01 Aug Mines: State, the big loser
Monitor magazine, 20.07.2014
Speech of Dorina Çinari, Head of Extractive Industries Transparency Initiative Secretariat
Discipline of the mining industry in Albania looks like a challenge that will be difficult to obtain, due to a series of problems that characterize it. Measures to be taken are urgent and for more are needed to fill state cashbox, which has won minimalist figures. The latest report (but delayed) on transparency in extractive industry provides an overview not very optimistic.
Once has been the pride of the “modest” Albanian economy, but although underground continues to be generous, the state cashbox is failing to benefit as much as potential. Extractive industry revenues in 2011 accounted for only 2% of the state budget. Of course 2011 sounds like a distant year and perhaps may seem to lack cohesion, but in fact it is a report that could be published only at the end of June 2014. Even this “delay” is a story itself. Our country is part of the global initiative on Extractive Industry Transparency and, as such, must meet certain obligations, among other things, drafting reports that give a real reflection of the industry. But after 2012, responsible institutions “forgot” this task, whose failure risk exclusion.
This is not a report that simply “fill sites”, but that helps to increase transparency in this industry that is controversial not less for the high level of abuse, corruption, lack of security, the reduced level of standards, lack of investment from the concessionaries etc.. In an interview for “Monitor”, Dorina Çinari, head of Extractive Industry Transparency Initiative Secretariat talks about the impact of this initiative, the findings of the latest report (2011), and for measures to be taken to “save” this sector, whose potential is enormous.
The mining industry still faces several problems. What impact has given Albania’s participation in the EITI initiative to increase transparency?
Natural resources such as oil, gas, mineral reserves are national assets. Extraction and utilization of these resources leads to economic growth and social development. However when these assets are badly managed, they generate corruption and conflicts. More transparency in the way a country manages its natural resources, the more is the possibility to benefit from the use of these resources. On this concept has raised the activity or EITI Global Initiative for Transparency in the Extractive Industry. EITI objective is: To develop and implement a mechanism for making a) declaration of income from the use of natural resources through extractive industries; b) publication of these data in a format understandable by all and c) their supervision in order to enable all Albanians to have all the information regarding income and public expenditure, contributing in a public debate and the creation of mechanisms for the management of these revenues to the benefit of communities.
Albania has published three EITI Reports for the fiscal year 2009, 2010 and on June 27, 2014, she published the EITI Report for the fiscal year 2011. Within 2014 Albania should publish even the EITI Report for 2012.
The first EITI Reports have provided disturbing data. In 2009 it is reported that the state budget had profit only 1% from the extractive industries, in 2010 1.2% and now for the 2011 1.83%. This is the contribution of these problematic industries for the state. It is also reported that during these years, the local institutions had not profit at all from the royalties. The Low defines that 25% of the Royalties goes to the local governments in order to mitigate the social, economical and environmental effects. It is really interesting that these results from the previous EITI Reports have not contributed to public debate.
Why do we have a delay in producing such Reports? It is about a report for the fiscal year 2001 why we are in 2014?
According to EITI Standard, an EITI Report should be maximally published until December 31, +2 years. Otherwise the country EITI Compliant looses the Status and is going to be suspended. EITI 2011 Report should have been published maximally on December 31, 2013. The EITI Report is a long and a complex one which asks for a serious financing and full commitment of seven governmental institutions, to report on detail for each company and each payment of 70 biggest operators and a colossal reconciliation work which has its own Albanian challenges. The year 2013, was an electoral year with its problematic matters, during this year was not done even e single effort to enable the publish of EITI Report for the fiscal year 2011. This meant that Albania didn’t fulfill the EITI Standard and Requirements and on January 2014, the International EITI Board discussed about the suspension of Albania from the membership. In spite of an immediate and high toned coordination by the leaders of ministry of Energy and Industry, the Albanian EITI Secretariat with the strong support of World Bank, which enabled the funds for the project were resumed promptly the necessary activities for the publish of EITI 2011 Report. The deadline for us was June 30, 2014. The EITI Report 2011 was published within the deadline and according to the new EITI Standard.
The revenues in the State Budget continue to appear very low. How does your monitoring process works, is there a discordance between the revenues declared by the companies and the audit process?
The EITI Reports are not audit reports. They are based on a self declaration and are reconciliation reports in which the companies declares the payment done to the state (taxes, royalties etc.) and these data are reconciliated with the revenues declared by the Government. The Government confirms if these payments are properly done and in case of discordances our institutions starts the investigative work to find the money destination, because this discordance means abuse and corruption. These kinds of discordances hadn’t been resulted by the reports published in 2009, 2010 and 2011. This means that each payment done by an operator is registered to the state budget.
What do you think are the steps to be taken to minimize the effect of informality in the extractive industry?
Should intervene in several directions. First, it must be clear what are the revenue potential of these industries, which then serve as the basis to build mechanisms of planning, control and audit. We have started work on the preparation of a study on the potential revenue from Natural Resources of Albania. The study will be funded by the World Bank that will bring in Albania high level expertise. The study is expected to be finalized within this year. During the preparation of EITI Report in 2011 we realized that it is very difficult to have the full report of total government revenues from extractive sector for 2011. Current financial management systems can not identify and separately account entirely for each of the tax, the revenues generated by extractive industry. So, the sector suffers the lack of an integrated information management. Informality can not be fought unless there is full information, reliable data to enable analysis, comparisons. Also, there is a need for legal reinforcement related to the statements of companies operating in the extractive industry. Already, the European Union adopted a new directive on accounting and transparency. Albania may require that similar principles, based on these requirements, companies licensed may represent payments for EITI reporting in an annex to the financial statements. These requirements can be further expanded by including other information useful to industry statistics, such as the amount of production, investment, environmental fees, etc.., which can be collected and processed each year, and provide the basis for reporting statistics and facts about the industry. The Ministry should followrigorously the application of the law for the preparation and audit of financial statements by companies licensed in the extractive industry.
Let’s turn to the findings ……
But, let’s look at the facts that the report of this industry shows,
The extractive industry in Albania is represented by the industrial oil sector and a medium and small-scale mining sector thriving largely on chromium, copper and nickel extraction.
In 2011, the extractive sector comprised about 1.7% of gross domestic product (GDP). Exports from the sector amounted to Lek 49.752 billion or 25% of total exports in 2011.
For the same period AKBN reported production of crude oil at 894,500 ton oil for an estimated value of USD 456.5 million. This production was extracted mainly from the Patos-Marinza oil fields (85% of production), operated by Bankers Petroleum. Exports of crude oil in 2011 amounted to USD 317 million or 69.4% of total crude oil produced in 2011. Customs data rank Italy as main export destination, followed by Spain and Malta. The total output of gas was reported at 15 million Nm3,5.
In the hydrocarbon sector after 2011 there were some significant developments.New exploration licenses were granted to Emanuelle Adriatic Energy Limited on Adriatic Blocks 2, 3 and 4 offshore blocks. In February 2012, Petromanas Energy Inc. (parent of Petromanas Albania GmbH), entered into an agreement with a wholly-owned subsidiary of Royal Dutch Shell plc, whereby Shell acquired 50% of participating interests rights on onshore exploration Blocks 2-3 in exchange for payments and carried costs up to USD 50.3 million. In June 2013, Shell further acquired an additional 25% of interest in Blocks 2-3. In late 2013, Petromanas Energy Inc. and Royal Dutch Shell plc announced positive test results from Shpirag –no. 2 well for a capacity at rates of 1,500 to 2,200 barrels per day oil equivalent.
In 2013, “Albpetrol” passed to “Phoenix Petroleum”sh.a, the rights of exploitation and production in Pekish-Murriz, Frakullë, Panajë, Povelçe, Divjakë, Ballaj-Kryevidh, Finiq-Karnë, Amonicë and Drashovicë.
Based on Albanian law, all petroleum deposits existing in their natural condition in strata lying within the jurisdiction of Albania are the exclusive property of the Albanian State.
The law permits Ministry of Energy and Industry to enter into a Petroleum Agreement, under which an oil company may be granted exclusive rights to explore and produce oil and gas for a limited period. But this “behavior” is expected to change because (last week) lawmakers approved some important changes to the law on hydrocarbons. In this report, of course are not reflected these changes.
Oil exploration in Albania began in 1918. Since then, oil bearing fields were discovered in the following 11 onshore areas: Drashovica (1918), Patos (1927), Kuçova (1928), Marinza (1957), Visoka (1963), Gourisht-Koçul (1965), Ballsh-Hekal (1966), Finiq-Krane (1973), Cakrran-Mollaj (1977), Delvina (1989) and Sqepuri (2001).
Gas exploration in Albania began in 19553. The first gas bearing field was discovered in Divjaka (1963), followed by Frakulla (1965), Ballaj–Kryevidhi (1983), Povelça (1987), Panaja (1988), and Ad-4 (offshore – 1994).
Mines, a history of rise and fall
Albania has a longstanding history in mining with significant mineral deposits of chromium, nickel, copper, and limestone. Chromium reserves have been estimated to be close to 36.9 million tons and copper reserves at around 27 million tons. Reforms of the mining industry present considerable governance challenges.
The sector was previously dominated by state-owned enterprises and started to open up to private investment in 1994. The mining objects given in concession so far are: Bulqiza chromium mine and ferrochrome smelters in Burrel and Elbasan Cities; Chromium Mines in Kalimash, Kukës district, Vlahnë, Has district and Kalimashi dressing plant; Munella, Lak Rosh, Karma 2 copper mines and also the dressing plant in Fush Arrëz town; Selenica Bitum mine, Vlora district mine and its bitumen smelting furnace.
As a traditional mining country, Albania contains an increasing number of medium, small-scale mining and quarry companies, and only a couple of large-scale industrial mining companies.
In November 2011, AKBN reported 752 mining licenses, out of which 673 production licenses, operating mostly in Bulqiza, Kruja, Berat, Tirana and Librazhd districts.
Currently, MEI is in the process of setting up an interactive licensee portal, which would provide updated information on license terms and current holders. This portal will show licenses granted in each area and free sites, via an interactive digital map.
According to 2011 EITI report, 461 out of 673 mineral production licensees reported their activity for the year 2011. Production activity reported by licensees to AKBN for 2011 amounted to USD 217.5 million.
Based on data presented by AKBN, production of chromium in 2011 amounted to USD 143 million. Bulqiza contributed with 70% of total production of chromium estimated at USD 100 million. Exports form the mining sector in 2011 amounted to USD 180.5 million or 83% of total production value.
Chromium contributes with the largest share of production at 66% of total mineral production value (Figure 4 on page 10). Exports of chromium amounted to USD 115 million or 81% of production, in 2011. Customs data show that chromium exports are directed to China, Netherland, Austria and Switzerland.
Albchrome (ACR – previously Albanian Chrome), operating the Bulqiza mine, was the largest industrial company extracting chromium in Albania. Many medium and small-scale companies (more than 200 licences) were extracting chromium in Buliqza, Tropoja, Has, Kukes etc.
Exports of copper in 2011 amounted to USD 42 million, five times larger than the production in 2011. Changes between production and sales seasons are explained by year on year fluctuations of the international price of copper. Turkey and China are the main export destinations for this commodity.
Beralb was the only industrial company extracting copper in 2011, comprising 99% of copper production value in 2011. Beralb holds production licences for the mines of Munelle, Lak Roshi, Karma and Fushe-Arres, all located in the province of Puke.
Nickel was mostly extracted in the form of iron-nickel and nickel silicate, in the regions of Elbasan, Pogradec and Librazhd. Production value was generated from medium and small-scale mining companies extracting this mineral in 2011, with few licensees collecting production of nickel from the medium and small-scale producers.
A large number of small-scale limestone mining companies operate throughout the country. Antea Cement operating in Kruja district was the largest producer of limestone in 2011 contributing with 19% of total production value.
Collection in minimal figures
Report shows that in total for 2011, oil and gas sector and Albpetrol contributed with Lek 4,706 million (equivalent to USD 47 million) to the State budget in 2011. This contribution comprised 10% of total production of oil in 2011 – reported at USD 456.5 million.
Oil and gas sector generated cash flows at Lek 7,523 million or 81% of total revenue. Out of these cash flows, shares of oil production of Lek 3,558 million is collected by Albpetrol from production licenses under its administration, whereby as a licensee, pays royalty, profit tax and dividend amounting to Lek 741 million.
Mining sector generated cash flows of Lek 1,793 million (equivalent to USD 17.9 million) or 19% of total revenue of Lek 9,316 million. This contribution comprised 8% of total production of minerals in 2011 – reported at USD 217.5 millon.
But, the Albanian State receives its share of the value created from the extractive industry through: taxation of petroleum and mining activities; charges / fees and dividends from ownership in Albpetrol sh.a.
The extractive sector in Albania has contributed with 6.3% of profit tax collected in 2011, whereby mining contributed the largest share at 5.5%. Profit tax at Lek 0.16 billion (0.8%) is paid by Albpetrol. Profit tax in Albania was charged at 10% of each company’s net profit. Taxation is levied on each company at 30 – 55% on taxable profit based on the production level. In determining the taxable profit, the licensee is allowed to deduct all capital and operating expenses as specified in the terms of the License Agreement. Such deductions have resulted in no profit tax collected from oil and gas companies during 2011. In 2012, Law on petroleum taxation was amended to 50% flat tax on profit.
Royalty tax contribution in 2011 amounted to 23.2% of other taxes, whereby the petroleum sector contributed 21.8% and the mining sector 1.4%. Under this law, royalty tax on petroleum extraction is applied at 10% while mining sector pays at 4-7% of revenue from extraction.
According to Law of 2008, amended, 25% of royalty tax shall be allocated to each local government unit (“LGU”) in proportion with their contribution within the terms of the annual budget law.
In 2011, 25% of total Royalty collected amounted to Lek 1,240 million. According to the Ministry of Finance, in 2011, revenues from the royalty payments were recorded in the State Budget in a pool and no accurate records were held on royalty generated out of each local government unit. The Ministry of Finance has reported that no sub-national transfers were made.
Subsequently, annual budget laws for 2012, 2013 and 2014 have foreseen specific terms for allocation of royalty when exceeding the unconditional grant the National budget transfers to each local government unit.
This allocation was limited to 20% of the unconditional grant in 2012 and subsequently increased to 50% in 2013. So that, the portion of royalty transferable would vary from 1% to 50% of the unconditional grant.