Business Page July 29th, 2001


In Search for a Mining Policy

 

Introduction

As the fourth National Conference on Mining and Quarry came to a close this week, it became obvious that the mining sector is facing problems of its own. It was also obvious that mining and certainly gold and diamond mining has not changed over the years. It is still seen as adventurous, dangerous and risky to the point of fortune or bust. Not surprisingly the failure rate is high and much of the mining activity carried on by local entrepreneurs is subsidised by other activities.

That mining plays a fairly significant role in the economy of Guyana is not in dispute although there is some debate going on in the press as to the real level.
                                                                                       1997         1998          1999          2000

Source: Bank of Guyana Statistical Bulletin

Sectors and sub sectors tend to be narrowly defined so the rice milling for example is considered agro-based manufacturing rather than agriculture. The more important point to note however is that the major players in the various mining sub-sectors are all non-Guyanese. In gold, Omai continues to be dominant, in bauxite Aroaima and in quarrying the Cummings Group. Domestic operators, often entirely through their own fault, remain marginal players, struggling for survival.

Features of the Economy

Given its natural resource base, mining has a critical role to play in the economy though it certainly is no silver bullet. We need to formulate and implement an economic, environmental and fiscal regime which encourages the development of the various sub sectors while protecting the environment and ensuring that the country gets a fair share from the depletion of its non-renewable resources.
The liberalisation of the economy has been accompanied by a number of modern pieces of legislation but the enforcement mechanisms have not effectively implemented. The uneven playing field has been caused by discretionary concessions granted to some sector participants creating unfair competition for others. There is little research and development capability and the sector does little by way of value-added production. Output-input ratio is therefore high and we remain vulnerable to international prices.

Specific Problems Facing the Mining Sector

Much of our mining activity takes place in the hinterland regions where rainfall is seasonal and severe. Production time therefore is limited while costs have to be incurred during the non-producing periods.

Despite attempts over several years, a stock exchange is still a far way off and the principal source of external funds is owners' funds and short-term bank borrowing. Even internationally, funds for mining exploration have been scarce as investors fled in the wake of Bre-Ex and into technology stocks. Remote locations with difficult access increase costs as all inputs, including labour have to be taken to the mining areas.

As countries around the world become more environmentally sensitive, measures and remedies to deal with ecological issues further increase cost.

Tax System

Success rate in the mining sector is notoriously low and explains why investors require risk return on capital of 20% and more. High capital intensity demands that the entity be allowed to retain as much cash in the earlier years to reduce the payback period. Some countries allow a full recovery of capital before any payment of tax. Long gestation periods require stable tax rates. Guyana appears to have recognised this in individual cases. It negotiated agreements with individual entities providing for recovery of investment before the payment of taxes on income.

Unfortunately, our tax system both generally and in the mining sector is riddled with exemptions, distortions and high rates. The Government has shown a singular unwillingness to tidy up the tax mess, which it exacerbates by all kinds of discretionary relieves. We need to review our tax system both generally and specific against the following criteria:
                               1. The tax system should be efficient in collecting taxes.
                               2. The tax system should be equitable and fair.
                               3. The tax system should be simple to administer.

Since 1996 it has had a report on the Mining Tax Regime but appears to have done little with it. This does not help the sector.


What the Mining Sector Needs to Do

Governments however can only be expected to do so much. The rest is up to the investor.

More importantly the Government should be cautious in awarding permits and licences to persons seeking to extract natural resources. If it does not, even our potential will be frittered away.

New paradigms of management need to be developed if the mining sector is to become/remain successful. Participants need to understand that they need to enter into joint venture arrangements, discard present management styles and concepts and buy in skills and technology to reduce cost of production. They cannot expect the country to subsidies them in their sometimes uneconomic activities.