The
Minister of Lands and Natural Resources, Nii Osah Mills has justified the
development agreement between government and Gold Fields Ghana Limited, arguing
that the allegation the agreements’ net-benefits are not favourable to government
is not supported by the facts.
He
indicated that the proposed US$2.55billion investment secured by the agreements
will lead to increased revenues for government beyond the perceived current
losses of the state.
“Apart from other typical benefits such as
royalties and taxes, additional benefits include dividend payments for
government’s 10% interest in the mines, as well as benefits to be derived from
local businesses linked to Goldfields’ operations and local content development,”
he said.
Minister
Nii Osah Mills made this assertion in a statement issued, signed and copied to
the Business and Financial Times. The statement is in reaction to media reports
concerning the Development Agreements signed between the Republic of Ghana and
Gold Fields Ghana Limited (GFG) and Abosso Goldfields Limited (AGL) (all together
Goldfields) which were ratified by Parliament on 17th March 2016.
The full statement
Under
the government of Ghana’s privatisation programme in the 1990s, Gold Fields
Limited (GFL) acquired the State Gold Mining Company’s Tarkwa Goldfields
Limited under a project development agreement in 1992. GFL subsequently
acquired a majority interest in AGL in 2001. Currently, GFL holds 90% interest
in both GFG (which owns the Tarkwa Mine) and AGL (which owns the Damang Mine).
The government of Ghana owns the remaining 10% interest in both companies.
Negotiations for
development agreement
In
2004, Government commenced discussions with Goldfields in respect of negotiations
for a development agreement. This
followed the execution of two investment agreements between the government of
Ghana and Newmont Ghana Gold Limited (Newmont) in 2001. Government entered into
these discussions based on proposals by Goldfields to meet the minimum
investment threshold of US$500million required by government for such agreements,
which was subsequently adopted in section 49 of the 2006 Minerals and Mining Act
(Act 703).
Since
2004, several meetings have been held between government’s tripartite team
(comprising representatives from the Ministry of Finance, Attorney-General’s Department
and the Ministry of Lands and Natural Resources) and Goldfields, without
concluding a development agreement. A key source of disagreement was that government
was unwilling to grant the company the same terms as Newmont -- because unlike
Newmont which developed a new mine, Goldfields acquired an existing mine
together with significant assets.
Government negotiation team
In
January 2012, the Inter-Ministerial Task Team assigned to review the Newmont
investment agreement established a Government Negotiating Team (GNT) to
renegotiate the Newmont investment agreement and any other existing stability
agreements between the government of Ghana and mining companies operating in
the country.
The GNT, chaired by Prof. Akilagpa Sawyer, included experts in taxation
and finance as well as representatives from the Attorney-General’s Department,
Ministry of Finance, and Ministry of Lands and Natural Resources. The team
successfully renegotiated the Newmont investment agreements.
It
was the government and GNT’s understanding that since Goldfields had not been
granted either a development agreement or a stability agreement, GNT did not
have the mandate to continue the negotiations begun with Goldfields in
2004.
Indeed, a letter from the Chairman of the GNT to Goldfields in response
to a request by Goldfields to enter into negotiations with GNT stated that Goldfields’
request fell outside the remit of the GNT, as GNT had been mandated to
re-negotiate only existing
investment/development agreements and not to negotiate any new ones.
The
Chairman of GNT, Prof. Akilagpa Sawyer, correctly noted in the letter that responsibility
for granting new development agreements was the sole preserve of the minister,
and consequently referred Goldfields’ request to the minister to confirm. The minister confirmed this in writing,
addressed to Prof. Sawyer.
Resumption of
negotiations
Following
this correspondence, the Ministry of Lands and Natural Resources reconvened the
tripartite committee to resume negotiations with Goldfields for a development
agreement. Mindful of GNT’s expertise, comments
were invited and received from the GNT.
The tripartite committee duly
considered GNT’s comments and concluded the negotiations with Goldfields,
culminating in approval and ratification of the two agreements by Cabinet and
Parliament, respectively.
Justification
for granting development agreements to Goldfields
Section 49 of the Minerals and Mining Act,
2006 (Act 703) provides that the Minister of Lands and Natural Resources, on the
advice of the Minerals Commission, may enter into a development agreement with
the holder of a mining lease whose proposed investment in the mining project
will exceed US$500million.
As noted, government began negotiations with
Goldfields in 2004, for a development agreement. At that time, Goldfields
proposed to exceed the Government’s US$500million minimum threshold for a development
agreement. Since acquiring the Tarkwa and Damang Mines to date, Goldfields has
invested about US$2.5billion in the mining operations.
Over the remaining period of its mining
leases (i.e. about 11 years), Goldfields proposes to invest about US$2.55billion
in the company’s mining operations. It has been duly ascertained that Goldfields
has the financial and technical capacity to meet the proposed investment
requirements.
Furthermore, based on Goldfields’ past and proposed investment in
its operations -- which exceeded the minimum investment threshold -- the
company clearly qualified for a development agreement.
Considerations in
granting the development agreements
In
granting the fiscal and other incentives under the development agreement, government
was keen to ensure a win-win situation for both parties.
The objective was to
review the front-end costs of the company and enable it to make the proposed
US$2.55billion investment in the mining operations, and to maximise benefits such
as local content development, dividend payments, infrastructure development
etc., other than only taxes and other payments that could affect the required
investment in the mines.
Also,
government took into account Goldfield’s
good corporate citizenship, including the following: that since 1993 Goldfields
had paid more than US$1billion in income taxes, royalties and dividends; Goldfields
was the second-largest taxpayer after Ghana Commercial Bank in 2015 (having paid
altogether about US$444million in direct and indirect taxes); Goldfields
employs about 6,000 Ghanaians; the company’s workforce comprises 99% Ghanaians;
and the company’s Corporate Social Responsibility (CSR) Foundation has invested
more than US$30million in community development projects.
Other
considerations included that: current depressed gold prices and high input
costs posed financial and operational challenges for Goldfields; without a review
of the existing fiscal conditions and providing stability of the terms, Goldfields’ investments and operations
were clearly at risk; Goldfields had not been granted a development
agreement since 2004, even though at that time it proposed to invest (and subsequently
invested) more than the minimum investment threshold;
The
negative impact on the economy of not supporting Goldfields to continue
producing and developing the mine was considerable (i.e. more workers were
going to be laid-off); the effective tax rate for mining firms in Ghana is
comparatively high in Africa; government as a shareholder of Goldfields was
persuaded that the incentives granted under the development agreement would
result in benefits to the company and its shareholders; and the benefits to the
country of retaining Goldfields’ investments -- especially in a depressed global
market -- thus ensured were considerable and far outweighed any fiscal benefits
that would accrue to the company from granting the development agreements.
Specific Issues Raised in
the Media
Proposed new investments
It
has been asserted that the Goldfields development agreements are based on Goldfields’
past investments while section 49 requires that a development agreement should
be based on proposed (new) investments to be made by Goldfields.
As noted, the
tripartite committee and the relevant agencies of the Ministry of Lands and
Natural Resources reviewed Goldfields’ proposals to invest a total amount of US$2.55billion
in their two (2) mines over the next 11 years and found the proposals to be
satisfactory. In doing so, Goldfields’ past investments of about US$2.5billion
were also taken into account as evidence of financial and technical capacity to
make the proposed new investments.
Newmont template
It
has also been argued that any development agreement based on Newmont’s
investment agreements is bound to be ‘sub-optimal’, as is the case with Goldfields’
development agreements. It should be noted, however, that most of the issues
addressed in mining agreements are similar.
Therefore, in terms of a framework,
it is important that there is consistency between Newmont’s agreements and
subsequent development agreements. Indeed, the minister is currently working on
deriving from the recently ratified agreements a standard framework or template,
which will serve as a precedent for development and stability agreements.
It
should be noted that as no two mining projects are the same, the specific
details of concessions and requirements in mining agreements may vary subject
to certain legal requirements.
Specific formulae, amounts and rates may also vary
depending on the circumstances of each project and the parties involved. For
instance, while dividends paid to affiliates are taxed in the Goldfields
agreements, they are exempt in the Newmont agreements.
Similarly,
government maintains a 10% free carried interest in Goldfields for which it is
entitled to dividends. No such equity exists under the Newmont agreement.
Notwithstanding the differences, novel concepts in the Newmont agreements such
as guaranteed advanced payments to government have been adopted in the GFGL
agreement.
Additionally,
Goldfields has also committed US$15million to constructing the Tarkwa Damang Road,
which represents a direct benefit to the country and is akin to an advance
payment.
Royalty
Again,
it has been contended that the rates of royalty negotiated under the Goldfields
agreements are ‘sub-optimal’ as they are not as competitive as the Newmont
rates -- which themselves could have been better but for the fact government
was negotiating from a weak position. As noted previously, the royalty rates
provided under the Goldfields agreement were arrived at after considerable
analysis and consideration including the proposed investments to be made by Goldfields
and current market prices.
Under
the sliding scale mechanism, Goldfields will pay 3% if the gold price is below
US$1,300/oz., and 3.5% and 4.0% if the prices rises to US$1,499.99 and US$2,299.99,
respectively. A maximum of 5% is payable if the gold price exceeds US$2,300/oz.
Any other minerals produced in the Tarkwa and Damang Mines are liable to the
current 5% rate of royalty as provided in section 25 of Act 703 as amended by
the Minerals and Mining (Amendment) Act, 2010 (Act 794).
Serious give-aways
without justification
The
contention that the net-benefit of the Goldfields agreements are not favourable
to government is not supported by the facts. The proposed US$2.55billion
investment secured by the agreements will lead to increased revenues for government
beyond the perceived current losses to the state.
Apart from other typical benefits such as
royalties and taxes, additional benefits include dividend payments for government’s
10% interest in the mines as well as benefits to be derived from local businesses
linked to Goldfields’ operations and local content development.
Whereas
Newmont has never paid dividends to the Ghana government due to removal of the
10% Ghana government free carried interest pursuant to terms of the development
agreement entered into with Newmont, Goldfields has on the other hand been
paying significant dividends over the years to government based on government’s
10% interest.
Undermining the role of GNT
It
is not true that the role of GNT has been undermined by the minister by virtue
of the two development agreements which have been entered into with Goldfields.
As noted, GNT was established specifically
to renegotiate the Newmont agreement and other existing stability agreements.
The GNT itself, having recognised
its lack of mandate, declined to negotiate new development agreements with Goldfields
and properly referred Goldfields’ request to the minister.
Its
role could therefore not have been undermined as it was not intended to take
over the role of the institutions mandated to negotiate such agreements. If
that had been the case, the law would have been amended accordingly. The assertion that the minister undermined GNT’s
role is false. The minister, as a matter
of fact, took into consideration GNT’s comments/position on various issues as
valuable inputs in the negotiations with Goldfields.
Therefore,
GNT’s complaint that its role has been undermined, or that it has been
circumvented, is without any basis whatsoever in law or in fact.
Distinction between
stability agreements and development agreements
A
distinction must be made between a development agreement and a stability
agreement. A stability agreement (see
section 48 of Act 703) requires that existing laws and fiscal imposts (taxes)
applicable to a mining project may be stabilised or frozen for up to fifteen
years to protect a mining lease holder from adverse effects of new laws or imposts.
A
development agreement (section 49) is an opportunity for a mining lease holder
to negotiate stability and other terms in exchange for a significant level of
investment: i.e. investments exceeding US$500million. Typically, more
favourable fiscal terms are granted under a development agreement, which are
stabilised for the duration of the mining lease. Thus, while any mining lease
holder may be granted a stability agreement, only holders who propose to and
show evidence of capacity to invest over US$500million are considered for a
development agreement.
CONCLUSION
Apart
from the increased investments assured by the agreements, certain improvements
in existing legal provisions were also negotiated in the Goldfields agreements.
For example, whereas section 30(2) of Act 703 allows companies to retain up to
100% of their net earnings from the sale of minerals abroad, the two
development agreements on the other hand require Goldfields to remit at least
30% of its gross sales proceeds into the country.
Additionally,
the requirement of taxes on inputs produced locally to promote local content
development and provisions in the agreements -- thus ensuring arms-length
transactions -- are important for developing linkages and to protect against
transfer pricing and revenue leakage.
Furthermore, the provision for periodically
reviewing the agreements’ terms when there are profound changes -- such as in
local or global conditions of mining -- is designed to ensure that government
is able to negotiate more beneficial terms where possible.
Last
but not least, it is important to note that not only has Goldfields abandoned
plans to lay-off some more workers, but also the investment of US$2.55billion which
will result in the creation of more jobs represents a major boost to Ghana’s economy as a whole at a time
of low commodity prices.
The
ministry is satisfied that careful considerations were made in concluding the Goldfields
development agreements, and that on balance the benefits to the country are
worth the concessions given to Goldfields.
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