LILONGWE, MALAWI: A 34-year-old mining law remains a windfall for multinationals but does little to benefit this country’s hungry and poor…
By Collins Mtika
Malawi may be missing a huge opportunity to curb poverty because it continues to rely on an outdated, opaque mining law that restricts tax and royalty revenues and
More than half of this nation’s 14m citizens live in poverty, while foreign mining companies are arriving in ever-larger numbers to exploit Malawi’s subterranean riches. The mostly agricultural country is blessed with significant quantities of bauxite, coal, limestone, nickel, precious rubies, sapphires, diamonds and other ore deposits.
The government has awarded three exclusive prospecting permits since 2011 to explore for expected oil and gas deposits in Lake Malawi, which stretches along the country’s eastern border, according to the mines ministry. Since 2000, Malawi has issued more than 172 mining licences to boost and diversify its economy, which depends largely on tobacco.
Little good news for Malawi’s poor
But Malawi’s poor stand little chance of benefiting from these riches. The country’s Mines and Minerals Act was enacted in 1981 under the country’s first post-independence president, Hastings Kamuzu Banda, long before the country mapped any of its mineral resources. The law gives the country’s president ownership of all mineral resources. ‘This means that the president and the minister responsible choose whom to deal with regarding mining contracts,’ said Mathias Kafunda, a project officer with the Centre for Social Concern, an NGO based in Lilongwe, the capital.
Negotiations can be held behind closed doors, fuelling rampant corruption, said Rafik Hajat, executive director of the Institute for Policy Interaction, a think-tank based in Blantyre, Malawi’s commercial capital.
A flawed law?
In addition, the law allows foreign companies to repatriate dividends, profits and royalties. Firms are absolved from paying customs and excise duties as well as value-added taxes for mining and plant equipment. Investors can enjoy a 100% tax reduction in the first year of assessment with generous allowances in the following years.
The law also lacks local content provisions requiring the hiring of Malawians or the purchase of supplies originating in the country. Measures to protect people displaced by mining, and health and safety regulations are also absent.
A 2013 joint report by Norwegian Church Aid and the Lilongwe-based Catholic Commission for Justice and Peace notes that such tax incentives cost Malawi 86bn kwacha ($205m at current exchange rates) from 2008–12. The actual loss could be much higher as this figure represents calculations from only two mining companies: Paladin Energy, an Australian firm, and Malawi’s Mchenga Coal Mines. These funds could have paid for more than 60% of the health ministry’s costs or the entire budget for public universities in the 2012/2013 financial year, according to the report.
Mining a minor contributor
Mining makes up around 10% of Malawi’s exports, but contributes less than 1% of its total revenues (including grants from donors) and just 1.2% of domestic revenues raised in Malawi, according to the official 2012 economic recovery plan. However, budget documents from 2007-12 do not show any income from the sector that corresponds with the government’s figures. The latest 2014-15 budget does not list any income from the mining sector. Instead, it specifies an allocation of 26bn kwacha ($52m) to build more hydropower plants for the mining sector.
The government does not require companies to publish their tax payments. From 2002-11 Malawi lost $5.3m in collectable taxes, according to a 2013 report by Global Financial Integrity, an American research group. In the report released in December 2014, Malawi ranked 75 out of 143 countries in illicit financial flows. The country has not joined the Extractive Industries Transparency Initiative, a voluntary programme where companies and countries publish their payments and revenues.
Mining could contribute over 30% to the country’s GDP if the law were revised, said Charles Kaphwiyo, Malawi’s mining director in the natural resources ministry. Its agreement with Paladin Energy exemplifies the raw deals that the old mining law allows.
Malawi awarded a 15-year licence to Paladin to mine uranium in Kayelekera in northern Malawi in April 2007. In return, Paladin agreed to build a school, a clinic and rehabilitate the airport, among other promises.
A row of note
A furore erupted in March 2013, however, when contents of the Paladin agreement were leaked to citizens in Karonga, a town about 8km north of the mine. The deal lowered Paladin’s corporate income tax rate from 30% to 27.5%; abolished its resource rent tax, a duty on profits from the mining of non-renewable resources; and reduced its royalty rate, a percentage of the revenue generated from the mine, to an initial 1.5%, compared to the 5% national rate, according to the 2013 church report. Many other discounts are listed in this 41-page analysis.
‘The problem is that some concessions which were given to Paladin are either contrary to, or go beyond, Malawi’s mining and taxation legislation and regulations,’ the 2013 report noted.
In February 2014 Paladin suspended its operations and laid off about 110 of the mine’s 613 employees. It claimed that it was operating at a loss, citing the decline in uranium prices in the aftermath of the 2011 Fukushima nuclear disaster in Japan.
‘People want to talk about the share of profits, but nobody wants to know that this is a loss-making entity,’ said Greg Walker, Paladin’s general manager, in March 2014.
Six years after Malawi signed the Paladin agreement, John Bande, the former mines minister, admitted the country had signed a ‘bad’ deal with Paladin. He blamed Malawi’s lack of mining expertise for exposing the country to exploitation by foreign companies.
Political will missing
The government tried but failed to persuade Paladin to return to the negotiating table. ‘Pressure to renegotiate after $500m has been invested makes the international investors nervous,’ Walker said in July 2014 during an interview with the Nyasa Times, an online newspaper. ‘Secondly, the mine has no economically recoverable ore as we’re operating at a loss,’ he added.
Atupele Muluzi, the natural resources, energy and mining minister, has acknowledged the current mining law’s flaws. ‘There is [a] need to put in place a viable and transparent fiscal and taxation regime that effectively regulates transfer of foreign earnings and ensures that a substantial amount of revenue is retained in Malawi,’ Muluzi said in an interview with Africa in Fact.
Donors like to hear these words but they ring hollow because political will is missing: under the cover of this anachronistic legislation presidents can continue to profit to the detriment of their citizens. The government is just scratching the surface, showing no deep commitment to enacting the necessary reforms.
*Collins Mtika is a Malawian investigative journalist who has worked for Malawi News and the Weekend Times, among other publications. He is the Malawi correspondent for South Africa’s Mail & Guardian newspaper.
Source: This article first appeared in Africa in Fact, the journal of Good Governance Africa and is republished courtesy of Good Governance Africa (http://gga.org/)