Ghana’s Obsession With ‘Mineral Rents’

Ghana’S Obsession With ‘Mineral Rents’ - What happened to value addition all these years?

- What happened to value addition all these years?

Ghana is one of the few countries in the world with rich deposits of mineral resources, yet less optimal benefits have been accrued from these resources. This portends a big puzzle that remains unsolved even centuries into the ‘elite’ business of mineral production. The country since time immemorial has shyly looked on value addition, as though a ‘forbidden practice’. However, feeds its obsession with seeking mineral rents (royalties, taxes, shares, and other revenues) to a very large extent.

It is almost a cliché that has been told by governments and sector ministers over and again that: value addition, however simple and compelling, is but challenging to practice. While true in some respects, there are quite a number of stories showing progress across some African countries, in this regard. Thus, the potential dividends to be accrued through going the way of value addition are evident, and to delay this further is to lengthen the current phenomenon of the paradox of owning abundant of mineral resources, yet poverty-ridden.

Besides, the true worth of the country’s mineral resources is yet uncertain. With mineral resources being non-renewable, finite and depletive, the government should be concerned and start considering the development of a national plan which expresses with clarity what economic transformation the country requires from its mineral resources using an ‘at-all-cost’ approach to realizing it.

Having a long-term nature (value addition), but sure benefits, the design of a national plan on this path must involve stakeholders and experts in the field, and painstakingly avoid any political barriers whatsoever.

Current Fiscal Regime For Mineral Resources

Over the years, reforms in Ghana’s fiscal regime for mineral resources have mimicked happenings within the global landscape, reflecting price hikes in mineral resources, and more broadly, the quest to exact more returns from mineral resources due to the assertion that mining companies are taking advantage of loopholes in the tax administrations.

These conditions, with much emphasis on the latter, have in turn, skewed government’s focus towards optimizing economic rents from mineral resources, whilst driving farther away the need for investments toward value addition.

Looking at the issue more specifically, some commitments toward value addition have been realized in smelting and refining gold ore, diamond processing, and recently bauxite, but still so far below optimum levels. The short-time horizon which governments face and the accompanied fiscal pressures divert attention from this important venture for quick-fixes.

Overtly or covertly, the country’s focus has hugely centered on fiscal returns from mineral production and sales. The table below describes the current fiscal regime in the mining industry.

Table 13x

Considering the foregoing, latest data provided by the Bank of Ghana in its Statistical Bulletin indicate that in 2020, mineral royalties reached GHS1.38 billion up from GHS1.007 billion in 2019. Also, for the first quarter of 2021, mineral royalties accrued to the country stood at GHS323.18 million.

Moreover, corporate income tax (CIT) amounted to GHS2.139 billion in 2020, employee income tax (PAYE) was GHS641.868 million, among other sources within the fiscal structure, according to the Ghana Chamber of Mines.

However, the following are incentives backing special contractual agreements between the government and mining companies. Indicatively, the latter enjoys: (a) concessionary rate for the payment of custom duties on Plant, Machinery & Equipment exclusively for mining operations as approved; (b) Holder of mining lease is entitled to the capitalization of expenditure on reconnaissance and prospecting approved by the Minister on the advice of the Commission where the holder starts development of a commercial find; (c) Royalties paid is tax deductible; (d) Retention of a portion of export proceeds in an external account to finance purchase of inputs; (e) Immigration quota in respect of approved number of expatriate personnel in line with Minerals and Mining (Local Content & Local Participation) Regulations, 2020 (L.I 2431).

While Ghana’s fiscal regime for mineral resources has not changed substantially over the past years, the mining industry remains the most taxed as a result of the various tax components indicated earlier. This has led some corporations within the industry to engage in illicit financial flows, transfer mispricing and mis-invoicing, in order to evade paying these taxes.

According to Dr. Ali Nakyea, a tax expert, in a recent interview, he indicated that losses as a result of illicit financial flows in the mining sector are in excess of US$6 billion every year. Noting this claim, however, the Chamber of Mines strongly contends that the government should allow tax exemptions to mining corporations, as the country is losing mining exploration investments to neighbouring countries in the region.

Over-Focus On Mineral Rents But Little Achievements To Show

Experts in the industry are persuaded by the fact that evidence is rife considering the potential gains Ghana stands to benefit from focusing on value addition, than excessive fiscal returns from mineral resources.

Broadly speaking, mining communities have for all these years benefited meagerly from the extraction of minerals in their communities; unemployment continues to remain a burden (partly explaining illegal mining activities); low levels of income, et cetera. Although, over the years, some improvements have been made but this is far from expected.

For instance, in 2020, despite the fact that revenue from mineral resources increased, as did royalties, the government did not render to mining communities their just due. Mining communities only received 13 percent of total royalties to the government, 7 percent deficit below the 20 percent mineral royalties required by law to be transferred to mining communities.

According to the Minerals Development Fund Act 2016 (Act 912) mining companies are to pay up to 5% of their total revenues as royalties to the state, and of that, the government transfers 20% to the Minerals Development Fund.

Of this amount, 4.95 percent accrues to the respective District Assemblies, another 4 percent to the Mining Development Scheme (MCDS). Essentially, this in no way suffices for the development of mining communities as they continue to remain among the poorest, and the allocations evidently minimal.

Table 23x

‘Extra’ Value Addition In Minerals Long Overdue

It is evident now that value addition, described as the means of processing of minerals such as refining of ores or smelting of metals is not sufficient. Going the way of ‘extra’ value addition requires providing the building blocks for creating and strengthening linkages between the extractive sector and other sectors of the economy.

A well-designed transition should be developed, which emphasizes manufacturing intermediate and final products to make better people’s lives and livelihoods, and to strengthen domestic supply chains so that local businesses can effectively participate in extractive industries.

These linkages come in the form of forward linkages into mineral beneficiation and manufacturing; backward linkages into mining capital goods, consumables and services industries; spatial linkages into infrastructure, including power, logistics, communications and water; and knowledge linkages into skills and technological development.

Since 2019, Ghana has been the largest producer of gold within the sub-Saharan Africa region. Recent data by the Ghana Chamber of Mines indicate that, despite the effect of the COVID-19 pandemic on extraction activities, limiting the quantum of output produced, Ghana still maintained its position.

However, the country’s gold production saw its highest decline in 2020 by 12.1 percent on a year-on-year basis since 2004. The total volume of gold produced locally declined from 4.577 million ounces in 2019 to 4.023 million ounces in 2020.

It is noteworthy to mention that since Ghana gained its current status as the largest gold producer in Africa, and seventh largest in the world, discussions have largely centered on whether the country is receiving its fair share from its gold resources. This is partly so because, increase in volumes of gold produced indicate more rents (in terms of taxes) accrued to the country, all else equal.

Meanwhile, its fierce competitor, South Africa, is exploring extra value addition more vigorously compared to Ghana. More importantly, there is no single evidence that shows that resource-rich nations have developed largely from focusing on fiscal returns from mineral resources. There’s global consensus that it is no optimum strategy for a country to maximize benefits from its mineral resources by focusing excessively on the rents paid by mining corporations.

However, Ghana’s mining sector procures 80 percent of its inputs from abroad, which costs the country US$1 billion, according to Mr Kwaku Addai Antwi-Boasiako, CEO of Minerals Commission, Ghana. He also indicated that the country exports the vast majority of its minerals as unprocessed ores which cost the country US$ 5.1 billion in lost revenue each year.

This shows the dearth in progress that the country has made in terms of value addition. More preferably, investments must be channeled to build supply-chain linkages between the mining sector and other sectors of the economy.

For the record, as of 2020, revenue generated from the export of minerals increased from US$ 6.678 billion in 2019 to USD 6.998 billion padded by the galloping price of gold, due to its safe haven nature as investor’s restructured their asset portfolios to hedge against the fall in value of liquid assets as a result of the economic effects of the pandemic.

Although there have been some attempts to go the direction of extra value addition in Ghana, such moves have always ended up in failures- efforts have been truncated due to mismanagement of funds, among others. A critical example was in the year 2004 when the government announced a revolving credit of unrefined gold for the purpose of promoting increased jewellery production and sales. The programme was to be assisted by AngloGold Ashanti and Gold Fields. However, in less than two years into the programme, the unrefined gold was mismanaged and the credit consequently terminated. Since then, steps to this end have been negligible and slow.

Therefore, successive governments have seemingly been disinterested in ensuring the country benefits from the greater prospects accrued in value addition.

More so, forums, high-level meetings have become platforms where governments over the past years have made hints of accelerating the process, only to revert to the status quo with little to no commitments whatsoever.

Government’s Renewed Focus Towards Value Addition

These notwithstanding, the government of Ghana has recently announced its intention to shift from the focus of fiscal returns on mineral resources to value addition.

Obviously, for the country to optimally maximize the benefits from its mineral resources, diversification is the key rather than excessively seeking rents from mineral resources.

However, robust systems and policies must be put in place in order to avoid the occurrences of mismanagement as have been the case in previous attempts. It is expected that after a century of engaging in mining activities, the country moves beyond the rhetoric of being in the midst of abundance but poverty-ridden.

Considering the new direction that governments of developing economies are expected to turn Post-COVID, diversifying the operations of the mining sector would rake-in more dividends beyond the rents (Taxes). That said, more value addition remains a potentially viable way to maximize benefits from the extraction of Ghana’s minerals.

While capital is expensive to kick-start and streamline the processes for value-addition, amid a COVID situation that has had a heavy toll on the economic affairs of the country, government’s considerations of potential collaborations with the private sector (Public-Private Partnerships) in order to attract the right and needed investments should be explored.

Should the government put in twice as much of the efforts and commitments towards dealing with the ‘galamsey’ menace into value addition, the country should be able to reap enormous benefits from its mineral resources.

Following the steps of countries such as Chile, which has become a success story in this regard, the government can consider adopting Chile’s model and vigorously chart the path to move beyond mere obsession with mineral rents.