The Chinese Government’s plans to introduce a “social credits” scheme to rate and rank the behaviour and conduct of its citizens far beyond their financial circumstances (the current focus of Western-created “credit scoring” systems) has predictably rattled observers.

One journalist summed up the situation starkly:

“The Communist Party’s plan is for every one of its 1.4 billion citizens to be at the whim of a dystopian social credit system, and it’s on track to be fully operational by the year 2020.”[i]

Many of the discussions have followed similar lines, focusing on the harrowing implications of such an intrusive state-run machine for individual freedoms and the right to privacy.

What has been less investigated is the essential structure of the social algorithms required to achieve the objectives of the Chinese government, and in particular the tensions between technical efficiency and political economy when mass surveillance is devolved to machine power and incorporated into social-behavioural systems in the presence of capitalist incentives.

Few treatments of the notion of “sovereign privacy” give it any respect. Yet, there are framings of the “state secrecy” question that goes beyond mere necessity (especially in such contexts as “law enforcement” and “national security”).

LSE’s Andrew Murray provides an interesting angle in his brief 2011 take on transparency:

“All bodies corporate (be they private or public) are in fact organisms made up of thousands, or even tens of thousands, of decision makers; individuals who collectively form the ‘brain’ of the organisation. The problem is that individuals need space to make decisions free from scrutiny, or else they are likely to make a rushed or panicked decision.”[ii]

When viewed as a “hive” of personnel insecurities, biases, errors, stereotypes, ambitions and proclivities, Central Governments emerge out of the monolithic pyramid we tend to envisage atop the panopticon of general surveillance and descend onto a more examinable stage, where their foibles and miscalculations and misdiagnoses can also receive useful attention.

Because the Communist Party’s 90 million members are an integral part of its overall structural integrity, its social management policies rely greatly on their ability to participate and contribute.[iii]

Many of the 20 million people who work in the 49000 plus state enterprises, especially from middle management and up, are fully paid-up members of the party. Some estimates put the percentage of the country’s 2 million press and online censors who belong to the party at 90%. Last year, the last barrier between the Party and command at all levels of state paramilitary and security institutions was removed, bringing an even larger number of non-career security commissars into both operational and oversight positions.

Such broad-based participation in the “social management strategy” might at first sight appear to favour the decentralised nature of social credit-based control. The only problem with that view is that the strategists behind the scheme see it in purgatory terms:

“The main problems that exist include: a credit investigation system that covers all of society has not yet been formed, credit records of the members of society are gravely flawed, incentive mechanisms to encourage keeping trust and punishments for breaking trust are incomplete, trust-keeping is insufficiently reward, the costs of breaking trust tend to be low; credit services markets are not developed, service systems are immature, there are no norms for service activities, the credibility of service bodies is insufficient, and the mechanisms to protect the rights and interests of credit information subjects are flawed; the social consciousness of sincerity and credit levels tend to be low, and a social atmosphere in which agreements are honoured and trust are honestly kept has not yet been shaped, especially grave production safety accidents, food and drug security incidents happen from time to time, commercial swindles, production and sales of counterfeit products, tax evasion, fraudulent financial claims, academic impropriety and other such phenomena cannot be stopped in spite of repeated bans, there is still a certain difference between the extent of sincerity in government affairs and judicial credibility, and the expectations of the popular masses.”[iv]

The goal is as much about moral self-policing as it is about social control. Self-policing inevitably induces low-intensity and highly diffuse factionalism and clique politics.

Chinese observers certainly understand the critical factor of power-play in these circumstances, as is obvious from the following passage by PhD student, Samantha Hoffman:

“The first is the struggle for power within the Party. The Party members in charge of day-to-day implementation of social management are also responsible to the Party.  As the systems were being enabled in the early 2000s, these agencies had a large amount of relatively unregulated power. The age-old problem of an authoritarian system is that security services require substantial power in order to secure the leadership’s authority. The same resources enabling management of the Party-society relationship can be abused by Party members and used against other within the Party (War on the Rocks, July 18, 2016). This appears to be the case with Zhou Yongkang, Bo Xilai, and others ahead of the 18th Party Congress. The problem will not disappear in a Leninist system, which not subject to external checks and balances. And it is why ensuring loyalty is a major part of the management of the party side of “state security”.[v]

But Hoffman and many like her misconstrue the implications of fragmented trust for social credit based control.

Complex social algorithms over time start to amplify signals that their makers do not fully understand and cannot control in advance. We have seen this many times with even much simpler systems like Facebook, Twitter and Instagram, whose operators have extremely narrow objectives: maximising attention retention to attract advertisers.

In a system designed to compel conformance to ideal criteria and yet dependent on large numbers of participants to shape that criteria, deviance can easily become more prominent when algorithms start to reinforce once latent patterns. Whether it is preening on Facebook or bullying on Twitter, there is a fundamental logic in all simple systems trying to mould complex behaviours, and this logic tends to accentuate deviancy because algorithms are signal-searching.

This is where the “sovereign privacy” point comes in. A state like China seeks inscrutability. It also seeks harmony of purpose. Social algorithms tend to want to surface hidden patterns and concentrate attention. A time-lag renders algorithm-tweaking for specified ends in advance highly unreliable. Very often, the operator is relying on surfaced trends to manage responses. The danger of rampant “leaking” of intention and officially inadmissible trends rise exponentially as the nodes in the system – financial, political, social, economic, psychological etc – increase. The “transparency” that results from the inadvertent disrobing of the intents of millions of Chinese state actors does not have to be the kind that simply forces the withdrawal of official propaganda positions. It can also be the kind that reveals which steps they are taking to regain control of the social management system.

The problem is somewhat philosophical. Right now, membership in the Communist Party and public conformance with the creed is non-revelatory. Integrating multiple “real behaviour” nodes together to compel “sincerity”, as is the official goal of the program could immediately endanger the status of tens of millions of until-that-moment perfectly loyal cadres and enforcers of moral loyalty. The proper political economy response, at least in the transition stages, is to flatten the sensitivity of the algorithms. Doing so however removes the efficiency, which alone makes the algorithms more effective than the current “manual” social conformity management system.

Unfortunately, such efficiency would render redundant large swathes of the current order. Which in turn means that lower levels of the control pyramid have very little incentive in providing complete data. The effect of highly clumpy data exacerbates algorithmic divergence from other aspects of social reality (in the same way that Twitter fuels political partisanship in America as oppose to merely report it) and prompts “re-interpretations” of the results churned out by the system. Over time, the system itself begins to need heavily manual policing. The super-elite start to distrust it. Paranoia about the actions of their technocratic underlings grow in tandem. Along with dark fears about a “Frankenstein revolt”.

At the core of all of this is the simply reality that any system that can realistically achieve mass deprivation of privacy will threaten sovereign privacy as well, and would thus not be allowed to attain that level of intrusion by the powers that be.


[i] “China’s ‘social credit’ system is a real-life ‘Black Mirror’ nightmare”. Megan Palin. 19th September 2018

[ii] Andrew D Murray. 2011. “Transparency, Scrutiny and Responsiveness: Fashioning a Private Space within the Information Society”. The Political Quarterly.

[iii] See: Yanjie Bian, Xiaoling Shu and John R. Logan. 2001. “Communist Party Membership and Regime Dynamics in China.” Social Forces, Vol. 79, No. 3, pp. 805-841.

[iv] “State Council Notice concerning Issuance of the Planning Outline for the Construction of a Social Credit System (2014-2020)”. GF No. (2014)21.

[v] Samantha Hoffman. 2017. “Managing the State: Social Credit, Surveillance and the CCP’s Plan for China”. China Brief Volume, 17 Issue 11.

PROPOSITION 1: A Ponzi scheme may exist if an economy has a large public sector (” is bounded below), and the assets of the state could be used for a bailout ($ is bounded below), and the probability of early termination of the Ponzi scheme by a regulator is low (2 is bounded above), and there is inexpensive access to citizens through the mass-media (c is bounded above), and there are no severe penalties on promoters of Ponzi schemes (d is bounded above).
PROPOSITION 2: A Ponzi scheme will exist even under partial bailout, if the condition in Proposition 1 holds and the probability of bailout, $, is higher than (1-n*), where n* is the critical fraction of citizens that are required to be involved for there to exist the possibility of a bailout.
—- Utpal Bhattacharya, “The Optimal Design of Ponzi Schemes in Finite Economies”, 2003.

The smart money is on the prediction that the more sophisticated regulatory frameworks around the world shall tend to balance technology growth and privacy protection if they are to retain their political legitimacy in an environment where both consumer rights and economic competitiveness have attained nearly equal status in policy debates around the word.

Skilled regulators have already begun to justify new reforms on the basis of privacy measures stimulating considerable technology progress.

Consequently, the growing concerns of consumers about the abuse of their personal data and the misuse of targeting algorithms to interfere with their decision-making autonomy are spurring some of the most fascinating work in the platform architecture design space today. A broad range of blockchain applications, for instance, is now anchored to the premise of facilitating greater user control over their own data, and provisioning of this data to service providers based solely on the wishes of the data owners.

Savvy governments have recognised this development and have begun developing regulatory frameworks that focus more on rewarding creative privacy management rather than stymieing novel business models and technologies based on some misguided, precautionary, principles. Others are just starting to align with the times.

Consider, for instance, Costa Rica’s Executive Decree # JP-40008. Enacted in December 2016 to amend extant provisions on privacy, the subsidiary legislation considerably transformed what, in the beginning, had been a wholesale, “precautionary approach”, regime into an innovation-compatible system of rules specifically designed to facilitate investments, business, and technology development in the data-rich arts and sciences. How does decree JP-40008 achieve these goals precisely?

Firstly, it retires the provision in Executive Decree # 37544-JP, an annex to primary Law # 8968, which had introduced a highly restrictive requirement for the “registration” of databases, registers, and other data repositories with the main data ombudsman in the country, the PRODHAB. Instead, it calls for the vetting of the security protocols employed to safeguard such data repositories against malicious breaches or inadvertent disclosures of personal data.

Furthermore, regulated financial institutions in the Central American country are exempt from the requirement of database registration with PRODHAB. The dynamics of inter-party certification in the financial industry, whereby such security and privacy certification is very often a prerequisite for interoperability (PCI-DSS plus being an obvious example), already delivers a higher standard for personal data protection in a more efficient and decentralised manner than can be achieved by most purely government-managed regimes.

The amendments also take into account the reality of cross-border data movements within federated entities by focusing on systematic compliance and downplaying overplayed concerns around jurisdictional fragmentation. The mere act of data crossing a border does not necessarily invoke jurisdictional issues if the technology platform observes uniform standards that may be higher than domestic requirements. The ability to investigate claims of abuse in electronic systems is rarely hindered, in practice, by such jurisdictional fragmentation, yet policymaking on “data sovereignty” and “data domiciliary” considerations frequently operates on unscientific notions that suggest that physical borders are determinate.

Costa Rica’s focus on ensuring that the country’s Data Protection Law evolves to reflect the growing appreciation of its technocrats for “embedded regulation” vindicates the hope that fast-paced technology progress can be aligned with pro-privacy regulatory regimes.

Embedded regulations seek to strengthen industry standards and promote cross-network accountability among industry actors in a relatively more decentralised fashion. Thus, whereas in the previous regime, “written individual consent” was required, the amendments now enable the use of digital assent, bringing the process more closely in line with the fast-growing trend of “e-signature management as a service”. The pace of innovation in the e-signature management space is such that the cost of complying with “individual consent” shall continue to drop dramatically without sacrificing the quality of compliance.

The experience of Singapore is also instructive in clarifying this “embedment” notion of weaving of regulations into the fabric of a country’s technology enterprise culture.

In Singapore, the Personal Data Protection Commission (PDPC) sees itself as a “capacity building” institution mandated to bear a significant portion of the costs and capacity burden of transitioning business, particularly small and upstart businesses, from complacency and ineptitude to readiness and vigilance. PDPC strives to transform enterprises of varying levels of sophistication into data-savvy operators equipped with the latest tools for complying with the law, whilst contributing at the same time to the tiny entrepot’s declared vision of becoming the world’s “data hub”.

Singapore’s government has invested in a significant range of compliance tools for seamless compliance tracking and reporting so that small businesses seeking to create disruptive technologies would not be distracted from that state-sanctioned mission.

This does not mean however, as it might seem at first, that consumer needs and rights have been deprioritised. On the contrary, the country is convinced that improved privacy protection is a technical-investment public good that must be addressed as a baseline for its technology industry to leverage for leadership.

The government of Singapore, in the context of dynamic privacy protection, refers to the “embedded regulations” notion used above as, “data protection by design”. This language has become popular in recent years within stringent regimes, but the assumption in such regimes has usually been that businesses are responsible for rebuilding critical infrastructure in order to comply. The Singaporean government, on the other hand, takes the view that this is best achieved through the cultivation of an “ecosystem of trust”, and that the key role of the public sector is not primarily that of a police service, enforcing aloof laws on a suspicious crowd of businesses, but that of an investor safeguarding a key resource: trust.

The Singaporean government’s posture on this matter is summed up in this quote from the country’s data ombudsman:

“The key challenge lies in enabling the use and disclosure of data to support the progress of technology and innovation, whilst protecting personally identifiable information, to allay privacy concerns.”[1]

By highlighting the fact of businesses confronting considerable reputational and business-disruption challenges when data is mishandled, Singapore’s privacy regulators have succeeded in driving consensus on a baseline of “data hygiene and ethics” that fosters collective action. Such action when backed by public investments contributes to advancing the state’s preferred motif of an “ecosystem of trust” beyond rhetoric into substantive interventions in critical data governance areas such as disputes resolution, advanced notifications of disclosure, profile reviews, and aggregation.

Whilst many countries focus on writing laws that merely heighten the risk barriers for legitimate enterprises but do nothing in facilitating the identification and penalisation of rogue operators, Singapore prefers a broad principles-based regime coupled with an active, co-investing, regulator that is respected by consumers for operating a transparent and highly communicative process, and trusted by businesses for a pro-innovation mindset that welcomes joint exploration of how to advance risk-fraught emerging disciplines such as big data, supervised machine learning on live diagnostic data, and behaviour profiling.

It is too early to conclusively judge whether or not role modelling in the international community will be sophisticated enough for the experiences of the likes of Singapore and, even, Costa Rica to become yardsticks of emulation. But with the heating up of competition in the machine learning space, it is very likely that international data treaties among like-minded countries shall in due course begin to drive the formation of “smart country leagues” akin to “free trade areas”. Data treaties should, in places like East Africa, prevent unnecessary replication of infrastructure whilst at the same time addressing concerns about “sovereign” data control. Should this happen, the world is likely to witness some short-term schism in the trajectory of data innovation, a veritable new digital divide between countries in pro-innovation “data leagues”, and those locked out due to incompatible privacy and data protection regimes.

In the long-term, however, the sense that only the rapid advancement of above-board, and done in the open, technology can safeguard consumers and citizens from powerful, malicious, actors, who do not give a toss about privacy, is likely to prompt an overall race to the top.

[1] Leong Keng Thai quoted on the website of the Info-communications Media Development Authority in an article titled: “Balancing Innovation & Personal Data Protection”, posted on 3rd November, 2017.l

When the Menzgold issues started to garner public traction, not many people thought it was interesting enough to spend any time analysing them. A few of us, on the other hand, found the whole affair mesmerising.

In our various comments on the subject, we warned against two extremes:

  1. Overbearing regulations and omnipotent regulators whose arbitrary, mission-creeping, and cookie-cutter approach to their work can stifle innovation and prevent genuinely mould-breaking innovations and innovators from entering our financial markets;


  1. Weak regulation that fails to engage with emerging trends in the financial markets, favour strong competition, or promote fair and transparent standards; and the absence of a consumer protection regime premised on open and consistent communications, clear guidance and risk-based supervision.

The first warning had the Bank of Ghana (BOG) in mind. The second was implied criticism directed at the Security & Exchanges Communication (SEC).

BOG was at the time of our initial commentary fast transforming itself into an octopus-omnibus regulator and encroaching the territory of other regulators; whilst SEC seemed, to all intents and purposes, comatose.

Since then, a whole lot has happened on various fronts, but the tension brought about by the continued framing of the Menzgold affair in certain circles, even in some sophisticated ones, as a tension between “financial innovation”, on one hand, and “firm regulation”, on the other, continues to block effective analysis. One Academic, an economist, was recently heard on primetime television applying the precautionary principle of harm: if people are benefiting from Menzgold, then what value would regulation bring, he asked.

In many ways, that is the issue at stake: innovations bring benefits to many people, and unless regulation can show that risks or harm to other people are possible, or even imminent, in the absence of control, many liberal-minded people are unlikely to accept that regulation must by all means be imposed. This country does not exist to provide regulators with “something to do”. Regulators, like all other professionals, must continually convince us that their resources and powers, all granted by public endowment, actually do improve our society and ultimately enrich our lives by securing our interests.

Menzgold insists that they are financial innovators here to rescue us from a moribund financial system that is shortchanging consumers by providing returns below inflation, and that their presence implies much needed competition to mutual funds, unit trusts, and other investment platforms in the country, who have had it too easy for far too long.

The regulatory agencies insist that, even so, Menzgold needs to comply with the relevant laws so that their operations can be better monitored to confirm that they are indeed doing what they claim is in conformity with the law.

Unless it can be shown that the activities of Menzgold are genuinely so revolutionary that our laws as they exist today did not foresee them and therefore could not have determined that they have characteristics that warrant additional regulation beyond that which all businesses must comply with (eg. business registration and tax), Menzgold would need to undergo immediate licensing. The demand for a “special” dispensation to accommodate them would be shown to be empty.

Licensing would ensure that they file regular reports to the authorities and submit themselves to intrusive scrutiny including the verification of claims made in the reports. A major feature of such prudential regulation would be to establish that the company is technically solvent, and that it is observing the standard rules of accounting practice.

Sections 24 to 31 of the primary legislation on securities in Ghana (Act 929) grant wide powers to the SEC over all businesses in Ghana dealing in securities, in whatever form. This extends to authority to cause the production of accounting records and other “books” of the company under scrutiny for examination. Indeed, the SEC’s powers here may even extend to non-licensees (under subsection 24(1)g and elsewhere).

The usual argument one hears in this connection is that Menzgold has not been known to default on its obligations, so what is the problem of the regulators? Well, by that logic, any driver that has never had an accident shouldn’t worry about licensing. Licensing of drivers exist because we consider driving to be risky and potentially harmful enough that a particular type of review of drivers’ skills and vehicular conditions has been established by law. This is without respect to any particular driver’s track record.

The rational question to ask therefore is whether the activities Menzgold are engaged in currently bear similar risks to those being engaged in by insurers, brokers, banks, discount houses, money transfer companies, etc. If so, then the next question to ask is whether, beyond the similarity of risks, the activity is sufficiently similar or perfectly identical to any of the explicitly identified lines of businesses regulated by mandated agencies under the law. If the answer is yes, then the analysis moves on to determine the appropriate manner of bringing Menzgold into compliance with the appropriate licensing regime.

The simplest way to make that determination is to simply examine the “product” and/or “services” that Menzgold is selling. The most definitive description of that product/service is to be found in the legally binding contracts that cover or governs the sale. They describe, more than anything else, what is officially on offer.

We have done just that, and our findings are as below.

  1. In each of the trading contracts Menzgold enters with counterparties, it identifies itself as a “Gold Trading Platform” and the counterparty as a “trader”. Menzgold starts by projecting itself as offering an over-the-counter channel to certain trading exchanges. The “trader” utilises Menzgold’s proprietary platform to “trade” in gold in these unnamed gold exchanges or markets.


  1. Menzgold asserts as follows: “the company, under full corporate authority and responsibility, declares that he (sic) has the clear and qualified right to deal in gold (AU metals)”.


  1. In the same clause 1, the “trader” (i.e. the individual or institution entering into the contract with Menzgold) affirms that (on the pain of “perjury”, no less) they did not get the gold from a criminal source.


  1. The trader is then provided with specifications that the gold must meet:  A. The gold must be Aurum Utallum; B. It must be 22+ carats; C. It must be in the form of Gold Dore bars; D. It must have 92% minimum purity.


  1. There is a “returns price payable” that will “not exceed” 10% “extra value on the prevailing market price at the time of commencing gold trade”. The clause that follows then talks about a monthly payment schedule but does not specify the rate.


  1. Menzgold commits to “superintend the gold trading within the trading period authorised by the trader”. Note the abrupt shift from offering a “gold trading platform” to offering an “agency service” to trade gold on behalf of the counterparty/customer.


  1. If the “trader”/customer/subscriber/counterparty is also not interested in monthly returns or the 10% “extra payable value”, then by giving Menzgold seven days’ notice and paying an unspecified fee, they can come for their gold upon the expiration of the term. Considering however that the minimum term is 6 months, and a monthly schedule for returns is provided, even if the rate is not specified, how exactly one can opt out of the benefit, or would want to, remains a mystery.


  1. The parties to the “trading contract” consent to a third-party assayer determining the quantity and quality of the gold, presumably in the event of a dispute. The procedure for appointing this assayer is not specified. Our interviewees confirm that they certainly did not sight any assay report at the start of the relationship.


  1. In clause 6 of the contract, the trader/customer consents to pay a commission of 100 GHS for each 7.7 grams of gold (200 GHS for every 5800 GHS) traded on the “gold trading platform”, but this amount or quantity (it is unclear which) is “subject to plus or minus 20”. Like many provisions in the agreement, it is impossible to make head or tail of this.


  1. The entire agreement is held to be subject to certain International Chamber of Commerce (ICC) non-circumvention rules promulgated in Paris, France, at an uncertain date. The intention is perhaps to reference one of the various ICC model contracts for intermediaries (such as pub. 169, which offers boilerplate language on non-circumvention). The agreement ends with another opportunity for parties’ avowal of authority on the pain of “perjury”.

The first thing that strikes the reader is the sheer improvisational tint of the whole 4-page contract. It clearly was not crafted by anyone who has ever studied any law, much less an actually practising lawyer. The terms are contradictory and the agreement’s worth as a reference document in the event of a dispute is zero. The two main pages of the document are attached for reader’s own assessment.


Here are some of the most spectacular species of weirdness:

  1. In the particular contract we analysed, which we have confirmed to be the company’s standard template, the amount of money involved was $230,000 or 1.15 million Ghana Cedis. From our preliminary analysis based on interviews conducted so far, we estimate the aggregate value of “funds under management” or “trading volume” in the so-called Gold Vault trading platform controlled by Menzgold at $300 million. But this is based on pure extrapolation from limited data and could be off by a considerable margin below or above. Yet, the full terms and conditions of the only subsisting legal agreement used for these transactions come to less than 600 words. A standard, plain vanilla, savings account at Citi, Barclays, or any serious Bank, comes with an agreement adorned with 10,000 words. The average savings balance in the UK is $5500. We must thus add “legal innovation” to the list of innovations we are examining in the Menzgold repertoire.


  1. A “dore bar” is an alloy containing gold and lesser valued minerals that is usually the starting point of the refinery process. To specify a purity of 92% or 22 carats minimum whilst insisting on “gold dore” bars is to indulge in meaningless specification. It shows a complete disinterest in traditional gold trading.


  1. The use of the phrase “Aurum Utallum” is a tell-tale sign of a lack of professional exposure to international gold trading, as that term is meaningless Latin, and is never used in any serious international commodities trading context.


  1. The agreement effectively asks the customer to bring unrefined gold from mines to trade on a platform, placing the burden of ensuring that the gold is of the requisite specs on the same customer. This is seriously comical seeing as the customer in fact brings money to purchase the gold from an affiliate of Menzgold, and rightly so since only licensed traders can buy raw gold in Ghana anyway. The contract is effectively describing a process that is contrary to the actual practice.


  1. The wording of the “consideration” in the agreement is incoherent and incongruous. The provision that the “returns price payable will not exceed 10% extra value on the prevailing market price at the time of commencing gold trade” is at best indiscernible and at worst deliberately obfuscatory.


  1. Even the quantity of deposits is left subject to indeterminate third-party verification.

In short, the agreement is so loosely written, to put it mildly, that as a private contract, it is well-nigh unenforceable. Is this “financial innovation”?

Menzgold insists that their model is “commodities trading”, a specie of financial activity that is simply, according to newly hired, highly expensive, lawyers, unaddressed by our laws. We can play a mind game with commodities trading that could perhaps, even if murkily, enable a model to fall through cracks in the current regulatory architecture. So let’s try.

For example, if people indeed bought refined gold from goldsmiths, and sent same to Menzgold, which then “borrowed” the gold, sold it abroad, repatriated the proceeds, kept a fee, and paid the owners of the gold, Menzgold would escape the PMMC regime but it would still be caught by the “investment advisory” and “brokerage” elements of the securities legislation (Section 3(c) of the Act). But if indeed, it merely arranges for the refining of the gold overseas, deposit of same in bullion vaults, authorising of trading by an overseas agent, and repatriation of the proceeds for management fees, then the situation becomes complex.

The following is the chain of actions inherent in the hypothetical model above. Raw gold is, say, provided by licensed gold buyers in Ghana. The gold is sent overseas for refining. The so-called Gold Vault platform enables the purchase of refined gold by the public (standard e-commerce marketplace). The refined gold is thus purchased by the retail investor using Menzgold’s electronic platform locally and in local currency. The purchased refined gold is deposited overseas in a bullion depositary. A nominated agent exploits spreads in the futures market or some other arbitrage-seeming opportunity. Gains are repatriated to Ghana and paid to the buyers of the refined gold. Menzgold keeps a fee.

Would this be innovative? To the extent that no such product exists in Ghana today that leverages the full continuum of the gold trading opportunity, one cannot begrudge its innovative character. Though we know for a fact that under current market conditions this model would most likely be unprofitable, we cannot presume to know all futures trading algorithms in the world available to every possible agent that Menzgold can engage.

Would the said business model escape the ironclad jaws of the SEC though? No. There is still an element where Menzgold is serving as a “clearing and settlements platform”, and to the extent that money is paid at one point to an institution, Menzgold, and returns received later from the same institution, in the expectation of profit, by an investor, one cannot escape the designation of “investment security”, within the general meaning of that term. In simple terms, even if the high bar of “innovation” could be met, that would not automatically absolve of the pain of regulation.

The fact that the Act does not provide an all-encompassing definition of “commodities futures, contracts [and] options”, or of “settlement” affords no comfort for an evader whatsoever. In the same way that “derivatives” are not defined in such a manner as to explicitly adumbrate all the million and one varieties of derivatives seen in many markets around the world, there is a certain sense in which the broad definitions are purposefully broad to capture reasonable varieties of actions obvious to those skilled in a particular industry.

The definition of “derivatives” in the Act, as a “financial instrument” whose value is derived from one or more underlying “assets” is so on-point as to make the argument that the Menzgold offering does not constitute either a derivative, or at the very least the means to trade derivatives and options, completely untenable. In a court of law, the exact mechanics of how exactly Menzgold converts notional credits of gold allocated to people’s account into profits in a world where the price of gold has been falling would be laid bare without the protections afforded purported trade secrets, which is probably why Menzgold has wisely chosen not to approach the courts.

So, we return to the question: is Menzgold a financial innovator?

The answer is clear: not according to the product description in the contract covering the products they are selling. The design of the contract shows striking inattention to detail. If anything at all, the quality of the contract raises great doubts about whether Menzgold understands the financial industry even well enough to actually participate in it.

Does that mean that there is no risk of regulatory overreach? We reckon that there remains such a risk. We should all not be overly fixated on Menzgold when evaluating the general posture of the regulator. We can be as concerned about the operational behaviour of regulation as we can about its substance. We have to be wary of regulatory overreach because otherwise someday regulators could stifle real innovation if we let down our guard.

There is also the issue of “political economy”. A regulator has to be sensitive to its environment. We live in a society where attention to the fine details of situations is not the forte of even the elite, not to talk of the masses.

A forced and abrupt winding down of Menzgold is very likely to be extremely nasty, politically and socially. Given the opacity of the company’s operations, and the fact that it has been unregulated, and therefore never reported, for nearly five years, the first order of business should have been intelligence gathering and the obtainment of detailed information about assets, including assets held overseas. In particular, an audit of Menzgold’s bullion position is extremely critical. It is the first stage in determining whether it has the capacity to meet even the bare obligation to return the 75% of the gold it is purportedly trading on behalf of their owners back to them in the event of a liquidation (the agreement it signs with its customers does not detail what constitutes a “force majeure” – a contract-relieving incident).

Section 205 of the SEC’s Act anticipates situations where the Commission would encounter recalcitrant companies. It thus makes provision for the use of court orders to compel undertakings. SEC could have used these powers to secure as much access to the information held by Menzgold so that prior to an order of suspension of trading it would have been in a much better position to determine the company’s risk of default on the hundreds of millions of Ghana Cedis’ worth of contracts it has entered into.  The approach that the SEC, and prior to it, the BOG in particular, seem to prefer may lead to a situation where the regulators are blamed for any defaults that occur.

We acknowledge an argument, gaining currency, that people who can “deposit” notional gold worth more than a million Ghana Cedis on the strength of a 4-page agreement ridden with elementary legal and technical errors and mindboggling confusions deserve to lose their principal, and not just 75% of it.

Unfortunately, from what we can gather, financial institutions and other types of institutions are considerably exposed to Menzgold.  There have been substantial placements as well as roundabout placements, of investments, through borrow-to-play methods, with the self-declared “gold dealership”. Should a mass default be triggered without proper due diligence, the ripple effects could well bring down another group of financial institutions, especially in the lower tiers of the banking system, which are already under great strain.

In short, we need savvy regulators fully capable of innovative risk management. Who said only entrepreneurs need innovation?

Selorm Branttie and Bright Simons are affiliated with IMANI Center for Policy & Education, which does not, as yet, endorse these views.


There are reports in the Ghanaian press that the IMF has referred Ghana’s recently ratified Master Project Support Agreement with Sinohydro Corporation of China to its legal department for advice on whether what the Ghanaian government is calling a “barter agreement” should instead be classified as a loan.

Intrusive as that may sound, and an affront to Ghana’s sovereignty as some may rightly term the intrusion, it may well serve some use, considering the fact that the said agreement has not been made accessible on the website of the Ghanaian Parliament or any government website for that matter. Most analysts may just have to wait for the IMF’s legal opinion.

Luckily, for some of us, it is not the legalities that are of primary interest; it is, rather, the commercial and financial logic.

The “bauxite barter deal” between Ghana and Sinohydro is not actually very different from the cocoa deal that got the Bui dam built (an interesting point considering the current dispute over the eligibility of the “loan” categorisation). The same company, Sinohydro, by most measures the world’s largest dam construction company, is involved. Clearly, it is drawing on its experience in the Bui episode as it enters into this latest arrangement.

Whilst the general design of the two deals, resource-backed infrastructure financing, is the same, there is a world of difference, however, when one takes into account the level of complexity.

In the case of Bui, Sinohydro was operating in its sweet spot: dam construction. A single dam to be precise. Dams are revenue generating objects, and to underline that fact, an escrow account was set up so that proceeds from power sold to the Electricity Corporation of Ghana (ECG) could be channelled directly to offset part of the debt. Furthermore, the natural resource involved – cocoa – is a mature category in Ghana’s portfolio of assets. The buyer – Genertec – and the ultimate lender – China EXIM bank – could be assured of the volumes without much fuss (about 40,000 metric tonnes per annum, just about 5% of Ghana’s usual annual production).

The “bauxite barter” deal on the other hand is far more complicated.

In the first place, the actual resource being presented as security is not yet available. The Government of Ghana chose “alumina” instead of bauxite in order to improve the value of the security. The motivation is very easy to understand, at an 8% discount rate, Ghana would need to find bauxite worth $420 million a year over the 15-year life of the facility for the arrangement to make sense (assuming zero production costs, a subject we treat later). With Chinese landed bauxite prices hovering around the $53 mark for our type of bauxite, that would suggest about 8 million metric tonnes of bauxite a year. Ghana has been struggling to produce even 800,000 tonnes a year to date. The infrastructural investments required to triple this quantity by bringing the Atewa reserves into play are significant (assuming here that all bauxite produced into the country shall be handed over to the Chinese). Increasing the overall production by ten times, which is what would be needed were bauxite the resource collateral, is simply unrealistic for at least 8 more years.

Hence the focus on alumina. Sound pricing forecasts for alumina in the near-term indicate an average of about $550 per metric tonne. In essence, using a rough rule of thumb, 1 million tonnes of alumina requires just about 2.5 million tonnes of bauxite, in turn requiring that Ghana only triples its current production of bauxite (assuming, once again, that no bauxite shall be exported raw to any other country).

Tripling bauxite production should not be gut-wrenchingly difficult. All that is needed really are access roads, giant trucks, ore cleaning machines, and port storage facilities. At those volumes, rail investment can be deferred. We can be safe in the knowledge that with an estimate of $100 million in capital expenditure and $25 per tonne in operating costs we would be getting close to what is required to deliver our side of the bargain. That means that an upfront investment of about $125 million should be sufficient to unlock the $2 billion. Except of course that it won’t. We are not carefully accounting for the alumina refining component of the deal nor explaining who bears the operating costs for mining the bauxite.

If Sinohydro is to become responsible for the operating costs of mining the extra 1.8 to 2 million tonnes of bauxite we need to produce in Ghana in order to be able to refine the quantities of alumina needed to service the $2 billion facility, then it needs to find roughly $750 million to underwrite that expense (over a 15-year period). It seems obvious that this amount needs to be factored into the calculations somehow. That cost, carefully reviewed, is the cost of the bauxite that has to go into the alumina production.

Ghana’s bauxite is mainly gibbsite which, compared to trihydrates, consume significantly higher amounts of power during the process of conversion to alumina. That fact, compounded with scale factors and other complications, yields a production cost for alumina in the Ghana context of about $300 per tonne.

Thus whilst Ghana could easily make $550 million per annum producing 1 million tonnes of alumina after tripling its bauxite production, it needs to find about $1 billion in upfront investments, and account for running costs of about $300 million a year.

Two questions therefore arise: is Sinohydro investing this amount of one billion dollars separately from the $2 billion “barter” arrangement, or is this investment requirement factored into the $2 billion “barter deal”? If so, how come Ghana has tendered a laundry list of roads and hospitals worth $2 billion, out of which an initial tranche of $500 million is already due by the end of the year?

More critically how is Ghana going to fund the refinery costs of $300 million a year if all the inbound $2 billion is expended on roads and hospitals and no portion of the amount is amortised to assist with costs of production and maintenance? Recall that at an 8% discount rate, the average servicing costs for both principal and interest is about $420 million per annum (including provisioning for principal retirement). Should the sale of alumina yield $550 million per annum, the surplus recorded is only $130 million, not enough to keep the engines running. The situation is only saved if $170 million is available annually to cushion the financial model.  To keep matters simple this analysis does not even take into account the 15% co-financing obligation of the government, another $300 million millstone.

But even if we have been overly stringent in our projections, it seems very likely that a substantial proportion of the $2 billion being borrowed is required just to support the underlying venture and thus uphold the security of the facility (i.e. to mine and refine the bauxite). It is hard to see how anything less than half of the amount will do. Unless Sinohydro is in the business of losing money, why would it guarantee $2 billion of loans from China EXIM Bank or other lenders for Ghana without factoring into the financial model somehow the costs of securing the natural resources needed to pay for the interest and principal? Unless the profit margins on the infrastructure it is to build are so large that it intends that ultimately Ghana gets far less than $1 billion of infrastructure for $2 billion worth of bauxite. This is after all, one giant sole-sourcing arrangement.

This discussion has centred only on the $2 billion package. As everyone now knows, the government plans to secure $10 billion overall. The analysis breaks down completely in the face of such audacity.

Much of the thinking propelling these bold borrowing plans is based on a misguided notion of zero-cost production. Firstly, there was a claim that Ghana has bauxite reserves valued at $460 billion, by none other than the Senior Minister himself. This implies 8.7 billion tonnes of proven bauxite reserves, making Ghana the owner of the world’s largest reserves, and with more than 25% of the global total. Obviously ridiculous.

Even the uncritical 960 million metric tonnes of bauxite reserves figure one hears often in government circles should translate to $50 billion in terms of historical average prices. If the $460 billion figure emanates from an assumption that all that bauxite shall be converted into alumina, then one wonders why we don’t assume that the bauxite shall be converted to aluminium, or even roofing sheets.  The truth of course is that converting any part of that bauxite into alumina, aluminium or roofing sheets requires billions of dollars of investment, a prospect far from assured.

It is also instructive to point out that the 960 million tonnes of reserves number is based on wild guessing. Successive Ghanaian governments have to date refused or neglected to conduct any serious mineralogical surveys, with the sad result that most of the data used for estimation in these matters date back to the ‘70s and ‘80s and rely on half-baked datasets. The upper bound found in the only major Ghanaian geological survey of bauxite reserves to date was 580 million metric tonnes across thirteen main deposits. These were however not all proven. Proven reserves were in the order of about 370 million metric tonnes. This would suggest a valuation of about $20 billion.

One may be tempted to argue that resources worth $20 billion are still far more than needed to secure a $10 billion facility, after all it would suggest that Ghana is “leveraging” only 50% of one asset category for massive development. Unfortunately, it is not that simple. “Exploiting” reserves of any mineral, as we have seen in the preceding discussion, is a complex undertaking. Guinea for instance only produces about 0.5% of its total reserves per annum. Australia produces about 1.25%. Jamaica produces about 0.4%; and Vietnam, about 0.05%. If Ghana is successful in exploiting an incredibly high proportion of 5% (i.e. decide to consume all the bauxite it has in 20 years), it will immediately become the 6th largest producer in the world, overtaking Russia, Jamaica and Vietnam, all countries with reserves many many times the quantity of Ghana’s. This amount of production – 18.5 million tonnes a year – will still yield only about $500 million unless the country succeeds in converting most or all into alumina. Doing so will indeed yield about $4.6 billion per annum (a testament to the incredible shift of the bauxite-alumina value ratio from 6.5 to nearly 10 over the last decade). More than enough to securitise a $10 billion facility with a 15-year tenor. But it will require anything between $25 billion and $30 billion in upfront investments. And a considerable amount of environmental damage. None of which we can afford for at least a decade.

In short, the idea of using bauxite resources to secure $10 billion is fanciful, and will go nowhere. The $2 billion package is more realistic, but the undertaking needs considerably more work to ensure successful realisation within the term of the current Ghanaian Administration, as well as value for money.



1. The Government of Ghana has propositioned the Chinese for $2 billion to set up an integrated bauxite to alumina value chain in Ghana.

2. Let us assume that if they get this money they shall invest $1.4 billion through Sinohydro, a Chinese contractor, to develop rail, refining and related infrastructure, thereby adding about 2.5 million tonnes of gibbsitic bauxite production and refining capacity. Let’s assume they shall keep $600 million as working capital.

3. 2.5 Million tons of bauxite = 900,000 tonnes of alumina. Note: a 900,000 ton alumina refinery could cost $800 million on its own, leaving $600 million for investment into the actual mining operations and transport infrastructure (rail lines, rolling stock and/or access roads and mega-trucks etc.)

4. Production cost of alumina in the hypothesized value chain = $320 million.

5. Realised price of alumina (three-year historic average) – $550. Realised revenues for two years: $1B. Cost breakdown: $640m (production), $110m (GSA), Loan Servicing (at 8% nominal) x 2yrs ($320m). Net margin: -$70m.

6. These ballpark calculations strongly suggest that below an alumina price of $600, the integrated project has a high risk of unprofitability. For most of 2017, the price of alumina on the world market hovered under $350 before a massive surge to $700. It broke the $800 a few months ago but the stable trend has been in the mid $400s. This analysis is therefore considerably optimistic.

7. Creative ideas are seriously needed to improve the viability of the project.


Many Ghanaians may not be aware, but their country is actually going through a second “decolonisation” phase right now.

The “neo-colonialism” that the country’s first President, Kwame Nkrumah, railed against so presciently is actually in fast retreat. At least as far as policy decision-making in Ghana is concerned. A few more sentences and my point would be clearer.

In 1998, the Ghanaian State collected about $1.2 billion in taxes. Foreign governments through their aid agencies – such as DFID, GTZ, USAID, DANIDA, JICA etc. – handed over to the government about $240 million in grants. Of the total planned expenditure of $2.13 billion, $600 million was financed by aid agencies through grants and concessional (low interest) loans.

Fast forward 20 years to today,  the phrase “concessional borrowing” has almost vanished from the country’s policy dictionary. Apart from a $191 million receipt from the IMF this quarter, low-interest loans from aid agencies have stopped being a thing in Ghana. Total grants from aid agencies and foreign governments shall amount to no more than $128 million this year. The Ghanaian authorities shall, on the other hand, be collecting taxes of nearly $8 billion.

In less than one generation, the West African nation has moved from European, Japanese and American governments financing more than 30% (40 to 50% in the early 90s) of its budget through handouts and low-interest loans to them financing just 3% (with the handout parts making up just 0.2% of GDP today compared with 8% in 1998, a 40x drop).

Whilst it is true that some of Africa’s good economic performers, such as Rwanda, where grants and low-interest loans still account for more than 30% of the national budget, are not yet in this state, the trend towards low aid dependence is actually strong across all of Africa’s reasonably well-performing economies. For instance, Zambia also, like Ghana, managed to drop the ratio of grants to GDP to 0.2% in 2016 before it saw an uptick to 0.7%.  Nigeria has for a long time had net aid levels of less than 1% of GDP.

What is the chief consequence of this development? Firstly, whereas a DFID Chief could get a same day appointment with the President of Ghana in 2000, today he/she would struggle to get a same day appointment with a Deputy Minister.

Aid agencies have stopped telling Africa’s major growing economies how to design their major systems of governance. For instance, when Ghana started large-scale public sector management reforms in 1994, and embarked on projects such as MTEF, PURFMAP, IPPD etc., virtually every detail had to be signed off in London, Washington and Amsterdam or Copenhagen.

Two decades later, when the country’s massive youth employment program – GYEEDA – was in full swing, officials hardheartedly approached the World Bank for support. The “consultant” they brought on board went online, copied some templates, and dumped it at GYEEDA, collected his money and walked away into the sunset. Truth is, Ghana had hundreds of millions of dollars of taxes in its kitty and didn’t really care for the World Bank’s “plenty grammar”.

There is no doubt that the incidents of grand corruption have increased in frequency and scale since Ghana started this second liberation from colonisation (or neocolonisation), marked by the symbolic “expulsion” of the IMF in 2006 (their current role in Ghanaian affairs is very different from before).

Of course, no way would a Western Aid Agency have allowed the amounts of money paid out to the likes of Woyome (a self-proclaimed “financial engineer” who was paid $32 million by the Ghanaian State for raising a phantom billion euro facility from Austria to build sports facilities in 2008) and the GYEEDA contractors (on whom the Ghanaian State lavished nearly a billion dollars, according to official reports, for all manner of harebrained schemes to “create” jobs for young people)  had money from these hand-wringing agencies been involved in a significant way.

As Professor Prempeh, a longtime observer of African policymaking, ponders over the prospect of kicking out Western policy imperialists only to replace them with “vulture capitalists” and “loan sharks” (Ghana’s high-interest loan borrowing in the commercial markets has jacked up, taking foreign debt as a share of GDP from 11% in 2002 to 55% today). Kobina Aidoo, another longtime observer of policy trends in Africa, marvels at the continued reliance on Aid for critical welfare services, even as newly tax-rich African countries happily splash on prestige projects. For example, Zambia relies on external funding for 60% of its health budget. Yet, the country is building another international airport at nearly $400 million.

All this generates complex feelings. It is impressive that Ghana, Zambia, Kenya and others have thrown off the shackles of the West’s policy colonisation. As it was when they threw off the shackles of political colonisation in the 1960s. Both achievements provide these African countries with moments of great pride and self-confidence. But it seems that Nkrumah was, once again, prescient when he said that the right to be independent also includes the right for a people to make their own mistakes and learn from them.

The only question is whether the corresponding responsibility for the consequences of an African country not learning from its mistakes are currently equitably shared between its elites, who have replaced the colonial policy overlords, and the masses, who under both the colonial and post-colonial systems are the worst sufferers of poor policy and corruption.