Ghanaian Finance Minister Kwabena Duffuor gets fiscally tough on the mining industry

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Finance Minister Kwabena Duffuor delivered his fourth budget to the Ghanaian National Assembly two weeks ago. The bill proposed significant changes to the mining sector fiscal regime, eliciting a volley of praise and opprobrium. Praise from civil society groups such as the National Coalition on Mining (NCOM) and opprobrium from industry representatives.

In any case, the proposed amendments should be understood in the context of longstanding government concerns about domestic revenue generation generally and the contributions of the mining sector specifically – as well as popular anxiety that the country is not getting a fair shake from its mineral wealth.

The 2012 budget proposals include:

• An increase in the corporate tax rate for mining companies from 25 to 35 per cent
• A windfall tax of 10 per cent to be collected from all mining companies
• And a uniform capital allowance of 20 per cent for five years, instead of the current 75% initially, then 50% annually thereafter

This is not a new issue. In its 2005 report, “Rethinking the Role of FDI”, the United Nations Conference on Trade and Development noted that “Ghana earned only about 5 per cent of the total value of exports” coming from the mining sector. Similar comments have been made by the Bretton Woods institutions also. For example, in 2008 the IMF noted that Ghana’s “exceptionally generous incentives given as inducement to investors” had resulted in a minimal contribution to the country’s reserves and budgetary revenue. And before it left office in January 2009, the New Patriotic Party (NPP) made it clear that it viewed mining sector revenues as insufficient.

When the National Democratic Congress (NDC) took the reins with estimated fiscal and current account deficits of 14% and 21% of GDP respectively (old GDP figures), and international reserves at less than two months import cover, it had pragmatic reasons to continue in a similar vein. In its inaugural 2009 budget, the government pledge to “review mining, oil and forestry firms’ agreements to require them to repatriate part of their retentions in Ghana” and to renegotiate the mining sector legislation’s stability agreement. In 2010, Finance Minister Kwabena Duffuor went further and raised the minimum royalty from 3% to 5%, in a bid to rework “rates, fees and user charges that do not reflect the cost of public goods and services rendered”. The following year mining royalty payments were shifted from a quarterly to monthly timetable.

Even so, the 2012 budget appears to have surprised industry and has prompted a number of contingent questions – how and to what extent will existing and prospective mining investments be affected by the new legislation? How important is the new regime to revenue generation? And are we now seeing the reversal of the post-1980s liberal mining regime?

What does this all mean?

Evidently mining companies operating in Ghana are seeing the ground shift beneath them. The very liberal system set up progressively since the 1980s is being adjusted. However, it would be too much to say that it is being reversed.

Of the five major gold producing companies in Ghana in the 1980s, the government owned two outright and held a major share in a third. Today the government holds 10-30% of the top ten mining companies in the country, and there are no moves to raise participation at this time. Fiscal terms are being changed, pushing up against but not out of sight of other comparable jurisdictions in the region.

Industry has expressed alarm. Chamber of Mines Chief Executive Toni Aubynn has been quoted by Reuters warning that “this stance will likely discourage investment and the expansion of current projects”. He added that while his organisation recognises the need for government to benefit from resource extraction, this needs to be done in a careful and sustainable manner.

The government has been quick to restate that this is part of a wider initiative to rationalise tax and raise revenues. Re-jigging the national accounts in November 2010 revealed a much larger economy and therefore a more meagre fiscal account deficit than had earlier appeared the case. However, it also put Ghana’s poor revenue generation in stark colours. According to the IMF, tax revenue as a proportion of GDP is lower in Ghana than in lower middle-income countries and Sub-Saharan Africa on average. According to Finance Ministry Official Dr Larbi-Siaw, this has not been done capriciously. Rather, it’s an attempt to bring the country in line with tax rates elsewhere in the region and to better reflect the new international price context – gold prices have risen significantly in recent years.

Outlook

Mining companies have expressed alarm at the tone of the debate and the pace of the 2012 budget proposals, warning that investment could be at risk.

However, Ghanaian government officials have been keen to point out that the government has not suddenly become anti foreign investment, rather these changes are an attempt to equalise the treatment of natural resources[2], to adapt to current international commodity prices and to bring Ghana in line with other similar jurisdictions. Moreover, the windfall tax will only be implemented after consultation with the industry.

That said, observers will be aware that Ghana is fast approaching an election year and pressing the mining industry is not going to lose votes – there are well established popular concerns that the sector has not paid its due.