REPORT
OF THE PORTFOLIO COMMITTEE ON MINES AND ENERGY VOTES 11 AND 24 ON THE 2011 POST BUDGET ANALYSIS
PRESENTED BY
HON EDWARD CHINDORI-CHININGA
CHAIRMAN
7TH DECEMBER 2010
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. Post budget consultations conducted with the two Ministries showed that there was gross underfunding given the important role they play in economic growth of the country. The Ministry of Mines received 0.2% of the budget and Ministry of energy received 2.5% of the total budget. It is also envisaged that the energy sector will receive additional resources from lines of credit and from internally generated resources. However, in the last national budget, Zesa faced a number of challenges accessing lines of credit from some financial institutions, such that investment in the energy sector is not fully guaranteed. This will have an impact in reviving economic growth for the rest of the sectors of the economy.
2 Ministry of Mines and Mining Development
These are some of the key issues that arose during consultations:
2.1 Monitoring and Surveillance
The Ministry has the responsibility to carry out inspections through mine and field visits to check on compliance hence improve on accountability on mineral production and sales. The Ministry requires 56 vehicles at a total cost of US$2,160,000 but did not receive enough to buy these vehicles. Currently, of the 54 vehicles at its disposal, 24 are unroadworthy, 8 are damaged and 19 are serviceable. As a result government is losing a lot of revenue through illegal mining, under declaration of production by miners and illegal marketing of minerals.
2.2 Human Resources
The Ministry has 40% of its technical staff hence compromising on service delivery. This is due to unattractive remuneration and poor working conditions. Currently in the department of Geological survey has a 77% vacancy rate, department of mining engineering has an 61% vacancy rate and department of metallurgy has 47% vacancy rate.
2.3 Royalties
The Ministry of Finance highlighted that government was going to increase royalty on gold and platinum from 4% to 4.5 and 5% respectively. This was premised on the need to increase revenue flows to Treasury because platinum and gold prices have been on the increase since 2009 and also due to the fact that government only collected royalties of US$20.7 million from sales of US$593.8 million. The Committee believes this is a piecemeal approach in terms of increasing government revenue from the mining sector. Government needs to come up with a comprehensive approach on the Fiscal regime on mining or the extractive industry that encourages inveastments while at the same time gauranteeing significant final contribution to treasury and national economic stimulus.
2.4 Taxation System/Mining Fiscal regime
The Minister of Finance highlighted that there is need for government to come up with a mineral taxation model that would benefit the nation. The Committee believes this only be achieved if government takes a re-look at some of the mining contracts and fiscal arrangements that were inititally signed between BHP and government of Zimbabwe that is currently benefiting ZIMPLATS and subsequent fiscal arrangements that have benefited MIMOSA, MUROWA, UNKI etc. The agreements could have been necessary then but the Zimbabwe economic situation has changed and is now dollarized.
Zimbabwe national economy can only be stimulated if mining revenue generated by the like of ZIMPLATS and MIMOSA is banked in Zimbabwean based banks and is available for on leading in the economy. Similarly all diamond revenue must also be bank in Zimbabwe based banks to support the economy. Measures must be put in place to require all mines to purchase all mining supplies and equipment through Zimbabwe companies producing supplies locally or operating under franchise agreements. This would support the stimulation of our economy and encourage industrial growth.
It is clear the Minister of Finance budget presentations that Mining contracts with mining giants such as Zimplats, Murowa diamonds - whilst they attract investment are not beneficial to the country except in the areas of employment creation and corporate social responsibility as it relates to platimun and no measureable corporate social resonsibility has been implimented by Diamond mines in Chiadzwa. ON diamond only RIO Zim Murowa Mine has made measurable corporate social responsibility contribution.
Government needs to learn from the experiences of other countries such as DRC which had similar type of contract arrangement where the mining sector had an array of mining contracts. DRC re negotiated these agreements. The Committee would like to urge the government to re negotiate these agreements in good faith and improve mining industry revenue contribution to the fiscus.
The Committee would like to emphasis that here is shortage of financial resources on the market and yet one mining company can make a turnover of over US$500 million which is banked outside the country. The Committee believes that since we have a dollarized economy, mining houses should be encourage to bank their financial resources locally and government needs to give the necessary assurances and gaurantees that the money would not be tempered with. This would in some measure stimulate growth in other sectors such as agriculture, manufacturing through borrowings.
2.5 Diamond Sector
During consultations, the Committee observed that government does not seem to have a clear cut policy on the diamond sector. At the official openning of Parliament H.E. The President informed the house that the legilative agender will include formulation of national policy on diamond as well as a diamond Act. In September 2010, the Committee was informed by the Permanent Secretary of Mines and Development that government was not going to introduce the Act but would introduce only a policy but in the Minister of Finance budget presentation he highlighted that government will formulate a diamond act, during budget consultations the Permanent Secretary said the position had changed and a Diamond Act was was back on legislative program. The Committee would like to urge the government to be clear on its policy direction because this would create a platform in resolving some of the challenges bedeviling the diamond sector.
2.6 Procurement Procedures
The Committee believes that one way of ensuring that Zimbabweans benefit from the mining sector, is by reserving a certain quota on procurement of goods and services for local companies. This should be enforced through a legal instrument.
2.7 Geo-Survey and Aeromagnetics
The Ministry needs to modernize its mining database, claims and titles registry. At the same time the country needs to do new aeromagnetic and geological surveys. These are critical in attracting investment in mining. The money allocated for these initiatives was very little. Hence there is need to attract private investors into these sectors.
3. Ministry of Energy and Power Development
3.1 Zimbabwe Power Company
In the budget, it is highlighted that US$100 million is required for the rehabilitation of Hwange Power Station (HPS) However, HPS only received US25 million and an additional US$30 million through the line of credit from AfDB. Whilst the energy ouput for 2011 is envisaged to rise to 1650, government also needs to put more resources towards demand side management. During consultations with stakeholders, the Committee was informed that in the immediate short-term, the country could save up to 500 MW at a cost of US$25 million. A new similar size thermal power plant will cost US$700 million. Secondly, the Committee believes if the country is to derive maximum benefit from HPS there is need to ensure that any investment at the station is not done in a piecemeal fashion, like what happened with the Nampower arrangements. These are some of the options to consider given the fact that HPS constantly experiences frequent breakdowns.
3.2 NOCZM
The Minister of Finance highlighted in the budget that an extra levy of US0.04C per litre will be charged on companies that bring in fuel by road, so as to encourage the use of the pipeline. Whilst this may be a noble idea, the Committee believes government should have first tried to build and give assurance to players in the petroleum sector that they would not be an fuel diversion. Failure to that might lead to price increase of fuel especially by companies using the road sector. At the same time there are other levies and taxes charge on fuel importation which increase the cost of fuel on the market. Petroleum is one of the major contributors to economic stimulation. Noczm is struggling to pay additional cost of deadstock and bufferstock on the pipeline this a matter that must be addressed and the petroleum players have indicated to the committee that they are will to discuss with NOCZIM and find ways to meet the cost. What are the plans of government in working out a mechanism to ensure that these costs are shared between all the users of the pipeline.
3.3 ZESA Tarrifs
During consultations, it emerged that electricity produced from the smaller thermals was very expensive but was being sold at a blended rate. However, what was not clear was who was subsidising the difference. This needs to be clear, given the fact that consumers often complain about the astronomical bills they receive from Zesa.
Before presenting recommendations, I must for good governance state that I am a former Minister of Mines and Energy. While I was not involved in the Zimbabwe government and BHP agreement negotiations or the transition from BHP to ZIMPLATs. As Minister, I was the driver of the followup fiscal regime that benefited UNKI mine, Murowa diamond as well as ZIMPLAT and MIMOSA were we tried to move away from signing agreements for each investment but have a framework fiscal regime that must be adhered to by the qualifying large mining investment. Now as Chairman of Mines and Energy Committee the committee position is that the political and economic environment has changed to the positive. The country has dollarized and the financial sector is stable. The committee recommends as follows:
RECOMMENDATIONS
1. There is need to allocate enough money for the Ministry of Mines to purchase adequate vehicles for their technical departments to carry out their mandates of monitoring and technical support to the mining sector.
2. There is need for government to take a wholesome approach and develop a comprehensive fiscal regime on mining that on one hand encourages investment while making significant contributions to national Treasury and local community economies where the mines operate.
3. Treasury can increase royalties to the mining sector as a temporary measure but a comprehensive tax regime/fiscal regime would be the long term solution.
4. There is need for a clear diamond policy and Act to provide clarity and assurance for investors and encourage diamond mining in Zimbabwe. There must also be clarity on the role of government and its ownership in diamond mining and particularly in alluvial diamond mining in order for the country and economy to secure maximum benefit.
5. All existing special contracts between the government and mining companies must be re-negotiated given the changing environment in Zimbabwe. The ideal arrangement legal and institutional structures must be put in place which all mining investors must adhere to and no special agreements must be signed. The role of government and local communities in platimun and diamond mining (and mining in general) must be articulated through new institutional and legal structures put in place.
6. Zimbabwe need to have an aeromagnetic survey to be done to determine the resource inventory and map in Zimbabwe. The Committee does not believe the establishment of a government parastatal on exploration will address the challenges we face in identifying our resources.
7. Government must put in place legal instruments that encourage mining companies to procure mining supplies through Zimbabwean based companies that manufacture mining supplies and Zimbabwean based companies that franchised to sell equipment and supplies by international suppliers.
8. All mining companies, irrespective of existing agreements which must be re-negotiated must bank their revenues with Zimbabwean based banks in order to stimulate the economy and encourage on-lending by local banks to the local economy.
9. Government needs to acquire more resources to fully rehabilitate and refurbish Hwange Power Station and Kariba Power Station as well as develop the South Bank extension.
10. Government needs to seriously engage international financiers and energy developers to develop new power stations as a long term solution to current power shortages.
11. Government needs to be clear on who is subsidising the blended price (includes local generation and international imports) that is benefiting mining companies and other companies benefiting from small thermal power stations such as Munyati.
12. Government needs to give assurances to the petroleum industry that fuel products will not be diverted when they are imported through the pipeline by NOCZIM.
13. Zesa needs to find a carrot and stick approach to encourage its customers to pay their electricity bills. Many tobacco farmers are now starting curing of tobacco yet many of them have been disconnected and have resorted to generators to cure tobacco. A stop order arrangement with tobacco floors or contractors must be put in place with a payment plan to enable farmers to carryout their farming activities while at the same time ZESA securing payment. The issue of illegal power connections to compounds, A1 and A2 farmers which has resulted in huge electricity bills some with no identified and registered client to pay except the former commercial farm owner need to be rationalized. Because while these outstanding electricity charge exist on ZESA accounts and illegal connections have been dismantled by ZESA a decision has to be made as to who is going to pay for these bills. The committee proposes that these outstanding bills be quantified and ringfenced for possible writeoff.
14. A cost sharing arrangement should be drawn up between the petroleum importing companies and Noczim on the issue of pipeline petroleum bufferstock and deadstock.
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