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Malawi’s laws do not provide for Government shareholding in any mines. Yet growing natural resource nationalism has compelled the Malawi Government to seek shares in recent and upcoming mines. Since Government does not have the money to pay for its equity participation in the mines, shareholding compels Government to trade off either taxes or royalties (which are provided for in law) for shares and hope for dividend. This paper analyses Malawi’s mining fiscal regime and applies it to the Kayelekera Development Agreement between the Government of Malawi and Paladin Africa Limited as a case study. We use three approaches. First is a narrative analysis of fiscal regime implied by the law, followed an normative and positive analysis of the overall fiscal and economic impact of the Development Agreement in terms of impact on fiscus, foreign exchange, employment and community development. Finally we develop a financial model and analyze gains and losses from shareholding using the fiscal regime prescribed in law as a counterfactual. Expected Results: Historical record shows that Government of Malawi’s ownership of mining interest in Kayelekera is the exception not the rule. On average Malawi would be better off applying the legal fiscal regime. Taxes and royalties represent a conservative but sure revenue stream and one that Government can control and monitor while dividends represent a more volatile and riskier revenue stream being a function of external and internal environment and more. Tentative Recommendation & Policy Implication: Government should not trade-off sure mining revenue sources for volatile ones. Unless there is a free carry, if Government wants more revenues from anticipated supernormal mining profits, they should use Resource Rent Taxes rather than shareholding in mining.
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RESOURCE NATIONALISM AND MINING FISCAL REGIME IN MALAWI: REVENUE
VOLATILITY AND TRADE-OFFS
WINFORD MASANJALA UNIMA
OUTLINE1. INTRODUCTION2. MINING IN MALAWI3. PRIMER ON MINING FISCAL REGIMES4. MALAWI’S MINING FISCAL REGIME5. PALADIN CASE STUDY6. CONCLUSION
Motivation• Malawi has no mining history• Until 2009, mining output represented about 3% of
GDP• With opening of Kayelekera, share of mining in GDP
rose to 10%• When Kayelekera MDA was negotiated, Govt opted for
partial carry equity participation• Is equity participation better than just reliance on
taxes?
Mining in Malawi: Exports Mineral 2010 2011 2012
Coal (tons) 6830 15500 10918
Agricultural Lime (MT) 0 0 740
Quarry Aggregate (m3) 8285 9946.22 7093.55
Gemstones (kg) 186.95 122.9
Ornamental Stones (MT) 167.8 435.9 238
Clay/Pottery (pieces) 4830 1020 0
Terrazzo (m3) 12355 4434 6.5
Uranium (tons) 58.58 726.008 887.78
Granulated clay 4830 1020 0
Mining EmploymentMineral 2006 2011 2014 AvgUranium 0 859 300 650Coal 713 907 606 705Cement 68 90 90Agricultural Lime 154 1640 1593 1668Quarry Aggregate 660 12030 8144 9442Cement 348 511 101 207Gemstones 125 1260 117 407Ornamental Stones 45 46 29 34Terrazzo 169 1340 . 483Other Industrial Minerals 20 2144 839 1199Total Employment 2480 20827 11897 14834
Designing Fiscal Regime in Mining1. Identify the mineral resources2. Allocate rights3. Design the fiscal regime4. Administer the fiscal regime5. Manage the revenues
Issue: Resource Nationalism • Citizens jealously guard national resources• However, in mining if the State wants to participate there
are four possibilities• Full Equity Participation• Carried Equity Participation• Free Equity Participation• Production Sharing (Petroleum)
• In Malawi the law is silent on State participation. • Any State participation needs to be negotiated and paid for
Issues • If the State has no money it can trade-off future taxes for
equity.• State also shares business risks (the good the bad and the ugly)
• The State trades-off taxes (sure and predictable revenues) for dividend (volatile revenue)
• If global market is vibrant State’s take is good. If global economiy tank, states revenues tank as well
• Since the choice has to be made ex-ante, the issue is whether we can predict the future mineral market.
Source: EISOURCEBOOK
Fiscal Regime in Mining
Fiscal Regime: Petroleum
Case Study: Kayelekera Mine
Malawi’s Royalty RegimeMineral Royalty (% of
Gross Value)Building and Industrial Minerals Unmanufactured Manufactured
75
Precious/semi precious Stones Rough uncut Any other case
105
Radioactive minerals 5
Precious metals 5
Any other minerals 5
Kayelekera Timeline• April 2005: Bankable Feasibility Study. • April 2007: Mining Licence, covering 5,550
hectares for 15 years. • June 2007: Construction of Kayelekera began
in, • budgeted cost of US$200M, • total construction time= two years.
• 17 April 2009 Kayelekera mine officially opened by Dr. Bingu wa Mutharika, • 17 August 2009: Transport of the first
containerised drummed product consignment to Walvis Bay, Namibia via Zambia.
Imposition or Allowance Rate and MethodGeneral Regime Kayelekera
State equity participation Not specified 15 percent, consideration reduced royalty, CIT rate, RRT and customs exemptions
Royalty 5 percent (on gross value minus transport costs) or as set in a mining license
Years 1-3: 1.5 percent, limited deductions. Then 3 percent with deductions
Corporate income tax 1/ 30 percent 27.5 percentCapital allowances 100 percent for mining
expenditure, annual allowances for other plant and equipment
100 percent for mining expenditure, annual allowances for other plant and equipment
Carry forward of losses Indefinite IndefiniteThin capitalization rule None (but MRA disallows interest
above 3:1 debt/equity ratio)Equity 20 percent of balance after third party project loans
Resource rent tax 10 percent, after 20 percent rate of return
Exempt
Baseline information
Source: FARI Model
Forecast Revenue
-
10
20
30
40
50
60
70
80
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
US$
mill
ion,
rea
l 201
0
Kayelekera terms
Corporate Income Tax
State participation
Dividend and interest withholding tax
Indirect taxes (ID, VAT, SWT)
Royalty
Note: Assumes actual contract prices and a long-term price of US65/pound thereafter; 80% borrowed costs; 2.4% real interest rate.
Government revenues NPV10: $262m
Government revenue to June 2013
13/9/0
9
20/12/0
9
01/03/1
0
14/06/1
0
19/07/1
0
23/08/1
0
20/09/1
0
11/01/1
0
29/11/1
0
21/12/1
0
04/02/1
1
18/03/1
1
14/04/1
1
01/06/1
1
11/07/1
1
03/08/1
1
14/10/1
1
11/11/1
1
07/12/1
1
14/12/1
1
23/01/1
2
20/02/1
2
19/03/1
2
30/04/1
2
28/05/1
2
09/07/1
2
06/08/1
2
24/09/1
2
07/11/1
2
14/12/1
2
09/01/1
3
08/02/1
3
04/03/1
3
05/04/1
3
05/04/1
3
29/05/1
3
28/06/1
30
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
Government Revenue up to June 2013
value royalty royalty cum
Concluding thoughts & Next Step• 1. Hindsight is 2020Kayelekera initially sold under a 3 year contract, with fixed prices each year.Yr 1: US$66 per pound Yr 2: US$71 (year 2), and Yr 3: US$73 (year 3) All these prices exceeded the spot market price at the time.Current spot market price around USD 34/lb.
