The miners’ foreign exchange retention: Essence, concerns and way out

On Monday, August 19, 2013, the Public Accounts Committee expressed shock at foreign exchange retention schemes operated by mining companies in the country and asked for investigations to be carried out with immediate effect. The committee had just begun to examine reports of the Auditor-General and the interest triggered by the issue prompted the Chairman of the committee to halt discussions and asked for members with concerns to wait until the committee “moves into a closed door meeting”.

While discussions and debates around the issue continue, this article is aimed at providing a bit of analysis into the rational for the retention, concerns and challenges associated with the schemes, and ways out of these concerns. While the call for investigation is welcome, it is expected that this time round more diligence will be done to the matter and more importantly, other equally “shocking” aspects of the mining sector will be opened up and reviewed in upholding the greater interest of Ghanaians.

Parliament’s lack of knowledge on foreign exchange retention arrangements worrying
The shock expressed by MPs on the public accounts committee is worrisome and quite disappointing. On one hand it reflects the much despicable secrecy in the mining sector in Ghana and across the continent. Given that the mineral resources belong to all Ghanaians, arrangements and contracts regarding their exploitation should be available to all Ghanaians therefore the parliament’s lack of knowledge on fundamental issues such as foreign exchange retention is clearly an important source of worry. On the other hand, Newmont’s agreement which also came up and amazed the MPs is being renegotiated since the beginning of last year (and they ought to know both the content and processes around this renegotiation as well as provide support for the Government Negotiating Team). So the fact that some of the MPs are new and either came to parliament in 2009 or 2013 (after the law had been passed and related contracts ratified) can simply not explain away their ignorance of the law and more importantly content of contracts such as Newmont’s. The MPs expression of shock at aspects of the law and terms of mining contracts is a sad indication that the Parliament is not paying enough attention to an issue of such high importance. This is regrettable. So how are the MPs preparing to ratify the renegotiated contracts when they lack basic information about the content of the existing contract? Will they ratify whatever is put before them or do due diligence?

On 4th July, 1986, the Provisional National Defence Council acting for and on behalf of the Republic of Ghana made the Minerals and Mining Law, 1986 (PNDCL 153). This law was part of the reforms that took place under the erstwhile Structural Adjustment Program (SAP) and Economic Reforms Program which were heavily influenced by the World Bank and IMF in design and implementation. These international financial institutions put optimum pressure on Ghana and other developing countries to narrowly focus on attracting foreign direct investment (with all kinds of incentives). The essence of this law and other related reforms was to “resuscitate” the mining sector that had collapsed together with the entire economy of Ghana in the preceding decade. At this time, the mining sector (like other sectors of the economy) was characterized by worn-out and run-down infrastructure, obsolete plant and equipment among other challenges. Worse of all, foreign exchange that was needed to import certain inputs were difficult to come by despite the gaping difference between official rates and black market rates. This predicament of the mining sector was largely the outcome of ridiculously low gold prices in view of the global financial architect which fixed the price of gold atUS$35 per ounce.

Essence of foreign exchange retention
It is against this background that the law allowed mining firms (with the permission of the Bank of Ghana and Ministry of Finance and Economic Planning) “to retain in an external account, not less than 25 per cent of foreign exchange earnings for acquiring machinery and equipment, spare parts and raw materials as well as for debt servicing, dividend payment and remittance in respect of quotas expatriate personnel” (Section 29 of PNDCL 153 on Transferability of Capital). The Ministry of Finance was required to consult the Ministry of Lands and Natural Resources and the Minerals Commission in granting such permission. The essence of the foreign exchange retention aspects of the law was therefore to enable mining firms take the necessary decisions to invest in Ghana. And from experience, those decisions were made and the miners came.

The expectations at the time (on the bases of PNDCL153) were that over time the bases for retention of foreign currencies by mining companies would be nullified with government taking greater stakes in mining entities, Ghanaians trained to replace expatriate workers and local sources of mining inputs developed. In relation to increasing government’s stakes in mining, the law right from the word go made it mandatory for the state to “acquire a ten per cent interest in rights and obligations of mineral operations in respect of which no financial contribution shall be paid by Government” (Section 8 of PNDCL 153 on Government participation). This has sadly been reneged in some mining entities (Newmont and Anglogold Ashanti are examples). The section goes further to provide the state an option to acquire further twenty per cent interest in mining entities and in the case of salt an additional forty-five per cent interest.

Regarding employment of Ghanaians and the utilization of local inputs (to enhance linkages between the mining sector and other sectors of the economy), Section 78 of the law (titled “Preference for Ghana products and employment of Ghanaians” and quoted below) is worth noting.

78. (1) The holder of a mineral right shall in the conduct of his mineral operations, and in the purchase, construction and installation of facilities, give preference to –

a) Materials and products made in Ghana;
b) Service agencies located in Ghana and owned by
i. Ghanaians; ii. Companies and partnerships registered under the Companies Code 1963 (Act 179) or the Incorporated Private Partnerships Act, 1962 (Act 152); iii. Public corporation, to the extent possible and consistent with safety, efficiency and economy.

(2) The holder of a mineral right shall, in all phases of his operations, give preference in employment to citizens of Ghana to the extent possible and consistent with safety, efficiency and economy.

Sadly for Ghana sections 8 and 78 of PNDCL153 which needed to be pursued vigorously in nullifying the bases for foreign exchange retention were clearly not implemented (and at worst ignored) by state agencies mandated to apply the law. It is therefore no wonder that two decades after PNDCL153 was passed the new law that was passed in 2006 retained, almost word for word, the section on foreign exchange retention with the same title. There is virtually no difference between section 29 of PNDCL 153 on transferability of capital and section 30 of Minerals and Mining Act, 2006 (Act 703). Section 78 of PNDCL 153 is also reproduced in section 105 of Act 703 word for word and with the same title. It is over two decades since and no visible efforts can be seen to implement these aspects of the law, beyond reproducing these sections in mining laws. New regulations were passed in 2012 (six years after the law was passed) to support departments and agencies implement aspects of the law but evidence of the impact is yet to emerge as these regulations have variously been described to be weak.

Challenges and concerns associated with foreign exchange retention
The foreign exchange retention section of the current Minerals and Mining Law (Act 703) is no longer serving its purpose and regrettably has been associated with some challenges in the mining sector. One of these challenges is “transfer mis-pricing” where mining companies under-value or over-value transactions with “affiliates” usually in tax havens in order to shift revenues and profits from one jurisdiction to another.

The 2012 Budget Statement and Economic Policy of Ghana revealed that “recent studies in the mining sector showed that Ghana loses about US$36 million through transfer pricing”. And this lost was not incurred in just a year or two but annually for several years. The main challenge here is that public servants are supposed to monitor these transactions and ensure that they are in conformity with the Internal Revenues Act which requires these transactions to be at “arms-length”. The arms-length principle necessitates that prices at which transactions between affiliates are undertaken must be related to prevailing market prices. The reference in the budget statement to “losses incurred” in the mining sector in relation to transfer pricing clearly shows that the miners have been breaking the law. The government is yet to prosecute any mining company on this issue.

The Parliament of Ghana passed a regulation last year to stem transfer mis-pricing in the country, providing for greater reporting rules. While the regulation could help the situation (in theory) the multinational companies are smart enough to out-wit the people of Ghana, likely with the connivance of some elites.

This can be done with the submission of voluminous reports that either exclude or hide transactions. The figure in the appendix below indicates how Canada based Barick Gold Corporation in 2005 had structured itself as a global mining giant with unimaginable number of subsidiaries in tax havens to facilitate transfers of revenues and profits. This strategy is not exclusive to Barick Gold or mining companies and it is done in a manner that is clearly difficult (if possible for public servants in African countries) to follow let alone make legitimate claims to portion of these revenues and profit made from the peoples’ precious and irreplaceable mineral resources.

Another challenge which is partly related to blanket foreign exchange retention is illicit financial flows. Foreign exchange retention remains an important part of the framework that facilitates illicit financial flows out of the continent. The African Development Bank recently estimated that the continent of Africa lost up to US$1.4 trillion between 1980 and 2009 through illicit flows. There is a sea of difference between the value of financial flows (from aid and grant to commercial loans) that came to Africa over the same period and the quantum revealed to have been lost to the continent through illicit financial flows. The continent’s paradox of being poor in the midst of plenty is therefore being explained in part by this phenomenon. Foreign exchange retention is therefore no small matter.

Dealing with the foreign exchange retention problem
In April, 2013, Zambia asked all mining companies to return to the country all the foreign exchange earned from the exportation of mineral resources they produce. This can guarantee the ability of the government agencies follow transactions made by mining companies that requires foreign exchange.

Then, probably, they can stop the obnoxious ones. Ghana must take a cue from this and annul the section on foreign exchange retention in Act 703. The regulation on transfer pricing and public servant implementing it will benefit substantially from such annulment. Companies that are engaged in all manner of transactions and essentially transferring profits out of the country can then be better checked. In the wake of conflicting reports on the exact amount of foreign exchange returned to Ghana by the miners, it is only by annulling the foreign exchange retention section of the law that can put the matter safely to rest. In 2010, the chamber reported having repatriated 68 per cent of revenues back to Ghana. It further claimed that an average of 20 per cent was sent through Bank of Ghana and remaining 48 per cent through private banks, a claim fiercely disputed by other stakeholders including government officials.

There are two other reasons why this section of the law must be annulled. The first regards the pursuit of other aspects of the law which deals with developing local sources of mining inputs and enhancing employment of Ghanaians in various aspects of mining (possibly replacing all expatriate workers at a specified time). This is of particular importance in view of rising unemployment in Ghana, which is partly responsible to increasing and widespread illegal activities (such as illegal mining). The case with developing local sources of mining inputs cannot be overstated, as it provides a more reliable source of enhancing developmental benefits of mining.

The second reason for annulling foreign exchange retention aspects of the law relates to equity and economic expediency and pragmatism. If all foreign investors had the option to retain in an off-shore account foreign currency earned from their beans and use them for their sole purpose, following the situation in the mining sector, the economy of Ghana will almost certainly run amok! The 1980s is way behind us and the miners’ foreign exchange retention basis can no longer be sustainably established. When the miners return the foreign exchange, it will be readily available to them. It is quite unfair to other sectors of the economy, such as manufacturing and agriculture, which create larger employment opportunities to be placed at a disadvantage as far as foreign exchange allocation is concerned.

The foreign exchange retention conundrum is just one of several challenges facing the mining sector in Ghana and across the continent. It is therefore important that a more holistic approach is used in dealing with the current challenge. There is no need for new policy prescriptions. The government has endorsed the Africa Mining Vision which provides the basis for using the continent’s mineral resources as a pillar for transformation and inclusive growth and development. All the arms of government (especially the legislature and executive) together with various government agencies are being urged to pay attention to the AMV.

Given the heavy influence of the mining industry on governance of the mining sector and potential efforts to forestall the implementation of the AMV in a manner that ensures optimization of mining benefits and their equitable distribution among all stakeholders, the government is being urged strongly to reach out to citizens group. This is to ensure that various interests in the sector, not only those of mining companies, are well considered. An important citizens group worth reaching out to is the National Coalition on Mining (NCOM) and the Ghana Mineworkers Union (GMWU). This is very important because these citizens groups, unlike the Ghana Chamber of Mines, do not have the resources to hot MPs on regular basis as is the case with the Ghana Chamber of Mines.