ANALYSIS: How 12 years of unethical practices stunted growth of Nigeria’s solid minerals sector

This report analyses the 11-years (2007 – 2018) audit of the sector and identifies ways by which the sector can operate for optimum efficiency.

Endowed, mismanaged sector

Nigeria is rich with over 34 commercially viable solid mineral deposits spread across the country. From 1903, the country had modest exploration and exploitation with intermittent growth up to 1960.

Tin, columbite, coal, etc, were the early solid minerals that contributed significantly to Nigeria’s economy but declined at the advent of the oil boom from 1970, a decline that has continued till date.

The clamour for a return to solid minerals was necessitated by the global failing of oil prices, international oil politics, and the need to diversify Nigeria’s economy.

In the 1970s, the federal government set an ambition to use Nigeria’s iron ore and coal to produce steel for her industrialisation. The search and project development for the steel project was under the National Steel Development Authority (NSDA).

Subsequently, the federal government broke the NSDA into Ajaokuta Steel Company, Delta Steel Plant and other steel rolling mills. At the same period, increased investments were made into the Nigerian Coal Corporation and Nigeria Mining Corporation with mandates to mine, process, add value and enhance the utilisation of solid minerals within their activities and to export the excess.

In early 2000, the privatisation policy of the federal government resulted in another decline in activities of extractive companies within the solid minerals sector, although there was increase in exploration and exploitation of construction materials such as limestone and granite for cement production and infrastructure development of Nigeria.

Also, privatisation brought an increase in foreign direct investment in exploration and exploitation of gold, iron ore, coal, gypsum, lead and zinc, tin and columbite among others. This increment in foreign interests brought about the Solid Minerals Roadmap of 2012, to add value to mining and processing towards utilisation and industrialization.

The federal government, through the ministry of mines and steel development, re-launched the Solid Minerals Policy Roadmap in September 2016 aimed at ensuring policy continuity and consistency in the sector.

But from 2016 till date, not so much has been recorded as major gains in the mineral sector.

NEITI reportshave further exposed, that with more than 50 minerals in commercial quantities strewn across Nigeria, paradoxically the solid minerals sector contributes less than 1 per cent to the national GDP while more than 80 per cent of mining activities (in particular artisanal mining) are unregulated and their revenue unaccounted for.

Total earnings from the sector since 2016 that the roadmap was launched up till the last NEITI report for 2018 was only N5 billion. About N1.6 billion was earned in 2016, N1.5 billion in 2017 from 59 companies and N1.9 billion from 69 companies in 2018. This figure is small when compared to Nigeria’s oil earnings in only year 2016 where Nigeria earned $17.05 billion.

NEITI Audit of the Sector

NEITI came into law in 2007 and has been empowered with special powers to reform the extractive industry by providing technical assistance to government bodies overseeing the industry. It is powered to constantly scrutinise the activities of the industry.

The many reports produced by NEITI alongside its National Stakeholders Working Group (NSWG) is part of its objective of reforming and improving the sector. This report focuses on the issues raised in 11 years of NEITI reports, identifies recurrent problems identified by these reports and highlights recommendations for improving the sector’s outlook.

Highlights of findings (2007 – 2012)

NEITI’s maiden report covered a 4-year (2007 to 2010) and showed that over 70 per cent of mining title holders in Nigeria’s solid mineral sector are inactive companies, causing Nigeria’s government huge revenue losses.

Mineral titles are issued by the Mining Cadastre Office (MCO) to many companies, however, only a few are paying their annual fees and other fees required such as royalties, taxes, permits etc as stated in Nigerian Minerals and Mining Act, 2007. The non-compliance of these licence-holding companies, by itself, constitutes a loss of revenue to the government

It also revealed that out of about 3,163 companies granted 1,443 mining titles during the period, only 30 per cent are engaged in active quarry, mining and exploration activities, with illegal miners, medium scale operators and artisan miners being the dominant group.

According to the 2007 – 2010, 2011 report, out of a total of 147 companies/entities audited, only 78, consisting of six cement manufacturing, 44 construction companies and three mineral buying centres, were aggregated for the audit population based on their meeting the materiality threshold of N1 million and above.

Total revenue yield from royalties paid by the major players between 2007 and 2010 was N2.2 billion; earnings from ground rents/annual surface rents for the period was about N173.9 million; tax, N51.4 million; and levies N122.9 million. These numbers will be much improved if the remaining 70 per cent of title holders carried out enough activities to meet the materiality threshold.

Loopholes for losses

According to the report, the cadastral office and its appointed officials have no proper way to assess the amount of solid minerals produced, sold, or consumed by companies.

Royalty payments made by the companies are therefore based only on what the operators disclose to the regulators. With no framework for transparency or real consequences for defaulters, the companies can withhold or share information to their benefit.

This is similar to what obtains in the oil industry where the federal government continues to find it difficult to determine how much crude is really produced daily but relies on figures submitted by the oil procuring companies.

The report also identified the dearth of sufficient data about the operators as well as the absence of effective synergy/collaboration between MCO and the State Offices, which makes it difficult for the regulators to monitor operators effectively.

Other areas identified include the refusal of the operators to file annual returns with the Corporate Affairs Commission (CAC), as stated by law; which frustrates efforts by government revenue agencies to determine the correct amount to be paid in taxes by the mining companies.

2013 – 2014 report

The 2013 audit report of the sector showed that the total revenue from the solid minerals sector amounted to NGN 33.9 billion in 2013. This amount is composed of 85.50 per cent of taxes received by FIRS, while mining taxes received by Mines Inspectorate Department (MID) and MCO represent 3.97 per cent and 2.08 per cent respectively and other taxes paid to other Government Agencies not selected in the scope 8.45 per cent.

NEITI also raised a number of issues in the report.

A significant concern in this report is that some of the quantities reported by the MID did not match the corresponding royalty amounts. This issue is a carry on from the initial report which noted that operators declare figures at will with no framework for ensuring transparency.

NEITI also noted that the decentralised structure of the Federal Inland Revenue Services (FIRS) makes the collection of taxes uncoordinated, meaning collection of taxes from extractive companies cannot be confirmed, which could mean loss of revenue to the nation.

Another major issue raised in the report was that the various agencies responsible for the supervision of exports of minerals do not have good synergy; figures from the agencies do not match and differ from those declared by companies. Despite the provision in the mining act, minerals are still exported without an export permit from MID.

Further analysis of the 2013 report showed similar patterns of unethical practices in the sector. NEITI noted that most of the findings and recommendations presented in the 2013 audit report have already been raised in previous NEITI reports and the recurrences of these issues during the reconciliation exercise for 2013 could have been avoided if previous recommendations had been implemented.

Lack of a visible action plan to resolve weaknesses and implement NEITI recommendations contributes to delays in NEITI reports and make the reconciliation process more difficult.

The audit report in 2014 showed a high variance of N19.5 billion arising from FIRS data. This means declared payments and revenue by companies and the government are not the same and have huge difference amounting to this variance (N19.5 billion).

This variance was attributable to the fact that Company Income Tax (CIT) payments for most of the construction companies were not captured in the FIRS portal due to system upgrade during 2014.

The table below shows the payments and receipts declared by companies and government.

NEITI also identified that lack of synergy between the state FIRS offices and the headquarters would likely account for the variance, a problem that was highlighted in the 2013 report. Export figures reported by companies were different from those declared by government

NEITI recommended that, in order to close the difference, a manual reconciliation with the state offices should be effected.

NEITI’s 2015, 2016 audit reports

Unsurprisingly, the majority of the issues identified in the operation of the sector in the previous reports covered also repeated itself in the reports of 2015 and 2016 analysed by PREMIUM TIMES and CDD in January 2020.

The mining sector appears to be unable to shake off the practices that have continued to limit its potentials despite NEITI’s efforts to find these gaps and recommend solutions.

The report revealed that mining companies operating in the mining sector in Nigeria have developed schemes through which they defraud the Nigerian government of billions in revenue. Analysis of the NEITI audit of the operation of the sector in 2015 and 2016 indicted these companies and exposed their schemes to include non-remittance of statutory dues, unlicensed mining and evasion of taxes, illegal practices, and incessant smuggling of solid minerals out of the country.

The audit report for 2015 and 2016 specifically focused on the volume of solid minerals produced (extracted and mined), exported and imported as well as comparison of all payments by mining companies against receipts by government agencies.

The exercise examined the accuracy of declared figures from operators and regulators, disclosed all cases of under-payments, highlighted the balances payable to the federation and identified lapses in policies and procedures on collection, custody, bases for financial computation and management of funds accruing from the solid minerals sector reviewed for the period that made the schemes effective.

2017 and 2018 audits

Analysis of the audits in 2017 and 2018 showed that some of the issues identified from the first report in 2007 are still happening – issues ranging from illegal mining to inconsistency in records.

For instance, 2017 audit report showed that export data received from the Nigerian Customs Service (NCS) include minerals that were not captured in the production data provided by the MID as well as inconsistency in free on board value of minerals.

The report explained that the absence of an industry-specific fiscal regime made it difficult to tie revenue flows from the solid minerals industry to the federation account.

A highlight of the 2017 report, however, is that the sector’s contribution to GDP was an abysmal 0.11 per cent which showed a decline of 0.01 percentage point and 0.02 percentage point from the data of 0.12 per cent in 2015, and 0.13 per cent in 2016.

It further explained that out of 1,072 entities covered by the exercise in 2017, only transactions by 59 companies were ‘reconciled’.

The 2018 earnings from the solid mineral sector were the highest in 12 years. The solid minerals sector contributed about N69.5 billion to federation revenue in 2018, the highest so far since NEITI commenced reconciliation of payments in the sector, However, the report explained that out of 720 entities covered by the exercise, only payments by 69 companies were reconciled.

Unauthorised operations were also identified in the 2018 audit reports where 302 companies (42 per cent of companies that paid royalty in 2018) but whose names/titles are not found on the MCO register (in spite of the fact they paid royalty in 2018).

NEITI also noted an emerging unethical trend of issuance of treasury receipt in advance of payment, an act that it said may lead to huge revenue loss to the government if it remains unchecked. Misstatement of government revenue/ receipts was also identified in 2018 reports.

A total of 1,801 holders of valid titles did not make any royalty payment in 2018. It was also noted that out of the 291 titles held by the 69 reporting companies, 143 or 49 per cent of the titles were inactive during the reporting period.

All these issues, as identified by NEITI since 2007 till date, has not only led to huge revenue loss for the government, it also deprived other prospective investors the opportunity to gainfully participate in the sector leading to even more loss of government revenue, employment opportunities and the sector’s dismal contribution to the economy.

It is estimated by the Nigeria Investment Promotion Commission (NIPC) in a report that the current commercial value of seven of the country’s solid minerals (Iron ore, Coal, Lead/Zinc, Bitumen, Gold, Limestone and Barite) runs into trillions of dollars.

It was also reported by Nigeria’s Ministry of Mines and Steel Development that Nigeria loses about $40 billion annually in unexploited gold alone (68.29 per cent of Nigeria’s 2017 budget of N7.28 trillion budget; higher than oil revenue in 2015 ($37 billion), and far higher than the 2016 oil revenue of $26 billion.

NEITI’s fiscal allocation, statutory disbursements analysis

Apart from NEITI’s audit of the solid mineral sector, In 2019, an analysis of two audit reports – The Fiscal Allocation and Statutory Disbursement of the Federal Government from 2007 to 2011 and 2012 to 2016 by DATAPHYTE showed how the Nigerian government reportedly diverted the sum of N908.6 billion over ten years meant for Natural Resource Development.

The NEITI report said the federal government continues to abuse its powers by misappropriating the Development of Natural Resource Funds (DNRF) and is complicit in the lack of development of the sector.

According to the report by DATAPHYTE, the Natural Resource Development Account was established in July 2002 as a response to Nigeria’s inability to secure generous revenue proceeds from oil, coupled with the economic challenges of cyclical recession, achieve resource diversification and to move the country away from its reliance on petroleum for revenue.

Sources of revenue that feed the DNRF include excess crude oil allocation, exchange gain, the share of SURE-P, share from non-oil revenue, contractual obligation, share from excess petroleum profit tax (PPT) and refunds.

Since the government established DNRF in 2002, trillions of naira have accrued to the account. It is, however, unclear what proportion of this has actually been utilised for the purpose for which the fund was created in the first place.

NEITI’s report showed that the fund accrued to the DNRF between 2007 and 2011 was N365 billion. The analysis revealed that of this amount, the sum of N275 billion (75.3 per cent of total fund) was released as loans from the Development of Natural Resources Fund to finance budget deficits, a clear contravention of the intention of establishing the fund in the first place.

The DATAPHYTE report also noted that the sum of N94.8 billion was released from the Fund between 2007 and 2011 to the Fertiliser Revolving Account. Within the same period, the refund made to the account by various state governments on procurement of fertiliser was N66.1 billion.

An additional N106 billion was withdrawn from the DNRF fund to the Ministry of Agriculture within this period.

DNRF between 2012 – 2016

Between 2012 and 2016, a total of N543.6 billion was withdrawn from the fund to fund government activities unconnected to development of the natural resource sector.

There appears to be no procedural requirements to check the withdrawal of money from the DNRF and no way to ensure the funds are actually used for the development of the natural resource sector.

Extent of Nigeria’s mineral endowment

Despite these setbacks, Nigeria is richly endowed with various types of mineral resources. Below are some mineral titles on which major exploration and exploitation are being carried out in Nigeria:

Gold: Gold is found in the North-west, North-central and South-west of Nigeria. Gold deposits found in Northern Nigeria are most prominently near the schist belt in Maru, Anka, Malele, Tsohon Birnin Gwari-Kwaga, Gurmana, Yauri, Dogondaji, and Iperindo in Osun State.

There are over ten sites holding reserves in excess of 50,000 ounces of high quality gold according to Thor Exploration Ltd, (2016). There are also a number of smaller occurrences beyond these major areas.

Till date, over 30 licences have been issued to co-operative societies and companies for mining of gold in the country. In Nigeria, most of the concessions in the mining of gold are still in the exploration stage.

Iron Ore: Nigeria currently has the 12th largest iron ore reserves in the world. There are over three billion tons of iron ore found in Kogi, Enugu, Niger, Zamfara and Kaduna States. Iron ore deposits in Nigeria typically occur in forms such as hematite, magnetite, metasedimentary, band of ferruginos quartzites, sedimentary ores, limonite, maghemite, goethite and siderite.

The Itakpe iron ore deposit has an estimated reserve of 310 Metric tons and Agbaja has about 500 Mtons according to KCM (2014), Ajabanoko (60 Mtons), Agbado-okudu (60 Mtons), Tajimi (20 Mtons), Ochokocho (12 Mtons), among others.

Lead-Zinc: Lead-zinc ores are found usually together and often associated with copper and silver. The minerals are found in commercial quantities along the Benue trough, extending from Abakiliki in the South-east through the middle Benue trough, through to upper Benue trough in Bauchi State.

Limestone: Limestone occurrences are reported in over 30 states of the federation with reserves of over 2.3 trillion metric tons with 568 million tons of proven reserves. The largest and purest limestone deposits are found in the South-west and North-central regions of the country. Most limestone mining activities are mainly for lime and cement production as is evident across all the six geo-political zones in Nigeria.

Coal: Nigeria has bituminous coal with low sulfur and ash content, and is environment friendly. It can be found in the North-east, North-central and South-east regions of the country. There are nearly three billion tons of indicated reserves in 17 identified coalfields and over 600 million tons of proven reserves.

Gypsum: Over two million tons of gypsum deposits are spread over many states in Nigeria. Active extraction of gypsum is ongoing in Tongo and Funakaye area and supports cement production of Ashaka Cement Plc, Ashaka, Gombe State and Nothern Nigeria Cement Company, Sokoto. Current production is put at 8 million tons per annum while the national requirement is 9.6 million tons (MMSD, 2013).

Recommendations

The NEITI reports exposed the vulnerabilities in the sector and its inability to live up to its enormous potential. It underscored the importance of a comprehensive action plan to shift attention from oil to the development of the solid minerals sector in the face of dwindling oil revenue.

Among the many recommendations by the report is the call on the government to develop strategies for monitoring and penalising extractive companies that fail to sign and or implement community development agreements.

It also advised that the newly introduced initiative on national gold purchase be strengthened.

Further recommendations include that the government must not only strengthen the structures of monitoring and enforcement but also exercise restraints in using the NDRF and allowing the funds to be used to develop the sector as originally intended.

If these recommendations are followed, the mining sector can greatly impact on the diversification of revenues from non-oil revenue.