ZELA budget analysis 2015

BUDGET TRACKING PAPER

ANALYSIS OF THE 2015 NATIONAL BUDGET WITH PARTICULAR FOCUS ON MINERAL RESOURCE GOVERNANCE IN ZIMBAWE

December 2014

Simbarashe Pasipamire and Mukasiri Sibanda

DECEMBER 2014

Analysis Of The 2015 National Budget With Particular Focus on The Extractive & Mining Sector

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1. Introduction

The Minister of Finance presented the 2015 national budget to Parliament on 27 November 2014. The national budget is a key annual fiscal tool that lays bare government’s intentions of mobilising and utilising its resources. The budget reveals the legal framework for raising revenue in form of taxation policy and administration. The Public Finance Management Act is one of the key legal instruments related to domestic resource mobilization, management and distribution for social development. The Act provides for the control, management of public resources and presentation of the national budget and financial statements. The Act relates to the management of revenues which include all taxes, fees and other revenues of the state. The objective of the Act is stated in Section 3 as to secure transparency, accountability and sound management of the revenues, expenditure, assets and liabilities of government and public entities, including statutory funds. From the budget one can gauge the level of investments earmarked for public goods such as but not limited to electricity, public infrastructure, water and sanitation. Also revealed by the budget is government’s commitment to reduce inequality through prioritisation of public health and education services. Using the lens of good natural resource management, it is critical to note key performance indicators in the budget on how the nation is leveraging its mineral wealth for socioeconomic transformation of the majority poor citizens. This is the centerpiece of this budget analysis.

In 2015, government expects to mobilise US$4.1 billion which is a clear sign that its capacity to generate fiscal revenue has plateaued looking at budget trends set for the years 2010, 2011, 2013 and 2014 with targeted revenues of US$1,4 billion, US$2,7 billion, US$4 billion, US$3,722 billion and US$4,1 billion respectively.

Figure 1: National Budgeted Figures (2010-2015)

Government has been operating without fiscal space with an average 84% projected expenditure on the civil service wage bill for the past 5 years (2010-2014) and 2015 was not an exception with projected 81% expenditure.


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2. Mining sector growth and a reality check for Zim-Asset. The Zimbabwe Agenda for Socio Economic Transformation (ZIMASSET 2013-2015), the country’s economic blueprint leverages on judicious exploitation of mineral resources. The projected growth rate as stated in the ZIMASSET policy document for 2015 is 11,4%, while the 2015 National Budget Statement projected a growth rate of 3,1% for 2015. Thus progress on implementing ZIMASSET is facing strong headwinds given the underperformance of the mining sector which is the mainstay economic sector expected to provide the leverage.

ZIMPLATS mining operations (picture by Shamiso Mtisi)

3. Mineral revenue transparency and Accountability

3.1. Transparency Initiatives

From 2011 to 2014 the national budget statements have been pointing at either the adoption of the Extractive International Transparency Initiative (EITI) or adapting EITI through a domestic initiative called the Zimbabwe Mining Revenue Transparency Initiative (ZMRTI). However, no real and meaningful progress was made by government on these initiatives. The initiatives appear to have faced a lot of political resistance. The 2015 national budget called for the resuscitation of ZMRTI but without clear guidelines and projected dates of implementation. This casts doubts on government’s seriousness on issues of public transparency and accountability of mineral revenues.


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Figure 2: Excerpts of Ministry of Finance Statements on EITI from 2011 -2014.

Government is the custodian of mineral wealth on behalf of the people of Zimbabwe and has an obligation to publicly account for the generation, distribution and utilisation of mineral revenue in line with the Public Finance Management Act. Limited transparency and accountability creates loopholes that cause mineral revenue leakages, which weakens the fiscal muscle leaving potholes in the development agenda.

3.2. Departure from the norm on disclosure of diamond production and revenue data The 2015 National Budget Statement was interestingly silent on performance of the diamond sector in terms of both production and exports volumes and values. This is inconsistent with the norm set by the Ministry of Finance in the past 5 years by disclosing such information. To compound matters, no provision for dividend revenue from diamonds was made despite that government owns no less than 50% stake in all the five companies operating in Marange. The only significant disclosure on Marange diamond was that there should be transition for alluvial to conglomerate diamond mining. Perhaps a soft confirmation of media reports in the first quarter of the year that pointed to the depletion of alluvial diamonds in Marange. Or, perhaps it was an attempt to manage public outcry on how Marange diamonds have depleted without meaningful financial and economic benefits accruing to the nation and communities.

3.3. Publication of ZMDC Financial Statements The 2015 National Budget Statement also called for the disclosure of the Zimbabwe Mining Development Corporation (ZMDC)’s audited financial statements. This is an


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interesting call from the Ministry of Finance. Civil Society, in particular ZELA have been making the same calls. ZMDC is a state owned enterprise representing state interests in the exploitation of mineral resources. It is important for the state as both regulator and a player to lead by example on transparency and accountability in an industry renowned for secrecy. ZMDC’s 2013 audited financial statements are still outstanding to date. This is a worrisome trend of lack of timeous disclosure of financial information given that ZMDC’s 2012 audited financial statements were released in the first quarter of 2014. Significantly, ZMDC’s audited financial statements give a bird’s eye view on performance of Marange diamonds since it owns no less than 50% stake in all companies operating in Marange with Anjin Investments being an exception where ZMDC owns 10%. The other 40% is held by an undisclosed government agent and the remainder 50% by Anhui Foreign Economic Construction Company Limited of China (AFECC).

3.4. Consolidated mineral revenue reporting Mining contribution to the fiscus has been a source of an omnipresent discord between the Chamber of Mines of Zimbabwe and government. Fiscal revenues have always been reported by the Zimbabwe Revenue Authority (ZIMRA) and also in National budget statements as segregated revenue tax heads. Thus the additional consolidated reporting of revenue from mining sector will pave way for proper reconciliation of mining fiscal revenue from government and chamber of mine’s reports. Treasury reported that the provision of such disaggregated information is limited due to preservation of secrecy enshrined in the Revenue Authority Act, which is meant to safeguard taxpayer confidentiality. ZIMRA is currently compelled to provide information that is limited to the total amount of taxable income. Government, through the national budget statement has thus made moves to empower ZIMRA to provide information beyond taxable income. This would be achieved through amendments of the Revenue Authority Act that will compel ZIMRA to avail information to the Minister of Finance and Economic Development or the ZIMRA Board without limitation. The Minister of Finance also proposed to provide for exchange of information between the Zimbabwe Revenue Authority and the Reserve Bank of Zimbabwe. Although this will enhance transparency between government departments, there is also need for provision of information to the public.

3.5. Setting up of the joint task force to monitor Marange diamond revenue

Through the National Budget Statement, it was noted that Government set up a Joint Task Force to forecast and monitor diamond-related revenue flows. This is an important step. Government advised that this task force is now operational and producing informative reports on diamond revenue flows and other operational matters. The Joint Taskforce is composed of technical staff from the following government agencies; Ministry of Finance and Economic Development, Ministry of Mines and Mining Development, Zimbabwe Revenue Authority (ZIMRA) and The Reserve Bank of Zimbabwe (RBZ). What may be vital is for the Task Force to publicly disclose and share some of its findings with citizens so as to prevent speculation on diamond production and revenue flows.

3.6. Consolidation of the Diamond Sector

In the Budget Statement Government indicated that it is currently undertaking a review of the structure of the diamond sector, with a view to streamlining the number of


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companies operating in the sector. This process is expected to enhance oversight and thus ensure transparency and accountability in the diamond sector. Government hopes to merge the current seven diamond firms operating in Marange into a fewer and manageable number. It must be remembered that Government has always been decrying limited transparency in entities operating in Marange and that government was not receiving its fair share of diamond revenue. Therefore, government should not reward truant companies that have been prejudicing the fiscus when implementing the consolidation process in Marange.

4.0. Mining Fiscal reforms: 2 year suspension of 15% export tax on raw platinum The Budget Statement also states that export tax on export of raw platinum will be suspended for the next 2 years beginning 1 January 2015 to 2017. This will be done on account of government’s satisfaction with the progress made by the platinum producers to build platinum refinery facilities locally. Zimplats is expected to invest US$200 million in early 2015 to support new investment in plant and machinery. Export tax is meant to discourage exports of raw materials which have dire effects on development of downstream industries, job creation and taxable income base. Government should have conditionally suspended export tax on raw platinum for 2 years and put a clause to recoup the lost tax revenue in the event that the targets are not met. For instance, in the event that platinum refinery facilities will not be ready by the end of the suspension period, export tax will be applied in retrospect or backdated.

The black granite beneficiation plant in Mutoko District (for cutting and processing black granite) which was part of early efforts to promote beneficiation of minerals has been abandoned. Equipment at the site is lying idle and will be beyond repair. There are no efforts to maintain the equipment (Picture by Mukasiri Sibanda).

5.0. Gold compliance and enforcement unit

Another important development noted in the Budget Statement is that Government has established the Gold Compliance and Enforcement unit with a view of unifying various Government agencies overseeing the operations in the sector. This will enable Government to fully account for gold production and monitoring in the country. The Unit will be comprised of the following stakeholders:

v Ministry of Mines and Mining Development v Ministry of Finance & Economic Development v The Reserve Bank of Zimbabwe; v The Zimbabwe Republic Police; v The Environmental Management Authority; v Fidelity Printers and Refiners;


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v The Zimbabwe Revenue Authority; and v Rural District Councils.

In a bid to plug loopholes in the gold sector, Government has directed that custom milling plants connection will now require prior authorization from the Ministry of Mines and Mining Development. This decision was arrived at after Government realised that some gold milling plants were connected to the ZETDC grid despite being not registered. Government also expects the custom miller’s account to be in the name of the mine or milling site and not individuals or other unrelated parties.

5.1. Mineral Exploration Treasury’s concurrence on how the country is not fully knowledgeable of the extent of the value of its mineral resource base is highly welcome. Government also appreciates how this often inevitably results in poorly negotiated contracts potentially prejudicing the benefits accruing to the State and its citizens.

Mining exploration is key for purposes of attracting investments and negotiating mining contracts (Picture shows some localized exploration and mine development activities in Marange)

Government has indicated that part of this will be addressed by the amendments to the Mines and Minerals Act that are currently being finalised with passage of the law expected in 2015. This is expected to pave way for the full operationalisation of the exploration company, among other measures. Efforts by treasury to push for the valuation of mineral resource are evidenced by an allocation of US$3 million towards exploration activities during 2015.

5.2. Support for artisanal and small scale miners

Treasury reported that Government through ZMDC has entered into a US$100 million Facility Agreement with Xuzhou Construction Machinery Group of China for the provision of small-scale mining equipment on credit. The beneficiaries of the facility are small-scale miners in gold, chrome and tantalite minerals. With respect to small-scale gold miners, Fidelity Printers and Refiners will make the loan recoveries through CBZ Bank Limited, which will purchase all the gold from small-scale miners. The responsible ministry is also expected to advice on the loan repayment mechanisms for chrome and tantalite miners. These efforts by government are highly welcomed given that artisanal and small-scale miners constitute a greater proportion and contribute significantly to output such as gold but usually lack funding. There is need for transparency in the distribution of this facility and also to ensure that youths and women in mining are also given their fair share. More robust measures should be adopted to ensure that the


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small-scale miners receive market prices for their gold and at the same time measures are taken to ensure traceability of minerals.

5.3. Sovereign Wealth Fund Treasury has shown its commitment to the establishment of the Sovereign Wealth Fund (SWF) in order to ensure that the country leverages on its resource endowments for sustainable development. Treasury reported that the legislation to establish the SWF the Sovereign Wealth Fund Act is now in place.

The Fund will be primarily resourced from 25% of all royalties on mineral exports on the sale of diamonds, gas, granite and other minerals through the Zimbabwe Mining Development Corporation. Treasury further accepts that this funding strategy is appropriate as it diverts resources away from recurrent expenditures towards capital development projects. The 2015 National Budget Statement set asides US$500 000 in support of the initial operations of the Sovereign Wealth Fund.

Treasury reported that modalities are being made for the operationalization of the Sovereign Wealth Fund. The process of appointing a Board and a Fund Manager is expected to follow. These efforts are highly commendable to ensure future generations benefits from the nation’s exhaustible resources.

However, transparency, accountability and integrity in the management of this fund are key aspects given that the SWF is a public enterprise. Most public enterprises have a bad reputation of mismanagement of public resources and renowned for corruption and inefficiency. For instance, the National Social Security Authority (NSSA) another public enterprise in charge of managing public funds has also been in the limelight of making inefficient and unprofitable investments. All these can wreak havoc to the noble intentions of operating a SWF. Zimbabwe should learn from other countries on how to manage the fund. Further, it must be noted that government lacks fiscal space and is struggling to service the gigantic civil service wage bill and this is a huge a risk to the disbursement of funds earmarked for SWF. This means government should closely look at the issue of balancing the immediate financial needs of the country versus investment for the future. At the moment the country is relying on a hand to mouth system and if the SWF is going to work effectively, a balance should be struck.

5.4. Efforts to curb Illicit Financial flows through Anti-Money Laundering & Combating Financing of Terrorism Treasury indicated that it has made progress on Anti- Money Laundering and Combating the Financing of Terrorism (AML/CFT). This included ratification of relevant Conventions and Protocols, enactment of new laws, revision of existing ones, as well as gazetting of requisite regulations. Treasury further reported that Zimbabwe was rated as being technically compliant after being evaluated by the Financial Action Task Force (FATF). Further implementation modalities of legislative systems and institutional arrangements with various relevant stakeholders are expected in 2015.

AML/CFT National Risk Assessment aimed at identifying, assessing and understanding Money Laundering and Terrorist Financing risks facing the country was also done. It was also reported that the national risk assessment was being finalised by the National Task Force, and a detailed report on combating illicit financial flows to and from the economy will undergo normal Government approval processes in the first quarter of 2015.


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Government has further acknowledged the increasing incidences of externalisation of funds through practices such as transfer pricing and under-invoicing. The export of minerals in many African countries especially the diamond sector has been subject to such practices as transfer pricing and under-invoicing. For example a report by Partnership Africa Canada (PAC) on illicit financial flows in the diamond and gold sector in Zimbabwe and DRC respectively has revealed that Zimbabwe lost approximately $770 million between 2008 -2012 through under-valuation and transfer pricing of diamonds by exported to the United Arab Emirates (especially Dubai).1 The UAE allegedly imports Zimbabwean diamonds on the cheap and export them at a much higher price. The report analysed the statistics of exports submitted to the KPCS by Zimbabwe and the statistics of imports and exports by UAE to arrive at this conclusion. The report states that “Perhaps one of the countries worst affected by transfer pricing and under-valuation of diamonds is Zimbabwe, which lost an estimated $770 million in taxable revenues on exports to UAE between 2008 and 2012 due to an average 50% undervaluation of its diamonds”.

In the 2015 Budget Statement, the Zimbabwe Government has therefore highlighted that it is stepping up systems of financial supervision and surveillance. What may also be important is for the Ministry of Mines and Mining Development in Zimbabwe to work closely with the Ministry of Finance on the issue of under-valuation of diamonds by the United Arab Emirates to curb this practice. Further, the Ministry of Mines representatives in the Kimberley Process Certification Scheme (KPCS) should support efforts to have the issue of under-valuation of diamonds to be discussed by the KPCS. It is African governments that are losing from under-valuation of minerals.

5.5. Revenue sharing between national and local fiscus Government must be applauded for prioritising allocations to provinces and local authorities. This is in line with the constitution, which states that at least 5% of the national revenues raised in any given financial year must be allocated to the provinces and local authorities as their share in that year. Treasury has indicated that it is ready to comply with this Constitutional requirement and awaits the enactment of the necessary legal framework. This is highly commendable given that mining impose a huge burden on the local authorities especially through environmental degradation and other social and cultural costs.

5.6. Amendments to the Mines & Minerals Act Government has taken time to make progress on amending the Mines and Minerals Act since 2007. However, Treasury, through the 2015 budget statement reported that Principles for amendments to the Mines and Minerals Act have been approved by Cabinet and the respective Bill is expected to go through the Parliamentary processes in 2015. This is also expected to pave way for the amendments to the Precious Stones Trade Act. This is a long outstanding necessary step given the fact that the Mines and Minerals Act is very old and often viewed as superseding other social, environmental and community rights. It is also important that this process be inclusive and participatory so as to balance the needs of all the difference stakeholders, including rural communities whose rights are mainly stumbled upon as a result of mining activities.

1 Partnership Africa Canada (2014) “All that Glitters is Not Gold: Dubai, Congo and the Illicit Trade of Conflict Minerals". http://tinyurl.com/o5he9bz


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6.0. Conclusion The 2015 national budget statement perpetuated the 5 year trend set by other budget statements where the civil service wage bill crowds out much needed investments in human and economic development projects. Fiscal revenues have stagnated and there is urgent need to vigorously stem illicit financial flows to improve tax revenue base and mobilise resources for economic growth. This is critical given the widely accepted view that Africa is a net creditor to the world-meaning that Africa losses more resources that it receives from both aid and foreign direct investments.

In the budget statement there was an omnipresent silence on performance of the diamond sector, which had grown over the years to be amongst the top 3 mineral exports. If this is read together with the statement that called for transition from alluvial to conglomerate diamond mining it may mean the sad closing chapter or exhaustion diamond deposits. It may also mean it is high time government engage companies with the technical expertise and not rely on opportunists who are not ready to invest in mining kimberlites that are much costly to exploit. This serves as a sharp reminder that transparency and accountability of mineral revenue value chain must not be taken for granted if the nation is to meaningfully benefit from its natural resources. This was a significant departure from the trend set by the past 5 year budget statements, which disclosed the performance of the diamond sector.

The past 4 national budget statements parroted mineral revenue transparency without any meaningful changes on the ground. This fails to stimulate public expectations on resuscitation of ZMRTI as directed by the 2015 national budget statement. ZIMASET that anchors on judicious exploitation of mineral resources is under threat from the depressed mining sector growth forecasts.

As stated earlier, what may also be important is for the Ministry of Mines and Mining Development to work closely with the Ministry of Finance on the issue of under-valuation of diamonds by the United Arab Emirates to curb this practice. Further, the Ministry of Mines representatives in the Kimberley Process Certification Scheme (KPCS) should support efforts to have the issue of under-valuation of diamonds to be discussed by the KPCS. It is African governments that are losing from under-valuation of minerals.

It now remains to be seen whether Government will judiciously implement the budget together with its policy intentions. Civil Society has the duty to monitor and engage government to ensure implementation of these projected policies.

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No. 26B Seke Road Prospect, Hatfield, Harare

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Economy & Finance

ZELA budget analysis 2015