On Thursday 27 August 2020, the Ministry of Finance (in collaboration with the Ministry of Information) held a press conference at its auspices to explain the Ghana government’s rationale for the proposed Agyapa Royalties transaction.
At the said press conference, the Minister of Finance, Ken Ofori-Atta and his deputy, Hon. Charles Adu Boahen, espoused the inherent rewards of the Agyapa Royalties transaction and their view of the benefits of the transaction for the nation.
However, what the minister and his deputy did not sufficiently highlight are the inherent risks associated with the transaction for future Ghana government budgetary needs, as well as the implications of the transaction for inter-generational equity.
The Agyapa Royalties transaction effectively commits over 75% of a large chunk of Ghana’s mineral (gold) royalty flows to a publicly listed company of the same name to be domiciled in Jersey, one of the most aggressive tax havens in the world.
The Ghana government, through the Minerals Income Investment Fund (MIIF), is to maintain a minimum of 51% shares in this company. Up to 49% of the company’s shares is expected to be floated on the London Stock Exchange in a bid to raise an expected $500 million upfront for Ghana.
What this means is that Ghana is indefinitely forfeiting up to 49% of the majority of its future mineral royalty income flows, in exchange for about $500 million today.
To begin with, in economics, finance, and business, there is a risk-reward frontier governing the actions of market entities (i.e. nations, companies, individuals, etc.).
Essentially, the higher the risk an entity is willing to take, the higher its expected reward in the market. However, the risk of losing out completely is also heightened with a higher risk strategy. Conversely, the lower the risk an entity is willing to take, the more assured its reward.
In the status quo, Ghana, as an entity is effectively on the low-risk end of the risk-reward frontier with respect to the mineral royalty, flows from its mineral concessions and companies because these royalties are accrued to the country’s coffers in an assured stream annually.
What the current government is doing with the Agyapa Royalties transaction is to effectively transition Ghana to the high-risk end of the risk-reward frontier with respect to the country’s royalty flows, in the hope of leveraging greater returns on these flows for the nation.
Whilst a high-risk strategy may be appropriate for private entities looking to enhance their returns, is it necessarily appropriate for a developing country such as Ghana which has chronic budgetary deficits and unstable income streams? It is instructive to note that the finance ministers mentioned at the said press conference that this is the first time such a transaction is being attempted in Africa, suggesting that they are introducing a great novelty.
However, it is not the case that similar African countries are not aware of royalty companies and how they are structured and set up. Perhaps they are just unwilling to accept the risks associated with royalty companies, regardless of their perceived rewards.
To illustrate how the Agyapa Royalties transaction represents a high-risk strategy for Ghana, consider that future management of the Agyapa Royalties company takes a series of bad investment decisions that lose money for the company.
An example may be that Agyapa Royalties invests in a series of mining concessions that yield lower than expected reserves, or no reserves at all; or that they accumulate toxic assets on the company’s balance sheet. In this situation, the management of Agyapa
Royalties may decide not to pay dividends to its shareholders, including the 51% Ghana government shareholder, for an indefinite period.
In an extreme scenario, Ghana may indefinitely lose any future royalty income flows from the mineral concessions and companies that have been assigned to Agyapa. Note that although the assigned mineral companies in the country would continue to pay their royalties to Ghana through the MIIF, those royalties would continue to be routed from the MIIF to Agyapa to finance Agyapa’s bad investments and toxic assets.
Is Ghana as a country willing to accept this risk? Is Ghana willing to accept a situation where there are no income flows from its mineral royalties to fund its future budgets? It is instructive to note the Ministers’ efforts at citing mineral royalty companies that are doing well on the international markets.
What they didn’t mention however are the many mineral royalty companies that are struggling or had gone bust in the past.
Is Ghana willing to accept a situation where the bulk of its royalty flows are routed to finance poor Agyapa management and investment decisions, at the expense of the country’s budgetary needs?
There are also hidden costs of the Agyapa Royalties transaction to the nation. At the moment, Ghana is able to raise bonds (i.e. borrow) on the international capital markets at a low-interest rate because lenders have an overview of the country’s income sources and streams and are able to assess the country’s capacity to pay back.
Royalty flows from mining concessions is a significant part of Ghana’s income sources and streams. With over 75% of the country’s royalty incomes now committed to Agyapa, a risky special purpose vehicle company, Ghana’slenders on the international capital markets are likely to take this into consideration and would likely charge higher interest rates on the country’s future bonds.
This represents an incidental cost to the nation. So, the Minister of Finance and his deputy have done a good job of explaining their perceived rewards of the Agyapa Royalties transaction to the nation and had been largely factual in their presentation. This however represents one side of the story.
They had been quiet on the other side of the story which is the risks of the transaction to the nation. Ghanaians need to understand what these risks are. More importantly, Ghanaians need to assess whether they are willing to accept these risks.
Is the country willing to forfeit an assured stream of royalty incomes (status quo situation) for an unassured stream (Agyapa Royalties transaction)? In my opinion, the risks are not worth it given the country’s context. Perhaps this also explains why similar African countries with mineral royalty flows have chosen not to pursue this course.
The Author: Dr. Yakubu Abdul-Salam is a Ghanaian and Lecturer in Economics at the University of Aberdeen, Scotland, UK.
Dr Yakubu Abdul-Salam