In February this year, a state gold buying mechanisms (SGBP) unexpectedly hit the limelight, when an AFP story on Gabon’s efforts to formalise what the Government described as “anarchy” in the artisanal gold sector even hit the UK’s tabloid press.
[…] in 2014 the government decided to address the “anarchy” of the situation of the artisanal gold diggers explains state representative, suggesting, the state’s management of this gold production “will improve living conditions for our people” with the development of “small mines better organised and semi-automated”.
While “anarchy” is a term that does not typically do the ASM sector justice, Gabon’s Government’s system for buying and collecting small-scale gold production to gain better visibility and control of the activity in the sector, complements well RCS Global’s latest report, published last week through the International Institute for Environment and Development (IIED).
In the report “State gold-buying programs: effective instruments to reform the artisanal and small-scale (ASM) gold mining sector? “, which features case studies of our previous research on SGBPs in Bolivia, Colombia, Côte d’Ivoire, Ghana, and the Philippines we detail SGBPs’ challenges and their potential as instruments for artisanal and small-scale gold mining (ASGM) formalisation and sector management.
At a time where market conditions and the broad development agendas are encouraging governments to look at the sustainable integration of their ASGM production into their markets, SGBPs are an important policy instrument that can fulfil multiple objectives.
SGBPs, what are they and how do they work
In a nutshell SGBPs allow a state to buy gold from ASGM operators through a network of official buying stations, offering an opportunity to foster positive interactions between ASGM miners and the State, build mutual confidence and support the formalisation of the sector.
In certain countries SGBPs purchase gold from sellers fulfilling responsible sourcing and/or specific legal requirements. In other countries SGBPs operate a ‘no questions asked’ policy, sometimes buying gold regardless of where it stems from or how it was sourced. Some SGBPS purchase directly from ASGM miners, while others purchase from middlemen. SGBPs operate at specific junctures of the ASGM sector value chain (see the red links in the figure below) to meet its purity and quantity requirements.
Furthermore the structure of the ASGM supply chain means that downstream customers, including final consumers, have the capacity to push for cascading purchasing standards (sometimes imposed on them through regulations, be they national or extra-territorial – such as Dodd-Frank 1502 or the forthcoming EU Directive on Conflict Minerals).
Often offering premium prices to attract sellers, or making it mandatory for legal sellers to sell into the SGBP, SGBPs fulfil particular objectives as part of a government ASGM strategy:
Indirectly reform the ASGM sector. When a government lacks the capacity to monitor and enforce regulations in the ASGM sector, an SGBP can be set up to complement a voluntary system of regulations where ASGM operations can participate in so to receive special incentives for their compliance with said voluntary regulations.
Raise standards in ASGM operations. A well-managed SGBP can link the miners to the government, even in areas of limited state presence, and generate trust and goodwill. When sellers come to sell gold to SGBPs, the state has an opportunity to set or insist on the application of international due diligence and responsible sourcing standards that traders and their suppliers must meet.
SGBPs also have been (and still are) used as a vehicle for certain states to collect revenue and bolster national gold and foreign currency reserves.
Our case study research also highlights a number of recurrent challenges to the implementation and operation of SGBPs. These challenges can weaken SGBPs in a variety of ways, most notably they can render the SGBP too costly to be run sustainably or constrain its operations to the point of non-efficacy, particularly by weakening its position as the dominant market player. Challenges are:
- Misapplication of price incentives can make the SGBP a deficit generating policy instrument depended on political goodwill. High price incentives can also attract smuggled gold from neighbouring countries, which can generate tensions;
- Lack of coordination between central banks, which usually govern SGBPs, and the ministries responsible for ASGM policy implementation can result in SGBPs that are not adapted to the realities on the ground, undermining effective implementation;
- A general lack of incentives for ASGM operators to sell to the SGBP can fail to foster regular interactions between the two parties, resulting in ASGM operators selling to the best buyer at the time of the sale and the SGBP struggling to attract sufficient volumes;
- Lack of pre-financing and credit – typically lacking access to formal credit ASGM operators often have to resort to financing sources that oblige them to sell back to their creditor and therefore block them from selling to the SGBP;
- Centralised gold collection –SGBP buying stations need to be on or near the mines to capture ASGM miners’ production, miners who live hand to mouth and often sell their gold on a daily basis. This is a significant capacity challenge, especially in areas of limited state presence or control.
- Due diligence deficiencies – are a common characteristic and can result in SGBP non-compliance with national and international laws and good practice requirements, thereby limiting the government’s ability to sell on the gold afterwards. However, effective due diligence is not only costly but also technically demanding and demands long term commitment and capacity. Not all countries considering an SGBP would meet these criteria from the word go and the incremental deepening of due diligence may therefore be required.
(Partially) Successful SGBPs practices
Our case studies suggest, SGBPs can fulfil their objectives and overcome the recurring challenges when they are backed by political commitment and their objectives are congruent both with state institutional capacity and the realities on the ground. Based on (partially) successful SGBPs and non-state programs from Colombia, Côte d’Ivoire, Ghana and the Philippines, the report points to the following considerations to make them more effective:
- Design financially sustainable programs to shelter implementation from shifting political priorities and long-term deficit;
- Shorten the value chain by removing intermediaries in order to offer higher prices to miners and decentralise gold collection to achieve this objective;
- Impose regulations gradually to conserves a certain goodwill among ASM operators;
- Build local community and stakeholder support and incentivize their participation to foster societal pressures towards compliance;
- Build capacity, transparency and resilience in state institutions, and facilitate their coordination through a dedicated management team that reports to an ASM taskforce[i];
- Provide non-fiscal incentives, including: credit, equipment, services and training, and bringing normality and stability to the ASGM miners and their relatives;
- Foster effective ASGM taxation to discourage cross-border smuggling, determine which is the appropriate level of taxation for ASM gold, if any as ASGM is often a survival activity.
So what should a successful SGBP look like?
We found two approaches to be helpful and promising some level of success:
SGBPs with a ‘no questions asked’ policy, are the easiest to implement as they require limited state expenditure and infrastructure, often relying to an extent on traders to purify and mobilize gold from the mining regions to the buying stations. However by relying on middlemen they create entry points for gold of dubious origin and are therefore non-compliant with international requirements for due diligence, unless an existing system of due diligence is already in place and can thus guarantee traceability from the mine-sites to the buying station. Access to key gold markets is moving towards the need to provide acceptable levels of traceability and due diligence; ‘no questions asked’ SGBPs will thus increasingly have to reform to incorporate standards if they want to continue to sell to international buyers.
Given the current international trend these SGBPS can play a role in ASGM sub-sectors where gold is already produced in line with legal and international requirements, where legal requirements pertaining to due diligence do not apply, or in cases where there is significant scope for incremental compliance, so long as the non-compliant gold is not earmarked for export, and an effective implementation program exists; said drive towards increasing transparency will force these SGBPs to either implement traceability measures or being progressively shun by key buyers having to or wanting to abide by said rules.
Examples of working SGBPs that do not effectively implement due diligence standards are Ghana and the Philippines.
Community-based SGBPs rely on the involvement of the community at the local level to achieve successful implementation and operation through local monitoring and (indirectly) social pressure, and can be effective due to their broad support base. Furthermore, by collecting gold through local structures these schemes shorten the trading chain and allow the SGBP to offer a higher price for the gold purchased. To invest the local community in the SGBP they offer incentives, including financial (percentage of the gold collected), community development and training.
The drawback of community based SGBPs is that they take time to implement and to become sustainable, not to mention profitable for governments interested in setting up an SGBP to strengthen their reserves (among other objectives), and that they need a certain level of State presence at the local level to be efficient.
Examples of community based programs are Colombia’s non-state run Oro Verde® and Côte d’Ivoire’s Groupements à Vocation Cooperative – although the latter was co-opted by a non-governmental group during Côte D’Ivoire political crisis, leading to its discontinuation.
Further details, case studies, and a broader set of analysis and recommendations extending far from the possible scope of a blog note are available in our report: click here to download it.
[i] As described in the Intergovernmental Forum on Mining, Minerals, Metals, and Sustainable Development Guidance for Governments on Managing Artisanal and Small Scale Mining, 2015.
Unless stated otherwise all pictures are from the author.