Feeding the cows to milk more — a look at the proposed mining royalty arrangements
As Parliament gathers public input for the Mines and Minerals Amendment Bill (MMAB), it is vital to distillate the Bill to see if it primes Zimbabweans for an equitable benefit arrangement. Confirming the oxygen supplies to the economy from mining, the Reserve Bank highlighted in its 2023 Monetary Policy Statement that nearly 76 cents per every dollar generated from exports in 2022 was minted from mining. In total, mineral exports generated US$5.6 billion in 2022, the bulk of which emanated from gold and platinum, precisely 84.08%. Chrome ore and ferrochrome contributed 4.39%, diamonds 2%, and other minerals 9.53%. Adding the lithium prospects, driven by a flurry of investments, mainly Chinese, mining fingerprints are set to be all over the economy from 2023 onwards.
With this background, this article analyses the mining royalty measures included in the MMAB to contribute to public policy formulation debates and discussions. Mineral royalty issues discussed in this article cover the use of royalty rebates to incentivize local value addition and beneficiation; that royalties must be paid for all minerals recovered from the processing of ores; the fixing of royalty annually in any fiscal year through the Finance Act; powers given to the Zimbabwe Revenue Authority (ZIMRA) to enforce the payment of royalties; and the powers given to the President remission of royalty obligations, wholly or partially to enhance continuation of a mining operation or enhance export earnings and local beneficiation and value addition.
Royalties are a form of government revenue derived by applying a percentage fee to the gross market value of minerals. In Zimbabwe, all minerals have a fixed royalty rate, differentiated according to mineral value. The highest rate applies to diamonds and other precious stones at 10%, platinum at 5%, base, and industrial metals at 2%, and coal at 1%. Gold is the only mineral that attracts a flexible royalty rate of 5% if the international market price is above US$1,200 per ounce and below that, 3%. This only applies to large-scale miners since artisanal and small-scale mining enjoys a fixed 1% preferential rate. Royalty revenue from mining is more predictable because it is precipitated by the marketing of minerals, therefore, payable regardless of profits or losses incurred. That is why mining royalties are deemed less prone to aggressive accounting techniques used to dodge income tax obligations unethically or illegally.
Local value addition and beneficiation of minerals are incentivized in the MMAB through a complete rebate on minerals consumed in Zimbabwe. Further, a proportionate royalty rebate is given to approved mineral beneficiation plants. The government trying to use the carrot approach to miners on beneficiation and value addition of minerals. Through levying export taxes on raw and semi-processed minerals, the Finance Act uses a different approach, the stick.
On the surface, by giving royalty rebates, it appears the government is letting go of revenue essential for boosting public expenditure to improve the quality of basic public health and education services. Using royalties as an incentive for industrialization, the government is opting to feed the cows to milk more. Increased value addition of minerals offers several economic benefits from mining. Right now, minerals have been exported predominantly raw or semi-processed. Apart from improving the country’s taxable capacity, industrialization creates more jobs, earns more foreign currency, and enhances better skills development, coupled with the attendant growth of tertiary industries like banking and finance.
The risk of under-declaration of the quality and quantities of mineral exports shrinks with minerals processed and refined locally, even better consumed. There is a longstanding public perception that the government is not getting a fair share from mining companies. One of the reasons cited is that mining companies declare only one mineral and hide other related minerals that are recovered. These allegations have been targeted at platinum miners. Platinum is generally used to refer to the platinum group of metals (PGMs) — platinum, palladium, rhodium, ruthenium, iridium, and osmium. Gold and silver are some of the precious metals including base minerals like nickel, copper, and cobalt that are recovered from the processing of platinum.
To some extent, allegations against platinum mines are sterile. The Zimbabwe Platinum Mines (ZIMPLATS), through its annual reports, publicly accessible online, declares revenue earned from the mineral varieties it extracts. It is a pity that the fiscal instruments continue to refer to platinum royalties while related metals like palladium and rhodium rake in more revenue for the miners than platinum. ZIMPLATS’s annual reports indicate that Palladium in 2019, for the first time, contributed 35.6% more revenue than platinum and nearly doubled in 2022 at 81.6% more. The revenue from rhodium in 2022 was 25.4% more than the platinum contribution. Considering that the MMAB makes it clear that royalties must be paid from all minerals recovered from the ore, the Finance Act must be fine-tuned in appreciation of the variety of metals recoverable from PGMs. More so, considering the changes in value, palladium, and rhodium are now more valuable than platinum.
Another highlight of the MMAB is that the royalties must be fixed annually in each fiscal year by the Finance Act, in cognizance of the recommendations of the Minister of Mines and other considerations. The predictability of tax regimes is another critical factor for the attraction of mining investments. Investors consider unstable tax regimes a massive investment risk. In the past, we have seen the government frequently change the royalty rates for gold and platinum to make them more fashionable in response to changes in the market.
Worried by the unstable royalty regime, the government introduced a flexible gold royalty rate dependent on the international market price in 2019. A similar argument can be used to predetermine the royalty rates for other minerals like platinum and lithium, for example, in line with the changes in international markets. This also manages the risk that fixed royalty rates sterilize mineral resources as miners target high-grade ores. If the market price of a given mineral falls, the royalty rate accordingly falls, and the opposite is true. South Africa uses the income-based approach to royalties which is an ideal situation for investors. However, faced with a degraded quality of public services, Zimbabwe must get revenue as miners tied to the marketing of minerals. Royalties cannot be deferred until mining companies start to make profits. Imagine the likely public fallout if the government fails to show in its coffers improved revenue from one of the world’s most sought-after minerals, lithium.
The MMAB is more intentional on the empowering of ZIMRA “to inspect all books and records, reports and other documents relating to the acquisition, disposal or removal of any mineral or mineral-bearing product as may be needed for the purpose authenticating any return, details, solemn declaration, certificate or document rendered in connection with the payment of royalties.” Further, in the event of a company defaulting in paying royalties or submission of royalty returns, ZIMRA is empowered to prevent the sale of minerals unless an agreed payment arrangement has been put in place.
A worrisome provision in the MMAB concerns the powers given to the President “to remit in whole or in part royalty payments for a specified period as an inducement to the commencement or continuation of mining operations, or the processing or refining within Zimbabwe of minerals or mineral-bearing products, or the development of any export market. Such remission may be backdated by up to 4 years.” According to the Constitution, Section 299, Parliament must have oversight on State revenue and expenditures. By wavering the payment of royalties, in effect, the President will be giving a subsidy to a concerned company. And such matters must be left for Parliament as they debate and pass the national budget. For this reason, the Bill should remove the powers given to the President to cancel in full or in part royalties owed by a mining company regardless of the circumstances. The proposal to cancel royalty obligations and to backdate the cancellation for 4 years must go through the national budget processes for more transparency, public and Parliamentary scrutiny, and approval by the latter.
To sum up, promoting local beneficiation and value addition of minerals through a partial royalty rebate and granting a full royalty rebate on minerals consumed locally is like feeding the cows to get more milk. The powers given to ZIMRA to administer mining royalties will go a long way to curb revenue leakages. All things considered; the powers given to the President on remission of mining royalty obligations must be struck off. Instead, the royalty remission proposals must go via the national budget process for public transparency and accountability to prevent abuse and respect the Constitution on Parliament oversight of state revenues and expenditures. Changes in the Finance Act are critical to ensure that minerals like palladium and rhodium that have surpassed platinum in terms of revenue contribution to the miners are distinctly charged royalties like platinum. In fixing royalty rates annually through the Finance Act, flexible royalty rates should be considered to make the mining tax regime more stable and predictable.
