Namibia and the ‘perfect’ Mining Tax

Namibia and the ‘perfect’ Mining Tax

 

Margret Thatcher, the first female Prime Minister of UK, thought she had the perfect tax. It was administratively simple, low cost and had plenty of precedent.  She was always a woman enthralled by right wing economic ideologues and as she had succeeded in doing what the right wing thinkers had told her. She lowered company and personal taxes, she smashed the trade unions, closed the coal mines  and got re-elected after waging a war with Argentina over a spec of land in the South Atlantic - the Falkland Islands.

But then power and hubris got in the way of the ‘Iron lady’ as it does with many leaders everywhere and she introduced a Poll tax. This was so simple. Instead of having council taxes based on property that funded British councils the ‘Council fee’ as it was known was based on the same principle as the 17^th century Poll tax. Each individual, rich or poor would pay the same amount to council. It was used in the UK in the 17^th century and in Africa by the British colonialists in the 19^th and early 20^th century. It was called ‘hut tax’ in many colonies. This tax was strongly resisted in Africa and in Europe because it was so patently unfair. No matter how poor you were you paid the same as any rich person. The tax resulted in the worst riots in the modern history of the UK when some 200,000 people rioted in Trafalgar Square in March 1990. Within a few months Thatcher was forced to resign as PM and her replacement John Major repealed the hated Poll tax in his first speech in parliament.

History is littered with those who simply don’t understand that if you impose the wrong type of tax at the wrong time or too much tax you will be relegated to the dustbin of history very quickly. The American Revolution, after all, began as a tax revolt.

For years Namibia has been looking for the ‘perfect tax’, for mining companies operating in its jurisdiction. There is no perfect tax but a good tax must be one that collects revenue, is simple to administer but does not dissuade investors from coming to invest in Namibia. Importantly it must also be seen to be ‘fair’

 Most of the government’s revenues from mining comes from the diamond sector. Despite being a relatively high cost operation they are very profitable and Namibia receives the highest unit export price for its diamonds of any diamond producing country. In the non-diamond sector there is very little tax revenue because the government has granted tax free status to Skorpion Zinc (soon to close), Tsumeb copper and Trekopje Uranium (now under care and maintenance). It also has three new mines which have heavy capital costs to write down which they are allowed to do in their initial years.

What government really wants is a tax that, when prices of many of the country’s base metal exports improve, will give the country more revenue without increasing the tax rates. The tax on minerals is not widely understood. The tax is the price the owners of the mineral i.e. the people of Namibia get for giving away a mineral to a foreign investor. If it gets no tax revenue then the mineral is free, though its extraction is costly. To sell a non-renewable resource with no tax makes no sense.

As painful as it may be to delicate ears, most people are dreadful liars and if you look at the psychological studies that have been done on lying you will find that the majority people lie on a daily basis. Mining companies are run by people and yes some of them lie to the tax man. In the diamond trade, diamantaire never declare profits and so the governments of Israel, India and Belgium where diamond trading is significant don’t even ask these companies what profits they make. They simply send them a tax bill based on sales and if you don’t like it, shut down and go and trade somewhere else. For the Namibian mining industry this option is problematic because they may well go somewhere else.

As it is so easy to lie about profits how do we operate in a manner that makes sure that the people of Namibia get a fair return on their minerals. One way to do this is to have a progressive tax based on the gross revenues that the company earns - not profits. The mining companies think the perfect tax is no tax e.g. the Trekopje uranium mine and if you can’t get that then the second best is one based on profits where you can easily lie and cheat the tax authorities.  

How do we stop the mining companies from lying? The best way is to tax them based on sales because it is so much simpler to calculate than profits. You only have to know the world price of say copper or zinc and the volume and quality of what is exported and then you impose a tax based on a percentage of that revenue. As the volume and price can be easily known or set by reference to the world price, as Zambia does then the option to cheat is more limited.

But what needs to be done to stop the cycle of resource nationalism as it has been called along with the  recriminations from the mining company? The best way is to have a progressive tax that rises and falls with the price of the mineral. This would allow Namibia to automatically decrease the tax rate as prices fall and it would rise automatically with the world price. In Zambia they have tried to reform the mining tax system 9 times since the privatization of the copper mines by Chiluba and the World Bank in 1999. The continual change sin tax and mining rules  have only hurt Zambia but the current system is based on a percentage of sales which rises and falls with the price of copper.

The mining companies hate this idea officially because it raises costs and results in earlier mine closure. This is the good reason and it is correct, but the real reason it is hated is  because it is so much harder to cheat. In 2016 Zambia received 17% of its exports in government taxes and royalties. This compares to some 3% in Namibia.

There is no perfect tax, only reason and compromise and so the government must sit down with the Chamber of Mines and the mining companies and determine a simple straightforward system that assures Namibia gets its fair share when commodity prices rise again as they inevitably will, and which is understood and will not change with the whim of one or other politician, as has been the case in Zambia.

These are the views of Professor Roman Grynberg and Mr Fwasa Singogo and not necessarily those of UNAM.

 

China and Namibian Uranium

                                                     China and Namibian Uranium 

Last month the Governor of Erongo Mr Cleophas Mutjavikua was quoted as saying that ‘Not only does Namibia have good nuclear resources and safety standards, but we need to turn this very important resource into energy for the Namibian people’. In other words he wants a nuclear power station in Namibia. To be polite, it is an idea that has almost no economic merit.

The first problem is that we could not use the yellow cake uranium that we currently export for generating electricity but would have to produce low-enriched uranium, U235 which is used in nuclear power stations. Making a profit now is almost inconceivable given the cost of building and operating an enrichment facility. After the nuclear accident at disaster at Fukushima in Japan in 2013 many countries moved away from nuclear power and there is now massive excessive capacity in enrichment facilities globally. As a result it is very improbable that a new Namibian facility could be commercially viable.

Once we have lost lots of money beneficiating Namibian uranium yellow cake into U235 then we would have to build a nuclear power plant. Since the Fukushima accident nuclear power has gone out of favor in most developed countries and so the engineering firms that build and export nuclear power plants to places like Namibia are very hungry and desperate for new business.  Germany has abandoned its nuclear power industry altogether. Only the Chinese and to a lesser extent the Indians are involved in a serious nuclear energy expansion program which involves the construction of many nuclear facilities.

If we did decide to build a nuclear power plant in Namibia we would suddenly find ourselves with many new ‘friends’. One need only ask former president Jacob Zuma how many ‘friends’ he managed to find once he decided to build a new nuclear power plant in South Africa. There are at least a dozen countries ranging from Canada to Russia to China who would be more than willing to build a nuclear power plant for Namibia and fulfil the governor’s dreams. And of course many of these nuclear power plant exporters, as the South Africans could attest, would come to Namibia bearing ‘gifts’…. very big gifts.

Furthermore if we started an enrichment facility, this would almost certainly send up red flags in developed country capitals and would get the very unwanted attention of the intelligence services in developed countries. This would be compounded by the fact that last month Rio Tinto sold majority 69% ownership in the Rossing uranium mine in Erongo to Chinese state-owned China National Uranium Corporation Limited (CNUC) for about N$1,5 billion. The other 31% is owned by the Iranian Foreign Investment Corporation, the Industrial Development Corporation of SA and the Government of Namibia. The fact of partial Iranian ownership of Rossing combined with any uranium enrichment program would just spell trouble for Namibia.

The purchase of the uranium deposits at Husab and sale of Rossing  to the Chinese is a real blessing for Namibia. Uranium has been decreasing in price since the Fukushima accident. In Namibia we have a tax free uranium mine at Trekopje owned by the French company Areva Resources Southern Africa, The mine ceased production in 2013 and has been under care and maintenance since. The only non-Chinese uranium mine in Erongo is Langer Heindrich mine which in 2018 produced a mere 394 tonnes of uranium in 2018 , down from over 2000 tonnes in 2013. The Chinese need uranium from a politically safe supplier and because of the country’s long and warm relationship with China, Namibia fits that bill perfectly. The reason why Chinese ownership is a blessing for Namibia is that ultimately the new owners of Rossing and Husab are not miners in the same way as Rio Tinto. For Rio Tinto they would only produce uranium if the price on world market covered costs. Since Fukushima this has been a challenge for everyone in the uranium industry. But the Chinese miners are directly linked to the electricity utilities in China and they will need the uranium for many years to come until China is willing to shift its energy mix away from nuclear in a profound way. They will buy come what may. The Chinese will continue to buy our uranium for many years to come and this is to Namibia’s benefit.

The real reason why the governor’s proposed  nuclear power station is just a non-starter is because of the economics of nuclear power. First, the cost of uranium is a tiny percentage of the total cost of nuclear power. Having uranium in the ground gives Namibia almost no commercial advantage in generating much needed nuclear power. Second since Fukiushima nuclear power has become more expensive over time because the public is demanding ever more security guarantees. Nampower is proceeding with a much better option for Namibia - wind and solar power which in terms of cost per unit are already on par with the lowest cost energy sources. While solar and wind are not available all the time the storage issue will be resolved in time. So the good governor of Erongo should stick to better energy resources his region has in abundance- wind and sun to generate electricity and let the Chinese buy our uranium.

Lastly, a word of caution is in order. In early 2017, before the coup in Zimbabwe, I attended a diamond conference in Antwerp and Mugabe’s last minister of Minerals addressed the audience and said that Zimbabweans were in five joint ventures with Chinese diamond companies but the Chinese appeared never to make a profit. The Chinese were obviously mining in Zimbabwe so as to improve their health. Moreover, the minister said that they always conducted board meetings of their companies in Mandarin and of course the Zimbabwean partners understood nothing of what was happening. As a result the tax authorities in Namibia must be very cautious to assure that the new owners of our uranium mines conduct their affairs in a manner that the owners of the uranium i.e. the people of Namibia get their fair share of economic benefits and do not give it freely to the Chinese or anyone else.

These are the views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed.