depressed market demand. Further to this, as the global demand for clean energy spikes as a result of heightened pressure to move away from carbon fuels, on paper, SADC’s minerals assets remain in the mix. The abundance of large volumes in copper, cobalt, lithium and nickel, for example, is part of the strategic minerals that are required to spur the just transition to clean energy agenda in the production of key components such as batteries for electronic vehicles.

The discussion kicked off with Dr Claude Kabemba, SARW’s Executive Director decrying the fact that not many inroads have been made since independence on transforming mineral wealth into meaningful development for the continent. Despite an array of initiatives, awareness-raising, research, multi-stakeholder engagements and campaigns, the problem is growing. In 2015, the report of the High-Level Panel on IFFs out of Africa estimated that Africa was losing US$50 billion annually. Recently, UNCTAD estimated that Africa was losing close to US$89 billion to IFFs annual. All reports concur that the extractive sector is the major driver of IFFs.

Collateral regional damage caused IFFs

Recent gold rushes in Malawi and Zambia portend well for development prospects yet there are no clear and transparent frameworks in place governing the extraction, presenting room for loopholes in IFFs according to Dr Kabemba. Zimbabwe is said to be losing roughly US$1 billion annually to gold smuggling alone, further emphasized Dr Kabemba. The collateral regional damage caused IFFs is seen in intensification conflicts evidenced in Cabo Delgado, Mozambique. Mukupa Nsenduluka, Oxfam Zambia’s lead person on extractives echoed Dr Kabemba’s sentiments that lack of formalisation of artisanal and small scale mining (ASM) in the gold sector is most likely to haunt Zambia.

Outside the gold sector, Dr Kabemba gave another example on ASM cobalt mining in DRC.  At the peak of cobalt prices, in 2016 and 2017, roughly US$1.8 billion was generated annually by artisanal and small-scale miners (ASMers). However, not even a tenth of it has impacted positively on the livelihoods of these ASMers. In Zimbabwe, over the past three years from 2017 to 2019, official gold deliveries from ASMers surpassed large scale producers. Despite this phenomenal achievement, commensurate socio-economic development in areas where these resources are extracted is hardly tangible. Recognising the growing threat of illicit gold trade in SADC, SARW has prioritized the tracking and monitoring of the gold sector as a key project under its natural resource governance work in the region.

Unable to leverage Zambia’s mineral wealth for development, Ms Nsenduluka indicated that the country had amassed a significant debt burden over the past ten years and that due to mismanagement of resources, Zambia was on the way to becoming the first country, post-Covid-19, to default in terms of loan repayments. This highlighted the corrosive impact of IFFs according to Ms Nsenduluka. The report produced by Zambia’s Financial Intelligence Corporation (FIC) revealed that Zambia annually loses US$3 billion to IFFs.  To shine a light on the economic significance of copper mining in Zambia, Mukupa highlighted that copper contributes 10% to the country’s GDP and 78.4% to total export earnings. Despite these challenges, significant progress has been made on legal reforms critical to curbing IFFs, but institutional weakness remains a huge challenge according to Mukupa. Zambia is part of the Extractive Industry Transparency Initiative (EITI) which has resulted in tightened of transfer pricing regulations and public beneficial ownership disclosure under the new Companies Act.

Speaking to Zimbabwe’s situation, Josephine Chiname, a legal officer with Zimbabwe Environmental Law Association (ZELA) indicated that in January this year, Zimbabwe included beneficial ownership disclosure in the new Companies and Other Business Entities Act as well but this registry is not publicly accessible. Additionally, Zimbabwe has been going around in circles on the adoption of EITI according.

In Tanzania, Silas Olan’g, Africa’s Co-Director of the Natural Resource Governance Institute (NRGI) spoke of several reforms that have been undertaken in the past 5 years which aimed at repositioning the country to benefit more from its mineral wealth. This has resulted in the enactment of laws to reinforce the country’s sovereignty over its mineral wealth, mining contract renegotiations, the upward review of mining royalties, and an end to perpetual carry over of mining losses and free state equity participation (16%) in mining. Some of the renegotiated contracts included 3 for Acacia with Barwick,  1 with Anglo-Gold Ashanti and a production sharing arrangement in the gas sector. In the re-negotiated contracts with Barwick, the country and Barwick will get 50:50 benefit sharing arrangement. It is not clear though, whether the new arrangement will deliver improved revenue flows because the definition of economic benefits was broadened to include labour, cautioned Olan’g. The political will to renegotiate the contracts is there but technical capacity constraints may prove to be a hinderance on how to amplify benefits from contract renegotiations.

Transparency and accountability of tax incentives

Josephine Chiname opined that Zimbabwe seems to have taken the opposite path to Tanzania: (a) Mining companies can still carry over their losses in perpetuity; (b) government missed the opportunity to renegotiate contracts in the platinum sector after the expiration of the 25-year stabilization agreement; (c) and the government is reversed the indigenization drive under Zimbabwe is open for business mantra. South Africa which started the Black Economic Empowerment (BBE) years before Zimbabwe has not reversed its policy direction. Communities are required to get 5%, likewise with employees and 20% for local businesspeople. The portion for local business, however, has been taken by a few greedy and politically well-connected people said Thembinkosi Dlamini, with Oxfam South Africa.

Past studies led by religious leaders in Tanzania for the period of 2012-1016 depicted how tax incentives had resulted in a loss of US$288 million amounting to 16% of government revenue loss. In Zimbabwe, the true picture of the impact of tax incentives is a blurred one. Despite a commitment to improve transparency and accountability of tax incentives in the 2019 national budget, tangible results have not been realized to date. Whilst data on tax incentives is opaque, the 2015 revenue performance report generated by the country’s tax collector, the Zimbabwe Revenue Authority (ZIMRA) disclosed that US$100 million was lost due to the 25-year stabilization clause on platinum royalties.

From the various country experiences on curbing IFFs and strengthening tax linkages in the extractive sector, SADC countries must surely learn and profit from each other’s experiences. Tanzania has renegotiated major mining agreements whilst Zimbabwe passed on the opportunity to do the same in the platinum sector. A careful learning on what worked well, what must be improved and what did not work in the case of Tanzania’s thrust to renegotiate mining contracts is needed. If not careful, SADC might squander the opportunity to obtain a commensurate share of government revenue from a boom for gold and platinum group of metals. Zambia has laws that provide for public disclosure of the beneficial ownership registry whereas the reforms in Zimbabwe fall short on making beneficial ownership disclosure public. As for gold rushes in Malawi and Zambia, if the governance process fails to draw lessons from developments in Zimbabwe, a similar fate of rampant smuggling will be encountered. The ASM sector, a key component of mining in SADC must be supported to ensure that ASMers and communities were the resources are extracted are not short-changed on benefits. Tax incentives must be monitored and evaluated to ensure they achieve a fair balance between attracting investment and filling of government coffers. More importantly, the risk of regional harmonization of taxes is vital to avoid harmful tax competition, the race to the bottom among SADC member states in the quest to attract investment.

Blog by Veronica Zano, Governance, Research and Policy Officer, SARW and Mukasiri Sibanda, Advisor on Tax and Natural Resource Governance, TJNA

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