Paladin offers Malawi raw deal
Lilongwe ‑ Natural resources have the potential to transform national economies in developing countries towards pro-poor and sustainable development if properly managed, according to a study published by Zimbabwe-based regional think tank.
The study by the African Forum and Network on Debt and Development (AFRODAD) largely dwelt on a case study of Malawi’s largest mine investment, the Kayelekera Uranium Mine, operated by Paladin African Limited.
The recently released report on Malawi’s extractive industry titled: “The revenue costs and benefits of foreign direct investment in the extractive industry in Malawi”.
Malawi’s extractive industry has begun to attract worldwide attention due to recent discoveries of various mineral resources ranging from coal, bauxite, niobium, uranium and rare earth of which Malawi has the largest deposit reserves in Africa.
Momentum and interest in Malawi’s extractive industry was ignited by the commissioning of Kayelekera mine in 2007/2008, which is by far the largest Foreign Direct Investment (FDI) in the country ‑ with an investment portfolio of over US$500 million and producing one percent of the world’s uranium.
“Despite this large investment, many sectors of society have criticised government in the manner in which the deal was negotiated with the investor,” said AFRODAD Executive Director, Dr Collins Magalasi.
The study was carried out in conjunction with the Lilongwe University of Agriculture and Natural Resources and the Steering Committee of the Tax Justice and Extractives Platform co-ordinated by Malawi Economic Justice Network (MEJN).
Magalasi said failure by African governments to harness revenue from natural resources for development could be measured in two ways, which are poor mining and investment policies and machinations of the investors, which make use of complex systems to evade and avoid taxes.
He observed that most African governments are resistant to change and the majority of those responsible for negotiating contracts on behalf of the general citizenry support policies that disproportionately benefit the investors at the expense of the nation, thereby raising suspicion that the responsible government officials are corrupt.
Magalasi also noted that in the absence of sound policies and procedures governing natural resources, mineral resources can be a source of economic instability, social conflict, and lasting environmental damage.
“The onus is, therefore, upon the national governments to develop and implement concrete policies that govern investments in the extractive industry and also address the problem of illicit financial flows,” he said, adding that unfortunately in Africa, and Malawi in particular, natural resource governance will remain a serious challenge unless polices are revised.
The result reveals that the research is “unequivocally” consistent with what many analysts who claim that Malawi’s benefits and gains in the Kayelekera mining deal “are tangential and dismal”.
It establishes that the benefits, which are skewed more favourably towards the mining company, were done hastily under an atmosphere whose negotiations were not transparent.
“Furthermore, the government officials involved were not experienced and were no match for the skilled negotiators for Paladin,” AFRODAD reveals in the report.
“Above and beyond this, the major problem that contributed to the disproportionate sharing of benefits is the country’s archaic laws that fail to hold the Multinational Corporation (MNCs) more accountable to pay taxes and remit profits to Malawi.”
• Complex Accounting System
The laws that govern FDI in the extractive industry are weak and in disharmony.
Taxation laws fail to adequately address issues of capital flight, tax avoidance or evasion, which the study findings have revealed are being perpetrated by MNCs.
“To this extent the MNCs in the extractive industry have evolved to use more rigorous and complicated accounting systems that evade the detection radar of the local tax and revenue authorities,” says AFRODAD.
The think tank claims that the investment incentives offered to Paladin have revenue implications to the Malawi government, including 15 percent equity to be transferred to the country, a reduction of corporate tax rate from 30 percent to an effective 27.5 percent, and 10 percent resource rent reduced to zero.
“As a result of this concessionary agreement, the government of Malawi lost billions of Kwacha from royalties, resource rent and value added tax against a meagre US$15.2m, which it has received in taxes and royalties within the three years that Kayelekera has been operating commercially,” says the think tank.
AFRODAD also reveals that royalty rate for the Kayerekera deal was also reduced from 5 percent to 1.5 percent (years 1 to 3) and 3 percent (thereafter), a 17 percent removal of import VAT or import duty during the stability period, and an immediate 100 percent capital write-off for tax purposes, the capitalisation (debt: equity) ratio of 4:1 for the project, and as well as a stability period of 10 years where there will be no increase to tax and royalty regime and commitment to provide the benefit of any tax and royalty decrease during the period.
“This clause in the agreement statement implies amortisation of profits,” says AFRODAD in the report adding: “This means that there shall be a reduction or cancellation of taxes to be paid during future years of subsequent profits as a means to compensate the debt accrued by the company during years of registering losses.”
AFRODAD has, therefore, called on the Malawi government to renegotiate the deal in order to benefit the country more.
It further recommends that in future dealings, the laws need to be reformed before any major deal is negotiated and signed to avoid repetition of previous mistakes.
The government has issued more than 120 mining licences to local and international companies for the extraction of coal, limestone, rare earths, Kaolin, dolomite, bentonite, semi-precious stones like ruby, garnet, amethyst, tourmaline and sapphire and ornamental stones such as rose quartz and uranium which is the highest mineral forex earner.
Malawi contributed 1 percent of world uranium production in 2010, according to the Ministry of Economic Planning. In that same year, the production of uranium rose by 58 percent; that of sulphuric acid, which is required in uranium processing, rose by 493 percent.
Uranium accounted for close to 10 percent of Malawi’s exports, by value.
In 2012, the mining sector contributed 10 percent to both GDP and exports, “but ironically, it contributed only 0.76 percent to government revenue and 1.2 percent to domestic revenue4”, according to the report.
The mining sector is expected to contribute more than 30 percent of GDP in the next five years.
This increase is largely accredited to the increase in uranium production with four more potential mines in the offing.
Due to this overall increase in mining activities in the country, the Zimbabwe think tank says the level of employment in the mineral industry rose between 2009 and 2010, from 11 565 workers to 21 022.
“Out of this, the uranium sector directly employs 933 Malawians” says the report, citing that in countries such as Zimbabwe there has been a shift in government direction towards indigenisation of the extractive industries.
Under the indigenisation policy, foreign mining companies are compelled to transfer 51 percent of their ownership into the hands of local investors,” says AFRODAD.
“In South Africa, questions have been posed over the possibility of revoking licences of companies that do not comply with increasing shareholding of black people in mining firms as stipulated in the mining charter which calls for 26 percent of all companies’ shares to be sold to South Africans by 2014.
In Botswana the government encourages joint ventures. Government shares are 50 percent.
In Botswana and Namibia where government involvement in the extractive minerals industry is extensive the level of benefits is higher unlike in Malawi, Zambia and DRC, says the think tank report.