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.
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