Ghana: Boosting mine returns

The second-largest gold producer in Africa, Ghana is looking to maximise the benefits of the mining industry for the overall economy, both by revising licensing procedures and levying tariffs on the sector. It is hoped this will increase local participation in service provision, though some of the measures have provoked concern amongst sector operators.

On February 8, Ghana’s deputy minister for lands and natural resources, Henry Ford Kamel, announced that the government was planning to introduce a new system of bidding for mine licences that aims to replace the existing system where licences are awarded on a first-come-first-served basis. The new regulations are expected to be introduced before the end of 2012, with the ministry having already given its approval to the proposal, Kamel said.

Under the proposal, new bidding options would be announced and prospective participants called to take part in the bidding process. The ministry would then review the bidders’ financial, operational and technical capability, as well as their past performance in other mining operations.

Later, when speaking to the Chinese news agency Xinhua, Kamel said these reforms and others would strengthen the industry and the economy. “We are trying to bring the licence-acquisition process in line with the country’s procurement laws,” Kamel said. “For mineral production to increase, we need to take a holistic look at the whole mining infrastructure, including the regulations and fiscal regime.”

The government has also launched a task force to review and potentially renegotiate agreements struck with several mining firms, a move that finance minister Kwabena Duffuor has said would ensure Ghana would receive fair returns on the exploitation of its gold and other minerals.

“Given that the country’s mining sector consists mostly of gold mines, one would have expected a higher fiscal take by the government. Unfortunately, the phenomenal increase in gold price has not sufficiently benefitted the people of Ghana,” said Duffuor at the end of January. “The first task is to review and renegotiate any part of a stability agreement signed between Ghana and any mining company that is not in the best interest of the country.”

Stability agreements are long-term contracts between companies and the government that typically preserve mining royalty rates at around 3% and cannot be amended regardless of future changes in laws. The last round of these agreements was negotiated in 2004 and they do not expire until 2019.

The government has also imposed a hike on taxes levied at the mining industry. Corporate tax for the sector has increased from 25% to 35%, and a 10% windfall tax was introduced in the 2012 budget. Mining companies with stability agreements continue to pay a 3% royalty tax, though the government would like to increase this.

Needless to say, the moves have raised eyebrows amongst mining firms, although many of the country’s bigger operators will not be immediately affected, due to clauses in their stability agreements that limit royalties and taxes.

On February 15, Mark Cutifani, the CEO of AngloGold Ashanti, said he did not believe the company’s operations in Ghana would be affected by the amendments to the tax regime. Cutifani added that the company’s present stability agreement, which is set to run to 2019 and mandates a 3% limit on royalty taxes and a 25% cap on corporate taxes, should remain valid.

The moves to reform and increase the country’s returns from the mining industry coincide with the release of a World Bank report that suggests potential strategies for Ghana and other West African nations to boost their earnings from the exploitation of their mineral resources.

The report, released February 6, recommended that the governments of Ghana, Guinea and Senegal work with mining companies, suppliers and civil society to strengthen definitions and indicators for measuring local procurement. According to the study, entitled “Increasing Local Procurement by the Mining Industry in West Africa”, if mining companies increased the share of local procurement, this would spread the benefits of mining more evenly across a country’s economy by creating jobs and stimulating the sustainable development of local enterprises.

The World Bank recommended that affected governments should enact and implement appropriate policies and regulations to encourage mining companies to purchase more equipment, supplies and services from local companies, while also providing an environment that will support enterprise development and investment.

According to the report, “there are important potential opportunities for expanding local supply in areas such as camp management, civil works, construction and transport, as well as drilling, mining and equipment maintenance”.

The benefits of Ghanaian firms raising their profile in the mining services sector could be immense, the World Bank said. By bolstering the contribution of local service providers, Ghana and other West African countries could retain up to 34% of the total export value of the minerals that are extracted and shipped overseas. A report by the UN Conference on Trade and Development said Ghana earns about 5% of the value of its gold exports, for example, and the Chamber of Mines put that number at 7% in 2009.

While many mining firms would probably welcome the opportunity to increase their usage of local services, those local service providers must ensure they can deliver − both on cost and quality. If they can do so, Ghana will be able to tap into another rich vein of income.