Widespread damaging impacts of illegal mining may finally catalyze efforts at making the mining sector more beneficial to Ghana and its people
The news, almost on a daily basis, is horrifying – over a dozen dead and a couple dozen more injured from a cave-in at an illegally operated mine pit; over 100 illegal Chinese miners arrested after series of gunshots at mobs of irate locals; several rural communities’ sources of drinking water polluted with dangerous chemicals by illegal gold miners – and the reports are coming in thick and fast from at least eight of Ghana’s 10 regions.
Gold, commercially mined in Ghana for over a century, and which gave the country its colonial name, the Gold Coast, has not really had a glittering impact on the economies of its mining cities as in other countries where the metal is mined.
But gold, which accounts for over 90% of the mining sector’s export revenue swill undoubtedly, for better or for worse, continue to define the socio-economic fortunes, as well as the international image of Ghana and its people, for many more years.
The country, in recent years, has been racing up the global ladder of most important gold producers. It was ranked the world’s seventh biggest producer in 2011 with an output of 3.6 million ounces, which shot up 17% in 2012 to 4.2 million ounces and growth is expected to increase by a similar rate in 2013. Tellingly, however, the country is also fast spiraling down another ladder of despondency and social insecurity on a national scale.
Unregulated and hazardous, illegal mining has become endemic, posing a national security threat.
Most Ghanaians hold the view that the country has not received enough benefits from the industry. And now, increasing numbers of the generally underemployed youth in rural communities are resorting to illegal mining, which is leaving in its trail degraded environments and devastated communities, not to mention rampant fatal accidents among the illegal miners, called “galamsey” – a local parlance for “gather and sell” – and the influx of foreigners into the activity, who have little or no regard for local social norms; chief among them are the Chinese, but also Indians and Africans from Burkina Faso, Mali and Cote d’Ivoire.
Data is not especially reliable but the Precious Minerals Mining Company estimates that about 500,000 officially –licensed and loosely regulated youth are currently engaged in small scale mining, which until recently was mostly artisanal. These are different from the other estimated 50,000 and rapidly increasing numbers of those classified as galamsey.
In-between the two is a flourishing gray area, where licensed small scale operators either give out their concessions to illegal operators or employ Chinese nationals (foreigners are barred by Ghana’s mining law from working in the industry’s small scale sector) who have brought in heavy duty dredging machines, water pumps and other mining equipment.
The rising incidence of illegal gold mining is indeed not peculiar to Ghana. With prices of the mineral staying steady on the international market in recent years, the rewards of illicit mining have been very alluring and illegal mining, which is very difficult to regulate, has grown on a global scale, especially so in African countries which lack strong regulatory regimes.
Alarmingly though, Ghanaian cocoa farmers are now reportedly turning over their farmlands to galamsey operators.
To put the development in context, cocoa had been and continues to be a major driver of the Ghanaian economy since independence and is presently the second biggest export earner, raking in US$939.8 million in the first quarter of 2013. In perspective, gold exports amounted to US$1.5 billion and crude oil, the third highest earner, fetched US$689.6 million for the period.
New geological survey results show that the land of Ghana bears more gold, and indeed other industrial metals; much more extensively across the entire country than has hitherto been estimated. And mining gold, even in however it’s crude a form, is fetching returns far higher and more quickly than farming and several other economic activities.
But while Ghana’s escalating incidence of galamsey may cursorily be explained away as purely a case of ordinary people taking advantage of an economic opportunity, there has for a long time been undercurrents of ambivalence and common perceptions among successive governments, and Ghanaians in general that the country is not deriving enough benefits from mining, evidenced by the little or no physical transformation in mining communities such as Tarkwa and Obuasi, as compared to Johannesburg in South Africa, for instance.
Illegal mining could therefore be the protestations of the deprived youth who see it more as a means of correcting an economic injustice. But ironically, affluent Ghanaians are suspected to have invaded the illegal sector by bringing in expensive machinery and employing the same hapless youth to work for wages. And worse, the affluent Ghanaians are collaborating with foreigners in bankrolling their investments in mining equipment.
Since 2012, Government’s answer to the perception of losing out on mining has been the imposition of more taxation on large mining firms operating in the country, which are all foreign multinationals.
Obviously encouraged by the current global trend in resource nationalism, whereby governments are seeking to transfer more value from mining, the Ghanaian government imposed fiscal measures on the mining companies; including hiking increasing the mining corporate tax from 25% to 35% to reflect what pertains in the country’s burgeoning oil sector; changing the existing mineral royalties of a range of three to six percent to a flat rate of five percent; and also changing capital allowance, from 80% in the first year and 50% on declining balance, to a straight line amortization over five years at 20% each year.Government also pushed for the ring-fencing of assets for the purposes of determining tax payable
But perhaps the most contentious measures have been the move to review the stability agreements and the proposed windfall profit tax of 10%, which was subsequently suspended temporarily in September 2012.
Mining firms worry whether government intends to get rid of stability agreements entirely and when the windfall tax, expected to pass in 2013, will start to apply., What would be the threshold for the super-tax on extra profits and whether it would be applied retroactively.
Expectedly, the large mining firms in Ghana reacted in consonance with the general trend globally, where projects around the world have been deferred and delayed, and in some cases investment withdrawn altogether, because of the degraded risk/reward arising from increasing resource nationalism, as reported by The Ernst & Young Business Risks Facing Mining and Metals 2012–2013.
The Ghana Chamber of Mines expressed worries that the future of the country, as the mining hub in the West African sub-region, could be significantly undermined by the new fiscal measures, more especially as it contravenes existing stability agreements with two of Ghana’s top three producers, AngloGold Ashanti and Newmont Ghana. The Chamber worries that as new exploration funds continue to flowing more into neighbouring countries, including Burkina Faso and Mali that, coupled with the stalling of expansionary activities in Ghana, poses a strategic threat to the country’s status.
The mining firms however don’t seem in a haste to pack out. Australian miner, Adamus Resources, says its operations in Ghana is in a far better position than back home in Australia since the latter’s measures to hike its take from the mining sector is even more stringent than Ghana’s. And an obviously elated civil society in Ghana is encouraging government to press on with the new measures, noting that concerns about mining firms quitting Ghana is unfounded, since miners will always have to operate where the resource is located.
But Ghana, it would seem, is not looking at only pinching a few dollars here and there.
In early 2012, Ggovernment set up a seven-member mining sector reform committee, to review and re-negotiate the stability agreements that the country had entered into with some mining firms; “to maximize the flow of economic and social value from our natural resources to the country on a sustainable basis,” said former Finance Minister Dr. Kwabena Duffour.
Professor Akilakpa Sawyer, head of the committee, says their work, which is about almost completed, aims fundamentally at creating a policy space for government in the mining sector. Ghana’s mining sector is dominated by gold by over 90% and historically, agreements on the exploration, production, exportation and fiscal arrangements for the gold sector have been dictated by the interests of foreign multinationals, usually to the disadvantage of the country.
“We’re looking at the situation where contracts and agreements in the mining sector would primarily be based on the political economy of the country and not so much on the needs and dictates of foreign multinationals,” Professor Sawyer said.
Obviously Government’s thinking is increasingly tilting heavily towards that of civil society about the country being shortchanged in its mining industry.
Dr. Toni Aubynn, CEO of the Ghana Chamber of Mines, agrees with Professor Sawyer; but not entirely.
Dr. Aubynn concurs that Africa is rich in several industrial mineral resources, with the continent ranked number one in known reserves and production of those minerals which include diamond, cobalt, phosphate, vanadium, gold, and platinum group metals (PGMs) among others. And yet the continent suffers a persistence of poverty, inequality and unemployment, with its mining business characterised by inadequate visible local content and no significant reflection of the industry on the communities where mining takes place.
He notes that the past history of the industry has not been very transparent making it an enclave, thus fueling a perception of ‘losing out’ by African countries.
Dr. Aubynn thinks the mining industry is a bad story teller but, that notwithstanding, the round numbers suggest Ghana’s gold sector is far from a being a basket case.
Ghana’s mining sector, in 2011, was the number one tax payer and highest contributor to the Ghana Revenue Authority (GRA) contributing about US$540million, representing 27.61% of total Internal Revenue collections.
Mining firms also paid US$360million in corporate tax to the GRA, representing 38.26%of the total company tax collected in 2011, while also voluntarily contributing an amount of about US$27 million to their communities and the general public for various developmental interventions
The sector, in 2011, accounted for about 42% of gross merchandise exports earnings with the companies returning about US$3.1 billion representing 75% of their mineral revenue through the Bank of Ghana and the commercial banks against a statutory requirement of 25%.
Notably, the industry grew by 14.3% in 2011 as compared to 8.3% in 2010 and continues as the leading attractor of direct foreign investments.
The Chamber of Mines is proposing that mining’s contributions to national economic development could better be applied to the benefit of host communities if government would adopt a system of tax credit that could help reallocate more of miners’ tax contributions to host communities.
Under the scheme – this has been successfully applied in Papua New Guinea and other mining-led economies – approved government projects are funded, managed and implemented by a developer, in this case a mining company, and expenditure thereof set-off against tax payable by the company for the year.
It is set as a percentage of the annual assessable income of the company; for example, at one or two percent, thus the Tax Credit Scheme, in effect, is first call on government resources.
Some experts have proposed the establishment of a mining “community fund” that should be made to handle or hold the tax credit and the development fund, of which to be implemented and operated by the mining company as developer.
Mr. Sulemanu Koney, the Chamber’s Director, Analysis, Research & Finance has also strongly pointed out that in all the talks about reform in the mining sector, not much emphasis is being given to the need of developing vibrant indigenous mining companies, which would be more likely be accepted as being less exploitative, as the foreign firms are perceived to be, and would also more likely reinvest more of their profits in the national economy.
His argument sits snugly with the position of the Ghana Association of Small Scale Miners, which over the years, have bemoaned the lack of opportunities and strong government programmes that aim at nurturing promising companies to grow into viable competitors with foreign firms for the exploitation of the country’s minerals.
Whereas their advocacy has strongly highlighted the need for government policies that would encourage local value addition to gold and diamond mining, Government’s current drive towards mining reforms has conspicuously shied away from another global trend; beneficiation.
Many governments, as reported by Ernst & Young, are now seeking to have minerals beneficiated in-country prior to export. South Africa has announced a beneficiation strategy, as has Zimbabwe, Indonesia, Brazil and Vietnam. In theory, this will capture more of the value-chain as the products will achieve higher prices.
In order to better ensure in-country beneficiation, governments are imposing new steep export levies on unrefined ores. For instance Indonesia, as part of its mining tax changes, has proposed a new export levy of 25% on mining exports in 2012, increasing to 50% in 2013. The Indonesian Government said in announcing the proposal that it is seeking to develop its mining sector, create jobs and turn itself into a producer of higher value finished goods from an exporter of raw materials.
Ghana may not be able to afford that luxury now, as already, cumulative electricity prices since 2001 means cost of production had increased and is now dramatically aggravated by the new taxes and levies, which has now made Ghana less cost competitive than some countries including Peru, Namibia, South Africa, Botswana, Mali and Nigeria, all of which it was more competitive than prior to the introduction of the new taxes.
The lack of will power to institute a policy of beneficiation notwithstanding, there is growing consensus that excessive reliance on rent and taxes may be a slippery slope.
There is need for a balance between profitability and equity and local content and value addition is the surest way to optimising the benefits of mining since mining should evolve from being a ‘stand-alone’ economy and be integrated into the broader national and regional economy.
The menace of illegal mining, which all stakeholders agree is undermining the country’s status as a stable and secure mining destination, may yet force onto all players in the industry, the need to take those hard decisions that add up some costs but assures sustainable development to benefit both the mining companies and country alike.