Mbada must make full disclosure

Mbada must make full disclosure March 28, 2014  by Mukasiri Sibanda  – The Zimbabwe Independent

THE Zimbabwe Environmental Law Association (Zela) noted with much interest the disclosure and celebration by Mbada Diamonds of its achievement in surpassing the US$1 billion threshold in total gross revenue within four years of operation.

While the partial disclosure by Mbada is laudable, it raises more questions than answers and falls short of fully satisfying the expected standards of transparency and accountability.

In its statement carried by various newspapers on March 18, Mbada also celebrated its contribution to the fiscus and corporate social responsibility activities.

The company stated it had contributed US$424 million (41%) towards taxes, dividends and government advances, US$33,9 million (3%) towards corporate social responsibility, US$214 million (21%) as capital expenditure, US$225 million (13%) in direct production-related expenditure and US$138 million (22%) as operational expenditure.

For many Zimbabweans, this disclosure may be an encouraging first step in answering the never-ending calls for public disclosure of mining revenues and payments by mining companies and government as a way of promoting transparency and accountability which have been lacking in the mining sector.

Mbada’s move comes at a time when former and current Ministers of Finance, Tendai Biti and Patrick Chinamasa respectively, and Mines minister Walter Chidhakwa have been lamenting that Marange diamond operations are shrouded in secrecy and government is not receiving its fair share of diamond revenues.

Even President Robert Mugabe has belatedly, but on several occasions also called for transparency and accountability in public administration, including diamond mining.

Civil society groups in particular, and Zela, through the publish what you pay (PWYP) campaign, have on several occasions raised the same concerns.

There are more than seven companies carrying out exploration and mining operations in Marange and the notable ones include Mbada Diamonds, Anjin Investment, Marange Resources, Diamond Mining Corporation (DMC), Kusena Diamonds and Jinan.

At least Mbada has made the first attempt and may emerge to be a pathfinder in public revenue and contract disclosure in a sector still shrouded in suspicion-raising secrecy.

However, the disclosure by Mbada raises more questions than answers. Mbada is encouraged to shed more light on the figures it presented in the statement so that the nation is well informed. The public must be fully furnished with disaggregated information on the flow of benefits arising from exploitation of the minerals. This will make it easy for the public to trace the various payment and receipt flows.

The following are some of the pertinent questions and issues Mbada should have addressed in their disclosure statement:

Taxes, dividends and advances
Mbada stated it paid US$424 million towards taxes, dividends and government advances. These three revenue streams are distinct and different and should be accounted for separately to ensure people are aware of the figures of each tax and what payment was for.

Diamond dividends
The government has a 50% equity stake in Mbada and hence it is entitled to its share of dividends.

In 2013, government did not receive any diamond dividends according to the 2014 budget statement. It would also be good practice for Mbada to disclose dividends paid yearly from 2010 to 2013.

The nation is eager to know if Mbada paid at all diamond dividends in 2013. If so, then the company should challenge the assertions made by Chinamasa when he presented the 2014 budget. Ultimately, this will set in motion public debate on what Mbada says to have paid and what the Ministry of Finance claims.

In the above context, it is also important to note government and the International Monetary Fund (IMF) entered into an agreement called the Staff Monitored Programme (SMP) in May 2013.

Among the key deliverables of the SMP are issues of accounting for 2012 diamond dividends and enactment of a statutory instrument guiding the sharing of the dividends. The deadline of July 31 2013 has lapsed and there is little evidence to show compliance.

Mbada (50% owned by the government through the Zimbabwe Mining Development Corporation (ZMDC)) has an opportunity to kick-start the fulfilment of this critical deliverable if it disaggregates dividends paid for each year and discloses the payments to the shareholders involved.

Government advances
There is need to give an indication of how much government owes Mbada. On the government side, there is need for the Finance ministry to disclose how much they received from Mbada as advances or loans. Even more important would be an indication of the purposes for which these advances were made and how the country benefited.

Tax payments
Mbada should have made an effort to disaggregate its tax payments per tax head. For instance, the company should have indicated how much they paid for each of the following tax heads: royalties, corporate tax, value added tax, withholding tax on dividends and pay as you earn.

Such levels of transparency will help to lift allegations of secrecy associated with Marange diamond revenues.

Generally, tax heads like corporate tax attract much interest as they are more susceptible to tax evasion and tax avoidance.

Largely, Marange diamond operations are restricted to alluvial mining which is less costly when compared to underground mining. Thus income tax would be a good indicator of the cost-efficiency of Mbada in carrying out its mining operations.

Mbada’s cost-efficiency ratio can be compared with other diamond firms operating in Marange. Such an analytical review can help the Zimbabwe Revenue Authority (Zimra) and other concerned parties appreciate risk associated with tax evasion and tax avoidance in Marange. Understanding the relationship between operational expenses and income tax is critical.

If operational expenses are inflated, income tax is deflated and the opposite is true.

Corporate social responsibility
Mbada stated that it has invested US$33,9 million on corporate social investments, a fairly substantial figure at face value. However, there is need to differentiate between purely charitable acts and quasi-fiscal operations.

Mining companies can offset the social investments they make to charities prescribed by government through allowable deductions which reduce their income tax obligation. Mbada further pointed out that nearly half of their corporate social responsibility (CSR) expenditure has gone to Manicaland and in particular Marange/Chiadzwa.

Recently, the board members of the Marange–Zimunya Community Share Ownership Scheme/Trust appeared before the parliamentary portifolio committee on Indigenisation and Economic Empowerment and alleged that they had not received the amounts that had been pledged by mining companies operating in the area, including Mbada Diamonds.

Thus it is important to have a social audit that determines the efficiency and effectiveness of the CSR investments made by Mbada in Marange. To kick-start the social audit process, Mbada can reveal the individual costs and periods of the programmes they have initiated as part of their CSR investments in Marange.

Capital expenditure
Mbada asserted capital investment of US$214,5 million was made by the company.

The company should clarify whether this investment was made by government’s joint venture partners as part of acquiring a 50% stake in Mbada Diamond operations or was this capital investment funded by revenues from Mbada operations.

The firm should disclose how much was paid by joint venture partners to government in favour of a 50% stake. Further, it is important to disclose if the payment was made in cash or kind. If payment was made in the form of provision of capital equipment and services, these transactions should be disclosed as they are highly susceptible to corruption.

This will help to establish the economic rationale behind the 50% given to private partners in Mbada as well as justifying the fruits they are enjoying in the form of dividends.

The parliamentary report by the late legislator and chairperson of the mines portfolio, Edward Chindori-Chininga, on Marange last year highlighted strong suspicion of an inflated in-kind contribution made by government’s partners in acquiring a 50% stake. Further, the report alleges ZMDC did not carry out an expenditure verification exercise pertaining to the in-kind contribution made by government’s partners.

Operational expenditure
Currently, the country is still coming to terms with exorbitant salaries being received by top management in state-owned or quasi-state-owned enterprises. Salaries are part of operational costs and inflated salaries have an effect of deflating income and consequently income tax.

Mbada, being partly owned by government, should disclose salaries and benefits of its top management to put to rest reasonable suspicion that few individuals are benefitting while government is not fully turning a profit.

There are other factors that are prominent facets of diamond revenue which Mbada omitted. Mbada diamonds should disclose the following to address its diamond revenue transparency initiatives:

Diamond production footprint
Mbada could have easily provided information on the quality of diamonds produced from 2010 to 2013, at least in percentage terms.

Generally, Marange has all three sets of diamonds,industrial/boart, near-gem and gem quality diamonds.

Recent diamond sales in Antwerp yielded an average of US$18 000 per carat for gem quality diamonds. Average diamond sales per carat in 2012 were nearly US$60, according to the Kimberly Process Certification Scheme (KPCS).

It would have been very important for Mbada to calm the waters on allegations of possible smuggling of highly-priced gem quality diamonds by mining companies operating in Marange.

Further, for all the companies, there was a massive increment in the exports of unsorted Marange diamonds from 2012 to 2013, according to the figures obtained from the Zimbabwe Statistical Agency for all diamond mining companies.

In 2013, export volumes of unsorted diamonds increased astronomically by 6 231%. About 11,43kg of unsorted diamonds were exported in 2012 and this increased phenomenally to 723,62kg in 2013. These volumes translated to a value of US$7,75 million and US$200 million for 2012 and 2013 respectively, which is a massive 2 480% increment in value.

This astronomical increase of unsorted diamond exports was met by a sharp contraction of 78% by volume and 71% by value of exports of sorted diamonds in 2013. The volume and value of the same exports were respectively 131,343kg and US$1,015 billion in 2012.

In 2013, the volume and value of exported sorted diamonds were 29,012kg and US$296 million respectively. These figures clearly reveal the escalating risk of poor classification and valuation of diamonds on benefits flowing from Marange to the state.

Production, export volumes
Mbada should have provided clear figures and disclosed the diamond production and export volumes from 2010 to 2013. Zela’s research entitled Tracking the Trends: An Assessment of Marange Diamond Revenue (2013), established that there are production and export variations between the Ministry of Finance and KPCS sources.

Disclosures by Mbada would have allowed for further scrutiny on diamond production and export data. In this regard, for Mbada to state and celebrate that they have reached a billion-dollar mark is a half-truth if production and export data which are intertwined with revenue are not disclosed.

Community share ownership trusts
Recent newspaper reports allege companies operating in Marange have failed to honour their obligations to contribute funds to the Marange-Zimunya Community Share Ownership Scheme.

Private-owned mining entities like Unki Platinum Mine have contributed in full US$10 million obligations to the Shurugwi Community Share Ownership Trust scheme. If this is true, it would be mind-boggling why a quasi-state-owned enterprise like Mbada would fail to honour such an obligation when private players are compliant.

Mbada can boost its image as a transparent and accountable company and enhance its fortunes by offering full and clear disclosure on these issues.

Sibanda is finance officer at Zela, a non-governmental organisation which seeks to promote environmental justice and sustainable and equitable use of natural resources.