Many African countries have recently begun revising their mining codes to increase their share of revenues.
In 2010, Ghana increased its royalty rate from 3 to 5 percent. Before the recent coup d'état, Mali had been in the process of revising its mining code, including increasing the royalty rate. South Africa instituted a royalty for the first time in 2008, though the implementation was delayed for a year. And in countries such as Liberia and the Democratic Republic of the Congo, extensive reviews of legacy mining concessions led to upward revisions of applicable taxes in the majority of cases.
This wave of reviews is a result of two phenomena: a significant increase in commodity prices over the past decade, which resulted in large windfall gains of which only a fraction accrued to the state, and the need to correct 'unfair' mining concessions. The first is explained by the fact that royalties in most African countries are pegged at an almost uniform ad-valorem rate of 3 percent of mining revenues, with a few exceptions reaching the 5 percent mark, while the value-share (rather than profit-share) nature of the royalty system skews the upside benefits in favour of the mining firm.
In gold mining, for example, prices grew at an average rate of about 15 percent per annum over the past 10 years. This has led to significant increases in the profits of mining companies in Africa to reach an average of about $430 per ounce in 2010, based on our survey of 27 mines on the continent; an increase of 22 percent from the previous year. This was before the gold price reached its recent peak of $1,900 per ounce. Our estimates show that such increases improve net profits for firms by up to four times the observed percentage increase in net government revenue flows.
The lower revenues captured by African countries are also explained by the fact that far too many mining concessions contained excessive amounts of tax exemptions for firms. Other traditional benefits enjoyed by mining firms include full exemptions from custom duties, export taxes, dividend withholding taxes and VAT. The combined effect of these is to reduce the tax revenues of governments even when these firms are already enjoying high profits.
The current mining codes in place in many African countries are mostly the product of reforms initiated by multilateral development banks, notably the World Bank. These mining codes are investor-friendly precisely because the reforms were motivated by the desire to encourage private investment in a sector that had previously been dominated by government-owned mining companies. By and large, the reforms have been successful by spurring investment in a sector that had become moribund. Our analysis of the sector showed that current royalty rates are far from being onerous on firms' profitability, nor do they adversely affect the investment decision of foreign investors in the sector.
The end result of that dynamic is that the sharing of the resource rents from mining have become highly skewed towards mining companies. A better situation is possible where there is a fairer sharing of resources rents, whereby private investors can still realise reasonable returns and countries can better benefit from their resource wealth.
The first part of our proposal is the requirement that all mining firms comply with the tax obligations in existing mining codes. Current mining codes in Africa already reflected the tax concerns of international mining investors who were consulted during the reforms. The second part is ensuring that the effective tax rate is at least as high as the statutory corporate income tax rates of relevant countries. This would limit the tax breaks that have become all too common in the sector. It turns out that when the tax requirements in the mining codes are applied, the effective tax rate condition is automatically satisfied. Finally, our analysis showed that the financial rate of return on typical mining operations remains very high and attractive even after these proposals are taken on board.
Ensuring African countries receive a fairer share of mining revenue is crucial. These countries need the revenues to finance their development programmes to meet targets such as the Millennium Development Goals. Mining is mostly an enclave and highly capital-intensive industry, which limits its job creation, especially for the communities directly affected by the mining activities. Consequently, the development gains of the mining sector will remain elusive if government revenues are forgone.
Ousman Gajigo, Emelly Mutambatsere and Guirane Ndiaye are economists at the African Development Bank.