HomeOpinionZimplats: reading between the lines

Zimplats: reading between the lines

Godfrey Marawanyika

THE recent threat by Zimplats to withdraw its investment from this country over a tax battle with the Zimbabwe Revenue Authority (Zimra) is a classic example of how policy inconsistencies in government have driven away the little investment remaining

in the country, analysts say.

It indicates how government has contributed significantly toward the economic meltdown by scaring away potential investors and frustrating those that are still operating in the country. The Zimplats case is emblematic of how mixed messages from government have hurt the economy by driving out investors. Ironically Zimplats is regularly held up as an example of Zimbabwe’s success in attracting direct foreign investment.

Analysts say the fight between Zimra and Zimplats shows that despite its claims to being investor friendly, Zimbabwe has no clear investment policy to lure offshore businesses or support those that are already here. There are no clear regulations on tax holidays for investors who might be eager to sink billions of dollars into the country although informal assurances have been given by successive ministers of mines.

The Zimplats case shows the policy confusion and sends damaging signals to other investors who might have chosen Zimbabwe for their businesses.

Government had initially promised that investors would not be penalised for investing large sums of foreign currency in new projects in the country, especially in view of the long-term risks and payback periods associated with projects such as Hartley Platinum inherited by Zimplats.

In Zimplats’ case there is a signed agreement giving the company a tax holiday. A “tax holiday” means that a company is exempted from paying tax for an agreed period. It is an incentive used worldwide to lure offshore investment. Other countries in the region like Botswana and South Africa have used this effectively to encourage foreign investment.

Zimplats had also been promised an exemption from withholding tax on dividends, thus effectively ensuring that the equity funding costs were not inflated to the point where investment became unviable. The investment agreement seemed to be clear in terms of the obligations of both parties. Under the agreement, government undertook to give effect to its obligations by way of amending legislation where necessary. This has not happened and Zimra has demanded that the company pays a whopping US$16,6 million in outstanding tax.

“As I am sure you will agree, this action runs contrary to the signed agreement, and to all the assurances given by your government to date,” said the company in its letter to the government last week. “The effect of the unspecified action to force the company to comply with Zimra’s demands would be to shut down the operations since the costs would not be met.”

The company this week said they were not shutting down but the contentious issue had now been referred to the Attorney General’s Office for analysis.

“This is not the case,” the company said about possible closure. “The private correspondence from Zimplats to Ministry of Mines and Mining Development merely points out the potential effect of the revenue collection authorities threatened actions to garnish operating bank accounts.”

Minister of Mines Amos Midzi this week said that despite the current problems pertaining to the Zimplats agreement government was still looking at the original agreement.

“This is a very clear case and there are no problems at all,” he said.

“What should only be done is to go to the original documentary history agreements that were agreed on,” said Midzi. “We are in the process of following up these agreements.”

Midzi said that the tax issue was in the process of being resolved with the line ministry which in this case is the Ministry of Finance.”

“We will be talking to the Ministry of Finance on the Zimra problems, but I cannot really say when we will have a solution. But it’s something that is being addressed urgently.”

At best this illustrates how there is no handover process when ministers change ministries. Mining regulations have been changing with each minister.

Since 2000, more than 10 mines have closed shop due to viability problems but experts in the industry have noted that at least two of them could have been saved had it not been for bureaucratic bungling within the government line ministries.

The mining sector accounts for 4,3% of the country’s gross domestic product.

In 2004, the costs of extracting platinum in Zimbabwe shot up by 55%, making it one of the most expensive countries in the world, a report released by London-based GFMS said in its Platinum and Palladium 2005 survey.

“Zimbabwe suffered the sharpest rise in production costs of US$135/ounce, or 55%, following the 2004 implementation of royalty fees on mineral production and exchange controls.”

Despite the high inputs costs within the mining sector as a whole, doing business in Zimbabwe is also considered a risky venture.

Besides the country being labelled as unsafe for business, others are concerned about the central bank’s directive that platinum miners ought to open their foreign currency accounts locally instead of maintaining them offshore.

“The government through Zimra is flip-flopping on the policy issues,” a mining chief executive officer said.

“Are they now so desperate for hard cash that they are now reneging on the initial agreement they signed. What sort of signal are we sending to potential investors if rules can flip-flop just like that depending on which minister is in charge?”

The mining executive also raised concern on the lack of clarity on the 30% empowerment stake which is meant for locals.

“Initially, we were told a 50% stake had to be reserved for locals, but then we were told it was 30%. So which is which here? This makes planning very difficult.

“I am not really sure if it means an empowerment stake implies one has to be aligned to the ruling party or one has to come from Mashonaland West,” he said.

“We have had people who are either related to ministers or are from the ruling party bothering us that they have the money yet they all seem to have one major guarantor, which is government.”

In January the central bank introduced the Enhanced Platinum Sector Regime, which resulted in platinum being classified as a strategic mineral.

The directive caused anxiety among the platinum players in the country who were worried that they would not be able to access their money in time for inputs.

Under the arrangement platinum miners were ordered to open four special currency accounts with a local merchant bank which would in turn lodge the foreign currency in a “mirror” offshore Trust Foreign Currency Account (TFCA) for the exporter, held by the central bank.

This would result in the creation of a platinum collection foreign currency account to receive all inflows including export proceeds, loan draw downs or equity projections.

The TFCA would also have a debt service coverage to guarantee the ability of exporters to meet foreign loan repayment commitments of a minimum debt service cover ratio of two months as determined from existing outstanding offshore loans.

The new arrangement is considered too cumbersome for investors who want to have easy access to their FCAs to enable them to import equipment.

Of concern also is that instead of encouraging investment, what is boldly clear are stringent rules when one wants to pull out of their operations in the country.

Since January, investors that wish to pull out of the country will only get their remittances paid over a 20-year period, a major policy switch from the original 72 months.

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