How Liberia is Losing $23.5 million on Illegal Debt Cancellation: Western Cluster limited - Vedanta Iron & Steel
---- Liberia’s current tax incentive regime remains one of the most generous in the region but this generosity has not translated into the creation of decent employment opportunities for our people. Tax incentives given by the government to companies, especially in the mining sector, are another cause of Liberia’s lost revenues.
Liberia has abundant natural resources. For many years the country was among the largest producers of iron ore in Africa, and in 2020, Liberia exported $322M in Iron Ore, spurred by growth in demand for metals in Europe and Asia making Liberia the 19th largest exporter of Iron Ore in the world.
The main destinations of Iron Ore exports from Liberia are France ($114M), Germany($67.4M), China ($56.2M), Poland ($43.7M), and Spain ($16M). There are many foreign Iron Ore mining companies operating in the country, with the largest including ArcelorMittal, the world's leading steel and mining company, a British-Indian company, Vedanta Resources PLC, Hummingbird Resources, etc– yet gain little tax revenue from the extraction of its resources, leading to lost opportunities to invest in public services such as education, health, agriculture, and roads which are essential in tackling poverty.
Western Cluster Limited, a subsidiary of Vedanta Iron & Steel, requested the government of Liberia to cancel its $23.5 million debt it incurred more than 12 years ago due to the cessation of operations in 2011 due to certain circumstances after acquiring western cluster iron ore deposits mines from Elenilto.
According to the Memorandum of Understanding (MOU) signed on April 12, 2022, a staggering sum of US$23.5 million debt owed the Liberian treasury by West Cluster Limited was canceled by the George Weah-led administration without legislative approval with speculations mounting of public bribery to cancel the company’s debt.
One might think that Western Cluster limited - Vedanta Iron & Steel hardly needs to engage in asking the Liberian government for the cancellation of the $23.5 million debt, given that it has been granted such generous fiscal terms by the Liberian government. The western cluster concession agreement negotiated with Vedanta by the Liberian government in 2011 gave it a 4.5 % royalty rate along with the ability to offset capital expenditures against tax and carry forward losses. These generous tax terms mean that Vedanta will pay very little corporate income tax, as noted above.
Vedanta Iron and Steel in Zambia
Vedanta Resources Plc manages three copper mines in Zambia, notably Konkola Copper Mines, Zambia’s largest and one of the largest high-grade copper ore mines in the world.Vedanta Resources Plc and specifically the Konkola operation has long been the target of international campaigns over the company’s environmental and labor impacts, and the generous tax terms under which it operates.
In 2011, protesters at the Zambian High Commission in London called on Vedanta to pay a fine of $2 million served by the Zambian courts in compensation for people poisoned by water pollution near the Konkola mine. At the same time, 400 non-unionized Konkola workers protested against their unfair pay and lack of contracts at labor offices in Kitwe, Zambia.
War on Want has accused Vedanta of dodging taxes in Zambia through transfer mispricing. This is when related companies or divisions trade with each other at prices that aren’t market-related, to avoid being liable for tax. Vedanta has 29 subsidiaries operating in the “secrecy jurisdictions” of Mauritius, the Netherlands, the British Virgin Islands, Jersey, and Cyprus according to their annual report. Zambia’s tax regime allows the company to pay less tax when it spends money on physical assets or makes losses, the same thing Liberia is doing. It paid only US$11,111 against profits of US$221 million in 2011-2012.
In May 2014, a video posted on the internet caused further controversy for Vedanta showing Anil Agarwal, Vedanta’s founder and chairman, mocking the Zambian government for selling Konkola mine for the knock-down price of $25 million; the mine’s asking price at the time was $400 million.
The video also shows Anil Agarwal saying that the mine brings in profits of $500 million a year, a figure that does not exactly square with Vedanta’s annual report stating that the company made a loss of $6.3 million in the year ending March 2013. The country loses about US$3 billion a year in tax revenues, a sum equivalent to an eighth (12.5%) of its current annual GDP.
Tax waiver and incentive program
Liberia’s current tax incentive regime remains one of the most generous in the region but this generosity has not translated into the creation of decent employment opportunities for our people. Tax incentives given by the government to companies, especially in the mining sector, are another cause of Liberia’s lost revenues.
The Librarians government offers an array of tax incentives to domestic and foreign companies. Companies investing US$500,000 and above, may apply to the government for incentives In addition, all companies investing over $10 million are automatically incentivized through a concession; thus all mining companies have been given special tax deals.
Mr. Thomas Doe-Nah Commissioner General of the Liberia Revenue Authority (LRA) told the 54th National Legislature during the 2022/2023 budget hearing that the country is loses US$300 million in revenue collection as a result of Tax waiver and incentive program.
An example of a company that appears to benefit from tax incentives is Farmington hotel, one of the largest hotel businesses in Liberia. Details of the tax incentives given to Farmington Hotel, owned by Lebanese businessman George E. Abijaoudi are public, and not available, but according to the National National Investment Commission Chairman under Ellen Johnson-led administration, George Wisner, the Government of Liberia awarded 15 years tax holidays to the Management of the Farmington Hotel in the 30-year lease agreement with the Liberian government.
In 2019, Hummingbird signed a 25-year Mineral Development Agreement (MDA) with the Government of Liberia. Under the terms of the MDA, the royalty rate on gold production was 3%, the income tax rate payable was 25% (with credit given for historic exploration expenditures), the fuel duty was reduced by 50%, and the Government of Liberia is granted a free carried interest of 10% in the project.
In June 2020, Hummingbird Resources PLC entered into an earn-in agreement with Pasofino Gold Ltd, a Canadian-based mineral exploration company listed on the TSX-V (TSXV: VEIN), for up to 49% stake in the Project upon the completion of a defined exploration program and completion of a feasibility study.
After the feasibility study, Pasofino Gold Limited acquired a 49% Earned Interest in the Dugbe Project from Hummingbird Resources PLC. On September 27, 2022. In layman's terms, it is a legal agreement made. between a mineral rights holder and a second party, which allows that party to earn an interest in the. mineral property in exchange for certain benefits granted to the license holder. On November 1, 2022, Pasofino Gold Limited exercised its option to consolidate ownership in the Dugbe Gold Project by converting Hummingbird's 51% ownership of the Project to become the owner of 100% of the Dugbe Gold Project in the name of consolidation without mining gold.
The last decade has seen rising inequality and continuing poor public services in Liberia. In Liberia, the scale of unmet basic needs is enormous. It is estimated 64% of the population in Liberia – one of the world’s poorest countries – live below the poverty line and 1.3 million of those live in extreme poverty according to the World Food Programme (WFP). About 16% of families are without food or unable to eat a balanced diet regularly. In the 2022 Global Hunger Index, Liberia ranks 113th out of 121 countries with a score of 32.4, Liberia has a level of hunger that is serious.
The revenue lost is a truly enormous sum in a country where 30 percent of children between 6-59 months are undernourished and 16% of children are physically not in school. A country where its infrastructure deficit is causing the country to US$17 million annually due to inefficiencies, mainly because of the absence of road user charges and underpricing of power according to the Africa Infrastructure Country Diagnostic (AICD) country report.
That is why we are glad the Liberian Senate is outraged after the Ministers of Justice, Mines, and Energy, Finance and Development Planning, and the Chairman of the National Investment Commission failed to explain why the Western Cluster's US$23.5 debt was canceled without legislative approval. The cancellation was illegal. According to Article 34 d (i) ”all revenue bills, whether subsidies, charges, imports, duties or taxes, and other financial bills, shall originate in the House of Representatives, but the Senate may propose or concur with amendments as on other bills.”
The illegal loss of $23.5 million to government revenue by the Weah-led administration could have increased our agriculture sector budget to 3.2% of our budget. In 2022, the agriculture sector was allotted U$7.3 million (0.9% of the budget). It is also equivalent to nearly twice Liberia’s combined spending on John F Kennedy Hospital, Jackson F Doe Hospital, Phebe Hospital, Bomi Community, Bomi County Health System, Grand Cape Health System, Gbarpolu Health system, etc.
Liberia, one of the poorest countries in the world, is hemorrhaging wealth that could support vital public services and anti-poverty programs, as a result of a lack of equitable tax policies. Translating Liberia’s natural wealth into revenues for the Liberian people requires equitable tax policies to ensure the government receives a fair proportion of the earnings from mining and other resources. I rest my case.