Mining sector goes unappreciated

Recent statements from senior government officials suggest deep dissatisfaction with the contributions of the mining sector to Ghana’s economic fortunes. Suleiman Mustapha examines the evidence.

At the recent launch of the International Monetary Fund’s Regional Economic Outlook for Sub-Saharan Africa, Ghana’s Vice-President, Dr Mahamudu Bawumia, expressed deep dissatisfaction and disappointment with what he said was the poor record of gold-mining companies in the country with regards to its fiscal obligations to the state.

He was particularly irked by the failure of mining companies to pay government dividends on its equity stakes in the various mining firms, which he described as “virtually useless”.

Under Ghana’s mining laws, the state is generally entitled to a freely carried interest — which means unpaid for — 10 per cent equity stake in every operating mine in the country.

This is apart from any further fully paid equity stake the state may take in a mine, based on normal negotiations between it and the mining company.

Coming on the back of a litany of similar complaints in recent times made by other highly placed public officials, expectations are growing that the government, as part of its ongoing drive to increase its revenues to match its expenditures, is planning to tighten the fiscal regime under which mining companies in Ghana operate.

This may take the form of either increased tax rates or revised stability agreements.

Wielding a big stick

Such concerns have arisen because an admittedly less than ideal situation is being exaggerated and wielded as a big stick; mining companies understandably are now expecting to be beaten on the head with that stick, more so since this is a strategy often used by the government in the past.

To be sure, records held by the Non-Tax Revenue Unit and the public investment department of the Ministry of Finance indicate that GH¢43.168 million was paid as dividends on this free-carried 10 per cent interest between 2004 and 2014, by four out of 14 mining companies. But these records are questionable to say the least.

For example, Gold Fields Ghana paid US$ 10.3 million for 2013 alone. In 2016, the dividends paid by one of the 14 mining companies that the government has shares in was GH¢26.7 million. This suggests that the overall dividend payments may have been significantly understated in the public records.

Fiscal regime

The government has picked its timing very well for a tightening of its applicable fiscal regime, at least from a populist view point. Over the past few years, the multinational mining firms have been accused of several types of unsavoury behaviour, ranging from neglect of host communities, through transfer pricing, to outright tax evasion.

The poor environmental practices of illegal small-scale miners, which have united the country against them, have also muddied the image of the industry, even though the relatively large, duly licensed mining firms by law adhere to strict environment protection regulations. And the recent labour dispute between Gold Fields Ghana and its unionised workers, over the company’s decision to resort to contract mining to avoid prohibitively high equipment replacement costs during its mine’s sunset years, has generated public criticism of the industry’s labour policies and practices.

However, with regards to the mining industry’s operational and financial fortunes, a tightening of the fiscal regime under which it works, could not have been worse-timed. Despite a partial recovery of gold prices on global markets, prices are still way below their peak during the early part of this decade.

Exploration cut back

This has further persuaded the mining firms to cut back on exploration activities, which are crucial to its sustainability, after a tightening of the fiscal regime during the previous era of high global market prices stripped Ghana of the international cost competitiveness, established in the 1980s which propelled the country to become Africa’s second highest gold producer.

However, the average Ghanaian understands little of this and governments — both past and present —have taken advantage of this ignorance, to make mining companies a populist target to blame for the country’s slow development in general and particularly, the lack of social and economic infrastructure in the industry’s host communities.

This conveniently diverts public attention from the fact that it is the government, as the recipient of taxes, that has the primary responsibility for providing public infrastructure and services, not the mining companies themselves whose contributions in this regard are voluntary, not obligatory.

To be sure, the poor public perception of mining companies is partly their own fault; until recently, they only publicised their corporate social responsibility efforts, keeping quiet about their tax and royalty payments which comprised the bulk of their contributions to the well-being and development of the country and its people.

But those contributions are truly invaluable. In 2017 alone, gold-mining companies paid a total of GHc 2.1 billion, this amounting to 116 per cent of Ghana’s total tax collections for that year. Of this, corporate tax and royalties contributed GH¢1.6 billion. Instructively, Gold Fields Ghana, which is now being maligned for its conversion into contract mining, was the single highest taxpayer in Ghana, contributing GH¢ 501 million in taxes to the national purse in 2016.

Payment of taxes

Importantly, the mining industry not only pays the most taxes – it is also the leading source of direly needed foreign exchange as well.

In 2017 alone, the mining industry repatriated $2.5 billion in export earnings back to the country through the Bank of Ghana and the commercial banks, this being 70 per cent of the total export revenues it earned during the year.

It is instructive to note that the benefits of this colossal percentage of mineral revenue returned to the country go to the large number of indigenous businesses who receive portions of this through the goods and services they supply to the industry. For example, about 70 per cent of the about $285 million spent on diesel is paid to wholly Ghanaian-owned oil marketing firms.

 A similar story can be told about  power where about 80 per cent of the $307 million bill goes to the Volta River Authority (VRA). The mining industry’s role in creating a buoyant economy through its linkages with the non-mineral economy needs to be understood and appreciated.

Comparative analysis

But even as the government complains about the mining companies, poor attitude to meeting fiscal obligations to the state, Ghana would do well to examine a 2015 report written by four researchers at the University of Western Australia, on behalf of the International Mining for Development Centre, and called “Fiscal Regimes for New Gold Developments: Africa and South America Peer Country Comparisons.”

The report, using what it calls, the Average Effective Tax Rate, establishes that out of 10 countries examined,  five from each continent – Ghana has the highest rate, at 66.5 per cent, ahead of Guyana 63.9 per cent; Mali,60.4 per cent; Tanzania 58.8 per cent; Peru 58.5 per cent; Columbia 55.0 per cent; Burkina Faso 52.2 per cent; Brazil 44.1 per cent; Chile 44.3 per cent; and South Africa 36.3 per cent.

Mining is a most competitive global industry, and one which is being squeezed by weak global prices.

Therefore, Ghana must draw a balance between securing as much as it can from mining revenues, and retaining the country’s global attractiveness to industry investors who have a choice as to where to invest.