Before the dust settles on Kenya’s new mining and oil legislation, the concept of a windfall tax has arisen. It may be new to Kenya, but has existed in various forms around the world for hundreds of years. It obviously fills the industry with dread, as another drain on potential profits. For governments though, it is often seen as the right thing to do, given the finite nature of minerals.
In its most basic form, a windfall tax is levied when economic conditions allow certain industries to experience above-average revenues or profits. It gets complicated when governments and industries battle on the definition of “above average” and the mechanics of calculating the tax.
It is no surprise that the two most famous recent windfall tax sagas occurred in Australia and Zambia, two economies managing massive natural resource endowments.
Zambia’s windfall tax was introduced in April 2008, just as world copper prices reached record levels. It was a unilateral government decision that trashed development agreements between the government and individual investors. Predictably, a majority of the public rejoiced while investors were up in arms.
The tax was to be calculated based on copper prices. For example, if the price of copper on the world market exceeded US$3.50 a pound in a given period and was say, US$4 a pound, companies would pay 50 per cent of the 50 cent difference as a windfall tax on sales during that period. By January 2009, however, the copper price had crashed by over 50 per cent in the face of the global financial crisis and a new government cancelled the tax.
Australia’s windfall tax debate took centre stage in 2010 and an acrimonious battle between government and industry ensued.
Rio Tinto, one of the world’s largest mining groups immediately put two massive projects in Australia under review and shifted resources to a Canadian project, citing the increased attractiveness of Canada over Australia following the new tax. The final version was known as the Mineral Rent Resource Tax and following intense lobbying, was watered down and levied only on iron ore and coal miners.
The current Australian government elected in 2013 has introduced legislation to scrap the tax based on its campaign platform.
What is the lesson for Kenya? Obviously the debates in Australia and Zambia were much more critical given the importance of minerals to both economies. While it remains the government’s prerogative to raise revenue, we need to think about growing the pie as much as or more than we think about dividing it.