Expectations are high in Mozambique that its wealth of minerals, oil, gas and precious stones will fund health care, education and infrastructure, helping to end the extreme poverty that blights the lives of most of its citizens. This case study examines one of the longest standing foreign investments in Mozambique by the Irish company, Kenmare, whose Moma mine is extracting mineral sands worth tens of billions of dollars. Sadly, the case of Kenmare’s Moma mine suggests that foreign multinationals will devour the lion’s share of the country’s precious, non-renewable resources, while Mozambicans will just be left with the crumbs.
Kenmare’s cushy deal
Kenmare Resources plc is an Irish company group whose productive activity is the mining and processing of mineral sands in Moma, on the northern coast of Mozambique. Its mine, which started production in 2007, was one of the first large foreign investments in Mozambique at a time when the country was viewed as a risky place to do business. The country was still heavily marked by civil war, politically unstable and lacking key institutions to facilitate both foreign and domestic investment. All of this helped Kenmare negotiate extremely favourable terms when setting up the mining company – including contract secrecy, no corporate taxes for one part of the company group and a halving of corporate tax rates for ten years for the other part, no payment of value added tax (VAT) for several goods, and no export or import taxes.
Things have changed dramatically since the signing of Kenmare’s contract. Mozambique has strengthened its institutions and business infrastructure, and the value of its natural resources has increased dramatically on the back of surging global commodity prices. Yet Kenmare’s sweetheart tax deal remains in place.
The facts: Kenmare wins, Mozambique loses
Kenmare has yet to pay any corporate income tax in Mozambique. Although the mine started to become profitable in 2011, the company was able to offset losses made in the start-up period to wipe out its tax bill.
The mine will soon start to make a taxable profit, but even then its payments to the Mozambique government will be much lower than the 35% statutory rate, because of generous tax incentives.
Since 2010, shareholders have seen the value of Kenmare shares treble.
The fact that Mozambique takes only a sliver of the value of its own resources is extremely important, as local employment and economic impacts are relatively low. This is not uncommon for extractive mega-projects. Fewer than 1,000 people are employed at the mine, and although 85 per cent are Mozambicans, very few are local to the area. Other impacts of Kenmare’s activity are on a much smaller scale. Kenmare has provided electricity and water to local communities, and runs a well-liked corporate social responsibility programme, but this is worth only a few hundred thousand dollars. Local environmental and social impacts have been
minimised, though some issues remain, including a mountain of sand where one neighbouring community once grew their cassava.
The future looks bright for Kenmare: its mineral reserves may be worth US$125 billion, and prices for the mineral sands found in Moma look strong. Yet Mozambique should not expect to benefit from this good fortune. In 2011, while ilmenite prices quadrupled, taxes paid by Kenmare increased by only 7.4 per cent.
Complex company structure rooted in tax havens
Although only running one mine, the Kenmare Group is composed of eight subsidiaries, most of which are registered in the tax havens of Jersey and Mauritius – well known for their low tax rates and financial secrecy. None of the subsidiaries are actually registered in Mozambique. According to Kenmare, two of the subsidiaries have an active role in the mine. These operate as branches under two different fiscal regimes in Mozambique. While set ups such as these can often be used to minimise tax payments, we have uncovered no evidence that Kenmare is using its complex structure for illegal tax evasion
International development institutions shamed
Despite the low development outcomes, five of Kenmare’s seven creditors are publically backed development finance institutions, contributing over 80 per cent of Kenmare’s loans. These include the African Development Bank, the European Investment Bank, and the Multilateral Investment Guarantee Agency (part of the World Bank).
These institutions claim that their objective is to fund private companies where development impacts are high. Supporting a European company to extract non-renewable resources from a low-income country while creating a handful of jobs and paying very low taxes does not do this. This behaviour continues a trend: Western countries and international financial institutions have shaped Mozambique’s tax regime and foreign investment policy, which offers foreign multinationals extensive benefits, including contract secrecy and generous tax breaks.
Change is needed
The people of Mozambique are getting a raw deal from the Kenmare mine. Mozambique is reducing foreign aid dependency and generating greater revenue through taxation. However, very little of this comes from the extractive sector, which is growing rapidly and already accounts for 10 per cent of exports.
The country’s ability to raise enough money to fund its own development is dependent upon whether it can change this picture. The country’s future depends on whether it can prevent the leakage of precious resources through tax minimising practises and the one-sided tax breaks and investment policies negotiated while the country was recovering from a debilitating civil war. It is also dependent upon whether the government will heed growing demands to renegotiate mining contracts and end the secrecy that shrouds the tax affairs of the powerful multinationals ripping the country’s wealth from the ground and giving little back in return.