Public Agenda (Accra)
Steve Manteaw
9 November 2009
Accra — It just doesn't add up, but that appears to be the case - Ghana is subsidizing the operations of mining companies to the tune of GHC146 million, at a time when world gold prices have climbed to an all-time high of over US$1,000 per once, from about US$500 per ounce in 2004.
Intelligence information gathered by Public Agenda has revealed that, at a time when ordinary citizens, many of whom can hardly make ends meet, are compelled to pay economic rates for the electricity they consume, the government of Ghana has continued to subsidize the energy consumption of mining companies.
While it costs about 19 cents to produce a unit of electricity, the companies pay only 10 cents for every kilowatt hour of energy consumed, leaving an under-recovered cost of 9 cents per unit consumed for government to finance. Our independent check with the Chamber of Mines puts the subsidy slightly higher, quoting electricity rates paid by companies at about 8 cents per kilowatts hour. It is estimated that the total subsidy to mining companies between July 2008 and July 2009 reached GHC146 million. Set against a total receipt of GHC141 million from the sector within that same period, the mining companies' contribution to national revenue mobilization has clearly been negative.
A source close to the World Bank has argued that, based on current light crude oil prices, the average price mining companies pay for electricity is only about half the short term marginal cost of generation.
"In the short term, I think that the case for charging prices that are not inferior to variable costs is very strong. If some mines become unprofitable with the new power prices, it would just mean that they are not economic with current oil prices," said the source.
Attempts to obtain some official explanation of the situation, has proven futile. What seems to be filtering through from unofficial sources however points to the non-enforcement of new tariffs negotiated and agreed upon in 2008.
On July 1, 2008 Kwasi Kpodo, reporting for Reuters, disclosed that Ghana's government had announced a cut in electricity subsidies for mining companies, as increasing global oil prices threatened to eat into the country's budget and growth rate. The then Finance Minister, Kwadwo Baah-Wiredu, was reported to have said the measure had taken effect as scheduled and that the companies would from then on be paying an average 22 cents per kilowatt hour, up from 11 cents.
It appears a sustained corporate lobby was set in motion by the Chamber of Mines, representing the interests of mining giants such as AngloGold Ashanti, Newmont Mining Corp., and Goldfields. Though the Chamber accepted that companies would have to pay higher power tariffs, it pressed for a reduction in the percentage increase.
"We are still negotiating. The issues are serious and delicate, so we need time to negotiate," Joyce Aryee, Chief Executive of the Chamber was reported to have told Reuters in Accra. Even so, Baah Wiredu was reported to have insisted: "We haven't changed the implementation date, neither have we revised the proposed rate... We will continue to dialogue with them and let them come to terms with the fact that we can no longer subsidise their operations".
Justifying the government proposal at the time, Finance Minister Baah-Wiredu cited the example of a power plant provided by a consortium of mining companies to augment the national supply. He said this private plant was producing electricity at a cost of 32 cents per kilowatt hour, far higher than the 22 cents being demanded by the government.
The revelation that the government is subsidizing these huge multinational mining companies comes in the wake of assertions that the global commodity price boom is benefiting the companies rather than the natural resource owners. A 2003 Project Performance Assessment Report on the World Bank mining projects in Ghana by the Bank's Operations Evaluation Department has admitted that the economic benefits of mining sector reforms to the country are uncertain. Commenting on the future trend of large scale mining in Ghana, the report asserted "Gold production and value of minerals produced have reached an unprecedented peak; however, it is unclear what their true net benefits are to Ghana".
An audit of mining sector payments and receipts by companies and the state respectively carried out by Boas and Associates in 2004 revealed that during the period under review, no company paid capital gained tax, as required by law, even though companies had changed hands during the period. The report also revealed that increases in world gold prices did not translate into increase in royalty receipts, even though the law provides for a range between 3% and 6%.
It is largely believed that companies and other investors in the sector, especially mining, employ a number of accounting techniques, including transfer pricing, manipulation of capital allowance provisions and many more to avoid, and in some instances evade taxes.
Ghana, Africa's second largest gold producer has not witnessed any marked change in its gold revenues in the last 4-5 years. The contribution of mining to total revenue collected by IRS i.e. corporate income taxes, royalties, PAYE, NRL, in 2000 was 13.7% while in 2006 it contributed a mere 9.6% of total revenue collected, according to a study commissioned by the Integrated Social Development Centre (ISODEC) early this year.
Industry analysts have blamed the fiscal regime, particularly the generous tax incentives, including capital allowances, low royalty payments, non-enforcement of capital gained taxes among others, for the low revenue from the mining sector.
News of the energy subsidy to mining companies has angered many civil society groups, who at a recent West Africa Tax Justice Seminar at Dodowa called for an immediate overhaul of the incentives regime in the country's natural resource sector and an end to government energy subsidy to mining companies. The participants at the workshop also called for a review of the incentives for the Economic Processing Zones (EPZ) as their impact on national revenue mobilization has been negative.
It is believed that, contrary to fears expressed by mining companies, a marginal increase in the tariffs they currently pay will not hurt their operations, especially given the good market prices they have and continue to enjoy. "I tend to think that given current gold prices, a temporary increase in the cost of electricity, by say 7 cents per kWh for a maximum of one year, would have a limited impact on the activity in this sector in Ghana", suggested an industry watcher in an intercepted communication.
The source explained that, beyond the short term, and assuming that enough natural gas becomes available for power generation in Ghana, on the basis of the West Africa Gas Pipeline coming on stream and the country harnessing the associated gas from the Jubilee Field, a cost-reflective electricity price for mines could be around 10 USc/kWh.
This level, the source argued is significantly more than what domestic mines benefiting from a regulated tariff in cedis are paying right now, but not much above the price paid by Anglogold.
Be the first to Write a Comment!
Copyright © 2009 Public Agenda. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
