November 2004

In her quest to help mining companies maximise profits in African countries, the World Bank Group has been helping write mining codes with minimal environmentally sustainable frameworks and of little socio-economic benefit to African countries.

By Thomas Akabzaa

The World Bank, after nearly two decades of developing mining sector specific mineral codes, revising and ‘re-revising’ them to make competing mineral-endowed African countries gain ‘the most conforming country’ status, is still not satisfied. Having provided the necessary fiscal incentives, absolute security of tenure of mineral rights and fenced off the state from direct participation in mining activities, the Bank now thinks the only way mineral-rich African countries can remain more competitive is by de-emphasising environmental protection.

The result is that most countries have no barriers to where and where not to mine. Forest reserves, protected sites, heritage sites, and ecologically sensitive zones are no longer barriers to mining.

It all started with the dawn of the structural adjustment campaign by the Bank Group when mineral-endowed African countries were required to reform the mineral sector as a significant conditionality under the Structural Adjustment Programme of the mid-1980s. These reforms entailed recapitalisation, refurbishment and subsequent divesture of state-owned mines to private investors, and complete removal of direct state participation in mining ventures.

The state would be an administrator and regulator of the industry and allow the private actor to do the actual mining. The state’s new role included the promulgation of investor-friendly mining codes, adoption of micro- and macro-economics measures which would allow unimpeded repatriation of profits and liberalised foreign exchange regimes.

Early favourites of this included Ghana, Africa’s second largest gold producer. Ghana complied with these demands in 1983 and by the close of 1986 had a minerals and mining code. Hitherto the mining code was part of the general investment code of the country. Salient aspects of this code included a liberal fiscal regime which defined a number of tax incentives to foreign investors in the mining sector.

Standing up tall among these were: generous capital allowances such as 75% of total investment write-off in the first year of investment and the balance depreciated at 50% in subsequent years. Corporate tax remained at 45% of net profits just like any other sector of the economy. Mineral royalty was at 3-12% sliding rate depending on the operating margin of the company. In addition the state was confined to 30% participation in every mining investment with a mandatory 10%. However, in line with International Monetary Fund (IMF) and World Bank prescription the mining industry is currently calling for total private ownership of the industry.

As Ghana faithfully followed this prescription she was paraded as a trailblazer and the showcase of the success story of structural adjustment. Successes catalogued included: the attraction of over 150 foreign exploration and mining companies and a ballooned mineral production. Other countries were called upon to emulate Ghana or remain in the cold. Ghana’s code was thus used to entice other countries such as Tanzania, Mali, Zambia, Burkina Faso, Guinea and even war-torn Democratic Republic of Congo.

With funds from the MICA and IFC and IDA, and equipped with Ghana’s mineral code as the minimum acceptable blue print, these countries undertook to write their respective country mining codes. Between 1994 and 1997 these countries were variously advanced Mining Sector Technical Assistance Credits to establish an enabling environment to both promote private investment in mining, accelerate the withdrawal of the state from direct mining activities and sale of state mines to private actors to ‘ensure’ a real and sustainable contribution to economic growth.

Tanzania, Guinea, Zambia and Mali started the reform process from 1994 and produced codes in 1998, whilst Burkina Faso and Mozambique started in 1997 and produced codes in 2000. These countries have evolved mineral codes with fiscal regimes that were described as providing very generous incentives to investors in the mining sector. The thrust of these reforms included: the pegging or royalty at 3%, 100% private ownership of mining ventures; increased quota of expatriate staff, with quotas determined by the investor among others. The framework of the Tanzanian code was not significantly different from the other countries in this group.

Like Ghana, these countries initially witnessed increased exploration activities, increased production and increased mine output. For Tanzania, diamond output surged from 25,500 carats in 1994 to 354,400 carats in 2000 while gold production recorded over 400% increase during the same time frame. By the close of 2000 the number of issued exploration licences exceeded 400.

The above statistics provided enough grounds to showcase the success of the Poverty Reduction Strategy Papers (PRSPs), the new name for the adjustment process at the close of 2000 in these countries, and justify the recommended reforms and further liberalisation of mineral codes. These countries struggled to maintain the position of ‘third large gold producer’ on the continent after South Africa and Ghana. Earlier reformers like Ghana who provided the prototype for the further refinement of the latter reformers but have experienced mixed fortunes were told that their mineral codes lacked lustre and therefore accounted for the dwindling investment in the sector.

The industry bureaucracy in Ghana was told to be more proactive, otherwise they would lose more investment to Tanzania, Guinea and Mali and the like, who have far more liberal codes. Lack of expansion in the issuance of exploration licences and stagnating investment in the mining sector of Ghana from 1998 to 2000 and beyond was blamed on the uncompetitive mining code. The analysis failed to take into consideration other factors which possibly accounted for this downward trend in Ghana, such as lack of prospective grounds and dwindling metal prices, among others.

Little was said particularly of the effect of the dwindling metal price on the industry. Between 1997 and 2000 gold price had dwindled from $400 to $260/oz. During the years, scams in the international exploration business saw the collapse of various companies’ stocks in the stock market. The infamous Bre-X scandals in Indonesia, which wiped out various pension funds invested in the Vancouver and Toronto stock exchanges, resulted in less aggressive investment in gold stocks. These scams coupled with the plummeting gold price reduced interest in gold stocks and affected exploration globally.

Whatever the reason, the industry drivers saw it as an opportunity to ask for more liberalisation from African mineral producers, citing ailing mineral codes which did not provide the needed incentives for investment. Ghana bowed under the pressure and put in place a process in 2000 to review its codes with back down with a country assistance package provided by the World Bank Group. This time consultants for the review had as their minimum acceptable prototype the code of Tanzania, Mali and the like.

The fiscal regime in the proposed new mining bill for Ghana was reduced to 32%, the royalty pegged between 1-3%, capital allowance increased to 80% in the first year of investment and 50% thereafter, expansion in the list of items to be tax exempt at the ports of entry, increased quota for expatriate employment, complete state withdrawal from mining ventures and transferability of mineral rights among investors. The draft bill also proposed that additional profit tax, which formed part of the ‘disfavoured’ code, should be abolished. In addition the proposals called for increased security of tenure of mineral rights, with proposals for the exploration licence to be extended from three years to six, and the mining lease to 30 years.

Ironically, whilst Ghana’s new bill is yet to be given the nod by the country’s parliament, Tanzania, Mali and Guinea and the rest of the second-generation reformers are being told that their codes are running out of lustre and that Ghana is the next destination for mining investment should the new minerals bill get the parliamentary nod. These countries are being asked to do something about their unattractive codes if they wish to stay competitive. A wish the governments of these countries certainly cannot afford to miss.

The obvious thing is that these countries would be seeking another country assistance package to enable them to send their waning codes to the drawing board to re-engineer them to make them more competitive than those of the likes of Ghana. By the time the long-delayed new mining bill of Ghana is out in the public domain it would have already lost its lustre and fallen out of favour, if the country’s competitors prove themselves to the task. This means Ghana would have to return to the drawing board to ‘re-re-revise’ its code to stay in tune. The question is when this cycle of race to the bottom will ever end.

At least what these countries have managed to achieve is that they continue to sink together at the same pace to greater poverty as they all fall within the same abject poverty zone within the scale of Poverty and Human Development Index.

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About the writer: Thomas Akabzaa is a lecturer with the Department of Geology, University of Ghana, Legon.

The above article first appeared in African Agenda (Vol. 7 No. 3, 2004).

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