With six (6) years left to meet the 2028 target of the ‘Ghana Beyond Aid’ agenda, one of the crucial strategies to ensure this happens has been left untouched. As stipulated in the charter, one of the ‘innovative sources of funding’ to meet this agenda includes introducing a new mining fiscal regime to shore up revenues.
This, has since provoked again and again, several debates about why the country generates less-than-expected revenues from its mineral resources, despite being in the extractives business for years, as well as vilified proponents calling for a new fiscal regime for the extractives sector, away from a concessionary regime.
Being a commodity-dependent economy, mining revenues accrued to Ghana remains a significant contributor to annual budgets, with the contribution of gold leading the pack— although supportive, a grim reality remains— the fact that the real value of the country’s resource wealth has not brought prosperity to wider populations of the economy.
CSOs, Research Institutions such as the Institute of Fiscal Studies (IFS), and the Centre for Natural Resources and Environmental Management (CNREM) have, in recent times, raised concerns about the paltry revenues accrued from the country’s extractives sector.
Ghana’s mining fiscal regime is concessionary, consisting of Company Income Tax (CIT) of 35%, royalty of 5% of gross market value of mineral sale, withholding tax on interest, dividend, royalty, and management services of 8%, 8%, 10% and 15% respectively, and withholding tax of 1.5% on small-scale miners, among others.
Though practiced for decades, the revenues derived from the regime appears relatively low compared to those of other countries on the continent. Comparatively, Botswana, which operates an almost similar mining fiscal regime tends to generate greater revenues from its mineral resources.
The Institute for Fiscal Studies (IFS) in a recent analysis on the government’s revenue from the extractive sector found that between the period of 2015 and 2018, the government received a smaller share of revenue from mining than what it received from oil production, though the average value of mineral production far exceeded the average value of oil production during the period.
“Specifically, while the government of Ghana received an average amount of US$548.7 million in oil revenue out of an average value of US$2.95 billion in oil production in 2015-2018, the government received an average amount of only US$370.26 million in mineral revenue out of an average value of US$5.68 billion in mineral production during the same period”.
IFS
Participation in Mining Sector ‘Too Small’
According to the Institute of Fiscal Studies (IFS), this is partly the case because “the government’s participation in the mining subsector is comparatively too small in Ghana” whereas comparatively, the government of Botswana has huge ownership interests in the country’s mining sector.
With the growing desire to see Ghana move beyond the rhetoric of always seeking aid, and being a model to its peers on the continent in development, the charter highlights that:
“We will introduce a new fiscal regime for the mining sector, which will not only encourage value addition to our mineral resources and leverage the resources for development, but also extend the current structure of government mineral revenues from just royalties and profit sharing to taking our shares of minerals output directly before sales”.
Ghana Beyond Aid Charter
Simply put, the government seeks to employ the use of production sharing agreements (PSA), in addition to the royalties and taxes already existing. This ultimately reflects a country that wants to obtain greater shares in its minerals, than the existing rule of just receiving royalties and taxes, but the delay in rolling out this regime is unclear.
Need to Renegotiate Oil and Mining Contracts
Indeed, the PSA regime is considered a much preferred antidote to the paltry revenues received from the extractive sector. And as “a matter of urgency” the IFS recommended that the government renegotiate oil and mining contracts towards purchasing controlling interests of not less than 55% in the Ghanaian operations of all the large mining companies.
Notably, “this should not be done in terms of more equity holdings. Rather, the large-scale mining companies’ operations in Ghana should be turned into joint venture (JV) arrangements between the government of Ghana and the foreign investors in terms of… production sharing”.
Similar sentiments have been expressed by the Centre for Natural Resources and Environmental Management (CNREM) for the oil and gas fiscal regime. Solomon Kwawukume, the Executive Director of CNREM, in several papers, has called for the revision of the petroleum fiscal regime for a production sharing regime.
In a note, he stated: “[The President’s vision] could be a “conjecture” and “cannot be achieved on the back of numerous burdensome nuisance taxes forced on Ghanaians which can be avoided through a fair and equitable sharing [production sharing] and utilization of the wealth generated through the exploitation of our sovereign natural resources.”
While the application of production sharing contracts (PCSs) is ubiquitous in oil and gas projects across the world (with about 81 contracts being under PSA), that for mining projects is minimal, according to the International Cooperation in Tax Matters Twentieth Session. Countries such as Russia, practice this type of fiscal regime in their mining industry.
According to the organization, one reason for the uncommon use of the PCSs regime in mining is the fact that “it tends to set annual limits on the amount of production that can be allocated to recover costs. The underlying assumption – that there is a sufficient predictable margin for allocation between the contractor company and the government– does not hold for the mining industry.
“This can be due to high up-front costs for mining projects, and significant changes in the annual capital and operating cost throughout the life of mine. For example, towards the end of the mine life, resources become less accessible and more difficult to extract, so costs can increase substantially. These factors therefore make it more difficult to agree, ‘profit commodity’ (equivalent of profit oil) and cost recovery terms up-front”.
International Cooperation in Tax Matters
Another reason it highlighted is with the marketability of mineral products. One key feature of the PSA is that the government retains the right to at least a proportion of the physical output, unlike in concessionary regimes. Thus, production sharing requires that the government can quite easily sell products domestically or on the international market.
It further said: “For mineral products, such marketing is more difficult, and companies tend to assume responsibility for marketing all of the mine output because they have the relevant technical expertise”.
However, these are not insurmountable, to cause the government to give all the rights of its mineral resources to foreign companies and get little-to-nothing from them. Besides, the International Monetary Fund (IMF) favours the adoption of production sharing agreements in mining and oil and gas contracts in developing countries. The fact that the resource is finite should place more premium on the host country benefiting the more.
The IMF’s fiscal affairs department in 2012, noted in a publication titled— “Fiscal Regimes for Extractives Industries: Design and Implementation” that government ownership of mineral resources should be above 40 per cent in order that the country can benefit adequately from its mineral resources.
Based on simulations, “…data here suggest that in mining, governments commonly retain one-third or rather more; simulations suggest higher government shares (40–60 percent), but do not capture all possible sources of revenue erosion.
“Fiscal regimes that raise less than these benchmark averages may be cause for concern, or— where agreements cannot reasonably be changed— regret.”
IMF Fiscal Affairs Department
‘Aid is Dead’
Renowned Global Economist, Dambisa Moyo, in her book, ‘Dead Aid: Why Aid is not working and how there is a better way for Africa’ highlighted the deleterious side effects of aid, noting that “aid has been, and continues to be, an unmitigated political, economic, and humanitarian disaster for most of the developing world.”
Although this is not necessarily suggestive of an apparent causality, there is ample evidence of an existing correlation between aid and the unending cycle of corruption and conflict in developing economies, she posited.
In her book, Dambisa proffered four alternatives of funding for African economies, including: First, following the Asian emerging markets example of accessing the international bond markets and taking advantage of the falling yields paid by sovereign borrowers; Second, encourage Chinese policy of large-scale direct investment in infrastructure; Third, continue to press for genuine free trade in agricultural products; Fourth, encourage financial intermediation.
Akin to the need to avoid this seeming ‘curse’ aptly discussed by Dambisa, the President of the Republic of Ghana, Nana Addo Dankwa Akufo-Addo, famously launched the ‘Ghana Beyond Aid Charter’ in 2018, highlighting among other things, the government’s quest to see:
“A Ghana that is beyond dependence on the charity of others to cater for the needs of its people, but instead engages with other countries competitively through trade and investments and through political cooperation for enhanced regional and global peace and security.”
Nana Akufo-Addo, President, Ghana
Not to belabor the point, it was four years ago, when sentiments of a ‘Ghana Rising’ began reverberating across the globe, as the country was all-set to move beyond the dependence on foreign aid to harnessing its own resources for economic growth and development: the Ghana Beyond Aid Charter was birthed.
While Ghana has a history of failing to realize similar ambitious strategies or plans to transform the economy, the premium placed on this new national agenda is so great that, it cannot be allowed to fail. The government must see to the rolling out of the new fiscal regime to help rewrite the story of Ghana and help realise the Ghana Beyond Aid agenda.
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