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Malawi’s mining revenue battles

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Two years after a mining revenue report alleged that Malawi has lost potential revenue of between US$205 and US$281 million from the tax regime given to Paladin Africa for its Kayerekera mine over the 13 year period of the project up to 2013, the auditors general’s office is yet to act on the matter.

The report, ‘Malawi’s Mining Opportunity: Increasing Revenues, Improving Legislation’, issued jointly by the Catholic Commission for Justice and Peace, the Evangelical Association of Malawi, and the Episcopal Conference of Malawi through funding from the Norwegian Church Aid and co-authored by economic commentator Rafiq Hajat, alleges that Paladin paid very little tax during its mining lifespan after the government reduced both its corporate income tax rate as well as its royalty rate on top of other tax concessions cast in stone for at least 10 years.

The report cited reductions in corporate income tax from 30 percent to 27.5 percent, resource tax rate from five to 1.5 percent, an immediate 100 percent capital write off for tax purposes and thin capitalization with a debt to equity ratio of 80/20, as some of the incentives that have cost Malawi crucial resources for development.

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But according to National Audit Office Public Relations Officer Lawrence Chinkhunda, the auditor general’s office could neither affirm nor dispute the findings in the absence of the said report.

“We have not been provided with the report for our study and possible action in form of audit based on which we could give an independent audit opinion,” he said.

Chinkhunda, however, said the National Audit Office is currently working on interventions in the mining sector by building capacity to ably carry out audit of extractive industries.

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He said the interventions will help the office issue independent audit opinions and conclusions on all mining activities in Malawi.

“Currently we are looking for a development partner who can sponsor our staff to acquire relevant competences and skills in the audit of extractive industries from developed countries that have been in the area for a long time,” he said.

In its response dated August 19, 2013, Paladin dismissed the report, saying it contained factual errors and conclusions. The company rejected the finding that the Government of Malawi incurred revenue losses of US$205 million to US$281 million as a result of the mining company’s tax regime.

Paladin said the conclusions were made on what appeared to be uranium prices of US$55/lb, which it said was one of several flawed assumptions, citing , the Ux Consulting uranium price at the time at the time of the launch of the report of US$39.65/lb.

But, the dust is refusing to settle on the controversial mining agreement the government of Malawi entered into with Paladin Africa in 2007. A new report released by ActionAid shows that in the last six years Malawi has lost US$43 million involving the same company.

ActionAid alleges that the money has been lost through a combination of harmful tax incentives from the Malawian government, and tax planning using treaty shopping by Paladin.

But, according to the report, Paladin’s actions are entirely legal as the company negotiated a secret tax break with the Malawi Government worth over US$15.63 million.

It then estimates that Paladin then avoided paying a further US$27.52 in tax by routing interest and management fees to Australia via a subsidiary in the Netherlands.

In one year, this lost revenue could have paid for 431,000 HIV and Aids treatments or 17,000 nurses salaries or 8,500 doctor’s salaries or 39,000 teacher’s salaries.

When we learnt that as a country we have high prospects to venture into full-fledged mining of uranium and other precious stones, we had high hopes that this would change the economic landscape of the country whose exports are still heavily reliant on tobacco.

The sector was initially billed to carter for about 30 percent of Malawi’s exports but several policy, institutional and expertise gaps crippled the sector hence limiting its potential to contribute significant economic benefits to the country.

Civil society groups, while applauding government for initiating a review of the Mines and Minerals Act, have asked government to renegotiate mining contracts it has done in the past.

The Evangelical Association of Malawi (EAM), which is implementing a mining advocacy project in Mwanza, Mulanje and Phalombe, says government must quickly implement the proposals made by stakeholders during the consultative meetings it held as part of the review process if Malawians are to start benefitting from mining activities being done in Malawi.

EAM Programme Coordinator Reverend Evans Jeka said they expect government to take on board the issues they raised as civil society by including them in the next mining legal framework.

He said among the recommendations was the inclusion of communities in mining agreement negotiations and giving a platform for community participation during the whole mining lifecycle.

But an economic commentator has blamed the government for venturing into unchartered waters when it does not have the expertise needed to develop such sectors.

Chancellor College economics professor Ben Kalua said the government erred when it single handedly negotiated the Kayerekera agreement without first seeking help from countries or people with the expertise.

“We do not have the competence to negotiate mining deals; therefore it is not surprising that we are unable to tap any benefits from such agreements. Government should concentrate on developing sectors where it has competence and seek help where it doesn’t,” Kalua said in an interview.

Meanwhile secretary for Mines Ben Botolo has confirmed that government is in the final stages of reviewing the Mines and Minerals Act. Botolo says the processe is expected to be completed before the end of the year.

Malawi’s mining legislation dates back to 1981 and has been criticized for containing major gaps and deficiencies in key provisions.

The deficiencies include the power vested in the Minister of Mines to grant mining licences with no consultation required with other stakeholders like parliament and civil society, many key terms under which companies operate are determined by bilateral negotiations rather than consistent application of law which means special treatment of some companies is possible, lack of provisions to maximise benefits for the country such as requiring certain proportion of supplies to come from Malawi and ensuring communities benefit from mining revenue.

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