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Zimbabwe Environmental Law Association

2015 PRE – NATIONAL BUDGET SUBMISSION

By Pasipamire Simbarashe

Zimbabwe eagerly awaits the 2015 National budget statement with high hopes that it will address the socio economic challenges afflicting the nation. This submission by the Zimbabwe Environmental Law Association (ZELA) details some of the key fiscal reforms and aspirations that the organization expects in the forthcoming 2015 National Budget statement. The potential role of the mining sector to anchor socio-economic transformation and infrastructural development has been recognised and highlighted by Zimbabwe’s current five-year (2014-2018) economic blueprint, the Zimbabwe Agenda for Sustainable Socio Economic Transformation (ZimAsset). These aspirations and/or reforms proposals are therefore key in ensuring good mineral resource governance and will ensure that the country unlocks its mineral potential. a) Improving transparency and accountability in the mining sector

Previous national budget statements have clearly enunciated the need for greater transparency and accountability in the management of mineral revenue. However, despite clear admission that there is opacity in the management of mineral revenues, there has been no significant improvement of mineral governance in terms of instituting to transparency either through legal and policy reform or through the adoption or adaptation of international best practices such as the Extractive Industry Transparency Initiative (EITI). Successive Ministers of Finance from 2009 to date have all explicitly mentioned government’s intention to adopt and implement the EITI. It is, therefore, important for the 2014 National Budget to come up with clear guidelines and timelines to improve on mineral revenue transparency and accountability.

b) The release and tabling of ZMDC’s 2013 audited financial statements before parliament

The Zimbabwe Mining Development Corporation (ZMDC) is a state owned enterprise, championing State interests the mining sector. Some of the ZMDC’s most prized assets include ownership of not less than 50% stake in all Marange diamond-mining entities. The only exception is Anjin where ZMDC’s shareholding is restricted to 10%. The dearth of transparency and accountability has consistently been characteristic of the accounting of Marange diamond revenues. In 2012, under-performance of diamond dividends caused fiscal stress whilst in 2013, the $61 million budgeted revenue failed to materialise.

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ZMDC 2013 audited financial statements are still outstanding notwithstanding legal requirements of the Companies Act to produce audited financial results within 3 months ensuing after each end of a financial year. This lack of timely production of financial information has become a black spot on Marange diamond mining more so given the fact that the company involved is a State enterprise. The 2012 audited financial statements were belatedly released in 2014, which clearly illustrates the need to reverse the trend of untimely production of financial information.

c) Transparency in contract negotiation and disclosure of mining contracts

Mining contract negotiation remains cloaked in secrecy and contracts remain hidden from the public, which juridical owns the mineral resources. The details of the recently signed and widely celebrated $3 billion platinum mining deal involving Russian investors have not been publicly disclosed. The public needs to know the price at which the investment was secured for. There is a risk that fiscal incentives prejudicial to tax revenue could have been used to attract this foreign investment. Furthermore, given previous potential cases of bribery and corruption in the mining sector; there is every reason for the public to be highly suspicious of billion dollar deals whose details remain secret. Transparency of mining contract negotiation and disclosure can plug mineral revenue leakages and maximise fiscal receipts from the mining sector. The current dispute between Zimbabwe Revenue Authority (ZIMRA) and ZIMPLATS on additional profit tax also highlights some of the potential revenue leakages to the fiscus that could emanate from secrecy in contract negotiation.

d) Lack of valuation of mineral reserves

ZimAsset is anchored on judicious exploitation of mineral resources. Regrettably the country does not know the value of its extensive mineral resource base. The often stated and much vaunted mineral wealth potential is merely a matter of speculation. Without knowledge of the reserves and value of minerals in Zimbabwe it is inevitable that contracts would be poorly negotiated as the value of minerals underground is not known. This increases the risk of state negotiators being outwitted by mining companies and hence fails to optimise mineral benefits for the State and its citizens.

Government’s plan to set up an exploration company (as set out in the 2014 National Budget) to carry out geological surveys is laudable. However, the 2015 National Budget should allocate adequate resources to the mineral exploratory company and the Geological Survey Unit.

e) Complexity of the mineral tax regime Too many government agencies are involved in the collection of mineral revenue. These include ZIMRA, Environmental Management Agency (EMA), Ministry of Mines and Mining Development, Zimbabwe Mining Development Corporation (ZMDC) and Minerals Marketing Corporation of Zimbabwe (MMCZ). The 2015 National Budget should give traction to the establishment of the consolidated mineral revenue fund. This clears the current discord on how much mineral revenue is accruing to the fiscus and would be a positive step in ensuring transparency and accountability with respect to mineral revenue. Such transparent accounting of mineral revenues through setting up a consolidated mineral revenue fund would put to rest the argument of whether or not the nation is adequately benefiting from its mineral assets.

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f) Progressive royalty regime & policy predictability

Over the past 5 years royalty rates for gold, platinum and diamond have been increased frequently to capture the upside swing in commodity prices. Recently, commodity prices have taken a knock and The Chamber of Mines of Zimbabwe is pressuring government to adjust royalties in light of commodity price movements. The establishment of a progressive royalty regime will have a self adjusting system where rates fall and rise in a pre determined manner allowing policy predictability in stead of the current reactionary approach in the adjustment of royalty rates.

g) Earmarking of mineral revenue to socio-economic infrastructure development Mineral resources are a finite and intergenerational wealth that should be extracted for the benefit of both the present and the future generations. The development of a Sovereign Wealth Fund Bill (SWFB) is a critical step that government took to signal its intention to manage mineral resources with inter-generational equity in mind. The SWF Bill must be enacted into an Act with clear transparency and accountability provisions. Equally important in capturing mineral resource rents and given that they are wasting assets is the need to earmark mineral revenue for human and infrastructure development. The 2015 Budget statement comes at a moment Government is struggling in social service provision. Greater importance should be put to earmark mineral revenue to sectors such as health, education that will promote human development. In 2012, the National Budget had earmarked 50% of the expected $600m diamond dividends to human and infrastructure development projects. However, this failed to materialise due to the fiscal stress suffered in that year. This practice must be retained and should form part of efforts to establish the sovereign wealth fund.

h) Addressing revenue leakages and illicit financial flows in the mining sector

Just like other African nations, Zimbabwe is not immune from illicit financial flows. Reports by African Development Bank and Global Financial Integrity indicate that Zimbabwe could have lost a cumulative US$12 billion from 1980 to 2009 through illegal financial outflows ranging from secret financial deals, tax avoidance and illegal commercial activities. Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU) also estimated that Zimbabwe could have lost an estimated US$2.85 billion through illicit financial flows in mining, fisheries, forestry and illegal Safari activities from 2009 to 2013. Illicit Financial Flows (IFFs) are funds illegally earned, transferred or spent. IFFs are more damaging to the nation given Zimbabwe’s current fiscal constraints. Illicit financial flows robe the nation off resources that could be used to finance socio- economic and infrastructure development such as the much-needed infrastructure and basic social services such as health and education. A greater proportion of illicit financial flows are estimated to be emanating from the mining sector. It is expected that the 2015 National Budget will come up with clear action plans on how to plug revenue leakages by addressing IFFs, especially in the mining sector.

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i) Support for Artisanal and small scale miners The 2014 National Budget and the subsequent mid term review statement reduced royalty rates and lifted presumptive tax on artisanal and small-scale gold producers respectively. Some of the positive steps taken by Government include the Introduction of a lower royalty rate of 3% on small-scale gold producers (output less than 0.5 kg per month) in January 2014; and the downward review of royalty from 7% to 5% on gold by primary producers and the reduction of presumptive tax on small-scale gold miners to 0% from 2% by the 2014 Mid term budget. These initiatives to support artisanal and small-scale mining that is a source of livelihoods to many particularly given the high formal unemployment rate are noble. More however still needs to be done in lowering mining licensing fees for artisanal miners to differentiate them with those of large-scale players so as to boost productivity. Support is also needed in form of finance and leasing of technology and equipment. Support  should  also  target  youth  and  women  who  mainly  constitute  the  larger  proportion  of  the  unemployed.  Women  small-­‐scale  miners  also  suffer  prejudices   operating   in   a   male   dominated   industry.   The implementation of previous policy pronouncements on government’s intentions to formalise the sector is key.

j) Clear, fair and equitable natural resource revenue sharing formula between national and sub national fiscus. ZimAsset leverages on mining to spearhead socio economic development but host-mining communities are overwhelmed with environmental, economic, social and cultural costs. For instance chrome mining has transformed the great dyke to the “threat” dyke with massive land degradation, deforestation; deep open unsecured and disused mining pits which resulted in loss of humans and animals.

Photo taken in Mhondongori, Zvishavane showing the extent of environmental degradation due to chrome mining.

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The pollution of Save and Odzi rivers by Marange diamond miners is also threatening livelihoods of communities dependent upon those rivers for drinking water for humans and livestock, gardening and fishing.

The budget must have a clear, fair and equitable formula on distribution of natural resource revenue between the national and local fiscus where resource revenues are generated. Community Share Ownership Trusts (CSOTs) and unit taxes are laudable mechanisms of sharing natural resource wealth with host communities but need to be complemented meaningful by national fiscal allocations. For instance Unit tax revenues for Mutoko Rural district council is charged at one dollar per tonne for granite mining, which minimal local fiscal traction to deliver on socioeconomic development.

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