Government gives up taxes to Vale

Poor negotiating skills have cost Malawi a fortune in a concession agreement it struck with Brazilian mining company, Vale Logistics Limited (VLL), as the deal favours the company, according to The Nation’s analysis of the pact and tax experts.

Malawi is expected to be getting K920 million (about $2 million) annually out of the K460 billion ($1.1 billion) VLL railway line investment after giving the company tax exemptions on almost all the taxes that could have accrued.

Among others, Malawi gave away corporate tax calculated at 30 percent and value added tax (VAT) at 16.5 percent.

In the deal, Lilongwe also gave up its ability to check what would be transported through the country, access to foreign exchange and has foregone virtually control over the cargo.

In 2011, Ministry of Transport and Public Works entered into an agreement with VLL to construct and rehabilitate a 136-kilometre railway line and operate a locomotive train that will be transporting 18 million tonnes of coal annually from Moatize in Tete, Mozambique, to the Indian Ocean port of Nacala on the other side of Mozambique through Malawi.

Vale could have opted to construct a new railway line from Moatize to Nacala within Mozambique, bypassing Malawi.

However, the project could have been expensive and time-consuming. The other option was to use Beira port, which is shallow and cannot handle huge volumes of cargo.

Copies of the concession agreement The Nation has seen reveal that Malawi offered to VLL several tax exemptions and technically accepted to forego potential foreign exchange earnings.

On taxes, Malawi offered an exemption of import duties for project equipment and removed VAT or exclusive use in Malawi in connection with the construction, renovation and expansion of the railway and no withholding tax on “service fees” made to non-residents incurred in relation to the project deliverables.

The country also offered Vale zero withholding tax on payments of interest made to non-residents and payable according to contracts registered with the Reserve Bank of Malawi (RBM) and that any corporate social responsibility (CSR) initiatives as agreed and approved by government are tax deductible.

The agreement reveals that Malawi agreed to reduce corporate tax by 30 percent on works conducted in relation to the project, its affiliates and subcontractors.

The agreement also stipulated that for the entire term of the agreement, Vale shall be exempted from the payment of any minimum tax.

But in an interview with The Nation, taxation consultant Emmanuel Kaluluma said going through the contract, it was clear that when it comes to taxation, Malawi got a raw deal.

“It seems all the taxes were exempted. Malawi gave out a bit too much,” he observed.

Kaluluma said while tax can be used as an incentive to woo investors, Malawi needed to come up with a proper negotiating team to help the country in international treaties.

He said: “When you look at what happened with Paladin [the uranium miner at Kayelekera in Karonga] and then this Vale contract, it seems we have a problem with negotiating international treaties.”

Kaluluma also said by reducing corporate income tax rate by 30 percent, it means the company would not pay any corporate tax at all considering that the reduction is in effect the prevailing rate for the tax in Malawi.

A former government employee experienced in international treaty negotiations agreed that the Malawi negotiators were more interested in the macroeconomic benefits of the project within the area affected.

Said the ex-technocrat: “Negotiators failed to push for a hard bargain based on what the investor would actually benefit from such an investment. One would wish government would engage in a cost benefit analysis that quantifies in monetary terms what is actually lost by conceding on certain concessions. How much is being invested?”

“It, therefore, conceded probably way too much. I must say that I was struck by the freedom of action that seems to be accorded to the concessionaire in terms of fixing fares for passenger haulage, even when granted that the whole enterprise has to be commercially viable, I would have thought this is part of social responsibility,” he observed.

In its defence, government has said negotiations between Vale and government were based on how best to apportion risk to various players involved in the project.

Ministry of Finance spokesperson Nations Msowoya said being a project that involves two countries was in itself a risk for the private operator and that such risk needed to be factored in the negotiations.

“Secondly, there is an investment risk which needs to be considered and thirdly there is an operational risk. Therefore, negotiations between the two parties were done in the spirit of sharing risks,” he said.

Msowoya said had government insisted on getting more revenue in form of taxes, Vale would have had an option of constructing the railway within Mozambique bypassing Malawi resulting in Malawi losing out.

He said Malawi will gain on the concession fees based on a percentage of Vale’s gross revenue, amounting to not less than K920 million ($2 million) at coal peak periods.

Other benefits, according to Msowoya, are the rehabilitation and upgrade of Nkaya-Nayuchi section of the railway line, which was supposed to be upgraded by government.

He said Malawi also benefited through employment and training opportunities for Malawians during construction and operations phases.

“Vale Logistic Limited paid compensation on behalf of government for the entire 136km from Kachaso to Nkaya. Government will take over and possess the infrastructure from Kachaso to Nkaya since it is a build, operate and transfer [BOT].

“[Government also considered] present and future economic development along the section where the line has passed, including areas where development has been lagging for a long period,” Msowoya said.

He also said the problematic 77-kilometre section of the rail line between Cuamba and Entre Lagos in Mozambique has been rehabilitated as part of the Nacala corridor for coal movement and that it will contribute to attract more cargo movement by rail due to its efficiency, thereby reducing heavy road maintenance costs and will eventually be an economic relief to government.

“The project has rejuvenated the ailing rail sub-sector in Malawi and continues to attract more investors in businesses related to railways, including the rehabilitation of the railway network in the country,” reads the response.

Vale communications manager Arão Valoi did not answer the set of questions that were sent, saying the company has adopted a low-profile strategy.

He said: “Given the scenario in the world economic outlook, as well the ongoing negotiation with the government of Mozambique and other stakeholders, Vale adopted, since last year, a low-profile strategy.”

The company is yet to get Malawi Government permission to start operating in Malawi. It was expected that the operations of the company will start at the beginning of 2015.