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Auditor General’s Report: Accountability Issues For The Diamond Company

Introduction

The quest to bring improved transparency and accountability in the management of Marange diamonds – scandalously known for “missing $15 billion” birthed the Zimbabwe Consolidated Diamond Company (ZCDC). As the Zimbabwe Environmental Law Association (ZELA), an organisation with solid interest in resource governance, we are compelled to sift the latest Auditor General’s report to have a better understanding of how well or bad is ZCDC managed for the benefit of all Zimbabweans.  After all, Chiri, the Auditor General is famed for digging out publicly data exposing the rot in the management of State Owned Enterprises (SOEs). Her reports were quite revealing on ZCDC’s predecessor in Marange, the Zimbabwe Mining Development Corporation (ZMDC). Apart from sifting through the evidence provided by the Auditor General, the scope of this article covers audit areas that must be improved to hold to fully hold ZCDC accountable.

Stale audited report

Audited reports are an important health check on the performance of an entity. Mismanagement of resources, like any disease early detection, even better prevention is quite critical to ensure operational sustainability. Here we are in 2018, discussing audit findings from ZCDC’s 2016 annual financial report. A clear one-year unproductive fallow period, 2017, shows that we are dealing with stale information. This a clear violation of the Public Financial Management (Act).  The Act requires SOEs and government institutions to produce annual audited financial statements within six months after the end of each financial year. ZCDC’s predecessor in Marange, Zimbabwe Mining Development Corporation (ZMDC) was notoriously known for producing outdated audited reports.

Apart from the Auditor General’s findings, there is no public record of ZCDC’s income statement and balance sheet. Citizens, therefore, have been denied the opportunity to know pertinent information like how much income did ZCDC generate in 2016. Considering that Zimbabwe is well behind on mineral revenue transparency best practice, the public does not have a clue how well ZCDC’s performance regarding taxes – royalties, customs duty, withholding taxes and Pay As You Earn (PAYE) among others. The same information can easily be publicly mined for Caledonia’s Blanket gold mine in Gwanda courtesy of Canada’s Extractive Sector Transparency Measures Act.

ZCDC is in financial distress

The Auditor General noted that ZCDC Made a loss of $7, 445, 606, negative working capital amounting to $7, 981, 756 and a total negative equity of $7,445, 576. Even worse, ZCDC is owed $20,307, 027 by related companies – SOEs that have closed. A figure that could not be verified by the Auditor General. The fact that ZCDC’s owed $20 million by related companies shows that the mismanagement of SOEs is contagious. There is a huge risk that ZCDC could have been used as a conduit to milk public funds through propping up companies that have since closed.

Mine rehabilitation fund problematic

The “missing $15 billion” from Marange diamonds has attracted great public attention, overshadowing environmental issues, rehabilitation and mine closure. The Auditor General failed to verify the $11,068,975, a provision for rehabilitation of mines left by the companies that used to mine diamonds in Marange. ZCDC’s response was that an expert will be hired to establish the budget needed to rehabilitate the mines and funding will be requested from the shareholder – government. As a regulate and player in Marange diamond mining operations, the state should lead by example. Unfortunately, ZCDC is painting a different picture.

Poor corporate governance cited

The Auditor General noted the Audit and Risk committee and Human Resource and Remuneration committees were not constituted properly in line with best practice on corporate governance. The CEO and executive audit officer are part of the Audit and Risk committee, and the CEO and the human resource executive are part of the Human Resource and Remuneration Committee. A development that compromises the fundamental oversight role of such committees as well as bringing reputational risks. The President has repeatedly stated the desire to fight corruption, the scourge stifling Zimbabwe’s growth. This war cannot be achieved without good corporate governance.

Illegal diamond mining activities

The Auditor General’s report is silent on the widely reported illegal diamond mining activities in Marange. Such activities are a loss to ZCDC and ultimately, government. As part of audit preparations, the Auditor is required to gain an understanding of the context under which the entity that he or she is planning to audit is operating under. Recently, ZCDC announced that it is planning to empower the community through artisanal mining to curb illegal mining activities and attendant losses through smuggling of diamonds.

Business and human rights and the threat posed by synthetic diamonds

The business case, especially in the diamond sector is growing beyond profitability. Because diamond industry is all about global value chain systems, from mining, cleaning and sorting, marketing of rough diamonds, cutting and polishing, jewellery production and marketing, consumer behaviour cannot be ignored. Increasingly, diamond consumers are demanding that beauty of diamonds should be preserved by ethically sourced diamonds which deliver sustainable development to communities impacted by mining operations. The audit scope must have been broadened to include management of risks posed by failure of government and corporates to protect and respect human rights, and in case of violations to provide access to remedy – United Nations Guiding Principles on Business and Human Rights. Notably, ZCDC has been ordered by the high court not to arbitrarily displace communities as required by the Section 74 of the Constitution. Pressure on ethical sourcing of diamonds has been piled up by the emergence of lab grown or synthetic diamonds which do not carry the burden of human rights violation linked to mining.

Legal risks and arrangements with companies displaced to pave way for ZCDC

ZCDC’s creation was blighted with legal challenges, companies like Mbada Diamonds, Anjin and Jinan taking to disputes to the courts. ZCDC failed to carry out mining activities in the disputed concessions. Consequently, ZCDC’s ability to optimise diamond production for the country’s benefit was affected. Along the way, it was announced that government is not negotiating with the affected companies to resolve the issue amicably.  Parliament oversight lacked during these negotiations as required by Section 315 (2) (c) of the Constitution. On 20 April, during the field visit by EU delegation, ZELA observed that the Chinese were fencing off claims formerly held by Anjin Investments. It was clear that ZCDC was not involved from the brief that we received from ZCDC’s top management. The Audit report must have ordinarily been alive to legal risks and the status of disputes between ZCDC and the companies that were forced to close to pave way for the new arrangement – this is a sustainability issue.

Conclusion

For an entity that was established to promote transparency and accountability in the management of Marange diamonds, the Auditor General’s report shows a false start for ZCDC. The entity’s audited report is lagging by one year, there is poor corporate governance, and a company that is in financial distress lending $20 million to related companies that are now closed. The Rehabilitation and mine closure fund issue is a timely reminder to government, we cannot talk of counting the benefits without fully accounting for costs of mining. In the diamond sector, value addition is not only about cutting and polishing, but embracing the UNGP on business and human rights. Consumers want diamonds that are ethically sourced, and diamonds which deliver sustainable development to communities. Areas that ZCDC and government are found wanting.

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Comment by Bazira Henry on November 21, 2018 at 8:49

State Owned Enterprises on the African continent tend to have similar characteristics and behavior often operating with impunity and total disregard of expected or set standards. I was expecting ZCDC to explain the auditor queries and not just come out to state that "an expert will be hired to establish the budget needed to rehabilitate the mines and funding will be requested from the shareholder – government" because the problems do not lie with the poor state of the mines and a limited budget, but rather poor corporate governance to which ZCDC should address itself publicly.

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