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