Rehabilitation of the Ghanaian mining sector

Kofi Ansah

Aspar t of the Ghanaian government’s efforts to revive the national economy a series of measures were instituted. They included devaluation of the local currency, reduc- tion of budget deficits and the rehabilitation of basic infrastructure. The mining industry plays an important role in the national economy and special measures were also introduced to encourage its rehabilitation and development. A new licensing system was introduced and a new fiscal regime was established which inter alia allows mining companies to retain part of their export earnings offshore. The re- sponse of the private investment community to those changes has been excellent and investment in the mining industry has increased substantially.

In spite of its well-known mineral potential (espe- cially gold), Ghana did not record the opening of any new major mines or the substantial expansion of existing mines from about 1960 to about 1985. Indeed during this period, production of all minerals declined markedly. Gold production declined from a record high of over 900000 oz in 1960 to about 280 000 oz in 1983. Diamonds declined from over one million carats in 1960 to under 400000 carats in 1983, man- ganese from about 600000 tonnes in 1960 to about 240000 tonnes in 1983, and bauxite from about 200000 tonnes in 1960 to just over 50000 tonnes in 1983.

The reasons for the decline have been discussed and debated many times, but it is widely agreed that problems with the Ghana economy in general were responsible. Those problems included over-valuation of the local currency (the cedi), chronic shortage of foreign exchange, an excessively high rate of infla- tion, deterioration of basic infrastructure (roads, rail- way, power lines etc) and exodus of skilled labourers.

In addition to the macro-economic problems, the fiscal regime governing mining was characterized by excessively high front-end charges (royalty at 6%,

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Mr Ansah is Chief Executive of the Minerals Commission, the State House, PO Box M248, Accra, Ghana.

This paper was presented at the UN Department of Technical Co-operation for Development Seminar on Mineral Explorations Investment Potential in West Africa, Cote d’lvoire, December 1989.

mineral duty at 5-10%, export levy at Us$3.00/oz after 100000 02). There were other elements of the fiscal package for mining which were not structured to fit the peculiarities of the mining industry as well.

All these factors combined to make investment in exploration or expansion very unattractive for those who wished to engage in mining. In its efforts to revive the economy of the country, the government of Ghana concentrated its attention on the rehabilitation of a few key sectors. Because of its present significant contribution to the economy (contributing about 20% of foreign exchange earnings) and also because of its enormous potential, the mining industry was chosen as one of those sectors. The government realized that to achieve any significant measure of rehabilitation of the mining industry, the factors which had been clearly identified as militating against investment in the industry had to be addressed. Some of the macro-economic policy measures which the government has embarked on in its general effort to revive the economy include:

The devaluation of the local currency. The unrealistically high value of the cedi had meant that export revenues yielded relatively low amounts in cedis even when local components of production reached very high levels. Reductions in budget deficits in order to control the very high inflation levels which made pro- jections of local production costs unacceptably high, and at the same time decimated the dollar value of what little profit was made.

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Rehabilitation of the Ghanaian mining sector: Kofi Ansah

Duty-free importation of equipment and ma- terials meant for mining operations. Permission for export-oriented mining com- panies to retain a portion of their export revenues in an offshore account for the ser- vicing of loans, acquisition of equipment, spares and raw materials for production, payment of expatriate personnel and the payment of dividends.

0 0 Rehabilitation of the basic infrastructure.

There were, however, problems that related speci- fically to investments in mining. These concerned mainly financial matters and acquisition of mineral rights.

To address these specific issues, a new minerals and mining law was promulgated in 1986 (PNDC Law 153). The main non-financial provisions of the law concern the acquisition of mineral rights and the terms and conditions under which such rights are held.

A three-stage licence system is provided for: recon- naisance licence - which is for a period of up to one year, renewable for a further year;prospecting licence -which may be granted over an area normally of no more than 150 km’for up to three years, with the pos- sibility of two further renewals of up to two years each, though there are relinquishment obligations at each renewal; and mining lease - which allows the holder to develop a mine and produce minerals com- mercially over an area normally no more than 50 km’. The holder of a prospecting licence is entitled to a mining lease upon establishing that the ‘mineral to which his licence relates exists in commercial quant- ities within the prospecting area’. A mining lease has a duration of up to 30 years, and may be renewed for a further 30 year period. These rights are granted to applicants if they demonstrate a basic technical and financial capability to engage in mining activity. The circumstances under which the rights thus granted are terminable are carefully spelt out in the law. Within the broad parameters set by the law, a licence (or lease) is granted by the secretary of state responsible for mines on terms and conditions determined by him. Thus there is considerable room for negotiations between the investor and the government on a number of issues depending on the peculiarities of the projects.

The main financial provisions of the law are:

0 The royalty rate varies from a minimum of 3% to a maximum of 12%. (The point in the range where a particular mining project falls depends on profitability and is determined in accordance with published regulations.) An income tax rate of 45%, together with an additional profit tax provision. Accelerated depreciation of capital-75% in the first year of application, and 50% in the sub- sequent years on a declining balance basis. The government has a 10% free equity in min- ing operations, with an option to acquire a further 20% on terms to be agreed with the investor.

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Of these provisions, perhaps the one that has been most welcome by foreign investors is the external retention account provision. In the past mining com- panies (and indeed almost all other companies and individuals) were fully subject to the country’s exchange control laws under which all foreign monies earned had to be surrendered to the Central Bank in exchange for cedis. If they wanted foreign exchange mining companies had to buy it from the bank with cedis in competition with other applicants; money for even the most essential items for operations could not be guaranteed, let alone money for the payment of dividends in foreign exchange.

In sum, the new law streamlines procedures for acquiring mineral rights and spells out the terms and conditions for holding such rights as well as outlining specific investment promotion measures aimed at attracting investments into the sector.

I t has been about four years since the new policies began to be implemented and the response has been quite positive. From the low production figures of 1983, already mentioned, production in all minerals (except for diamonds which is a peculiar case) has increased markedly. In 1988, for instance, gold reached about 380000 oz, bauxite 300000 tons and manganese about 300 000 tons.

However, the most dramatic effect of the new policies has been on investments in exploration lead- ing to the development of new mines, and in expan- sion of existing operations. During the period, over 40 prospecting licences, all for gold, have been taken by both local and foreign companies. One company actually started producing gold in 1988 while three others are in the development stage and are all scheduled to start producing within the next year. These four companies alone have made total invest- ments of well over US$50 million and will have invested close to US$l50 million by the time they all start production. They will also add 250000 ounces per annum to Ghana’s gold production at their full production levels.

Regarding expansion of existing mines, the case of Ashanti Goldfields Corporation (AGC), by far Ghana’s largest gold producer, illustrates best the response of the international financial community to

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R ~ ~ ~ i i ~ ~ i l i ~ ( ~ t i [ ~ t i of t f ie Gfrii t~ii i i i t i tninitig .swtor: Kofi Atrsuh

Ghana's new policies. The huge and rich ore reserves o n the company's concession were known and could easily be demonstrated, but until 1085 the company was able to attract hardly any financing from inter- national lenders. Beginning in 1985, however, A G C was able t o get a consortium of international banks and other financial institutions. led by the Inter- national Finance Corporation (IFC) to put up loan financing totalling some US$76 million for a US$160 million rehabilitation and expansion programme which was t o increase gold production by about 40%.

It is of interest t o note that in the loan negotiations the banks felt particularly reassured by the arrange- ment that allows A G C to retain a portion of its revenues in an offshore account. In 1989 A G C was able to get pledges for loan financing for a second (and bigger) expansion programme which will enable production to reach well over half a million ounces of gold in lYY2.

I t is fair to take all these as indications of some measure o f satisfaction on the part o f the investing community with the fiscal and legal regime under which mining companies are now operating in Ghana. This is not to say that the government is unaware o f many problems that mining companies encounter in their dealings in the country. The state o f infrastructure in the remote mining areas, particu- larly roads, is still a problem, and matters requiring administrative approvals are unduly delayed. How- ever. there is evidence that the government is taking steps to resolve some o f these problcms. For instance there is ;I systematic programme for the improvement of roads.

However. a few difficult issues have been thrown up during actual implementation of some of the new mining policies. One such issue relates t o the portion o f export revenues that government may allow com- panies to retain in an offshore account. Negotiations between the government and the companies regard- ing this matter always generate heated discussion. This is largcly because o f the tension existing between the government's desire to provide an adequate level o f retention to ensure smooth operations and transfer o f capital to foreign shareholders o n the one hand, and the desire not to signal lack of confidence on the part of government itself in its own newly instituted foreign exchange auction system for transferring monies. I t is feared that allowing very high levels of retention thus making it unnecessary for mining com- panics to use the foreign exchange auction could undermine that system.

Granting very high retcntion also does not do very well for the country's balance of payment problems. Considerable goodwill is needed on the part of both the government and the investor regarding this issue.

Only those commitments which must definitely be met in foreign exchange should be considered in the retention arrangement. Mining companies are expected to use, as much as possible, local goods and services, which will help retention levels t o be kept down and also achieve the government's long-term aim of ensuring that mining activities are more fully integrated into the national economy. A combination of retention together with the ability of the mining companies to use the auction system to obtain addi- tional necessary foreign exchange seems to be the most desirable compromise on this issue.

Attention has also been drawn to the need to amend some provisions of existing tax legislation which work in contradiction to the aims of the new mineral policy.

Lack of access to loans from local financial institu- tions has been another source of difficulty. Unfortu- nately it is unrealistic to assume that this problem will ease soon because of the imposition of tight credit ceilings as a component of the country's structural adjustment programme. But it may be reassuring to prospective investors t o know that there is constant dialogue between the government and the operating companies on these matters.

The effort to rehabilitate the mining industry in Ghana has also led the government to include the state-owned mining companies in the list of com- panies in which the government wishes to reduce its ownership interest. The wholly owned state mining companies that produce gold, diamonds and man- ganese are all on this list. It is believed that under new ownership the full potential o f the companies will be realized.

The recent passing of legislation regarding arti- sanal small-scale mining of gold and diamonds is also a step in the rehabilitation effort. By legalizing the activities of the small-scale miners and paying a com- petitive price for their product, the government hopes that a large part of small-scale gold will be sold through official channels instead of being smuggled out. Technical assistance can now be extended to the miners t o enable them to operate more efficiently and safely. It was expected that this sub-seetor would add about 20000 oz of gold per year to the country's official production figures in the years t o come.

So far almost all the investments and other rehabil- itation efforts have related to gold. This is because for new ventures, prospective investors receive far more data on prospects for gold than for other minerals. However, other minerals which are presently mined, ie diamonds. manganese and bauxite, are expected to receive increased attention under the government's divestiture programme. The importance of other minerals is also very much recognized. It is recog-

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nized for instance that the mining of industrial min- erals such as limestone and kaolin could provide the raw material base for local industries. For this reason the government has indicated willingness to offer very favourable concessions to encourage the exploration and exploitation of industrial minerals.

In conclusion, it can be said that Ghana has achieved some measure of success in her attempts to rehabilitate the mining sector. This has come about

NATURAL RESOURCES FORUM August 1990

Rehabilitation of the Ghanaian mining sector: Kofi Ansah

mainly as a result of fundamental structural changes that were made to the country’s economy as a whole, as well as some new policy measures that were taken regarding mining specifically. Ghana is confident that if world economic conditions affecting mineral pro- duction remain favourable, the improved situation can be sustained because the policies that have been adopted are flexible enough to accommodate any difficult and peculiar problems that may arise.

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