Mineral revenue transparency reforms: Priorities for the new government
Under the auspices of “Operation Restore Legacy” led by the military, a new transitional phase has been ushered in Zimbabwe. Government has publicly shown its policy intentions to grow the economy, revamp public service delivery and to fight dogged corruption. As the country is endowed with vast mineral wealth, civil society must not miss this opportune moment, to engage government on critical enablers to make mineral wealth anchor “sustainable economic growth and broad based socio-economic development” as contemplated by the African Mining Vision (AMV).
Apparently, this new window of opportunity may not last long, in the next 7 months or so, new elections are to be held if all goes according to the book. Therefore, civil society must engage government on quick wins or low hanging fruits that can transform the landscape of mineral revenue transparency and accountability in Zimbabwe. Mindful of this narrow window of opportunity, this discussion paper is tailored to; (i) galvanise aggregate public demand for improved transparency and accountability in the management of mineral resources, (ii) to give traction to multi-stakeholder policy and practice reform dialogue to ensure mineral resources are well managed for the benefit of all Zimbabweans, and (iii) to better focus policy makers on critical areas that require urgent attention to attract much needed “responsible investments”, to curb corruption and deliver socio-economic development hinged on mining.
Attracting Foreign Direct Investment (FDI) is one of government’s main priorities as highlighted in the 2018 national budget statement and the State of Nation Address (SONA), 20 December 2017. In so doing, some policy interventions have urgently been carried out, in the process undermining transparency and public participation, cornerstones of public accountability which augurs well for “Operation Restore Legacy.” Indigenisation requirement of 51/49 equity in the mining sector was scrapped except for platinum and diamond sectors. Host mining communities, who bear the brunt of mining, were not consulted. They are in the dark as to operationalisation of Community Share Ownership Trusts (CSOTs) outside platinum and diamond mining areas. Likewise, mining workers set to benefit from Employee Share Ownership Schemes (ESOS) have been affected.
Whilst government is under pressure to turnaround the economy through attracting investments, the risk of festering a “resource curse” increases as bad mining agreements can result if the fast-tracking approach is taken. Lessons can be drawn from Marange diamond mining activities in which minerals rights were parcelled without economic consideration of the value of diamond reserves, investors failed to meet required capital contributions, exploration, a life blood of any mining activity was not done and anticipated $50 million to the Marange Zimunya CSOTs failed to materialise amongst other host of challenges. Another case of poor mining deals is the 2.5% royalty stabilisation clause for Special Mining Lease Agreements (SMLA) involving platinum houses which undermined the Public Financial Management Act (PFMA) royalty rates currently pegged at 10%. If well managed, the country’s mineral assets can be a good leverage for Domestic Resource Mobilisation (DRM) to finance development. Avoiding overgenerous tax incentives is a low hanging fruit for DRM. This will ease government pressure to borrow development finance from International Financial Institutions (IFIs).
Ongoing policy reforms like the Mines and Minerals Amendment Bill (MMAB) offers opportunity for government to entrench public disclosure and performance monitoring of Mining Agreements (MAs). This will fulfil Section 315 (2) (C) of the Constitution which requires transparency, cost effectiveness and competitiveness in negotiation and performance motoring of MAs.
Considering that the country is opening to investors, there is urgent need to review various Double Taxation Agreements (DTAs) to mitigate against abuse which can harm the DRM initiatives. DTAs are entered between countries to facilitate cross border investments by making sure income generated by individuals or corporates is not taxed twice. Nonetheless, DTAs can be abused through treaty shopping and permeant establishment definitional issues. According to International Tax Blog, “treaty shopping generally refers to a situation where a person, who is resident in one country (say the “home” country) and who earns income or capital gains from another country (say the “source” country), is able to benefit from a tax treaty between the source country and yet another country (say the “third” country). This situation often arises where a person is resident in the home country but the home country does not have a tax treaty with the source country.”
Permanent establishment risk can be managed according to PwC when “the permanent establishment (PE) threshold test is contained in many countries’ domestic tax laws and double tax treaties. It determines whether a business has sufficient activity in another territory to create a taxable presence in that other territory from a corporate tax perspective. While multinational groups may have found that PE issues were not a key area of focus for many tax authorities in the past, this position is now changing in light of the OECD’s proposals outlined in Action 7 of the Base Erosion and Profit Shifting (BEPS) project, which relates to addressing the perceived artificial avoidance of PEs by multinational corporations.”
Mining, unquestionable is intertwined with the country’s development prospects as evidenced by its principal contribution to much needed foreign currency earnings and its potential tax contribution and development of within the mining value chain and beyond the mining value chain. It is mindboggling that the country does not have a computerised and open mining title management system. The tender for the mining cadastre was flighted in 2014 and the tender was awarded to Spatial Dimension in 2016. To date, there is hardly any evidence that the open and computerised mining cadastre will be operationalised. There are many claim ownership disputes cause largely by corruption in the award of mining claims. Certainly, such risks are not good for attracting foreign or domestic investment in the mining sector. The Artisanal and Small-Scale Gold Mining (ASGM) sector critical to the country’s agenda to increase foreign currency earnings and to community empowerment is reeling from mine claim ownership disputes. A red flag on mining disputes was raised by women in ASGM during the 16 days of activism against Gender Based Violence (GBV).
Beneficial Ownership (BO) is a critical dosage to fight corruption in the award of mineral and mining operation or investments. Without knowing of the natural persons that are profiting from mining deals, initiatives to curb corruption will have limited success. Whilst disclosure of interest is important in public or private procurement, knowing the real beneficial owner of the deal is a game changer to avoid corruption, transfer pricing abuse and tax evasion. It is a matter of public interest to know whether the new Minister of Mines and Mineral Development (MMMD), Wiston Chitando, a former executive chairman of Mimosa Platinum Mining company, is a beneficial owner in Mimosa mines’ operations through equity or procurement deals. Similarly, there is strong public speculation that Mnangagwa, the president, has vast business interests which also covers the mining sector.
With BO disclosure, transparency and mutual public trust can be built to enable policy makers to operate without unnecessary speculation fuelled by social media on potential conflict of interest. Equally so, BO can have impact in other sectors of the economy including stemming wanton corruption in public procurement contract. A quick win in the mining sector to implement beneficial ownership lies in the finalisation of mining cadastre that includes an online registry beneficial ownership of mining claims. In addition, BO on a multi-sectorial approach can be carried out through the ongoing reforms of the Companies Act (Chapter 23:04). Government’s list of suppliers can be revamped to include beneficial ownership.
The role of the Office of Auditor General (OAG) is without doubt key to strengthening transparency and accountability in the management of mineral resources. Consistently, the OAG has been exposing the rot in the management of Marange diamond resources. Regrettable, the OAG’s reports have not been met with sombre public interest. Unwittingly acknowledging the bad culture of one centre of power and undermining institutions, the public was awakened when the President opined that the state was prejudiced around $13 billion from Marange diamond operations. Given that the Auditor General’s contract has recently been renewed, the public can expect to continue tasting Chiri’s chilli on corrupt practices in the handling of public resources.
Government must be applauded for renewing Chiri’s contract. However, more needs to be done especially ensure that the Auditor General’s recommendations to rectify the misallocation of public resources are complied with in line with Section 309 (3) of the Constitution. Critical, audited financial statements on diamond mining entities in which government had equity in Marange were never made public as they were operating like private companies. Therefore, the alignment of the PFMA with the Constitution as announced in the 2018 national budget statement to expand the institutions to be audited by the OAG must include government controlled entities in line with Section 309 (2) (b).
Since minerals are public assets, the public has interest in how much revenue is generated from the finite resources. Unlike previous budgets statements, it is unfortunate that the 2018 national budget statement missed to the opportunity to clutch mineral revenue transparency best practice like the Extractive Industry Transparency Initiative (EITI). Apart from mineral royalties, it is difficult to discern mining contribution in other revenue heads like Corporate Income Tax (CIT), Pay as You Earn (PAYE), customs duty and withholding taxes among others. Already, the Zimbabwe Revenue Authority (ZMRA), the country tax administrator is disclosing quarterly and annually revenue performance reports. The revenue performance report shows information per tax or revenue head and they can be twerked to share specifically show mining contribution per revenue head as a quick win. Going forward, it is important to focus on revenue disclosure per mining project. Through Caledonia’s Extractive Sector Transparency Measures Act (ESTMA) report of 2016, data on payments made by Blanket Gold Mine to various government institutions is publicly accessible courtesy on Canadian law on mandatory disclosure by all extractive companies listed at the Toronto Stock Exchange (TSX). Such developments must spur government into action to ensure that Zimbabweans are not starved of information needed to hold government and mining companies to account on management of public resources.
Since the army is responsible for this transitional arrangement through “operation restore legacy”, it is important to draw parallels with “operation hakudzokwe” launched under the guise of restoring order in Marange diamond fields. After the army cracked down artisanal diamond mining in Marange, companies that emerged in Marange like Anjin had a significant footprint of the army in terms of ownership. Similarly, after operations restore order that culminated in Mugabe’s resignation and pruning in government of G40 aligned Ministers, army has moved to occupy key Ministries in Government.
Whilst benefits stemming from the army’s involvement in the exploitation of Marange diamonds are hardly discernible, the army sponsored transitional arrangement anchored on new hope of reforms. To consolidate and sustain the goodwill that was generated from Mugabe’s “resignation”, government must move with speed to implement reforms in the mining sector that lifts mining activities from the veil of secrecy. If government adopts the same approach of Mugabe’s regime which was allergic to mining sector reforms, the ghosts of the missing $15 billion in Marange will not be exorcised. It will leave to haunt the transitional government.
Government must urgently focus its attention on public disclosure of mining contracts, operationalisation of a computerised title management system, beneficial ownership disclosure on mining deals and public procurement contracts, reviewing DTAs to mitigate risk of abuse, disclosure of mining contribution per revenue head, expanding the scope of institutions to be audited by the Auditor General to include government controlled institutions and to ensure that the Auditor General’s recommendations are complied with in line with the Constitution.