Tax concessions are good. An IMF working paper on tax concessions and Foreign Direct Investments (FDIs) found that the trend of using tax concessions to attract FDIs has continued, and some countries have granted increasingly generous concessions.
So when a government decides to give a preferential tax treatment to a firm, it is fair to assume that it is deliberately drawing out targeted growth or investment into that sector.
Tax concessions are also commonplace across the world and the recent development agreement between the government of Ghana and Anglogold Ashanti (Ghana) Limited, fits within the growing trend for developing countries. The question that agreement has generated has centred on its viability.
So will Ghana benefit from the deal?
The facts of the agreement are not difficult to find. Ghana’s Parliament ratified a deal in May to give fiscal concessions to mining firm AngloGold Ashanti. As part of the deal, a tax concession of $259 million has been granted to the mining company.
As part of the agreement, the mining firm is expected to redevelop one of its defunct mines at Obuasi, a gold-rich town in the Ashanti Region of Ghana, within a period of 22 years. AngloGold Ashanti is also expected to make a capital investment of $880 million in the Obuasi mine by the end of 2018.
Government is expecting a total of $5.3 billion from the redevelopment of the Obuasi mine over the 22-year period, representing approximately 51% of the total sales revenue. Anglogold Ashanti will also contribute directly to government revenue (fiscal mechanisms), local content, as well as employment and community investment.
Furthermore, government says an estimated $2.2 billion will be contributed directly to state coffers over the life of the mine, representing about 21% of the total revenue over the life of the mine.
Out of the total contribution to the economy, local content is expected to generate $2.4billion. AngloGold is also expected to employ between 2000 and 2500 Ghanaians. An additional 1500 people are expected to be employed during the construction phase.
The Obuasi mine has an estimated recoverable reserve of 5.5 to 5.8 million ounces. With the expected production yields per year that will give the mine a lifespan of around 14 years.
With an average of 400,000 ounces of production expected per year, that would give the Obuasi mine an average revenue of $460 million per year based on a conservative $1,150 gold price per ounce.
According to the World Gold Council, a multi-sector, globally-oriented, market development organisation for the gold industry, on average 70% of operating expenses in gold mining is taken up by suppliers, contractors and employees.
Using general Africa averages, Craig Parker, Research Director at Frost & Sullivan, a growth and evaluation research firm, says every year, at least $460 million direct revenue could generate additional indirect revenue of $322 million for Ghana’s economy to total approximately $782 million on an annual basis.
“If we take a 14-year lifespan of the Obuasi mine, this equates to $10.9 billion in total possible GDP contribution and approximately $4.5 billion in indirect revenue…Ghana government’s $5.3 million estimate seems feasible,” he adds.
Furthermore, data from the World Gold Council and the Thomson Reuters gold survey (2013) found that Ghana had a gross value added (GVA) multiplier – which is used as a basis for making estimates of economic regional economic activity – higher than the Africa average. It was estimated at around 2.3. This would push indirect GVA from $460 million per annum to $8.4 billion over the life-cycle of the Obuasi mine.
Ghana’s estimated government earnings from gold mining are estimated at 16% for 2016 for total tax. Mining also represents approximately 5-6% of GDP.
But more returns and profitability of the mine will be highly dependent on government’s ability to control illegal mining and the gold price, which is estimated to hit $1,238 in 2018. This will be the key to the success of the mining operation.
AngloGold Ashanti has been under immense pressure in South Africa and have incurred losses, with their need to minimise their portfolio held in South Africa it is clear that they have a significant commitment to ensure the success of operations at the Obuasi mine, says Craig Parker.
“They have a long-standing history of community development in Ghana and the rest of Africa and the feasibility of their commitments to CSR is not questionable in my opinion,” he said.
Regarding employment, in general mines usually employ 90% of the local economy, this is a general standard derived by the World Gold Council. Hence this would mean significant local employment derived from the revamp of the mine.
The level of indirect employment created from mining in Africa is high and is estimated with an employment multiplier of 4.0. The expected 2000 and 2500 Ghanaians is feasible. The benefits of increasing direct employment at the mine will greatly benefit the economy.
Gold production from the revamped Obuasi operation begins in the third quarter of 2019, and the deal between Ghana and Anglogold Ashanti would be put the test.