VRA Guilty of Criminal Negligence

Accra — Evidence gathered by Public Agenda suggests that the Volta River Authority can be cited for criminal negligence for not collecting new electricity tariffs from mining companies negotiated and agreed upon in July 2008. The failure of the national power producer to collect the new tariffs has led to under recovery of electricity production cost by VRA to the tune of GHC146 million as at July 2009. Set against a total receipt of GHC141 million from the mining sector within that same period, the mining companies' contribution to national revenue mobilization has clearly been negative.

Public Agenda investigations have revealed that even as VRA and ECG are negotiating an upward adjustment of electricity tariffs by a whooping 400% the authority has negligently failed to ensure that mining companies pay the full cost of the electricity they consume in spite of an agreement reached to this effect two years ago. While it costs about 19 cents to produce a unit of electricity, the companies pay only 10 cents for every kilowatt hour of energy consumed, leaving an under-recovered cost of 9 cents per unit consumed, a situation Public Agenda believes accounts for, to a very large extent, the huge losses in the Authorities books.

The Government of Ghana announced a cut in electricity subsidies to mining companies in May 2008, as increasing global oil prices threatened to disrupt its budget and development programmes. The companies obviously were not amused by the government's decision and sought to negotiate the new rates that were being contemplated. In spite of their protestations, the then Finance Minister Kwadwo Baah-Wiredu was reported to have affirmed, following weeks of negotiations, that the measure had taken effect as scheduled and that the companies would from then on be paying an average of 22 cents per kilowatt hour, up from 10 cents.

In response to the Chamber of Mines' claim that, it was "still negotiating," and that "the issues are serious and delicate and so needed time to negotiate" Baah Wiredu insisted: "We haven't changed the implementation date, neither have we revised the proposed rate... they (the mining companies) will have to come to terms with the fact that we can no longer subsidise their operations".

Justifying the government proposal at the time, Finance Minister Baah-Wiredu cited the example of a power plant provided by a consortium of mining companies to augment the national supply. He said this private plant was producing electricity at a cost of 32 cents per kilowatt hour, far higher than the 22 cents being demanded by the government.

The revelation that the government is subsidizing these huge multinational mining companies was first made by Public Agenda in its November 9 2009 edition. The story pointed out that the revelation of the under-recovery comes in the wake of assertions that the global commodity price boom was benefiting the companies rather than the natural resource owners. It cited a 2003 Project Performance Assessment Report on the World Bank mining projects in Ghana, undertaken by the Bank's Operations Evaluation Department which has admitted that the economic benefits of mining sector reforms to host countries are uncertain. Commenting on the future trend of large scale mining in Ghana, the report asserted "Gold production and value of minerals produced have reached an unprecedented peak; however, it is unclear what their true net benefits are to Ghana".

The story further cited an audit of mining sector payments and receipts by companies and the state respectively carried out by Boas and Associates in 2004, and which revealed that "during the period under review, no company paid capital gained tax, as required by law, even though companies had changed hands during the period." The report also revealed that increases in world gold prices did not translate into increase in royalty receipts, even though the law provides for a range between 3% and 6%.

It is largely believed that companies and other investors in the sector, especially mining, employ a number of accounting techniques, including transfer pricing, manipulation of capital allowance provisions and many more to avoid, and in some instances evade taxes.

In a rejoinder to the Public Agenda story the Chamber of Mines argued that the mines are classified by the government as 'bulk supply' customers, and therefore purchases electricity in much the same way as Electricity Company of Ghana. The Chamber's response sought to explain why ordinary citizens pay more for their electricity than the mining companies, arguing that, the ECG incurs extra cost of installing and maintaining the infrastructure that delivers power to its customers, and which cost is factored into its pricing mechanism.

It quoted the current distribution service charge gazetted by the PURC in June 2008 as GHp5.85/kWh, and pointed out that the service charge represents the difference between what ordinary citizens pay and what mining companies pay for their electricity consumption. The response further stated that the average ECG consumer pays GHp16/kWh while the average mine consumer pays 10 U.S. cents or GHp 14.3 kWh. It goes on to argue that if one subtracts the distribution service charge of GHp 5.85 / kWh, the ECG should be paying VRA a bulk supply tariff of GHp 10.15/kWh, and concludes that on that basis, the mines are paying GHp.4.15/kWh more than what ECG pays.

The Chamber clearly misses the point. Government has every right, indeed a fundamental responsibility to ensure universal access to essential social services for its citizens, and to do this might require subsidizing consumption. The Chamber therefore has no business meddling in whatever social protection mechanism a government puts in place for its citizens. The matter at stake is whether or not mining companies who use power for profit are adequately compensating the state for the cost of making the power available for their business. The answer from the Chamber's own response to Public Agenda's story: "The Great Gold Robbery" is NO!

A source close to the World Bank has argued that, based on current light crude oil prices, the average price mining companies pay for electricity is only about half the short term marginal cost of generation.

"In the short term, I think that the case for charging prices that are not inferior to variable costs is very strong. If some mines become unprofitable with the new power prices, it would just mean that they are not economic with current oil prices" said the source. The companies are believed to be paying more for electricity they consume in countries like Mali, Niger etc where power generation is solely thermal.