Legal Reform Process Halted in favour of Stability in the Malagasy Extractive Industry

Since 2005, Madagascar has become an attractive investment destination for investors in the mining sector as a result of the investment-friendly Malagasy mining code.[1] In 2015, Madagascar embarked on a process to amend this mining code to ensure a larger contribution by the sector towards government revenues. The Malagasy government has indicated that the current mining code no longer supported the aspirations set out in the Madagascar’s National Development Plan. 

Over time, it had become apparent that the current mining code allowed investors to gain large returns from mining operations, while government coffers and local communities only receive crumbs. The mining industry is therefore not assisting in the promotion of the National Development Plan goals.

Following Madagascar’s long, destructive and divisive political crisis which lasted from 2009 to 2013, the National Development Plan was drafted to put Madagascar on an inclusive and sustainable development trajectory. Since the mining and petroleum sector is one of the most productive in the country, it is very important that revenues derived from the industry can be directed towards the implementation of the National Development Plan.

Amending the code, therefore, became paramount to ensure that revenues from the industry can be utilised for the realisation of the goals of the National Development Plan. The proposed amendment mainly aimed to increase the State's control over the industry and strengthen social and environmental agreements with operators. Benefits enjoyed by mining and oil companies, such as low tax rates and little or no obligation to consult with or distribute benefits to local communities, were to be curtailed. It was argued that cutting down on benefits for mining companies would promote a better redistribution of wealth realised through oil and mineral extraction.

The amendment process took off smoothly and the necessary consultations were concluded. In November 2015, the Malagasy President confidently advanced that the government was busy debating the finer details and expected the amended version to be a great improvement in all aspects. He even anticipated that the draft will pass by the end of 2015 or early 2016.

Almost two years after the President reassured citizens of the progress of amendment process, the amended code has not even been tabled in Parliament. In fact, on 14 June 2017, the President announced that the amendment process has been halted, or possibly scrapped. As a result, the current code remains the applicable legislation in the mining and petroleum sector.

The government’s apparent U-turn may be the result of pressures from the industry. Needless to say, mining companies operating in the country do not view the draft code that seeks to reduce benefits enjoyed previously, favourably. The Chamber of Mines of Madagascar argues that the suggested amendments would bring additional financial burdens for the mining companies that have already been impacted by the economic slowdown caused by the political crisis.

The timing of the amendment is also under discussion. The Chamber of Mines questions prioritising the amendment of the code in the light of economic challenges mining operators have faced over the past two years. Revenues generated by the mining sector have decreased significantly because of the fall in metal prices on the world market. The Chamber underlines that besides the crisis of global scale facing the sector, the prevailing situation at home is still precarious since the country’s economy is yet to recover following the political crisis that started in 2009. To this end, the anticipated tightening of the legal and fiscal framework through the amendment of the mining code could aggravate the difficulties facing the mining and oil sector. The amendment may not attract foreign direct investment and new domestic investment in the sector. 

The Chamber of Mines, therefore, strongly disagrees with the amendment draft and favours the current mining code as it promotes an economically stable environment that attracts investment. The Chamber maintains that significant investment growth in the Malagasy mining industry has occurred thanks to the current code. It is equally argued that the current code has caused an increase in both tax and non-tax related contributions from the mining sector. The current code is also praised for, amongst other things, facilitating the creation of employment opportunities and public infrastructure. Thus, the Chamber of Mines argues that instead of amending the current code, the government should prioritise improving collaborative governance practices in the sector because good governance can help the government to meet the National Development Plan. 

Clearly, stakeholders in the Malagasy mining sector are divided on the matter of amending the mining code. On the one hand are those, specifically the government that believe that reasonable revenues from the sector can only be achieved through legal reform. On the other hand are investors and the Chamber of Mines that do not think that a legal reform is what Madagascar needs as its mining sector is already battling as a result of economic downturn. Besides, they believe that if the government goes ahead with the reform process, current contributions derived from the mining sector risk disappearing.

The fear of destabilising an already embattled sector has pushed the government to bow down to pressure from mining companies and the Chamber of Mines. Thus, the amendment process is put on hold indefinitely. It goes to show that the timing of legal reform is critical, especially when faced with the challenge of balancing investor’s interests and government objectives.

Written by Bernard Kengni