Will resource rich West African countries be able to collaborate in order to optimise their benefits?
It is no coincidence that the 1st ECOWAS Mining and Petroleum Forum and Exhibition (ECOMOF), was hosted by Ghana. The country’s economy has largely been driven, in addition to agriculture, by its mining industry, especially in the exploitation of its gold deposits and, in the past five years, by its nascent oil and gas sector. But an irksome sense of not benefiting much from the industry is driving the search for ways to address some inherent challenges hindering the optimal realisation of value in the extractives sector.
Ghana’s situation is no different from all other West African countries. The exploitation of the sub-region’s abundant mineral resources is not yielding the expected economic development, thus the theme of the forum; “Valorising West Africa’s Mineral & Petroleum Resources through Regional Cooperation.”
The country, with over a century’s experience in commercial gold mining, as well as, extensive exploitation of other minerals including manganese and diamond; and now oil and gas, is a real microcosm of the extractives sector in the sub-region. Developments in Ghana’s extractives sector, therefore, offer valuable lessons for a sub-region desperate to derive maximum benefits from the industry.
On paper, and indeed concretely, West African countries have chalked some noteworthy growth on the back of their respective extractives industries.
Ghana Chamber of Mines statistics, for instance, show that in 2014, the mining industry contributed 18% of the total domestic tax collected by the Ghana Revenue Authority, returned about 77% of mineral revenue to the country, and delivered 34% of gross merchandise exports.
Ghana’s nascent oil and gas sector is also fast becoming a most significant source of export revenue, as well as, attracting investments into the country. The Sankofa project – Ghana’s first dedicated gas field development – for example, is expected to inject about US$7.9 billion into the country’s economy between now and the end of 2018 with first oil expected in August, 2017 and first gas coming on-stream in 2018. The project will deliver about 45,000bopd and about 118mmscfd, which is to be used to generate 1,000MW of electricity. It is believed this will encourage an influx of new independent power producers (IPPs).
Recent headwinds, in the form of plummeting prices of most commodities in the extractives sector have, however, once again exposed the lack of depth of West African economies thus the need for the respective countries to leverage their extractive resources for sustainable economic development.
With respect to making its extractive sector a catalyst for economic development, serious efforts have been on-going to address issues including good governance, in the sector, with transparent and effective utilization of extractive revenues. Ghana’s Mineral’s Commission and its Ministry of Lands and Natural Resources have introduced the Minerals Development Fund Act, which gives legal backing for the return of a proportion of mineral royalties to both host communities and related research institutions with a mind to address developmental challenges to host communities.
Other issues being frontally tackled are the integration of the extractives industry into the host economy, pushing for increased local content and localization of labour while ensuring the effective participation of indigenes in the extractive sector, in addition to creating the appropriate and mutually beneficial fiscal regime for both investors and the host country.
Ghana has also, since 2003, signed on to the Extractive Industry Transparency Initiative (EITI), which is now recognised as the global standard for good governance in the sector.
Given that the country is now considered a global leader in EITI implementation due to the fact that its innovations largely created reforms, which culminated in the current EITI standards, Ghana has been emboldened to extend the initiative to its new, but rapidly expanding, oil and gas sector.
Mr Johan Ferreira, President of the Ghana Chamber of Mines, notes that; “whilst these are critical success factors, host countries have a responsibility to provide the enabling environment for the extractive sector to thrive.”
In that regard, Ferreira reiterates the much discoursed need to develop an efficient rail system for transportation of capital goods and particularly bulk minerals and materials.
He also stresses the need for adequate, reliable and competitively priced power, which is a real challenge in Africa and especially Ghana, as the country has, in recent years, been experiencing a regime of power rationing that has hobbled its otherwise buoyant economy of the first decade of this century.
While these are, of course, big ticket investments that are likely to materialize the medium to the long terms, Ferreira notes that a serious bottleneck exists in the licensing and permitting regime that could be a dampener to investor interest.
“Given the high risk nature and huge capital outlays required in the extractive sector, it goes without saying that a predictable framework for considering licences and permits is crucial,” Ferreira says, explaining that investors want to be assured of predictable timelines in permitting, which has a bearing on the timelines for projects to generate cash flow to pay back investments.
On the issue of power, Mr Alex Mould, CEO of the Ghana National Petroleum Corporation (GNPC) concurs.
“The real question is; are we going to be able to collaborate in West Africa, to form a hub in the sub region to harness all the energy resources we have – oil and gas – to produce power and make it the building block of our industries?”
He notes that the challenge confronting West Africa, “in the development of our oil and gas resources is that each country is trying to follow its own agenda, with little or no collaboration among countries. That’s how the politicians are doing it.”
Mould, however, challenges that should West African businesses take the initiative to do more collaboration among themselves; “our businesses will thrive and force our politicians to ensure that policies are changed to drive business,” and , in turn, make the private sector the true driver of the various national economies.
Ghana’s game-changing Sankofa gas project is the typical example of his thinking. This project requires strong collaboration from the State, from partners and from stakeholders alike, to ensure a successful deal.
The commercial structuring of the Sankofa project makes it one of the most complex of its kind; it is a gas-to-power project and the resource, gas, is going to be used as the main feedstock for relatively cheap power generation, much needed in all of West Africa’s countries to power industrial development.
Mould explains; “we have to work collaboratively with the power sector, both in the generation and in the downstream distribution aspects to ensure that we have a seamless operation.”
This is critical because, in most West African countries, all the aspects of power supply is controlled by government and it makes it quite difficult running the sector efficiently and effectively as governments subsidise electricity and when they do not pay up, it makes it difficult for refinancing; “and that is why we have shortage of electricity in our countries; we, therefore, need to take all steps to ensuring that we remove these barriers to enhance new investments coming into the country,” Mould concludes.
His position cannot be slighted as Ghana seems to be at the inflection point of stress to economic development, which the situation in the power sector has created; a situation where the lack of adequate, reliable and competitively priced electricity is compounded by an inverted power pricing structure, which dictates that industry subsidises the cost of power of residential end-users.
Traversing the difficult terrain from the lower reaches of a middle income economy (where Ghana is presently with a couple of its West African neighbours) to its upper reaches would require substantial industrial activity that help add value to a lot of the countries’ commodities, which have hitherto been exported in raw form. And inexpensive and reliable supply of quality electric power is the most critical requirement in this transition. The mind-set, therefore, of the industrial sector bearing the brunt of the development of the power sector will have to change.
Ferreira notes that recent experience has taught that in the West Africa sub-region, power is expensive and the lack of it is even more troubling as the alternative can be very dire.
He says valorising – the drive to optimise benefits from the extractives industry through value addition – will be, “a mirage if we’re unable to address the fundamental challenges of the industry.”
“After all, the industries which will supply goods and services and value to outputs will require adequate and competitively priced power, in order for them to be competitive and viable, much in the same way as the extractive companies themselves.”
There seems to be unanimity in thought that, to centre growth and development in the West African sub-region on the sub-region’s vast extractive resources, there is the need for collaboration through partnerships among investors, governments, communities, and civil society. Each stakeholder definitely has a vital role to play. What seems lacking in cross-border collaboration is the political will.
But Alex Mould thinks the onus is on the business community to collaborate and show the way; to get politicians to do what is expected of them.
“After all, politics is a business,” he says.