IEG Documents Ghana

EVALUATION OF THE WORLD BANK GROUP’S ACTIVITIES IN THE EXTRACTIVE INDUSTRIES Background Paper Ghana Country Case Study October 15, 2003 Document of the Operations Evaluation Department This report was prepared by OED by S. Mathrani (Consultant). The views expressed herein do not necessarily represent the views of OED or the World Bank. Currency Equivalents (annual averages) Currency Unit = Cedi (C) 1993 1994 1995 1996 1997 1998 1999 2000 2001 US$1 = C649 US$1 = C957 US$1 = C1200 US$1 = C1637 US$1 = C2050 US$1 = C2314 US$1 = C2669 US$1 = C5455 US$1 = C7171 Abbreviations and Acronyms AGC CAS CEM DA EIA EMP EPA ERP GAGL GFGL GOG GSD ICR IRS MC MD MDF MOF OED PER PMMC PPAR SAR SGMC SSM TA WBG Ashanti Goldfields Company Country Assistance Strategy Country Economic Memorandum District Assembly environmental impact assessment environmental management plan Environmental Protection Agency Economic Recovery Program Ghana Australian Goldfields Ltd. Goldfields Ghana Limited Government of Ghana Geological Survey Department Implementation Completion Report Internal Revenue Service Minerals Commission Mines Department Mineral Development Fund Ministry of Finance Operations Evaluation Department Public Expenditure Review Precious Metals Marketing Company Project Performance Assessment Report Staff Appraisal Report State Gold Mining Corporation small-scale mining technical assistance World Bank Group Fiscal Year Government: January 1–December 31 Background papers, as special working papers, are informal documents made available to disseminate the findings of key building blocks for major evaluation studies and to encourage the exchange of ideas about development effectiveness through evaluation. The findings, interpretations, and conclusions expressed in these papers are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank, the governments they represent, or the Operations Evaluation Department. The World Bank cannot guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply on the part of the World Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries i Contents Preface............................................................................................................................... iii 1. Background ..................................................................................................................1 Macroeconomic Context ..........................................................................................1 Extractive Industries ................................................................................................1 History of World Bank Group Involvement .............................................................5 Minerals Sector Strategy..........................................................................................7 2. Economic Benefits and Distribution...........................................................................8 Sharing of Resource Rents .....................................................................................10 3. Environmental, Social, and Governance Issues ......................................................13 Artisanal Mining ....................................................................................................13 Environmental Mitigation in the Small-Scale Mining Sector ................................14 Land Use Conflicts.................................................................................................15 Relations with Local Communities ........................................................................16 Governance Issues .................................................................................................17 4. Assessment of World Bank Interventions in Ghana’s Mining Industry ..............18 Relevance ...............................................................................................................18 Efficacy ..................................................................................................................19 Efficiency................................................................................................................19 Institutional Development Impact..........................................................................20 Sustainability..........................................................................................................20 5. Conclusions.................................................................................................................21 Future of Large-Scale Gold Mining ......................................................................21 Annex A: World Bank Group Assistance to Ghana’s Extractive Industries .............23 Tables Table 1: Year of Establishment of Industrial-Scale Mining in Ghana.................................1 Table 2: Mineral Production in Ghana, 1985–2001.............................................................2 Table 3: Gold Production in 2001........................................................................................3 Table 4: New Gold Mines Established Since 1988 .............................................................4 Table 5: Mining Sector Contribution to Government Revenue...........................................9 iii Preface This case study was prepared as part of an Operations Evaluation Department (OED) assessment of World Bank Group activities in the extractive industries sector. The larger study is available on the Internet: http://www.ifc.org/oeg/EIEvaluation/eievaluation.html. The World Bank has been involved in Ghana’s mining sector for the past 20 years and has made two loans to the government specifically for the mining sector. Other macroeconomic adjustment operations in the mid 1980s also provided assistance for mining. The International Finance Corporation (IFC) has had 14 operations with three mining companies during the same period. Ghana was selected for study because of its transformation within a decade from a declining, state-dominated mining sector into a dynamic, expanding industry by means of a massive injection of new technology and private investment. Ghana was a pioneer in liberalizing its mining legislation in the mid-1980s and served as a sector reform model for numerous other African countries. The case study was prepared by Sunil Mathrani (Consultant) under the supervision of Andres Liebenthal (Task Manager). It is based on a review of Bank project files, economic and sector work, interviews with Bank staff, industry representatives and government officials in Ghana, and on the findings of a mission to the country in October 2002. The mission also carried out a Project Performance Assessment of two mining projects, which was issued as a separate report (No. 26197) in July 1, 2003, containing complementary information. This report first briefly describes Ghana’s extractive industries, then provides a more detailed account of World Bank Group involvement in them. The main issues confronting the mining sector are then presented, followed by an evaluation of the Bank Group’s assistance. The report concludes with some suggestions that merit further reflection by the Government of Ghana (GOG) and its development partners. Following OED procedures, the draft of this Country Case Study was sent to the borrower for comments before finalization, but no comments were received. 1 1. Background Macroeconomic Context 1. Ghana has a population of slightly over 20 million that is increasing at 2.2 percent annually. Over 60 percent of the population lives in rural areas. Its GDP of about $5.7 billion is dominated by agriculture, which accounts for over 35 percent of GDP and 60 percent of employment. GDP per capita is about $280, lower than the average for Sub-Saharan Africa. Real growth averaged about 4 percent annually during the 1990s, supported by large inflows of concessional aid. However, the economy still suffers from frequent bouts of macroeconomic instability, high inflation, and a rapidly depreciating currency. These are partly the result of weakness in governance and fiscal laxity driven by electoral considerations.1 They hinder private investment and growth. The state continues to play a large role in the Ghanaian economy, despite a long-standing government commitment to disengage. Ghana’s external debt of about $7 billion represents 125 percent of GDP and the country recently qualified for relief under the HIPC initiative. 2. By the standards of Sub-Saharan Africa Ghana has a fairly large and diversified industrial sector that accounts for about 25 percent of GDP, but the economy is still heavily dependent on three commodities: gold, cocoa, and timber, which together account for two-thirds of Ghana’s exports. In this respect, the structure of the Ghanaian economy has changed little in the past hundred years. Mining is a long-established and mature industry in Ghana, but despite its importance as a major exported, the sector represents only about 5 percent of GDP, and its contribution to government tax revenues is similarly low. Current hydrocarbon production accounts for an insignificant share of GDP. Extractive Industries 3. Ghana’s extractive industries produce gold, diamonds, manganese, bauxite,2 and salt. Modest offshore oil and natural gas reserves in the Saltpond basin were briefly exploited in the early 1980s, but then shut down, as they were uneconomic. Gas production from the offshore Tano field is due to commence soon, to feed a power plant. 4. Gold has been produced artisanally in Ghana for hundreds of years. Modern mining methods were introduced in the late 19th century and production reached a peak of about a million ounces in the early 1960s. Thereafter the industry went into a decline that was finally halted in the midTable 1: Year of Establishment of Industrial-Scale Mining in Ghana Gold Manganese Diamonds Bauxite 1897 1921 1923 1940 1. For example, the deferral of increases in petroleum product and public utility prices in 1999–2000. 2. The bauxite is not of metallurgical grade and is exported, while an aluminum smelter operates on imported alumina. 2 1980s. Since then the nature and scale of the mining sector has gone through a massive transformation. Foreign direct investment of about $5 billion3 has flowed in and probably exceeds the value of FDI in all other sectors combined. The new investment has been heavily concentrated in surface mining, now the predominant method of extraction. While diamond, manganese, and bauxite have all shown large increases in production in recent years, their financial importance to Ghana is dwarfed by gold mining (Table 2), which accounts for over 90 percent of mineral exports and, at about $650 million in 2002, is by far Ghana’s largest export.4 5. Gold mining in Table 2: Mineral Production in Ghana, 1985–2001 Ghana today bears little Mineral 1985 1990 1995 2000 2001 resemblance to that of the Gold (000 ounces) 300 541 1709 2315 2336 1980s when virtually all Diamonds (000 carats) 636 637 632 627 870 operations were in 357 247 187 895 1077 underground, state-owned Manganese (000 tons) 5 Bauxite (000 tons) 124 364 530 504 678 or controlled mines. The mid-1990s saw successful N.B. The total value of minerals production in 2001 was $662 million. flotation of Ashanti Goldfields Ltd. (AGC) on the London stock exchange6 and divestiture of the three main state-owned gold mines. Gold production was valued at over $600 million in 2001 and is entirely controlled by the private sector, although GOG has a 10 percent shareholding in most companies.7 Two companies, AGC and Goldfields Ghana (GFGL)8 account for almost 70 percent of production (Table 3). 3. Including mining service companies. Mining projects alone during the 1990s accounted for about $3.5 billion. 4. In 1992, gold overtook cocoa, historically Ghana’s principal export. 5. Before 1988 all gold was produced by AGC (55 percent state-owned) or SGMC (100 percent public), which together employed about 19,000 workers. 6. AGC is Ghana’s largest company (but with a substantial British shareholding), and also has mines in Guinea, Zimbabwe, and Tanzania. In 2001, it was ranked the tenth largest gold producer worldwide. GOG is a minority shareholder. 7. Statutorily acquired from project promoters at no cost, as a condition of obtaining a mining license. GOG also retains the right to purchase a further 20 percent equity stake for a price to be negotiated with the other shareholders. These provisions are currently being reviewed and are likely to be modified in a new Mining Act. 8. A subsidiary of Goldfields of South Africa, the world’s fourth largest gold producer in 2001. 3 6. A large, and mostly illegal, smallTable 3: Gold Production in 2001 scale/artisanal sector produces gold and Quantity Value Mine diamonds9 and employs much more labor (000 ounces) (US$ m) than large-scale mining. It is a longAshanti Goldfields 998 271 standing feature of the sector and is likely Goldfields Ghana 527 143 to outlive large-scale mining. By absorbing Abosso Goldfields 303 82 large amounts of unskilled labor, this Resolute Amansie 111 30 activity is a valuable socio-economic safety Others 231 61 valve in a context of permanently high Small-scale miners 166 50 unemployment. Up to 100,000 people, Total 2336 637 including children, may be involved in it, although not necessarily full-time. Unfortunately, artisanal mining has markedly poor health and environmental impacts (para. 39-40). 7. Gold output is now about 2.3 million ounces, a tenfold (Table 2) in volume terms, compared to its record low of about 280,000 ounces in 1983/84,10 when the industry had been debilitated by macroeconomic mismanagement, severely degraded transport and communications infrastructure, as well as an excessive tax burden.11 The Rawlings government’s Economic Recovery Program (ERP), launched in 1983, addressed Ghana’s macroeconomic problems and received massive backing from the donor community. The Bank quickly approved an export rehabilitation project and two structural adjustment operations. They provided a crucial injection of scarce foreign exchange to the economy to enable the purchase of essential spare parts and other inputs needed to revive Ghana’s main export industries — cocoa, timber, and gold. 8. With the improved macroeconomic conditions and a new minerals law passed in 1986, private foreign investment quickly began to flow into the sector. The first new mine for over 40 years (Konongo) started production in 1988 (Table 4). Three new open-pit gold mines entered production in 1990/91. One of these (Bogosu) was backed by the IFC. 9. Small-scale mining collectively holds fourth place among Ghana’s gold producers. Over half of Ghana’s total recorded diamond production comes from small-scale operators. 10. The contraction of the Ghanaian economy was so severe that real per capita incomes in 1984 were nearly 30 percent below the level of a decade earlier. 11. For example, a 6 percent royalty and other levies, including an export levy, could bring up-front charges to about 12 percent of the value of minerals produced. 4 Table 4: New Gold Mines Established Since 1988 Mine Konongo Bogosu Teberebie Kwabeng Esaase Akyempim Iduapriem Ayanfuri Prestea Tailings Project Nkran Abosso Bibiani Asikam Tarkwa Surface Mine Production start 1988 1990 1990 1990 1991 1991 1992 1994 1995 1997 1997 1997 1997 1998 Mine operator Obenemase Gold Mines (Australia) Bogosu Gold Ltd.(Canada) Teberebie Goldfields Ltd. (AGC) Goldenrae Mining Co. Bonte Gold Mines Ltd. (Canada) Satellite Goldfields (Ireland) Ghanaian Aust. Goldfields Ltd. (Australia) AGC, Ghana Prestea Sankofa Gold Ltd. (Ghana) Resolute Amansie Ltd. (Australia) Abosso Goldfields Ltd. (Australia) AGC, Ghana AGC/Midras Goldfields Ghana Ltd. (S.Africa) 9. A side effect of the poor condition of the mining sector in the 1980s was the neglect of its adverse impact on Ghana’s environment. In mining areas, this was both extensive and severe, with considerable arsenic, mercury, and sulfur dioxide pollution. As late as 1991 a Bank environmental reconnaissance team recorded that the AGC gold mine at Obuasi had contaminated the Obuasi area and downriver drainage with airborne pollutants, tailings, and various liquid effluents. IFC’s involvement with AGC helped to bring pollution abatement and environmental cleanup to much greater prominence. Pressure as well as funding from IFC led to the installation of an arsenic recovery plant in 1992 that put an end to airborne emissions of arsenic trioxide. 10. The State Gold Mining Corporation (SGMC) mines were also responsible for substantial water and air pollution and they were the slowest to begin addressing these problems. The first efforts to tackle environmental mitigation at the SGMC mines did not begin until 1993 under the auspices of the Bank’s Mining Sector Rehabilitation Project (para. 15). Much progress has been achieved during the past decade, both in the observance of much higher environmental standards by operating mines as well the remediation of previous environmental damage. However, artisanal mining continues to completely disregard environmental concerns (para. 39). 13. These were the Export Rehabilitation Program Credit (Cr. 1435-GH) and the Export Rehabilitation TA Project (Cr. 1436-GH) in 1983, followed by the Second Reconstruction Imports Credit (Cr. 1573GH) in 1985. 5 History of World Bank Group Involvement 11. In the early 1980s, as part of IDA’s support to the ERP, nearly US$50 million was made available to the mining sector from IDA adjustment credits13 to GOG. It was believed that this would be a quick and effective way of arresting the production decline and generating scarce foreign exchange for Ghana. The funds were used to purchase essential spare parts and other inputs (that could only be purchased with foreign exchange), and to begin the rehabilitation of the three gold mines run by SGMC. These mines, which employed about 8,000 workers, were on the point of physical and financial collapse. Worker safety was a real concern, given the dilapidated condition of the equipment such as the shafts and winders (hoists to take workers in and out). In 1985, an expatriate management contract team was put into SGMC with Bank-CIDA funding14 to help fill the many gaps in technical and managerial positions. Many skilled Ghanaians had left the public sector and/or the country due to low salaries and the prolonged macroeconomic crisis during the 1970s and early 1980s. 12. In 1985, IFC committed its first investment in AGC — $27.5 million for IFC’s account and a $27.5 million syndicated loan, for a mine rehabilitation project. IFC made a second loan to AGC in 1990 for $35 million directly with a further $35 million syndicated loan for development of an open pit mine, new oxide treatment facilities and tailings re-treatment facilities. In 1992, IFC also approved a swap facility ($6.4 million), and committed a loan of $40 million for its own account and $100 million for other participants to finance a major mine expansion by AGC. However, only a small portion was disbursed and IFC’s remaining investment was soon prepaid since AGC was able to raise financing from commercial sources. Ashanti Goldfields attributes15 its success during this decade in part to the economic reform programs supported by the World Bank and IMF, and the financial support from IFC. 13. In 1987, IFC approved a $0.6 million quasi-equity investment in Canadian Bogosu Resources, a consortium of Canadian investors that reopened the abandoned Bogosu Mine; IFC approved follow-on investments in 1989 ($0.6 million), 1991 ($14 million plus $29 million from other participants), and 1993 ($1.2 million). The project, completed in 1991, entailed the construction of a mining and processing facility designed to process oxide ores by using conventional carbon-in-leach (CIL) technology at a design capacity of 1.36 million tons per year and to process sulfide ores by using flotation, fluid bed roasting, and CIL technology at a design capacity of 0.9 million tons per year. The project encountered serious operational and mechanical difficulties with the fluid bed roaster and the flotation circuit and roaster were closed in 1994. Following closure of the roaster, the operations focused on oxide ore. The investors sold their stake in the mine to the mine’s project lenders, including IFC, who then sold the majority interest in the mine to Golden Star16 in 1999. 14. From the Export Rehabilitation TA Project (Cr. 1436-GH). 15. See http://www.ashantigold.com/ashantigold/culture/agchistory.jsp?subsection=3, see also section 4. 16. See Golden Star Resources: http://www.gsr.com/Bogoso_Prestea.htm 6 14. In 1990, IFC approved a $2.5 million equity investment in Ghana Australian Goldfields Ltd. (GAGL), a consortium headed by Australian investors, to complete exploration drilling and a feasibility study for the Iduapriem gold mine, near Tarkwa.17 In 1991, IFC approved an investment of $18 million for IFC and $18.5 million for other participants in the development of an open pit mine and a carbon-inpulp (CIP) treatment plant designed to produce 1.5 million tons of ore, to produce 110,000 ounces of gold per annum. In1995, IFC provided a shareholder loan of $2.6 million as its share of the funding to increase annual capacity to 2.8 million tons mined; raising gold output to 150,000 ounces per year. In 1996, a further $4.5 million was provided by IFC as a senior loan for the installation of a heap-leach facility to handle low-grade ore reserves. Following the 1996 expansion project, the mine encountered increasingly hard ores, and with the consequent higher costs and falling gold prices, it reclassified its ore reserve estimates and scheduled to close in 2000/01. However, Ashanti Goldfields, which had purchased a controlling interest in GAGL in 1997, also acquired the adjacent Teberebie ore deposit, thereby extending the life of the Iduapriem processing facilities by an additional 5 to 6 years. 15. By 1986, when preparation of the first free-standing, IDA lending operation for mining began, the decline in gold production had been arrested, but SGMC was still making losses due to its high costs (in part due to overmanning), decayed plant, and low output. The mining industry as a whole was still penalized by an overvalued exchange rate, which also provided strong incentives to smuggling of gold and diamonds. 16. Although the Mining Sector Rehabilitation project (approved in mid-1988) was the Bank’s first project tailored exclusively to the needs of the mining sector, it was the logical continuation and extension of the “emergency-type” assistance that had been given to the sector several years earlier. The project sought to (i) rehabilitate economically viable mines, (ii) help attract private investment in mining, (iii) strengthen the governmental agencies dealing with the sector, and (iv) increase the benefits to the country from small-scale mining. These objectives largely reflected the Bank’s vision of what was needed for the long-term development of the Ghanaian mining sector, and the Bank worked closely with GOG in establishing a coherent sector policy. 17. The outright sale of the state-owned mines had been mooted within the Bank, but was not an explicit project objective. However, joint venturing of the three SGMC mines (Prestea, Tarkwa, both underground, and Dunkwa, alluvial dredging) with private partners was seen as the best way of improving management and possibly obtaining additional funding for mine rehabilitation. At this time it was believed that the mines had sufficient long-term technical and financial viability to justify fresh investment in them, although this later turned out not to be the case. 18. The Mining Sector Development and Environment Project followed in 1995, seven years later. This was essentially a capacity-building project that redressed the relative neglect of socio-economic and environmental issues in the Bank’s previous 17. For more information see http://www.ifc.org/ogc/eirprojects/docs/GAGL.pdf 7 interventions in the sector. Its objectives were (a) to enhance the capacity of the mining sector institutions to carry out their functions of encouraging and regulating investments in the mining sector in an environmentally sound manner; and (b) to support the use of techniques and mechanisms that would improve the productivity and financial viability of small-scale mining operations, and reduce their environmental impact. These two IDA-funded operations overlapped for about two years, due to a major delay in implementing the former project. The latter project closed at end-2001 and there has been no follow-on operation. Minerals Sector Strategy 19. As a condition of obtaining the Mining Sector Development and Environment Credit in 1995, GOG provided the Bank with a short statement of mineral sector development policy.18 It states, “The key objectives of the Sector Development Policy are to sustain the growth of the mining sector in order to assure increased foreign exchange earnings and increased revenues to the Government in the form of taxes and royalties; the creation of employment and development in rural communities where the mining takes place; and ensure that sectoral growth is environmentally sustainable and does not harmfully impact the local population.” 20. After this low-key policy statement,19 little reference was made to mining sector development in Bank country economic memoranda (CEMs), country strategies (CASs) or public expenditure reviews (PERs) during the rest of the decade. There does not appear to have been any discussion of the rising contribution to government revenues and foreign exchange of the mining sector. Neither the government nor Bank strategy for mining in the mid-1990s addressed important issues such as the sharing of resource rents between the state and mining communities, economic linkages between large-scale mining and local communities, competition between mining and agriculture for access to land in mineral-rich areas, or the provision of infrastructure and services to mining areas.20 21. It was implicitly believed by both GOG and the Bank that further expansion of mining activities was desirable for macroeconomic reasons, provided that the environmental impacts were properly managed. The latter would prove to be a major challenge, given that all new mining projects were surface rather than underground and tended to be concentrated in areas where population densities were relatively high and arable land was scarce (para. 34). 18. In the form of a letter from the Minister of Mines and Energy dated May 3, 1995. 19. It was not even annexed to the SAR for the project or officially published by GOG. 20. This is perhaps unsurprising, given that neither of the Bank’s two Africa-wide papers (Strategy for African Mining, World Bank Technical Paper #181, August 1992, and Strategies to Attract New Investment for African Mining, J. Strongman, June 1994) deal with these issues either. On the other hand, the Bank was familiar with the approach of other countries, especially Papua New Guinea, where the 1992 Mining Act includes provision for local community consultation and participation and where formal undertakings are given on infrastructure and service provision to mining communities. 8 22. By the late 1990s, outside commentators such as academics and NGOs were highlighting the importance of addressing the socio-political dimensions of mining21 and the growing discontent of affected communities, but their concerns were slow to filter through to GOG and the Bank. In 2000/01, the Bank funded consultants to assist the Minerals Commission (MC) in devising a comprehensive policy for the minerals sector covering fiscal, environmental, and legal issues. However, socio-economic concerns of mining communities (such as employment, infrastructure, and service provision) were not part of the Bank-funded assistance. Nor does the Bank appear to have engaged the MC in a joint reflection on ways to improve the royalty-sharing mechanism (para. 28-30). However, these issues do appear to have been considered by the MC in the new draft minerals legislation that is soon to be placed before Parliament for debate and approval. It was subject to some public scrutiny and discussions took place with the mining industry, NGOs, and community representatives on the content of the draft bills. The new bills are a step toward redressing some of the omissions in the existing laws. They explicitly recognize the risks of social conflicts arising from mining activities, the need for greater consultation with all stakeholders, and the importance of an “equitable” sharing of benefits from mining. One hopes that parliamentary debate will also permit the proposed legislation to better reflect the concerns of mining communities. 2. Economic Benefits and Distribution 23. Ghana’s fiscal receipts from mining, and therefore its budgetary dependence on it, are relatively low. Mining’s share of total tax revenue22 in 2001 was only about 4 percent, although since 1993, the mining sector’s contribution to GOG’s direct tax revenues has averaged 12 percent (Table 5), or about $32 million in 2001. This is not an impressive figure for an industry with a turnover in excess of $600 million. Taxes on imported petroleum products contributed three times as much to GOG’s revenues. Even cocoa export duties were slightly greater than receipts from the mining sector.23 21. A conference on mining, development and social conflicts in Africa was held in Accra in November 1999. The conference papers have been published by Third World Network-Africa, along with “Boom and Dislocation” by T. Akabzaa, June 2000, which is a critical study of the environmental and social impacts of mining in the Wassa West district of Ghana. 22. That is, including indirect and trade tax receipts. 23. 280 billion Cedis from cocoa versus C221 billion from the mining sector. 9 Table 5: Mining Sector Contribution to Government Revenue (in millions of Cedis) Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total Corporate tax Royalties A B 4311 6942 19713 2880 14094 4061 8528 11405 24677 96611 7485 12784 20912 35493 32697 49485 48620 118737 127358 453571 Income tax from workers C 2649 4811 7952 16835 25022 31017 27839 59244 75501 250870 4251 4251 Reconstruc- Total income Total IRS Mining/total tion levy from mining collection revenue D E=A+B+C+D F E/F 14445 24537 48577 55208 71813 84563 84987 189386 231787 805303 113237 166596 275513 424492 605783 785437 901664 1409445 2089788 6771955 12.8% 14.7% 17.6% 13.0% 11.9% 10.8% 9.4% 13.4% 11.1% 11.9% Source: IRS; Collated by the Finance & Research unit, Minerals Commission. 24. The sector’s contribution to government revenue cited above includes about C75 billion ($10 million) of income tax paid by about 30,000 employees of mining and related service enterprises in 2001. Royalties24 account for the bulk of the mining sector’s contribution to government revenues.25 Various tax allowances mean that corporate income tax payments by mining companies are modest. 25. Despite political pressure from certain quarters, there appears to be little prospect for increasing Ghana’s share of earnings from the mining sector through higher royalties or taxes. Competition among mineral-rich developing countries for foreign investment in exploration is intense and any such step is likely to seriously erode Ghana’s attractiveness to prospective investors. Some observers (such as the Ghana Chamber of Mines) feel that Ghana has already slipped behind its main “rivals” in this regard and needs to reposition itself through enhanced investment incentives. As part of the revisions to the 1986 Mining law, consideration is being given to altering the provision for the automatic free acquisition by GOG of a 10 percent stake in every new mining operation. However, other (non-industry) commentators have pointed out the dangers of developing countries competing with each other to attract mining investment in a downward spiral of declining economic benefits to the host countries. 26. It is difficult to compare taxation regimes across countries, since every tax regime is different. There are a large number of different taxes and which taxation system is relatively more or less favorable to the producer also depends on the cash flow stream of a particular mine. A recent comparative study of mineral taxation 24. Which are levied at 3 percent of the value of gold production at the free market price. These amounted to $18 million in 2001. However, under the current law, royalties can vary from 3 to 12 percent, depending upon industry profit margins, which have been low in recent years. 25. GOG also earns dividends on its 10 percent shareholding in most mining ventures. Data on GOG’s royalty income is publicly unavailable. 10 regimes26 ranked Ghana 11th in terms of attractiveness,27 with an after-tax rate of return of 13.6 percent. It is also noteworthy that only 14 of the 23 countries in the study would provide after-tax rates of return over 12 percent, the cutoff below which the study considers it unlikely that private investors would find it attractive to invest. Sharing of Resource Rents 27. The Constitution of Ghana28 explicitly reserves all mineral rights for the state and does not recognize the rights of landowners to receive any share of benefits flowing from the extraction of mineral resources. Despite the lack of any constitutional provision, the considerable expansion in mining activity in Ghana in the late 1980s gave rise to the sentiment that local communities in affected areas should receive a direct share in the royalties paid to GOG by the mining companies. This was also consistent with the practice of mining companies paying local chiefs “concession” and various other fees before the 1962 Minerals Act when landowners still had rights to the subsoil resources. As a result, the Mineral Development Fund (MDF) was set up29 by GOG in 1992 at the initiative of the Minerals Commission, without any public debate. There does not appear to have been strong political pressure to do so at that time, although mining companies were being called upon by local community leaders to contribute to the development of the host communities. Hence, the MDF restored the practice of paying the traditional custodians of the land on which mining companies operated. 28. At present, the MDF receives 20 percent of all mining royalties, which amounted to $3.6 million in 2001. Half of this amount is intended for mining communities30 via the District Assemblies, the Traditional Councils and the stool chiefs. The other half is retained for mining sector institutions and mineral-related investment projects. The payment of a portion of royalties from the MDF to the sector entities was a pragmatic way of ensuring that they had adequate funding to operate effectively and to be able to pay their staff more than civil service scales. 29. The portion disbursed to mining communities is again subdivided among the local administration (District Assemblies), which ends up with 25 percent of the MDF, while the Traditional Councils and the stool chiefs are entitled to 9 percent and 26. Global Mining Taxation — Comparative Study, Second Edition, March 2000, by James Otto, Colorado School of Mines. He calculated the after-tax rate of return from the point of view of a private investor for a “model” gold mine. The model assumed a 24.4 percent pre-tax rate of return and compared 23 different countries (or provinces). 27. Behind countries like Chile, Peru, South Africa, and Zimbabwe and on par with Indonesia and Tanzania. 28. Article 257, clause 6 of the 1992 Constitution vests all minerals in the President on behalf of, and in trust, for the people of Ghana. 29. By an administrative decision, not by an Act of Parliament. 30. Less 10 percent retained by the Office of the Administrator of Stool Lands (OASL) since 1999 to cover its administrative charges. 11 11 percent, respectively.31 Currently, 29 District Assemblies (DA) benefit from MDF monies, although just two of them, Adansi West and Wassa West, account for 80 percent of the transfers. 30. The varied ways of utilizing and accounting for the use of the monies has given rise to controversy, both in terms of the respective shares as well as the manner in which these bodes use the funds. There is a widespread view that funds disbursed to the stool chiefs and traditional councils have contributed little to local economic development or to assisting those displaced by mining to develop alternative livelihoods. However, since there is no requirement to record and report to GOG how these funds are used, this is impossible to corroborate. It should also be noted that there is no explicit obligation upon the councils or stools to use the funds for purposes indicated by the MDF. Nor are there formal reporting requirements specifically on the use of MDF funds by the DAs, beyond their routing expenditure accounting obligations to the Ministry of Local Government. 31. For instance, some DAs simply treat these funds as part of their normal revenues to pay for recurrent expenses rather than for specific projects. Inevitably, access to inflows from the MDF has led to a slackening of revenue collection efforts from other sources by the biggest beneficiary DAs. In other cases, the traditional leaders have been criticized for using the MDF money for conspicuous consumption rather than using it for community development or disbursing it to those most adversely affected by mining. 32. The current lack of clear expenditure guidelines and the limited transparency of MDF fund flows are unsatisfactory. A board of trustees with wide stakeholder representation would be a possible way of managing the use of MDF funds at the local level. Some of these shortcomings are being addressed in the proposed legislation governing a revamped MDF (para. 36). 33. Equally seriously, the flow of mineral royalties back to the producing areas from the Mineral Development Fund has also been seriously disrupted in recent years by the MOF policy of retaining these funds for general budgetary use rather than releasing them to the MDF. In the absence of any Act of Parliament governing the MDF, royalties earmarked for it are legally just part of the Consolidated Fund, disbursements from which are at the discretion of the MOF. Given that there is already a significant degree of popular resentment against mining, this is a politically risky strategy. 34. A field visit to Wassa District, which contains the predominant share of Ghana’s mines, confirmed the competition between mining and agriculture for arable land, the poor state of local infrastructure, inadequate public services, and high unemployment. The heavy concentration of mining activity in Wassa District means that social and environmental impacts are felt more acutely than if mining was more dispersed geographically. A substantial relocation of about 20,000 rural people from 14 villages took place in the late 1990s because of the opening of the new GFGL 31. After the deduction of the administrative costs of the OASL, i.e., 5 percent of the total MDF. 12 surface mine. About 5000 illegal artisanal miners (known in Ghana as galamsey) also lost access to the concession area. The resettlement operation appears to have been conducted with thoroughness and at considerable expense, with a range of compensation schemes for the loss of buildings, and crops and new housing was built for the affected people. However, despite the compensation to those with property, the schemes did not work in favor of all affected people. Young, single men and women who did not own property usually received no payouts. Sharecropping was a fairly common practice and while landowners were compensated, the sharecroppers did not receive anything. The loss of access to cultivable land was a serious economic blow to all these groups. Evidently, the galamsey also suffered through loss of their livelihoods in that area. 35. In overall terms, the local economy in Wassa District does not appear to have benefited from the large-scale mining projects (developed in the 1990s) through sustained local economic growth and improved public services. Local people feel no perceptible benefit from the resources extracted from “their” land, despite the sharing of royalties between the central government and the mining communities. In part this is due to the poor dissemination of information to the public about projects funded by the MDF through the DA. Unemployed youth attacked local chiefs and looted or destroyed their palaces in two towns in Wassa West in late 2001. Their main grievances were the lack of jobs and insufficient access to land for cultivation. Although the mining companies promptly pay royalties to GOG on a quarterly basis and cannot be held responsible for the lack of adequate flowback of these rents to the local communities, they inevitably endure the brunt of local discontent. 36. It is essential that the sharing of resource rents be put on a transparent, equitable, and sustainable footing. The MDF needs to be institutionalized by Act of Parliament that would clearly define its objectives as a vehicle to mitigate the impact of mining and to create alternative economic opportunities in mining areas. Parliamentary debate would also be an appropriate forum to decide on the share of royalties to be retained by the central government and that to be recycled to mining communities.32 Such legislation should also ensure that the MOF would not be able to withhold releases of royalties to the MDF.33 The present disbursement process involves too many entities, is slow and cumbersome, and needs to be rationalized. In the face of public discontent about the use of MDF monies by the traditional community leaders, the proportions earmarked for the different types of beneficiaries also need to be reviewed through public consultations in mining areas before passage of the necessary legislation. The draft bill prepared by the MC is only a first step in this direction as it essentially preserves the status quo regarding the sharing of the rents among the different beneficiaries. 32. One proposal under consideration is for the MDF’s share of royalties to be doubled from 20 percent to 40 percent. 33. Along the lines of the Road Fund, which directly receives fuel levies from the IRS, rather than via the Consolidated Fund. 13 3. Environmental, Social, and Governance Issues Artisanal Mining 37. This long-established segment of the Ghanaian mining industry makes a significant contribution to mineral exports and is likely to remain an important feature of the industry in the very long-term, well beyond the life of large-scale surface mines. Most of it is still illegal, despite the option of legalization since 1989. It commonly takes place on the fringes of industrial mining operations, which can create friction between the two over encroachment by the former. There have been numerous instances of forcible ejection of galamsey by the police from concession areas held by mining companies. Mining companies are understandably reluctant to take responsibility for environmental degradation caused by galamsey in their concession areas. Abosso Goldfields34 is a rare instance of a modus vivendi having been agreed with the galamsey. They have been allocated an area to work within the Abosso concession and their production is purchased by the mine rather than sold independently to third parties. 38. The bulk of this subsector’s activity consists of the unmechanized35 processing of ore, waste rock, or tailings from previous or presently functioning large-scale mines. It has a high absorptive capacity for unskilled labor, a low import content, and makes a big contribution to the sectors net foreign exchange earnings because there are no outflows for foreign debt service, dividends, or expatriate salaries.36 39. On the other hand, the use of child labor is not uncommon, but there are no statistics available on its prevalence. Furthermore, artisanal mining as practiced in Ghana today often entails considerable risks of injury or death due to digging in unsafe, unsupported mine shafts. It also has substantial health hazards. Most artisanal workers who crush the ore-bearing rock do not use facemasks and inhale large amounts of fine dust particles. Mercury is the most widely used chemical to separate gold from ore and is highly toxic. About seven tons of mercury37 are consumed annually and dispersed into the environment. But virtually no precautions are taken by artisanal miners while using it. Many artisanal miners have a poor awareness or are skeptical of the health risks of handling and inhaling mercury. The failed efforts of the MC at disseminating mercury retorts on a large scale leaves the large number of mercury users exposed to unacceptably high risks to their health as well as that of their unborn children. These issues clearly need more attention in the coming years in order to find technical and financial solutions to the lack of acceptability of mercury retorts, including a study of 34. Now part of GFGL. 35. With the exception of small diesel powered crushers/grinders that are fairly widespread. 36. Although there are some losses of potential foreign exchange earnings to Ghana as a result of undeclared sales to smugglers. 37. Sectoral Environmental Review, Lundberg & Larmie (Swedish Geological AB), 2002. 14 the case for an initial free distribution of retorts on health grounds. Alternatives to separation and concentration of gold with mercury also need to be tested.38 40. Equally important, artisanal mining is responsible for considerable environmental degradation. There are thousands of abandoned pits in mineral-rich areas in need of restoration and revegetation. Even 10 years ago, an estimated 15,000 hectares of land had been degraded by artisanal mining.39 The stock of such degraded land increases each year because the artisanal miners do no land restoration and there is no government-run cleanup program either. All the indications suggest that the scale of artisanal mining will rise in the future, both in numbers of sites as well as in volumes excavated, so the problem of environmental damage can only worsen. 41. The miners pay virtually no taxes and operate largely in the parallel economy. A sizable share of its production is sold outside the official channels to intermediaries seeking to repatriate funds outside Ghana. This is impossible to eradicate because of the premium over world gold prices that such intermediaries are prepared to pay. In countries with an unstable, non-convertible currency, gold and diamonds will always be attractive alternative stores of value and convenient vehicles for tax avoidance. 42. The subsector is (and is likely to remain) poorly regulated in all its aspects because of the difficulties arising from the high mobility and changing composition of its operators. There would seem to be considerable scope for improving its productivity through mechanization, its health and safety record,40 and its environmental performance, but these are major challenges that so far have proven to be beyond the capability of GOG and donor-funded interventions. Environmental Mitigation in the Small-Scale Mining Sector 43. No workable mechanism has yet been devised to ensure that the environmental damage caused by galamsey activities is rectified. All too often, such activities are short lived and highly mobile, making effective monitoring extremely hard. In most instances the mining is undertaken illegally, often on legal concessions held by large mining companies, and even the identities of the miners are unknown. 44. The MC intended to use a portion of the MDF revenues flowing to it for land reclamation projects. However, in effect this would amount to large-scale mining paying for the environmental damaged caused by small-scale mining (SSM), which pays no royalties or taxes. It is not consistent with the principle that the polluter should pay. Such royalties should flow directly into community development projects in the areas most affected by large-scale mining. 38. To be addressed as part of the forthcoming EU-Sysmin project. 39. MC estimate for 1992, cited in the Bank appraisal report for the Mining Sector Development and Environment Project. 40. About 20 fatalities/year are attributable to shaft and gallery cave-ins (Lundberg & Larmie). 15 45. Another attempt to deal with the problem was made via the Precious Metals Marketing Company (PMMC), but this failed. The company was obliged to drop the 4 percent levy for a land rehabilitation fund that it deducted from the gold purchase price offered to artisanal miners because it was unable to compete with private gold buyers. No attempt has since been made to reintroduce it. Yet the gold and diamond purchasing agent (whether public or private) seems to be the only point of contact with the official economy at which the SSM sector can be levied a fee for environmental reclamation. Provided the environmental levy is kept as low as possible and is systematically collected by all registered buying agents, it should not lead to a substantial increase in undeclared sales. However, the challenge of universal application and enforcement should not be minimized. 46. It seems unavoidable that even if some contribution to the cost of reclamation work can be raised from the SSM sector, the responsibility for the organization and supervision of the restoration of land degraded by artisanal mining will fall upon the MC or MD. They are not presently geared up to undertake this additional work, although the recent pilot schemes executed by private contractors under MC supervision (with funding from the Bank’s Mining Sector Development and Environment Project) seem to provide a model that could be replicated. Land Use Conflicts 47. Competition for land between large-scale surface mines and agriculture is a serious political and economic issue, particularly in those areas such as Wassa West District, where there is a heavy concentration of mineral reserves. Many concessions are too large in area — up to 150 square kilometers can be authorized, which potentially can affect the lives of thousands of rural people. The situation is exacerbated by the lack of precision in the determination of legal precedence over land surface usage rights. 48. The 1986 Minerals and Mining Law (PNDCL 153) attempts to balance competing uses for land between mining companies and local communities, but gives rise to uncertainty and ultimately creates conditions for conflict over land use, as can be seen from the following: • “The exercise of a mineral right must be consistent with the reasonable and proper conduct of mining operations and shall affect as little as possible the interest of any lawful occupier of the land in respect of which such right is exercised; The lawful occupier of land subject to a mineral right has grazing and cultivation rights insofar as such grazing and cultivation do not interfere with mining operations. In other words, the mining corporation is obligated to permit the exercise of the surface rights of grazing and cultivation that do not interrupt its mining.” 41 • 41. Section 70 of PNDCL 153. 16 49. The draft new mining legislation goes some way to reducing the present imprecision in determining which party has legal precedence over land use. While retaining the principle that prior occupants of land (for which a mineral lease has been granted) still retain some access to it for grazing and cultivation, on balance the new proposals appear to favor mining over agriculture, with the proviso that in the case of disputes over compensation terms, landowners/occupiers have an explicit right to a High Court referral. Relations with Local Communities 50. Local communities affected by large-scale mining have seen little benefit to date in the form of improved infrastructure or service provision because much of the rents from mining are used to finance recurrent, not capital expenditure. Income disparities in mining areas have been accentuated because the labor “elite” employed by the mining and service companies generally have salaries that are indexed to the dollar. They also have access to good benefits like company healthcare and pension schemes. But the majority of the local population is excluded from these privileges. High incomes among mining workers tend to drive up the overall level of rents and retail prices, with adverse effects on other residents and consumers in mining communities. All these factors help to account for the increasing local opposition to surface mining, particularly given the recent poorly functioning redistributive mechanisms of the MDF for cash benefits from the national level to flow back to the people most directly affected by mining (para. 35-36). 51. Recognizing the need to promote sustainable socio-economic development, improve its public image, and address local resentment, GFGL recently set up a Trust Fund to finance community development projects around its operating mines (mainly in the Tarkwa area).42 Such initiatives exist in several other countries, but this is believed to be the first of its kind in Ghana. The fund was granted an initial endowment of $0.2 million of seed money and will be financed by an annual allocation of 0.5 percent of pre-tax profits plus 1 Rand for every ounce of gold produced by GFGL. In 2002, the GFGL financed community development projects to a value of C3.26 billion ($0.4 million). 52. The question of mine closures and post-mining economic activities has received virtually no attention so far, despite its increasing relevance to Ghana’s mining sector. AGC’s Obuasi and Ayanfuri surface mines closed in 2001 with some job losses. The Resolute Amansie mine is slated for closure very soon. The closure of the Prestea underground mine has devastated the local economy of the township and its future is a political “hot potato” for GOG. Residents are clamoring for government assistance and would like to see underground mining restarted in order to preserve jobs. Potential investors interested in surface mining are being rebuffed because it offers far fewer job opportunities and would also stop the widespread illegal artisanal mining that currently takes place. Other mines are also likely to close in the medium 42. The Trust Fund will primarily concentrate on projects and causes in the health, education, and infrastructure sectors. Projects of national significance will also be funded where appropriate. 17 term, with the prospect of a very serious fall in total gold output by the end of the decade in the absence of new projects. Experience elsewhere (for example in Papua New Guinea43) shows that planning for alternative economic activities needs to begin well before mine closure takes place. Governance Issues 53. All the mineral-producing companies in Ghana publish audited accounts and annual reports. They are generally careful to be in compliance with local legislation on environmental and safety issues and fulfill reporting requirements to GOG. There are evident shortcomings in mine monitoring by GOG, particularly on environmental matters, but these are due to the budgetary squeeze on the concerned departments and an insufficient number of qualified staff. The fact that GOG is a 10 percent shareholder in all producing mines gives rise to a conflict of interest between the government as owner and regulator, but this is of secondary concern. Nevertheless, some community activists and local people in mining areas feel that GOG has tacitly condoned nonobservance of its own laws by large mining companies. They see government agencies not as neutral arbiters but more as “agents” of the large mining companies. 54. Taxes and royalties that mining companies pay to GOG are recorded by the IRS but not published. There is little opportunity for under-recording of such revenues in order for them to be diverted to non-transparent off-budget accounts. However, once these funds are transferred by the IRS to the Consolidated Fund of the Ministry of Finance, they are no longer earmarked and are available for general government expenditure (net of the 20 percent of royalties destined for the MDF). During the 1990s, the Bank gave extensive support to efforts aimed at better public financial management and civil service reform, but a country assistance evaluation undertaken by OED in 2000 found that these were only partly successful.44 Heavy public spending during the past decade has not resulted in the hoped-for rapid and sustained improvements in living standards. There remain numerous shortcomings in the overall quality of Ghanaian public governance, as illustrated by the politically motivated government spending on public sector wage increases and consumer subsidies before each preelection period in 1992, 1996, and 2000. These led to persistent macroeconomic instability, with negative consequences for investment and growth.45 55. Within the mining sector, there is understandable dissatisfaction with the poor accounting and lack of public information on the use of MDF monies by the recipient bodies (para. 30-32). Improvements in transparency and accountability of the MDF are urgent and essential to head off public unrest in mining communities. 43. The Ok Tedi and Misima mines are both scheduled for closure by 2010 and are already working on closure planning and post-mining local economic development. 44. This issue is addressed in more depth in Appendix A of another Background Paper in this series, “Factoring in Governance” by M. Thomas. 45. See Annex C of another Background Paper in this series, “Managing fiscal revenues from resource extraction” by L. Ramirez. 18 56. At present there are few channels of communication between people affected by mining and mining agencies and companies. There is a clear need for greater dialog with stakeholders46 and their participation in information exchange and decision-making. Effective public consultations are crucial, along the lines of the Papua New Guinea Development Forum process, prior to award of licenses to project developers.47 It ensures that stakeholders have an adequate opportunity to obtain extensive information on the nature and impact of the proposed project before license award. The forum is also an ongoing consultative mechanism during normal project operations among the main parties implicated. 4. Assessment of World Bank Interventions in Ghana’s Mining Industry Relevance 57. The stated objectives of the Mining Sector Rehabilitation Project (para. 16) were highly relevant to the issues in the sector as perceived at that time. However, the basic premise of rehabilitation of state-owned gold mines, the core of the project, was flawed. Two, and arguably all three, of the state gold mines slated for rehabilitation proved to be unviable for technical and financial reasons. Viewed from the standpoint of current sectoral priorities, with the exception of mine rehabilitation, the remaining objectives (attracting private investment, strengthening government agencies dealing with the sector, and increasing the benefits from small-scale mining) are assessed as substantially relevant. 58. From GOG’s perspective, the project’s unstated objective was the preservation of mining sector jobs, regardless of the financial or economic viability of the SGMC mines, particularly as Prestea and Dunkwa were company towns with no other raison d’etre. In addition, the mineworkers union was powerful politically. The Bank appears to have tacitly accepted this objective, as seen from its willingness to finance unviable mine rehabilitation and by condoning SGMC’s financial losses over many years. 59. In overall terms, the Mining Sector Development and Environment Project (para 18) sought to support the sustainable development of Ghana’s mining sector on an environmentally sound basis. Furthermore, addressing the problems of small-scale mining (SSM) was also a welcome rebalancing of effort and attention away from large-scale mining that had dominated the sectoral agenda since the mid-1980s. The project was in line with the declared 1995 CAS objectives of capacity building, improved governance, and environmentally sustainable growth. In 1990, the Bank46. A priority action recommended by “On Common Ground — integrating socioeconomic and environmental issues into mining sector development in Ghana,” 1999 a study for the Minerals Commission by S. Huston, Ruitenbeck resource Consulting Ltd. 47. For more information see the parallel case study of PNG undertaken as part of the evaluation of WBG activities in extractive industries. 19 funded study on managing the effects of mining on the environment was an important precursor to the legislation making EIAs obligatory for new projects and requiring EMPs for existing mines.48 The 2000 CAS places much more emphasis on rural poverty alleviation, which this project attempted to address through its SSM/artisanal mining component. Hence, the relevance of project objectives both at the start and at project completion was high. 60. Overall, the Bank’s assistance to GOG, particularly in better supervising and managing the mining sector and in improving the legislative and regulatory framework during the 1990s was highly relevant. Efficacy 61. Overall efficacy of the Mining Sector Rehabilitation Project was assessed in the PPAR49 as substantial, because three out of four objectives were largely met. However, the principal stated objective, the rehabilitation of viable mines, cannot be said to have been achieved. The implicit project objective to provide GOG with the financial resources to keep the SGMC mines in operation to avoid job losses was largely met, even if there are reservations about the validity of this objective. The Mining Sector Development and Environment Project substantially succeeded in its capacity-building objective but failed to improve the performance of small-scale mining. The PPAR rates the project’s efficacy as modest. 62. The overall efficacy of the Bank’s interventions in Ghana’s mining sector during the 1990s is judged to be substantial because of the success in attracting private capital and in strengthening sector management capabilities, particularly of the MC. Further information on the achievements of the two projects is provided in the PPAR. Efficiency 63. The short period and low level of benefits accruing from the rehabilitation investments funded by the Mining Sector Rehabilitation Project strongly suggest that the net benefits from the SGMC component of the project have been negative. All three mines were shut down by their private operators within a few years of their takeover, due to a combination of poor geology, technical problems and low gold prices. The ICR indicates that about $105 million was spent on mine rehabilitation, not including subsequent investments made by the private sector. Even a very generous redundancy package for all of SGMC’s 8,000 staff would have cost significantly less. Furthermore, a substantial number would in any event have been reemployed by the many new mining ventures that were started in that period. For these reasons, the PPAR assessed the project’s efficiency as negligible. 64. Measuring the efficiency of TA and capacity-building projects is always difficult. In the absence of any financial or economic analysis for the Mining Sector 48. That came into force in late 1994 with the passage of the EPA Act (#490). 49. Report # 20 Development and Environment Project, the PPAR was unable to assess its cost effectiveness or evaluate its efficiency. Institutional Development Impact 65. The Bank’s two projects made a substantial positive impact on the Minerals Commission. It is clearly the premier public entity dealing with the sector. After nearly 15 years of support from and intensive dealings with the Bank under two projects, it has developed into a mature and relatively well-run institution. It has made a major contribution to the impressive growth of the Ghanaian mining sector. The projects also provided office equipment, training, and vehicles to enable the GSD and MD to carry out their functions, but it was less successful in enhancing their capabilities. 66. Upon advice from the Bank, gold production by small-scale artisanal miners was legalized in 1989 by passage of the Small-Scale Mining Law.50 The establishment of legal purchasing arrangements initially by a public (and later by private) buying agents offering world prices for gold and diamonds to artisanal miners was the result of an active policy dialog with the Bank. It was an important liberalization of the sector and helped to boost recorded gold exports and Ghana’s foreign currency earnings. 67. Overall, the ID impact of the Bank’s interventions in Ghana’s mining sector is assessed as high because of (i) the positive capacity building results achieved in the MC and MD, (ii) the legalization of and improved procurement arrangements for small-scale mining, (iii) the heightened awareness of and emphasis given to environmental matters, and (iv) the improved legal and fiscal provisions for mining (currently before Parliament) that were drawn up as a direct result of assistance under the Mining Sector Development and Environment Project. Sustainability 68. The main physical component of the Mining Sector Rehabilitation Project (upon which most of the IDA Credit was spent) has not proved to be sustainable. Rehabilitation of the SGMC mines that were not technically or financially robust at a time of falling gold prices proved to be unviable. On the other hand, the inflow of private investment to the sector proved to be sustained for the past decade, but is now increasingly uncertain. The overall progress in institutional development achieved under the two projects and its sustainability are threatened by the ongoing severe squeeze on the operating budgets of all the sector supervisory bodies. The annual allocations from MOF to them are grossly inadequate. In recent years they have been able to top-up what they receive from MOF with their share of the MDF. However, the disbursement arrangements have been altered since 1999 because of GOG’s budgetary crisis. These monies are now credited to the Consolidated Fund rather than being disbursed directly by the IRS. GOG has been withholding releases to the MDF from the Consolidated Fund, with an adverse impact on the operational capabilities of the MC, 50. PNDCL No. 218. 21 MD, and GSD. A loss of skilled staff is also to be feared if there is no early resolution to the financial crisis faced by the sector entities. The sustainability of the capacitybuilding achievements of these projects is now seriously in doubt and, hence, the overall sustainability of the Bank’s interventions in the sector is uncertain. 5. Conclusions 69. The development impact of the resources derived by Ghana from the mining sector has been modest because of the poor management of overall public expenditure at the national level and due to insufficient “recycling” (or flowback) of such revenues to mining communities (para. 36). Without improved macroeconomic management, more effective use of public resources for investment, and better targeting of resource rents in mining areas, the case for the further extension of mining activities is weak. Future of Large-Scale Gold Mining 70. Gold production in Ghana has reached a plateau, the current level of exploration activity is very low and total production will decline in the near term. Some estimates show that it would fall to only 30 percent of its present output within ten years, unless new projects are brought into production.51 Should this be a cause for concern to GOG? Its position seems to be ambivalent. Five exploration companies seeking leases to mine gold reserves that they have found have not yet been able to obtain the go-ahead from GOG, due to opposition on environmental grounds as these finds lie within forest reserves. 71. It is unclear what the true net benefits to Ghana from large-scale gold mining are. When undertaken by foreign companies (which is now predominantly the case), it has a high import content and produces only modest amounts of net foreign exchange for Ghana after all its outflows have been accounted for. Similarly, its corporate tax payments are low, due to various fiscal incentives necessary to attract and retain foreign investors. 72. Compared to underground mining, which has virtually ceased in Ghana and has little future potential, modern surface mining produces greater national benefits (in the form of royalties on much higher production volumes), but over a shorter time span due to the faster ore extraction rate. It also results in higher social costs (greater land alienation) and lower social benefits for the local communities. The latter is due to the highly capital-intensive nature of modern surface mining techniques, which lead to only modest job creation. Furthermore, due to the lack of vocational training programs in mining areas, many of the local unemployed youth have no skills that would make them suitable for work in mining companies. This increases the tendency to employ 51. This fall is one of the justifications for the EU’s forthcoming Euro 40million Sysmin grant to Ghana. 22 “outsiders,” (albeit Ghanaians), aggravating social tensions. Shorter mine lives meant that massive socio-economic transformations52 occur within as little as 10 to 15 years. 73. It is probable that while the economic benefits to Ghana from large-scale mining outweigh the overall costs, this is frequently not true for those most directly affected by mining. The costs to local communities often exceed the benefits they receive. A broader cost-benefit analysis of large-scale mining that factors in social and environmental costs to local communities needs to be undertaken before granting future production licenses. 74. The long-term prospects for large-scale gold mining in Ghana are unclear, given the collapse of exploration activity53 and the lack of any major new investments under active consideration. However, this may now increase under the combined effect of the forthcoming revisions to the mineral legislation and higher gold prices. Some observers also believe that there is considerable potential to expand the production of other base minerals, although these have a low financial value per ton, but large environmental footprints, since they are also surface mined. But the fundamental question remains: Is it worth depleting non-renewable natural resources when there are no guarantees of the effective use of the revenues so generated? 52. First boom and then bust as mines open and close. 53. Only four licenses were granted in 2001, compared to more than 60 in 1997. (Ghana Chamber of Mines annual report, 2001.) 23 Annex A Annex A: World Bank Group Assistance to Ghana’s Extractive Industries IBRD/IDA Assistance Energy Project, (Cr.1373-GH) SDR 10.2 million, Approved 1983, closed 1990. Export rehabilitation program credit (Cr.1435-GH), 1983 Export rehabilitation TA Project (Cr. 1436-GH), 1983 Second Reconstruction Imports Credit (Cr.1573-GH), 1985 Mining Sector Rehabilitation Project (Cr. 1921-GH), SDR 29.3 million, Approved 1988, closed 1996. Mining Sector Development and Environment Project (Cr. 2743-GH), SDR 7.9 million, Approved 1995, closed 2001. IFC Assistance Project short name Ashanti Gold I Keta Basin Oil Bogosu Gold Bogosu Gold II Bogosu Gold III Iduapriem Gold Ashanti Gold II Bogosu Gold IV Iduapirem II Ashanti SWAP Ashanti Gold III Bogosu (V)-Restrn. GAGL III GAGL IV GAGL IV-Restrn. Approval date 6/12/1984 12/18/1986 7/16/1987 11/22/1988 6/22/1989 2/28/1990 3/8/1990 3/18/1991 6/11/1991 3/31/1992 6/25/1992 6/25/1993 7/12/1995 3/22/1996 6/23/2000 CMT date 5/8/1985 12/19/1986 9/30/1987 11/15/1988 11/27/1989 3/16/1990 3/19/1990 3/28/1991 7/8/1991 3/31/1992 11/25/1992 n.a. 11/6/1995 7/10/1996 8/1/2000 Project size (US$m) 157.7 30.1 6.0 6.0 86.0 13.5 93.0 1.2 55.4 6.4 305.0 0 11.5 13.5 13.5 IFC gross (US$m) 60.0 4.5 0.6 0.6 48.0 3.0 70.0 1.2 48.0 6.4 165.0 0 10.1 4.5 0.5 IFC net (US$m) 30.0 4.5 0.6 0.6 19.0 3.0 35.0 1.2 18.0 6.4 65.0 0 10.1 4.5 0.5 24 Annex A 25 Annex A C:\DOCUME~1\wb12261\LOCALS~1\Temp\k.notes.data\Ghana CCS 10-15-03.doc 26 Annex A Andres Liebenthal C:\DOCUME~1\wb12261\LOCALS~1\Temp\k.notes.data\Ghana CCS 10-15-03.doc November 19, 2003 4:32 PM