MINING INDUSTRY IN AFRICA AND THE IMPACT OF THE MINING REGULATORY AND TAX LAWS REFORMS ON THE SUB-SAHARAN AFRICAN COUNTRIES’ ECONOMIES

Dr. Rugemeleza NshalaLawyers Environmental Action Team (LEAT) Dar es Salaam TanzaniaPresented at the Africa-wide Convening on Governance on Oil and the Extractive Sector: Experiences and Lessons for Kenya ConferenceSimba Lodge, Naivasha,KenyaJanuary 31, 2013rnshala@sjd.law.harvard.edu; rugemeleza@gmail.com

Tanzania

Zambia

Ghana

Namibia

Botswana

Moçambique

Malawi

République Démocratique

du Congo

UgandaGabon

Niger

Nigeria

Mali

Côte d’Ivoire

Burkina FasoGuinée

Sénégal

TchadSudan

Mauritanie

Zimbabwe

South Africa

Lesotho

Swaziland

Angola

Kenya

Somalia

Ethiopia

Eritrea

Djibouti

Congo

Cameroun

Rwanda

Burundi

RépubliqueCentraafricaine

Guinea Eq.

Sierra Leone

Liberia

Benin

Togo

Madagascar

Gambia

Guinea Bissau

Algeria Libya

Egypt

TunisiaMorocco

Presentation Overview Challenges the Strategy for African Mining of 1992 and faults its claim

that minerals in Africa are a global patrimony not for the Africans;

It asserts UNGA Resolutions 1803 of 1962 and 3281 of 1974;

The global mining industry is complex and its both vertically and horizontally integrated; Besides additional value is created along the value chain;

Discusses the reforms undertaken in Sub-Saharan African countries (using Ghana, Tanzania and Zambia as case studies).

Mines in Ghana

Copper Mines in Zambia

Metallurgical Map of Tanzania

The Strategy for African Mining

In 1992 the WB published the Strategy for African Mining.

It required African countries to liberalize the mining sector;

Foreign mining companies have required capital, technical and management know-how, and integrated in the global minerals market

Strategy ctd

African countries must give incentives to foreign mining companies

Incentives were necessary as they were medium to high-risk countries

Incentives: generous tax incentive, stable fiscal regime; disavow expropriation;

MDAs; International dispute settlement

A complex industry

Many mining companies but controlled by few of them. 4000 metal mining companies.

They are vertically and horizontally integrated

149 big mining companies control mining, smelting and refining operations;

They trade with each other and engage into transfer pricing

Mining industry Value Chain

Minerals and Oil Value Chain ctd

Booms and Busts

Mineral prices are volatile prices fell in 1970s and 1980s and this crippled the mining industry in Africa;

In 2004 prices began to rise. Fueled by the Chinese economic growth

Fell in 2008 but recovered in Mid-2009 and have remained reasonably higher

Adoption and Implementation of the Strategy

Ghana was the 1st Country to initiate reforms as in 1986 it passed the Minerals and Mines Law;

The experience gained by the WB in the reforms in Ghana was used by it to write and publish the Strategy;

The WB made sure that 40 Sub-Saharan African countries adopted the Strategy;

The Mining Laws of Ghana, Zambia and Tanzania

The laws include the Minerals and Mining Law of 1986 (Ghana), the Mines and Minerals Act of 1995 (Zambia) and the Mining Act of 1998 (Tanzania).

Vested enormous discretionary powers in the ministers responsible for minerals, who are virtually accountable to no one, except the president;

The ministers have the power to give mining rights i.e. mining licenses for exploration, exploitation, processing, and smelting.

Ministers’ power

They have power to waive or defer payment of royalties, and to negotiate and sign MDAs, among others.

Not supported by strong and effective mining regulating institutions.

Weak institutions Mining institutions are very weak and incapable of regulating

a complex industry along the minerals value chain; They have failed to ascertain the amount and quality

produced, processed, smelted, refined, and sold and the prices fetched;

Unable to monitor and inspect operations, audit accounting books and levy appropriate taxes.

Mining companies provide false data and engage in transfer pricing;

Little parliamentary oversight e.g. 21 MDAs retroactively ratified in Ghana in 2008

Mining Development Agreements(MDAs)

Agreements signed by the Ministers with the aim of clarifying, supplementing, even supplanting various laws;

Negotiated under secrecy and kept confidential

They provide generous tax incentives e.g. 3% royalty; 25-30% income tax;

Waived customs, excise and other levies

MDAs ctd

Guarantee fiscal stability; Prevent expropriation and right to prompt,

adequate and effective compensation; They limit the discretionary powers of the

ministers and their assistants; Guarantee assignment right without payment of

capital gains tax; Recourse to international arbitration; Legal enclaves

High Production but Miniscule Revenue

In Ghana, for example, gold production rose from 287,124 ounces in 1986 to 2,625,500 in 2007. Diamond increased from 560,538 to 839,235 carats in the same period. Bauxite production rose from 226,461 to 1,033,368 tons. Manganese from 262,900 to 1,305,809 tons from 1986 to 2007.

Between 1990 and 2007, Ghana collected $387 million as royalty charged at the lowest rate of 3 percent instead of $775.47million at the medium rate of rate of 6 per cent or $1,550.95million at the highest 12 percent. Ghana lost about $1,163.21 billion

WB on MDAs

In the past, Development Agreements may have been needed to attract investment to revive a declining industry but the Zambian people have paid a high price in terms of foregone public revenues that could have been invested in public services and infrastructure (WB: 2011)

Miniscule revenue ctd In in 1992 Zambia produced 400,000 tons of Copper and

earned$200million.

In 2004 same amount produced but received US$209,249, the copper price was US$2,280 and US$2,868 in 1992 and 2004 respectively per ton;

The Tanzanian government forwent over Tsh11.56 billion (US$8,785,942.49) and Tsh32.7 billion (US$24,498,007.98) in 2006/7 and 2007/8 as fuel levy to mining companies. Between 2004-06 the Tanzanian government waived over Tshs62.8 billion (US$60million) in taxes out of the 178milion liters that six gold mining companies imported.

Vulnerability to Corruption

Ministers and mining officials grant generous incentives for personal gain;

Government officials hold concessions and shares in mining companies;

No bidding or tendering mining rights are awarded administratively

Secrecy and severe punishment for whistle-blowers

Citizens Protests and Cosmetics Reforms

CSOs campaigns against the mining legal regimes;

WB Extractive Industry Review in 2003;Repeal and enactment of new mining laws in

Ghana (2006), Zambia (2008) and Tanzania (2010);

Cancellation of MDAs in Zambia (2008)

Botswana Experience Third poorest nation in the world in 1966 Reached an agreement with De Beers in 1969/70 and created

a joint venture company Debswana (De Beers Botswana Mining Company). De Beers had 85 percent of the shares while the remaining 15 percent.

Forming the Mineral Policy Committee that negotiates all mining agreements

Renegotiated the deal in 1974 and reached a 50-50 joint venture in De Beers.

The Botswana government insisted that a “greater proportion of the financial benefits of mining should flow to the public rather than to private capital.”

Botswana ctd The 1974 agreement also gave the Botswana’s government right

to participate equally in the management of Debswana by contributing half of its board members with the chair having no casting vote.

The equal participation in the management enabled the government to obtain key information on the operation of the industry, which “restricts the scope for potentially adverse practices such as transfer pricing.

A purposeful government which acquires the expertise to deal with foreign companies on its own terms need not have a fear of domination by foreign companies, however large they may be”

Botswana holds 15% shares in De Beers. Forced De Beers to relocate Diamond Trading Company to

Gaborone and

Botswana is now involved in the diamond trade not only for the diamond produced in Botswana but also from other countries, including Tanzania, where De Beers operates.

It is now a high-middle income country  It has an external reserve amounting to US$6

billion which it has invested in different portfolios and ventures and uses their proceeds to finance its budget and economic

Lessons to Kenya and other Africa Oil Rich

CountriesThe primary beneficiaries must be Kenyans and

not foreign mining or oil corporationsEstablish strong oil and mining institutions able to

oversee the industry along the value chain;Strong laws criminalizing transfer pricing and tax

avoidance mechanismsKenya should be a major shareholder in oil

exploration, exploitation, processing and selling;Learn and internalize the lessons of Arab and Latin

American Countries

Recommendations

Fundamental philosophical shift minerals belong to the countries and they must be primary beneficiaries;

Cancellation of all MDAs;Enactment of new laws that enable countries to

effectively regulate the industry;Form joint ventures and promote small-scale and

medium scale mining in the countries by citizens;Promote value addition activities in the countries;

Asanteni Sana!