Miners reject more taxes

...after windfall tax resurfaces in budget

Any attempt by government to introduce a windfall profit tax on mining companies will further discourage investment in the industry, Dr. Toni Aubynn, CEO of Ghana Chamber of Mines, has said.

Already, with the persistent drops in gold price, mining companies are struggling to keep the cap on rising cost of operations.

The warning comes after Seth Terkper, the Finance Minister, said that government has not backed down on the windfall profit tax bill first introduced to Parliament last year, but withdrawn for further consultations with the industry and regulators.

“A committee is reviewing all stability agreements, incentives, and the windfall profit tax that could not be passed in 2012. In due course, government will re-introduce the bill in Parliament after completion of the consultations with all stakeholders. I will urge all civil society interest groups to continue with the submission of their recommendations on how to adequately tax the mining industry,” the Minister told MPs.

Dr. Aubynn told B&FT that the tax would be inimical to future mining investments and the long-term sustainability of the industry.

“We were surprised that the Finance Minister even mentioned it in the budget at this time; maybe there must be some good reason for reintroduction of the tax,” he said.

“If government introduces a windfall profit tax when gold prices are rising, will government also provide subsidies to the industry when prices fall?” he queried.

Dr. Aubynn said miners will find it difficult to accommodate yet another tax as the price of gold continues to drop. The metal has lost 25 percent of its value this year, and this came on the back of an increase in the mining sector’s corporate tax rate from 25 percent to 35 percent.

Efforts to boost the tax-take from the extractives sector are informed by a “super-decade” of mining -- in which prices quintupled - and common sentiment that the sector has not provided sufficient benefits to government and communities, with civil-society bodies and the International Monetary Fund (IMF) supporting additional taxes for the industry.

But after more than a decade of record prices, the gold price bubble has been bursting in 2013, hitting miners hard and causing a rethink of investment plans for the industry. In a bid to tighten their belts, companies have announced job-cuts.

He also cautioned government to be careful with its decision to embark on stakeholder consultation on matters involving mining taxes, “because persons who do not understand the industry may have their way.

“It should be technically considered because not everybody understands mining, and not everybody understands taxes. If you technically consider the issue, you look at the technical intricacies and listen to what the experts from both sides are saying before you come to a compromise,” he said.

Falling prices have been further worsened by rising costs according to the CEO, as gold miners are currently producing at a cash cost of US$962 per ounce -- up 25% from US$768 per ounce in the first half of 2012.

This situation has led to the discontinuation of some exploration and brownfield projects, and rationalisation of inputs including labour.

Newmont Ghana is terminating the employment of approximately 300 of its miners, while AngloGold Ashanti’s (AGA) Obuasi Mine is also expected lay-off about 430 of its workers.

Gov’t to establish infrastructure fund to bridge deficit

Government has proposed to set up the Ghana Infrastructure Fund (GIF) to deal with the huge infrastructure deficit and to focus on strategic infrastructure that will lead to job creation and the growth of the economy.

“The GIF is a response to the need to manage Ghana‘s limited but potentially expanding fiscal space; sub-optimal classification and management of public debt; and difficulties in mobilising funds, in particular for infrastructure projects of a commercial nature,” Mr. Seth Terkper, the Minister of Finance and Economic Planning, said yesterday when he presented the 2014 budget to Parliament in Accra.

In a quick response, the Director General of the Securities and Exchange Commission (SEC), Mr. Adu Anane Antwi, who has been pushing for the establishment of such a fund to address the infrastructure gap, welcomed the proposal to create the GIF.

“This is a good proposal. There is a need to have such large funds for our infrastructure development since government borrowing alone cannot do that -- because we will end up borrowing to the excessive limit which would not be sustainable,” he said.

“We believe that government will invite international financial institutions to team up in partnership, probably in the form of equity, so that the company can be owned by government and these financial institutions, and be able come to the market and raise bonds for the development of infrastructure in the country.”

The GIF will be a quasi-fiscal body chaired by the Minister of Finance, and will pursue its own ratings on the domestic and international financial and capital markets.

“The linkages to the private sector are crucial, since to leverage private sector investment in infrastructure projects, it is necessary to vigorously pursue long-term quasi-fiscal institutions as well as banking and capital market solutions,” Mr. Terkper said.

Conservative estimates by the government indicate that the country’s huge infrastructure deficit requires sustained spending of at least US$1.5billion per annum over the next 10 years to address the shortfall.

The deficit covers all the main infrastructure areas: roads, energy, water, aviation, housing, and ICT. In the housing sector, for instance, the government estimates that the country needs to build about a million more units to bridge the demand-supply gap.

The intention of government, the Finance Minister said, is to consolidate the use of commercial financing facilities to finance projects that can repay commercial loans that the government contracts directly or guarantees.

It is also a means of freeing grants and concessional facilities for social infrastructure projects that often return benefits indirectly through improvements in social indices.

The successful implementation of the GIF will therefore provide several opportunities to apply national resources in various novel ways, including long-term infrastructure bonds to accelerate the upgrading and renewal of critical national infrastructure.

The major sources of funds for the proposed fund will include the recent 2.5 percent increase in the Value Added Tax (VAT) and the portion of petroleum receipts used for debt amortisation and infrastructure development.

Government estimates the benchmark revenue from petroleum receipts for the year 2014 at US$584.39 million (GH¢1,285.66 million). Of this amount, US$409.07 million (GH¢899.96 million), representing 70 percent, will be spent on the budget.

“In the medium term, government has decided to spend the ABFA (Annual Budget Funding Amount) on the development of six major specific projects and to clear the pipeline of infrastructure projects,” the Minister said.

The GIF, with the assistance of the Bank of Ghana, will set up and manage a Debt Service Account (DSA) to service designated domestic and foreign sovereign debts.

The account will utilise the flows of foreign exchange from oil to spur confidence in the markets and minimise foreign exchange exposures.

The board of the GIF will advise the Minister on viable projects, including those involving special purpose vehicles (SPVs) such as joint ventures and public-private partnership (PPP) projects.

It is envisaged that the fund will issue special bonds to finance specific commercial projects. It will be empowered to set up on-lending, escrow and other mechanisms for the purposes of pursuing and ensuring the success of its investments.

Mr. Seth Terpker said the establishment of the fund will lead to a review of government‘s exposure to risks from borrowing and issuing sovereign guarantees.

“It is our intention to minimise the use of sovereign guarantees that are currently treated automatically as public debt in our Debt Sustainability Analysis (DSA) band, and not as contingent liabilities. We are currently in discussions with the World Bank and African Development Bank (AfDB) on the appropriate classification of SOE and other guarantees.

"Where guarantees are essential, we will maximise the use of third-party guarantees such as MIGA guarantees and World Bank/AfDB partial and credit risk guarantees.”

Activist group warns over GMOs

The Civil Society Network, a group of non-governmental bodies, says government should address the wider causes of food insecurity -- land, credit, agricultural training and infrastructure -- before commercially adopting genetically modified (GM) crops in the agricultural sector.

“To have a lasting impact on poverty, policymakers must address the real constraints facing smallholder farmers -- lack of access to land, credit, resources and markets -- instead of focusing on risky technologies that have no track-record in addressing hunger,” said Bernard Guri, Executive Director of the Centre for Indigenous Knowledge and Organisational Development (CIKOD), a member of the network, at a forum in Accra.

Speaking to participants made up of other representatives from the network and farmers, Mr. Guri said Africa is the only part of the world that is receiving GM crops with both hands.

“Developing country governments are under huge pressure to accept GM crops. Smallholder farmers have not been properly informed [or] consulted, [nor have they] agreed to accept or reject the crops. Poorer farmers and communities are being sidelined in debates and decisions about GM technology,” he said.

“The promoters are working it through our politicians and leaders just because these groups don’t understand its impact and its future effects.”

He said the pervasive adoption of GM crops seems likely to aggravate the underlying causes of food insecurity -- leading to more hungry people, not fewer.

More than 80 percent of small-scale farmers in Africa save their on-farm produced seeds for the next season. Yet the proliferation of intellectual property regimes that come with GM seeds threaten centuries-old practices of saving and exchanging seeds -- as GM seeds must be bought each season.

Research shows that up to 1.4 billion people, including about 90 percent of farmers in Africa -- many of them women -- depend on saved seeds.

Mr. Guri explained that the potential impact of GM crops on food security, poor farmers and biodiversity should guide the development and implementation of a national bio-safety framework, and that poorer farmers should be enabled to participate more in national GM debates and policymaking

A law, the Biosafety Act, 831, of 2011, has been passed to enable the country to allow the application of biotechnology in food crop production, including allowing Genetically Modified Organisms (GMOs) to enter food production.

Before the passage of the law, the country was using a legislative instrument -- CSIR Act 521 of 1996 -- as a template, since it had provisions for the conduct of research in general. The new law was simply to extend this to the conduct of research on GMOs.

Mr. Guri said the poor smallholder farmers in the country cannot afford expensive GM agriculture and are vulnerable to falling into cycles of debt. “If they rely heavily on modified seeds, over time they will lose their traditional seeds. Relying on new GM seeds for propagation means that when their prices go up, not all farmers would be able to afford it as this will increase the cost of production -- and subsequently the cost of food.”

Outlining some of the challenges of commercially adopting GM crops, he explained that genetically modified varieties do not meet the needs of poor farmers who rely on affordable, readily-available supplies of seeds for a range of crops to meet diverse environmental, consumption and production needs.

“GM seeds, by contrast, are targetted at large-scale commercial farmers growing cash crops in monocultures,” he said.

Most research and development in GM agriculture is conducted by the private sector, with less than 1 percent of all GM research directed at poor farmers.

GM introduction starts with farmers signing a contract with the company, obliging them to pay a royalty or technology fee and agreeibng not to save or replant seeds from the harvest.

Mr. Buri said buying external supplies of seeds and pesticides leaves farmers more economically and agriculturally dependent on corporations.

“The technology fee makes such seeds prohibitive for the poorest farmers who lack access to credit. The contracts are complex and easily misunderstood by farmers.”

Just six companies control almost all GM crops: Monsanto, Dow, Syngenta, Bayer, BASF and Dupont. They also control three quarters of the agrochemical market.

Monsanto enforces its patents through a force of private investigators, suing farmers on the slightest suspicion.

Richard Adjei-Poku, Executive Director of Livelihood & Environment Ghana, a non-governmental organisation, said the idea that GM will increase farmer yields, empower them better economically and make them wealthier is just fallacious.

He said transnational companies, the government and some civil society organisations promoting GMOs should step back from the speed with which they are proceeding.

“It is important that they listen carefully to the genuine concerns of farmers, rather than proceed with scientific models that seek to entrench the power of transnational companies,” he said.

Meanwhile, the American Academy of Environmental Medicine (AAEM) has said genetically modified foods pose a serious health risk in the areas of toxicology, allergy and immune function, reproductive health, and metabolic, physiologic and genetic health.

The AAEM revealed that animal studies show serious health problems resulting from GMOs in the diet, and that commercial interests, rather than health and scientific interests, are driving the push for GMOs.

Tariff rise fuels inflation

Headline inflation surged further away from the Central Bank’s target in October, rising to 13.1 percent from 11.9 percent in September.

 

The jump in the rate, which represents 1.2 percentage points, is the highest since March 2010 and is attributed to the effect of price increases in housing, utilities and gas. The Bank of Ghana has said it is targetting an end-year inflation figure of 9 percent. 

“We all know that there were substantial increases in the price of water, utility products and fuel, and that has pushed the inflation rate up.

“The electricity tariff was increased by 77.60 percent, kerosene by 23 percent, with gas and water having an increase of 10.3 and 52.1 percent respectively,” Government Statistician Dr. Philomena Nyarko said at a media conference in Accra.

She said non-food inflation -- which comprises transport prices, utility costs, and the price of alcoholic beverages -- went up to 17.7 percent from 14.2 percent in September, while food inflation went down to 6.9 percent from 8.9 percent in September. 

The Public Utilities Regulatory Commission (PURC) last month increased power tariffs by 78.9 percent and water prices by 52 percent, maintaining that the adjustment will allow utility companies to cut down on their losses.

The electricity tariff increase has however been reviewed from 78.9 percent to 59.2 percent, following agitation by labour groups against the magnitude of the hike.

The decision, which government said will cushion the effect of utility tariff increases on consumers, could help to ease inflation in the coming months.  

The weak cedi has also contributed to the high rate of inflation this year, with the currency losing 17 percent to the dollar, according to Ecobank Research. The cedi will fall to 2.4 per dollar before the start of 2014, Souheir Asba, a London-based emerging markets strategist at SocGen, has predicted. 

The Bank of Ghana (BoG), which traditionally targets a single-digit inflation rate, has raised its policy lending rate by 100 basis points this year to contain price pressures as government cancels subsidies on petroleum products, electricity, and water.

The policy rate has been pegged at 16 percent since July, and the bank’s monetary-policy committee (MPC) is expected to convene in the week of November 25 to review its policy settings.

Apart from inflation rising, GDP growth has slowed to a projected 7.2 percent in 2013 from 7.9 percent last year, creating a tough balancing act for the BoG as it seeks to rein-in prices without hurting growth.

Inflation dynamics 

Three sub-groups of the food and non-alcoholic beverages sector recorded inflation rates above the group’s average of 17.7 percent. They include fish; mineral water; and soft drinks and cereals.

Three sub-groups, including housing, water and electricity; transport; and clothing and footwear recorded inflation rates above the national average of 13.1 percent.

Meanwhile, the Western Region maintained its lead as the region with the highest inflation rate of 15.8 percent, followed by the Greater Accra Region with 15.3 percent inflation. 

The Upper East Region recorded the least inflation rate of 5.7 percent.

Gold Fields to shed 600 jobs

About 600 staff of Gold Fields Ghana’s Tarkwa and Damang mines are to be laid off by next month as the mining firm battles rising costs and falling prices.

Alfred Baku, Senior Vice-President and Head of the West Africa Region, told B&FT the action is part of a restructuring strategy to streamline costs, improve efficiency and restore profits as the price of gold consistently drops.

Gold has fallen by almost a quarter this year even as miners’ costs rise and communities and government demand more benefits from the industry. According to the Ghana Chamber of Mines, the cash cost of gold production went up 25% from US$768 per ounce in the first half of 2012 to US$962 per ounce in the same period in 2013.

Gold Fields currently employs about 4,200 staff at both the Tarkwa and Damang mines in the Western Region, and the job-cuts will cost the company about US$30million.

“The job-cuts will be in the region of 300 to 600 of our workforce. We want to embark on this as soon as possible. It is about looking at our productivity profile, as Tarkwa mine’s productivity has dropped in recent times,” Mr. Baku said.

“Ongoing price volatility and steadily rising costs create intense pressure for us to continuously improve our efficiency and effectiveness to ensure that our operations are profitable and sustainable. We are committed to treating people fairly throughout this process.”

Gold Fields has been operating in the country since 1993 and this is the first time that job restructuring at the company is being discussed.

“It is rather unfortunate, but if we don’t do anything at all with the current low gold price, the entire mine will collapse. It will be better to lose 20% than all the 100%,” Mr. Baku said.

The mine’s job-cutting strategy has necessitated various discussions and negotiations between workers and top management personnel to agree compensation and severance packages.

“The severance package will ensure the workers take a reasonable amount home to invest in profitable ventures that will enable them to continue making a living,” Mr. Baku said.

Gold Fields Ghana is the third major mining company in the country to lay-off staff this year. Mining giant AngloGold Ashanti’s (AGA) Obuasi mine announced imminent job-cuts of approximately 430 of its miners, and Newmont Ghana -- the second major miner in the country, is also terminating the employment of 300 of its workers.

Other miners are contemplating a similar strategy because the difficult times and operational challenges confronting the industry are curtailing their production targets.

Globally, the world’s biggest mining companies are cutting costs, selling assets and scrapping expansion plans to counter lower prices and sustain operations.

Miners equity model at ‘breaking point’

Mr. Nick Holland, Group Chief Executive Officer (CEO) Gold Fields Limited says the global mining industry is faced with difficult times, with rising production cost, price-dip and increase in the number of taxes.

 “The equity model is at breaking point, mining investments are under threat. Existing mines are under pressure from price decreases, and cost increases and greater taxes will aggravate the problem.

“Prospective foreign investors are relocating to other destinations, as they appear unenthused about Ghana.

“The companies are also not interpreting the dynamics of mining operations properly to the public, thereby creating the impression that there is much money in the sector.

“The reality is that margins and returns from mining are declining with gold price fallen as low as 1,300 dollars  per ounce,  while operating cash flows are not sufficient to cover investment with the equity model breaking point.

 “The infighting will encourage investors to flee, causing the industry to shrink and hurt all parties,” Holland told participants at a forum on resource nationalism in Accra.

The forum, spearheaded by the Ghana Chamber of Mines in collaboration with Gold Fields Ghana Limited, brought together policymakers, natural resources experts, civil society organisations, think-tanks, government officials, members of parliament, and representatives of regulatory bodies as well as opinion leaders from host resource-rich communities.   

Resource Nationalism is when countries make efforts to extract maximum value and developmental impact for their people from their finite natural resources.

Mr. Holland observed that countries like Chile, Peru, Botswana and Zambia are making strides in addressing resource nationalism and have put in place strategies, programmes and measures to remodel their fiscal margins.

“Protecting investor rights will help countries make the most of their resources,” he said, “equity investors are frustrated,” he added. 

The world’s biggest mining companies are cutting costs, selling assets and scrapping expansion plans to counter lower prices.

The decline in the price of gold in the global market currently is equivalent to about 25%.

The cash cost of gold production went up 25% from US$768 per ounce in the first half of 2012 to US$962 per ounce in the same period in 2013.

The industry has already announced it will undertake massive job-cuts by the end of the fourth quarter of 2013 as part of its strategy to streamline the cost structure and improve business-efficiency.

Newmont Ghana is terminating the employment of approximately 300 of its workers, whilst AngloGold Ashanti’s (AGA) Obuasi Mine is also expected to lay-off about 430 of its workers.

Mr. Holland explained that companies must work with governments, workers, investors and communities to expand the industry rather than fighting over profits -- citing Peru, Chile, Botswana and Zambia as nations where cooperation has been successful.

“The industry can either take the high-road and start collaborating and forming partnerships, which will increase investments; or we can keep on fighting each other for a bigger share of a diminishing pie.”

Mr. Holland argued that governments instead of putting in place stable, competitive tax systems that allow equity investors to earn competitive risk-weighted returns with governments benefitting increasingly from the upside, is rather seeing mining as a means of putting more into their central coffers.

He said all this, including increased pressure from civil society organisation and government, has become a disincentive to critical investments in the industry.

“It is time for honest partnerships and collaborations among stakeholders to ensure that resource nationalism is managed more effectively.

“Government must seek collaborative partnerships with miners who are better able to operate and develop ore bodies and who are good social partners.” 

He urged government to create a climate conducive to responsible investment that provides policy certainty; develop infrastructure and the broader economy; partner to manage input costs; and help miners to procure locally. 

In 2012, research revealed that most governments’ -- especially developing countries’ -- balance sheets were under pressure because they view resource nationalism only in the context of mining profits, Mr. Holland said.

He added that a study of 40 top mining companies in 2012 also indicated that they were operating at a loss due to the general economic hardship -- with some closing down and making people lose their jobs, whereas everybody’s focus is on the resources in the sector.

“Mining investments are under threat with many trillions of dollars that should have been made in the past three years.

Dr. Toni Aubynn, CEO of Ghana Chamber of Mines explained that resource nationalisation has assumed and retained the number-one risk ranking on the side of the investor and operators, while governments around the world have  tended to proffer a mix of increased taxation, a wave of mandated beneficiation, export levies and limits on foreign ownership.

He said it is time for honest partnerships and collaborations among stakeholders to ensure that resource nationalism is managed more effectively.

“Ghana and other stakeholders should therefore draw synergies that would boost the mining sector for mutual benefits.

“The mining industry forms a key component of the economy, and everything should be done to boost investor confidence in the industry,” Dr. Aubynn said.

Chamber of Mines holds forum on resource nationalism

The Ghana Chamber of Mines, held a resource nationalism forum in Accra for stakeholders in the industry to ensure that all actors benefit equally from the natural resources. 

 

Resource Nationalism is when countries make efforts to extract maximum value and developmental impact for their people from their finite natural resources.

The forum brought together policymakers, natural resources experts, civil society organisations, think-tanks, government officials, members of parliament and representatives of regulatory bodies. 

 

Mr. Dan Owiredu, President, Chamber of Mines, explained that in certain areas some have even attempted to justify the illegality of ‘galamsey’ operations on the altar of resource nationalism.

 

It is an undeniable fact that Africa is endowed with abundant mineral resources that far exceed its demand requirements. It is well-documented that without access to sufficient, quality and reliable minerals every social and developmental activity will be critically hindered. 

“The mining industry forms a key component of the economy, and everything should be done to boost investor confidence in the industry,” Mr. Owiredu said.

Dr. Joyce Aryee, former CEO of the Chamber of Mines, said resource nationalism is a good concept that needs to be thought through so that government can sit with industry to see how best resources can benefit the people.

Local content drive causes unease

United States Ambassador to Ghana Mr. Gene Cretz says the country’s local content policy in the oil and gas sector may make it difficult to attract the needed foreign capital, technology and expertise.

Mr. Cretz indicated that though the US government is not opposed to Ghana’s proposed local content law, there are problems with the penalties in the law against foreign companies, which could be detrimental to the interests of foreigners.

“As a development partner, the US government is supportive of local content efforts in the hope of developing viable local companies or actors that can do business in Ghana and around the globe,” the Ambassador said.

“We are concerned, however, that Ghana’s local content regulations -- especially in the oil and gas sector -- may make it more difficult for them to continue being the regional leader in attracting the best source of foreign capital, technology and expertise.”

Ambassador Cretz was addressing a media conference in Accra on trade and investment opportunities between US businesses and their Ghanaian counterparts.

Other US officials at the discussion included Mr. Joel Wiegert, Economic Counsellor; Mr Paul Taylor, Senior Commercial Officer; and Mr. Kurt Seifarth, Agricultural Counsellor.

The deliberation, which focused on U.S economic and trade policy towards Ghana, emphasised how the US team works to encourage investment and two-way trade with Ghana.

“For us, maximising the benefit of local content is not the same as maximising local value- addition, and we will continue to dialogue with all levels of government on how best to achieve commendable local content objectives,” he said.

President John Mahama has already approved a proposal to send a legislative instrument to Parliament for the passage of a Local Content Policy in the petroleum industry.

The key highlights of the policy include: that priority should be given to Ghanaians in the granting of licences and agreements in the petroleum sector in all operations; where foreigners want to be involved, they must partner with Ghanaians -- who should carry at least a five percent equity interest that is reviewable at the pleasure of the Minister given certain circumstances.

Also, there is an elaborate reporting procedure that requires the companies to use local services and products manufactured by Ghanaian companies. They must also make investments in research and carry out programmes aimed at technology transfer to Ghanaians.

The country discovered oil in 2007 and commercial oil production began in 2010.

Commenting on the economy and other issues, Mr. Cretz said vulnerabilities remain a major challenge as the country is striving to become an established middle-income economy by 2020.

“In 2013, Ghana remains highly dependent on the export of primary commodities such as gold, cocoa and oil, and also faces significant infrastructure challenges,” he said.

He explained that the effort to lower the deficit from last year’s 12 percent of Gross Domestic Product (G.D.P), coupled with the debt to GDP ratio of 50 percent, have significantly slowed government spending and borrowing.

Government indicated in its 2013 budget that it planned to reduce the budget deficit from last year’s 12 percent of GDP to 9 percent of GDP this year.

Mr. Cretz explained that President Barack Obama’s Partnership for Growth Initiative, Power Africa Initiative, and the Millennium Challenge Corporation programme focus on developing the private sector and public solutions needed to overcome challenges in the power sector.

These challenges will be viewed as opportunities for companies, he said, adding: “We look forward to continuing our effort to make sure that we bring American solutions to bear on these challenges.”

Mr. Cretz stated that Ghana is beginning to serve as a US trade hub for the rest of the West African sub-region, and that a number of American businesses including General Electric (GE) and Halliburton have set up their bases for operations in the country.