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Transparency: Malawi’s lost mining opportunity

One of the fundamental principles of democracy and good governance in any sovereign country under democratic style of government is transparency, which must also be espoused by accountability. Truth be told, in Malawi transparency remains to be an obstinate problem.

This has apparently been elusive as evidenced by government’s foot-dragging over enactment of the Access to Information Bill. Malawi’s Constitution Chapter IV, Section 37, vaguely provides an inconclusive statement as it simply submits that “Subject to any Act of Parliament, every person shall have the right of access to all information held by the state or any of its organs at any level of government in so far as such information required for the exercise of his rights.”

However, reading from the recent defensive statements by government officials on civil society and media criticism over the bloated entourage to the UN General Assembly, one could tell how much the government would have liked to keep this presumably an élite information top-secret, for obvious reasons.

It is no exaggeration that the government’s operations are largely shrouded in secrecy, not just for security reasons, but as they would apparently raise some eyebrows. Many a time, calls for absolute transparency by civil society and the media are perceived as a threat by politicians. However, the manner in which these secrecies form becomes a recipe for corruption and depletion of public funds.

The mining sector has not been spared in this political mode, especially when there has been contradicting figures on how much Malawi could earn from mining industry. In its 2009 Mining Sector Review of Malawi, the World Bank estimated that the mining sector could generate between $ 500 million to $ 1 billion by 2020, producing government revenues of $ 50 to $100 million a year. It stated that mining could account for as much as 10% of GDP and 20 to 25% of export. But government officials gave other estimates.

For instance, at that time, the Director of the Geological Surveys Department, was on record to have estimated that Malawi expected to earn over $500 million a year from the then four launched projects: the Kanyika mine managed by Globe Metals and Mining which was estimated to contribute $50 million in taxes and other revenues; Kayelekera Uranium Mine ($50 million), the Kangankunde Rare Earth Project in Balaka ($50 million) and the Mulanje Bauxite Project ($350 million, which was subsumed in favour of a rare earths project at Songwe Hills in Phalombe.

Despite painting great rosy pictures, Malawi is economically still a long way off to the reality of those figures. Overburdened with both internal and external debts, the country’s leadership continues globe-trotting with a begging bowl. Having frozen direct aid to government’s coffers by the western donors and their allies, as result of misuse of public funds-Cashgate; the country is now turning to China and elsewhere for economic opportunities which would otherwise have been locally attainable but all is lost due to poor application of democratic principles such as public consultations, transparency and accountability.

In February, 2007 the mining agreement between Paladin and the government was contested by the Civil Society Mining Network of Malawi – a group of civil society organizations –which launched a legal action against the government to seek a court ruling on the project’s compliance with legal, social, economic and environmental requirements. An out of court settlement was reached with Paladin in November of the same year, which included a commitment by the company to: (1) spend up to $ 8.2 million on a water treatment plant to serve the 30,000 residents of Karonga, (2) Deposit $ 1.8 million into a fund for community development projects, (3) Upgrade Karonga Airport, refurnish a dirt road from the airport to the mining site and introduce jatropha to farmers and processing plants that would produce bio-diesel.

However, taking advantage of the inconclusiveness on the access to information bill, the government had not been transparent enough to make this development agreement public in full as it was reportedly bound by a non-disclosure agreement.

Malawi’s mining sector has since been notoriously opaque. Though the government chose to make the agreement with Paladin confidential, there is nothing in the Mines and Mineral Act 1981 binding the government to keep mining development agreement secret. The Act simply forbids the disclosure of the financial reports that companies are required to provide to government.

According to Deloitte, Malawi Highlights 2012, there were several major problems with terms of agreement: “First, some concessions given to Paladin are either contrary to, or go beyond, Malawi’s mining and taxation legislation and regulations, such as the reduction in corporate income tax, the exemption from Resource Rent Tax and the exemption from all imports VAT, despite all mining companies being already exempt from VAT on mining machinery, plant and equipment). Neither is there legislation in Malawi concerning thin capitalization. ”

Furthermore, there is no specific provision in the Mining and Minerals Act 1981 for fiscal stabilization. Deloitte secondly stated that, “The royalty rate agreed by the government was extremely low; indeed, it appears to be the lowest in Africa and the world for uranium”.

A study of five uranium mines in Africa by the Netherlands-based NGO, SOMO, found that Paladin secured the lowest royalty rate for its Kayelekera mine. “Its initial 1.5 % compares to 3 % payable by Rio Tinto in Namibia and by Paladin itself in Namibia, 5.5 % by SOMIAR in Niger and COMINAK in Niger and 1.75% by AngloGold Ashanti in South Africa,” highlights the report.

Another challenge was the absence in the agreement of any mention of the price at which Paladin would export its uranium. The Deloitte’s document reads “This is a key issue given that multinational companies are often able to inflate or deflate prices of commodities sold between their subsidiaries to pay less taxes in lower tax jurisdictions( transfer pricing).”

Paladin, a uranium production company based in Australia with projects in Australia and two mines in Africa, Namibia and Malawi, “ was apparently also given a further, little –noticed concession related to its required spending on community development”.

According to Paladin’s 2012 Annual Report, the required $ 10 million spending was recognized as an intangible asset and was being amortized over the life of the mine estimated to be 9 years on a straight-line basis. “This means that the company’s obligatory community development spending can be offset against tax, reducing company tax liability to the government still further” concludes Deloitte report.

The millions of dollars estimated by the World Bank in its 2009 Mining Sector Review of Malawi, were probably an opportunity lost through corporation tax incentives. Those could be enough to put every primary school aged child in school, meet all the health-related Millennium Development Goals, and invest in agricultural programmes needed to end hunger. Ironically, the country’s leadership has recently sent an SOS appealing to both local and international bodies for support in the adverse prospect of hunger likely to affect estimated over 2 million people this year alone.

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