GOVERNMENT could have shot itself in the foot with an overly concessionary sweetheart mining agreement with Zimplats in 1994, following revelations that the State last year refunded the platinum miner US$102 million in royalty payments covering the 10-year period to 2014.
The US$102 million refund amounts to more than half of Government’s monthly wage bill.
The payment was processed in the fourth quarter of 2015.
Technically, the royalty refund, prompted by a ruling by High Court Judge Justice Lavender Makoni in January last year, accounted for the three percent decline in State revenue collections to US$3,5 billion in 2015 from a year earlier.
Had the refund not been paid, Government could have easily surpassed its revised revenue target of US$3,46 billion as set by Treasury.
The High Court ruling effectively made the hike in royalties after 1994 non-binding to Zimplats because it had struck an agreement with Government to peg the royalties at 2,5 percent of fair market values.
In addition to the concession made between the then Mines Minister Edward Chindori-Chininga and Zimplats, the latter was also not oblidged to pay the Additional Profit Tax (APT), or windfall tax, which is typically paid when mining company profits far exceed expectations.
Zimplats said between January 1, 2004 and September 30, 2010, it “overpaid” royalties by more than US$6,1 million because it was levied as much as 3,5 percent rather than the 2,5 percent stipulated in the 1994 agreement.
Further, royalty rates accrued in the four-year period to 2014 when platinum royalty rates were twice reviewed upwards, reaching 10 percent on January 1, 2012. Highlighting the marked impact the US$102 million payment to Zimplats had on the fiscus, mining royalties plummeted to -US$19,4 million from US$191 million realised in 2014.
The country had targeted to harvest more than US$146 million in royalties from the sector in 2015.
It, in essence means, that all the royalties collected in the mining sector last year were re-routed to the Mhondoro-Ngezi platinum producer rather than to the public. Zimra board chairperson Mrs Willia Bonyongwa said in a statement accompanying the Authority’s performance for the year ended December 31, 2015 that the court ruling seriously dented collections.
“Mining royalties closed the year with negative collections of US$19,42 million due to a refund of US$101,55 million that was processed during the fourth quarter of 2015 . . .
“The performance of the revenue head was negatively affected by a court ruling which resulted in the refund. The future performance of mining royalties is dependent on prices on international markets, production levels and Government policy going forward,” said Mrs Bonyongwe.
In a veiled indictment of some of agreements between Government and miners, Mrs Bonyongwe said Zimra “as the fiscal advisor to Government has a view that mining tax laws need to find a fine balance between attracting investments and benefitting the fiscus”.
In a Press statement on March 26, 2015 after Justice Makoni’s determination, Zimra said: “The High Court of Zimbabwe in January 2015 ruled in favour of (Zimplats) in the case involving a dispute it had with Zimra over which mining royalty rates are applicable to the operating subsidiary.
“The effect of that judgement is that the operating subsidiary overpaid royalties in respect to the period between 2004 and 2014. The operating subsidiary is engaging Zimra on the financial impact of the judgements and the modalities of giving effect to them. Stakeholders will be updated on the outcome of this engagement in due course.”
Good corporate governance advocates in the mining sector have long lobbied Government to publicise agreements made with miners to enhance transparency.
In a recent blogpost, Mr Mukasiri Sibanda – an economic governance officer at the Zimbabwe Environmental Law Association – said minerals were public assets and must be publicly accounted for.
“Secretive MAs (mining agreements) may have harmful tax incentives which may prejudice mineral revenue flows to the public purse and consequently inhibit broad-based socio-economic development…
“Secrecy surrounding MAs presents opportunities for corrupt public official and corporate (sic) to benefit at the expense of the nation.
“Secretive MAs have been identified as one of the causes for failure of resource-rich countries to leverage on natural resources to attain socio-economic transformation that lifts the poor out of poverty,” said Mr Mukasiri.
“Reviewing of MAs to unlock the mining sector’s potential in line with the new economic status of mining is critical to the realisation of Zim-Asset’s transformation agenda. MAs should be publicly accessible . . . Zimbabwe should follow the lead of countries such as DRC and Guinea in publishing mining contracts and mining agreements.
“This helps plug opportunities for corruption and ensures that public officials negotiate in good faith knowing full well that the mining agreements will be subjected to public scrutiny.”
Conversations within Government for the past four years have centered on the need to review and renegotiate some agreements with mining companies to address the anomaly gap between income accruing to the fiscus and the benefit to the country. It is not clear when amendments to the Mines and Minerals Act, which have been in the pipeline for the past decade, will be effected.
Some commentators say the proposed amendments to the Act, which was crafted in 1963, will help spur both investment and sustainable development.
In March last year, Mines and Mining Development Deputy Minister Engineer Fred Moyo indicated before Senate that a Draft Bill was ready.
The DRC Precedence
Reviewing existing mining agreements, especially those that do not have a renegotiation clause, has often generated considerable debate.
Between 2007 and 2010 the DRC set out to renegotiate mining agreements in at least 63 mining contracts on suspicions of illegal mining exploitation.
But the amended agreements that have been agreed to so far in the DRC show many unresolved issues.
Experts say long-term agreements are concluded in specific assumptions, which may be untrue, a development that almost always justifies a renegotiation clause.
Experts highly recommend that governments include renegotiation clauses in all mining agreements.
Due to the opacity of Zimbabwe’s current minerals regime, it could not be established last week if local mining agreements had renegotiation clauses.