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Opening up Madagascar’s extractives sector

Madagascar makes progress in extractives sector disclosures, but has yet to achieve its potential for systematic transparency.

Following its second Validation, Madagascar achieved meaningful progress in implementing the EITI Standard, with considerable improvements across several requirements.

As a low-income country, Madagascar’s economy depends significantly on the extractives sector. In 2018, the sector contributed 4.41% to the country’s GDP and over a quarter of total exports. EITI implementation in Madagascar has improved transparency in areas of public interest, such as the impact of the decade-long freeze on new mining license awards and the allocation of mining revenues to local communities. Ahead of its second Validation, Madagascar also made progress on a series of first-ever publications, including the financial statements of its state-owned enterprises (SOEs) and independent government agencies such as OMNIS.

Yet stakeholders still consider that the EITI in Madagascar has fallen short of its potential in broadening public understanding of the extractives sector, using the EITI more as a compliance exercise rather than a tool for improving extractives governance. To close this gap, the EITI Board encouraged Madagascar to undertake timelier and more systematic EITI reporting through government and company systems. This would enable Madagascar’s EITI multi-stakeholder group (MSG) to focus on analysing the data to inform decision-making and public debate.

Systematic reporting is in the interest of Madagascar’s government and citizens. It can help support the government’s national development plan (Initiative Émergence Madagascar), which aims to leverage key sectors of the economy to support sustainable and inclusive development. Below are four questions systematic reporting can help answer.

What revenues can the government expect to collect from extractives companies?

Comprehensive, reliable and timely data on extractives companies’ payments can help inform the government’s efforts to improve domestic resource mobilisation. The 2020 Budget Law already requires taxpayers to submit their financial statements to tax authorities through its new e-portal. Routine publication of these financial statements, which adhere to taxpayer confidentiality provisions, could ensure that the Ministry of Finance and Budget’s website provides up to date information on companies’ financials and payments to government.

Furthermore, systematic disclosure of this information can bolster public understanding of specific extractives projects’ contributions to government tax revenues. Making data available on existing systems, such as the Ministry of Mines and Strategic Resources and the mining cadastre (BCMM), could strengthen oversight of non-tax revenues, such as mining administration fees.

Madagascar EITI publishes 2018 data on mining administration fee payments by company and license in open data format on its website.

The Covid-19 pandemic is expected to have a significant impact on the Madagascar’s national economy and foreign investment. Estimating extractives revenues over the long term will be critical in the face of these challenges. Financial modelling by Madagascar EITI could help this exercise, drawing on data such as payments to government at the project-level and extractives contracts. This data could also inform ongoing efforts to revise the Mining Code, including on contentious issues such as royalty rates and the level of government participation in extractives projects.

Is the extractives sector contributing to local development?

Extractives projects in Madagascar have faced opposition in some rural communities.  Civil society organisations and affected communities want to see the benefits of these projects for the local population, and to understand how the negative impacts of extraction are being mitigated.

EITI Reports contain a wealth of information on companies’ social expenditures and environmental obligations, including the number of relevant environmental permits. Over the past ten years, EITI reporting has also identified weaknesses in the transfer of mining revenues to local governments (mining administration fees and ristournes) and helped to clarify the use of these funds at the local level.

Ambatovy, a large-scale nickel and cobalt mining enterprise in Madagascar, disbursed USD 18 million in revenue transfers to subnational governments for the period of 2012 to 2018.

There is potential to improve the timeliness and relevance of this data further. Regular disclosure of planned and actual subnational transfers of mining revenues by the mining cadastre could help respond to frequent demands for this information by local governments and communities. This could free up Madagascar EITI’s capacity to focus on working with local governments to document how these local revenues are managed and spent.

Companies are also well placed to routinely disclose their social and environmental expenditures as part of their regular disclosures, including the nature of these payments, their value and the identity of beneficiaries. In addition to clarifying the legal basis for companies’ payments to government, the publication of extractives contracts would shed light on companies’ social and environmental obligations. It is also a necessary step to help strengthen citizen oversight and monitoring of companies’ adherence to their contractual obligations.

Who are the companies operating in Madagascar?

The identity of companies operating in Madagascar has been the subject of significant public debate. EITI reporting has documented the absence of criteria in the country’s licensing framework to assess companies’ technical and financial capacities. This has intensified popular scepticism over how extractive companies are granted licenses and whether they are sufficiently qualified. Many companies operating in Madagascar are subsidiaries of privately held companies, making it difficult to hold their owners accountable for their companies’ operations. To date, EITI reporting is the only publicly available source of data on extractives companies’ legal and beneficial owners. This reporting partially documents ownership of company shares by Malagasy nationals and highlights gaps around the involvement and ownership structures of international companies in Malagasy operations.

Annex 5 of the 2018 EITI Report provides partial 2018 beneficial ownership and company ownership data, including for Madagascar Oil, the only oil company in the production phase in the country.

Publicly accessible beneficial ownership registers could bring this information to light, allowing citizens and government entities to know the ultimate owners of the companies investing and operating in Madagascar.

The building blocks are already in place to bring greater beneficial ownership transparency to Madagascar’s extractives sector. In late 2019, Madagascar EITI drafted a decree for the government, which defined the process for collecting and verifying beneficial ownership information. Routine disclosure of this data – via registers hosted by governments agencies BCMM (mining) and OMNIS (oil and gas) – could support the government’s due diligence of license applicants. For financial intelligence unit SAMIFIN, this data could inform their work on anti-money laundering and fighting illicit financial flows, while improving information exchange at the international level.

How are extractives revenues managed by state-owned enterprises and government agencies?

SOEs and government agencies such as OMNIS collect a substantial share of government revenues from extractives companies. Opacity surrounding their role and operations have led to allegations of fund mismanagement. Through EITI reporting, all but the environmental agency ONE have published their 2017 and 2018 audited financial statements, revealing previously undisclosed aspects of their financial performance and expenditures on behalf of the government.

Institutionalising the routine disclosure of these audited financial statements would help clarify these entities’ revenue management practices and fiscal relations with the government. Timelier information could strengthen the government’s oversight role while improving public understanding of how extractives revenues are managed beyond the national budget process.

Next steps

Madagascar has made strides to improve key disclosures of extractives data. These efforts provide a solid foundation for the government and companies to begin systematically disclosing relevant data on their own systems. The country is well placed to address the gaps from its second Validation through these kinds of systematic disclosures. Faced with the challenges of the Covid-19 pandemic, the flexible approaches to EITI reporting agreed in May 2020 could provide an opportunity to transition towards timelier and more systematic disclosure practices, an approach which can benefit Madagascar in the long term.

The EITI Board determined that Madagascar will have 18 months before a third Validation, i.e. until 9 December 2021, to carry out corrective actions regarding government engagement, civil society engagement, MSG oversight, license allocations, contract disclosure, state participation, data disaggregation and subnational transfers.

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