By Michelle Smith — Exclusive to Gold Investing News
A large number of resource-rich African countries have seen little benefit from their resource endowments, says “Gold Mining in Africa: Maximizing Economic Returns for Countries,” a working paper recently published by the African Development Bank (AfDB). For the most part, this is due to unfair mining concessions, especially with regard to royalties, the paper concludes. However, there is also another key factor, which some media sources have done a disservice to miners by omitting.
Gold mining is described as a “significant sector” in at least 34 African nations. And though the continent accounts for 20 percent of global gold production, and gold prices have risen to an “almost unprecedented high,” the AfDB report argues that the potential for gold to contribute to both economic growth and development has not been realized.
Between 1980 and 2000, GDP growth rates in resource-rich African nations fell below the continent’s average rate of growth. The authors note that due to the commodity boom and perhaps better governance, this performance has somewhat changed course post-2000, but add that GDP growth alone is not a sufficient measure of economic development.
Africa is failing to reap the maximum benefits of gold mining, they insist, and its failure to do so is largely because of the prevalence of unfair mining concessions. Since most gold mines are owned by multinational companies, the main avenue through which governments benefit is by way of tax revenues.
But, often mining companies have negotiated tax exemptions far above the provisions specified in relevant mining codes. In the majority of cases, the authors say, these departures are not justified by the profitability of the mines.
The average corporate income tax for mining companies in Africa is approximately 32 percent. However, given the tax exemptions that have been granted, this is not a major source of revenue in most African countries, the report claims.
Royalties are identified as a major source of revenue from the gold mining sector, but as the authors suggest, the rates in Africa are low and outdated.
Royalties in Africa
The most common royalty rate in Africa is three percent, and in most cases it is fixed, which limits the ability of countries to take advantage of high rents during periods of rising commodity prices, the report says.
Royalty rates in many countries were set in the late 1980s or early 1990s, when gold prices were significantly lower than those seen now.
And though the authors recognize the possibility that raising royalties could create distortions in the optimal level of production or the cutoff grade, they do not recognize this as a valid argument in Africa.
“The level of royalties that are high enough to impact decisions on whether to invest in a particular mine or not, as well as affecting the profitability of existing mines, is far above the prevailing royalty rates in Africa,” the paper concludes.
The other side of the story
The AfDB paper highlights the growing challenges faced by gold miners, including the increasing amount of focus on the fairness of mining revenue distribution and the benefits countries are obtaining from their resources.
However, miners also face another challenge: the skewed manner in which information surrounding their activities is often presented to the public. The reporting on the AfDB paper provides an ideal example.
Many articles discussing this report, including one published on the AfDB website, have been unfairly selective in summarizing it. They have done so by failing to mention the lack of transparency in how concession agreements and mining licenses are issued. How governments funds are spent was also cited as a major contributor to the problem.
The authors said that an increase of government revenues is necessary, but will not sufficiently ensure that gold mining contributes positively to development.
Without good governance, resource rents are unlikely to be spent appropriately even if a higher share of the rent manages to accrue to governments, the report says.
It is also important to note that the allegedly unfair terms under which miners operate in Africa do not exist solely due to aggressive negotiating by miners. Rather, the authors of this paper claim major development finance institutions (DFIs), such as the World Bank, spearheaded African mining reform in the 1980s.
African nations were advised to make moves such as reducing royalties and regulations, as foreign investment was thought to be the path to Africa’s economic development. The authors even noted that the World Bank advocated earnings-based royalties, which ignored the limited capacity of tax administrations in Africa.
Any necessary policy reforms for ensuring fairer sharing of resource rents must start with the requirement that all mining agreements conform to the relevant mining codes, the report says.
But, it also adds that DFIs have financed numerous mining operations in Africa. These entities, including the AfDB, are identified as having important roles to play in reducing the resource curse phenomenon. And doing so is in their best interest as it helps ensure that their participation in these projects is in line with their development mandate.
Omitting the ill-advice of DFIs and mismanagement of revenues by governments is a disservice to miners who are already dealing with increasingly sensitive relationships with the government and citizens in the locations where they operate.
It also highlights the potential benefits that gold miners can reap from operating transparently and supporting good governance within nations where they conduct business.
Securities Disclosure: I, Michelle Smith, do not hold any equity interest in the companies mentioned in this article.