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.

1. RESOURCE NATIONALISM AND MINING
FISCAL REGIME IN MALAWI: REVENUE
VOLATILITY AND TRADE-OFFS
WINFORD MASANJALA
UNIMA

2. OUTLINE
1. INTRODUCTION
2. MINING IN MALAWI
3. PRIMER ON MINING FISCAL REGIMES
4. MALAWI’S MINING FISCAL REGIME
5. PALADIN CASE STUDY
6. CONCLUSION

3. 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?

4. 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

5. Mining Employment
Mineral 2006 2011 2014 Avg
Uranium 0 859 300 650
Coal 713 907 606 705
Cement 68 90 90
Agricultural Lime 154 1640 1593 1668
Quarry Aggregate 660 12030 8144 9442
Cement 348 511 101 207
Gemstones 125 1260 117 407
Ornamental Stones 45 46 29 34
Terrazzo 169 1340 . 483
Other Industrial Minerals 20 2144 839 1199
Total Employment 2480 20827 11897 14834

6. Designing Fiscal Regime in Mining
1. Identify the mineral resources
2. Allocate rights
3. Design the fiscal regime
4. Administer the fiscal regime
5. Manage the revenues

7. 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

8. 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.

9. Source: EISOURCEBOOK

10. Fiscal Regime in Mining

11. Fiscal Regime: Petroleum

12. Case Study: KayelekeraMine

13. Malawi’s Royalty Regime
Mineral Royalty (% of
Gross Value)
Building and Industrial Minerals
 Unmanufactured
 Manufactured
7
5
Precious/semi precious Stones
 Rough uncut
 Any other case
10
5
Radioactive minerals 5
Precious metals 5
Any other minerals 5

14. 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.

15. Imposition or Allowance Rate and Method
General 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 percent
Capital 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 Indefinite
Thin 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

16. Baseline information

17. Source: FARI Model

18. Forecast Revenue
80
70
60
50
40
30
20
10
-
Government revenues NPV10: $262m
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
US$ million, real 2010
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.

19. Government revenue to June 2013
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
13/9/09
20/12/09
01/03/10
14/06/10
19/07/10
23/08/10
20/09/10
11/01/10
29/11/10
21/12/10
04/02/11
18/03/11
14/04/11
01/06/11
11/07/11
03/08/11
14/10/11
11/11/11
07/12/11
14/12/11
23/01/12
20/02/12
19/03/12
30/04/12
28/05/12
09/07/12
06/08/12
24/09/12
07/11/12
14/12/12
09/01/13
08/02/13
04/03/13
05/04/13
05/04/13
29/05/13
28/06/13
Government Revenue up to June 2013
value royalty royalty cum

20. Concluding thoughts & Next Step
• 1. Hindsight is 2020
Kayelekera 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.