Govt says mining royalty high enough

Govt says mining royalty high enough

The Guardian (Tanzania)

By Judica Tarimo

28th March 2007

Investors in the mining sector have been positive on the review of mining contracts but the government says there is little possibility that the respective royalty will go beyond the current three per cent.

Dr Peter Kafumu, commissioner of minerals in the Energy and Minerals ministry, told The Guardian in an exclusive interview in Dar es Salaam yesterday that raising the royalty would scare prospective investors.

`Mining royalty worldwide ranges between 1 and 12 per cent and not beyond that. Our rates range between 3 for most minerals and 5 per cent (for diamond and gemstones,` he said, adding: `In fact, basing on global standards and the nature of our environment, our royalty is highly competitive and charging anything beyond that will definitely discourage investors.`

The commissioner described mining royalty as an especially sensitive element on which the success or failure of local and foreign investment heavily depends.

`We need to be careful because playing games with royalty means frightening or keeping away existing and prospective investors,` he cautioned.

Kafumu explained that, apart from royalty, investors are compelled to pay various taxes and levies alongside servicing their capital debt and covering other running costs.

He added that investors normally conduct feasibility studies on the viability of their planned investment before embarking on mining projects `and all that costs money`.

`If a country charges high royalty rates, you just overburden the investors because their operational costs will increase - automatically rendering the project in question non-viable,` he clarified.

He gave examples of countries that have scrapped mining royalty as part of a strategy to lure investors, noting that in some other countries investors who have started paying corporate tax are exempted from paying royalty.

According to the commissioner, mining royalty in South Africa and several other countries stands at 12 per cent `because of the conducive investment climate prevailing there as well as ready availability of skilled labour, mineral experts, machinery and equipment and other inputs needed for smooth investment`.

`You cannot do likewise in Tanzania because operational costs are already very high and investors would be required to import skilled labour, mineral experts and machines from outside,` he elaborated.

In Tanzania, he said, mining investors have to cover operational costs that are around 60 per cent of the total profit they generate.

`Out of that 60 per cent, 20 per cent is spent on taxes and other levies. They are left with 40 per cent and they still have to cough up 3 per cent as royalty,` he pointed out.

He observed that out of the remaining 37 per cent, investors have to service bank loans at 12 per cent and are therefore left with 25 per cent after-tax profit. Out of this 25 per cent they have to pay 30 per cent in corporate tax.

I think most people have been complaining simply because they do not know these technicalities, he noted further.

A number of institutions, pressure groups and ordinary members of the public have lately been complaining that the 3 per cent royalty paid by mining firms was peanuts compared to what investors earn from the country?s mineral wealth.

For its part, the government has responded by seeking to review mining contracts to ensure what is commonly referred to as a win-win situation.

Dr Kafumu said negotiations with mining investors have been generally positive, `with the investors agreeing on terms that are sure to benefit the country`.

`We are about to wind up negotiations with one investor, Anglo-Gold Mining Company. Talks between the government and investors are proceeding well,` he revealed.