Madagascar’s new mining and petroleum bills threatened by political instability

20 Jul 2015

Madagascar’s new mining and petroleum bills thre...

Madagascar's Mining and Petroleum Minister Joeli Valerien Lalaharisaina has announced plans to pass long-delayed mining and petroleum bills in October. Political instability since the 2009 coup has weakened investor appetite, while an impeachment scandal in May has left the National Assembly in disarray, casting doubt over whether both bills will be passed this year. Even if the bills are approved, high levels of political risk, combined with the current low price of oil and mineral commodities, mean that investor interest in future licensing rounds could be limited.

The announcement comes amid a revised IMF growth forecast for Madagascar from 5 percent to 3.5 percent in early July in part associated with depressed commodity prices and a series of environmental disasters, including a cyclone and a drought in early 2015. Foreign investment has fallen in the country since a coup in 2009 with foreign direct investment (FDI) declining from USD 1.36 bn that year to USD 455 mn in 2013.

The government has earmarked both mining and petroleum sectors as key to countering slowing growth. Madagascar is known for having some of the world’s largest nickel mines as well as deposits of titanium, cobalt, iron and uranium. At the height of foreign investment in 2009, mining contributed around USD 1.06 bn of USD 1.36 bn of total FDI. There are no proven hydrocarbon reserves off Madagascar’s coast though the country shares a maritime boundary with Mozambique where huge gas deposits have been found. Antananarivo plans to auction 96 of 249 offshore exploration blocks in the Mozambique Channel should the petroleum bill be passed.

Details of the new legislation have not been revealed but authorities have said that the new mining and petroleum bills will not differ significantly from the codes that are already in place. As such, terms should remain favourable to mining operators, including royalties of just 2 percent on the value of gross exports of raw minerals, or 1 percent on minerals processed locally. This compares positively with nearby South Africa where royalty fees can be as high as 7 percent. The bill has had significant input from the World Bank, mining companies and civil society and there is some suggestion that additional transparency measures will also be introduced, to improve Madagascar’s operating environment.

Despite these developments, the history of the mining sector in Madagascar suggests investors still face significant challenges. Sanctions imposed by the Southern African Development Community (SADC) following the 2009 coup have meant there is a backlog in the issuing of new mining permits, with around 4,000 requests still pending.  New corporate social responsibility initiatives, which Lalaharisaina previously hinted would be necessary to improve mining’s overall contribution to national development, could increase the cost of operations. Further details of what sort of obligations these measures could entail remain unknown.

Within the oil sector, one of the key changes likely to be enacted is the separation of roles for national oil company and state regulator OMNIS. Madagascan authorities have previously raised concerns that the dual role of OMNIS has increased bureaucracy and creates a conflict of interest that they would seek to amend in future legislation. However, key questions remain around how such reforms would be implemented, what would replace the existing administrative structure and what implications it would have for oil companies. Additionally, while Tullow, Madagascar Oil and Afren have all expressed interest in the proposed new bidding round, prospective investors will be deterred by the absence of major oil finds to date off Madagascar’s coast. ExxonMobil announced its withdrawal from Madagascar in early July 2015 as a result of insufficient findings, saying it was not convinced by the “potential” of the Ampasindava block. Depressed world oil prices will further undermine interest in the sector.

High levels of political risk and instability in Madagascar have cast doubt over the planned October passage of the bill. Madagascar’s parliament impeached President Hery Rajaonarimampianina in May 2015 in a move that was eventually overturned by the constitutional court, but raised considerable questions over the stability of the government. Rajaonarimampianina has had only limited political support since coming to power in January 2014 and controversial moves in May to dissolve all existing political institutions, with the exception of the presidency, have sparked discord. Although the situation appears to have somewhat stabilised, Rajaonarimampianina has only precarious alliances with main parties in the National Assembly and the passage of major legislation, including new mining and petroleum bills, will face considerable political hurdles.

The impeachment scandal appears to have allowed both the transitional President Andry Rajoelina and the pre-coup President Marc Ravalomanana to resurface. Both Rajoelina and Ravalomanana have kept loyal support bases in the army, businesses and church, and in the absence of a strong leader they may attempt to reassert their authority in the coming weeks. The ongoing potential for political upheaval will ensure investors will remain cautious about reinvesting in Madagascar’s mines or participating in oil and gas auctions for at least the next 12 months, even if the new bills are passed.

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