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Why Zimbabwe Must Join The Extractive Industry Transparency Initiative

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Introduction

Recently, the government of Zimbabwe reignited its interest to join the Extractive Industry Transparency Initiative (EITI) through the 2019 National Budget Statement. A step in the right direction. But it is important to note that since 2011, government repeatedly expressed interest to join EITI or to resuscitate the Zimbabwe Mining Revenue Transparency Initiative (ZMRTI). A domestic version of EITI which suffered a still birth in 2011. Interest on joining EITI disappeared from the fiscal policy radar screen from 2016 to 2017. That said, it is quite critical to look at the drivers, the fundamentals for government to join EITI to ensure that positive policy intentions to join EITI not go to waste as before. This article is part of a series of article being produced by the Zimbabwe Environmental Law Association (ZELA), designed to stimulate multi-stakeholder interest on joining EITI.

Convergence of principles, the Constitution and EITI

The 2013 Constitution, the supreme law has provisions which resonates well with EITI principles. Section 62 of the Constitution speaks to public access which basically is the bedrock of EITI, opening the extractive sector for public accountability. Emphasis on the right of resource rich communities to benefit from the exploitation of resources in their localities is both echoed by the Constitution, under Section 13(4) on National Development and EITI. Contract transparency, another pillar for EITI is a constitutional requirement under Section 315 (2) (c) of the Constitution. To ensure transparency, honesty, cost effectiveness and competitiveness, an Act of Parliament is required to guide negotiation and performance of mining agreements.

Regarding transparency and accountability of how revenue mining, oil and gas is collected, allocated, spent and accounted for, the Constitution caters for this under Section 298, Principles of Public Financial Management. Subsection (1), essentially calls for transparency and accountability in all public financial matters. Section 299 of the Constitution speaks to Parliamentary oversight on state revenue and expenditure to enhance public transparency and accountability. This constitutional role of Parliament can be enabled by implementation of EITI as Parliament have access to granular data on mining sector performance on tax revenue contribution and impact on inclusive development.

There are fears of what will happen if Zimbabwe struggles to comply with EITI requirements. Mutuso Dhliwayo calms the nerves with a good piece of advice, “we are grappling with implementation of the provisions of the new Constitution, we stand resolute though, laws must be aligned with the Constitution. Likewise, implementing the EITI requirements will not be easy. But with political will, Zimbabwe must rise to the challenge.”

Building trust between government and citizens

The wanton plunder of mineral resources witnessed in the past means that government lacks public goodwill, public confidence and public trust on its steward role in resource governance. A point in case is the allegedly missing $15 billion from Marange diamonds. Never mind arguments on the accuracy of the figure, but findings from credible sources like the Office of the Auditor General (OAG) is damning on the same subject. Since the changes in government which happened in November 2017, several mega deals have been sealed in the mining sector. Public apprehension is high on how the deals are primed to cure past ills. By adopting EITI, government will set itself on a firm path to win lost public confidence concerning its stewardship role in the mining sector. This also augurs well with government’s stance to fight corruption which is particularly rife in the mining sector. Although mining sector transparency reforms anchored on EITI may not curb corruption, it sends the right signals to citizens.

Zimbabwe is open for business

To attract essential foreign direct investment (FDI), government is on a rebranding exercise, the new mantra is “Zimbabwe is open for business.” A quite simply appealing message. If Zimbabwe is surely open for business, certainly, what stops government from being open about business, mining sector transparency in this case. Therefore, government must embrace policy reforms to show openness in a sector general perceived globally as murky. One important area of reform is implementation of EITI, an initiative regarded as a global best practice on openness and accountable governance of oil, gas and mining industries. By so doing, government will be sending a message to the international community and its citizens, the Zimbabwe open for business mantra is not a fluke.

The quest to reengage with International Financial Institutions (IFIs)

To move the country away from isolation and to unlock access to finance for development, government is prioritising engagement with International Financial Institutions (IFIs). The IFIs include International Monitoring Fund (IMF). In this bid, government must prove seriousness on enhancing its domestic resources mobilisation (DRM) capabilities. A move which helps to justify the importance of external support to the country’s socio-economic development thrust. Because Zimbabwe is a mineral rich country, demonstrating the nexus between mining and DRM is critical. Without transparency, leveraging mining sector for DRM will prove to be a daunting exercise. In the past, government, as part of the IMF’s staff monitored programme (SMP) managed to publicly disclose audited annual reports for the Zimbabwe Mining Development Corporation (ZMDC). By implementing mining sector transparency reforms in form of EITI, government will be adopting a proactive stance to improve resource governance.

EU, UK and Canada’s mandatory disclosure requirements

Data on various payments made to government by major mining companies operating in Zimbabwe which are either registered or listed in EU, UK and Canada is already in the public domain. Such companies include Caledonia’s Blanket Mine which promotes tax revenue transparency because of Canada’s Extractive Sector Transparency Measures Act (ESTMA). Anglo-American owned Unki Mine, for example, is disclosing information on payments made to government at the behest of the EU accounting directive. Given this important ventilation of Zimbabwe’s mining sector, government must be encouraged to entirely open the mining sector for greater public accountability. Importantly, government once angled for local primary listing of all companies in the mining sector as part of the amendments to the Mines and Minerals Act. Of course, this was dropped due to pressure from investors who felt that the domestic market does not have capacity to mobilise investment capital. However, another important objective of achieving good governance in the mining sector, greater transparency and accountability suffered as a result because listed companies have a high corporate governance compliance bar. This noble objective can still be achieved if government implements EITI.

Conclusion

To win public confidence and trust pertaining its steward role on the management of mineral resources, by adopting EITI, government will set itself a strong foundation to gain public goodwill. There are questions concerning the sincerity of the Zimbabwe is open for business agenda, implementation of EITI can help government to prove to stakeholders that government is open about business, the mining sector essentially. More importantly, the supreme law of the country’s principles jives well with EITI. Therefore, the EITI framework is best suited to ensure that government fulfils constitutional requirements. By joining EITI, Zimbabwe will join several countries in SADC like Mozambique, Zambia, Malawi, Tanzania, and DRC that are part of EITI family.

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Recent Gold Rush in Bubi: What You Need To Know

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Picture courtesy of Jane Lusinga, Ncube Narrates his family ordeal caused by a gold rush

Two weeks ago, a gold rush was experienced in Bubi district of Matebeleland North at a place which is a stone throw away from Lonely Mine. Gold rushes in Bubi are not a rare phenomenon. Trend analysis from community witnesses revealed that gold rushes are frequently experienced in Bubi. This year alone, Jane Lusinga, informed us that eight gold rushes have so far been recorded in Bubi District. The places which experienced the gold rush are Dromaland, Farmona (twice), Battlefields, Durban mine, Chirisa in Durban, Ingaka and Lonely mine. Jane is a small-scale gold miner in Bubi, and she is also a regional representative for women in Matebeleland North province under the Zimbabwe Miners Federation, an umbrella body for all artisanal and small-scale miners (ASMers) associations.

Written by Rodrick Moyo and Mukasiri Sibanda 

Despite these frequent gold rushes, gold deliveries to Fidelity Printers and Refineries (FPR) have been falling drastically compared to last year. FPR is the country’s sole gold buyer, refiner and exporter. According to the Midterm Monetary Policy Statement (MPS) delivered in September 2019, gold deliveries to FPR fell by 40.6% during the first half of the year compared to a similar period last year.

12.3 tonnes of gold were delivered to FPR between January and June 2019 against 17.3 tonnes delivered during the comparative period in 2018. According to the Midterm MPS “exchange rate, pricing and payment issues, which partly accounted for the decline in deliveries.” Strikingly, gold deliveries from Artisanal and Small-Scale Mining (ASM) accounted for 60% of total gold deliveries to FPR during the first half of 2019.

This article project the Zimbabwe Environmental Law Association (ZELA)’strong interest in promoting responsible and sustainable ASM. Section 13 on National Development, subsection 4 compels the State to put mechanisms to ensure communities benefit from resources in their localities. The Africa Mining Vision regards ASM as an integral part of sustainable and inclusive rural socio-economic development.

Involuntary displacement, loss of agricultural land and uncertainty

Whilst others are furiously trying to dig their way out of poverty, other families are confronted with forced displacement, loss of agricultural land, homesteads destroyed, and future uncertainty. Two families were forced to relocate for safety because of the Lonely mine gold rush.

Ncube’s family had their 2 huts burnt down by artisanal and small-scale miners (ASMers) who then proceeded to dig up the foundations in search for gold. “I lost my property, a wardrobe, double bed, kitchen utensils, clothes among other valuables” said Mr Ncube. Despite the loss, Ncube is not against gold mining, he appreciates that if done orderly, the nation stands to benefit from its rich gold endowment.

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Pictures taken by Mukasiri Sibanda

To compound matters, Ncube’s family field was partly destroyed by the miners. A massive blow because the family relies mostly on dry land crop agriculture as a source of livelihood. Mr Ncube expressed no desire to venture into gold mining. “I have a strong background in farming, I once worked at an agriculture research institution in Matopo” said Mr Ncube

For safety reasons, Ncube was forced to relocate his family, three daughters and wife who are now staying at his father’s homestead. Ncube reported the invasion of his homestead to the police together with the village head. The police responded quickly but had to call for back up and use guns to disperse the bold ASMers who were fighting Open pits back throwing stones. Ncube is now back at his homestead because of the security offered by police officers. With high levels of corruption affecting the corruption experienced in the country, poor salaries for civil servants, police include, there are strong fears expressed by some people we interacted with that the police will soon be digging for gold or taking bribes to facilitate mining activities.

The situation remains tense though as a sizeable number of ASMers are camped in the bush nearby, during the night, they fight running battles with the police. Since the gold rush, Mr Ncube has seen different individuals with cars milling around his homestead holding papers but leaving without engaging him. Ncube fears that the claim owners will forcible move him without any compensation.

If gold is not being mined in an ethical manner and violating rights of communities residing in areas where gold is extracted, as depicted by Ncube’s family situation, there may be severe repercussions. International soft low such as the OECD due diligence guidelines on responsible mineral supply chains can close space for gold from Zimbabwe to find its way on lucrative world markets. Zimbabwe cannot be open for business if it does not create enough conditions to promote responsible mineral supply chains.

To restore order, government must urgently reform the archaic and colonial Mines and Minerals Act to enable legalization of ASM. This should be complemented with other measures like demarcation of zones viable for ASM, better access to finance and technical skills development among others.

Benefits of gold rushes a boost for livelihoods if locals are involved?

Gold rushes are normally associated by a massive influx of people seeking to dig their way out of poverty. Although the accurate numbers of people that participated in recent gold rush that took place at Lonely mine are not known, it is estimated that over one thousand people were involved. This is evidenced by the amount of land degradation, a result of the digging of pits that barely exceed half meters by artisanal and small-scale miners (ASMers).

Fig 3: Open shafts with deforested environment and high land degradation

Within a short space of time, a thousand of people had descended on Ncube’s homestead, furiously digging for alluvial gold. News of a gold rush spread rapidly, and the reaction of teams is quite swift. Just like several gold rushes which occurred in Bubi, the locals are always dominated in numbers by people from far away places. One person we had a conversation with came from Nkayi, which is 100 km away to join the Lonely mine gold rush.

The domination of outsiders during gold rushes is a major source of concern judging by the comments of people we interacted with. “we can control our own local people, but outsiders bring violence, use abusive language and have no respect at all when we try to engage with them… strangers want quick money at any cost” said one of the shop owners at Lonely business center. There was acknowledgment that the Lonely mine gold rush led to a spike in violence amongst the miners. According to the police, cases of violence linked to illegal gold mining activities are rarely reported, AMSers prefer to keep away the police from their activities.

Despite fears of violence, the shop owner conceded though that they record brisk business whenever gold rushes occur. Alcohol and some basic commodities such as mealie meal and dried small fish (matemba) are some of the items that sell quickly.

Gold output and access to quality education mismatched

The impact of gold rushes is not felt at all when it comes to settling school fees at Lonely primary school. Over half of the pupils at Lonely mine have their school fees in arrears. According to the headmistress of Lonely primary school, “parents prefer to buy food when they get some money from gold mining because the area is suffering from a devastating drought.” Obviously, the school is failing to deliver quality services because of school fees are largely in arrears. Because of gold rushes, or increase in gold mining activities, school attendance is a huge cause of concern.

“Most children are now behaving like orphans as they are left to take care of themselves when parents spend time searching for gold” said the headmistress of Lonely mine primary school. On school fees, the Basic Education Assistance Module (BEAM), funded by the national purse to support vulnerable children is quite active. The challenge though is that BEAM only supports 27 pupils out of over 300 people, most of which are struggling to pay school fees. School authorities were not aware of the local service delivery funds allocated in the 2019 National Budget Statement under section 301 (3) of the Constitution. Perhaps, a clear sign that there is need to ensure that school development committees must not only focus on income from fees payable by parents, but to follow the money allocated for service delivery from both national and local budgets.

Conclusion

Gold rushes are a frequent occurrence in Bubi district but there is very little to show for it when it comes to delivery of essential services such as education and health. Government must move with speed to ensure that communities residing in areas where resources are extracted derive meaningful benefits from such activities as required by the Constitution. Despite the havoc caused by gold rushes, it is understandable that people are desperate, poor rainfalls and limited employment opportunities drive more and more people into gold mining. That said, the current chaos must be urgently addressed to ensure ethical gold supply chains by preventing conflict, involuntary displacements and violence associated with disorganized gold mining activities. Government must reform the Mines and Minerals Act, a colonial and archaic piece of legislation which in fact criminalizes artisanal mining.

Constitutional case for mining sector transparency reforms: is EITI only route for Zimbabwe?

Government, since 2011, repeatedly made commitments to implement the Extractive Industry Transparency Initiative (EITI) or resuscitate its home-grown version, the Zimbabwe Mining Revenue Transparency Initiative (ZMRTI). EITI is regarded as a global best practice that promotes open and accountable governance of oil, gas and mineral sectors.

Intentions by government to either implement EITI or revive ZMRTI have not resulted in any tangible transparency reforms in the mining sector. A temperature check is needed. Should transparency reforms be stalled because of fears that openness will stifle government’s sanction bursting measures? This blog makes a constitutional case for transparency reforms in the mining sector.

Our Constitution, the supreme law of the land has provisions that promote an open and accountable governance of the mining sector in Zimbabwe. Good governance, especially transparency and accountability are part of the founding values of the Constitution. Through Section 13(4) on National Development, the State is compelled to put mechanism to ensure communities benefit from resources in their localities. A requirement which jives well with the values of EITI.

Public access to information is provided under Section 62 of the Constitution. Communities need access to mining contracts which reveal the terms and conditions under which the resources are going to be exploited for their benefit. In fact, the Constitution, under Section 315 (2) (c) requires and Act of Parliament to guide negotiation and performance of mining agreements.

If this requirement is complied with, the mystery around mining mega deals signed will be removed, laying the foundation for public trust and confidence in government. A key legitimacy issue for government outside the contestation around elections. The missing $15 billion from Marange is a ghost that government must exorcise to convince citizens of its willingness to fight corruption and to ensure minerals are exploited for the benefit of citizens.

Access to information is not only limited to mining contracts, but on what is paid by mining companies to and received by government. And how mining revenue earned by government is allocated, spent and accounted for, not only financially wise, but the development impact. All this is provided for in the Constitution – Section 298, Principles of Public Financial Management.

Section 194 of the Constitution speaks on Basic Value and Principles governing public administration emphasises that transparency must be fostered by providing the public with timely, accessible and accurate information. Something which state-owned enterprises involved in the mining sector like the Zimbabwe Consolidated Diamond Company (ZCDC), Zimbabwe Mining Development Corporation (ZMDC), and Minerals Marketing Corporation of Zimbabwe (MMCZ) have failed to do.

And further emphasis is on establishment of transparent, open and competitive procurement systems. Without discounting the requirement for government to join EITI, it is important to understand that reforms that promote open and accountable management of our minerals are a constitutional issue. Alignment of the laws with the Constitution is something that government, Parliament, civil society and citizens must be seized with as a matter of priority.

The Constitution we have was enacted in 2013, six years have passed, and it is disturbing that requisite transparency reforms in the mining sector have remained elusive. Notably, several developed countries that are resource rich are not part of EITI. Probably for Zimbabwe, going beyond constitutional reforms on transparency in the mining sector is important because under the “Zimbabwe is open for business mantra” it is certainly catchy to investors that the country’s reform process is attuned to global best practice – EITI.

Impact Assessment of Buying Gold On No Questions Asked Basis

By Richard Ncube & Mukasiri Sibanda

Introduction

To funnel gold produced by artisanal miners into the formal market, Government introduced a policy to buy gold on no questions asked basis in 2014 through the National Budget Statement. A move designed to stop the arrest of artisanal gold miners whose activities are criminalised under the Mines and Minerals Act and the Gold Trade Act. It is illegal to prospect or mine any mineral without the requisite license under the Mines and Minerals Act. The Gold Trade Act makes it a criminal offence for one to trade in gold without a gold buying license or a mining license. Artisanal mining, it must be noted that it was an integral part of livelihoods during precolonial times. Well documented it is that several large-scale gold mining operations in Zimbabwe are a result of upscaling the working of artisanal gold mining. This article carries out an impact assessment of the move to buy gold on no questions asked basis.

Large scale gold producers evading royalties: investigate & bring culprits to book

The 2019 Budget Review Statement included interesting policy proposals with a telling impact on artisanal and small-scale gold mining (ASGM). Royalties payable by artisanal and small-scale gold miners (ASMers) were increased from 1% to 2%. According the Budget Review, this move was triggered by the desire to curb arbitrage opportunities as some large-scale miners were now delivering gold as ASMers to take advantage of the lower royalty regime. Royalties for large scale gold producers are pegged at 5% and 3% for any annual incremental production. Therefore, it can be argued that instead of paying 5 cents royalties per every dollar earned by large scale gold producers, some producers were paying 1 cent. This means that 4 cents were being syphoned from the fiscus per every dollar earned by some unscrupulous large-scale gold miners.

Production in the ASM has been rising phenomenally since 2014 when gold royalty rates were tinkered with to ensure ASMers pay 1% and large-scale producers pay 5%. In 2014, 3.9 tonnes were delivered to Fidelity Printers and Refiners (FPR) by ASMers. Last year – 2018, ASM allegedly contributed to record breaking gold deliveries to FPR. ASMers contributed 21.7 tonnes to total gold deliveries amounting to 33.2 tonnes. It must the flagged that the Budget Review allegedly accuse some large-scale gold producers of tax evasion. It defies logic that the Budget Review failed to recommend investigation of this malpractice which greatly prejudiced the fiscus. Instead of dealing with truant actors, the Budget Review tightened screws on ASMers by increasing a royalty rate from 1% to 2%. What this means in effect is that instead of stealing 4 cents, the unscrupulous large-scale miners can now still 3 cents. This move by the treasury is by all means to the detriment of ASMers. They are being punished for the sins of the large-scale miners. It is vital for the state not to just impose baseless taxes but to adhere to the principles of administrative justice in terms of section 68 of the Constitution.

Tax burden must be shared equitably

Considering that the Budget Review decided to increase gold royalties paid by ASM miners, it is critical to talk about tax justice – whether the State is raising and utilising public revenue in a transparent, accountable, fair and progressive manner. Section 298 of the Constitution of Zimbabwe 2013 on principles of public financial management (PFM) offers a clear entry point on tax justice as a rights-based approach. One of the constitutional principles on PFM directs that the burden of taxation must be shared equitable.

It must be noted that 2% gold royalties for ASM is slightly lower the 2.5% royalties paid by large scale platinum miners. Further, platinum royalty rates which were once pegged at 10% were reduced to 2.5% and the rate is now half of the gold royalty rate for large scale gold producers which is pegged at 5%. Clearly, the burden of taxation is not equitable shared here. The Treasury must honour its pledge made through the 2018 National Budget Statement to review platinum royalty rates in August 2019.

Tax and value for money

Government’s quest to turn mining into an economic growth engine by achieving US$12 billion annual revenue will worsen inequality if mining linkages are not strengthened. In the case of Nyambirai vs NSSA 1995 (2) ZLR the court observed that tax has to be used for the benefit of the public or to provide a service in the public interest. To that end it important for the state to impose taxes that meant for public interest not to worsen the life and business of people.

Another Tax Justice issue is that the State must accommodate the concerns of tax payers and deliver value for money. The Budget Review failed to explain the value proposition of increasing gold royalty rates to ASMers and communities where the gold is extracted. Several factors which strangle ASM must be addressed by the State to make the sector sustainable. Among others, the use mercury, lack technical skills, poor health, safety and environment practice, and widespread violence leading to “bloody gold.”

Government must therefore use a portion of taxes raised from gold mining to invest in research to drive innovation of smart and clean gold processing and recovery technologies to eliminate the use of mercury. As part of the vision to achieve a US$12 billion industry by 2023, Ministry of Mines is angling an annual gold production of 100 tonnes. Without cleaner gold processing technologies, an ecological disaster is looming. Mercury is harmful both to health and the environment. Also, government must set up a disaster management fund to help to prevent or respond to safety challenges like the Battlefields Mine disaster which claimed lives of 29 ASMers. Communities must not be left behind, taxes raised from gold mining must be equitable shared between government and local authorities to spur local economic and social development.

Debate on the impact of buying gold on questions asked basis

From a debate on the utility of the no questions asked policy which involved ASMers from Gwanda, Bubi, Zvishavane and Mberengwa, interesting discussion points emerged.

Those that argued that the no questions asked policy was a necessary policy intervention noted the following points.

  • Decriminalisation of ASM is in line with the spirit of the Constitution, Section 13 (4) which requires the State to put mechanisms to ensure communities benefit from resources in their localities. Additionally, ASM is embraced by the Africa Mining Vision (AMV), a continental blue-print offering guidance to resource rich countries on how they can harness the propulsive potential of abundant mineral wealth to spur sustainable and broad based socio-economic development.
  • The policy has contributed to reduced corruption because ASMers are no longer arrested for operating for not complying with the burdensome Mines and Minerals Act and Gold Trade Act. Because of the heavy penalties prescribed by the law for illegal gold mining and illegal possession of gold, police were allegedly demanding bribes to ensure ASMers do not face the full wrath of the law.
  • Because AMSers are no longer fear getting arrested, the no questions asked policy is behind record breaking gold deliveries to FPR.
  • Illicit financial flows have been reduced since ASMers funnel their gold on the formal market leading to increased foreign currency generation capacity and improved contribution to the fiscus.
  • Stop criminalisation of a livelihood

Arguments against buying gold on no questions asked basis

  • Increased criminality in ASM – violence, theft or ore and disrespect of property rights were all triggered by the policy to buy gold on questions asked policy.
  • Because of increased lawless, the laws of the country, Mines and Minerals Act and the Gold Trade Act are being flouted including international best practice, for example, OECD Diligence Guidelines on Responsible Mineral Supply Chains.
  • The policy is fuelling tax evasion challenges. According the 2019 Budget Review, lamented that large scale gold miners were evading taxes by disposing their gold as ASMers.
  • This policy was introduced as a stop gap measure to help formalisation of ASMers and its continued use without monitoring and evaluation of progress is a major setback on legal recognition of artisanal mining. why government has not seriously made a positive policy reform to formalise artisanal mining.
  • Safety disasters affecting ASM are catalysed by the no questions asked policy as illegal miners have space to sell their gold without traceability of where the gold is mined.

Conclusion

It is apparent from the discussion above that the State needs to be clear on its position relating to the no questions asked policy. The policy was never meant to last long, rather to encourage artisanal miners to formalise their operations. We therefore urge the responsible authorities to address this issue as a matter of urgency. Further to this, the issue of tax justice raised herein also needs to be addressed. An investigation is required to bring to book large scale gold miners who evaded paying required gold royalty fees. Taxes raised from ASM must be used to promote sustainable development of the sectors and for the benefit of communities where the gold is produced.

2019 Midterm Budget Review: How Agile or Fragile Is the Mining Fiscal Transparency Reform Agenda?

Introduction

Totemic. That is the word which perhaps sums up aptly the potential of Zimbabwe’ huge and diverse mineral wealth to propel the country’s socio-economic development agenda. Early this year, the Minister of Finance and Economic Development (MoFED), Hon Prof Mthuli Ncube declared that mega mining deals worth US$8 billion have been sealed. It is anticipated that mining will generate US12 billion annually by 2023. In 2018, the mining sector earned US$3.4 billion.

Government is on record that “Zimbabwe is open for business.” A slogan best tailored to resonate with investors. But what it is at stake for citizens? Is government keen to be open about mining contracts and the sector’s contribution to the national purse? Against this backdrop, and clutching on the 2019 Mid Term Budget Review Statement, this article tries to decipher the implications of the Budget Review on transparency and accountability in the management of mineral revenue.

The signature objective is to help citizens, Publish What You Pay (PWYP) campaign in Zimbabwe, and legislators to easily figure out how agile or fragile is the mining fiscal transparency reform agenda? Obviously, the way mineral wealth is managed determines whether citizens enjoy a fair share of mining benefit. Interesting interest in the status of mining fiscal transparency regarding the 2019 Midterm Budget Review is due to the fact the 2019 National Budget included progressive policy proposals for improving mining sector transparency.

Update on key mining fiscal transparency reforms missing

Key policy proposals for improving mining sector transparency contained in the 2019 National Budget Statement included the implementation of the Extractive Industry Transparency Initiative (EITI), funding for modernisation of the mining title administration system – mining cadastre, monitoring and tracking of tax incentives for cost benefit analysis purposes. Sadly, the Midterm Budget Review failed to give updates on implementation of the 2019 proposed mining sector transparency reforms.

A positive though is that the Ministry of Mines and Mining Development (MMMD) together with the Zimbabwe Environmental Law Association (ZELA) organised a multi-stakeholder meeting on implementation of EITI in July 2019. Perhaps, the information blackout on implementation of EITI in the Budget Review is a sign that two Ministries, MoFED and MMMD must work closely together to ensure successful implementation of EITI.

Silence on progress regarding the computerisation of the mining title administration system is a serious indictment to government that purports to open Zimbabwe for business. The current mining title administration system is outdated, heavily susceptible to corruption and is also festering numerous claim ownership disputes.

Disclose tax revenue forgone to incentivise the mining sector

Although there was no update on tax incentives given to the mining sector, a notable exception concerns the disclosure of tax revenue forgone because the Clothing Manufacturers Rebate. As at April 2019, revenue forgone, or tax incentives given since the start of this Rebate Facility amounted to US$14 million against imports worth US$43.9 million. Likewise, Treasury must disclose revenue forgone to spur growth of the mining sector. Such disclosure is important considering the Budget Review highlighted that “….in the case of imports, the mining sector largely benefits from a rebate of duty regime that supresses both customs duty and Value Added Tax (VAT).” Disclosure of tax incentives given to the mining sector, a mega economic activity, is crucial to enable the public to assess whether government is negotiation fair deals which harness well finance for development from the finite mineral resources. This domestic resource mobilisation opportunity must not be squandered, it doesn’t last forever.

Significantly, the Budget Review raised concern that beneficiaries of the Clothing Manufacturers Rebate are allegedly profiteering illicitly by “disposal of fabrics intended for value addition on the domestic market and transfer pricing.” While government hinted that an investigation will be done to bring the culprits to book, government must extend the investigation into the mining sector rebate facility to check whether similar malpractices are at play.

Mining economic dominance not a good sign

Mineral export earnings continue to underpin the country foreign currency earnings. According to the Budget Review, mineral exports raked in US$1.3 Billion during the first half of the year. An enormous 68% contribution to the country’s total exports of US$1.9 billion. So many indicators can be used to depict how dire the economic situation is currently. One such prominent indicator for our sick economy is the heavy reliance on mining. And this is a major concern because of several reasons which include the finite nature of mineral resources, volatility of mineral prices, and evinces a mining sector growth which is unhinged from other economic activities.

Race to the bottom?

It is disturbing to note that the Budget Review proceeded further to weaken mining fiscal linkages by giving in to industry demands on deductibility of royalties for the purpose of calculating taxable income. Starting 1 January 2020, royalties will be recognised as an allowable deduction for tax purposes. Noting mining sector’s poor tax contribution, the 2014 National Budget Statement directed that mineral royalties will no longer be an allowable cost for the purposes of calculating taxable income.

Referring to regional best practice, the Budget Review reversed this position. However, the Budget Review failed to realign Corporate Income Tax (CIT) rates of between 15% and 25% which were noted as below the regional average. Rather, the CIT rates were deemed as competitive, a major worry because Zimbabwe must not take a leadership position on race to the bottom – using lower tax rates to woo investors. The Budget Review admitted production in the mining sector was not responsive to a favourable tax regime, a clear sign that tax incentives are not working as intended. So why continue the same path.

Rear-view mirror forgotten?

Sadly, the Budget Review failed to make good of the promise made by the 2018 National Budget Statement to review platinum royalties in August 2019. A promise that was made when platinum royalty rate was reduced from 10% to 2.5% in order to ensure tax fairness and equity. At the time, holders of ordinary platinum mining lease holders like Mimosa were paying 10% royalties whilst special lease holders like Zimbabwe Platinum Mines (Zimplats) and Unki Mine were paying 2.5%. August 2019 is significant in the sense that Zimplats had a 25-year 2.5% royalty stabilisation agreement with government which was set to expire that same period.

In 2015, Zimplats won a court dispute against the country’s tax collector, the Zimbabwe Revenue Authority (ZIMRA) on the legality of the royalty stabilisation agreement. Consequently, US$101.55 million was gobbled from the national purse in 2015. This is a clear testimony that stabilisation agreements can weaken government’s fiscal capabilities. Citizens, PWYP, and Parliament must pressure the Treasury to make good of its promise to review platinum royalties to ensure the platinum sector contributes fairly to the national purse.

Progressive royalty regime for the gold industry

Commendably, the gold royalty regime is now self-adjusting, at 3% below US$1,200 and at 5% above US$1,200. It must be noted that between 2010 and 2014, gold royalty rates were changed three times in response to gold price movements. ZELA intensively pushed for Treasury to adopt a progressive royalty regime with rates increasing or falling depending on the price. Treasury must not limit the self-adjusting royalty rate to the gold sector, this should be applied to all minerals.

The Treasury also moved upwards the gold royalty rate for small scale producers from 1% to 2% in order to prevent arbitrage. The Budget Review Noted that the gulf between royalty rates for small- and large-scale gold producers “…. created an opportunity for tax avoidance whereby some mining houses may sale gold through small scale producers, in order to benefit from lower royalty rates as well as higher foreign currency retention thresholds.” A situation that is made possible because of the no questions asked basis on gold deliveries to Fidelity Printers and Refiners (FPR) and higher retention thresholds then given to small scale miners.

Differentiation of royalty rates for small- and large-scale producers is a product of the 2014 National Budget Statement which sought to incentivise small scale producers to channel gold on the formal market. The Budget Review was supposed to bring back traceability of gold as required by the Gold Trade Act and in line with international best practice like OECD due diligence guidelines on responsible mineral supply chains. Considering wanton violence in artisanal and small-scale gold mining, it is important to curb raising criminality by restoring sanity in the sector. Of course, gold traceability must not be used as an excuse to criminalise artisanal mining, an important source of livelihood for over a million people in Zimbabwe. Precisely why the Mines and Minerals Amendment Bill must have a special permit for artisanal gold miners.

Multiplicity of taxes hurting the mining sector

The Budget Review noted “the mining sector has also been constrained by some levies and charges imposed by Government Departments and Local Authorities. These include fees levied Unit Tax paid to Local Authorities, mining fees & charges payable to the Ministry of Mines & Mining Development, and Environmental Fees payable to the Environmental Management Agency, among others.” Therefore, it was proposed that the fees be streamlined. Parliament,  citizens and the PWYP campaign must be on guard to ensure that the Constitutional right of local authorities to mobilise finance for development from the mining sector is not undermined. According to Section 276 (2) (b) of the Constitution, local authorities have “… power to levy rates and taxes and generally to raise sufficient revenue for them to carry out their objects and responsibilities.” This is one of the avenues for complying with the Constitutional principles on devolution, Section 274 and Section 13 (4) which compels the State to put mechanism for communities to benefit from resources in their localities.

Alignment of the Definition of Mineral

The Budget Review must be commended for aligning the Mines and Minerals Act and Income Tax Act on the definition of mining and quarry concerning dimensional stones like black granite. The Mines and Minerals Act deems 327 dimensional stones extracted from quarries as a mineral. Whilst the Income Tax Act did not deem such activities as mining but quarrying. The effect was that black granite mining producers were not enjoying the mining fiscal regime eg allowable deduction on Corporate Social Investments (CSIs) and recoupment of capital expenditure.

A death certificate issued to the indigenisation agenda

Finally, platinum and diamonds were removed from complying with the indigenisation requirements. A death certificate, therefore, was issued to the indigenisation framework. It was proposed that a new empowerment framework will be crafted. Prior to this, all mineral sectors, apart from diamonds and platinum were excluded from complying with the indigenisation framework at the behest of the 2018 National Budget Statement. It is understandable that government must make Zimbabwe a mining attractive investment jurisdiction because mining is a capital-intensive business. Certainly, foreign direct investment is crucial.

Zimbabwe is ranked among the 10 least attractive investment jurisdictions in the world according to the Policy Perception Index (PPI) produced in 2018 by Fraser Institute. The Index factors in both policy and mineral potential. According to Fraser Institute “The survey is an attempt to assess how mineral endowments and public policy factors such as taxation and regulatory uncertainty affect exploration investment.”

The challenge with entire scrapping of the indigenisation requirements is that community share ownership trusts (CSOTs) no longer have any legal backing. In the platinum sector, for instance, districts like Tongogara and Zvishavane received a massive infrastructure development boost through CSOTs.

This is a clear violation of Section 13 (4) of the Constitution which compels the State to put in place mechanisms to ensure communities benefit from resources in their localities. Also, this is a major dent on political will for devolution as communities dislocated from ownership and control of resources without any clear alternative.

Partial privatisation of the Zimbabwe Mining Development Corporation

To ensure State participation in the mining sector, government established the Zimbabwe Mining Development Corporation (ZMDC), a State-Owned Enterprise (SOE) through an Act of Parliament. Against the backdrop of poor performance by SOEs, the Transitional Stabilisation Programme (TSP) “recognized the need for more accountable, transparent and economically viable SOEs.” ZMDC is one of the SOEs earmarked for partial privatisation. Because of high corruption risks, the partial privatisation of ZMDC must be carried out in a manner which prejudices national interests.

Parliament must be involved in the whole tendering process to ensure that a bidder with a high development proposition is selected. If this route is taken, it resonates well with the aspirations of the Africa Mining Vison (AMV), a blueprint for guiding mineral rich African countries on how to unlock sustainable and broad-based socio-economic development hinged on mining. More so, Section 315 (2) (c) of the Constitution, requires an Act of Parliament to guide negotiation and performance of mining agreements.  It is important to note that already, Anjin and Alrosa were selected as ZMDC’s partners in the diamond sector in a manner which was not open.

Conclusion

Citizens are keen to see the totemic role of mining in terms of domestic resource mobilisation. That is, mining sector contribution to improved opportunities to fund health and education sectors. The slogan “Zimbabwe is open for business” is failing to resonate with citizens because government in not open about business, mining is a case in point. Government must disclose mega deals, it must come up with a clear plan for implementing EITI and give constant publicly updates. Citizens, PWYP campaign and Parliament must crank up pressure to compel government to comply with the Constitution, Section 298 which among other requirements calls for transparency and accountability in the handling of public finances.

The cost of revenue forgone to incentivise the mining sector must be monitored and publicly accounted for to weed out overgenerous tax incentives. Government’s move to open Zimbabwe for business must not fuel the race to the bottom, the tax regime must be aligned to regional trends to ensure mining tax contributions are not undermined. Certainly, investors are needed to unlock value in the mining sector, but government must not prejudice the constitutional right of communities to benefit from resources in their localities. As it stands, mining fiscal transparency reform agenda is quite fragile.

 

What it takes to bring public & market confidence in Marange diamond mining operations

Introduction

On Friday, 17 May 2019, seven Executive managers of the Zimbabwe Consolidated Diamond Company (ZCDC) were dismissed by the ZCDC Board. Although granular reasons were not given, the Board highlighted the need to rebuild public and market confidence in the diamond mining operations of ZCDC. There is no doubt that given how it was founded and its record and the history of the Marange diamonds , ZCDC need to build public and market confidence. Without digging deeper to understand what triggered this move, which is of course necessary, the Zimbabwe Environmental Law Association (ZELA) has taken the initiative to share critical steps that can be taken to build public and market confidence in the management of Marange diamonds by the ZCDC. ZELA is a lead public interest law organisation whose thrust is to influence legal, policy and institutional reforms which deliver good governance, transparency and accountability in the natural resources sector at the national, regional and international level. Internationally, ZELA is involved in monitoring diamond mining and trade through its participation in the Kimberley Process Certification Scheme on diamonds.

Diamond Policy

Whilst a raft of policy and legal reforms to ensure good mineral resource governance are long overdue, transparency and public participation must not be undermined. Zimbabwe now has a new Diamond Policy, although sadly this has not yet been publicly shared. Further, communities affected by the diamond mining and citizens in general, were not consulted during the formulation of the Policy and this is unconstitutional – Section 13 (2) of the Constitution on National Development. Therefore, to build public confidence, Parliament Portfolio Committee on Mines and Mining Development must conduct public hearings to harvest the views of communities affected by diamond mining activities in particular and the citizens in general. Ministry of Mines must be open to public dialogue with civil society and industry, to unpack the contents of the Diamond Policy to stimulate robust public debate.

Transparency and Accountability

It is an open secret that ZCDC was created because of the consolidation of former diamond mines in Marange with the objective of promoting transparency and accountability in the management of Marange diamonds. The latest report from the Office of the Auditor General (OAG) revealed that ZCDC failed a transparency test. ZCDC’s audited annual reports are lagging by one year – ZCDC 2017’s books were not part of the OAG’s 2018 narrative report on state enterprises and parastatals.

Unlike the Minerals Marketing Corporation of Zimbabwe (MMCZ), ZCDC’s audited financial statements are not found on the company’s website.  Notably, ZCDC’s predecessor and parent company in Marange, the Zimbabwe Development Corporation (ZMDC) started to release its audited financial statements in 2013 as part of the International Monetary Fund’s (IMF) Staff Monitored Programme (SMP). Therefore, ZCDC must urgently put on its website its annual audited financial statements and make sure that its books are timely audited.

Diamond production and export figures must be disaggregated to show the quality footprint, gem, near gem and industrial diamonds. Such a move will allow the public to have better insights on the performance of gem and near gem quality diamonds which are highly valuable and highly susceptible to theft and undervaluation. Another drainage of public confidence is that diamond statistics from various government institutions, MMCZ and Zimbabwe National Statics Agency for instance on exports by volume and value are different. This information asymmetry is part of the findings of research carried out by ZELA in 2013, Tacking the Trends: An Assessment of Diamond Mining Sector Tax Contribution to Treasury with Particular Reference to Marange Diamond Fields. When data from different government institutions on the same subject matter differs, public confidence is eroded.

Public confidence without transparency is a fruitless exercise. Government must move with speed to implement the Extractive Industries Transparency Initiative (EITI), a policy position taken by the 2019 National Budget Statement. EITI is a global best practice when it comes to transparency in the mining sector which promote the public disclosure of revenues, contracts and recently commodity transparency as part of its new Standard.

ZMDC has signed a number of contracts with a number of investors as part of its Joint Venture Initiatives. One of the ways of building public trust and confience is making these contracts available to the citizens in line with section 62 of the constitution. Contracts are a key component of mineral resource governance. Currently these contracts are not in the public domain and this creates unnecessary suspicion.

Decriminalise artisanal diamond mining to end violence

Last year, ZCDC announced that it is ready to support artisanal diamond mining in Marange to empower communities and reduce conflict between the company’s security guards and artisanal miners. No tangible development has been made to date on decriminalising artisanal diamond mining. Violent conflicts are frequently experienced, and this discolours the Marange diamonds in the world market. Therefore, steps must be taken quickly to decriminalise artisanal diamond mining to enable co-existence of large-scale mining and artisanal mining in the diamond sector. After all, artisanal mining might be crucial to mop up some diamonds that cannot be economically exploited by large scale mining operations because of geological factors. However, in doing this, compliance with KP minimum requirements and best practices on promoting artisanal diamond mining and trade should be adhered to in order to promote public and market confidence in Marange diamonds.

The return of Anjin Investments must be conditional  

Government announced that Anjin Investments along with Alrosa, are the two foreign companies from China and Russia respectively that will mine diamonds in Zimbabwe in addition to ZCDC and Murowa diamonds. It is good for sure to open Zimbabwe for business to attract much needed foreign direct investment, technology and skills to unlock the diamond sector’s potential. However, care must be taken to ensure that any investor must be guided and given mining concessions that are conditional on adopting of responsible sourcing principles including respect for human rights, community investments, disclosure of revenues and payment of royalties and other mining taxes.  A look at Anjin Investments’ previous record in Marange for example shows several red flags. OAG failed to verify payments made to government like depletion fees by Anjin Investments because the entity’s books were never audited. The former Minister of Finance, Tendai Biti once singled out Anjin Investments for failing to pay taxes to government. Parliament reports noted that investments made by Anjin in the diamond sector could not be easily verified. It is therefore necessary to ensure that responsible investments are attracted in the mining sector and close space for investors which have a murky past.

Talking Points on Platinum Symposium

For civil society working to influence policy and practice reforms tailored to strengthen linkages between mining and sustainable development, stakeholder engagement is a critical piece of the jigsaw puzzle. To gain a pulse feel of industry’s thinking concerning current and future of mining, the Zimbabwe Environmental law Association (ZELA) is participating at the Chamber of Mines’s 2019 Annual Mining Conference. Themed “Realizing Vision 2030 Through Resource Led Growth” the Conference is being held at Elephant Hills Resort, Victoria Falls, from 29 May to 01 June 2019.  Reaching upper middle-income status is the goal for Vision 2030.

The Conference’s theme resonates well with the Africa Mining Vision (AMV) which envisages “Transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable growth and socio-economic development.” Realising that resource rich Africa must not continuously squander the opportunity to industrialise and diversify its economy from mining, Africa Heads of States and Government adopted AMV in 2009. This article shares key highlights from the platinum symposium which was held on Thursday, 30 May 2019. Further, the article ventilates some of the main issues discussed to help citizens to understand some pressure points when it comes to mining and sustainable development.

Technology redefining the future of mining

Unlike South Africa, Zimbabwe’s platinum industry is highly mechanised because of favourable geological characteristics. In light of fourth industrial revolution, the industry must explore new technologies out there to “produce more with less.” Automation and modernisation of the industry is fundamental to drive production efficiency. Embracing technology becomes key to lowering the cost of production to gain a competitive advantage in addition to the comparative advantage that Zimbabwe enjoys. Cheap commodities have a future and expensive ones have a short life span said Stanley Segula, Managing Director of Zimplats.

Comparative advantage stems from the fact that in platinum, the country is endowed with a world class mineral asset which ranks second best after South Africa. In terms of platinum production, the Zimbabwe is ranked number three, after South Africa and Russia in that order.

Rightly so, industry is taking leadership to stimulate discussion on the impact of technology on mining. Government and civil society must not be late to get off the blocks on this one. As suggested by Vanessa Ushie in her recent blog titled new mining technologies and the fiscal space: ensuring shared value and sustainable development, government must explore options to give oxygen to mining linkages to development in the context of new technologies. Right now, the employment situation in Zimbabwe is quite unsustainable.

With technology set to drive platinum production growth, employment linkages are going to be further weakened. Even worse, there is strong risk that retrenchments can occur as labour is substituted by machines. Poor mining agreements have always been a major challenge to unleash mining’s development potential, starting with the 1888 Rudd Concession. With secrecy around mining contracts, the public does not have a fair view picture of how mining agreements are primed to manage a technological driven mining sector. Venessa suggest that the fiscal regime must be nimble to compensate for employment losses through equity participation or production sharing among other options. Obviously, our outdated Mines and Minerals Act and the mining fiscal tools are not best primed to anchor a mining led realisation of Vision 2030.

The status of the platinum industry

As part of its contribution towards the realisation of Vision 2030, the platinum sector is supposed to hit 50 tonnes annual production by 2030. Along with gold, platinum is one of the country’s top export earners. Although commonly referred to as platinum mining, it is crucial to note that Platinum Group of Metals (PGMs) are produced – 10 minerals are a product of platinum mining. By volume, nickel tops the production list. The oldest platinum mine in Zimbabwe, Mimosa started as a nickel mine and later shifted focus to embrace platinum mining. In terms of nickel production in Zimbabwe, the platinum industry’s production is favourable compared to primary nickel producers.

In 2018, production stood at 14.6 tonnes, a marginal from 2017 production. Accounting for 60% of the country’s total platinum production, Zimplats is the largest player in the platinum industry. Mimosa is the smallest player in terms of both output and ownership of proven platinum resources. Mimosa owns about 3% of the country’s platinum resources.

“The industry is fluid and confusing” currently, palladium price has surpassed platinum.  Palladium currently fetches around US$1,300 per ounce, a figure that roughly matches the gold price. “Platinum prices are in a long winter” currently fetching around US$800 per ounce. It is important to flag that platinum and palladium production volumes are nearly equally.

Make hay whilst the sun still shines

Platinum is mainly used to produce auto catalyst convertors that are critical in the reduction of carbon emissions from motor vehicles. With technology pointing to electronic vehicles, the platinum industry is under severe threat because auto catalyst converters account for 60% of platinum market.  The Jewellery market accounts for 12%. However, technology also offers hope in that platinum can be used to generate electricity, and research is at advanced stage. Equally so, other minerals like nickel that are part of the PGMs are key in the production of electronic vehicles. The key lesson here is that Zimbabwe “must make hay whilst the sun still shines”, quickly leverage on its platinum assets as future technologies pose risks which can sterilise the resource. Exploration beyond the Great Dyke.

Indigenisation policy an albatross

In 2018, the Finance Act removed indigenisation requirements for all minerals aside from platinum and diamond sectors. As it stands, foreign players in the platinum and diamond sectors are required to cede a minimum of 51% equity to indigenous partners. This is making Zimbabwe one of the least attractive investment jurisdiction. Whereas the President announced that government is fully removing indigenisation requirements for platinum and diamond sectors, the law has not been changed. The industry’s position is that legal reforms to repeal the indigenisation framework must be expedited.

It is understandable that a conducive policy environment is a key enabler to attract much needed investments in the platinum industry. But, the Constitution must not be undermined. As rightly stated by Honourable Mukaratigwa, the Chairperson of Parliament Portfolio Committee on Mines, the State is compelled to come up with measures to ensure communities benefit from resources in their areas. To that effect, the issue of Community Share ownership trusts (CSOTs) must not be affected by any changes to the indigenisation framework. Interestingly, a sterling example of the impact on CSOTs in terms of reducing infrastructure deficits in rural areas comes from the platinum industry. All three platinum producers contributed $10 million each to fund community development programmes in their areas.

Beneficiation and value addition

Industry expressed displeasure with the current stick approach, use of export taxes to compel local value beneficiation and value addition of platinum. Certainly, beneficiation and value addition are fundamental to generate more foreign currency earnings, create more jobs, widen the tax base and to promote industrialisation. The platinum industry, it must be noted, has lower ripple effects to the domestic economic compared to steel making which can spur construction sector and other downstream industries. Given that platinum is a “sexy mineral” – high valued mineral, government must not lose sight of low valued minerals – development minerals which have strong linkages to other economic sectors, agriculture and construction, for instance. Despite its perceived challenges, the results of export taxes are encouraging in that Unki mine recently commissioned a smelter. Gone are the days where Unki mine used to export platinum concentrate. “Keep walking” there is room to achieve more – base metal refinery and finally precious metal refinery facilities.

Conclusion

To ensure that platinum industry growth plays a critical role towards the attainment of Vision 2030, industry is clear on critical success factors that must be addressed. It must be clear though, that any growth anchored on mining must not leave communities behind as required by the Constitution. Of course, the indigenisation framework as it stands is not attractive to investors, it must be tweaked but not entirely scrapped to give legal teeth to CSOTs. Afterall, the sterling example of community led development comes from the platinum industry in Zimbabwe. The impact of technology is another fundamental which government and communities must be alive to, policies and laws must be “nimble” to leverage better mining for the realisation of Vision 2030.

Steps To Curb Short Circuiting of Mining Fiscal Linkages

Zimbabwe’s socio-economic development plan, the Transitional Stabilization Plan (TSP) is hinged on mining. This is not surprising because the country is endowed with world class mineral deposits in form of gold, platinum, lithium and chrome among others. Therefore, it is important for Parliament to increasingly hold more to account government and industry, on how mining fiscal linkages are leveraged to promote progressive realization socio-economic rights of citizens – health and education, for instance.

To help achieve this important milestone, the Zimbabwe Environmental Law Association (ZELA) facilitated a one-day workshop to upskill knowledge of Parliament Portfolio Committee on Budget, Finance and Economic Development on mining fiscal transparency challenges, opportunities and progress recorded. The workshop was held on Friday, 24 May at Cresta Lodge, Harare.

Community members from resource rich areas of Gwanda, Zvishavane and Mutare took part in the workshop. The Zimbabwe Revenue Authority (ZIMRA), the country’s tax administrators delivered a presentation on mining taxation, ZELA ventilated mineral revenue transparency and accountability issues, and PACT clarified linkages between mining and development.

Under listed are critical action points to enhance mining sector fiscal linkages, mainly for Parliament Portfolio Committee on Budget Finance and Economic Development

  • Since 2011, government repeatedly made empty promises to implement the Extractive Industries Transparency Initiative (EITI) or its home-grown version, the Zimbabwe Mining Revenue Transparency Initiative (ZMRTI). EITI is a global best practice on mineral revenue transparency, which enables public scrutiny on mining sector and its contribution to development, tax revenue mainly. This time around, the Parliament must exercise its oversight role to ensure that the Ministry of Finance and Ministry of Mines come up with a clear EITI implementation which they will regularly monitor.
  • Even though Section 34A (3a) of the Revenue Authority Act estops the Zimbabwe Revenue Authority (ZIMRA) from sharing client information on taxes, there is room for improvement to enhance mineral revenue transparency. For example, ZIMRA can disclose mining sector performance per each revenue head corporate income tax (CIT), withholding taxes, customs duty, value added tax (VAT), and Pay As You Earn (PAYE) among others. Further, disclosures can be disaggregated to show how major minerals like platinum, gold, diamonds and chrome performing per revenue head.
  • Tax incentives are a discount on tax revenue and they must be publicly accounted for. ZIMRA’ tax revenue performance reports, therefore, must be refined to account for the cost of tax incentives. Creditably, the 2019 National Budget Statement recommended the development of “a tax incentive monitoring and evaluation framework to facilitate the management of timed tax expenditures as well as to inform Cost Benefit Analysis of tax expenditures by Treasury, on an annual basis, with effect from 1 January 2019.” Parliament must hold to account the Ministry of Finance and ZIMRA on how tax incentives are accounted for in line with policy position of the 2019 National Budget Statement.
  • Parliament should follow up on Platinum royalties which were reduced by the 2018 FinanceAct from 10% to 2.5% to ensure that there is equal treatment for all players. The 2018 National Budget Statement which triggered this development promised that by August 2019, the platinum royalties will be reviewed. This is getting close and it is important for Parliament to ensure that platinum royalties are reviewed accordingly to maximise revenue flows to the treasury.

“Government entered into Special Mining Lease Agreements with some platinum group mining companies which provide for a specific royalty rate of 2.5%.  1107. However, platinum produced by mining companies that do not have a Special Mining Lease Agreement remained liable to a royalty rate of 10%, as provided for in the Finance Act. In line with the principles of equity and fairness in the taxation system, Government committed, in April 2017, to align the royalty rates to 2.5% as part of the 2018 Budget measures. The 2018 Budget, therefore, proposes to regularise royalty rates for platinum on all platinum group mining companies with effect from 1 April 2017, until August 2019.” 2019 National Budget Statement, Page 243 – 244.

  • To ensure that mining mega deals do not yield meagre tax revenue, as recommended by Africa Mining Vision (AMV), government must adopt competitive bidding in the disposal of mineral rights with proven geological potential. An extract from the Anglo Platinum mines’ (Angloplats) 2012 integrated report shows that “…. the company will receive a payment of the amount of US$142 million due to it for the cession, in March 2008, of Kironde and Bougai mineral right claims….”  This is clear evidence that if government pursues lose it or use it principle, there is potential to have bumper revenue from disposal of attractive mineral claims if competitive bidding is adopted.  Right now, it is not clear how much government received from disposal of various claims released by mining companies like Unki mine and Zimplats. In 2018, Zimplats released to government nearly 24,000 hectares of platinum claims and it is not clear how much government benefited from such claims as well as concessions made to Zimplats as part of the new lease agreement.
  • Corruption is a cancer to the country’s development plans. Having a public register of beneficial ownership is important to peep beyond the corporate veil to expose the natural persons that are benefiting from mining deals. This way, it is easy to publicly identify policy makers and implementers that that have interest in business deals that they must negotiate and regulate for the benefit of the public. As it stands, most government suppliers are highly over charging goods and services, some of which are poor quality and it is not possible to fish out the “tenderepreneurs” that are siphoning public funds.
  • A country that hinges its economic development plans on mining must be guided by the Constitution, Section 315 (2) (c) – “An Act of Parliament must provide for negotiation and performance of concessions of mineral and other rights” In March 2019, the Minister of Finance announced that government has so far sealed mining deals worth US$8 Billion. These deals must be immediately be brought to Parliament for scrutiny to ensure that the terms and conditions harness optimal national development linkages from mining.
  • ZELA to request for partnership with ZIMRA to produce position paper to guide Parliament on alignment of relevant pieces of legislation on mining taxation, the Income Tax Act, Mines and Minerals Act, and the Environment Act which are not currently speaking to each other. For example, the Income Tax Act does not qualify black granite mining as mining operations. As a result, exemptions like capital redemption allowances which are enjoyed by mining operations are not applicable to black granite mining.

 

Marange Diamonds: The Drama Never Ends

“… when it comes to diamond, there are syndicates that are very sophisticated in the country and outside the country and many people get involved. Many beneficiaries get involved to ensure that the truth never comes out” remarks given by Prof Gudyanga, former permanent secretary of the Ministry of Mines during a Parliament hearing on Missing $15 billion from Marange.

Introduction

Seven executive managers of the Zimbabwe Consolidated Diamond Company (ZCDC), including the Chief Executive Officer (CEO) were fired by the board on Friday 17 May 2019.  ZCDC is a State-Owned Enterprise (SOE). The entity was created in 2015 and started operations in 2016 after seven diamond mining companies were booted out in the name of bringing transparency and accountability to murky Marange diamond mining activities.

The dismissal according the board, was necessitated by the desire to restore market and public confidence following several allegations of corruption and abuse of office. Since no granular details were shared, it is important not to take things at face value. But to try to dig deeper for possible clues and to help with suggestions on what it takes to bring public confidence in the management of Marange diamonds. I shudder to say rebuilding public confidence as opined by the ZCDC’s board because from the onset, Marange diamond mining operations dismally failed to inspire public confidence.

Jobs robbed by diamond robberies

ZCDC experienced a spate of armed robberies of diamonds. We have not heard of any public report on diamonds robberies at Murowa diamonds. Consequently, one can argue that a spate of diamond robberies might have robbed the senior management of their jobs. Speaking of armed diamond robberies, could it be that ZCDC management closed loopholes for powerful and well-connected individuals who are used to looting diamonds from Marange. Perhaps out of frustration and desperation, the clique became so daring to make a statement to ZCDC by organising several armed robberies. This sounds like stretching facts a bit far, but, the former Permanent Secretary, Prof Gudyanga warned “… when it comes to diamond, there are syndicates that are very sophisticated in the country and outside the country and many people get involved. Many beneficiaries get involved to ensure that the truth never comes out”

Allegations of corruption and abuse of power

Before the board announcement on dismissal of the ZCDC senior management, the CEO was arrested for recommending diamond sales to a black listed person under Kimberly Process (KP). Allegations surfaced on abuse of power by the chief financial officer who allegedly bought 1,200 bags on cement from Lafarge on ZCDC’s account for his own personal use. Looking at the rear-view mirror, Office of the Auditor General (OAG)’s report on ZCDC’s 2016 raised several damning issues on poor corporate governance. The board must openly address steps it took to implement the OAG’s recommendations.

People feel good when hunting with their own dogs

There were strong allegations that ZCDC was created to close revenue stream for one ZANU PF faction, Lacoste, which allegedly had the military backing. ZCDC was created when Chidhakwa, allegedly aligned to Generation 40 (G40) faction in ZANU PF, oversaw the Ministry of Mines and Mining Development. The Military had a stake in one of the biggest diamond mines in Marange, Anjin Investments, which was booted out along with other entities – Mbada, Jinan, Diamond Mining Corporation (DMC), Kusena, Gye Nyame and Marange Resources. Companies like Anjin investments failed to have their books audited year in year out. The Auditor General had trouble to verify taxes paid by Anjin because of failure to produce audited financial statements. Whilst speculation was strong that factional fights created ZCDC, transparency was one of the main reasons given for creating ZCDC. Considering that Anjin’s books were never subjected to an audit, the transparency card was genuine although other motives could not be ruled out. So, when the Lacoste function emerged supreme after the November 2017 events which reshaped Zimbabwe’s political landscape, arguably, it was only a matter of time before changes were made. People feel good when hunting with their own dogs. Always, the ZCDC management which was dismissed was skating on thin political ice.

Failure to manage expectations

ZCDC mostly painted a robust outlook in terms of diamond production and earnings. Now that the country is facing severe foreign currency shortages, could it be that authorities in government were disappointed that diamonds were not bringing in the anticipated cash.  In its 5-year strategic plan, ZCDC has a target of producing 10 million carats generating annually, generating $1 billion in foreign currency, contributing $250 million in taxes to government and $20 million to Marange-Zimunya Community Share Ownership Trust.  In 2018, ZCDC surpassed its targeted diamond production, producing 2.8 million carats against 2.4 million carats. Between 2016 and 2018, ZCDC generated $22.9 million according to MMCZ. Diamonds, including gold, and platinum used to be a top performer on foreign currency earnings at one-point generation US$740 million in 2012.

Conclusion

It is too early to celebrate whether ZCDC’s board made a good move to restore market and public confidence by firing the entire ZCDC executing management aside from the chief operating officer. Parliament Portfolio Committee on Mines and Mining Development must dig to deeper to unmask real challenges at ZCDC. The board must understand that given past chronicles of corruption concerning Marange diamonds, openness is the pillar of building public confidence. Anything short will always attract speculations whether the move by the board is well intentioned or not.

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