Exposed! Malawi EITI report reveals grave weakness in extractives revenue administration

Exposed!

…MWEITI report reveals grave weakness in extractives revenue administration

…licensed companies not paying royalties, ground rent

…government entities falling short on revenue collection

By Chiku Jere

Malawi is failing to maximize revenue collection from extractives sector as some mining companies are evading ground rent for their concession areas while government is falling short in enforcing mineral royalties remittance, a situation which is leading to loss of  revenue by the State – reads the  Malawi Extractives Industry Transparency Initiative (MWEITI) 2015/16 Financial Year Report.

The country’s second EITI report which was officially launched on  October 17, 2018 at Capital Hotel in Lilongwe, points at glaring weaknesses in revenue administration that mostly involve the non-collection of non-tax payments such as ground rent and royalties by Department of Mines(DoM).

Ground rent is the annual charge of surface rental paid by the exploration or mining company per square kilometre of the area covered by the licence, while royalty is a fee paid by a mine operator or owner to compensate for natural resources that are extracted.

Companies named in the report as not having been paying ground rent during 2014/15 to 2015/16 financial years despite holding active licences include Bwanje Cement Products, Crown Minerals Ltd, Dantansie Mining Company Ltd, Blackfire Explorations Ltd; Ashgill Australia Pty Ltd, DDY General Dealers and FSK Civil Engineering.

No reason has been given as to why these entities have not been giving what is due to the State and why authorities mandated to enforce such payments have remained inert.

For years, the report also indicates that the DoM has not been collecting the 2.5% sale’s royalty of the highly-valued cut and polished corundum from Nyala Mines Ltd sold by the US-based Columbia Gem House Inc. despite the company reporting exports of up to 432 Kg of the precious minerals in the 2014/15 financial year alone.

The 193-page report attributes this upshot to, among other factors, Mines Department’s lack of required resources to carry out audits in order to estimate the sales’royalties due.

It also notes that the current legislations have no specified basis for charging royalties either based on production amounts or the selling price.

Section 78 (u) of Petroleum Exploration and Production Act (1983) and Section 128 (2.g) of the Mines and Mineral Act (1981) only stipulate that royalties may be paid in kind at the discretion of the Minister of Natural Resources, Energy and Mines, but does not provide any guidelines to the Minister for determining royalties payable.

Another telling revelation in the report is that Portuguese multinational Mota Engil has over eight (8) mining licences in Malawi but only pays royalties for one licence.

It is reported that government exempts Motal-Engil from paying royalties on non-commercial licences used for governmental infrastructure projects, but the weakness is that the DoM has no means of distinguishing which quarried products are being sold for commercial purposes from those being sold for government projects’use, a scenario that presents a loophole for revenue stonewalling.

The report notes that this situation symbolises a general lack of control and inadequate monitoring of the activities of mining licence holders throughout the country to effectively enforce revenue collection.

The Malawi government made a commitment to join EITI as a way of upholding sound governance of the extractive sector by ensuring transparency and accountability for maximized benefit of the citizenry.

The launching ceremony of the second MWEITI report attracted different stakeholders including government officials, civil society and private sector representatives.

Presiding over the launch, Ministry of Natural Resources, Energy and Mining Chief Director Bright Kumwembe said substantial progress Malawi has made so far in embracing the initiative demonstrates government commitment to reforms adding that successful production of two EITI reports, sets the  sector on the right path.

Government will strive to implement all the recommendations that the report has brought forth,to improve the governance of the sector with the aim of making it beneficial to the nation,

he said.

Kumwembe urged all stakeholders to remain committed to the course saying, more effort is still required to achieve the goal of attaining EITI Membership status.

On his part, Deputy Head of Mission at the Embassy of the Federal Republic of Germany Thomas Staiger, whose government funded the Malawi EITI process through Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, said the German government is encouraged with the effort and commitment the country has vested in the implementation of the initiative, and pledged continued financial and technical support.

Natural Resources Justice Network Chairperson Kossam Munthali also appreciated the commitment that government and other stakeholders have shown in implementing the initiative describing the status quo as a giant step taken towards breaking the vicious cycle of suspicion, mistrust and cat-and-rat relationship that has existed amongst stakeholders regarding the extraction and utilisation of natural resources.

He said that through EITI implementation, Malawi is definitely changing, in a positive manner, the way in which business is conducted.

Adherence to EITI principles and enactment of the Access to Information law underscore government’s commitment in ensuring that there is transparency in the public sector. Malawians will be able to access extractives industry information and data that was in the past taken as sensitive and secret, and will go a long way in helping government in making informed decisions,

said Munthali.

He said the nation should not only be contented with the fact that it is able to produce good EITI Reports annually but authorities should embrace and put into effect the recommendations that the report suggests pertaining to the extractives industry governance to spur the reforms in the sector.

Munthali emphasized the need to expedite the enacting of the revised Mines and Minerals Bill into law, reviewing the Petroleum Exploration and Production Act of 1983, developing the Oil and Gas Policy and finalizing the development of the model Petroleum Sharing Agreement (PSA) saying that will provide a viable legal framework to inform negotiations of extractive sector contracts.

Coordinator for Malawi Chamber of Mines and Energy Grain Malunga hailed the EITI process for bringing together stakeholders who formerly were exhausting their energy in fighting each other.

There is now a common understanding amongst players with different interests in the sector.The good thing is that we all want something good to come out of the extractive sector for the betterment of the economy of this country. All we need is to maintain this path of coordination, appreciation and understanding of each other’s role in this respect to achieve this common goal,

he said.

The report reconciles revenue payments to government receipts of 19 selected extractives companies plying trade in Mining, Oil and Gas, Forestry as well as Transport Sectors that exceeds the materiality threshold of MWK 33million.

Such companies include Hamra Oil Holdings Ltd, RAKGAS MB45, SacOil Holdings Ltd, Mota Engil Minerals and Mining (MW)Ltd, Paladin (Africa) Ltd, Shayona Cement Corporation, Lafarge Cement Ltd, Cement Products (MW) Ltd; Terrastone Ltd, Cilcon Ltd and Cpl-Mchenga Coal Mines Ltd.

Others are Optichem 2000 (Malawi) Ltd, Zalewa   Agriculture Lime Co, Kaziwiziwi Mining Co, Sovereign Services Ltd, M.A Kharafi & Sons, Malawi University of Science and Technology, Master StoneBreakers and Pamodzi Stone Mining (PSM) Investments.

Reconciliation of receipts reported by the government between July 1, 2015 and June 30, 2016,indicates that total revenues received by State from the extractive sector amount to MWK 5,346 million (K5.3billion), accounting for 8.2% of the total domestic revenues in the financial year.

MRA accounted for largest amount of the total revenue streams generated by the sector at 69%,followed by the Department of Forestry (DoF) and the Ministry of Transport and Public Works (MoTPW) accounting for 17% and 6% respectively while the Department of Mines collected 5% of total extractive industry revenues.

An analysis of Government revenues by sector contribution designates the Forestry Sector at top contributor at 48%, followed by Mining Sector at 30%, Transport Sector 18% while as the Oil and Gas Sector pumped in 4% of the total extractive sector revenues during the FY 2015/16.

According to National Statistical Office (NSO), mining sector contribution in the Economy in terms of Gross Domestic Product (GDP) has decreased from 0.92% of the previous financial year to 0.90% of the average GDP at the constant price, accounting for MKW 11,622 million (MK11.6bn) on average of the calendar years 2015 and 2016, mainly from mining and quarrying sector.

The NSO, splits the annual average GDP contribution from mining, oil and gas, and forestry sectors for 2015-2016 as 0.9%, 0% and 7.3% respectively.

2016 only saw an increase in terms of sector’s contribution to employment compared with 2015,with the sector employing 8,172,228, people which makes the average contribution of the mining sector for the years 2015 and 2016 to be 0.18%.

In terms of export earnings, NSO confirmed mining commodity earnings for the financial year 2015/16 amounting to MWK 6,400million against country’s total exports during the financial year which amounts to MWK 614,639 million.

The Report launch saw eight institutions that submitted certified templates for 2015/16 EITI Report production, namely: Hamra Oil, RAKGAS MB45, Shayona Cement Corporation, Terrastone, Raiply Malawi, Department of Mines, Ministry of Finance, Economic Planning and Development (MoF) and Malawi Revenue Authority (MRA), being awarded with certificates.

***

This piece was initially published in Malawi’s Mining & Trade Review Issue Number 67 (November 2018). This monthly publication is edited by Marcel Chimwala.

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