ANALYSIS OF AUDITOR GENERAL 2014 REPORT ON STATE ENTERPRISES: A FOCUS ON MINING STATE ENTERPRISES

 

Mukasiri Sibanda and Gilbert Makore

The 2014 narrative report on state enterprises and parastatals by the Office of the Auditor-General (OAG) reveals continued rot and mismanagement of public resources. This article takes particular interest in the findings pertaining to the Zimbabwe Mining Development Corporation (ZMDC), a state owned enterprise (SOE) advancing state interests in the mining sector.

ZMDC is involved in the extraction of gold, diamonds, graphite, platinum and asbestos among other minerals. It is its involvement in Marange diamond fields, where it owns no less than 50% stake in all the seven companies operating in Marange, which galvanised its position in mineral exploitation. The diamond entities in which ZMDC has an interest include; Mbada Diamonds (50%), Diamond Mining Corporation (50%), Jinan (50%), Marange Resources (100%) and Kusena Diamonds (100%).The only notable exception is Anjin Investments where ZMDC’s shareholding is 10% although the other 40% is said to be held by Government of Zimbabwe.

Minerals are finite sovereign assets and state equity participation warrants close public scrutiny to determine the extent to which the exploitation of the mineral assets is benefitting the citizenry. Scrutinising the role of direct state participation in mining is particularly important in the context of current international discourse on how corporations are bleeding Africa of critical development finance.

An analysis of the 2014 narrative report on state enterprises and parastatals by the OAG, therefore, becomes opportune and imperative as it provides for reflection on how ZMDC is faring on managing the country’s minerals assets. The findings from the OAG clearly show how poorly ZMDC is executing its mandate as a state agent in the exploitation of minerals.

Some of the findings from the report show that;

  • ZMDC’s latest audited group financial statements are for the year ended 31 December 2013. ZMDC is perpetuating its custom of sharing stale financial information. Timely audited financial statements are one of the key tenets of good corporate governance and their undue delay affects the integrity with which the company is managed. It is, however, important to note that Marange Resources (a ZMDC subsidiary) has its 2014 annual audited reports in place.
  • ZMDC has failed to honour statutory obligations to the Zimbabwe Revenue Authority (ZIMRA), pension funds and medical aid schemes. For instance Marange Resources owes statutory obligations amounting to $16,201,622 as at 31 December 2014 broken down as follows; $11,466,864 (royalties) $2,504,615 (depletion fees), $1,162,674 (depletion fees), $758,270 (Minerals Marketing Corporation of Zimbabwe commission), $167,892 (Pay As You Earn- ZIMRA) and $141,365 (National Social Security Authority).
  • Mineral reserves and ores are not known as no meaningful exploration has been done. This carries the risk of poor economic justification for disposing equity stake to investors as the quantity and quality of concerned mineral assets is unknown. In addition, fiscal plans are most likely to be undermined by poor confidence in revenue. This has been the case since the start of formal exploitation of Marange diamonds in 2010.
  • Joint venture partners have been enjoying dividends without honouring their committed capital investments.
Joint Venture Agreed amount (US$) Amount invested (US$) Variance (US$)
Mbada Diamonds (Pvt) Ltd 100,000,000   47,914,009 52,085,991
Jinan (Pvt) Ltd 200,000,000 134,853,491 65,146,509
Diamond Mining Corporation (Pvt) Ltd 1000,000,000   40,971,654 59,028,346
  • Corporate Social Responsibility (CSR) investment amounting to $3,163,091 lacked proof of receipt from beneficiaries and no breakdown of expenditure was availed. Included under CSR; $195,000 (Kimberly Process Certification Scheme Inter sessional meeting on 4-7 June 2013), $165,000 (Diamond mining conference in Angola & Turkey), $100,000 (Diamond expenses for Israel & China- Dewe L). These travel expenses dwarf the $250,000 given to Marange Zimunya Trust. It is unclear how travel to international conferences by senior executives constitutes CSR. It can be inferred that some of the CSR budgets that the companies tout as representing commitment to community social development are essentially personal and or executive expenses.
  • No proof of ownership of investment in Anjin (private) Limited, Jinan (Private) Limited, Gyme Nyame (Private) Limited, Diamond Mining Corporation and Global Platinum Resources (Private) Limited as share certificates could not be availed.
  • The OAG report noted that there is no Environmental Impact Assessment certificate for Marange resources, a ZMDC’s subsidiary. Notably, the state is both a player and a regulator in the mining sector its partiality in enforcing the rule of law shows double standards and dissipates confidence in mineral resource governance.
  • Mbada diamonds posted an operating loss of $49,651,859 in 2013 after making $56,015,647 profit in 2012. The entity’s current liabilities exceeded current assets by $89,916,504 (2013) and $57,383,887 (2012). The report expressed concern on the business’s ability to operate in the foreseeable future.
  • Marange Resources non-executive board members were given a cumulative total of 2,940 litres of fuel, $27,450 each as holiday allowances and an extra security payment of $758,000 over and above the approved remuneration rates. These payments were not taxed under PAYE contravening the Income Tax Act (Chapter 23:06).
  • The Chairman of the Mining Development Board retired from the Board on June 30, 2013 and was paid US$ 261 000 as gratuity for his three and half years service on the board.This is in contravention of corporate governance  principles which state that non-executive directors shall not receive excessive payments on contract termination.
    The gratuity payment was also not taxed in contravention of the Income Tax Act [Chapter 23:06].

Despite national political rhetoric on state resource ownership the OAG report clearly exposes the need to improve management of SOE that are participating in mining.  Where state participation in mining is not fully accounted for, socio-economic transformation leveraged on minerals resources will remain a pipe dream. It is important to note that the OAG 2014 Report is not the first to expose this decay in SOE. There is, therefore, a need for various actors to ensure that the findings from this report are urgently taken forward and considered.

RECOMMENDATIONS

  • The Ministry of Mines and Mining Development must swiftly act to address the rot as minerals are a finite resource. The Ministry must publicly state how it will address the findings from the OAG Report. ZMDC should be compelled to timeously release its financial information to stakeholders particularly given that this is a SOE.
  • The government must disclose Marange diamond joint venture agreements and all mining contracts to enable public oversight on how sovereign assets are being managed. Contract disclosure can act as a deterrent to cases where joint venture partners with government enjoy dividend income without making good of their committed capital injection.
  • The government must explore possibilities of recovering dividend income that was enjoyed by joint venture partners who failed to honour their capital contributions in full. The process of consolidating diamond entities should not reward truant joint venture partners who have failed to contribute required capital to justify their equity position in Marange diamond exploitation
  • The Parliamentary Portfolio Committee on Mines and Energy and the Committee on Public Accounts must ensure that the report findings are urgently considered. Parliament should investigate how the 40% government equity in Anjin Investments is being accounted for.
  • Civil Society through the Publish What You Pay (PWYP) campaign must make use of already existing and credible information reports of the OAG to raise public awareness and aggregate public demand for government accountability to stop the bleeding of public resources. Demand driven accountability can be coalesced through public awareness and understanding centred on abuse and leakages of public resources. An analysis of implications of poor management of public resources vis-á-vis provision of constitutional socio-economic rights would be vital.

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For more information on the OAG Report Findings please get in touch;

Mukasiri Sibanda- (Economic Governance Officer, Zimbabwe Environmental Law Association)- mukasiri@zela.org

Gilbert Makore (Coordinator, Publish What You Pay- Zimbabwe)- gtmakore@gmail.com

Zimbabwe Environmental Law Association

26B Seke Road, Hatfield, Harare

Tel: +263 57360-3

Website: www.zela.org

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Mining and the IMF Staff Monitored Program for Zimbabwe

The IMF published the Government of Zimbabwe’s Letter of Intent and the IMF Staff Report for monitoring that began in March and ended 17 April 2015. This is all part of the IMF Staff Monitored Program (SMP) that Zimbabwe voluntarily subjected herself to in 2013. The program is aimed at normalizing the country’s relationship with creditors and mobilize meaningful development finance. Should Zimbabwe meet all the quantitative and structural benchmarks under the IMF SMP this would demonstrate the country’s capacity to repay its debts and could unlock funding from not just the Fund but other agencies.

The government’s commitment to implementing various reforms under the SMP is, therefore, high particularly given the continued challenges in mobilizing development finance and a general choke-hold on the economy. In that regard the SMP becomes an important arena for tracking and monitoring progress with respect to various structural reform commitments.

Of particular interest in the recently published LOI and Staff Report are the points below;

Point 13 in the Staff Report: Authorities expect submitting the amended Mines and Minerals Act, including the fiscal regime for mining, to the Attorney General by end-March, to be submitted to Parliament in the third quarter of 2015. They have already started developing regulations to support the implementation of the amended Act, which would help strengthening the tax regime for the mining sector and improving mining revenue transparency. The authorities have committed to continue publishing the audited financial statements of the Zimbabwe Mining Development Corporation (ZMDC).

Point 23 in the Staff Report: In January 2015, the Indigenisation and Economic Empowerment (IEE) Act was amended to include new roles for the line ministries to approve indigenization plans, issue compliance certificates, and monitor implementation. Line ministries are required to define and publish the parameters for their respective sectors. To further clarify the policy, the authorities plan to publish a simplified summary of the law on the Zimbabwe Investment Authority’s website.

General Comments

It is highly likely that the amendments to the Mines and Minerals Act will be tabled before Parliament before end of 2015 and it is important to monitor and influence this reform process as much as is possible.

There is a commitment to publish the audited financial statements of ZMDC. This is a welcome commitment although its tempered by the fact that the government had (in a letter to the IMF on 3 November 2014) earlier committed to ensuring that the 2013 audited financial statements of ZMDC would be published by the end of 2014. This target was not met.

It is not clear if the new roles for the line Ministries address investor or investor confidence concerns. The IMF Staff report also concedes as much. There remains a lot of confusion in government, the general public and investors with respect to the interpretation and implementation of the Indigenisation and Economic Empowerment Act.

DISPUTES EXPOSE POOR MINING AGREEMENTS

By: Mukasiri Sibanda* (Guest Blogger)

In Zimbabwe, Mining Agreements (MAs) or contracts are not publicly available and accessible. This is so despite that constitutionally speaking; minerals are public assets and must be publicly accounted for. Secretive MAs may have harmful tax incentives which may prejudice mineral revenue flows to the public purse and consequently inhibit broad based socio-economic development.

In 2014, Zimbabwe was ranked 156 out of 175 countries on Global Corruption Perception Index released by Transparency International. Given such high levels of corruption in the country, the secrecy surrounding MAs presents opportunities for corrupt public official and corporates to benefit at the expense of the nation. Secretive MAs have been identified as one of the causes for the failure of resource rich countries to leverage on natural resources to attain socio-economic transformation that lifts the poor out of poverty.

The news surrounding the tax dispute between Zimbabwe Platinum Mines (ZIMPLATS) and the Zimbabwe Revenue Authority (ZIMRA) clearly demonstrates the imperative for full disclosure of mining contracts or mining agreements. Zimplats is one of the largest platinum mining companies in Zimbabwe and operates out of Mhondoro-Ngezi. The company is listed on the Johannesburg and Australian Stock Exchanges and is largely owned by Implats. A local weekly newspaper, the Financial Gazette, carried a story on 26 February titled “ZIMPLATS Wins Tax Dispute”.

According to the story, ZIMPLATS entered into a Mining Agreement (MA) with government in 1994 which stipulated that royalty rates will be paid at 2.5% of fair market values. Further, the MA exempted ZIMPLATS on payment of Additional Profit Tax. These fiscal incentives are known as stabilisation clauses which are used as a tool to attract investments in a sector through the insulation of tax incentives from potential future changes in legislation.

ZIMRA argued that the MA agreement clause on stable 2.5% royalty rates was not binding since  requisite Statutory Instrument (SI) was not issued as stipulated by the Income Tax Act (Chapter 23:06) whereas Zimplats argued otherwise (case number 12292/11). Justice Lavender Makoni in favour of Zimplats citing that “the definition of taxes under Income Tax Act (Chapter 21:05) does not include royalties under the Mines and Minerals Act (read with Chapter VII of the Finance Act (Chapter 23:04).

The period under consideration in this dispute is 1 January 2004 to 30 September 2010. ZIMPLATS argued that it had paid royalty rates at 3% and 3.5% which were above the stipulated 2.5% in its MA with government. The overpayment amounted to US$6,057,146.00. It must be noted that royalty fees for platinum have since been further repeatedly revised upwards to 5% on1 January 2011 and 10% on 1 January 2012. Experts estimate that ZIMPLATS may claim up to US$120 million from ZIMRA. It is, however, noteworthy that ZIMRA has been complying with the reviewed royalty rates and has not demanded restitution as Justice Lavender Makoni noted in her judgement.

On another separate note the dispute between ZIMRA and ZIMPLATS on Additional Profit Tax (APT) payment amounted to $50.4 million from 2002 to 2011.

Royalties

These stabilisation clauses pertaining to flat royalty rates of 2.5% and the waiver of APT when added up shows that the public purse is at risk of losing over $176million. This becomes glaring when one considers the 2011 national budget statement which lamented poor royalty revenues despite booming mineral prices.

It is interesting to note that the MA that ZIMPLATS had with government was concluded in 1994. During this period, agriculture and manufacturing were the mainstay sectors of Zimbabwe’s economic growth. This has since changed as mining is now the lead economic sector after surpassing agriculture and manufacturing based on its contribution to both the Gross Domestic Product (GDP) and export earnings.

The country’s 5 year (2013-2018) economic blueprint, the Zimbabwe Agenda for Sustainable Socio Economic Transformation (ZimAsset) is anchored on judicious exploitation of mineral assets. Yet MAs that were entered into over 2 decades ago are likely to encumber whatever plans are in place of fully capturing mineral resource rents and fully beneficiating the country’s mineral assets. These unbeneficial tax incentives should be put in the context of the fact that mineral resources are wasting assets that cannot be recovered once exploited. In addition, the failure to judiciously exploit the country’s mineral resources means that treasury is starved of much needed revenue and this has the knock-on effect of stifling much needed investments in creating social safety nets to ameliorate the plight of many poor Zimbabweans.

Reviewing of MAs to unlock the mining sector’s potential in line with the new economic status of mining is critical to the realisation of ZimAsset’s transformation agenda. MAs should be publicly accessible and it is disheartening to note that the details of the much touted recent $3 billion platinum MA between Russian investors and government are not public. Do we have to wait for disputes to start exposing the malcontents of this MA as is the case with Zimplats? Zimbabwe should follow the lead of countries such as the DRC and Guinea in publishing mining contracts or mining agreements. This helps plug opportunities for corruption and ensures that public officials negotiate in good faith knowing full well that the mining agreements will be subjected to public scrutiny.

* Mukasiri Sibanda is an Economic Governance Officer at the Zimbabwe Environmental Law Association ( a member of Publish What You Pay Zimbabwe)