Ghana: New guidelines for mining

In a bid to increase the sector’s contribution to economic growth, Ghana’s national mining policy is set to undergo a major reworking over the next few months.

The mining sector has performed steadily over the past year, particularly in gold production. In all, it generated revenues of $2.83bn, an increase of 27% compared to 2009, while contributing over 6% to GDP. Investment in the sector reached $770m in 2010, bringing the cumulative total over the past decade to $6.2bn. Furthermore, it contributed $364m in taxes, or 21% of the total. Despite these successes, the government believes that more can be done to generate local benefits in terms of revenue and jobs.

Under pressure from the World Bank, Ghana’s formerly state-owned mines opened the door to foreign participation in 1986, offering generous incentives – including royalties capped at 3%, exemptions from import taxes on mining equipment, expatriate quotas and capital allowances. However, since the late 1990s, the liberalisation of the sector has lost momentum. Efforts to reform the fiscal framework were delayed by the onset of the global financial crisis, but have picked up over the past year, spurred by rising commodity prices and a drive to mobilise revenue for the country’s “Better Ghana” agenda.

In line with this, the Ministry of Finance announced a rise in royalties from 3% to 5% in March 2011, adding that concrete efforts were being made to restructure the sector’s entire fiscal regime. The government has also indicated that it wants to renegotiate the so-called stability agreements, which were concluded with mining giants Anglogold and Newmont in 2004. In return for a commitment to large investments, these agreements have exempted both players from an increase in duties until the year 2019.

Mike Allen Hammah, the minister for lands and natural resources, told OBG that the draft policy was recently submitted to parliament and is expected to be implemented in early 2012. The new law will involve far-reaching measures with regards to licensing, compensation, settlement and mining support services. Rather than just fiscal reforms, Hammah said that the policy will bring about a “paradigm shift that will put local companies at the forefront of the mining services industry”.

“We are looking at a diversification of the mineral base and an improvement of local servicing capacity. In doing so, we have to encourage the creation of indigenous mining service businesses that can fulfil the needs of large mining companies throughout the value chain,” Hammah told OBG.

Daniel Owiredu, the president of the Ghana Chamber of Mines, recently said that the sector’s spending on local services could be increased by up to two-thirds, from a current annual average of $1bn to as much as $1.6bn.

Moreover, local content has become a household term of late following the start of oil production in Ghana, putting pressure on the government to encourage domestic enterprises and boost job creation. Local requirement clauses in energy deals may very well spill over into the revised mining policy.

The draft legislation is also aimed at curbing the rapid growth in illegal mining. On the back of rising gold prices, an increasing number of informal, small-scale operations have popped up. The Minerals Commission, the sector’s regulator, estimates that out of the more than 500,000 people currently working for small mines, up to 50,000 are involved in illegal operations. Disregard for health, safety and environmental standards in these mines is common, with a corresponding detrimental impact on both the miners themselves and the communities in which they work. Negative effects from illegal mining include the theft of tools and equipment from legal operations, as well as environmental damage from mercury and cyanide spills, landslides or disrupted water flows, and even the loss of life.

“Education and awareness are a key measure to lure miners away from illegal activity,” Hammah told OBG. “Too often, illegal miners are not aware of the numerous advantages of operating legally, such as access to EU-sponsored technical and financial assistance.” The ministry is also encouraging the formation of cooperatives of small-scale miners in a bid to streamline assistance efforts. Although a significant number of unregistered mines are in foreign hands, according to Owiredu, moving indigenous operations into the legal economy is considered a key priority in the government’s efforts to clamp down on illegal mining.

One issue that seems to have gone unaddressed in the new policy is that of power pricing, which has been the subject of heated debate since the government withdrew subsidies for mining operators in 2008. High oil prices have made the issue an increasingly central one for local producers.

Joyce Aryee, the CEO of the Ghana Chamber of Mines, told OBG that, although gold output is likely to exceed last year’s 3m ounces in 2011. “Rising power prices could well become a deterrent for direct foreign investment in Ghanaian mining in the long run.” To reduce the impact of volatile oil prices on investment in the sector, Aryee is calling for a cap on the cost of electricity purchased from the Volta River Authority, the state-owned power company.

Given the push for significant regulatory changes in several major mining countries, as well as Ghana’s own emphasis on local involvement in its burgeoning energy sector, investors are understandably keen to learn the terms of the country’s new mining policy. Above all, ensuring consistency will be key. As the cost of establishing and running mining operations is high, too much tinkering with investment terms may dampen foreign interest in this crucial driver of growth. The slowing of capital flows into North African energy giant Algeria following the imposition of new regulatory reforms is an excellent example of this. Thanks to its reputation as a stable and predictable investment destination, and spurred by steady increases in commodity prices, Ghana is well placed to ride the wave of growing investment in mining going forward, provided its approach is a pragmatic one.