Investment vs fiscal regime in small scale solid mineral mining in west africa

Category: Investment, Money, Tax
Last Updated: 27 Jul 2020
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Small scale solid mineral mining (SSM) in the West African region of Nigeria and Ghana has been subject to analysis by many writers before to bring out the hidden aspects related to the outcomes of taxation and investment in the industry. However most of these studies are focused on the volume related outcomes rather than the strategic scenarios of the region. SSM industry output in Nigeria in 1959 contributed a mere 1% to the Gross Domestic Product (GDP) of the country. By 2010 mining contributed just 0.3% to the total GDP[1]. This insignificant contribution made by the mining industry to the country’s GDP is attributed to the vast petroleum deposits (African Development Bank and the African Union, 2009).

In Nigeria the existing mining law is incorporated in the Federal Minerals and Mining Act of 1999 and the Ministry of Solid Minerals Development[2] is responsible for the oversight of all management of mineral resources in the country. The Law has been developed from the rudimentary system of regulations starting from 1903 when mining industry in Nigeria was launched by the British colonial government (Ayine, 2011). By the 1940’s the country was one of the leading producers of coal, columbite and tin. The government monopoly over SSM in Nigeria came to an end in 1999 when the government began to sell assets in mining corporations to private entrepreneurs.

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However, it must be noted that the Law governing the SSM in Nigeria [3]was not as sophisticated as that of Ghana. Ghana’s fiscal policy measures were particularly conducive for the development of the SSM industry on a small scale. Though the country too has a sizable amount of oil it did not neglect the SSM related developments. The fiscal policy regime in Nigeria concerning SSM has been described by researchers as one-sided, i.e. it is overloaded with petroleum resources related developments while tax concessions to SSM business, especially private is almost non-extant. Thus this study analyses the outcomes related to the possibility developing SSM related fiscal and investment framework in Nigeria in comparison to Ghana (The Nigerian Minerals and Mining Act, 2007).

1. Analysis

1.1. Literature Review

Nigeria’s SSM cannot be well understood without a reference to its gradual neglect of the industry as well. For instance according to many writers on the subject during the 1980’s the country had relied on coal and wood as a source of fuel for most of the countryside population’s day-to-day cooking needs ( Subsequently coal was sought to be replaced by diesel for the railways though the rural communities continued to use coal and wood into the foreseeable future for their cooking needs. Just 73,000 tons of coal were produced in 1986 as against a whopping figure of 940,000 tons in 1958. The same fate befell the columbite and tin mining because by the end of 1980’s high grade iron ore was almost completely depleted.

The Ministry of Mines and Steel Development was created with a view to developing the solid mineral industry in the country ( Though the Minster himself has assured the international investors of good opportunities and invited them to come and invest in the SSM industry there is a general trend of reluctance among investors primarily due to the inadequacy and inefficiency of fiscal regulations to assure good returns on their investments (Alison-Madueke, 2009). Fiscal policy [4]measures adopted by Nigeria concerning SSM have been known to be scanty and sparse. SSM related fiscal policy and investment measures in Nigeria have to be studied against the Ghanaian developments in SSM because the latter has adopted some of the far reaching changes in respect of the country’s SSM thus encouraging the small scale investors to identify and invest in more lucrative areas of the industry (Environmentally and Socially Sustainable Development Department, 2006).

Nigeria right now has one of the most undeveloped fiscal policy regimes in the whole continent concerning SSM while on the other hand Ghana has adopted some advanced features in the system of taxation. In addition to the macroeconomic policy reforms the country has extensively adopted MMS related policy reforms in order to attract investment to the country. The Mineral and Mining Law (PNDCL 153) of 1986 [5]vests all rights of ownership in the Ghanaian government thus creating one of the most successful pillars for effective governance of the industry ( Subsequently two addendums were introduced – the Additional Profit Tax Law (PNDCL 122) and Minerals (Royalties) Regulations (LI 1349). These laws along with highly generous tax incentives and exemptions to foreign investors have served as the cornerstone of the entire SSM in Ghana. But nonetheless these laws were codified in the Ghana Internal Revenue Act [6]since 2000.

By 1994 the level of corporate tax in the industry was brought down to 35% in Ghana while the capital expenditure allowance to investors was increased to 20% in the first year. Subsequently in each year the investor is entitled to 15% .of allowances from 1986. The Royalty rate calculated at 6% of the total worth of the mineral was subsequently reduced to 3%. All other duties such as import duty, mineral duty and the foreign exchange tax were done away with. The import taxes on machinery and equipment were also exempted ( These developments created a positive cumulative impact on the SSM scenario in Ghana. There was also the provision to permit the leaseholder to retain 25% of the foreign exchange earnings in a foreign bank account. This is intended to facilitate the purchase of equipment and machinery.

Ghana’s fiscal policy measures on SSM are wide and varied. For instance the net present value of the investment is sought to be maximized for the investor in conformance with a comparison on probable net returns from alternative investment vehicles such as purchasing government or/and corporate bonds, shares and other investments in funds (

After tax yield of the investment matters so much that the net present value of the company ought to be maximized especially in an SSM environment. Mineral taxation systems [7]ought to take into consideration the realized profitability as against the potential and empower the firm to pay back capital borrowings at an early date. Tax duplication must be avoided and any structural adjustment initiatives undertaken by the company must come to a successful conclusion with the help of the tax system (Hossain, 2003). Since the SSM industry requires a higher level of capital investment for a longer period of time before adequate positive earnings are made the tax system of the country must be designed to accommodate concerns of the investor.

According to some recent research works tax systems on mineral exploration and development often run into rough weather in times of economic recessions because governments fail to provide adequate buffer against the investment failure (Economic Commission for Africa, 2004). If the government fails to maximize the net present value of tax revenue and earn more tax revenue during periods of high profit earnings by companies, then there would be some incapacities coming into the system to prevent it from registering positive growth. Marginally productive mines have to be brought into higher yield capacity through capital intensive production techniques. Internal cost drivers like administration and research & development [8](R&D) must be controlled in such a manner to avoid cost rises in production.

1.2. Research Methodology

Secondary data was collected through an extensive research effort conducted in libraries and online. The information regarding SSM was collected in order to analyze and come to conclusions. Secondary data is regarded as the second hand data or the data that have been exposed before for various reasons. It is not fresh data as the primary data. It is relatively easier to find secondary data than the primary data (Twerefou, 2009).

Various sources are used to implement the objective by using secondary data gathered from such sources as textbooks, professional journals, and various university publications, corporate reports of various companies and the government, and university theses. These sources were used to analyze and provide the reliable accurate inferences regarding the SSM in Nigeria and Ghana. These secondary data sources have provided an extensive understanding of the fiscal policy measures adopted by Nigeria and Ghana (Davis, Ossowski & Fedelino, 2003). The comparison has been made to show that Ghanaian system of taxation [9]is far superior in the solid mineral mining and exploration industry when compared to the Nigerian system.Various textbooks and publications were used to build and draw reliable theoretical conclusions and make findings.

References were taken from most of the research material available in the field. Theoretical analysis is much well facilitated than primary material which is basically limited to responses in the questionnaire and the survey. Also there is considerable reflection on the state and relevance of current research. Relevant web sites and official documents links were accessed to provide more credibility to the study and for further reference (Onugu, 2005).Future research possibilities in the field are discussed in depth to show how theoretical underpinnings evolve with time and space with specific reference to the current developments in the SSM field.

1.3. Deductive and inductive reasoning

This paper used deductive reasoning as against inductive reasoning. Deductive research refers to a process in which a more general approach leads to a more particular approach. For example the researcher may start off with a theory on the subject and then build up a series of hypotheses to arrive at specific details of the research topic (Campbell, 2009). Deductive reasoning is sometimes known as top-down approach. On the other hand inductive reasoning refers to the opposite process or approach. In inductive research the researcher starts from more specific hypotheses and then go on to generalized areas of study. This is sometimes known as bottom-up approach.

1.4. Research Limitations

The industry-centric research methodology aspect was focused on both the quantitative and qualitative paradigms but nevertheless the qualitative aspect was hindered by a variety of shortcomings including the inability of this researcher to obtain quality testing measures. However it must be noted here that this detailed study would pay more attention to qualitative shifts than to quantitative data shifts caused by an industry in transition (Daniel & Keen, 2010).

The skewed nature of published data cannot be stressed on too much either because such bias and prejudice are only too common at each level. However for the purpose of ascertaining the tax system related outcomes such skewed data did not have a greater negative impact on conclusions. Next the all too well known limitations, viz. cultural bias [10]and prejudice displayed by researchers in Nigeria and Ghana might have hampered the efforts of this researcher to a certain extent. By following strict control mechanisms and a set of relevant guidelines the accuracy of the analysis can be made right though. This tendency apart some data sets were characterized by a degree of inaccuracy with regard to analysis. The recent developments in the SSM were not adequately borne out by these analyses (MBendi, 2011). Thus the qualitative research aspect also assumes a significant dimension of right or wrong. Organizational settings could have hampered the data collection efforts of many researchers and as a result they might have been influenced by cultural attachments and biases.

The most significant data sets for any serious conclusions have been sifted to come to some conclusions that have a direct bearing on the learning outcomes of this study. For instance the Nigerian fiscal policy measures as based on attracting foreign investors to invest in solid mineral mining and exploration is particularly influenced by a desire on the part of the government to provide employment to local population (Chamber of Mines Newsletter, 2001).

1.5. Data Analysis


Table 2.5.1: Nigeria’s seven strategic solid minerals


Table 2.5.2: Gold Production in Ghana


1.6. Overall analysis

Tax analysis with emphasis on fiscal policy in Nigeria requires a systematic theoretical analysis of the net present value. When corporate taxes are considered the firm is entitled to interest expense deduction which enables it to increase value of its assets. According to Modigliani & Miller (1963) the tax exemption allows the firm to reduce the leverage-based premium in the cost associated with raising the equity capital. Subsequently Miller added personal taxes to the equation.

An investor ought to make an investment only when it has a positive Net Present Value (NPV). Those investments or projects whose returns are negative must be disregarded. The following formula is generally used to depict the NPV [1]of an investment or a project. The hypothetical example that follows the formula shows a positive NPV equal to ?123,928.60 at the end of the five year period. Here the opportunity cost of capital is assumed to be 12%.

Year Cash flow Discounted cash flow

0= ?-(10,000.00)

1 10,000.00 =? 8,928.57

2 20,000 .00= ? 17,857.14

3 40,000 .00= ? 35,714.28

4 50,000.00=?44,642.85

5 30,000 .00= ? 26,785.71


NPV= ?123,928.60

Thus by adopting it as the discount rate for all future cash flows one can effectively obtain the NPV for them. This gives a few advantages. In the first place proper financial management requires a realistic opportunity cost to be set against capital. Though over a period of 5 years there can be considerable pressure on interest rates, a steady return of earnings would be ensured through proper cash flow management. After all the above cash flow forecasts are assumed to be constant though, in reality they might vary.

The decision to make the investment is based on the apparent returns by way of future cash flows and it does not take into account the risk factor involved. For instance the investor has totally disregarded DCF method because he probably considers those future returns to be final and conclusive with respect to their values. The DCF calculations and the NPV figure of the total investment show that the decision is fairly justifiable because the NPV is equal to ? 123,928.60 which is a considerable value against probable future inflationary pressure, i.e. the opportunity cost of capital.

The importance of discounting future cash flows by using these formulas also depends on other factors as well. Discounted cash flows give a real picture of the future possibilities. Since DCF[2] is what an individual is willing to pay at present in order to have what he expects to have in the future, it’s a process of expressing future revenue flows in terms of today’s value. Probably the most important reason behind DCF is the fact that inflation erodes the value of money in times to come, i.e. future. Therefore it’s essential to make up for the loss. That is why in each subsequent DCF multiplied by the number of years, a lower value comes up (Notermans, 2000).

The Internal Rate of Return (IRR) [3]sets the present value of all future cash flows of an investment equal to zero. IRR usually holds the assumption that all future cash inflows would be reinvested at the internal rate as calculated at present. Assuming that there are investment projects with returns that exceed the cost of capital or interest, such projects would be seriously considered for investment. In other words when the IRR is greater the investment is more attractive. However it’s the NPV that every investor seeks to adopt because it has a less number of disadvantages or flaws.

However there is abatement or mitigation of systematic risk through hedging. Individual investment decisions concerning risk mitigation are inevitably focused on the capital adequacy rules. Concurrent decisions to mitigate risk and maintain capital adequacy are nothing new in the investment sphere.

Sharpe ratio is used to calculate the amount of systematic risk:

Here the performance evaluation is based on risk-adjusted measures.

Now the question “is the return adequate compensation for the risk?” has to be answered by working out the returns given the risk involved. The following explanations are used to work it out. The Sharpe ratio enables the adjustment of returns on investments to be conclusive with respect to risk-free returns and the degree of volatility of an investment.

Rp = Average return on the portfolio

Rf = Average risk free rate

Sp = Standard deviation of portfolio return (total risk).

While Sharpe ratio is useful in determining adjusted risk and performance of a portfolio, there are other measures as well that have to be used in order to determine the level of risk accurately.

Treynor ratio:

rp = Average return on the portfolio

rf = Average risk free rate

?p = Beta of portfolio (systematic risk)

Treynor ratio is used to measure returns that are in excess of what could have been made on risk-free investment. For example Treasury Bills are less risky than other volatility-prone assets. That’s why it’s sometimes called reward-to-volatility ratio. It uses systematic risk. Thus higher the Treynor ratio, the higher the returns made on investments. However it is not like Sharpe ratio which is a measure of the excess return and does not help much. Next there is the Jensen’s Alpha, a measure that calculates the excess returns above the security market line as done in the capital asset pricing model (CAPM).[4] CAPM also uses beta as a multiplier to determine the total value of returns. Jensen’s Alpha is a risk adjusted portfolio performance metric. It’s calculated by using a regression technique to determine the performance of a given portfolio of a manager tested against a benchmark.

On the other hand unsystematic (un-systemic) risk refers to a risk inherent in a particular industry or market that falters due to a specifically divergent variable. Unsystematic risk[5] (or residual risk or diversifiable risk) can be overcome by resorting to diversification of one’s portfolio (Lo, 2005). Since unsystematic risk is specific to a particular market/industry or market segment, diversification helps investors either to reduce risk or totally cancel out depending on the relative offsetting effect of less risky investments.

Unsystematic risk essentially presupposes the existence of a remedial measure without resorting to hedging which can be uncertain for a number of reasons. In the first place hedging is carried out with the intention of obviating systematic risk which occurs as the result of an exogenous variable going astray. In the case of unsystematic risk exogenous variables are assumed to behave in the predictable way (Lehmann, 1990). Thus forecasts are reliable to the extent that the individual potential investor does not feel the need to shuffle the basket of investments. Fund managers whose instincts the investor relies on, do not feel obliged to advice clients on the contrary decisions. In fact such advice depends not only the instincts of fund managers but also statistical forecasts. As the portfolio is more diversified unsystematic risk moves closer to zero. Accounting risk[6], financial risk [7]and economic risk[8] are all part and parcel of unsystematic risk. They signify the very nature of risk. For instance a financial risk might involve mistakes in cash flow forecasts thus leading to liquidity problems.

These residual risks do not have a big impact on the whole system. The systemic imperviousness stands out as the most credible security against risk. But nevertheless the degree of this imperviousness is determined by a number of other factors that are inherent to the system itself. Calculations involve the same process as above. However, CAPM is often used to measure an individual security or a portfolio. Additionally the security market line [9](SML) is used to measure the reward-to-risk ratio of a security in relation to the total market as shown below.

Finally total risk is the sum total of systematic risk and unsystematic risk. While the choice of the individual investor between different types of securities or investment instruments matters here, there is the need for the investor to make some decisive decisions involving which risk out of systematic and unsystematic risks to be reduced vis-a-vis the other. The following graph illustrates the hypothetical scenario of a company which invests in a given portfolio of securities. The red line is the Security Market Line.

the horizontal axis shows the betas of all companies in the market
the vertical axis shows the required rates of return, as a percentage

Assuming that the risk free rate is 5%, and the overall stock market will produce a rate of return of 12.5% next year the following would give a clearer picture of fundamental financial ratio analysis. The imaginary investor/shareholder/company has a beta of 1.7.

This result is obtained by substituting a few sample betas into the CAPM equation as follows.

Ks = Krf + B (Km – Krf).

Table 2.5.3: Beta Values

SecurityBeta (It’s a measure of risk)Rate of Return
‘Risk Free’0.05.00%
Overall Stock Market1.012.50%
Utopia Company1.717.75%


This figure and hypothetical data can be applied to understand all three types of risks in investing in the Nigeria’s solid mineral mining and exploration industry.


Time and again it has been argued that Nigeria’s existing fiscal policy regime in general and the tax system in particular regarding the SSM requires urgent revision to invite both local foreign investors. It has also been suggested that such a revision or an overhauling would be worked out in conformance with SSM’s current developments. Nigeria has been heavily dependent on its oil resource and in fact has been neglecting solid mineral mining industry [1]while another West African country Ghana has been systematically developing its solid minerals industry at a consistent pace. Thus the analysis is focused on a distinction between industry related features in Nigeria and Ghana to bring about a conviction of the existing tax anomalies in the former.

While the paper focuses attention on a variety of tax related shortcomings in Nigeria ranging from the near total absence of a well structured corporate tax system in the solid mineral mining industry[2] in general and the SSM sector in particular, it has stressed on the significance of fiscal policy measures that require a systematic effort sustained over the years to bring about both a qualitative and quantitative shift in the solid mineral mining industry. The comparison with Ghana is made to in order to delineate a series of positive developments that have taken place within the Ghanaian taxation system in the solid mineral mining and exploration sector. Ghana has put in place a number of corporate tax incentives and relaxed its rules and regulations on the acquisition of mining rights[3] to assure the potential foreign investor that net returns on their investment in the sector would produce more than anticipated net returns. Nigeria just needs this kind of change in its tax system to create a series of positive synergies.



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