Africa’s Natural Resources and Underdevelopment: How Ghana’s Petroleum Can Create Sustainable Economic Prosperity by Kwamina Panford is an important addition to critical thought on the continent. It tells how Ghana, under pressure from global capitalism, enacted mining laws that have empowered foreign companies to do whatever they wanted with the country’s gold resources without any Ghanaian supervision. Review by Baffour Ankomah.
According to Kwamina Panford’s explosive book, Ghana’s government under President John Agyekum Kufuor enacted a mining law that literally gave international mining companies total freedom to mine, process, package, ship and sell overseas all the gold they produced in Ghana without supervision or intervention by any Ghanaian authority – not the government itself or any of its relevant agencies.
And all this was done in the name of boosting foreign investor confidence in the country and to entice more foreign direct investment (FDI) into the mining sector.
But “by so doing, the state of Ghana literally reneged on its duty to ensure proper accounting for the tonnage of gold produced and to ensure accurate assessment of taxes and other relevant fees owed the state,” says Kwamina Panford, a Ghanaian associate professor who teaches at the Northeastern University in Boston, Massachusetts, US, in his book.
“It is therefore not surprising,” Panford says, “that some gold companies did not pay to the Government of Ghana dividends from its carried interests in such enterprises … This is, in effect, ‘globalisation run amok’. It is also tantamount to the public authorities handing over Ghana’s gold, in this case bullions or ‘dores’, on golden platters to mining companies.”
Panford is an expert with intimate knowledge of Ghana’s gold and oil industries. In 2015, he provided critical input into Ghana’s Petroleum Revenue Management Act (PRMA), and was also instrumental in getting the PRMA to make it mandatory for the Ministry of Finance and the Bank of Ghana to publish audited accounts of Ghana’s petroleum funds in newspapers to make it easy for Ghanaians to know how much their country’s oil earnings are, and how they are being spent.
In February 2012, Panford was designated by the Public Interest and Accountability Committee (PIAC), a multi-stakeholder committee made up of government officials, workers, academics and civil society members that oversees how Ghana’s petroleum revenues are spent, to visit the Bank of Ghana to verify information and data pertaining to the country’s oil and gas earnings. As the lead consultant for the PIAC, Panford used the information and data he collected to draft the PIAC’s first report in 2012.
Thus, what he reveals in his book carries great weight and is bound to cause great commotion in his native country. Interestingly, since the book came out late last year in the US, the usually vociferous Ghanaian media has somehow missed it and no reviews have appeared in the country so far.
In the beginning
Panford dates his extraordinary story back to 1986 when the then military government led by Flt. Lt. Jerry John Rawlings capitulated to pressure from the neoliberal Washington Consensus and enacted the first ruinous mining law (ruinous to Ghana) giving multinational mining companies what amounted to an official licence to exploit the country’s natural resources.
“As a result of global capitalist pressure, starting in 1986 with mining, especially gold and diamonds, and since 2007 with oil, the Government of Ghana, acting on policy advice from the IMF and World Bank, seems to be forsaking Ghanaians,” the book says matter-of-factly.
Two pieces of bad legislation stand out in this drama. “The first law, the book explains, “was passed by the PNDC [Rawlings’ Provisional National Defence Council] as part of its 1983-85 Economic Recovery Programme (ERP) which it later converted into one of Africa’s notorious Structural Adjustment Programmes (SAPs). The second law was enacted [in 2006] by the NPP [President John Kufuor’s New Patriotic Party] to deepen the country’s neoliberal credentials.”
Panford continues: “PNDCL 153 was a ‘pro-investment’ mining code introduced as part of Ghana’s SAP developed with the support of the IMF and World Bank. Purportedly aimed at spurring foreign direct investment (FDI), PNDCL 153 allowed sweetheart deals granting large capital investment allowances, exemptions from fees for imported equipment, expatriate personnel salary transfers abroad, and nominal royalties of as low as 3%. Although on paper Ghana could access royalties of up to 12%, in fact that rate was never charged.
“In the attempt to make mining to benefit Ghana, there was supposed to be a windfall tax of 25% levied on mining companies’ extra profits. In addition, in the initial but feeble and ill-fated attempts to retain some local control, the law nominally allowed the government to acquire up to 30% of all companies’ stocks. In reality the government retained only 10% carried interest.”
According to the book: “By 1994, Ghana had acquired a uniquely dubious distinction, by becoming the most economically liberalised country in the whole of Africa… But this created a paradox: while privately-owned companies’ profits soared from 2003 to 2014, the proportion of state revenues shrank substantially.
“Developments in the mining sector after 1986 exemplify how neoliberal policies in Ghana not only ruined its fiscal situation in terms of falling government revenues, but also led to an environmental nightmare which is still unfolding and which will require massive public policy intervention to halt or even to bring under control.”
Race to the bottom
Even worse, instead of setting the pace for an environmentally friendly and local community-centred agenda, Ghana, through the introduction of the post-1986 mining laws, policies and actual practices, embarked on what is known as the ‘race to the bottom’, and set the bar so low that it was emulated by other African countries such as Sierra Leone, which had a mining lease with a royalty of a miniscule 0.5% a year.
Panford reveals that “after other countries sought to catch up with Ghana’s attempts to race to the bottom, it created a much lower standard to boost its competitiveness and to persuade Western donors that it was indeed their Sub-Saharan Africa’s star pupil.”
That notwithstanding, the gold companies still threatened that they would relocate to Tanzania if it did not offer even lower taxes and royalties. This prompted President Kufuor’s government to enact the Mining Act 703 of 2006 that assured foreign investors of the safety of their capital by imposing a new ceiling of an absolute 10% on state ownership in foreign mining companies. That meant the state could not attain more than a 10% stake in any multinational mining company.
Act 703 also scrapped taxes on mining companies’ extra profits, and introduced a new tax regime, ranging from 3% to 6%. In practice, however, most companies paid the lower 3%. In subsequent changes to the law, and under pressure from the mining industry, the government fixed a new royalty rate of 5%.
In 2010, a new government headed by President John Atta Mills, in a bid to undo the harm done by Act 703, enacted the Minerals and Mining (Amendment) Act 794 after complaining publicly in its 2010 budget about the mining companies’ anaemic dividend payments and excessive tax exemptions.
“But the mining companies and their neoliberal backers – the IMF, World Bank, USAID, Canada’s CIDA, and the UK’s DFiD – kept pressing while Ghana steadily kept its lead in the race to the bottom under the guise of enticing more FDI into a sector it deemed indispensable,” says Panford.
As a result, “there has been one glaring result,” Panford says. “Ghana has attracted substantial FDI, and boosted gold and diamond output and exports but with little or no job growth, technology transfer, improved quality of life, enhanced state revenues, or enhanced capacity to undertake more development.”
In September 2013, Ghana finally woke up to the reality of giving away its mineral resources to foreign companies, some of whom have been mining Ghana’s gold for the past 120 years. Parliament suddenly ‘discovered’ that the country’s mining laws allow some foreign companies to retain virtually all their earnings in Ghana in offshore accounts.
The revelation stung Dr Tony Aidoo, the then Head of Policy Monitoring and Evaluation in the President’s Office, into saying that he would prefer Ghana’s mining resources remained untapped in the ground, so that someday, local mining techniques, however primitive, could be developed to exploit them for the benefit of the nation.
But worse was to come. Parliament’s Public Accounts Committee (PAC) expressed ‘shock’ after ‘discovering’ that mining agreements signed by various Ghanaian governments in the past and ratified by Parliament itself were heavily tilted in favour of foreign companies.
“As much as 100% of earnings from gold mined in Ghana by some foreign companies,” the PAC discovered, “are lodged in offshore accounts. And all this is backed by Ghanaian law!”
This led inquisitive Ghanaians to ask where Parliament was when all this was going on. It is Parliament that ratifies the mining agreements and bills before they become law. But Parliament, blinded by partisan politics at the time, did not see that it was ratifying damaging mining laws under President Kufuor’s watch.
As Panford illustrates in the book, “In 2013, out of a total $23bn worth of gold produced in Ghana, the state’s revenue was $1.7bn, or a paltry 7%. Newmont Gold made $931m in 2012, and $919m in 2011 in profits, plus another $2.5bn (extra profits over the two years). But in three years, it paid taxes of less than $500m.”
What is more: Between 2005 and 2014 only four of 22 mining companies operating in Ghana did not evade paying dividends to the State. The other 18 paid zero dividends for the State’s 10% carried interest.
“This means the state got absolutely nothing for its 10% ownership of 18 separate gold mining companies all of which were raking in huge profits,” the book says. “The 4 companies that paid dividends to the State, contributed only GHc43.168m, approximately US$10m.”
At one point, reveals Panford, even the IMF, which had pressed Ghana in the past (alongside the World Bank and others) to give more tax and other concessions to multinational companies, became worried that Ghana’s lax tax enforcement was leading to massive revenue losses, and therefore the IMF “nudged the Government of Ghana to rake in more funds through taxes from mining companies.”
But things did not improve considerably, to the point that in the 2015 national budget, the then Finance Minister, Seth Terkper, revealed that mining companies’ revenues for 2013 were $4.8bn, and in 2014, $4bn yet State proceeds (from corporate dividends, taxes, royalties, and other fees) amounted to $309.35m for the two years 2013-14.
“It can therefore be concluded correctly that after almost 120 years of gold mining, there is growing evidence that this sector has not significantly enhanced the Ghanaian economy,” Panford says.
Oil the same
Remarkably, the same thing is happening in Ghana’s nascent petroleum industry which came on stream on 15 December 2010.
Contrary to earlier projections of incomes to the State ranging from $1bn to $1.4bn annually, Panford’s investigations show that in the first three years of oil production, Ghana received less than half of the projected earnings while no corporate taxes were paid to the country in 2010, 2011, and 2012 by the multinational oil companies (MNOCs) operating in the country.
As a result, while the companies have raked in billions of dollars in the last seven years, Ghana’s earnings between 2011 and 2015 have been paltry: $470m in 2011, $541.62m in 2012, $846.77m in 2013, and $978.88m in 2014. This is because “in the rush to attract foreign capital into its oil industry, Ghana charges some of the lowest royalties and fees in Africa, while, at the same time, it does not diligently enforce tax and fee collection,” Panford writes.
But that is not all. Although Ghana’s Model Petroleum Agreement (MPA) passed in 2000 provides a maximum of 12.5% in royalties, currently the MNOCs operating in the country pay a 5% royalty for crude oil and 3% for natural gas.
In addition, the Petroleum Income Tax Law (PNDCL 188) of 1987 and the Internal Revenue Act (Act 592) of 2000 require the MNOCs to pay a tax rate of 35% on their profits.
However, “under these two tax instruments, MNOCs enjoy excessive tax exemptions and fiscal incentives such as extremely generous and accelerated capital equipment depreciation of 20% in 5 years. That is, all capital equipment can be depreciated at 20% for each of the first 5 years of usage,” Panford reveals.
Crucially, the existing tax regime sets no limit to how much MNOCs can deduct business-related expenses. Hence the companies can manipulate accounting practices and financial reports to reflect losses in perpetuity. “This is partly due to the fact that without clearly defined caps, virtually all expenses on exploration, development and production (EDP), including payments to expatriate workers, are tax deductible.”
As a result, “Ghana, that is deemed so poor a country that it cannot finance EDP operations on its own, ends up paying for (or at least subsidising) the MNOCs that extract oil for profits which they do not share with Ghana,” Panford writes, while emphasising that “Ghana does not share in the MNOCs’ extra profits because it does not have viable laws to effectively assess and then tax oil companies’ unusual profits.”
No local refining of oil
Another glaring paradox is Ghana’s failure to refine locally produced crude. “So far not one drop of [Ghana’s] oil is refined locally,” Panford says. “Instead all crude, including the nation’s share received in lieu of cash payment, is shipped to the international market for sale.”
Interestingly, the quality of Ghana’s crude shares the properties of Nigeria’s preferred Bonne and is perceived as comprising ‘the luxury or Mercedes Benz’ classes of oil. Hence it is easy to refine.
Yet, as Panford shows, “due in part to the rush to ‘cash in on raw crude oil exports’ by both the Kufuor and Atta Mills governments, starting with the first lift of 55,000 crude barrels meant for export, not a teaspoon of crude produced in Ghana has been refined at the Tema Oil Refinery (TOR)” – the nation’s only refinery built in 1960 and refurbished several times since then.
“A paradox that has emerged,” Panford continues, “is that Ghana built TOR in 1960 when it had not discovered oil, and now that it produces oil, it has refrained from refining it locally using TOR while it spends about $1m a day on refined oil products. This is tantamount to outsourcing lucrative jobs while not adding to its miniscule industrial base established by the CPP in the early 1960s.”
Panford finishes on a strong note: “In deciding whether or not to resuscitate TOR and whether it should refine locally produced crude, policy makers ought to be mindful of private interests who benefit from the importation of refined petroleum products and those that will cash in commissions if TOR were privatised.”
The lesson is clear: In their pursuit of FDI, African countries should avoid Ghana’s example and instead put in place proper laws and tax regimes that will ensure a win-win for all concerned.