Ethiopia is believed to have large untapped mining resources. The Ethiopian government has planned to leverage this potential by increasing the mining sector’s contribution to the national economy by reforming and enhancing the implementation capacity of the sector and improving policy, legal and regulatory frameworks.
Currently, there is no mining policy in Ethiopia which provides a general framework for the mining sector. The Mining Operations Proclamation No.678/2010 (as amended in 2013) (“Mining Proclamation”) is the key legislation that regulates the sector. In 2018, the Council of Ministers issued the Mining Operation Regulation No.423/2018 (“Mining Regulation”) replacing the previous regulation No. 182/1994. In this issue of our legal update, we will highlight the main changes introduced by the Mining Regulation.
Additional Incentives
The Mining Proclamation offers various incentives for holders of a mining and exploration licenses to import duty free equipment, consumables, machineries and vehicles. The Mining Regulation expanded these incentives by allowing holders of an exploration license, to import, free of customs duties and taxes, small aircraft or helicopter having seat of 6 persons for the purpose of collecting data. The incentive is available only for holders of an exploration license who can import the small aircraft or the helicopter on a temporary basis and re-export it upon completion of the work or can transfer the small air craft or the helicopter to another exploration license holder. These incentives require the prior approval of the Ministry of Mines, Petroleum and Natural Gas (Ministry). In addition, exploration license holders are subject to other customs and aviation rules before and after importation of the small aircraft or helicopter.
Government Participation
The Mining Proclamation provides for the government to acquire a five percent (5%) participation interest in large scale mining companies. The Mining Proclamation does not clearly provide whether the right of the government is limited to taking 5% percent of the mining company’s profit or whether it will extend to the government acquiring a stake in the mining company. The Mining Regulation appears to clarify this by requiring holder of a large scale mining license to pay 5% of the government equity annually to the revenue collecting authority even if profit is not distributed among shareholders.
In addition to the 5% stake, the Mining Proclamation empowers the government to acquire an additional equity participation in large scale mining company. The details of how the additional equity is to be acquired are left to be determined during the negotiation and signing of the mining development agreement. Recently, the Ethiopian Mineral, Petroleum and Bio-Fuel Corporation was empowered by Regulation No.413/2017 to represent the government in its equity participation.
Regional States are empowered to hold the government cost free equity and to also determine the rate of government cost free participation and the additional equity participation. The failure of the Mining Proclamation to put the maximum cost free government participation interest in small scale mining companies creates a room for Regional States to take the percentage as high as they would like.
Royalty
The Mining Proclamation was silent on how royalty will be calculated. It only provides the royalty percentage payable on each mineral type. The Mining Regulation introduces the base of calculating royalty which will be levied ad valorem at the production site.
Social Responsibility
Pursuant to the Mining Proclamation, mining license holders, except artisanal license holders, are obligated to contribute to the community development plan and to the environmental impact restoration fund. The community development plan was left to be determined in the mining development agreement on the basis of the license area.
The Mining Regulation elaborates this further by requiring the community development fund to be a certain percentage of the operation cost or annual revenue depending on the stage of the mining operation. At the stage of the mining period, the license holder is required to contribute 2% from the annual revenue or net expenditure, whichever is higher whereas, at the stage of the development or preparation period, the license holder is required to contribute a lump sum amount from its operation cost as follows:
- Construction or industry minerals - 1%
- Precious or semi-precious minerals - 0.2%
- Iron or potash or metallic minerals - 0.1%
- Coal - 0.7%
The allocation of the community development fund is required to be approved by the Ministry to confirm that it is in line with the need of the local community and the country’s development strategy. In addition, the license holder is required to annually allocate funds to cover the costs of environmental rehabilitation upon the closure of its mining site.
Size of the License Area
The previous mining regulation provided the maximum area to be covered by a single license. However, under the Mining Regulation, such restriction was removed and replaced by providing the maximum area to be covered on the basis of mining blocks. A license can cover more than one block. The Ministry is empowered to determine the maximum area to be held by a single license through a directive. Such directive has not yet been enacted.
Miscellaneous
The Mining Regulation lists down the detail documentary requirements that must be submitted during application and renewal of various types of licenses. Further, the administrative fee for registration and licensing has been increased by more than double.