Adapting to COVID-19 in Africa’s Extractives Sector
PWYP members in East and Southern Africa are calling on resource-rich countries to give direct support to extractive communities and adopt progressive tax regimes in response to the pandemic
As COVID-19 infection rates climb across Africa, the continent is taking decisive measures to minimise the pandemic’s impact on its people. Many African countries already have full or partial lockdowns, affecting schools, public services and businesses, and leaving millions of people without a livelihood – including in the mining, oil and gas sectors.
The impact is being strongly felt in some resource-rich countries of East and Southern Africa, which are highly dependent on extractive revenues. They are suffering a double blow, with the effects of lockdown making daily life increasingly hard for their people, and the pandemic’s effects on global commodity prices undermining their national economies.
Struggling without income
In response to the pandemic, Publish What You Pay (PWYP) members are working together in new ways to address the effects of the crisis and continue working towards an extractive sector that benefits everyone. In May, PWYP members from across East and Southern Africa gathered for a webinar to examine the impact of COVID-19 on the region’s extractive sector and discuss policy options to mitigate its effects.
Participants described many workers left without support or income as extractive operations are reduced or suspended under lockdown. Labour rights and job security are threatened in many African countries, and public services are under strain. With funding from extractive revenues set to fall, this will only worsen. Women are particularly affected by the pandemic, in their roles as primary carers for children and the elderly, key users of health services and the majority of the workforce in artisanal and small-scale mining.
For PWYP members, the crisis has disrupted negotiations with stakeholders and halted progress in bringing transparency, accountability, participation and equity to the sector.
Undermining Africa’s economies
COVID-19 is also having a far-reaching impact on Africa’s resource-dependent economies. Although prices of precious metals such as gold have increased in response to the economic uncertainty, demand for oil and base metals has crashed, as global industry slows down and export markets such as China are closed. Production has also been affected as the extractive sector adjusts to the new COVID-19 health regulations.
Governments across the region can expect future revenue reductions if mining, oil and gas operations remain suspended or are permanently scaled back or shut down. In Zambia, for example, where extractives contribute over 10 percent of GDP, 80 per cent of exports and 29 per cent of government revenues, the finance minister estimates a 20 per cent shortfall in revenue for the country’s 2020 budget. Over 10,000 extractive sector jobs are set to be lost with the closure of just one company.
Threats to the extractive industries could result in pressure on African governments to provide tax relief to boost the sector. Zimbabwe has already granted waivers on royalties in its mining sector, and Zambia has suspended some export and import duties related to the sector. But PWYP coalitions agreed governments should resist pressure for tax exemptions for extractive projects.
With the ongoing need to collect revenue to provide essential public services, governments should only consider tax support for the extractive industries in exceptional circumstances, where financial modelling shows that lower commodity prices make an industry unviable without temporary assistance. In such cases, discretionary measures such as deferred royalty payments should be industry-wide, provided with full transparency, based on pre-set eligibility criteria and with a clear end-date.
Opportunities for better tax systems
Crucially, the impact of COVID-19 on tax revenues presents an opportunity for countries to reflect on the best tax systems for their extractive sectors. Fiscal regimes for mining, oil and gas commonly include production-based tools (such as royalties) and profit-based ones (such as corporate tax). Profit-based taxes often have progressive rates, giving the government a higher share in more profitable projects, while production-based taxes can be progressive by charging different rates for different commodity price ranges.
The webinar confirmed PWYP coalitions’ support for progressive taxation in the extractive sector and for closure of loopholes that allow companies to avoid taxes, as outlined in the African Union’s African Mining Vision. Progressive systems have inbuilt flexibility and predictability, helping nurture resilience in a country’s extractive sector. When lower commodity prices hit the industry, taxation rates fall in response. This helps companies to adapt. Government revenues will automatically increase again as soon as profits start to rise – meaning the extractive sector yields a fair share of public income that can be spent on services to benefit everyone.
Stronger support for communities
Whatever a country’s response to COVID-19 in relation to the extractive sector, webinar participants agreed that transparency and accountability are more important than ever. They reaffirmed PWYP’s support for countries to join the Extractive Industries Transparency Initiative and uphold its standards, so people can see exactly where revenue is coming from and can demand accountability for how public money is spent.
Participants also discussed how companies can provide better support during the crisis to communities among which they operate. In Tanzania alone, 600,000 communities are involved in extraction. Laws around corporate social responsibility could be strengthened across the region, and more government and corporate revenue be used to support communities directly.
The crisis also exposes the need for stronger labour laws to better protect employees in the mining and oil sectors. In the wake of the pandemic, women’s needs should particularly be considered in the design of social assistance and economic stimulus packages, to achieve greater equality, opportunities and social protection.
To help achieve these goals, PWYP members across the East and Southern Africa region will be urging governments to develop secure systems for ongoing stakeholder negotiations in the extractive sector. We can then press governments to ensure that extractive communities whose livelihoods are hit by the pandemic receive the immediate support they need. And we can promote the progressive taxation and closure of tax loopholes that will help everyone to benefit fairly from extraction in the future.