Malawi’s mining stakeholders divided over new report on lost tax revenue

Mining RevenueOn Friday 21 June 2013, the report Malawi’s mining opportunity: Increasing revenues, improving legislation was launched at the Capital Hotel, Lilongwe, among stakeholders representing civil society, traditional leadership, government, parliament, mining companies and the development sector. The report was commissioned by the Catholic Commission for Justice and Peace (CCJP), the Evangelical Association of Malawi (EAM), and the Episcopal Conference of Malawi (ECM), funded by Norwegian Church Aid, and researched by Mark Curtis of Curtis Research with input from Rafiq Hajat, Executive Director of Institute of Policy Interaction.

We hope this is the start of constructive dialogue between the many stakeholders in Malawi’s extractive industry, however, mining companies and the government were not consulted in the researching and writing of this report, according to the company representatives (Greg Walker of Paladin and Neville Huxham of Globe Metals & Mining) and civil servants (George Harawa, Chief Economist in the Revenue Division, Ministry of Finance) present at the launch. This seems to be a trend; the Ministry of Finance was not consulted in the writing of another report on revenue launched in May by the African Forum and Network on Debt and Development (AFRODAD). During the question and answer session, the faith-based groups that commissioned the report did not respond to queries about why the company was not contacted, but the spokesperson simply stated that “the study was done in the best interests of the country”.

The Master of Ceremonies at the launch may have successfully ensured that there were no “confrontations”, but conflicting narratives were put forward by Paladin, the case study company in the research, and by the report. It became difficult to discern the facts.

Below we have included a snapshot of the main findings from the report and then a summary of the presentations given by different stakeholders at the launch – some of which contradicted each other! – and of the question and answer session.

Paladin responded to the report in August 2013. See here for their statement.

***

Malawi’s Minister of Mining, John Bande, who survived the cabinet shuffle this week, opened the launch, and was followed by a presentation outlining the report.

Malawi’s mining opportunity: Increasing revenues, improving legislation sets out to analyse Malawi’s tax revenue from mining with a focus on how legislation can be improved to ensure that Malawians benefit more from the country’s natural resources. Malawi’s largest mine, Kayelekera Uranium Project, operated by Australian mining company Paladin, is the subject of much of the research as the company has been given tax incentives. According to the report, the tax regime agreed with Paladin has resulted in revenue losses to Malawi at between USD 205 million and USD 281 million over the 13 years of the project. Furthermore, Curtis Research points out that while it is encouraging that government is committed to revising the mining legislation, progress is slow and the currently proposed revision of the Mines and Minerals Act is little better than the existing Act.

The estimates made by the report also highlight the dearth of or lack of access to data on the mining sector and discrepancies between data published by the government and companies. The extent and amount of these discrepancies are difficult to track, which highlights the importance of Malawi signing up to the Extractive Industries Transparency Initiative (EITI).

Some key points made in the report (largely verbatim)

  • Revenue from mining: The only overall revenue figure provided by government is ‘slightly over MWK 2 billion’ for 2010. Even this low figure may be exaggerated and it is unclear what taxes contributed to this amount. Even if correct, MWK 2 billion amounts to only 0.76% of government revenues in 2010 although mining makes up around 10% of Malawi’s exports.
  • Revenue lost from tax incentives: One recent estimate is that tax incentives in the mining sector, aimed at encouraging investment, have cost Malawi a minimum of MWK 86.4 billion (USD 217 million at current exchange rates) between 2008 and 2012; this is an average of USD 43.4 million per year. Yet this calculation has been made on just two companies, meaning that real losses from mining will be higher. This revenue loss – which amounts to an average of MWK 17.28 billion a year – is over 8 times larger than the revenues received by the Government from mining (according to the 2010 figure of MK 2 billion). Thus Malawians are in effect paying for the privilege of mining companies to operate in their country. The MK 17.28 billion lost annual revenues could pay for over 60 per cent of the costs of the Ministry of Health in 2012/13 (K27.6 billion) or the entire budget (of MK 13.8 billion) for Public Universities.
  • Paladin’s taxation regime: Government reduced, for a period of 10 years, Paladin’s corporate income tax rate and removed resource rent tax. Internal figures from Paladin show that Paladin itself paid taxes of just MWK 444 million (USD 1.6 million) in FY 2012, based on exports worth USD 127 million. This excludes payroll taxes paid by employees of the company not the company itself, which if added bring the tax total to MWK 1.55 billion (USD 5.75 million) in FY 2012. Yet in Paladin’s 2012 Annual Report, the company claims that it paid USD 9.6 million to the government in ‘a variety of Government taxes’. It is unclear how the company arrived at this higher figure in its public report.
  • Royalty rate for Paladin’s Kayelekera Uranium Project: Paladin received a reduced royalty rate, initial 1.5% for three years and 3% thereafter (compared to national rate of 5%). Analysis shows that Paladin paid even less than the 1.5% royalty rate for its first three years of operation, as specified in the 2007 agreement. Figures show royalty payments of only USD 2.58 million based on export sales of USD 295.5 million – a rate of just 0.87%.
  • Uranium exported by Paladin: There are uncertainties about how much uranium Paladin is actually exporting and whether reported uranium imports into Canada and Namibia match 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 USD 114.3 million worth of uranium to Canada but that Canada recorded imports of only USD 68.7 million – a difference of USD 45.6 million. The report notes that Paladin has a complex groups structure of over 32 entities including several in Mauritius, the Netherlands, Switzerland and the British Virgin Islands (Paladin’s corporate structure is available online) which increases the possibility of both legal (but ethically questionable) tax avoidance and illicit capital flight.
  • Malawi’s mining legislation: Current deficiencies with mining legislation include 1) the power vested in the Minister of Mines to grant mining licences with no consultation required with other stakeholders (parliament, civil society); 2) many key term under which companies operate are determined by bilateral negotiations rather than consistent application of law which means special treatment of some companies is possible; 3) 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; 4) inadequate regulation of certain other areas such as protection for people displaced by mining, and health and safety regulations for specific mineral extraction; and 5) proposed revisions to Mines and Minerals Act (1981) as of January 2013 provide for government to only have 10% equity in a mining operation, retain government and company ability to negotiate individual royalty rates, make no mention of taxes and royalty payable by mining companies, and do not require contracts to be public.

Following the presentation of the report’s main findings, people representing the different stakeholder groups in Malawi’s mining sector gave their responses.

David Luka, MP and Chairperson of the Agriculture and Natural Resources parliamentary committee,  delivered a brief speech on behalf of all parliamentarians expressing his commitment to the “title of this report” and gratitude to Paladin as “a pioneer and pathfinder in Malawi as a large-scale miner”. He encouraged stakeholders to work together and “to cultivate a culture of talking [… to] transform the mining sector into an opportunity for our mutual benefit”.

Luka was followed by Rev. Francis Mkandawire of EAM who spoke on behalf of EAM, the Malawi Council Churches (MCC) and ECM described the exploitation of minerals in Malawi as “uncharted waters”.

None of us have been on this path, we are all learning and it is important that we move together. The precedence from countries around us who have been on this path earlier makes us nervous and makes us want to avoid their mistakes. We think we will benefit from the resources God has endowed on us. The time has come for all Malawians to participate in our economic rights and as a faith community we will stand with the voiceless without fear or favour. We have done it before and we will do it again. It should be the responsibility of all individuals and organisations who want to see lives transformed in Malawi so we want to work on a platform with all stakeholders.

Congratulations to Paladin for being the path setters, thank you for coming to Malawi. Let’s put our heads together to work together to benefit you and Malawians.

We call on government to be more transparent and accountable and applaud the government for efforts already made to engage Malawians in this. We are ready to run with you.

To Paladin and our other investors, we welcome you and ask you to be more responsive to the districts you are working in.

Civil society has a role that we may be able to speak with one voice, but we must speak on these issues soberly and objectively.

We as faith groups in this country appreciate this launch, we fully support the report and we believe that this is the beginning of openness.

All stakeholders need to listen to the voices and the voices of the poor at the community level.

In line with Mkandawire’s call for stakeholders to listen to “the voices of the poor at the community level”, Bon Kalindo, accompanied by a traditional leader, explained the community’s side of the story in acquiring a court injunction – subsequently overturned – to halt exploration activities of mining company Spring Stone in Mulanje.

My name is Bon Kalindo. I am a comedian, teacher, activist and most importantly I am a Malawian who loves my country, which has prompted me and my senior to come all the way to Lilongwe. We as concerned people went to court to seek relief to stop Mulanje Mountain Conservation Trust [MMCT] and Spring Stone to stop the activities. I want to put the record straight, going to court was not to fight the government, investors like Paladin or Spring Stone. No, our idea of going to court was to seek justice and get things in order. We felt that government sidelined communities, sidelined us, in giving the concession. We went there to seek court relief so that these people may halt their activities, to sit together on a round table to discuss issues, but surprisingly government awarded the licence to Spring Stone, and the company did not launch an Environmental Impact Assessment.

People in Mulanje are in problems, they are drinking dirty water and they have destroyed 3500 hectares of pine. This has been destroyed, the temperature has changed. The same government that goes around to preach planting trees is cutting down trees. We want government to consider us people, to protect us, our children and the unborn. We feel relieved by seeing this report.

Let me ask those on the forefront to immediately organise some meetings in Mulanje to sit down with MMCT and Spring Stone but somehow we feel these people are trying to play games. If we don’t iron out these things we will be cursed. We can use traditional means to resolve to bewitch investors. We don’t want to do this because these minerals can benefit Malawi. Poverty is not fun. People in Mulanje have negative thinking about what is happening on the ground, if we can have these meetings we won’t have problems if we sit together. There is nothing for us without us. Investors and government please work with us as it is our heritage. Instead of sitting down together we are now trying to destroy the mountain.

Greg Walker, the General Manager of International Affairs for the mining company examined by the report, Paladin Africa, a subsidiary of Paladin Energy, promised to be “non-confrontational” in response to Kalindo’s threat of bewitchment. He proceeded to deconstruct what he called “myths” produced in the report and explained that the company would not renegotiate the Mining Development Agreement with government, as many have called for, because the company is making a loss. Many of his arguments hinged on the premise that Paladin Africa and the Kayelekera uranium project is not profit making in Malawi. This would not be the first time a subsidiary reported a loss in a country to minimise taxation requirements.

Greg Walker, General Manager of International Affairs, Paladin Africa responds to report (Neville Huxham of Globe Metals & Mining and Rafiq Hajat, Executive Director of Institute for Policy Interaction look on)

Greg Walker, General Manager of International Affairs, Paladin Africa, responds to report while Neville Huxham of Globe Metals & Mining and Rafiq Hajat, Executive Director of Institute for Policy Interaction look on

Thank you for inviting me to say a few words. It’s not a common thing to be invited to these events, it’s refreshing there is opportunity to have dialogue. I was reflecting on what’s been said earlier, the key that has been said earlier, that there is a desire to see further FDI [Foreign Direct Investment] in Malawi, yet we have the Minister quoting Her Excellency saying that we don’t want to see Malawians ripped off. Take a moment to think about it, think what it means for investors, it’s as if people are expecting to be ripped off. Investors want to know conditions and certainty, want to know an agreement set is certain. […]

What is the value of minerals in the ground? And what is necessary to get that out of the ground for money? There is nothing stopping Malawians setting up their mines otherwise you need FDI, and investors need certainty and return on investment. I think it’s important to understand this – the reality is that this contract [Mining Developing Agreement] is not a contract that can be swept aside. The government has been quite clear with their intentions with us that they are not planning to renegotiate. It is unfortunate that there are mixed messages in public. The government says that whatever mistakes were made, it is not the intention of this government to renegotiate. We are talking about encouraging investment in Malawi. People come to us to ask about doing business in Malawi. There is great concern among international investors that USD 500 million can be swept aside and government can renegotiate. Kayelekera that sat for 25 years without being developed. Anyone had the opportunity to invest but didn’t. It would not have been built.

People want to talk about share of profit, but nobody wants to know that this is a loss-making entity. ‘You crafty mzungus are transfer pricing or something, you are cheating us out of our birthright’. No evidence has been produced, it’s a mythology. The uranium price fell from USD 72, drifted through last year at around USD 50. This week it dipped below USD 40. It is running at a loss. This is a fact.

We have relief on duty of import on 1.5 million litres of diesel per month. Two-thirds is burnt to generate power because ESCOM [Electricity Supply Corporation of Malawi] is unable to supply power to this project. It costs more than USD 0.40/kwh, while the average price is USD 0.17 in Africa. This is the other side of the equation that people forget about. We hope to be put on  ESCOM. We will be the highest paying customer, save diesel, save forex, and be on hydroelectric power generated in Malawi which we should have been using from day one. Don’t just look at one side of the equation, the government of the day was smart enough to know we had to generate electricity to run the project. We want to get on the grid because it’s good for Malawi, the company and the environment. We have continued to support Kayekelera even though it was loss-making. […]

We are at a critical point whether we keep it open or not. Our exploration licences are being reviewed by government, we have been told they have been refused. We have appealed. […]

These issues are not reflected in the report. Why did they not talk to us or any company? Is this because they do not want to have mythology punctured? How much better would it be to have dialogue before?

You hear that Malawi was robbed because of the concessionary royalty rate. What it ignores is this fact, what if 5% royalty was not economically viable, then Malawi would have got 100% of nothing. The government of the day gave 3%, most comparable mining states have a royalty rate of 3 percent. It’s not reality to say Malawi was cheated, what it shows is the government of the day recognised that the royalty rate of 5% in Mining Act was not profitable. […]

Malawi has one of the highest taxation rates. We got a lower rate (middle of pack). We got import tax exemption; there’s nothing unusual about this arrangement. It will never make a profit; there are no super profits to tax. No evidence is produced of transfer pricing, it’s just asserted. The Malawian government has a 15% stake, two senior officials sit on the board, and the government has all the records. The accounts of Paladin Africa must be passed by its board including the two govt officials, Ernst & Young Malawi audit us, and we report to Paladin Energy. The notion we would do that to cheat Malawi out of a few million dollars is farcical. It shows how little the people who prepared this report understand. Get an accountant to go through the accounts to show where this mythical transfer pricing happens.

Walker continued to contradict the “myths” in the report: every single sales contract is given to the Commissioner of Mines, royalty paid is paid on a quarterly basis, expatriate staff pay taxes [although some may not have the correct work visas according to Nyasa Times], and “meanwhile our return on investment is zero. I can tell you there aren’t many foreign investors would be impressed by this”.

In response to the 4 recommendations directed at the company by the report, Walker noted that Paladin is EITI compliant, the agreement could be made public and he would provide explanations for discrepancies in the report, but that the company would not renegotiate the agreement. So far, Malawians have not seen this agreement, despite government’s promises, but Paladin is happy for people to see the agreement,

There is no confidentiality clause in agreement. The government didn’t want the agreement to be public because they didn’t want it to be the starting point for other agreements. As far as I’m concerned it’s in the public domain. Come and see me if you want a copy.

We have complied with three [recommendations] and we have no intention of complying with the other because Malawi is getting a very good deal.

At the moment, we are seeking to extend mine life. We want to be in Malawi in the long term. We want to participate in the dialogue. […]

I am happy to deal with issues in far greater detail. It is a great pity that in producing report that the dialogue did not start before words were committed to paper and only after words were committed to paper. Nevertheless, we are where we are and we look forward to continuing the dialogue.

Walker was probed again during the question and answer session about possibly renegotiating with government. His response was clear

Why aren’t we prepared to renegotiate? I can only reiterate by making two points. Number one, it’s absolutely critical, this is relevant for the future, that when you negotiate and sign agreement that you stick with it. Pressure to renegotiate after USD 500 million has been invested is the very thing that makes the international investors nervous. The second reason is realistically is that we are talking about a mine that has no economically recoverable ore as were operating at a loss. We are talking about a mine that has approximately a 3 to 5 year life. Where is the logic of sitting down at this point when were are working at a loss, where we are asking the board to keep on putting in money in in the hope that prices will increase? […]

If we had 20 years left with  super profits then we could see some logic in renegotiation. Calling for renegotiation is tantamount to asking us to close. We do not lie about these things [making a loss]. You can go to our published accounts. Nobody lies about something as fundamental as that. […]

As a foreign investor, I’m bemused by the way this country has treated our company. When other companies come to ask us if they should invest in Malawi. I say, go to Malawi’s media and ask yourself how u would feel if that was being said about you?

Finally, the Principal Secretary for the Ministry of Mining, Leonard Kalindekafebrought the presentations to a close by reminding all stakeholders that

We are all in the same boat in the sense we are all asking responsible mining and I’m looking at this as a way of reducing poverty and creating a win-win situation. I like the way the religious leaders are emphasising no confrontation. Let’s look at what we have as mineral resources and how we want to exploit these resources.

Kalindekafe was followed by a question and answer session. George Harawa, Chief Economist in Ministry of Finance’s Revenue Division, responded to the report with concern that the Ministry of Finance was not consulted and explained that Malawi is committed to joining EITI,

We should have been consulted before the report was published. The Ministry of Finance was not consulted. The same happened with the another report [AFRODAD]: I told these guys that “a,b, c, d” were incorrect. There is need for us to be consulted before these things are written down. […] The report said Malawi loses MWK 17.8 billion. We would have loved to know how you come up with that figure. We are standing with my colleague (Paladin) to categorically refute that this is not the case.

Rafiq Hajat, who contributed to the report, exclaimed that it was ironic that people were given so much time “attack us” with little space for them to respond. He explained that Paladin’s claims that they did not agree to certain corporate social responsibility requirements (not listed in the agreement) is erroneous because the conditions were agreed in a sideline meeting and went on to describe that

The villages outside Kayelekra do not have a health centre, they fear the water, that’s the reality on the ground. That’s what we should be contending with and not throwing figures at each other. Greg, when you visit Blantyre let me take you to hospital [Mwaiwathu]. A former employee you sacked in January is suspected of being sick with radiation poisoning.

Hajat urged government not to enter into any other agreements until a suitable regulative and legislative framework is in place and the relevant capacity exists to negotiate agreements, “otherwise we only have ourselves to blame”.

Kalindekafe acknowledged the shortfall in technical expertise and consequently he explained that the Scottish government with the University of Dundee will provide training for civil servants within the Ministry of Mining this month and lawyers have been engaged to help draft the agreement with Globe Metals & Mining for the Kanyika Niobium Project, which will not be confidential. In fact, Malawian civil servants participated in a 2-day workshop in Yaounde, Cameroon, this week to put together a manual on negotiating mining contracts to guide negotiators so that the needs of government and the people are fully considered and taken care of.

Concerns were raised that Members of Parliament (MPs) representing constituencies in Karonga have never visited the Kayelekera mine. One participant even stated that the MPs had failed in the role. Walker of Paladin came to their defense but noted that the company could not cover the expenses of a visit

I think it’s unfair to say that they are not doing their job. I’d be more than happy to have a session with the committee [Agriculture and Natural Resources parliamentary committee] and for them to come to Kayelekera. You can call for greater transparency. Here’s the reality, it’s a criminal offence in Australia for a company to fund a visit of an MP to a mine. It doesn’t matter if allowances are common in Malawi. They are illegal in other places.

Malawi's Mining Opportunity: Increasing Revenues, Improving Legislation

Malawi’s Mining Opportunity: Increasing Revenues, Improving Legislation (read online)

Several articles were published in the Australian press today about this report and the issue of tax avoidance:

Scrutiny on the bounty: tax probe on global giants – Georgia Wilkins, The Sydney Morning Herald

Out of Africa, tax tricks emerge – Georgia Wilkins and Ben Butler, The Age

Tax man takes scalpel to energy and resources firms – Georgia Wilkins, Myall Coast Nota

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18 responses to “Malawi’s mining stakeholders divided over new report on lost tax revenue

  1. Pingback: No interim agreement reached: SADC resolution team meets Malawi’s president on lake border dispute with Tanzania | Mining in Malawi·

  2. Pingback: Spring Stone faces further community opposition to REE prospecting in Mulanje, Malawi | Mining in Malawi·

  3. Pingback: Record production at Paladin’s Kayalekera uranium mine, but communities remain disgruntled | Mining in Malawi·

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  5. Pingback: Khwima Phiri dies at Paladin’s Kayelekera uranium mine days after UN says Malawi is losing out from mine | Mining in Malawi·

  6. The community around Kayerekela should indeed be cared. Apart from radiation, they should expect more side effect originating from the mine. Provide adequate safety nets to this community before its worse.

  7. Pingback: Malawi’s “owners of the land” need to be engaged in and benefit from mining – Paramount Chief Kyungu | Mining in Malawi·

  8. Pingback: Missed off the 2013 SADC Summit agenda: Lake Malawi dispute | Mining in Malawi·

  9. Pingback: Spring Stone concludes exploration activities at controversial Mulanje site in Malawi | Mining in Malawi·

  10. Pingback: Presidential aspirant criticises Malawi’s mining policies | Mining in Malawi·

  11. Pingback: Quadria Muslim Association of Malawi working to promote citizen participation in mining issues | Mining in Malawi·

  12. To anyone interested in gaining perspective, I encourage you to access the 43-page response to the Norwegian Church Aid/CCJP Malawi Mining Revenue Report at the Paladin Energy Limited website at: http://www.paladinenergy.com.au/default.aspx?MenuID=247. The Company has responded in detail to the various assertions and allegations of the CCJP. Please draw your own conclusions after reading both sides of the story.

    • Thank you for providing this information. Sorry we had not seen it earlier.

      We will put up an article in the next week to draw readers to Paladin Energy Limited’s responses to the CCJP/Norwegian Church Aid and AFRODAD’s reports.

      • Thank you for your very prompt response and no need for apology. I am sorry I did not notice your very comprehensive and balanced coverage of this issue before. Incidentally, I am happy to forward (if you do not have it already) a copy of the Company’s announcement of 07 February 2014 regarding the decision to place Kayelekera Mine on care and maintenance. I notice that the CCJP again has been critical of the company in respect of this development, alleging that we did not properly inform the Government of Malawi. That is not the case and I am happy to respond to those allegations if you have questions regarding this matter.

  13. Pingback: Inside Malawi’s largest mine: Parliamentary visit to Paladin Africa’s Kayelekera Uranium Mine | Mining in Malawi·

  14. Pingback: Event: ActionAid launch of report on Paladin Africa’s mining operations in Malawi (9am, 17 June 2015, Crossroads Hotel, Lilongwe) | Mining in Malawi·

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