Zimbabwe loses US$144 billion

Source: Zimbabwe loses US$144 billion | The Financial Gazette April 27, 2017

By Shame Makoshori, Senior Business Reporter

ZIMBABWE has lost US$144 billion in potential revenue from the mining sector since 2009, largely due to a plethora of problems, among them a power supply crisis, punitive tax regime and investor fatigue caused by unfriendly laws, the Financial Gazette can report.

Volatile commodity prices are also said to have played a part in the sector’s failure to recognise its full potential, according to figures from the Chamber of Mines of Zimbabwe (CoMZ).

The CoMZ data revealed that the country’s 800 mines had capacity to earn US$18 billion per annum, but are currently only turning out about US$2 billion annually since 2009 when the country dollarised its economy to escape a hyperinflationary crisis.

This represents about a tenth of the sector’s full potential and translates to a loss of potential revenue amounting to US$16 billion annually, or US$144 billion since 2009.

The mining sector, considered by government to be one of four sectors supporting economic recovery, are currently facing problems in the payment of foreign suppliers of critical materials that have reportedly hampered production. This is despite the fact that mining is currently the single largest foreign currency earner in the country.

Resources analysts acknowledged that the cash-strapped country was losing substantial amounts in potential revenue, saying this boiled down to poor investment policies and an environment that undermined existing operations.

The report, generated last year but only seen by the Financial Gazette this week, said Zimbabwe had experienced a slump in mining revenues last year, generating US$1,8 billion compared to US$1,95 billion generated in 2014. It however, expected a recovery last year, but figures were not available from either government or the CoMZ by yesterday.

“If fully optimised, the country has the potential to generate as much as US$18 billion annually from its resources,” the CoMZ said in an overview of the mining sector.

To put this into perspective, Zimbabwe is running an annual budget of about US$4 billion, which it has been battling to fund over the past few years. Its gross domestic product is at US$14 billion.
Potential revenue of US$18 billion per year is therefore 3,5 times higher than the national budget, and just over US$4 billion more than the size of the economy.

It means the resources sector alone could drive the country out of the current bust into boom.
Mining experts said there was a hostile environment for potential mining investors that had been fostered by a punitive tax regime, unfriendly legislation that proscribed foreigners from controlling their investments in Zimbabwe, and a host of other issues.

Details of the mining industry’s revenue performance revealed that among the mining subsectors worst affected were gold mines, which have been generating US$740 million per annum out of a potential turnover of US$1,8 billion.

Four minerals — gold, platinum, palladium and diamonds — accounted for 83 percent of total mineral revenue in 2015. Gold alone accounted for 40 percent of total revenues.
With requisite investment, the gold industry has potential to produce in excess of 35 tonnes of gold annually by 2020 and generate US$1,8 billion in revenues, said the CoMZ.

“At those levels of output, the contributions of the sector to the economy will more than double,” said the CoMZ.

“Despite hitting a record low of 3,6 tonnes in 2008, gold production recovered significantly to 20 tonnes in 2015, and is projected at 24 tonnes in 2016, just three tonnes short of the historic peak of 27,1 tonnes in 1999,” said the CoMZ.

By October last year, gold output had hit 17,3 tonnes in the 10 months to October, compared to 14,8 tonnes during the corresponding period the previous year.
Growth in the mining industry has been affected by high royalties, taxes and fees.
These have combined with uncertainty created by the State’s threats to seize foreign controlled mining firms to destabilise the sector.

In 2007, government enacted a law that forces offshore shareholders to relinquish majority control in domestic businesses. Although this law has been relaxed for other sectors, government insists it will not budge on the resources sector.

The situation has been made worse by a deteriorating foreign currency situation, which reached tipping point in January, just as the industry tried to shake off depressed prices during 2016.
Volatile mineral prices pushed operators to the brink of collapse.

Experts urged government to address problems that have frustrated FDI inflows into the mining sector and improve transparency while fighting illicit trade in minerals.

“It will be in order to state that potential revenue lost annually is US$16 billion,” said Lyman Mlambo, chairman of the Institute of Mining Research at the University of Zimbabwe.
“There is need to address operating capital finance requirements of the industry so the industry capacity utilisation may increase. Finalisation of the sector’s policy and legal instruments, which have been pending for a long time, will reduce uncertainty.”

“This, coupled with improvement in general ease of doing business, may unlock FDI which is sitting on the fence and other forms of foreign funding. The tax system, like the power pricing structure, needs review. Royalties should be profit-based and not gross revenue based,” Mlambo told the Financial Gazette.

He said royalties must be deductible for income tax purposes to avoid double taxation of profits.
In addition, indexing royalty rates and power tariffs to commodity prices would help mines to remain viable during times of depressed price cycles, said Mlambo.

Tax systems must be simplified in order to reduce multiple tax heads as well as collection agencies, he added, while emphasising the need for measures to improve infrastructure and bolster the capacity of small scale miners to increase production.

“The potential is there,” said Zimbabwe Environmental Lawyers Association (ZELA) director, Mutuso Dhliwayo. “But the fundamentals are not there to turn potential into reality. Last year, Zimbabwe attracted about US$500 million FDI while neighbouring countries attracted about US$5 billion to US$6 billion. It is such investment that turns potential into reality.”

He said research had established that the mere presence of mineral resources signifies comparative advantage.

“You need a legal and policy framework, transparency, governance and institutional systems, fiscal framework and revenue management, land use planning, investment attraction strategies and stakeholder engagement that determines if you are able to turn comparative advantage into competitive advantage,” Dhliwayo told the Financial Gazette.

Analysts said CoMZ statistics were a wake up call for government to develop a viable climate in order to attract vital capital inflows.

“We have to interrogate the US$18 billion (in potential revenue),” said Oliver Maponga, a geologist and exploration expert with the United Nations Economic Commission for Africa.

“Importantly, what needs to be optimised are investment inflows for both brown and greenfield projects to address constraints such as doing business parameters, power, funding, political factors and the fiscal framework. We need to see if it is competitive. We have to look at factors like transfer pricing. In accepting that loss, you have to put caveats,” Maponga said.

The CoMZ said in November the mining industry required US$777 million in fresh capital, with 72 percent of this amount needed in the platinum sector, which has been expanding at a terrific pace in the past decade.

The sector has not been spared from high power costs of between US$0,10 and US$0,15 per kilowatt hour.
Government has admitted these tariffs were too high; the sector requires a tariff of about US$0,07 per kilowatt hour to sustain viability.

“We are certainly way below our potential,” said economic analyst, Trust Chikohora, the former president of the Zimbabwe National Chamber of Commerce, talking about the mining sector.
“We must replace the Indigenisation and Economic Empowerment Act with legislation that makes us competitive. We must allow investors to be able to pay dividends outside the country. We must have investor friendly policies so that we attract FDI in mining,” he added.
Extractive industries researcher, Malvern Mkudu, concurred.

“There are a number of issues why mining has not reached its full potential. Poor capitalisation means we are lagging behind in terms of updating the mining technologies and machinery required to reach optimum levels. Policies and laws, such as the recent removal of diamond mines from Chiadzwa have introduced uncertainty. None will invest in an environment that is uncertain. A number of players have lost land to government and this has affected output,” said Mkudu.
However, others felt the US$18 billion projection was “exaggerated”.

They agreed, however, that the mining industry had missed significant growth opportunities due to lack of capital and other problems confronting the resources sector.

“The first issue is that we exaggerate our resources, secondly for political reasons we make people believe those resources should deliver for us with us doing nothing. Non-resource countries have done better than us because of planning and strategic thinking,” said an economist with one of the country’s listed resources firms who declined to be named.

Another said: “The potential is there, but US$18 billion is such a huge number. But based on the Chamber of Mines’ statistics as you are presenting them, it is true that the industry is losing US$16 billion every year. On the face of it, there is an opportunity cost of US$16 billion based on the facts as you have presented them.”

The factors that have undermined revenue inflows into the mining industry, and into State coffers through taxes, are not only confined to harsh government policies.

In a 2015 investigation, ZELA said at least US$1 billion in potential revenue due to the State was being salted away every year because those entrusted to manage the diamond resource had either failed in their stewardship role, or were colluding with shadowy dealers to dodge paying taxes to the State.

In 2012, mismatches between government’s revenue projections from diamond mines and actual remittances hit US$555 million, ZELA noted, while in 2014, Treasury received nothing out of the US$61 million originally earmarked from the controversial Marange diamond fields.

“There has been a steady decrease in terms of non tax revenue contribution by mining companies from 2010 to 2013,” ZELA said.

The report, entitled “Tracking the Trends-An assessment of diamond mining sector tax contributions to Treasury with particular reference to Marange diamond fields,” warned of extensive pillage of diamonds through the manipulation of taxes and related fees by the private sector.

Finance and Economic Development Minister, Patrick Chinamasa, has also expressed reservations over mining revenues.

“Minerals are being exploited, but there is nothing coming into the fiscus,” he said in 2015.
Mines and Mining Development Minister, Walter Chidhakwa, has also said he had commissioned an audit to establish what has been happening in the diamond sector.

In the case of platinum mines, rare earths, palladium, rhodium, cobalt and gold — by-products of refinery — had not been fully and transparently accounted for after final processing at the Rand Refinery in South Africa, he said.

President Robert Mugabe made shocking claims two years ago that US$15 billion had been lost through diamond theft involving politicians and miners.

This could be Africa’s worst incident of natural resources plunder in recent times.