2018 National Budget Expectations: The Quest to Make Mineral Wealth Work for All: AMV
“Much as government prides itself as a champion on broad based economic empowerment through indigenisation programmes, without access to information, citizens are blindfolded to see how their mineral wealth is being accounted for.”
For a country replete with mineral wealth, the national budget is a vital tool to make mineral resources work for all citizens. “Follow the Money” where is the Great Buck from the mineral rich Great Dyke? As the country formulates its 2018 national budget, there is an opportunity to advance one of the African Mining Vision (AMV)’s goals; “to create a sustainable and well governed mining sector that effectively garners and deploys resource rents and contribute to broad based growth.” Surely, the country must take advantage of its significant but finite mineral wealth to generate domestic finance for development. An immense challenge that must be tackled by the 2018 national budget. Time and again the treasury has decried that mining is not contributing a commensurate share of tax revenue. Yet mining is the lead sector in terms of export earnings, contributing over 50% to the country’s overall export earnings. This blog shares some pointers on how the 2018 national budget can improve mining tax contribution, enhance transparency and accountable management of the country’s mineral wealth.
Embrace mineral revenue transparency best practice
AMV urges African Union member states “to mainstream governance best practices such as the Extractive Industry Transparency Initiative (EITI) into their respective policies, laws, regulations, codes and standards; and expand the initiative to address upstream and downstream issues such as licensing, procurement, ownership, and sustainable development and call for its urgent operationalization.”
It is a plus that national budget statements from 2010 to date have signalled the intention of adopting or adapting EITI. The downside is that no material progress has been recorded on the ground. A domestic version of EITI, the Zimbabwe Revenue Transparency Industry Initiative (ZMRTI) suffered still birth in 2011. Fundamentally, the 2018 national budget should walk the talk on implementation mineral revenue transparency best practice. To kick start the process, the budget should show disaggregated data on mining contribution to the national purse per revenue head. This entails specific disclosure of mining contribution to various revenue streams like corporate income tax, pay as you earn, withholding taxes, royalties and custom duties among others.
Much as the government prides itself as a champion on broad based economic empowerment through indigenisation programmes, without access to information, citizens are dislocated from the accounting of their mineral wealth. EU, Canada and USA mandatory disclosures of payments made to government institutions by listed mining companies in their jurisdiction are certainly helpful. Information such as payments made to government by Blanket mine’s Caledonia is found courtesy of the Canadian Extractive Sector Transparency Measures Act (ESTMA) reports. How ironic is that a Zimbabweans should rely on outsiders to understand what some mining projects are contributing to finance development.
Disclosure of tax incentives
Tax incentives are a cost to the fiscus, they discount or reduce taxes paid by mining companies to government. Tax incentives constitute off budget expenditures, it is critical that the budget should disclose how much government is paying to the mining sector inform to enhance public scrutiny of the budget through Parliament as required by the Constitution. This will enable the public to identify harmful tax incentives and push for their eradication. It is unfortunate that government is freely giving away its taxation rights to a sector that is notoriously leading on illicit financial flows according to the High Level Panel report known as the Mbeki Report.
Curb illicit financial flows
It is incomprehensible that on one hand, government is paying export incentives to the mining sector for largely exporting finite raw materials to earn the country much needed foreign currency. Mining companies are receiving 2.5% export incentives from the Reserve Bank of Zimbabwe. Government on the other hand advances export tax as a tool to encourage local beneficiation and value addition of minerals. In the platinum sector, government suspended a 15% export tax on raw platinum exports which will resume on 1 January 2018. This is sending mixed signals and government surely must stop giving export incentives for raw mineral exports if it serious about beneficiation. In one of my blogs, how harmful or helpful is RBZ’s export incentives scheme, I argued that mineral royalty revenue has been sterilised by such practice. For instance, Zimplats, one of Zimbabwe’s biggest mines has a 2.5% royalty stabilisation agreement with government. By giving Zimplats 2.5% export incentives, it means on paper that Zimplats is not paying any royalty revenue. Other base and industrial mineral like nickel pay 2% royalties to government whilst government is paying 2.5% export incentive on the same minerals.
Honour constitutional revenue sharing between the national and local governments
Section 301 subsection 3 of the Constitution prescribe that at least 5% of national generated revenue must be distributed to provincial and local governments and this must be honoured by the 2018 national budget. Since the new Constitution was put in place in 2013, government is yet to honour this constitutional requirement.
Allocate enough funds for the mining cadastre
A computerised mining title management system is needed to promote transparency and accountable management of the country’s mineral rights. This is important to woo investors as incidence of multiple claim ownership disputes can be reduced or if not eliminated. Corruption in the allocation of claims will also be stifled if the mining cadastre system is prioritised.
Subside exploration costs for artisanal and small-scale miners
Artisanal and small-scale gold miners are indispensable to the country’s agenda to earn foreign currency through increased gold production. Gold contribution by artisanal and small-scale miners has surpassed production of large scale gold miners. Apart from the impressive contribution of the ASM sector to the economy, the sector is a direct source of livelihood for about 500,000 people and indirectly it supports over 2 million people. Sustainable ASM production is hampered by the gambling nurture of their operations. Exploration costs are beyond reach for most players in the ASM sector. Government must take lead and buy exploration equipment for each gold mining province to help with exploration for all ASM sites.
Plough back Rural Electrification Levies (REL)
Mining companies are significant contributors to the REL because they are heavy electricity consumers. Through Caledonia’s ESTIMA report for 2016, we can pick that Blanket mine of Gwanda RDC contributed over $466,000 to the REL whilst no dividends were paid to Gwanda Community Share Ownership Trust (GCSOT). To broaden opportunities to share mineral benefits with communities as required by Section 13 subsection 4 of the Constitution, the 2018 national budget must plough back at least 25% of rural electrification funds to resource rich communities.
Operationalise the Sovereign Wealth Fund (SWF)
Although government is struggling to raise revenue, it is important for the budget to honour its obligation to allocate 25% of mineral revenue to the SWF. Minerals are a finite resource which must be shared fairly between current and future generations.
To conclude, the Ministry of Finance and Economic Development should be guided by the African Mining Vision when crafting the 2018 national budget. This can be progressively achieved in many ways. The budget must embrace best practice on mineral revenue transparency like EITI, stop harmful taxes incentives, capacitate key institutions to play their regulatory roles in the mining sector eg on mining cadastre, support the ASM sector with exploration costs and to honour the constitutional revenue sharing mechanism between the national and local government.