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REPORT
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OF THE PORTFOLIO COMMITTEE ON
MINES AND ENERGY VOTES 11AND 24
ON THE
2010 POST BUDGET ANALYSIS
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SECOND SESSION – SEVENTH PARLIAMENT
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PRESENTED BY THE CHAIRMAN HON E . CHINDORI-CHININGA
1 INTRODUCTION
The Committee on Mines and Energy has an oversight responsibility over the Ministries of Mines and Mining Development and Energy and Power Development. During post budget consultations with stakeholders, it emerged that the two ministries were grossly underfunded due to the budgetary constraints facing the government. Both Ministries received a marginal increase for 2010 in comparison with the 2009 budgetary allocation.
The Ministry of Mines and Mining Development was allocated an Expenditure budget of US$3 005 000 for the 2010 budget. This amount falls short of the original modest request of US$ 8 766 945. It received 0,167% of the total national budget. From bids submitted to the Ministry of Finance, the Ministry of Mines and Mining Development received 14% of its total requirements. Against such a backdrop, the ministry will not be able to achieve most of its objectives.
2 MINISTRY OF MINES AND MINING DEVELOPMENT
2.1 Application for EPOs and Special Grants
In the Budget Statement, the Minister of Finance, said that there were plans to encourage prospectors to relinquish ground for new applicants. A proposal has been made to reduce the maximum size of an Exclusive Prospecting Order (EPO) from 65 000 to 20 000 hectares. In addition, a fee of US$100 000 for applications and renewals for EPOs and special grants has been introduced. Whilst this is a noble idea, the Committee is of the view, that one of the best options in resolving this matter is provided for in the law, the Mines and Minerals Act section 94- 4b which provides for reducement or abandonment after a specified period based on exploration reports submitted by EPO or Special Grant permit holder and assessment and reviewed by the mining Affairs Board. The other option is to stipulate how much should be spent per hectare in actual mineral exploration. The concept is to set an escalating structure per year based on realistic exploration work that companies that are serious spend over the life of an exploration programme. This rate should be set by Mining Affairs Board and enshrined in a statutory instrument.
The Mining Affairs Board has the mandate to assess sixth monthly progress reports and conduct site visits. Where a prospector is not in compliance, an abandonment report is issued and the ground is open to new prospectors. It must be understood that in terms of the Mines and Minerals Act, EPOs and Special Grants are meant for exploration and do not bestow mining rights to the holder. On completion of exploration, holders still have to apply for a mining claim after they have discovered a mineral resource and it is at this stage that mineral deposit are evaluated and can be allocated a monetary value. It is the Committee’s view that it is at this stage that significant monetary value can be attached to the claim. EPOs has been known to be abandoned due to lack of mineral prospectivity. The region examples of maximum mineral exploration areas enshrined in there laws are:
1. Zambia 100 000 Ha
2. Namibia 100 000 Ha
3. Botswana 100 000 Ha
As can be seen from the countries around us the reduction from 65 000 Ha to 20 000 Ha greatly reduces the initial size of EPOs and SGs. Mineral exploration being akin to searching for a needle in a hay stake implies that the larger the area the higher the chances of finding a resource of interest.
However, the Committee is concerned that the Mining Affairs Board operations were suspended in April 2009 and has not met since then, yet it has a backlog of issues that it has to deal with. The Committee is also concerned during the nine-month period that the Mining Affairs Board was not meeting; there were repeated violations of the Mines and Minerals Act by the secretary for Mines and Mining Development. The Secretary for Mines and Mining Development under oath in a committee meeting admitted that he violated the Mines and Minerals Act by:
1. Suspending the operations of the Mining Affairs Board from April 2009 to date December 2009 a total of nine months since he cam e in to office.
2. The Secretary for Mines and Mining Development reduced the Exclusive Prospecting Order size and Special Grant from 65 000 to 20 000 including cancellation of SG and EPO applications without following the Mines and Minerals Act and consulting the Mines Affairs Board of which he is chairman. The Ministry of Mines did not develop any legal instruments or statutory instruments to legalise the reducing of 65 000 to 20 000 hectares. This should have been done through a legal instrument under section 93.4(b), which provides for reducing or abandonment after specified period.
3. The Secretary for Mines and Mining Development charged EPO and Special Grant Holders US$ 20 000 for 65 000 hectares and then reduced to 20 000 hectares without adjusting the fee of US$20 000 this was done without developing any legal instrument, following the Mines and Minerals Act or consulting the Mines Affairs Board of which he is the Chairperson. This should have been done through a legal instrument under section 87., 2(a) in the Mines and Minerals Act
It must be understood that the Mines Affairs Board is a board enshrined in the Mines and Minerals Act to bring transparency to issuing of Mining titles and operations of the Mining sector. It also provide technical guidance and protection of office of the Minister and the office of the President in the issuing of EPOs and Special Grants in the general operation of the Mining sector.
Now that the Minister of Finance has announced new measures in the National budget that affect EPOs and Special grant it is our expectation that the Minister of Mines and Mining Development and the Minister of Finance will ensure that the necessary legal instruments will be put in place and the Mines and Minerals Act would be adhered to and the Mining Affairs Board will be allowed to carry out its duties.
2.2 Unworked Claims
The policy on 'use it or lose it' stemmed out from speculative behavior that was taking place in the mining sector over the past few years resulting in over-pegging and holding of claims. The Minister of Finance proposed to charge a fee of US$100 per hectare on unworked claims with effect from 1 January 2010. The Committee would like this policy to be applied with caution because of a number of factors.
The speculative pegging has resulted in the Secretary for Mines and Mining Development issuing a blanket suspension of all peggers irrespective of whether individual peggers were in breach of the Mines and Minerals Act or not. While the actions may have been done with good intentions it lacked technical know-how and did not follow the Mines and Minerals Act section 17. The same effort could have been achieved by following the law and separate the law abiding peggers and those who did not. The approval of a pegger’s paperwork rests with the Ministry, which should check authenticity of the pegged area. There is need to build capacity in the Ministry to police acquisition of claims. There is also need to regularize the suspension of pegging by separating those whose are in violation of the Mines and Minerals Act and those who are from the Law abiding peggers. The Committee is of the view that this problem can not only be resolved by charging US$ 100 per hectare but that their is need for Mining Commissioners Office to be Capacitated with human resources, vehicles and equipment to carry out inspections and audits of mining claims.
The challenge in applying this policy is that some mines are on care and maintenance like Bindura Nickel (BNC) because of a slump in the price of nickel on the world market. Several gold mines are either closed or suffering from viability, due to non-payment of gold deliveries by RBZ. Refractory gold mines such as Indarama, Anzac, and Phoenix cannot operate due to the closure of government's roasting plant in Kwekwe. The situation is even more complicated for ZMDC which has unworked claims in Chiadzwa stretching to about 120 000 hectares. A special dispensation in the form of incentives must be put in place for productive mines, which have to consolidate their claims because these claims can be used as collateral for raising finances for the company. Under such circumstances, it would be inappropriate to charge the US$100 per hectare fee. Therefore there is need for a proper definition of an unworked claim; claims speculative in nature should be differentiated with worked claims. The Committee supports the removal of option of spreading taxable income from sales of claims over four years in order to discourage speculative activities on claims.
The Committee is of the view that the Ministry should set minimum work that should be conducted in a year or six months to enable one to maintain a mining title. The Minimum work requirement should be tough enough to encourage land utilization under title. The Ministry must put in place effective structures to monitor the conduct of work on the ground. All productive Mines need a life of Mineral resource or reserve for Mine Planning Purposes.
2.3 Royalties
2.3.1 Royalties on Precious Metals
In the Budget Statement, the Minister of Finance highlighted that there will be a review of royalties on precious metals from 3% to 3,5% with effect from 1 January 2010. Although, this may appear to be a marginal increase, stakeholders expressed concern that the impact will be felt when the increase is combined with other expenses incurred by miners such as corporate tax, levies, duties and production costs. In view of the statement by the Minister of Finance, that the mining sector has not been making significant contributions to the fiscus, the Committee believes that it is important to review the taxation system in the mining sector, so that government gets a good return.
2.3.2 Accountability of Royalties
The Committee would like the Minister of Finance to account for the appropriation of Royalties. At the moment there is no transparency and communities living adjacent to mines are not getting fair returns from government. There may be need to set up a Special Fund on royalties targeting community development.
2.3.3 Collection Agent on Royalties
The responsibility of collecting royalties has been shifted from MMCZ and placed on ZIMRA. The Committee supports the move because it makes it easier for government to account for the revenue from the mining sector.
2.4 Mining in Chiadzwa
2.4.1 Weekly Dividend
The Committee supports government's policy where the joint venture operators have to declare weekly dividends. Although it may seem punitive, in some way it will instill transparency and accountability in the mining of diamonds at Chiadzwa. Chiadzwa mine has been in the spotlight for a long time and stringent measures in line with Kimberly system should be put in place so as deter misdemeanors and encourage investment. However the Committee is not clear on the mechanism that government will use for account for its returns because the disposal of diamonds is based on scheduled selling.
2.4.2 Establishing of Exploration Company
ZMDC has been overloaded with a lot of responsibility by government without corresponding support and should be capacitated so as to carry out exploration work in Chiadzwa. This has contributed to ZMDC's dismal track record in the mining sector. The Committee does not see the rationale in government establishing a new exploration company when there is a company, Zimbabwe Mining Promotion Company (ZMPC) under ZMDC mandated with that responsibility. The company needs skilled personnel and financial resources in order to do its work. The Committee is also concerned that government will lose a lot of money, because exploration work is a non-profit venture and requires huge sums of money often raised by shareholders of companies. The Committee would like to know the difference in terms of vision, between the exploration company under ZMDC and the new exploration company that is going to be established.
2.4.3 Government Diamond Evaluator
In the Budget Statement, the Minister of Finance stated that plans are underway to appoint a government diamond evaluator. The Committee would like the government to appoint at least two independent diamond evaluators. The two independent will ensure accuracy, transparency and accountability. Preferably the evaluators should be persons of repute within the world's diamond industry.
2.4.4 Value Addition on Minerals
The Committee was pleased with the 10% reservation on diamonds for local cutters and polishers. This is a positive step in generating wealth and employment for the country. However, it is important that the Ministry of Mines develops a diamond policy and legal instruments so as to guide companies to venture into this industry. In the same vein, the concept of promoting beneficiation on Chrome before exporting is a noble idea. The Committee supports the 15% tax on Chrome Ore Exports in order to encourage beneficiation locally but the best option is to ban their export totally. The Committee was not pleased that a lot of Chrome ore was being exported and yet we have a smelting plant in the country, hence generating more wealth and employment for the country.
2.5 Mining Industry Loan Fund
As Committee we would recommend that the same program that was conducted in the mechanization of the agricultural sector should be done for the mining sector. This will empower the youth and women who are actively involved in mining. About US$5 million under the Vote of Credit and US$500,000 in the Ministry's Vote has been set aside under the Mining Industry Loan Fund. However more money is needed to support the small-scale miners, so that they can use modern technologies hence improve production. History as shown that small-scale miners are an integral part of the mining sector as evidenced by the significant contributions they made in 2004 in the production of gold. The Committee also believes, that in support of the indigenisation and empowerment policy of government, it would be imperative to introduce a mining development levy in support of small scale miners. Government must encourage private financial sector to put in place financial structures to support small-scale miners and use their claims as collateral.
2.6 Administration and General
The Ministry needs vehicles to carry out monitoring and surveillance and well as computers to capture data on mining claims, etc. Under sub-head on Administration and General, the Ministry receive US$ 40 000 for the purchases of vehicles and computers. The Committee is concerned that this is inadequate and government may not be able to achieve it objective of collecting US$100 on unworked claims. It would also be prudent upon government to consider embarking on a mining claims audit, similar to the land audit, in order to resolve some of the disputes in the mining sector due to over-pegging.
3 RECOMMENDATIONS
3.1 Mining Affairs Board: The Mining Affairs Board should meet regularly so as to assess progress reports and recommend abandonment of ground where applicable. This will in turn open ground for new applicants.
3.2 Observance of the Law: The Ministry of Mines should adhere to the requirements stipulated in the Mines and Minerals Act in its performance of duty. Inconsistent application and violation of the law will result is unnecessary litigation and will prove detrimental in the drive to attract investment in the mining sector.
3.3 Unworked Claims: The government needs to capacitate the Ministry of Mines with human resource expertise, state of the art equipment and vehicles so as to carry out comprehensive audits on unworked claims. This will also enable the government to efficiently collect the US$100 on unworked claims.
3.4 Gold Sector: The Ministry of Finance should speedily come up with measures that will enable RBZ to pay what it owes to the mining sector. This will enable closed gold mines to re-open and improve on viability of the rest of the gold mines.
3.5 Royalties: A Special Fund should be established, administered by a national Board, with the sole purpose of community development in the area of the mine.
3.6 Collection of Royalties: Zimra should be capacitated so at toe collect royalties and other revenue from the mining sector.
3.7 Government Diamond Evaluators: Government should employ at least 2 independent diamond evaluators for purposes of accuracy and transparency.
3.8 Value Addition on Diamonds: Legal Instruments and a diamond policy should be developed so that local cutters and polishers have access to the 10% reservation on diamonds.
3.9 Skills Retention: Incentives, similar to those offered to the health personnel should be offered to technical experts and to attract skilled personnel to work in the Ministry of Mines.
3.10 Operations of ZMDC: ZMDC should be capacitated in the areas of sorting, exploration, security and evaluation, preferably through exchange programs with countries such as Botswana, Namibia or South Africa. This will enable government gets a good return on its investments in Chiadzwa.
3.11 Mining Industry Loan Fund: More lines of credit should be opened up for small-scale miners where government is the guarantor so as to promote mechanization in this sector. The private sector must also be encouraged to put in place financial structures that will support small-scale miners and use their claims as collateral.
3.12 Mining Development Levy: A mining development levy should be established through legal instruments. This levy should be charged on established mining houses so as to develop small-scale miners.
MINISTRY OF ENERGY AND POWER DEVELOPMENT
1. Introduction
The Ministry of Energy and Power Development was allocated US$ 1 499 500 as expenditure target for 2010 against a Ministry total requirement for 2010 of US$ 5 709 458. Of the total allocation of the Ministry of US$1 499 500, US$ 500 000 is for Rural Electrification Operations (REA). Total percentage allocation from the fiscus is 0,066%. The Ministry received 26 % of what it bided for and yet it plays a critical role in spearheading the growth of the economy. There has been a lot of talk about the economic recovery through the STERP document yet the country does not have sufficient energy to achieve this objective.
2 Electricity Sector
The country has been experiencing intermittent electricity shortages in the last few years. Internal generation capacity from Kariba, Hwange and Small Thermal Stations is around 900 MW against a possible capacity of 1650MW. Demand for electricity in the country has been increasing partly due to the economic turnaround and is around 2 270 MW during peak hours. To try and offset the balance, the country has been importing 35% of its power. However the country has not been able to pay for its regional power imports amounting to US$97.7 million as at 27 November 2009.
2.1 ADB Loan Facility: In the budget statement, the Minister of Finance highlighted that in the short-term, to alleviate these power shortages, it would be prudent to rehabilitate existing infrastructure for generation and distribution of electricity rather than to expand on new projects. The cost for emergency rehabilitation is around US$385 million but government only managed to secure a loan facility of US$51 million. During consultations with stakeholders, it emerged that the loan from the African Development Bank will most likely be released in the second quarter of 2010 because of bureaucratic and political considerations by the lender. This will militate against government's efforts of improving electricity generation in the short-term period. The Committee was advised by ZESA Holdings that, its grouping together with government had identified other possible financiers. It is important for government to consider these options. Among these, include off shore financial institutions such as the Development Bank of Southern Africa, which is prepared to avail an amount of US$82 million in the form of a loan facility.
2.2 Coal Supply
The government needs to re-consider the relationship that exists between Zimbabwe Power Company (ZPC) and Hwange Colliery Company (HCC). One of the reasons for the shortages of electricity has been due to unstable coal supplies. ZESA Holdings lost its coal mining concessions under unclear circumstances. In 2005 ZESA was allocated the Western coal mining special grant (SG4521) for a period of 15 years and in 2006 got another grant, Sinamatella (SG4475). The Committee believes it is not proper for HCC to hold a monopoly in the mining of coal. More players are needed in this sector so that there is constant supply and a competitive price on coal. During consultations, ZESA Holdings highlighted that investors has always linked the ownership of Zesa with coal concessions to Hwange 7 and 8 Expansion Project. The Committee also believes Hwange Colliery Company should be capacitated so at to mine coal.
2.3 Manyuchi Hydro Station
The construction of this project has been on government's workplan over the last 5 years. In 2009, the project was allocated US$2 million but up to October 2009, the money had not been released. This mini hydro station is crucial in improving the power generation with an addition of 30kw. The completion of hydro station will improve on the livelihoods of communities within its vicinity, through irrigation projects, trading, etc. For 2010, no allocation was reserved for Manyuchi Hydro plant.
2.4 Review of Electricity Act
The Committee noted with concern that penalties on vandalism or theft of ZESA cables and oil in transformers are not deterrent enough. During consultations it emerged that in other countries such acts of sabotage attract a minimum jail sentence of 25 years. In Zimbabwe, according to the Electricity Amendment Act of 2007, the minimum jail sentence of such acts of sabotage is ten years.
2.5 ZESA Debts
ZESA is experiencing huge foreign debt of US$465 million. The loans were used to fund major capital projects e.g. refurbishment of Hwange Power Station and the construction of the interconnectors. Again the company is failing to make timely payments to external power providers. ZESA owes regional utilities about US$98 Million. ZESA is currently importing about 28% of its requirements from the regional suppliers, i.e. HCB of Mozambique, SNEL of the DRC and ZESCQ of Zambia.
3 RECOMMENDATIONS
3.1 African Development Bank Loan: Government needs to consider other options in securing finances for ZESA, especially those that have been worked on by ZESA Holdings and the government such as the US$82 million loan facility under DBSA.
3.2 Coal Supplies: ZESA holdings should be allowed to go into joint venture partnerships in the mining of coal for its power plant, so as to improve of availability and generation capacity of the ZPC.
3.3 Manyuchi Dam: Government needs to encourage public-private investment so that the hydro-plant is completed.
3.4 Review of Electricity Act: There is need to review the Electricity Act so as to deter vandalism and theft of ZESA infrastructure used for generation and distribution of electricity.
3.5ZESA Debt: There is need fro government to take over the foreign debt. The current tarrif has no provision for debt repayment
Presnted in the House of Assembly 08 December 2009 by Hon. Chindori Chininga (Chairman Parliamentary Portfolio Committee On Mines and Energy).
