Abstract

Mining projects attract investment if the country’s incentives and fiscal regime are more favourable than alternative investments. Malawi risks chasing away mining investment if its fiscal regime is enacted into law and does not give flexibility in terms of making projects financially and economically viable. There is need always to refer to what is trending in the region around us in order to be competitive. Care should be undertaken in order to exercise reasonable benefit sharing arising from mining projects without giving away too much. This paper looks at issues that need to be considered in order to attract investment in the mining sector.

The government of Malawi has set its development priorities into three sectors of Agriculture, Tourism and Mining (ATM). These are also well expounded in the Malawi 2063 Vision document. Agriculture and Tourism have specific investment incentives. The mining sector has no amalgamated investment incentives and reliance is put on window shopping all over general incentives. The Ministry of Mining needs to come up with a investment incentive package that will be used in concluding mining agreements.  It takes too long to conclude Mining agreements because of the diverse nature, institutional interest and availability of the government negotiating team. This must be attended to because it frustrates investors and more often leads to rent seeling behaviour and geopolitical influences. This paper looks at available general incentives and fiscal incentives that must be considered in order to consolidate Malawi’s readiness in attracting mining investment.

1.0             General Incentives

1.1         Geological Prospectivity

Recent geophysical survey (around 2013) and selected geological mapping has improved availability of geological and geophysical data for mineral, oil and gas exploration. This is a plus for the country although recent mineralpermits acquisition has been infiltrated with permit speculators with no adequate risk money for grassroot exploration. Strict monitoring of permit conditions need to be followed in order to clean up the mining cadastre platform.

1.2         Enabling Infrastructure

There is no doubt that good road infrastructure, easy access to sea ports, excellent telecommunication and reliable banking system are conducive to mining investment. The current situation puts a plus to telecommunication.

Road access to mining projects is fair but not ideal for transportation of mineral commodities. Access to sea ports (Nacala, Beira and Dar es Salaam) have a fair amount of logistical problems. There are efforts to improve on rail access and to solve handling logistics to improve turn around time.

The banking system does not have enough capital to finance mining projects. This has favoured off shore capital markets and creation of opportunities for lines of credit for local banks. Foreign exchange regulations and repatriation of initial capital, dividends and interest should be granteed in order to attract investment capital. Double taxation treaties are necessary with countries such as United States of America, the European Union, Britain, South Africa, India, Australia, China and Canada.

1.3         Rule of Law

Investor confidence is mixed in terms of upholding rule of law in Malawi. It takes too long to solve investment disputes. The recent establishment of Commercial and Industrial Dispute Court may improve delivery of justice. The justice system needs to earn lost confidence.

1.4         Political stability

Political stability brings a sense of a stable investment environment. Malawi is one of the few countries that is known for political stability. There has been stable and fair transfer of political leadership. This is good for long term investment projects such as mining with over 10 years of  project life.

1.5         Sense of security

Individual security in Malawi is granted. Police works tirelessly in securing public and private property. Crime busting system works well and community policing works well too. Invetsors are assured of personal security and their assets are secured too.

1.6         Security of Tenure

Malawi is signatory to various international investment guarantee protocols such as membership in International Court of Justice and Multilateral Investment Guarantee Agency. This offers confidence in settlement of international investment disputes. Recent geopolitical risks have emerged that could polarise security of tenure in country alignment. Political leadership should guard against this emergent geopolitical risk and temptation of rent seeking behaviour among political leaders. The executive arm of government needs to be guided and motivated accordingly in order to avoid actions that may lead to breakdown of security of tenure for mining projects.

1.7         Policy and regulatory certainty

Malawi started its journey of promoting mining investment through the Mines and Minerals Act of 1981. This was replaced by the Mines and Minerals Act of 2018 after a lengthy period of national consultation from 1997. This introduced sustainable development aspects including community benefit sharing and community engangement arrangements. This Act is perceived to have been the best and well consulted by all stakeholders. 5 years later in 2023, another Mines and Minerals Act was enacted with the aim of establishing the Mines and Minerals Regulatory Authority. This act was hurried with no consultation with stakeholders and was passed taking advantage of misinformation related with perceived illegal mining activities and illicit financing flows in the mining sector. This Act has brought institutional disorientation and the need to restructure the Ministry of Mining in terms of the role the Geological Survey and the Department of Mines will play in promoting the Minerals sector.

The National Mining Company and Malawi Development Corporation were incorporated with the aim of spearheading minerals development and development finance respectively. The challenge has been sourcing seed finance. These two institutions are necessary in order to hold government equity in mining and promoting speedy financing of strategic mining projects that will speed up wealth creation and and economic development.

1.8         Smart partnership among stakeholders in the mining sector

There is no doubt that there is mistrust and lack of cordial relationship between government and mining companies. This has been exposed in recent political and advocacy platforms. Government needs to engage its citizens on the activities of mining companies. Mining companies need to engage government more in terms of promoting transparency and accountability in their exploration and mining activities. The Malawi Chamber of Mines and Energy is playing a crucial role in promoting integrity, transparency and accountability in the minerals sector. The Chamber members have put Malawi on the world mining map through discovery of world class critical minerals such as rare earths, niobium, uranium, rutile and graphite. The relationship that exists between government and The Chamber needs to be improved and safe guarded in order to develop effectively the minerals sector.

The above general observations should be taken seriously and addressed where necessary in order to promote good service delivery for facilitating mining investment and building trust among mining investors.

2.0     Fiscal Incentives

Fiscal incentives are sometimes viewed as loss of potential government revenue. Others call them subsidies. How does one lose that he never owned? How do you attract green field investment without a carrot? Can mining investment be easily attracted into a country that has no mining tradition? Fiscal incentives are necessary in order to attract mining investment especially in a country that is trying to develop its mining sector and surrounded by countries with a mining history and well established.

2.1     Exploration Expenditure

Exploration activities are risky undertaking. Exploration capital can be recovered when an economic mineral deposit has been discovered. Exploration finance can not be recovered where no mineral deposit has been found. In order to attract exploration expenditure the government should guarantee recoupment of exploration finance against taxes in the iniatial years of production.

2.2     Expatriation of Capital Expenditure

Initial Capital expenditure is usually sourced through capital markets and equity holders. These look for returns on their investments and look for alternatives where they can earn more dividends and interest. Recoupment of this capital must be easy and in the shortest period. The Central bank should be able to guarantee this.

2.3     Value Added Tax Claim   

Exploration companies should be allowed to register for VAT and be able to claim input VAT without unnecessary hussles.

2.4     Royalties and Export Levies

Government should acknowledge that royalties and export levies are a form of tax and therefore should be tax deductible. The Mode of calculation for royalties and export levies should be clearly explained. It may be agreed on gross revenue or ex-mine mineral value.

2.5     Corporate Tax

Mining projects are capital intensive. In order to reduce debt service burden, it is recommended that apart from loss carry forward for a certain period, there is need to reduce corporate tax during the period of debt servicing from 30% to 25%.

2.6     Resource Rent Tax

Resource rent tax applicability is complex and difficult to implement. Any taxes of super profits are a captured through royalties therefore there is no need to apply this tax. Most countries in the region scrapped this tax.

2.7     Effective tax rate

An effective tax rate is the total tax revenue that goes to government from a mining project. A reasonable effective tax rate that a government should benefit from a mining project mostly financed by a mining company should be between 51 and 60%.  This will attract the private sector into investing in the mining sector. It must also be understood that a mineral is of value once it is out of the ground.

3.0     Conclusion

The mining sector requires an incentive package under ATM. This will attract investment in the mining sector and reduce hurdles and speculations of outwitting each other when undertaking mining agreement consultations. With this investment package in place, it is easy to train the negotiation team to effectively hurdle mining agreements and reduce consultation period.

It must be understood that no any amount of money will buy trust because trust has to be earned.  Mining projects promote local content and increase local revenue through provision of goods and services. Government benefits from Pay as you earn (PAYE) and VAT to fill revenue gaps. Mining benefits economic growth and development. One mining project can not transform an economy of a country. Several projects will create more wealth and sovereign fund that will benefit future generations.

Let us be wise and investor friendly in order to create wealth for agricultural productivity, industrialization and urbanisation.

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