Managing mining revenues: What’s the formula?

How much, in terms of revenue, should Malawi be demanding during negotiations for a contract with investors and what is the transparent and accountable way of managing such revenue? EPHRAIM NYONDO explores.

Revenue losses to Malawi from the tax regime given to Paladin Limited for its Kayelekera Uranium Mine are projected around $205 million and could be as high as $281 million over the 13 years of the project.

This is according to estimates by a 2013 study by the Norwegian Church Aid titled Malawi’s Mining Opportunity: Increasing Revenue, Improving Legislation.

This study further estimates that two figures amounts to a mean average of $15.8 million a year (K6.5 billion) but which could be up to $21.65 million a year (K 8.9 billion).

But what, actually, was Malawi getting from Paladin in terms of revenue? Former Reserve Bank governor Perks Ligoya was once quoted in media as faulting government for “having given out funny tax concessions to Paladin”.

The concessions included reduced Paladin’s corporate income tax rate, abolishment of its obligation to pay resource rent tax, reduction in royalty rate to an initial 1.5 percent (compared to national rate of 5 percent), and given other tax concessions and set these in stone for ‘at least’ 10 years. It is worth pointing out that in return for these concessions, Malawi Government got a 15 percent stake in the project.

However, according the 2013 Norwegian Church Aid study, the agreement means that “Paladin is paying very little in tax”.

“Internal figures from Paladin obtained by the authors indicate that Paladin itself paid taxes of just K444 million [$1.6 million] in financial year of 2012, based on exports worth $127 million.

“This excludes payroll taxes paid by employees of the company not the company itself, which if added bring the tax total to K1.55 billion [$5.75 million] in the 2012 financial year.

“Yet in Paladin’s 2012 Annual Report, the company claims that it paid $9.6 million to government in ‘a variety of government taxes’. It is unclear how the company arrived at this higher figure in its public report,” reads the report.

The study also shows that Paladin paid even less than the 1.5 percent royalty rate for its first three years of operation, as specified in the 2007 agreement.

“Figures show royalty payments of only $2.58 million based on export sales of $295.5 million—a rate of just 0.87 per cent,” explains the study.

The study further details that are there also some uncertainties about how much uranium Paladin was actually exporting and whether reported uranium imports into Canada and Namibia matched the reported exports from Malawi.

“Both the government and the UN trade database give significantly higher export sales figures than reported by Paladin; these would have required Paladin to have made higher royalty payments. In 2010, UN figures show that Malawi exported $114.3 million worth of uranium to Canada but that Canada recorded imports of only $68.7 million – a difference of $45.6 million,” reveals the study.

These details only cement the long-held public view that Malawi lost a great deal of revenue from Paladin.

Paladin Africa officials were not immediately available for comment but its general manager for International Affairs Greg Walker told Business News in March last year that Malawi did not get a raw deal in its agreement with Paladin.

He was responding to concerns from Petra president Kamuzu Chibambo who wanted the mine deal renegotiated.

So, now that the country is in the midst of reviewing the Mines and Mineral Act—the legal framework that regulates mining in the country—what should be included in this framework to ensure that the country gets the best revenue from its natural resources?

Renfold Mwangonde, spokesperson for the Natural Resource Justice Network (NRJN)—a group of civil society organisations (CSOs) that speak on mining—argues that the first thing needed is to change the process for granting mining licences.

“The current law invests huge power in the Minister of Mines and his discretion and does not require consultations with other stakeholders such as Parliament or civil society,” he says.

He adds that many key terms under which companies operate in Malawi are determined by bilateral negotiations rather than consistent application of the law.

“The current Act says that royalty rates are fixed by ‘the mining licence concerned’, i.e in individual agreements. This is a recipe for special treatment being accorded to some companies and indeed for corruption. This needs to be abolished. We wanted a consultative process that is transparent and accountable,” he says.

The Norweigian Church Aid study adds that Malawi lacks key provisions in its mining legislation that could maximise the benefits to the country.

“The Act says nothing about companies being required to source a proportion of their supplies from Malawi [local content] and neither are there provisions to ensure that communities in mining areas financially benefit from mining revenues,” reads the study.

Mwangonde, therefore, argues that Malawi needs a law that should allow government to own at least 30 percent equity in mining operations.

A recent report by the Centre for Environmental Policy and Advocacy (Cepa) argues that the new law should avoid tax stability or tax holiday agreements for specific investors unless as a temporary measure.

The report also recommends to government to provide royalty tax by law rather than by negotiation with individual investors.

“We need to ensure that the minimum tax rate is kept at an internationally competitive minimum. We need also to introduce after profit tax to share bonanza profits over and above the required investor return on investment. We also need to limit either the period of loss carry forward or the cost amount as determined in the income tax calculation,” reads the report spearheaded by Cepa’s executive director William Mwanza.

However, despite these thoughts on how Malawi can best negotiate revenues from its natural resources, there are again strong fears regarding the management of these revenues. The underlying philosophy is that it is one thing to have good mining revenue and it is another for such revenue to trickle to the people.

According to Mwabi Shaba, programme officer for Catholic Commission for Justice and Peace (CCJP) at Karonga Catholic Diocese, the challenge in Malawi is that “we just do not know where actually revenue from mining goes”.

“With governments’ Consolidated Account Number One, it means all the money from mining goes into it. We cannot trace it. But let us not forget that mining is a non-renewable resource.

“To mean, after we have extracted all the uranium we need, after years to come, to show our kids that we extracted uranium in Karonga and this is what we built or did from the money we realised.

“However, with Account Number One, we cannot trace what money from uranium was used. Should we be surprised today that Malawians are saying there is nothing we benefited from our uranium? But this does not suggest that Paladin never gave us the money,” he says.

Shaba proposes that the new law should consider creating a special account where all the money realised from mining should be deposited.

“This will not just help in issues of transparency and accountability; it will also help Malawians to know specific development ventures that will be emanating from mining funds,” he says.

What Shaba is proposing is not out of the blue. In Ghana they have a specific account, or a fund, where all the revenue from their newly founded oil goes.