Big deals, big mistakes

The year 2011 has been a year of big deals. One of the biggest deals, the Essar deal, remains in controversy to this date. Having gotten 54% of Zisco in a special bargain, well above the 49% shareholding that is normally reserved for foreigners, Essar believes it can get more. There are reports of its planned iron ore slurry pipeline to be built from Chivhu and Kwekwe all the way to Beira. Why would Essar want to pump unprocessed ore out of Zimbabwe at a time players in the chrome industry are being forced to add value? How much will the country lose in terms of VAT, income tax, jobs and so on if iron ore is going to be processed outside Zimbabwe?

How does one put market value to unprocessed ore being pumped out of Zimbabwe for taxation purposes and do we have capacity to deal with transfer pricing issues that could potentially prejudice the country of billions of dollars? Does it ever make sense that big mining companies do not pay that much in corporate tax in the country they extracts the resource, whilst the tax is paid elsewhere? In the US, GlaxoSmithKline PLC, a UK drug maker, settled $3.4 billion for its transfer pricing sins, and the US government is always taking to court suspects of prejudicial transfer pricing. Zimbabwe could do much more for its minerals that are exported with very low values. If the values of the ore reserves of Zisco are in excess of $50 billion, why therefore would Essar get 54% in the first place as a special case in violation of the indigenisation laws? There are just but many questions on the Essar deal that remain unclear and indeed the deal is big, with big mistakes as well on part of the Zimbabwe government.

Steal from me and I will fix you!

Having well understood and appreciated the contribution of the diamond revenue in transforming the Zimbabwean economy, Minister of Finance made two important decisions in the last budget. The first was to acknowledge that indeed the diamond revenue in Zimbabwe, just like in Namibia and Botswana, is very critical in determining scope and direction of GDP via the government revenue route. He revised the revenue estimates upwards by $600 million to $4bn. If diamonds bring $600 into the fiscus, what is the government getting directly from gold and platinum whose combined exports are estimated over $1.6 billion annually?

Hiking royalties, according to Hon Biti, could bring the desired cash into government coffers since the government has no notable shareholding in the mining of these two key minerals where not much accrues to the government as compensation for the depletion of the natural resources other than the obvious PAYE and corporate tax. He hiked royalties from Gold and Platinum to 7% and 10% respectively as if saying ‘steal from me and I will fix you’. In Zambia, copper exports are expected to top $8.4 billion this year, but the mining sector contributes a paltry 11% to GDP. Worse still, bank deposits remain below $5 billion whilst cost of credit has remains very high above 30% per annum on the back of a volatile exchange rate.

These factors put Zambia in a difficult scenario of failing to finance infrastructure projects to develop the country yet it will export copper worth over $20 billion in the next 4 years. The fact that the copper exports proceeds remain offshore is the major curse of Zambia, and indeed it will remain poor a country notwithstanding the huge resource endowments in copper. Zimbabwe and Zambia may need to borrow a leaf from Austria. In Australia, 85% of the mining industry is foreign owned. To compensate the Australian for the depletion of resources, the Australian government imposed new taxation levels that, in effect would take the cumulative taxation levels to as high as 57%, making Australia miners the highest taxed in the world. Surplus profit will be charged at 30% beginning January 2012. That is expected to add an additional A$4bn every year, which money will go towards infrastructure projects and pension.

The Chamber of Mines in Zimbabwe has a different idea. It opposes the increase in royalties and believes the mining sector is contributing more to the economy through investment in health, education and housing. That fact is not deniable, but does the Chamber of Mines believe that building toilets and schools in the remote areas for their employees’ benefit is good enough to off-set the royalties? If a big mining company sets up operations in the bush and builds a road to get there so that they can extract the resources, and equally builds a clinic so that their sick and injured workers get attended to as per the law, would one honestly call that ‘significant’ in contributing to the development of the economy?

That a very sick argument, and indeed the President of the Chamber of Mines, Mr Chitando needs to understand that royalties address the wider spectrum in the distribution of national income from key resource endowments as opposed to localised benefits to a few people. The government will be receiving at least $100 million each year from the recent hike in royalties from Gold and Platimun, and surely the mining sector, on its own volition through building classroom blocks, toilets and clinics, cannot be expending as much annually for the wider benefit of the economy. Indeed the Minister of Finance was spot on.

Mathematics, a difficult subject after all

The last person you expect to get numbers wrong is the accountant, moreso the Ministry of Finance lest other ministries are allocated disproportionately higher votes in error. The economy is growing, no doubt about it. Economic growth is estimated at 8.1%, 9.3% and 9.4% for 2010, 2011 and 2012 respectively, so the official position stands. GDP tops $8.3 billion, $10.1 billion and 11.9 billion for 2010, 2011 and 2012 respectively. These figures from the budget do not tally at all, so will all the statistics that use GDP as the base reference. The mathematics is very bad, even if the nominal GDP figures are deflated using the average inflation. The ordinary person does not need to know the implicit GDP price deflator that is used to arrive at the GDP figures, but the bottom line remains that the figure as published in the budget are somewhat not correct unless what we refer to nominal GDP is probably GDP at purchasing power parity.

Nominal GDP growth from $8.3 bn to $10.1 bn is 22%. What is the figure of the real GDP in billions that then that gives us the official growth position as stated of 8.1%? Taking the 2009 GDP estimate to be correct, would it not be the correct position to say our GDP as a country is $7billion for 2011, not the $10.1 billion we are getting from the Ministry of Finance? Mathematics has always been a very difficult subject since the beginning of time, and indeed when it comes to national statistics, more attention needs to be given to such so that planning becomes much easier for everyone.