Too Little of a Good Thing: A Reaction to Mbada Diamond’s Celebration on Surpassing the US$1 billion Revenue Mark

Date of Issue: 20 March 2014 “Those who stand straight should not fear crooked shadows” a Chinese proverb The Zimbabwe Environmental Law Association (ZELA) noted with extreme interest the disclosure and celebration by Mbada Diamonds of its achievement in surpassing the US$1 billion dollar threshold in total gross revenue within 4 years of operation. The diamond mining company also celebrated its contribution to the fiscus and corporate social responsibility activities. The disclosure was contained in a statement published by various newspapers including the Newsday, Daily News and the Herald on the 18th of March 2014. The company stated that it had contributed US$424 million (41%) towards Taxes, Dividends and Government Advances, US$33.9 million (3%) towards Corporate Social Responsibility, US$214 million (21%) as Capital Expenditure, US$225 million (13%) as Direct Production related Expenditure and US$138 million (22%) as Operational Expenditure. For many Zimbabweans, this gesture may be a good first step in answering the never-ending calls for public disclosure of mining revenues and payments by mining companies and government as a way of promoting transparency and accountability in the extractive/mining sector. This act comes at a time when the former and current Ministers of Finance and the new Minister of Mines and Mining Development have been lamenting that Marange diamond operations are shrouded in secrecy and that the government is not receiving its fair share of diamond revenue. Even the President has on several occasions also called for transparency and accountability in public administration. Civil society groups in particular, ZELA through the Publish What You Pay campaign (PWYP), have on several occasions raised the same concerns. There are more than seven companies carrying out exploration and mining operations in Marange and the notable ones include Mbada diamonds, Anjin Investment, Marange resources, Diamond Mining Corporation (DMC), Kusena Diamonds and Jinan. At least Mbada has made the first attempt and may emerge to be a pathfinder in public revenue and contract disclosure, in a sector shrouded in secrecy. For ZELA the disclosure by Mbada Diamonds raises more questions than answers. Mbada Diamonds is being encouraged to shed more light on the figures it presented in the statement so that the nation is well informed. The public must be fully furnished with disaggregated information on the flow of benefits arising from exploitation of minerals. This will make it easy for the public to trace the various payment and receipt flows. The following are some of the pertinent questions and issues we consider are important for Mbada to have addressed in their disclosure statement;

1. Grouping of Taxes, Dividends & Government advances. Mbada stated that it paid US$424 million towards taxes, dividends and Government advances. These 3 revenue streams are distinct and different and should be accounted for separately for to ensure that people are aware of what each tax head and payment was for.

2. Diamond dividends. The government has a 50% equity stake in Mbada dimonds and hence it is entitled to its share of dividends. In 2013, government did not receive any share of diamond dividends according to the 2014 Budget statement from the Ministry of Finance. It

will also be good practice for Mbada to disclose dividends paid yearly from 2010 to 2013. Thus the nation is eager to know if Mbada diamonds paid at all diamond dividends in 2013. If so, then the company should challenge the assertions made by the Minister of Finance Hon. Chinamasa) when he presented the 2014 National Budget. Ultimately, this will set in motion public conciliation of what Mbada diamonds is alleging to have paid and what the Ministry of Finance alleges to have been received. In the above context, it is also important to note that the Government of Zimbabwe and the International Monitoring Fund (IMF) entered into an agreement called the Staff Monitored Program in May 2013. Amongst the key deliverables of the SMP are the issues of accounting for 2012 diamond dividends and the enactment of a Statutory Instrument guiding the sharing of diamond dividends. The deadline of 31 July 2013 has lapsed and there is little evidence to show compliance. Mbada diamonds (which is 50% owned by the Government through the ZMDC) has an opportunity to kick start the fulfilment of this critical deliverable if it disaggregates dividends paid for each year and disclosing the payments to the shareholders involved.

3. Government Advances. There is need to give an indication of how much the Government owe Mbada diamonds. On the government side, there is need for the Ministry of Finance to disclose how much they received from Mbada as advances or loans. What is more important will be an indication of the purposes for which these advances were made and how the country benefited?

4. Taxes. Mbada should have made an effort to disaggregate its tax payments per tax head. For instance the company should have indicated how much they paid for each of the following tax heads; royalties, corporate tax, Value Added Tax, Withholding Tax on Dividends and Pay As You Earn. Such levels of transparency will help to lift allegations of secrecy associated with Marange diamond revenue. Generally, tax heads like corporate tax attract much interest as they are more susceptible to tax evasion and tax avoidance. Largely, Marange diamond operations are restricted to alluvial mining which is less costly when compared to underground mining. Thus income tax will be a good indicator of the cost- efficiency of Mbada in carrying out its mining operations. Mbada’s cost efficiency ratio can be compared with other diamond firms operating in Marange. Such an analytical review can help ZIMRA and other concerned parties in appreciating risk associated with tax evasion and tax avoidance in Marange. Understanding the relationship between operational expenses and income tax is critical. If operational expenses are inflated, income tax is deflated and the opposite is true.

5. Corporate Social Responsibility (CSR). Mbada stated that it has invested $33.9 million on corporate social investments, a fairly substantial figure at face value. However, there is need to differentiate between purely charitable acts and quasi fiscal operations. Mining companies can offset the social investments they make to charities prescribed by government through allowable deductions which reduces their income tax obligation. Mbada further pointed out that nearly half of their CSR expenditure has gone to Manicaland and in particular Marange/Chiadzwa. Recently, the Board members of the Marange –Zimunya Community Share Ownership Scheme/ Trust, appeared before the Parliamentary Portifolio Committee on Indigenisation and Economic Empowerment and alleged that they had not received the amounts that had been pledged by mining companies operating in the area including Mbada diamonds.Thus it is very important to have a social audit that determines the efficiency and effectiveness of the CSR investments made by Mbada diamonds in Marange. To kick start the social audit process, Mbada can reveal the individual costs and periods of the programmes they have initiated as part of their CSR investments in Marange.

6. Capital Expenditure. Mbada asserted that a capital investment of $214.5 million was made by the company. Mbada diamonds should clarify whether this investment was made by government’s joint venture partners as part of acquiring a 50% stake in Mbada diamond operations. Or was this capital investment funded by revenues from Mbada Diamond operations. Mbada diamonds should disclose how much was paid by joint venture partners to government in favour of a 50% stake. Further, it is important to disclose if the payment was made in cash or kind. If payment was made in form of provision of capital equipment and services, these transactions should be disclosed as they are highly susceptible to corruption.

This will help to establish the economic rationale behind the 50% given to private partners in Mbada as well as justifying the fruits they are enjoying in the form of dividends. The Parliamentary Report by the late Hon. Chindori Chininga on Marange diamonds (2013) to highlighted strong suspicion of inflated in kind contribution made by government’s partners in acquiring a 50% stake. Further, the report alleges that Zimbabwe Mining Development Corporation (ZMDC) did not carry out an expenditure verification exercise pertaining to the in kind contribution made by government’s partners.

7. Operational Expenditure. Currently the country is still coming to terms with exorbitant salaries being received by top management in state owned or quasi state owned enterprises. Salaries are part of operational costs and inflated salaries have an effect of deflating income and consequently income tax. Mbada diamonds, being partly owned by government should disclose salaries and benefits of its top management to put to rest reasonable suspicion that few individuals are benefitting whilst government’s fortunes are thinning.

There are other factors that are prominent facets of diamond revenue which Mbada omitted. Mbada diamonds should disclose the following to address its diamond revenue transparency initiatives;

Ø The diamond production foot print: Mbada could have easily also provided the public with information on the quality of diamonds produced from 2010 to 2013 at least in percentage terms. Generally, Marange has all three sets of diamonds, industrial/boart, near gem and gem quality diamonds. Recent diamond sales in Antwerp yielded an average of $18,000 per carat for gem quality diamonds. Average diamond sales per carat in 2012 were nearly $60 according to the Kimberly Process Certification Scheme (KPCS). It would have been very important for Mbada to calm the waters on allegations of possible smuggling of highly priced gem quality diamonds by diamond mining companies operating in Marange. Further, for all the companies there was a massive increment in the exports of unsorted Marange diamonds from 2012 to 2013 according to the figures obtained from the Zimbabwe Statistical Agency (ZIMSTAT) for all diamond mining companies. In 2013 export volumes of unsorted diamonds increased astronomically by 6 231%. 11.43 kgs of unsorted diamonds were exported in 2012 and this increased phenomenally to 723.62kgs in 2013. These volumes translated to a value of $7.75 million and $200 million for 2012 and 2013 respectively, which is a massive 2 480% increment in value. This astronomical increase of unsorted diamond exports was met by a sharp contraction of 78% by volume and 71% by value of exports of sorted diamonds in 2013. The volume and value of the same exports were respectively 131,343kgs and $1.015 billion in 2012. In 2013, the volume and value of exported sorted diamonds were 29,012kgs and $296 million respectively. These figures clearly reveal the escalating risk of poor classification and valuation of our diamonds on benefits flowing from Marange diamonds to the state.

Ø Production and Export volumes of diamonds: Mbada should have provided clear figures and disclosed the diamond production and export volumes from 2010 to 2013. ZELA’s research on ‘Tracking the Trends; An assessment of Marange diamond revenue’ (2013) established that there are production and export variations between the Ministry of Finance and Kimberley Process Certification Scheme (KPCS) sources. Disclosures by Mbada would have allowed for further scrutiny on diamond production and export data. In this case, we are strongly stating that for Mbada to state and celebrate that they have reached a billion dollar mark is half-truth if production and export data which are intertwined with revenue are not disclosed.

Ø Community Share Ownership Trust Scheme. Recent reports in the newspapers allege that companies operating in Marange have failed to honour their obligations to contribute funds to the Marange-Zimunya community share ownership scheme. Private owned mining entities like Unki platinum mine have contributed in full $10 their million obligations to the Shurugwi community share ownership trust scheme. It is mind boggling why a quasi-state owned enterprise like Mbada fails to honour government laws and policies whereas private players are compliant.

For the time being, the country’s macroeconomic framework is outlined in the Zimbabwe Agenda for Sustainable Socio Economic Transformation (ZIMASSET), a five year development agenda. ZIMASSET justifiably singles out the mining sector as important for promoting inclusive economic

growth. Zimbabwe is a mineral rich as it is endowed with many mineral deposits that are economically exploitable. Mining is the lead sector in terms of its contribution to the gross domestic product and export earnings. Yet Zimbabwe is beset with socio-economic ills ranging from high unemployment, food insecurity, and poor public service delivery on health, education water and sanitation. Clearly, Zimbabwe is failing to leverage on its mineral wealth to spur socio-economic transformation. The nation suffered fiscal stress in 2012 as a result of underperformance of diamond dividends. Transparency and accountability are the critical success factors if the government is to optimise mineral revenue receipts. Mbada diamonds has a window of opportunity to be the torch bearer of transparency and accountability in the Marange diamond fields. Therefore, Mbada diamonds can transform itself from offering too little of a good thing to full and clear disclosure. While the partial disclosure by Mbada diamonds is laudable, it raises more questions than answers and falls short of fully satisfying the expected standards of transparency and accountability.

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