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Towards an Optimal Capturing of Rent for Zambia’S Large Scale Copper Mining Industry

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Towards an Optimal Capturing of Rent for Zambia’S Large Scale Copper Mining Industry TOWARDS AN OPTIMAL CAPTURING OF RENT FOR ZAMBIA’S LARGE SCALE COPPER MINING INDUSTRY By EDWARD CHISAKULO A thesis submitted to the University of Zambia in fulfilment of the requirements of the degree of Doctor of Philosophy in Mineral Economics THE UNIVERSITY OF ZAMBIA LUSAKA 2018 COPYRIGHT © 2018 by Edward Chisakulo All rights reserved. No quotation from this document should be published without prior consent of the author and all information derived from it should be used for non- commercial purposes, fully acknowledged and cited properly. DECLARATION I Edward Chisakulo do hereby declare that this thesis is the result of my own investigation and research and that it has not previously been submitted for a degree, diploma or other qualification at University of Zambia or any other university. Signature:……………………………. Date:………………………………….. ii APPROVAL iv ABSTRACT Zambia is largely a mineral economy faced with challenges of designing a tax system that meets two fundamental objectives namely to ensure a fair share of rent for itself and simultaneously allowing for sufficient investment revenues needed by investors. Zambia’s mine fiscal regime has evolved more than six times from privatisation time to date with the aim of striking a win-win situation in the capturing of mineral rents. These changes have not yielded satisfactory results since tax revenue captured has regularly remained lower than 4 percent of the gross domestic product (GDP). The main objective of this thesis is to examine the underlying reasons for the failure and how Zambia can optimise its rent capturing as part of a solution to the current problems facing the copper mining industry. Literature reviewed highlighted various issues needed to optimise rent capturing from the mining industry covering the theoretical concepts of economic rent, optimal taxation and perspectives on “good tax” criteria as a condition for resource taxation. Furthermore, literature review covered concepts dealing with a blend of key taxation instruments and evaluation of their competitiveness, investment incentives, equity participation arrangements, institutional capacities, and additional benefits to mineral taxation clarified by social investment and local content. Data was collected from a range of “experts” in the mining industry through a survey by semi-structured interview and structured questionnaire employing a non-probability purposive sampling for both. Thirteen interviews were conducted and 120 questionnaires were distributed to people covering the same scope of sources of information, to obtain experts’ views based on the study objectives informed by the literature reviews. Out of these, 82 responses were received. Results were achieved based on literature reviews, interview and questionnaire survey, competitive assessment of the mine fiscal regime using international best practice and quantitative evaluation of the fiscal regime through a stylised copper model. The study established that optimal capturing of rent in Zambia is devoid of a “best taxation” model for arguing taxation matters. Additionally, the study ascertained the underlying reasons for Zambia’s failure to capture optimal rent including; poor design of the tax regimes that are inflexible to meet economic perspectives, improper evaluation of granted tax incentives, weak institutional capacities affecting tax administration and sector monitoring, dismal equity stake performance, and suboptimal performance of non-fiscal benefits dealing with social investment and local content. These findings have significant implications for designing and performance of the Zambian mine taxation system and it is concluded that Zambia’s mineral fiscal regime is not adequately structured to optimise rent capturing consistent with the interests of both investors and government. v Inductively, the study proposes a guide for the appropriation of an optimal government share of rent through the need to have parameters for fiscal stability, transparency and progressivity in the design of fiscal regime, maintaining headline fiscal tools consistent with global norms and instituting the excess-profit tax indexed to price movements. Other indicators include, satiated cost-benefit analysis for the offered tax incentives, government assuming equity stake in new and viable mineral projects, and need for strengthening institutional capacities. vi ACKNOWLEDGEMENTS I wish to thank my supervisor Dr. S Kambani for being readily available for me during the entire period of my studies. His positive suggestions and reshaping of this thesis write-up has resulted in significant improvements. I also extend my gratitude toopperbelt University (CBU) for awarding me a Special Staff Development Research Fellowship to carry out this programme. Thank you to all members of staff in the University of Zambia, School of Mines for accommodating me once again and for the wonderful interaction and encouragement. Many thanks go to my wife (Patricia) for single handedly managing domestic affairs in my absence and to Kapeso Eddie Chisakulo for patiently waiting for the missing father. E. Chisakulo (2018) vii TABLE OF CONTENTS Copyright ............................................................................................................................ i Declaration ........................................................................................................................ ii Approval ............................................................................................................................ iv Abstract ............................................................................................................................. iv Acknowledgements ......................................................................................................... vii Table of Contents ........................................................................................................... viii List of Figures ................................................................................................................. xvi List of Tables................................................................................................................... xix List of Acronyms ............................................................................................................ xxi List of Appendices ....................................................................................................... xxiii CHAPTER 1 ..................................................................................................................... 1 PROBLEM AND BACKGROUND OVERVIEW ........................................................ 1 1.1 Problem outline on rent capturing ............................................................................ 1 1.2 Parameters influencing the research ......................................................................... 4 1.3 Rationale for the study ............................................................................................. 5 1.4 Problem statement .................................................................................................... 8 1.5 Objectives of study ................................................................................................... 9 1.6 Significance of the study .......................................................................................... 9 1.7 Structure of thesis ................................................................................................... 10 1.8 Summary ................................................................................................................ 11 CHAPTER 2 ................................................................................................................... 12 LITERATURE REVIEW .............................................................................................. 12 2.1 General taxation concepts of base metal mining .................................................... 12 2.1.1 Concepts of economic rent .................................................................................. 12 2.1.2 Definition of economic rent ................................................................................ 15 2.1.3 Types of economic rents ..................................................................................... 16 2.1.3.1 Ricardian rents ............................................................................................. 17 viii 2.1.3.2 Quasi - rents ................................................................................................. 18 2.1.3.3 Scarcity (Hotelling) rents ............................................................................. 18 2.1.3.4 Monopoly rents ............................................................................................ 19 2.1.4 Justification for rent taxation .............................................................................. 20 2.1.5 Mechanisms for extracting rents ......................................................................... 20 2.1.6 Design principles and factors influencing economic rent ................................... 22 2.1.7 Factors influencing economic rent ...................................................................... 22 2.1.8 Dissipation and diversion of mineral rent ........................................................... 23 2.2.1 Optimal taxation .................................................................................................. 24 2.2.2
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