100345 ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR RESEARCH SUMMARY Acknowledgements This research on the Economic Contributions from Industrial Mining in Madagascar was commissioned by the World Bank Energy and Extractive Industry Global Practice from the Centre for Social Responsibility in Mining (CSRM), at the University of Queensland. The World Bank team, comprised of Mylène Faure, Olivia Rakotomalala and Remi Pelon (Task Team Leader), benefited from the input of several colleagues, including Bryan Land and Keiko Kubota. The CSRM team was led by Cristian Parra and Daniel Franks successively, and comprised Fitsum Weldegirogis, Lynda Lawson, Kathryn Sturman, Rupert Cook and Saleem Ali. The present Research Summary is based on a set of brochures and an economic model prepared by the CSRM team who conducted the research. A Technical Annex is available separately with the key assumptions and justifications of the model. The research would not have been possible without the participation and the contribution of many individuals from Government, mining companies, civil society organizations whom we would like to thank for their invaluable contributions at different stages. In particular, we would like to acknowledge key members of the Orientation Committee: Daniella Rajo Randriafeno, Pamphile Rakotoarimanana and Gerard Rakototafika, from the Mining Ministry; Ny Fansa Rakotomalala and Willy Ranjatoelina from the Chamber of Mines; Danny Denolf and Stephanie Ranaivo from GIZ; Martin Nicolls from WWF; and Eddy Rasolomanana from University of Antananarivo. The project was made possible by the financing support of the South African Trust Fund for Sub-Saharan African Energy, Transport and Extractive Industries (SAFETE). World BANK - Madagascar Rue Andriamifidy L. Razafimanantsoa Anosy BP 4140 - Antananarivo (101) - Madagascar Websites :  www.worldbank.org/madagascar and http://www.banquemondiale.org/madagascar Layout and Graphic design Email :  wbmadagascar@worldbank.org Rakotomanana Andriantoavina 4| ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Graph and tables Graph 1 : mports of pearls, precious metals, precious and semi-precious stones from I Madagascar (US$ Million) 14 Graph 2 : Contribution of large-scale mining to GDP sensitivity to nickel price 21 Graph 3 :  Gross Domestic Product by sector in Madagascar and forecast contribution of mining in 2025 (US$ Million) 21 Graph 4 :  Gross Domestic Product by sector in Madagascar and the contribution of mining (US$ million; Scenario 3) 22 Graph 5 :  Total exports and mining exports in Madagascar (US$ million – current – FOB) 23 Graphe 6 : Foreign Investment in Madagascar (US$ million) 24 Graph 8:  Total royalties from large scale mining (US$ million) 30 Graph 9 :  Estimated Total Operating Cost, by Import and Direct Domestic Operating Cost (US$ Million) 38 Graphe 10 : Total direct, indirect and linked employment by year mining activities at full capacity 47 Table 1 : Mining Scenarios in Madagascar production based on Phases of Mining Development (‘000 tonnes) 18 Table 2 : Total monetary flows of large scale mining at full capacity (US$ Million) 20 Table 3 :  Annual exports of large scale mining at full capacity (US$ million – current – FOB) 22 Table 4 : Total fiscal income from large scale mining (US$ million) 30 Table 5 : Examples of complementary infrastructure: Ambatovy 40 Table 6 : Examples of complementary infrastructure: QMM 41 Table7 : Direct employment by scenario (At full capacity) 46 ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR |5 Contents Executive Summary 6 Introduction 10 SECTION 1 : Mining Development in Madagascar 13 History of mining 14 Modelling the future contribution of mining 17 Production forecasts for mining scenarios in Madagascar 18 SECTION 2 : Macroeconomic Impact 19 Key Findings 20 Recommendations 25 SECTION 3 : Fiscal Contribution 27 Modelling of fiscal income 28 Key Findings 28 Recommendations 32 SECTION 4 : Local procurement and economic linkages 35 Key Findings 36 Recommendations 40 SECTION 5 : Employment 43 Key Findings 44 Recommendations 47 * Technical Annex - available online : www.worldbank.org/madagascar 6| ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Executive Summary The contribution of mining used to be seen This report, the result of a 2-year research essentially through taxes and royalties; it project, attempts to improve that information tends to be viewed now in a more integrated and to structure the debate around the long- manner. Fiscal revenues continue to remain one of term economic impact of industrial mining. the biggest questions when it comes to assessing The objectives of this research were to assess the benefits of mining. However, Governments are the fiscal and non-fiscal contribution of mining to increasingly exploring ways in which mines can Madagascar economy, and by so doing to reinforce become more closely integrated with local economies the capacities of main stakeholders to prepare for the via local purchasing and hiring and/or synergies with related challenges and opportunities. Its scope was infrastructure and community development. This shift deliberately focused on large-scale mining, excluding in policy approach is described in the African Union’s i) mining exploration; ii) artisanal and small-scale “African Mining Vision 2050”, which outlines a new mining; and iii) quarrying. This explains why the reader resource-based industrialisation and development may notice important differences between historical strategy for Africa. Such policy documents highlight data and information published by EITI in Madagascar, the potential for non-fiscal contributions of mining which also includes petroleum exploration activities. if sufficient “linkages” – a word used to characterize The research focused on economic spillovers as economic activities and socio-economic impacts a first step. Admittedly, additional research on the catalysed and/or boosted by mining operations – can environmental and social impacts of industrial mining be developed. over time should complement this work to provide for a more complete picture of the contribution of the In Madagascar, where two world-class mining sector towards sustainable development. operations have recently been launched, there is a need to document and share information A lot of assumptions need to be made in order to be about those developments and their potential able to envisage future mining developments and impacts. Large-scale mining can be a shock both at their fiscal and non-fiscal contributions. The research the national and local levels. In countries where there is based on a review of available information, discussions is limited experience of such industry, many questions with stakeholders including private companies who shared are raised about the costs and benefits generated information when possible, as well as economic modelling for the country. Madagascar is no exception: high for future potential mines. Important assumptions are expectations or strong suspicions in some regions made to forecast both the evolution of Madagascar’s have already led to disappointment, grievance and economy (growth, fiscal receipts, exports etc.), and blockades. Despite communication efforts from the the mining sector’s development (commodity prices, Government and private sector, as well as multi- production, new investments etc.). The reader needs to stakeholder initiatives like the Extractive Industry bear in mind that, given the number of assumptions, Transparency Initiative (EITI), there is a clear need the results are mostly illustrative when it comes to for more information and understanding of the real future mines. Most of the technical details and model and potential contribution of mining to the local and assumptions or justifications are listed in the Technical national economy in the near and long run. Annex that accompanies the present Research Summary, and which can be found online. EXECUTIVE SUMMARY ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR |7 At this point in time, there is no certainty that the opportunities of the next generation of mining new large-scale mines will be constructed in the investment. However, any revision should be based coming five years. It is important to emphasize that on detailed analysis as well as proper modeling, and the “pipeline” of mining projects in Madagascar needs respect existing stability clauses to maintain investor to be developped before one can really ascertain which confidence. of the known deposits will reach the exploitation stage. The research built 3 scenarios for the future of large- The non-fiscal effects of large-scale mining scale mining in Madagascar, which may or may not will also be significant, especially at the local materialise depending on domestic and international and regional levels. According to the model, local factors. For instance, scenarios 2 and 3 rely on the procurement could increase from around US$ 200- development of another ilmenite mine, as well as 300 million per year with the existing mines to close a coal mine and an iron-ore mine. This will greatly to a billion dollars per year under the most favourable depend on: i) international markets and commodity scenario. In terms of employment, although mining prices; and ii) results of (pre)feasibility studies. In any is not considered a labour intensive sector, more case, the basic scenario based on QMM, Ambatovy and than 12,500 people are directly employed by mining Kroama mines is the most probable for the coming companies in Madagascar (representing 9 percent years. Attracting investment in exploration will be a of the total workforce in industry, and 2 percent of condition for additional mining development. national employment). In the future, the potential final employment effect of mining (direct, indirect In the current economical context, industrial and linked) could reach more than 65,000 people mining can have very significant macroeconomic under the most optimistic scenario. Mining projects, impacts. According to the findings, industrial mining like QMM and Ambatovy, may also help catalyse could account between 4 and 14 percent of GDP the development of various infrastructures: ports, and dominate Madagascar’s exports by 2025. It roads, bridges, social services, and water distribution should provide a steady fiscal income representing systems. However, optimizing economic linkages up to 10 percent of the country’s fiscal income. Large and complying with good practice and international investments in mining provided a very timely support standards require engagement by both Government to the economy in a time of crisis, but more modest and private sector, in partnership with civil society. investments in productive operations could result in For instance large-scale companies in Madagascar better macroeconomic effects in the long run. The have established significant programs to develop main recommendations focus on fiscal aspects as local procurement, with promising results on the the research shows: i) royalty will remain the principal local economy. They have also provided opportunities source of revenues generated by mining in the for training and skills development and prioritised medium term; ii) corporate tax could change the order the employment of Malagasy citizens. However, of magnitude of mining revenues, but only once new Government should prioritise such local content and projects reach profitability; and iii) state participation procurement in policies and/or regulations. Rather is not expected to generate significant dividends. For than adopting highly prescriptive or punitive measures, those reasons, Madagascar needs to consider whether it should seek to encourage and reward best practice the current mining fiscal regimes are suited to seize and processes for multi-stakeholder planning and EXECUTIVE SUMMARY 8| ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR training (local, regional and national). The Chamber as demonstrated through initiatives like Wealth of Mines, Ministry of Mines and Petroleum, Planning, Accounting and the Valuation of Ecosystem Services Employment and Education, and regional Government (WAVES), mining decreases the national mineral should further dialogue on key areas of local content assets. Mining also has environmental and social and procurement and their relationship with human impacts that can damage biodiversity and/or affect development. communities. It is essential to ensure that the right policies and/or practices are promoted to leverage A whole host of benefits can stem from mining the positive aspects. But it is at least as important investments but Government, companies, that the proper capacities are in place to monitor as well as communities each have a role in the operations and manage the sector. The reflection managing the prospective costs. This research on the institutional framework as well as capacity focused on the potential benefits but this is not strengthening strategies is in that sense essential. to underestimate the potential costs. Typically, EXECUTIVE SUMMARY IBRD 33439R1 45°E 50°E Antsiranana Mayotte MADAGASCAR (France) Ambilobe Vohimarina Ambanja DIANA l e Maromokotro n (2,876 m) n M assif Sambava a Ts a r a t a n a n a SAVA h Bealanana C Antalaha Antsohihy 15°S e 15°S u iq Sofi Befandriana a Maroantsetra b Mahajanga m SOFIA a Mandritsara z Mampikony o Soalala em B M ar avo iv Mananara va BOÉNY Mahavavy M a ANALANJIROFO o ol ah Cliff of Ang g ajamba Besalampy n Andilamena Bo Maevatanana Soanierana-Ivongo BETSIBOKA ALAOTRA of MELAKY MANGORO Fenoarivo-Atsinanana ff Kandreho Andriamena Ma Lake Cli na mb B Alaotra aho Ambatondrazaka ets iboka Maintirano Ankazobe Andilanatoby Toamasina ANALAMANGA BONGOLAVA ATSINANANA Antsalova Tsiroanomandidy ITASY ANTANANARIVO Miarinarivo Tsiafajovona Moramanga INDIAN (2,642 m) Vatomandry Antanifotsy OCEAN ata Miandrivazo Belo Tsiribihina VAKINANKARATRA Mang kar oro Tsiribihina Man ia Antsirabe Mahanoro An 20°S 20°S Morondava Malaimbandy AMORON’I MANIA Ambatofinan- Ambositra MENABE drahana Varika Ambohimahasoa Mandabe HAUTE-MATSIATRA Mananjary Manja Fianarantsoa Beroroha VATOVAVY- Morombe goky Man FITOVINANY 0 40 80 120 160 200 Kilometers Ankazoabo Pic Boby Manakara Ihosy (2,658 m) ATSIMO- ANDREFANA IHOROMBE 0 40 80 120 Miles a Ma Farafangana 50°E an na en Sakaraha na er ra F i h Betroka Toliara Betioky Onilahy Midongy- Atsimo ATSIMO- ATSINANANA MADAGASCAR SELECTED CITIES AND TOWNS Tsivory Berakete REGION CAPITALS re This map was produced by ra the Map Design Unit of The NATIONAL CAPITAL Mand World Bank. The boundaries, colors, denominations and Ampanihy ANOSY any other information shown dr lat eau RIVERS roy P a on this map do not imply, on an ar A n d Amboasary the part of The World Bank 25°S MAIN ROADS Androka en Tolanaro Group, any judgment on the Beloha Ambovombe M legal status of any territory, or any endorsement or ANDROY RAILROADS acceptance of such boundaries. REGION BOUNDARIES 45°E APRIL 2013 10 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Introduction Country background Mining at a glance Madagascar remains one of the world’s least While Madagascar has a long history of small-scale developed countries, ranking 155 out of 187 on the mining of gold and precious stones, the sector has Human Development Index1. It is estimated that, entered a new era with the launch of two large- 92.8 percent of the population lives on less than scale mining projects in the 2000s. These include USD 2 PPP per capita per day (2010). Madagascar’s Ambatovy, the largest private investment ever development has been hindered by repeated political witnessed on the island, having invested a total crises, occurring every decade on average since the of US$ 7.2 billion as of 2013. The second projet, country’s independence in 1960. The latest crisis QMM, indicates having invested US$ 930 million in occurred following the unconstitutional change of Madagascar by 2008. A number of other indicators regime in 2009, and lasted close to five years. It left provide evidence of the magnitude of the mining the economy severely crippled and led to a sharp rise sector in Madagascar: in poverty levels. In 2012, income per capita had fallen  The contribution of the mining sector to the to its 2003 level (around USD 400). Key business Madagascar’s GDP is estimated in 2013 at 2.12 indicators have experienced a downward trend, with percent (INSTAT). the decline for example of the country’s ease of doing business ranking from 148 out of 189 countries in  The growth of extractive industries was far grea- 2014, down to 163 in 20152.The return to an elected ter than that of the primary, secondary or tertiary government in 2014 has raised hopes of an economic sector between 2000 and 2012. rebound and a return to the development path.  In 2013, 30 percent of exports were minerals. Madagascar’s GDP is estimated at US$ 11.8 billion (2013)3. The country’s economy is overwhelmingly Should this trend be maintained, Madagascar will soon dominated by informal activities: according to «ILO», become a resource-rich country as defined by the persons in informal employment represented 73.6 IMF, i.e. a country in which, over the course of several percent of non-agricultural employment in 2005. The years, exhaustible natural resources account for either Transparency International index ranks Madagascar at at least 20 percent of total exports, or 20 percent of 133 out of 174 countries in 20144. natural resource revenues5. However, mining is a very cyclical sector and both international and domestic factors will affect the future of mining in Madagascar, including the country’s capacity to govern and monitor the sector. 1 United Nations Development Programme (UNDP) 2014, Human Development Report. 2 IFC & World Bank 2013 & 2014, Doing Business 2014 & 2015, 11th and 12th editions. 3 IMF 2014, World Economic Outlook database. 5 IMF 2014, Macroeconomic Policy Frameworks for resource-rich 4 Transparency International 2013, Corruption Perception Index. developing countries. INTRODUCTION ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 11 How do governance issues affect mining development? Governance of the mining sector will largely determine whether the sector will either bring about sustainable development in Madagascar, or further destabilise an already fragile economy. The island’s underground wealth constitutes a non-renewable asset that requires cautious and effective management by Government. In some countries, like Chile or Botswana, the skillfull management of the mining sector has translated mining into a comparative advantage. If the mining sector is riddled with vested interests, opacity, non-compliance with rule of law and un- regulated environmental and social impacts, it could lead to the degradation of the country’s political and economic conditions. Conversely, complete transparency, effective Government and civil society oversight, with a view to use mining wealth to improve the lives of the Malagasy people in the short and long term, will ensure the sector can become a real catalyst for development. About this research This report is the result of a research project on It is aimed for a wide audience of sector stakeholders the economic contributions of industrial mining in or other parties interested in learning more about what Madagascar. This research was an initiative of the to expect with regards to the economic impact of World Bank in partnership with the Ministry of Mines large-scale mining. and Petroleum (formerly the Ministry of Mines and Ministry of Strategic Resources), the Chamber of The research was conducted by a multidisciplinary Mines, and GIZ. It was financed by the South African group of local and international professionals. The Extractive Industry, Energy and Transport Trust Fund methods included field research within Madagascar, (SAFETE), and implemented by the Centre for Social visits to mining sites; analysis of primary and Responsibility in Mining (CSRM), at the University of secondary data; economic modelling; case study Queensland, Australia. The Australian Government’s analyses; semi-structured interviews; and workshops International Mining for Development Centre (IM4DC) with local stakeholders. also provided support for the last mission and training. The results are presented in the form of “key findings” The main objectives were to assess and anticipate the and “recommendations” in an attempt to make the fiscal and non-fiscal contributions of large-scale mining reading easy. Most of the technical details and model in Madagascar, and to provide recommendations about assumptions or justifications are listed in the Technical how Madagascar can maximise the potential benefits, Annex that accompanies the present Research and ultimately leverage the mining sector to improve Summary and which can be found online. the quality of life of the Malagasy people. INTRODUCTION 12 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Scope The research focused on economic contributions as a first step. Additional research on environmental and social impacts of industrial mining over time should complement this work to provide for a more complete picture of the contribution of the sector towards sustainable development. In addition, the research focused on large-scale mining, excluding: i) mining exploration; ii) artisanal and small- scale mining; and iii) quarrying. Petroleum activities (exploration essentially) are also precluded from the research. This would explain why the reader may notice important differences between historical data and information published by the Extractive Industry Transparency Initiative (EITI) in Madagascar. Caveat The research is based on economic modelling. It is built on possible scenarios for the future of large-scale mining in Madagascar, which may or not materialise depending on domestic and international factors. The reader needs to bear in mind that, given the number of assumptions, the results are mostly illustrative when it comes to future mines. INTRODUCTION Section 1 Mining Development in Madagascar 14 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR History of mining Graph1 : Imports of pearls, precious metals, precious and semi-precious stones from Madagascar (US$ Million). Artisanal and small-scale mining 300 Until recently, mining in Madagascar predominantly 250 amounted to artisanal and small-scale extraction of gold, precious and semi-precious stones such 200 as sapphire, ruby, aquamarine, tourmaline, topaz, 150 amethyst and emerald. 100 At the end of the 1990s, a rush for sapphire 50 and ruby led to the sudden development of new mining towns at Ilakaka and Sakaraha 0 2006,5 2007 2007,5 2008 2008,5 2009 2009,5 2010 2010,5 2011 2011,5 and turned Madagascar into one of the world’s World United Arab Emirates China USA largest producers of these coloured gemstones. The artisanal extraction of alluvial gold is also a livelihood activity in many parts of the country, with - Despite significant contributions to the Madagascar’s at times - several tons of gold produced per year. economy and local livelihoods, artisanal mining has also been associated with considerable adverse Gold exports dramatically increased since 2008, impacts on health, safety, social harmony, the coinciding with the rise in gold price (see graph 1). environment, taxation revenue, as well as corruption 2012 is considered to be one of the peak-years and illicit trade. for gold and gemstone production in Madagascar: official gold production was multiplied by 10; and The present research focuses on large-scale mining, ruby production by an estimated factor of 4.4, yet also recognises that the development of large- compared with 2008. However, only a fraction of the scale mining should not shift attention away from gold produced and exported are reported and such initiatives aimed at formalising the artisanal and statistics paint an incomplete picture of what remains small-scale mining sector, as well as the government’s an essentially informal sector. The significance of capacity to regulate the sector. small-scale mining is better understood looking at data on imports from Madagascar: in 2011, almost US$ 250 million worth of gold and stones were imported by Large-scale mining foreign countries from Madagascar, mainly the United Arab Emirates (Dubai). Until the 2000s, chromite was the only commodity exploited industrially in Madagascar. Chromium is The artisanal mining sector is one of the largest an important commodity for the production of steel. providers of employment in Madagascar, with an Chromite production commenced in 1968 with the estimated 500,000 full-time and seasonal artisanal COMINA company, which was nationalised in 1975 and miners taking part in gold and precious stones’ is now known as Kraomita Malagasy or Kraoma SA. extraction. This is less than the agricultural sector, but With this medium-sized mining company, Madagascar more than the textile and clothing industry6. has long been the 10th world producer of chromium, although way behind South Africa, the number one producer. 6 United States Geological Service (USGS) 2014, Minerals Yearbook 2012, Madagascar. S E C T I O N 1 : M I N I N G D E V E LO P M E N T I N M A DAGA S C A R ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 15 Large-scale mining markedly increased in the years Other prospective large-scale mining 2005-2012 with the development of two large projects industrial mining projects that are now in their exploitation phase: The international crisis and Madagascar’s 2009-2013  QIT Madagascar Minerals (QMM) is an ilme- political transition have slowed mining exploration nite, rutile and zircon mine in Tolagnaro, in the and degraded the country’s attractiveness as an South East of Madagascar, which was launched investment destination. In light of these factors and in 2009. The entity is 80 percent owned by the history of mining development in Madagascar, it Anglo-Australian mining giant Rio Tinto and 20 is likely that QMM, Ambatovy and Kraoma will remain percent by the State. The site includes a mine, a the only large-scale mining projects in production in separation floating plant and port facilities. The Madagascar within the next 5 to 10 years. extracted ilmenite is exported then enriched in the metallurgical complex of Sorel-Tracy of Rio However, some deposits have been significantly Tinto in Canada. The total investment amounts explored and could be developed in the medium-term. to US$ 1.1 billion, including US$ 930 million in It is impossible to predict which ones will become Madagascar as of 2008. The potential full capa- economically viable in the years to come, but the city at QMM is 496,000 ton per year of ilmenite following have been the focus of much attention: and 26,710 ton per year of zirsill.  Ilmenite extraction on the East Coast and around Toliara. Madagascar’s coastline is rich  The Ambatovy Project produces nickel, cobalt in mineral sands. The south-western coast near and sulphate of ammonia (as a refining by- Toliara has been explored by World Titanium product), from a mine near Moramanga, and a Resources Ltd. The deposit could contain around processing plant at Toamasina, in the East of a billion ton at 4.4 percent of ilmenite at Ranobe. Madagascar. The project was launched at the end Toliara Sands has an Exploitation Licence (EL), of 2012 by a consortium of Sherritt International and at the end of 2013 an Environmental Impact Corporation of Canada (40 percent), Sumitomo Study (EIS) was under way (the approval of Corp. of Japan (27.5 percent), Korea Resources which is required before construction can begin). Corp. of the Republic of Korea (27.5 percent), and Depending on the results of the feasibility study, SNC-Lavalin Inc. of Canada (5 percent). The ore and according to preliminary studies, the poten- slurry is conveyed to the processing plant in Toa- tial mine could produce 407,000 tons per year masina through a 220 km long pipeline. Product of ilmenite and 44,000 tons per year of zircon is shipped to international markets from the port concentrate7. The company has declared that an of Toamasina. With an accumulated investment initial investment of US $216 million would allow of $7.2 billion as of 2013, it has a capacity of the project to reach full production capacity in 60,000 tons per year of refined nickel, and 2023. On the East Coast, Mainland Mining, a 5,600 tons per year of cobalt. Chinese company, already extracts ilmenite on a small scale around Toamasina. 7 World Titanium Resources 2014, Building a Tier One Mineral Sands Company. Presentation to GMP Mining Jamboree. SECTION 1 : MINING D E V E LO P M E N T I N M A DAGA S C A R 16 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR  Coal extraction at Sakoa. Several companies Quarrying explore coal deposits in this region: MCM-SA Sakoa, PAM-SAKOA and Lemur Resources. Initial Madagascar produces a range of industrial minerals estimates vary between 1,1 and 1,2 billion tons and other ornamental stones: graphite, gypsum, of coal. If the feasibility studies confirm the kaolin, mica, agate, quartz, labradorite, salt, granite, initial estimations, coal mines could potential be limestone, marble and cement. Holcim Madagascar developed in the Greater Sakoa Basin, with 5 to SA, the cement producing company, was the second 10 million tons per year capacity8. largest mining contributor of Government payments in 2011, according to the Extractive Industries  Iron ore extraction at Soalala. According Transparency Initiative10. The company employs 280 to initial estimations, this prospective deposit people and consists of two production centers: an contains more than 800 million tons of reserves integrated production capacity of 150,000 tons per available for exploitation9. Wuhan Iron and Steel year in Antsirabe (Ibity) and a bagging and silo facility CO (WISCO), China’s third largest steelmaker, with a capacity of 180,000 tons per year located started exploration in 2011. Limited information in Toamasina. Another company, Madagascar Long is available about this project and despite the Cimenterie (Maloci) of China also owns a cement plant ambitious plans, to date, the project has not with 360,000 ton per year capacity. advanced beyond exploration. Remark on Petroleum Other mineral deposits have some potential for development, including: Production of oil has started on a pilot basis at the  The gold of Betsiaka, Maevatanana, and Dabola- Tsimiroro site but exploration is expected to expand va, where mining permits were issued to several significantly. The company Madagascar Oil is the most operators in 2008 with a view to transforming advanced on-shore with a pilot of production by vapor artisanal exploitation into industrial production. injection in Tsimiroro which demonstrated an average of 465 barrels a day (March 2014). The company has  The bauxite of Manantenina, where several com- also partnered with Total for the exploration of the panies, including Rio Tinto-Alcan, hold prospec- neighboring field of Bemolanga. Oil potential off-shore ting permits. is not proven but the proximity to fields in Mozambique gives hope for discoveries in Madagascar.  The rare earths of Ampasindava and Fotadrevo. Occasional price peaks have renewed interest for rare earths and several projects are already active. 8 United States Geological Service (USGS) 2014, Minerals Yearbook 2012, Madagascar. 9 Madagascar Ministry of Strategic Resources (formerly Ministry of Mi- nes) 2014. Fiche relative au projet de la société MADAGASCAR WISCO 10 Ernst and Young, 2013. EITI Madagascar: Rapport de réconciliation GUANGXIN KAM WAH RESSOURCES S.A.U. (unpublished). (version preliminaire), Exercice 2011. September. S E C T I O N 1 : M I N I N G D E V E LO P M E N T I N M A DAGA S C A R ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 17 Modelling the future contribution of mining Mining scenarios in Madagascar A sensitivity analysis was undertaken to model the impact of variations in production and commodity Three possible scenarios for the future of large-scale price. mining in Madagascar were developed to forecast the potential impacts of the sector for the 2014- Phases of mining development 2035 period. Scenarios were constructed based on the history of mining in Madagascar, a prospective The scenario analysis has considered an estimation of analysis of operational and planned mining projects in the duration (in years) of key planning and construction various stages of development, and consultation with phases before projects operate at full capacity. These key stakeholders. phases include: 1. Feasibility studies Scenario 1: This scenario considers only the existing 2. Financial planning large-scale mining projects: Ambatovy, QMM and 3. Legal approval and permits Kraoma. 4. Engineering and procurement 5. Construction Scenario 2: Scenario two consists of scenario one 6. Start up projects, and the development of two additional mining ventures: 1) another ilmenite mine based on the Factors that can accelerate or reduce Toliara Sands project, and 2) one coal mine based on a the speed of mining development in combination of projects in the Sakoa Region. Madagascar Scenario 3: Scenario three comprises scenario two Several interrelated factors could accelerate or reduce plus the development of an iron mine based on the the speed of mining development in Madagascar and Soalala Project (WISCO). the likelihood of new projects materialising. These are:  1) Technical aspects. Including: resource esti- A simplified cash-flow model was developed for mation; geological analysis; quality of resources; individual mining projects based on empirical data, technology of extraction; mining and processing; estimations and assumptions of the project cost and local capacity to provide goods, services and structure; actual and forecasted production; market labour. conditions and prices; and an analysis of Madagascar’s mining fiscal regime. The cash-flow models for each  2) Capacity to develop complementary in- individual project were then aggregated to estimate frastructure. Including: roads; ports; industrial the monetary effect of the large-scale mining sector in facilities; or energy infrastructure. Madagascar, including national costs, salaries, taxation and royalties. Royalties are included in the analysis  3) International market conditions. Including: acknowledging that these are payments for inputs commodity prices; cost of production; and cost owned by the state. The final component of the model of energy. uses an analysis of the projected macroeconomic conditions in Madagascar to determine the impact  4) Financial structure. Including: capacity of of large-scale mining development on key economic the companies to raise capital; credit structure; variables, including exports, GDP, employment, fiscal financial covenants; and financial risk analysis. revenues, GDP per capita and fiscal revenue per capita. SECTION 1 : MINING D E V E LO P M E N T I N M A DAGA S C A R 18 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR  5) Management of environmental and social im- port for development; the presence of, and ability pacts. Including: proximity to sensitive environ- to enforce, regulation; and political stability. ments; engagement with civil society and local communities; and the level of public support or  7) Technical capacity of the mining authority. concern about the project. Including: the knowledge and resources to facili- tate, regulate and oversee mining development.  6) Political and legal context. Including: the role of the state of Madagascar; level of political sup- Production forecasts for mining scenarios in Madagascar Analysis of the three mining development scenarios Project transition from one stage of development in Madagascar indicates that the projects included to another is not an automatic process. It will take a under scenario two and three are not likely to reach significant effort on the part of government and other construction phase before 2019-2020 (see table 1 relevant actors. below). Full capacity is anticipated by 2023-24 under scenario two, and full production under scenario three is not anticipated before 2025. Table 1 : Mining Scenarios in Madagascar Production based on Phases of Mining Development (‘000 tonnes) Commodity Projects 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Scenario 1 Chromium Kraoma 141 253 256 183 201 130 150 150 150 150 150 150  150 150 0 0 0 Nickel Ambatovy 5.7 25 37 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 Cobalt Ambatovy 0.5 2 2.7 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 Ilmenite QMM 160 287 470 562  562 562 475 396 480 496 496 496 496 496 496 496 496 496 496 496 496 496 496 496 496 496 496 Zirsill QMM 5.3 12.6 17  30  30 30 24 23 24 26 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 27 Scenario 2 (additional projects) Coal Sakoa                               5,000  5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 Ilmenite Toliara                             407  407 407  407 407 407 407 407 407 407 407 407 407 Zircon Toliara                             44  44 44 44 44 44 44 44 44 44 44 44 44 Scenario 3 (additional projects) Iron Ore WISCO                                 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 Notes Feasibility Studies Technical, economic and financial evaluation Financial Structure, Legal Approval and Capital structure, lenders, shareholder structure, Environmental Impact Assessment, permits, agreements Engineering and Procurement planning, programming, estimation , design, purchasing Construction Including construction of mine facilities, pre-stripping, complementary infrastructure Start up First period of production phase Production at full capacity Two years after start up S E C T I O N 1 : M I N I N G D E V E LO P M E N T I N M A DAGA S C A R Section 2 Macroeconomic Impact 20 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Large scale mining is projected to have a growing macroeconomic impact in Madagascar, with increased monetary flows (salaries, domestic expenditure and fiscal income), and a rising contribution to GDP and exports. Key Findings 1 - Monetary flows are dominated by in the last seven years of the analysed time period domestic expenditure (2028 to 2035). The fiscal contribution is discussed further in section three of this report. The large scale mining projects under analysis have contributed and will continue to contribute significant The final impact in terms of monetary flows will depend monetary flows to the economy through domestic on the number of companies operating in Madagascar expenditure, salaries and fiscal contribution. Monetary (scenarios 1, 2 or 3), the level of production, and flows are expected to increase as the three main commodity prices. International evolution of mining projects reach full capacity and new ones commodity prices could impact fiscal contributions enter into production. The table below illustrates those (potentially reducing net profit and consequently the monetary flows based on the assumptions listed in level of corporate tax) and reduce salaries and national the Technical Annex. It shows domestic expenditure procurement (due to the relatively fixed cost structure dominating this flow, and fiscal contributions of mining). increasing in terms of percentage of total contributions Table 2 : Total monetary flows of large scale mining at full capacity (US$ Million) 2012 2015 2025 2035 Scenario Scenario Scenarios Scenarios % % % %   S1 S1 S1 S2 S3 S1 S2 S3 Salaries 24 19% 99 22% 96 128 198 16.4% 96 128 198 13% Domestic 84 67% 318 69% 310 469 924 76.4% 310 469 924 62% Expenditure (1) Fiscal 18 14% 43 9% 40 52 88 7.2% 38 89 378 25% contribution (2) Total monetary 126 100% 460 100% 446 649 1,210 100% 444 686 1,500 100% flows Note: The scenarios include the following mining activities: Scenario 1: QMM, Ambatovy and Kroama Scenario 2: S1 + Toliara Sands and Sakoa Region Scenario 3: S2 + WISCO Domestic procurement includes the potential expenditure at local or national level during operational phases. Fiscal contribution includes: royalties, corporate taxes, withholding taxes on dividends, customs duties and import taxes, professional taxes, non-refundable VAT, foreign transfer taxes, and minimum corporate taxes. This fiscal contribution does not include indirect effects of taxes and personal taxes Section 2 : M acroeconomic I mpact ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 21 2 – Mining could account for 4 to 14 salaries and local procurement – could amount to US$ percent of GDP by 2025. 159 million in 2015 and US$ 462 million each year from 2025 to 2035. This means that for each GDP Large scale mining development in Madagascar is dollar directly generated by mining, mining related expected to have a significant impact on the national activities would indirectly generate US$ 0.29 in 2015 gross domestic product (GDP) - i.e. the country’s and US$ 0.24 each year from 2025 to 2035. capacity to generate added value, and on future opportunities for development. Comparison with other sectors offers some perspective of large scale mining’s significant Mining accounted for only 1 percent of total GDP contribution to GDP in Madagascar: by 2015, total in 2012. But by 2025, mining could amount to 4 mining GDP is expected to match the rest of industry percent of GDP under scenario 1 and 14 percent under GDP, half of agriculture GDP and a third of services scenario 3. This contribution is evidently susceptible to GDP. (see graph 3 and 4). key factors like nickel price: as shown in the graph 2, a 10 percent increase in Ni price results in the model in Mining contribution to GDP consists of large scale one more percent of contribution to GDP. mining investments’ added value and productivity in Madagascar over the study period. While this The model assumes Madagascar maintains the contribution is relatively stable given the execution economic trend of the last five years, and increases of planned investments and productivity, it does not its GDP – excluding mining – from US$ 10 billion in automatically result in economic development and 2012 to US$ 11.8 billion in 2015 and US$ 16.5 billion improved livelihoods. It should rather be perceived as in 2025. It calculates that mining development could an opportunity, which could be translated into human generate a direct mining GDP of US$ 554 million in development given the right mechanisms for the 2015 and US$ 1,89 billion each year from 2025 to generation, management and distribution of benefits at 2035. The model estimates that indirect GDP – the the local level. added value generated in other sectors from mining Graph 2 : Contribution of large-scale Graph 3 : Gross Domestic Product by sector in Madagascar mining to GDP sensitivity to nickel price and forecast contribution of mining in 2025 (US$ Million) 16.0% 7500 6 700 14.0% 12.0% 5 300 10.0% 5000 8.0% 2, 360 6.0% 2500 2 200 4.0% 462 2.0% 1 898 0.0% 0 6 7 8 9 10 11 Primary Secondary Tertiary Mining GDP Ni price (USD/lb) 2025 2025 2025 S1 2025 S2 2025 S3 S ection 2: M acroeconomic Impact 22 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Graph 4 : Gross Domestic Product by sector in Madagascar and the contribution of mining (US$ million; Scenario 3) Estimation of Potential Growth of Madagascar 17 500 Total GDP with mining = 16,560 15 000 14% Total GDP (w/o mining) = 14,200 12 500 6% 1% 10 000 55% 50% 41% 7 500 GDP without mining 13% 5 000 15% 16% Services (tertiary) 2 500 29% 29% 32% Industry (secondary) Agriculture (primary) 0 Mining (secondary) 1990 1995 2000 2005 2010 2011 2012 2015 2020 2021 2022 2023 2024 2025 2013 (e) 3 – Mining could dominate the increase in exports will make a much smaller Madagascar exports by 2025 contribution to improving Madagascar’s balance of payments, as they will coincide with corresponding The large scale mining projects under analysis financial outflows: large mining investors will operating at full capacity could export US$ 1,14 billion retain most of the export earnings abroad (outside in 2015, and US$ 3,69 billion each year from 2025 Madagascar) inter alia to repay their investors and to 2035. As shown in the table 3 and graph 5 below, creditors. The export earnings will be brought back to mining exports are expected to account for 54 percent Madagascar essentially to fund operational costs. of total exports by 2025, a significant increase from 30 percent in 2015 and 8 percent in 2012. However, Table 3 : Annual exports of large scale mining at full capacity (US$ million – current – FOB) 2012 2015 2025 Scenario Scenario Scenarios   S1 S1 S1 S2 S3 Export 214 1,139 1,270 1,876 3,696 Section 2 : M acroeconomic I mpact ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 23 Graph 5 : Total exports and mining exports in Madagascar (US$ million – current – FOB) Estimation of exports growth 8 000 7 000 Total Export including mining = 6,846 6 000 5 000 4 000 54% Total Export (w/o mining) 3 000 30% = 3,150 8% 2 000 92% 70% 46% Total Export Madagascar (without mining) 1 000 Mining Export 0 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (e) 2015 2020 (e) 2021 2022 2023 2024 2025 S ection 2: M acroeconomic Impact 24 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR 4 – Large investments in mining This rare investment peak may have led to shocks for provided critical support to the local stakeholders, especially in rural areas, but also economy in a time of crisis, but provided a strong and timely boost to the national more modest investments could economy at a time of economic and political crisis. result in better macroeconomic effects in the long run. However, given the existing fiscal regime, high investments could also result in reduced fiscal Large scale mining companies, mainly Ambatovy and revenues because they are deducted from income QMM, have invested around US$ 8.13 billion between tax (depreciation in loss-making years can be carried 2005 and 2013. This is a historical inflection point for forward indefinitely). By assuming lower levels of Madagascar’s economy: in previous periods, foreign capital investment for future mines under scenarios investment across sectors had not exceeded US$ 256 2 and 3, the research indicates a more significant million for every five years between 1970 and 2004 contribution can be achieved through good production (see graph 6 below). Ambatovy and QMM accounted levels and limited investment. Needless to say, for 39 percent of total investment in-country between investment requirements for projects such as Tulear 2005 and 2009. Ambatovy’s significant contribution Sand and Wisco are based on early estimates, which extends to 2013, representing 65 percent of total are subject to a high level of uncertainty and will most investment between 2010 and 2013. likely be revised. Graphe 6 : Foreign Investment in Madagascar (US$ million) 10 000 9,267 9,267 9 000 8 000 8 000 7 000 7 000 65% Mining 65% Mining 6 000 6 000 5,523 5,523 5 000 5 000 39% Mining 4 000 39% Mining 4 000 3 000 3 000 2 000 1766 2 000 1766 1 000 1 000 256 52 78 109 256 217 0 10 33 0 52 78 109 217 0 10 33 0 1970-1974 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 2010-2013 2014-2023 2024-2035 1970-1974 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 2010-2013 2014-2023 2024-2035 Section 2 : M acroeconomic I mpact ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 25 Recommendations Enhance access to public Monitor key macroeconomic factors information related to mining As mining becomes an even more important sector Seeing as the economy is increasingly dependent from a macroeconomic perspective, the Government on mining, the Ministry of Mines and Petroleum of Madagascar, in particular the Ministry of Mines and the Ministry of Finance should closely monitor and Petroleum, should ensure that all data that macroeconomic factors of influence to the sector. At is key to understanding the impacts of mining the international level, monitoring commodity prices are disclosed and available in one single location (like nickel, which is very volatile) is undoubtedly key. (website). Data collection mechanisms need to be For minerals without a publicly available reference established, particularly in remote regions and for price (like ilmenite), it is essential to develop a deeper companies that do not rigorously report information knowledge of the market. At the national level, the to Government, the public and the market. Key areas Central Bank should closely monitor not only exports of information and responsibilities include: production but also export earnings. Investments in mining and exports; investment; taxes collected; employment; exploration are a key indication of sector vigour, and environmental impact studies, audited financial reflect the likelihood of new mines being developed. statements, policies, legislation. Mining investments in construction and production can be proportionally very high compared with the rest Ensure transparent governance and of the economy. They should be monitored closely as management of monetary flows they can have a great and timely contribution but can also reduce long term benefits. A lack of transparency, poor governance and mismanagement of monetary flows could fuel corruption, lead to the decline of state institutions, and result in a missed development opportunity. EITI, which has recently expanded its mandate from revenue- focused information to more contextual information, is a critical tool to counter such risks, and should be promoted and streamlined. The central and local governments should seek support from, and partner with, development organisations, but also continue to strengthen national leadership. This would ensure that development priorities are identified and monetary benefits from mining are effectively directed into focused social and economic development programs. S ection 2: M acroeconomic Impact Section 3 Fiscal Contribution 28 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Modelling of fiscal income It should be noted that while royalties are included under the term «fiscal income» in this study, as The analysis presented in this section is modelled previously mentioned they are in effect a payment for using estimations of the cost structure of large-scale the State’s ownership of mineral resources. mining companies; average realised ore prices for the companies currently in operation up until 2014; price The model does not include all mining and mineral forecasts for the 2015-2035 period based on different exploration companies operating in Madagascar (see forecasting methods, including World Bank forecasts; section one). A number of small companies excluded and the final or net effects of royalties and income from analysis (Mainland, PAM etc.) do make fiscal taxes, indirect taxes and direct payments (including contributions. The magnitude of their combined corporate tax, minimum corporate tax, withholding tax, contributions was calculated at around US$ 2 million professional tax, non-refundable VAT, foreign transfer in 2011. tax, customs duties, import tax, and direct payments associated with state participation). The Technical Annex that supplements this research summary provides details on the economic approach The model is based on the tax regime and legal applied to the study. framework for mining in force in 2014, as well as available information on corporate policies (accounting and investment policies such as depreciation, Key Findings fiscal discounts, and dividends), commodity prices, production levels and cost structure. Large scale mining in Madagascar has the potential to provide a steady fiscal income (tax and royalty The model was benchmarked against payment data payments) to the country because of the sector’s disclosed by the 2011 EITI report for Madagascar11. The capacity to generate long-term resources through benchmark analysis found that the model accounted royalties, corporate taxes and other payments. for the tax and royalty payments considered as fiscal Modelling has revealed that royalties will provide contributions. EITI data represents both tax and royalty the majority of fiscal contributions up until 2028. contributions, as well as payments (and taxes) which Corporate taxes only become significant in the later are not considered fiscal contributions in this study. years of the analysis due to fiscal incentives to Penalties, administration fees, employee personal encourage large-scale investment. income, employee pension fund contributions, environmental impact assessment evaluation fees, visa 1 – Large scale mining in and identity card fees, and other one-off payments are Madagascar should provide a steady not included in the present modelling but represent a fiscal income and could reach 11 substantial component of the payments to Government percent of the country’s fiscal in EITI data. Many of these payments are for services income. provided by Government or for contributions by Fiscal revenues from existing mines could employees, which should not be considered as mining increase from an average US$ 10 million per year sector fiscal contributions. However, the magnitude of today to around US$ 40 million per year under these payments indicates an indirect value in providing the model price assumptions. resources for services delivered by Government or resulting from the employee labour. 11 Ernst and Young, 2013. EITI Madagascar: Rapport de réconciliation, Exercice 2011. September. S EC T I O N 3 : F I SC A L CO N T R I B U T I O N ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 29 The large-scale mining projects currently in production 2 – Royalty will remain the principal (scenario 1) contributed to a total fiscal income of source of revenues generated by US$ 11.4 million in 2012 and in US$ 15.9 million in mining in the medium term. 2013 (see table 4). As explained in the introduction, these figures differ from the EITI results because they Whereas royalties will represent between 30 to 40 do not cover the same monetary flows. When both percent of mining fiscal revenues in the short run, this QMM and Ambatovy will operate at full capacity, those could exceed 70 percent once new mines develop. revenues could amount to US$ 40 million. Royalty, non-refundable VAT, minimum corporate tax and Royalty is the most emblematic “fiscal” instrument professional tax are the largest contributors to fiscal associated with mining: it is designed to compensate income from currently operating mines during the the exploitation of national mineral resources and it period of analysis. Nickel price fluctuations will directly is paid once production starts. The research shows impact sales that are not subject to long term offtake royalties as the predominant fiscal income between contracts at Ambatovy. Although QMM is part of an 2014 and 2027 for all scenarios. integrated company, ilmenite price variations are likely to affect production levels, either positively or negatively, and would therefore affect QMM royalties in At the local level, royalties will be even more the same proportions. critical. New mining projects could increase the According to the mining code, an important share contribution of mining from 1 to 11 percent of of total royalties (70 percent) is managed by local national fiscal income. entities, with the remaining 30 percent managed Based on the average fiscal revenue as a percentage of by the central Government (see graph 7 below). The GDP for 2008-2010, the fiscal revenue of Madagascar 70 percent are further apportioned to autonomous is estimated at 14 percent of GDP each year for the provinces (10 percent), regions (30 percent), and 2011-2035 period. This assumption is influenced by communes (60 percent). For example, local entities how fiscal revenues other than mining change over time. received US$ 2.4 million in royalties from currently operating projects in 2012 (Scenario 1), of which The increase will depend on additional companies in US$ 1.4 million is allocated to communes (see figure Scenario 2 and 3 and in particular their payments in below). When Scenario 1 projects are expected to terms of royalties, corporate taxes and withholding operate at full capacity in 2015, they are forecast to taxes on dividends. Under the model assumptions, generate US$ 10 million of royalties for local entities. overall government fiscal revenues would amount to Communes would receive a US$ 6 million share of this US$ 3,4 billion in 2035, with mining accounting for 11 total. percent of the total. Graphe 7 : Royalty distribution in Madagascar 10% Provinces Local Entities 70% Royalty 30% Region 1%-2% of sales Central Government 30% 60% Communes Note: Royalty rates are 2% for mining and 1% if there is value added contribution from local processing (under the LGIM). S EC T I O N 3 : F I SC A L CO N T R I B U T I O N 30 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Table 4 : Total fiscal income from large scale mining (US$ million) 2012 2015 2025 2035 S1 S2 S3 S1 S2 S3 S1 S2 S3 S1 S2 S3 Royalties 3,44 3,44 3,44 14,38 14,38 14,38 15,68 27,81 64,21 15,68 27,81 64,21 Corporate Taxes 2,90 2,90 2,90 2,22 2,22 2,22 0,00 0,00 0,00 0,00 18,31 212,04 (less ITC) Minimum 0,00 0,00 0,00 0,00 0,00 0,00 2,45 2,45 2,45 2,84 2,84 2,84 Corporate Taxes Withholding Taxes 0,73 0,73 0,73 0,00 0,00 0,00 0,00 0,00 0,00 0,00 20,81 78,92 on Dividends Non-refundable VAT 0,00 0,00 0,00 10,20 10,20 10,20 9,20 9,20 9,20 8,20 8,20 8,20 (food and mobile fuels) Professional Taxes 2,4 2,4 2,4 3,4 3,4 3,4 8,00 8,00 8,00 8,00 8,00 8,00 Customs Duties 0,0 0,0 0,0 1,8 1,8 1,8 1,8 1,80 1,80 1,00 1,00 1,00 and Import Taxes Foreign Transfer Taxes 2,00 2,00 2,00 2,40 2,40 2,40 2,40 2,40 2,40 2,40 2,40 2,40 Total Fiscal Income 11,48 11,48 11,48 34,40 34,40 34,40 39,53 51,66 88,06 38,12 89,37 377,61 Note: The scenarios include the following mining activities: Scenario 1: QMM, Ambatovy and Kroama Scenario 2: S1 + Toliara Sands and Sakoa Region Scenario 3: S2 + WISCO Given the challenging fiscal situation in Madagascar, 3 – Corporate tax could change capacity to develop new and tailored social programs the order of magnitude of mining has been significantly reduced at the local level. revenues once new projects reach Royalties managed by all the relevant entities could profitability. therefore have a significant impact on local public policies (especially in the provinces of Toamasina, Existing mining projects are not expected to generate a lot of corporate income tax. Toliara and Mahajanga). Ambatovy and QMM are not forecast to pay corporate tax above the threshold of minimum corporate tax (0.5 percent of income) during the period under analysis (2016-2035). This is largely due to the high level of investments of those two projects, as well as the S EC T I O N 3 : F I SC A L CO N T R I B U T I O N ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 31 Graph 8: Total royalties from large scale mining (US$ million) 64 64 60 45 36,2 36,2 28 30 11,85 12,1 12,1 15 14,4 15,68 15,7 15,7 3,4 0 2012 (SCENARIO 1) 2015 (SCENARIO 1) 2024 (SCENARIO 2) 2025 (SCENARIO 3) 2035 (SCENARIO 3) Ambatovy, QMM, Kraoma Toliara, Sakoa Region Wisco fiscal incentives associated with investments such under Scenario 1, they are forecast to generate more as depreciation, carry forward of accumulated losses, than 50 percent of fiscal income for Scenario 2 by and investment tax credits. The mines are expected 2035 and for Scenario 3 by 2028. By 2035 the to generate a greater degree of fiscal income after sector could generate a total of US$ 378 million under the period of analysis when fiscal incentives decline. Scenario 3. This is a four-fold increase compared with In the meantime, the benefits of these investments contributions forecasted for 2025. are derived from other payments (mainly royalty) but also the provision of employment, procurement, and One needs to note that in this model, the effect of a infrastructure, as well as the strengthening of the project like Soalala tends to be over-emphasised. This investment climate for future growth of the large-scale is mainly due to the assumptions of high production mining sector. levels combined with a relatively modest investment. In turn, it illustrates the effects of these parameters on the overall contribution of an operation. Once new large projects become profitable and corporate tax becomes significant, annual revenues generated by mining could reach a new level. Although corporate income taxes do not – at any time – account for more than half of mining fiscal income S EC T I O N 3 : F I SC A L CO N T R I B U T I O N 32 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR 4 – State participation is not context, political risk, quality of infrastructure, and type expected to generate significant and quality of mineral resources. The legal framework, dividends. tax and royalty regime for mining development in Madagascar (mining code-general regime; LGIM The State currently has participations in both Kraoma regime; and QMM convention) is a composite model and QMM, however neither of them is expected to based on different norms and rules according to generate high levels of dividends. Kroama’s payments different needs and State objectives in different to the State may have been significant in the past time-periods. However, in the context of the recent (although they don’t appear in EITI reports), but beyond political instability in Madagascar, the legal and tax 2022 State withdrawal is modelled to cease with the framework for mining development has proved to be mine reaching the end of its life. QMM is not projected a competitive tool from the perspective of foreign to result in State withdrawal for the period of analysis mining investment in the country. The regime has due to carry forward of forecast losses. allowed the materialization of significant mining investment amounting to US$ 8.1 billion in a relatively However withholding tax on dividends could be short period (2005-2013). The magnitude of this significant and achieve the same fiscal effect as state investment can be compared to ‘initial foreign mining direct participation in the long run. A project like investments’ in other mining countries in the 1990s Wisco reaching profitability with a relatively limited (e.g. Botswana, Peru or Chile). investment (scenario 3) would mean a substantial increase in fiscal contribution. In 2035, the sector Madagascar now needs to consider whether the could generate US$ 378 million. Corporate taxes current mining policy regime and fiscal settings are make up a large portion of the total fiscal income suited to seize the opportunities of the next generation contributing US$ 212 million (56 percent of the total) of mining investment. For example, research fiscal but the next significant income would come from forecasts revealed that royalties are the predominant withholding taxes on dividends, ahead of royalties (21 means of securing revenue in the early stages of percent and 17 percent of total, respectively). investment as rapid cost recovery and low rates of income tax limit fiscal revenues. Compared to other countries in the region, Madagascar’s royalty rate Recommendations is very competitive and in fact one of the lowest. Government should carefully assess if an increase Assess the merit of revising the of the royalty rates can increase revenues while mining fiscal regime maintaining competitiveness at an appropriate level. As the royalty rate directly impacts cut-off grade, level A country’s fiscal regime for mining should be of reserves and mine life, it should be modelled for simple, predictable, and transparent. It should ensure future mines on the basis of available information as a fair distribution between mining companies and well as for theoretical “standard” mines for the purpose Government of the economic benefits derived of benchmarking. Similarly, Government should explore from mineral resources, with fiscal rules that are whether incentives such as income tax discount for complemented by an efficient and transparent tax in-country beneficiation are still needed or relevant. administration. Proposals to restrict the export of unprocessed commodities and require downstream value addition Madagascar’s fiscal regime has achieved its aim of could limit fiscal income by deterring mining attracting mining investments, if one considers the investment and generating large tax incentives from early stage of the mining industry, the recent political downstream capital investments that delay income S EC T I O N 3 : F I SC A L CO N T R I B U T I O N ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 33 tax payments for long periods. Capturing upstream in the sector, like management of mining titles value addition can be an equally important source of or distribution of mining royalties. It should now development potential. include contextual information, such as production, employment, etc. It should receive continuous support Any revision should be based on detailed analysis as both from Government and development partners / well as proper modeling. For example, the strength donors. of the current LGIM regime is that it is legislated and not negotiated project by project. However it includes Given the strategic importance and political incentives that may no longer be appropriate. The sensitivities, clear information about public institutions costs and benefits of investment tax credits (ITCs) and state owned companies should be made public. should typically be reviewed. Under the LGIM, ITCs EITI reports, typically, should disclose and justify can be realised at any time, with the effect of further payments related to State participation (dividends). delaying income tax payments. Consideration could be given to removing this incentive or limiting the timing Set structural rules for allocation of of realisation of ITCs to year 6-10 of operations (as is mining fiscal revenue the case with QMM). As mining revenues grow, and in consideration of the Finally, any revisions of the fiscal regime should cyclical nature of commodity prices, the Government respect existing stability clauses to maintain investor should consider adopting revenue management confidence. An important driver of growth in the sector mechanisms, especially at the local level. In particular, will be the identification of world class ore bodies. establishing a consensus formula for royalty While commodity markets and exploration spending distribution at the commune level has been an ongoing internationally are in a period of decline, support and challenge. Royalties have been distributed to the incentives for exploration will be crucial. Measures that communes where mine areas are located. However, encourage political stability will also have an impact on there are arguments for extending this distribution investor decision-making. to other communes: i) mining activities make use of different industrial facilities and associated Support the EITI and enhance infrastructure beyond the communes where the mine public information on mining fiscal is located; and ii) the socioeconomic effects of mining revenues activity also extend beyond these communes. The Ministry of Mines and Petroleum should publicise the The EITI in Madagascar represents a unique February 2014 decree to reform the local distribution opportunity to promote transparency in the sector of royalties as it tries to address this challenge. Also, but it also requires continued support. The EITI has in line with the ongoing debate on the optimal way performed as a platform to promote transparency in to share and manage royalties around the Ambatovy the extractive industry even during the difficult days of project, the government should consider whether the the transition. However, despite communication efforts existing rule is viable in other circumstances, and from the Government, mining companies and civil whether specific mechanisms should be set up at the society organizations, there is a clear need for more local/regional level. These could include trust funds information and understanding of the real contribution or foundations for strategic long-term investments, of mining to the local and national economies. The and would help avoid over-reliance on cyclical mining new EITI standard, which now goes beyond the revenues for recurrent spending. Governance of such reconciliation process, is a great opportunity to extend mechanisms would have to be transparent, efficient the dialogue on other dimensions of transparency and inclusive. S EC T I O N 3 : F I SC A L CO N T R I B U T I O N 34 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Enhance capacity to administer and production; processing; inventory; and exports, among manage revenues at the national and others). local levels Local capacities, resources and policies also need to It is imperative that the Ministry of Mines and be enhanced to improve the collection, management Petroleum and the Ministry of Finance have a complete and investment of royalties by communes, regions and and in-depth understanding of the mining tax regime provinces. Learning from the participatory budgeting in Madagascar, and develop internal capacities to pilot projects, the training could be developed for local collect, control, monitor and evaluate mining taxes and governments, such as basic financial literacy and royalties. Opportunities should be sought for public business administration and setting up administrative officials to gain experience from regulators in other infrastructure (including bank accounts). Development countries with a history of mining development. Skills programs require skills in project management, will need to be developed to facilitate and regulate communication, inclusivity, governance, and the development across the ‘financial mining cycle’ design of trusts and funds for equitable and sustained (investment; construction; capital import; pre-stripping; social development. S EC T I O N 3 : F I SC A L CO N T R I B U T I O N Section 4 Local procurement and economic linkages 36 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR The mining industry’s demand for goods and services presents an opportunity for the growth of local businesses in Madagascar. If well planned, the mining sector can create positive links with a range of economic sectors and suppliers with different operational, administrative and technological capacities. Both Ambatovy and QMM have supported local procurement and set an encouraging standard to guide future mining development. Partnerships for the provision of complementary public and private infrastructure can enhance regional development and should be a key feature of the next generation of mining projects. Key Findings Ambatovy have their own policies to enhance business ties with the local economy. These policies include: 1 – There are no explicit legal Local preference for purchases and procurement.  provisions requiring or incentivizing companies to develop local Training of small size local suppliers to  procurement in Madagascar, a notion strengthen their administrative and management that is poorly defined in-country. capacities. In Madagascar, laws and regulations do not precisely Specialised payment arrangements for small size  define ‘local procurement’. The term ‘local’ is used in local suppliers. different contexts as a reference to different levels, either the national level (‘local’), or at the regional level These corporate efforts, sometimes with the (known as ‘local local’). There is no consensus on the collaboration of international organizations (such as criteria used to identify local procurement. Experts GIZ in the case of QMM), aim to establish long term have suggested that a series of criteria, including the relationships with local suppliers and enhance inclusive percentage of local staff, management, and ownership, development beyond the direct economic benefits on would be appropriate to adequately capture truly the economy at the national and regional level. local entities.† Large-scale mining companies often refer to «local suppliers» as any enterprise registered CARA (Anosy Regional Affairs Centre of QMM) and in Madagascar, and understand «local purchases» to ALBI (Ambatovy Local Business Initiative) are two mean any goods and services purchased from a «local specific corporate initiatives to develop and support supplier. Statistics on local procurement have been local suppliers. In 2012, QMM spent around US$ 12 provided by mining companies on this basis. Such million in direct purchases linked to local suppliers and data may obscure international suppliers registered organized training programs for 335 local suppliers. locally in Madagascar. Ambatovy used more than 700 small and medium- sized enterprises across 40 sectors in 2013. The 2 – In compliance with international company’s database references 3,500 businesses, standards or voluntary initiatives, including more than 2,700 local companies used by large-scale companies in Ambatovy and its subcontractors.12 A report for the Madagascar have developed Chamber of Mines found that QMM has a database of significant programs to develop local 900 suppliers with 300 active suppliers in the past 3 procurement, with promising results years13. on the local economy. 12 Ambatovy. 2014. Local suppliers. Online resource: http://www.amba- Although Malagasy law does not require companies to tovy.com/docs/?p=439. Accessed: 3 November 2014. 13 Ramanoara, Georges. 2013. Appui au Groupe de Travail sur le Contenu procure their goods and services locally, both QMM and Local (GTCL) de la Chambre des Mines de Madagascar S EC T I ON 4: LOC A L PRO C U REM EN T A N D ECO N OM I C L I NK AG E S ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 37 The sectors with the most potential for linkages with quality of local suppliers; skills, productivity and cost mining include: of labour; mining and processing technology; financial vehicle rentals and transportation  and investment structure; and management capacities food services  of the mining companies. miscellaneous services (such as cleaning)   technical assistance Detailed disaggregation of costs was not made  insurance available by the companies, but Ambatovy shared auditing  that 55 percent was spent nationally. As shown in the Technical Annex, the portion of national expenditures has thus been estimated at 50 percent 3 – According to the model, local for the other companies. Benchmarking of national procurement could increase from expenditure in established mining economies reveals around US$ 200-300 million per up to 90 percent of expenditure is possible. But in year with the existing mines to close developing economies that are new to mining, national to a billion dollar per year under the procurement typically ranges between 30 to 60 most favourable scenario. percent. The model estimates that the cumulated cost of This represents a demand for national goods and operating Ambatovy, QMM and Kraoma mines should services that will generate business opportunities for increase from around US$ 160 million in 2012 to US$ large, middle and small sized suppliers in the country. 590 million in 2015. In scenario 2 and 3, this could If we assume that 50 percent of the direct local cost gradually increase to US$ 900 million and US$ 1,8 could be spent procuring from large sized suppliers, billion respectively. 40 percent from medium sized suppliers, and 10 percent from small sized suppliers (see graph 9), As with other mining activities worldwide, the project this equates to around US$ 160 million (large), US$ cost structure is a composite of different factors such 130 million (medium), and US$ 30 million (small), as: geology and mineral resources; availability and respectively. Graph 9 : Estimated Total Operating Cost, by Import and Direct Domestic Operating Cost (US$ Million) 924 874 Domestic cost (10% on small suppliers) Domestic cost (40% on Medium suppliers) Domestic Cost (50% on Large suppliers) Imports 924 470 419 462 318 267 2015 (Scenario 1) 2024 (Scenario 2) 2025 (Scenario 3) S EC T IO N 4: LO C A L PRO C U R E M E N T A N D ECO N OM IC L IN K AG E S 38 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Experiences of the pioneers in local procurement ‘Buy locally, hire locally’: Ambatovy In 2012, more than half of Ambatovy’s suppliers Some achievements of the ‘buy were from Madagascar. This is the result of locally, hire locally’ policy are: a corporate policy to ‘Maximize business opportunities for local suppliers and local  In 2012, Ambatovy purchased approximately entrepreneurs’ and the Ambatovy Local Business one million kilograms of fruits and vegetables Initiative (ALBI)14. from its three purchasing centres in Toama- sina and Moramanga. These centres purchase The ALBI database lists 3,500 suppliers, 75 percent directly from local producers, thus enhancing of which are national companies, who can provide the value of their products. goods and services to the Ambatovy. Since 2011, the database has grown by 26 percent15.  Ambatovy bought over 12,000 uniforms from two sewing cooperatives in Toamasina – more Ambatovy does not require providers to be ISO than double what the company purchased in 90001 or meet other types of standards but audits 2011. 99 percent of the staff from the two them once they are registered in the company’s cooperatives is female. database. Its local procurement arm, ALBI, publishes all necessary information on its website, explaining  In 2012, Ambatovy received over 10,000 the need to better understand the activities of wooden pallets from its suppliers certified by potential providers, check their status with respect the Forest Stewardship Council. Suppliers in to laws and regulations applicable in Madagascar, Moramanga produce pallet parts which are as- define their ability to meet Ambatovy’s requirements, sembled by a supplier in Toamasina. Ambatovy and monitor and support their progression. They has the potential to purchase approximately have been able to audit 25 to 30 companies per 50,000 pallets per year to transport its refined month and publish some interesting statistics nickel and cobalt. which show that most of the “candidates” are micro or small enterprises (with 1 to 99 employees). 75 percent of them have been found compliant in the general audit (legal status, accounting, and administrative principles) but only 46 percent and 41 percent have been so in the quality and HSE (Health, Safety and Environment) audits, respectively 14 Ambatovy. 2013. SCM/ALBI Monthly Report of 30/9/2013. 15 Ambatovy. 2014. Local suppliers. Online resource: http://www. ambatovy.com/docs/?p=439. Accessed: 3 November 2014 S EC T I ON 4: LOC A L PRO C U REM EN T A N D ECO N OM I C L I NK AG E S ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 39 4 – Careful planning is required to 3. New infrastructure is part of a larger ‘socioeco- design complementary public and nomic development plan’ for the region that takes private infrastructure into account social needs and includes initiatives for the development of other sectors, such as Large scale mining development in Madagascar tourism or agriculture. presents an opportunity for the complementary development of public and private infrastructure. 4. Mining sector operators and the State have adop- The QMM and Ambatovy projects are linked to the ted complimentary roles to manage and operate development of infrastructure, including: a port, roads, new infrastructure. The mining sector has played bridges, facilities for social service provision, a thermal a key role in the operation of new infrastructure power station, powerlines, and a water distribution due to limited state capacity. system (see tables 5 and 6 below). 5. The development of complementary infrastructu- Key characteristics of infrastructure linked to mining re represents new opportunities for employment development in Madagascar are: and local development and tangible economic 1. Operational capacity of developed mining benefits at the local level. infrastructure exceeds the demand of the mining sector. This means that the assessment model Development of public-private interest infrastructure is cost structure for new infrastructure includes a seen as an important socioeconomic contribution for social price. the local communities, and helps to better ‘visualize’ the contribution of mining development at the local 2. Infrastructure planning and assessment includes level. a range of actors: State, local communities, inter- national development agencies, and NGOs. Table 5 : Examples of complementary infrastructure: Ambatovy Infrastructure Description and public-interest goal pursued Built and/or enhanced 100 km of roads and bridges. Objective: enhance safety, Roads security and access for local populations to transportation corridors and markets linking plant to port. Upgrades to the Port of Toamasina, Madagascar’s largest seaport – over $70 Port million invested. Objective: ensure a safer, cleaner transfer of energy products from tankers and bulk primary materials from cargo ships. A 12 km railway line built in parallel to the existing line between the plant site and Railway the port. Objective: create the capacity needed to move commodities efficiently between the port and the plant site. Water Pumps Drilling of water wells and installation of water pumps along the pipeline. S EC T IO N 4: LO C A L PRO C U R E M E N T A N D ECO N OM IC L IN K AG E S 40 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Table 6 : Examples of complementary infrastructure: QMM Infrastructure Description and public-interest goal pursued Construction designed to support mining development and economic Port Ehoala development of other sectors Tolagnaro Port Rehabilitation to provide continuity for traffic during construction of the new port Roads, including Rehabilitation to provide access to a landlocked region (90 km rehabilitated main RN 13 between 2005 and 2012) Rehabilitation of water treatment plant, installation of new sewage system, Drinking Water construction of new plant to provide access to drinking water (urban population Treatment Plant needs met) Purchase and installation of generator for the city to have a reliable source of Electricity electricity Recommendations Both QMM and Ambatovy have a good track record Two main issues have emerged: of local procurement and economic linkage. The  Firstly, as QMM and Ambatovy move toward full companies have made these achievements by production, the challenge is how further econo- adhering to international standards, and training mic opportunities for local people and busi- and employing local staff. Significant infrastructure nesses can be leveraged from both the mining has been built. Company spending through their activity and new infrastructure, such as roads, local suppliers and its multiplier effect have been the Port of Ehoala and its free trade zone, the significant. However, this is not widely acknowledged market in Moramanga and capital works in the in the community. Better communication and more Port of Toamasina. transparent processes are needed to build public confidence in this area.  Secondly, how can lessons learnt from QMM and Ambatovy’s experience of local procurement and While less people are employed in the post economic linkages inform, and form the basis of, construction phase, opportunities for employment and standards, policy and regulations to encourage local procurement are likely to be ongoing and prove best practice in local procurement for the next more sustainable. They will draw on and train people generation of mining projects? in skills that are transferable to other areas such as administration, production, occupational health and These issues are addressed in the following safety, services such as cleaning and maintenance and recommendations. Specific recommendations for the rehabilitation of mined land (transferable skills in Government, Chamber of Mines, industry or civil forestry, land maintenance and agricultural business). society are made where appropriate. S EC T I ON 4: LOC A L PRO C U REM EN T A N D ECO N OM I C L I NK AG E S ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 41 Government should encourage local Chamber of Mines could enhance knowledge exchange procurement, local content and and improve practice by: infrastructure linkages  Establishing a Charter of Best Practice that asks member companies to demonstrate and report The Government of Madagascar should take action on local procurement and regional development. to prioritise local content and procurement either in policies or regulations. Rather than adopting highly  Take the lead in fostering public private par- prescriptive or punitive measures, they should seek to tnerships for example with chambers of com- encourage and reward best practice and processes for merce to enhance local procurement strategies. multi-stakeholder planning and training (local, regional and national). This could include:  Facilitate opportunities for continuing professio-  Definitions of local, as well as «local» vs. «local nal development, training and exchange between local» (referring to an even narrower area of companies about best practice in local content. influence), procurement using criteria such as number of local staff and ownership.  Coordinate public engagement especially in areas of mining and infrastructure development. Incentives for companies to use local procu-  Topics for dissemination include: tendering pro- rement such as concessions on VAT for local cedures; SME financial management and access procurement and allowable cost recovery against to micro finance; quality control; ISO standards; good performance in employing and training occupational health and safety standards; work- local people. place culture; transitioning from the informal to the formal sector. Specific requirements in the Terms of Reference  for Environmental Impact Assessment to assess Civil society, business organisations and development economic impacts and linkages, and use of local donors can support and partner with industry to procurement of goods and services and local advance practice. Examples include: local business content throughout the life of the mine. associations; chambers of commerce in both the capital and the mining regions; women’s business Beyond defining targets, processes should be associations; civil society platforms and donors. established to support knowledge transfer and skill development. For example, training for workplace Create a multi-stakeholder reference readiness, diversification of skills and enabling group for local procurement and local firms to adhere to ISO and other international local content standards. The Chamber of Mines, Ministries of Mines and Industry should promote best Petroleum, Planning, Employment and Education, practice in local procurement, local and Regional Government should further dialogue on content and fostering economic key areas of local content and procurement and their linkages relationship with human development. This multi- stakeholder reference group could work toward the The Chamber of Mines can be a forum for industry creation of a strategic plan including: leadership and the promotion of best practice.  An in-depth supply and demand analysis of products Knowledge and experience developed by members can that can feasibly be supplied locally, and what capa- be shared to influence practice across the sector. The city and financial support would be needed to do so. S EC T IO N 4: LO C A L PRO C U R E M E N T A N D ECO N OM IC L IN K AG E S 42 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR  Tailored approaches for micro, small and mid- National planning on infrastructure size business development and import substitu- development tion. The Government of Madagascar should coordinate  Coordinated planning, prior to the construction with all relevant government agencies, local and of projects and building, to enable local popula- regional government, to maximise the opportunities tions to gain employment, through training on associated with future mining development. best practice, such as QMM’s intensive profes- Infrastructure development not only serves mines sional training (High Intensity Labour Force). but also provides development corridors within the Professional aptitude testing can help select the regions, opening up areas for product and people best candidates for training. movements, and the creation of parallel economies that do not dependent on extractive industries.  Consideration of broader development objectives Potential complementary infrastructure associated and local economic linkages, and preparing local with prospective mining development includes: a communities for sustainable development that is paved highway between Toliara and Tolagnaro; upgrade independent from mining. of the Toliara port; and a new port or port upgrade on the West Coast. Collaborative planning is needed  Strategies to encourage foreign companies wor- with the mining industry and technical specialists as king in critical areas - such as heavy machinery projects are designed. franchise - to set up in Madagascar (especially in regional areas). Even if not locally owned their presence develops the business culture and experience at the regional level. S EC T I ON 4: LOC A L PRO C U REM EN T A N D ECO N OM I C L I NK AG E S Section 5 Employment 44 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR Key Findings 1 – While mining is not a labour The research includes only a small portion of that intensive sector in relative terms, labour force but one which may represent higher more than 12,500 people are directly salaries and qualifications. Current large-scale mining employed by mining companies in projects in Madagascar (Scenario 1) operating at full Madagascar. capacity provide direct employment for 4,200 people (see table 7). Employment in those operations is According to the national survey on formal forecast to remain steady unless production decreases. employment, 12,500 individuals were directly hired in the mining industry in 2012, which represented 9 Direct employment associated with Scenario 2 is percent of the total workforce in the industry and 2 forecast to increase to around 5,000 by 2025, largely percent of national employment. Such figures include due to the potential for the Sakoa Region projects to companies that are not covered in the study: quarrying start operating at full capacity. Scenario 1 projects, of industrial stones and minerals, including cement, however, are still expected to dominate employment small formal exploitation of precious and semi- during this period. Scenario 3 is forecast to double precious stones as well as exploration companies. Of direct employment potential to more than 10,000 course, a much larger number of people is informally jobs after 2025 (and possibly much more during the involved in full-time or seasonal artisanal mining of construction phase, when a higher number of people is gold and stones and is impossible to account for with usually employed). certainty. Some estimates even reach as much as 500,000 people throughout the country. Table7 : Direct employment by scenario (At full capacity) 2015 2023 2024 2025-2035 Scenario Scenarios Scenarios Scenarios Total Total Total Total S2 less S2 less S2 less S3 less   S1 S1 S1 S1 S1 S1 S1 S2 Direct employment 4,200 4,200 3,700 200 3,900 3,700 1,250 4,950 3,700 1,250 6,000 10,950 Percent of total 100% 100% 95% 5% 100% 75% 25% 100% 34% 11% 55% 100% Notes: The scenarios include the following mining activities: Scenario 1: QMM, Ambatovy and Kroama Scenario 2: S1 + Toliara Sands and Sakoa Region Scenario 3: S2 + WISCO Construction jobs not included. S E C T I O N 5 : E M P LOYM E N T ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 45 2 – Large scale mining generates capacity can create up to 20,000 indirect and linked a large number of indirect jobs in 2015, in addition to direct mining employment. employments and higher average This brings the total of direct, indirect and linked salaries employees to around 24,000. Large scale mining is supported by a wide range As with direct employment, it is expected that indirect of businesses in Madagascar. Modelling of indirect and linked employment associated with the additional employment in this study has assumed that three Scenario 2 projects (Toliara Sands and Sakoa Region) rounds of suppliers could benefit from the total will be generated over different time periods depending domestic cost of large scale mining. Each round of on the start of their full capacity production. In addition supplier is expected to create its own jobs. To estimate to the direct jobs created, mining is therefore forecast jobs created by the mining sector and linked suppliers, to provide more than 30,000 direct, indirect and the study has used the salaries generated by mining in linked jobs under Scenario 2. relation to base salaries in Madagascar. During the period 2025- 2035, the potential full On the one hand, higher salaries associated with employment effect of all the large scale mining mining sector activities provide greater opportunities projects studied (Scenario 3) is forecast to be realised. for mining suppliers and local spending. On the other Therefore as with direct employment, the indirect hand, unusually high salary levels can cause inflation, and linked employment created is forecast to almost inequality, social tensions and economic disruptions, double. Based on the most optimistic scenario, mining primarily affecting the poorest populations. has the potential to lead to the creation of 65,000 direct, indirect and linked employments (see graph 10). Under the assumptions detailed in the Technical Annex, it is estimated that current projects operating at full Graphe 10 : Total direct, indirect and linked employment by year mining activities at full capacity 67, 178 66, 000 Indirect & Linked (S3 less S2) Indirect & linked (S2 less S1) Indirect & linked (S1) Direct Employment 27,676 44, 000 9, 667 35, 502 24, 088 32, 000 18, 885 19, 266 10, 950 4,200 0 2030 2020 2034 2028 2035 2026 2029 2024 2025 2033 2023 2032 2027 2022 2018 2016 2019 2015 2031 2017 2021 Kraoma ceases Toliara begins Sakoa Region begins WISCO begins S E C T I O N 5 : E M P LOYM E N T 46 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR QMM QMM is supporting accessibility and quality of education through programs including scholarships, literacy (in 2012, 178 young people participated), civil education, technical training and leadership. In 2012, the company completed 33,518 hours of training in technical health, safety, environmental language, leadership and other skills. QMM implements the Integrated Talent Management System (SIGT) to support the management of employee performance, as well as development of local skills to create a pool of local expertise. The company also has a scholarship program, Rio Tinto for Education (RISE) in partnership with Pact Madagascar which is expected to deliver about 1,300 scholarships in primary, secondary, and university levels. QMM is also currently supporting entrepreneurship training for local suppliers under the CARA program, which trained 278 people in 2011 and 335 people in 2012. Ambatovy Ambatovy has reported training enrolments in 2009- 2011 in areas such as health and safety, language, office and administration software, area and vender specific training, operators training, and skilled maintenance training in trades including electricians, instrument technicians, millwrights, welders and pipefitters. The company also launched the Ambatovy Leadership Development Program (ALDP) and a Mentorship Program to support the transfer of knowledge and experience as well as career advancement. With respect to preparing the local workforce for mining employment, Ambatovy has a Technical Excellence Program (PEXT) which offers 18 months of training and a two-month internship for recent high- school graduates in the Atsinanana Region. Under this program, the company reported its first wave of 43 students in 2011 which more than doubled to 98 students in 2012. S E C T I O N 5 : E M P LOYM E N T ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR | 47 3 – The large scale mines Recommendations currently operating have provided opportunities for training and skills While the mining sector is not considered labour development and prioritised the intensive compared with other sectors of the economy, employment of Malagasy citizens. it provides an opportunity to maximise development outcomes. Partnerships between the mining industry In a context where 75 to 85 percent of the Malagasy and Government offer the best opportunity to population is located in rural areas, and only 15 percent simultaneously train a professional workforce with the and 3 percent of the labour force hold secondary and skills for employment in mining and to strengthen the tertiary education qualifications, respectively, training education sector for broader development outcomes. and skills development is an important contribution to local development. For some people, the training Strengthen the secondary and initiatives offered by the mining industry are the only tertiary education systems opportunity for advanced professional training. Madagascar has recently demonstrated a decline in The Government expects the mining sector to education scores according to human development prioritise employment and training of Malagasy reports. Strengthening access to, and the quality of, citizens. Chapter 4 of the LGIM states that mining secondary and tertiary education is important for companies must give priority to Malagasy nationals the success of the mining industry. Literacy skills (Article 103) and put in place a training plan that are a key driver of development and UNESCO has equips and enables Malagasies to take up employment recently illustrated the powerful impact of using at various levels of company activities (Article 104). resource wealth to improve education across a range of resource rich countries, turning the resource curse To meet this expectation, over 84 percent of into a blessing for education (Education for All Global Ambatovy’s direct employees and contract workers, Monitoring Report, Policy Paper 08, UNESCO, 2013). and 94 percent of QMM’s direct employees (excluding The Ministry of Education and the Chamber of Mines Antananarivo office staff) are nationals. should identify synergies for further development of basic educational outcomes that can meet the future demand of the mining workforce. Continue to develop the vocational skills of local labour force The Chamber of Mines and individual mining companies should continue working with government agencies at multiple levels, as well as development partners, to support the establishment of technical trade schools, and targeted vocational programs (especially in areas of skills shortage) within existing institutions. The mining industry is best placed to provide start-up support and continued enrolments but there is an important role for the public sector to strengthen independent management of the education system. Due to the short lived nature of S E C T I O N 5 : E M P LOYM E N T 48 | ECONOMIC CONTRIBUTIONS FROM INDUSTRIAL MINING IN MADAGASCAR the construction phase and associated workforce, Support local business incubation pre-employment training programs for future mines to maximize the linked employment should begin local training early and focus on the skills benefit of mining needed for the permanent workforce. Innovative programs for the incubation of mining Encourage industry leadership and service businesses can enhance the potential industry standards to promote best employment outcomes of mining and foster ‘local practice in local employment local’ procurement. Programs using enterprise facilitation, micro-financing, savings and investment The Chamber of Mines can be a forum for industry forums, and coaching on financial management and leadership and the promotion of best practice. business development could be supported by local Knowledge and experience developed by members government in mining regions with the assistance can be shared to influence practice across the sector. of development partners and the mining industry. The Chamber of Mines could enhance knowledge Cooperatives have also proven successful in other exchange and improve the future practice of the next African countries such as Rwanda and Ethiopia. generation of mines by establishing a Charter of Best Practice, that asks member companies to demonstrate and report on local employment and training efforts. Key elements of leading practice in local employment include: local recruitment priority; pre-employment programs; contracting and wages; long term and multi- skills training and development programs; diversity and equal opportunity; and health and safety. S E C T I O N 5 : E M P LOYM E N T Disclaimer This paper has not undergone the review accorded to official World Bank publications. 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