As I always tell folks, value is either created or destroyed by the decisions a government makes. As a country, we have endured many bad choices in the past. Some of these value-destroying decisions have been self-inflicted unnecessary chaos that does not stand up to reason. Just think about for president of previous administration appointing someone with a retail store experience as energy minister at a time when the country needed competent, skilled career energy professionals to lead.
This energy minister and his colleague, the power minister, caused the country great economic harm and destroyed value with deals that were poorly thought out and executed with external energy companies. The economy-busting mess of dumsor and the subsequent flawed agreements that these ministers signed have saddled the country with almost US$600 million in avoidable annual costs for power we do not use, and we do not need.
Government policy and decisions can create or destroy value. A comparison of incomes per capita in Ghana compared to its economic peers shows a dismal performance during the period preceding the Kufour administration. Why did income per capita decline from 1981 to about 2001? Again, this goes back to a decision made by a former president who said in his recent interview that his motivation for overthrowing a democratically elected government was because the government was harassing his boys. Thus, for the next 20 years, the country endured a period of investment uncertainty, rampant inflation, and a precipitous depreciation of the currency. A massive destruction of value.
At the time when our peer countries by income per capita were growing their economies, Ghana was compelled to go through an IMF structural adjustment program to prevent total economic collapse. Other ideological experiments by our governments and a lack of understanding of how economies work, ushered in a culture of insolence and indiscipline that unfortunately destroyed many indigenous companies. Ghana’s private sector industries, built over about two decades, were destroyed.
It is unfathomable that former president Mahama could grant a bauxite mining lease to his brother on December 29, 2016, a week before he was to hand over power, without regard to the propriety of such a transaction? A decision that could have cause significant value destruction for the country. Such as action was possible only because our mining assets and revenue for minerals rights have largely remained unprotected.
Previous governments also have not prioritized investing in our mining resources and moving the whole country down the value chain, where the state could create more wealth for the country. It did not happen under the Rawlings administration and the PNDC, and we risk it not happening unless we make decisions that prioritize the interests of the country over politics.
Ghana is not the number one exporter of gold even though it has a relative comparative advantage score of 28, more than that of South Africa at 7.5 and Peru, which is practically a mirror of our country with about 30million population, at 12.8. So how do we end up with Switzerland, a country that neither has mines nor dominant mining companies end up making so much money from gold and being the number one exporter in the entire Gold value-chain?
(Source: OEC Data)
Switzerland gets a significant portion of its imported gold from Ghana. So while we made $10B from gold exports in 2018, Switzerland made about $63B mostly through value-add processing of gold. Even United Arab Emirates (UAE), with no gold mines whatsoever, made $15.4 billion from gold, primarily by importing unrefined gold from African countries such as Ghana. Unfortunately, there is a lot of illicit gold smuggling that also gets from places like Ghana through Dubai.
How in heavens name do we allow countries like UAE to have such an advantage in gold when they possess no such natural resources? Take a look at the diagram below. In 2016, UAE reported having received much higher amounts of gold from Ghana than the official amount indicated by the Ghana government. That discrepancy across African countries shows you the extent of illicit gold smuggling, which could only happen on that scale with the tacit knowledge of the authorities in power then.
Just imagine the scale of “value” that can be created by moving up the value chain? But also the scale of investment that might be needed to do so and hence the need for clean Special Purpose Vehicle (SPV) structure to raise capital; and also the scale of GDP and employment jump such a quantum of investment can create – over the next 5 to 10 years.
The result of poor decisions and often attempts to put personal interest above the country, such as almost happened to our bauxite mineral rights is an example of the motivation behind protecting mineral assets. There is a need for the current government to ringfence mineral resources if we have any hope of cleaning up the galamsey mess. Unless there are discipline and stability in the mining industry, we can never build up value. We will cede wealth from our resources to other countries, not endowed with such abundant resources.
It was with this in mind that Parliament enacted the 2018 law establishing the Mineral Income Investment Fund to protect our mineral assets, royalties, and other rights against abuse. Also, it has a goal to invest in the industry to move the entire sector down the value-chain to improve our income per ton of gold exported.
Ringfencing Mining Sector Revenues
Once the Mining Income Investment Fund (MIIF) came into existence, it then established a Special Purpose Vehicle (SPV) to create a platform to be able to go to external investors to raise capital for the sector. I will touch on the reason why an SPV is needed, specifically in an off-shore jurisdiction.
The MIIF ringfences our mineral-related assets and offers us an opportunity to manage a transformation of the entire industry through investments that have the potential to move us up against some of the countries earning inordinate rents from gold without possessing such mineral resources.
That means MIIF has to be able to tap significant investments from external investors, much the same way you and I go to banks with our future earnings potential to borrow money. Our borrowing will make sense if it is to finance tertiary education that would end up helping us make far more money once we complete our higher education program.
To be able to do that, two things have to happen:
- You have to give external investors a stake in your future revenue stream from your mineral assets
- You have to protect the country’s assets in case something happens to the industry, and we are not able to pay returns on money received from investors.
Point #2 is very critical. In an extreme example, what happens if a U.S. space orbiter discovers gold on an asteroid in abnormal quantities such that the price of gold goes from $1,600 to $70 and the industry collapses? We have to be able to protect our assets, and that means we have to use a bankruptcy-remote entity to tap money from investors. That is the Special Purpose Vehicle (SPV), which is a typical structure used in international financial markets for such purposes.
With that in mind, MIIF established an SPV called Agyapa Royalties, why not Mamepa Royalties since most of us have much more love for our mothers than our fathers, I do not know. But we are here with Agyapa Royalties. SPVs are accounting entities, not operational entities housing employees like a traditional company does and can be established in an off-shore jurisdiction to be bankruptcy remote. Someday if the country develops enough financial depth in terms of industry maturity and professional capital markets skills, we can also create an off-shore jurisdiction in a place like Elmina where the few highly-skilled finance executives can enjoy the sea.
An SPV once is set up requires the entity (in this case, the GoG) setting it up to provide a bare minimum of officers to serve as contact and executives overseeing the reporting around the SPV. So who does the government appoint? Yakubu Mensah, an unknown public servant? Of course not. Officers of the state who investors can engage with at the highest level have to be appointed and hence why the Minister of Finance and the Senior Minister’s name appears on the SPV documents.
Monetizing Future Revenues to re-invest into the sector
On Day 1, when MIIF is ready to raise money from external investors, it will follow the transaction outlined above by selling a portion of not-yet-realized revenues coming into the Fund to Agyapa Royalties SPV. The amount it sells will initially be about 75.6% of its revenues due. Why? Because 75.6% works out to be enough initially to support floating 49% of the equity in it to investors.
Note that initially, the Fund owns 100% of Agyapa Royalties SPV, and the Fund has to maintain ownership and be able to consolidate Agyapa Royalties onto the government of Ghana books. As a result, the Fund’s stake in Agyapa SPV can never fall below what it takes to maintain the majority stake, which is 51%.
The Fund will start with a share issuance on both an international exchange and the Ghana Stock Exchange. That initial listing will bring in an initial windfall of money into the Fund, MIIF, and kick off the process of targeted investment to build the industry back up.
Ongoing dividends recouped as part of investing
Ultimately, we need severe governance and transparency to create wealth from this for our people
I will again remind us of Peru, a country that is a mirror image of Ghana. Peru has gold, Peru has cocoa, and Peru also has about 30million people, but with a GDP of about $240B, which is four times Ghana’s GDP. We can learn from Peru because it has a very well-organized mining sector, unlike our chaotic galamsey-ridden industry. If a Ghanaian today wants to build a private company in our minerals sector, there are absolutely no incentives to formalise a corporate entity. In 2018-2021, Peru’s mining sector received an estimated $59B in new investments, almost the size of the whole GDP of Ghana. This latest investment targeted at 48 projects covering construction of new mines, restructuring of existing mines, and other projects to support the private sector in mining. Just imagine the level of economic activity, job creation, and opportunities for the private sector to grow on the back of such hefty investment. This ability for our mining sector, and a disciplined framework, to attract significant investments is what we need else decades from now. If it does not happen, we will continue to cede value to others, and incomes in this country will continue to be depressed.
What success will depend on
The goals of the MIIF and by extension the government will never be achieved if the current state of the mining sector is cleaned up. There is too much chaos around galamsey and its destructive environment effects that creates to much risk to attract investment capital.
Besides the obvious clean-up, whether the MIIF and what it does will translate into increased incomes for the average Ghanaian, or it will become another failed attempt at state transformation, depends on full transparency around the Fund’s operations and the investment process through which money raised is deployed in the sector.
Here are five changes I will recommend for the government to make to the law and the plan to increase the chances of success decades from now:
- Amend the Minerals Income Investment Fund Act, 2018 (Act 9/8), to restrict appointments to its board to people with specific-related experience.
- MIIF should have the structure of a typical fund with an investment committee not appointed by the government but rather recruited through an open process using an outside firm. We need to remove politics out of the setup.
- The head of MIIF or its investment committee, if one is put in place, should be open to both qualified Ghanaians and non-Ghanaians to apply. We are trying to create wealth, not hug our brethren.
- Any investments into the mining sector should, by law, fall into three categories: a) development of new mines, b) maintenance of existing assets, and c) investing in private startups focusing on value-addition and leveraging of technology.
- Require a reconciliation process to all investments planned for the industry, which requires payments for services only after certified completion of projects.
- Require mandatory annual reporting and annual audits by one of the major audit firms and transmission to Parliament on a specified date in the year.
- The proper accounting of any income-based SPV funding platform to make sure external investors have the confidence needed is not a task to be taken lightly. There is always a risk of double-counting of value and mispricing. So, I will recommend MIIF make recruiting open to Ghanaians with relevant experience
Hopefully, this platform will serve as an example for the country to ringfence a lot of public assets to allow the state to both build trust in the polity and reduce a lot of the mischief that drives corruption in this country. It is time to take bolder steps to increase incomes for Ghanaians.
Hene Aku Kwapong, the author of this article can be reached on [email protected] He is a founder of The Songhai Group and NBOSI (National Blue Ocean Strategy Institute). He formerly worked with GE Capital, Deutsche Bank and Royal Bank of Scotland and had been a Senior Vice President at the New York City Economic Development Corporation.