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sharing in governance of extractive industries

What does the 2016 Annual Budget Review and 2017 Outlook Tell Us About Mining and Development Finance

  • Mining’s impressive contribution to economic indicators like export earnings has little bearing on the welfare of poor and marginalised communities residing in areas in which mineral wealth is extracted from.
  • Mining contributed $2.2 billion in 2016, constituting more than half of total export earnings. Yet mining paid $75,74 million to government, a figure that accounts for only 2.2% of total revenue generated by mining.
  • Although the budget disclosed total revenue received by government from mining, without a breakdown of mineral revenue contribution per revenue head and project, it is difficult for the publicly to ask pointed questions on how government is generating revenue from mining.
  • Likewise, government must make it mandatory for mining companies to disclose the various payments made to government. We own the resources and yet we are relying on countries like Canada to know the various payments that Blanket Mine made to government through Caledonia’s ESTMA report.
  • Tax incentives given to the mining sector are a cost must be accounted for in the budget and eliminated if they are harmful.
  • Disclosure of projects per province undertaken by the likes of Rural Electrification Fund offers opportunities for CSOs and CBOs to carry out social audits through verification of budget outcomes with the results on the ground.

Mineral wealth blessings often boost expectations of improved funding for social protection programmes that cushions poor and vulnerable groups of society. However, the signature performance of many countries endowed with mineral wealth is abject failure to share mining benefits with citizens. A scenario known as the “Resource Curse.”

Against this background, the 2016 annual budget review and 2017 outlook presented by Hon Patrick Chinamasa, the Minister of Finance and Economic Development on 20 July 207 deserves public scrutiny on how the country’s significant mineral wealth is being managed to promote the progressive realisation of socio-economic rights (SERs). Rightly so, the Minister indicated in his introductory message that budget accountability and fiscal transparency are critical elements to enable policy engagement and accessibility for a wider range of public and targeted audiences.

A budget is fundamental a tool that governments use to promote development. Critically, a budget reveals government’s priorities on how it intends to generate, allocate and spend public resources. All this has a telling effect on progressive realisation of SERs guaranteed by the Constitution. The Constitution stipulates that realisation of SERs is subject to the limits of the resources available.

Poor revenue generation, inefficient allocations and expenditure can therefore hurt the provision of social protection programmes that are integral to the fight against inequality. Hence budget analysis and following the money is a signature programme of the tax justice campaign in Zimbabwe. Certainly, how government generates, allocates and spend money from finite mineral resources has gained some pre-eminence in the tax justice campaign.

Mineral resources form a critical component of public wealth. Their exploitation loses legitimacy if citizens are not getting their fair share. This is the reason why the African Mining Vision, a key policy document agreed to by the African head of states in 2009, that seeks to enhance socio-economic transformation hinged on minerals strongly envisage domestic mobilisation of development finance from mining. Rightly so, the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim-Asset) (2013-2018) acknowledges the potential of mineral wealth to anchor finance for its development programmes.

Mining, undoubtedly is fundamental to Zimbabwe’s socio-economic development agenda. The country is blessed with over 40 known mineral deposits. Minerals exports contribute not less than 50% to the total export earnings. This makes our economy mineral dependent according to IMF’s standards. Countries that rely on at least 20% of their export revenue from minerals are classified as mineral dependent economies. However, such impressive economic indicators like export earnings have little bearing on the welfare of poor communities living in areas where mineral wealth is extracted.

Through paying a fair share of taxes, mining can have a positive impact on the welfare of resource rich communities. Unfortunately, the Minister of Finance decried the fact that despite the impressive contribution by mining to export earnings, its contribution to national revenue is only a pittance as reflected by the table below.

Mining Sector Revenue

  2009 2010 2011 2012 2013 2014 2015 2016
Total Government Revenue (US$ Millions) 934 2,339 2,921 3,496 3,741 3,727 3,737 3,502
Mining Revenue (US$ Millions) 50.6 154 161.3 245.8 185.2 335.9 139.9 75.74
Mining Revenue Share (%) 5.4 6.6 5.5 7 4.8 9 3.7 2.2

Source: Ministry of Finance and Economic Development

Budget transparency is critical to enable public accountability in the handling of public resources. Transparency carries more weight considering that opacity in the management of mineral wealth is one of the major reasons for poor mineral tax revenue. The budget must be commended for revealing mining’s total contribution to national revenue on annual basis from 2009 to 2016. Despite raking in $2.2 billion in 2016, mining contributed $75.74 million constituting a 2.2% share of mining revenue. Taking into account that mineral royalties contributed $61.9 million in 2016, it implies that other revenue heads contributed $13.84 million to the national purse.

Whilst the disclosure of total revenue paid by mining to government is an important step, huge transparency gaps inhibit public accountability concerning mineral revenue generation.  The budget must disclose disaggregated data such as mining revenue contribution per revenue head and per mining project. Revenue heads include royalties, corporate income tax, customs duty, withholding tax, rural electrification levy among others. On disclosure per mining project, government should be guided by materiality. For instance, a minimum revenue threshold can be set on what qualifies a mining project for disclosure of what government receives from a particular project e.g. $1 million and above annual revenue per project is subjected to disclosure.

If implemented, the above move must be complemented by company disclosure of various payments made to government per project. This is not too much to ask. Already such information has already available for major mining projects in the country such as Blanket Mine and Unki mine, respectively owned by Caledonia and Anglo American. Such information has been made possible by mandatory disclosure rules for listed companies in Canada and EU that are operating in the extractives sector. Mimosa mine has also voluntarily disclosed the various payments made to government.

Disclosure of payments made to government by mining companies and what government receives from mining companies will lay the stage for public reconciliation of mineral tax revenue data. Such levels of transparency can deter corruption as rogue projects that are not paying taxes are exposed and whilst corporates that are paying a fair share of taxes earn their social license to operate.

Currently the poor performance of the mining sector in terms of tax revenue contribution is tarnishing the whole sector although we know that there are different players in the sector. Multinational corporations, state owned entities and other private players among others. Through the ESTIMA reports, we can tell what Blanket mine paid to government. The same cannot be said in terms of payments made to government by other large gold mining projects like How mine and Fredda Rebecca for example. Lastly, without contract transparency, it is difficult for the publ....

Another important issue regarding budget transparency and good mineral resource governance is the disclosure of the cost of tax incentives in line with best practice. For instance, government is giving 5% export incentives. Since mining is the largest export earner, it follows that mining is the largest recipient of the 5% export incentives. In the first half of 2017, mineral export earnings surpassed the $1 billion revenue mark. It can be deduced that government paid over $50 million as export incentives to the mining sector, constituting 66% of what the government received from mining in 2016.

Earmarking of mineral revenue to enable investments in human and infrastructure projects is an important aspect of sustainable budget practice. The budget is silent on earmarking of mineral revenue. However, it is known that mining companies are heavy consumers of electricity which makes mining contribution to the Rural Electrification Fund significant. Blanket mine alone paid $466,322 in 2016 according to the Caledonia’s 2016 ESTMA report.

Taking into consideration $18.9 million was disbursed to the Rural Electrification Fund in 2016, Blanket Mine’s payment accounted for 2.6% of the total funds disbursed to Rural Electrification Fund. So, there are opportunities for communities residing close Blanket mine to track how they are benefiting from this fund. Such opportunities gain traction from the budget disclosure of projects that were funded by the fund in 2016.

For instance, we can tell that 45 rural electrification projects were implemented in Matabeleland South, where Blanket mine is located. The electrification projects included 16 primary schools and 9 secondary schools among others. CSOs and CBOs can therefore carry out social audits to fact check the results of the rural electrification fund as reported by the 2016 annual budget review statement against what is obtaining on the ground.

Government must embrace best practice on mineral revenue transparency and accountability if minerals are to benefit all citizens. For many years, the treasury has been on record that mining sector is not paying a fair share of mining taxes. Yet government is giving mining companies incentives that are hurti...

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