An international non-governmental organisation (NGO) Oxfam Malawi, has cast doubt on the country’s mining sector as a potential replacement for the agriculture sector as an economy driver.
The statement by Oxfam follows a study that reveals a systematic overestimation of production volumes and underestimation of project costs that distort the true reflection of the industry’s potential.
The Oxfam report, presented at the Bingu International Conference Centre (BICC) in Lilongwe yesterday, highlighted the country’s potential and possible benefits from the mining sector following a study that was carried out on Songwe Hill’s potential rare earth elements (REE).
Presenting the report, Oxfam consultant Don Hubert advised government to be transparent when issuing mining contracts and on subsequent fees and taxes it receives, saying this was the only way to prevent people from speculating on how government awards mining contracts.
Said Hubert: “Transparency is very crucial in any extractive industry and early project-level economic analyses can help communities recognise the long timelines from the discovery of deposits to mine development and first production.”
He said the analysis of the study carried out on Songwe Hill Rare Earth Elements project in Phalombe, also highlights the risks of commodity price fluctuations and their impact on project viability and potential government revenue streams.
Government licensed Mkango Mining Resoucres, a Canadian Stock Exchange-listed company, to explore and mine rare earth elements in Phalombe District and the work was expected to begin in 2018. But the study disputes this saying the mine would only be ready in 2020.
In the report, Oxfam found that in theory, the country’s mining fiscal regime suggests that it was well positioned.
However, it was also noted by the International Monetary Fund (IMF) that in many cases, actual receipts fall far below these expectations, indicating the overestimation and overly optimistic approach to the sector.
Since assuming power in 2014, President Peter Mutharika’s government has been talking about transforming and accelerating the country’s economic growth by diversifying from agriculture to mining.
However, the Oxfam report observes that comparative analyses of mining feasibility studies reveal a systematic bias towards overestimating production volumes and project revenue and underestimating timelines and project costs.
Focusing on the Songwe Hill project—which was touted as a highly promising deposit and a ‘game changer’—the report raised ‘serious’ questions about the economic viability of the project in the absence of major REE price increases.
The study found that if Songwe Hill becomes a mine, government revenue would come from five major sources that include five percent royalties paid on production value, 30 percent corporate income tax paid on company profits, a 15 percent resource rent tax 10 to 15 percent withholding taxes on payments to foreign companies, and 10 percent as government’s equity in the project.
The report indicates that revenue forecasts on the mine were certainly inflated, saying even if they were to materialise, an additional $30-50 million per year would not fundamentally change the government’s budget situation.
“The forecasts for potential government revenue provided above should, therefore, be used to provide a sense of potential scale under “best case” assumptions. Even if those price increases materialise, it is not obvious that Songwe Hill would be one of the four or five REE mines that would be needed to meet projected global demand.
“Market analysts point to relatively low concentrations of REEs in the Songwe deposit, while Mkango claims that they have a comparative advantage in capital and operating costs,” reads part of the report.
Oxfam further observes that on the optimistic assumption that the project [Songwe Hill] does go ahead, production could not start until at least 2020, given the need for a definitive feasibility study, project financing and then around two years for mine development saying: “Depressed prices make delays likely”.
“Fiscal terms define what the government should get in theory. As noted above, the IMF suggests that an analysis of mining fiscal regimes suggests that they should generate a government take of between 40-60 percent. The analysis above suggests that, in theory, the Malawi fiscal regime is well positioned.
The report observed that stopping tax base erosion has become a priority for developed and developing countries alike.
“In the extractive sector, this means verifying the quality, quantity and international market value of resource production in order to ensure that project revenue is accurately reported. It also means ensuring that profits are not under-reported due to inflated project costs. Meeting these objectives requires strong tax administration and careful audits,” reads the report.
Speaking on behalf of government, Ministry of Finance chief economist George Harawa welcomed the report describing it as an excellent one that has ever been produced by a nongovernmental organisation with facts and input from government perspective.
Harawa pointed out that government made a commitment by joining the EITI which he said was an important step that will help effective monitoring depending on the disclosure of revenue payments of extractive sector contracts and of the individuals who ultimately own the rights to extractive sector resources. n