A REVIEW OF POLICY AND LEGAL FRAMEWORK TO PROMOTE ZIMBABWE?S COMPETITIVENESS IN THE MINING SECTOR Willis Z. Saungweme A research dissertation submitted to the Faculty of Engineering and the Built Environment, University of the Witwatersrand, Johannesburg, in partial fulfilment of the requirements for the degree of Master of Science in Engineering. Johannesburg, 2005 ii DECLARATION I declare that this research report is my own unaided work. It is being submitted for the degree of Master of Science in the University of the Witwatersrand, Johannesburg, South Africa. It has not been submitted before for any degree or examination in any other University. Word count: 28 483 (excluding References and Appendices) Willis Z. Saungweme This day of year iii ABSTRACT The Republic of Zimbabwe is a landlocked country located in the southern part of the continent of Africa, between the Victoria Falls, Zambezi River, Kariba Dam and Limpopo River. It is surrounded by South Africa to the south, Botswana to the west, Zambia to the north and Mozambique to the east. The country is well endowed with mineral wealth and has been a reputable contributor to the region?s gold, coal, nickel and chromium production in the late 90?s, but this has negatively changed for the worse. Since 2000, Zimbabwe has been on economic recession resulting in growing global interest in the country?s economic and social environment. The lucrative mining sector has also been adversely affected by the harsh economic climate hence thwarting flow of foreign direct investment (FDI) into the country which is needed to boost Greenfield and Brownfield competitiveness in the sector. Apart from its lucrative mining sector the country has done very little in harnessing the anticipated FDI that should ensue. Concerns about governance, the rule of law and human rights, and the continued lack of clarity about property rights have severely damaged confidence, discouraged investment, and promoted capital flight and emigration, thus contributing to the economic decline. Its competitiveness in attracting FDI has since declined because of the international perception of the country?s high political risk. The country has failed to live up to expectations with regards to mineral resource development in the region. The research established that, governance issues are at the helm of the current low performance of the economy. It therefore prescribes a complete change in government?s attitude and calls for it to develop a long overdue mineral policy document to map a strategic way forward for the country?s mineral resource development. Interestingly the country has been hailed to have one of the most liberal mineral administration laws through the Mines and Minerals Act of 1996. Its fiscal incentives to the mining sector compare favourably with the rest of the region e.g. a corporate tax of 15% for exporting mining companies and currently most gold operations are royalty exempt among others. There is a growing divergence from iv policies to actions on the ground. The rule of law is under threat and corruption has taken its toll. It is therefore important for this research to analyse the historical performance of the country in the mining sector to formulate policies and recommendations that will improve the country?s competitiveness in the sector. The policy and fiscal incentives should continuously be revisited to be in tandem with global developments. The endowment theory, strongly believed by the country?s mining ministry as illustrated by Tilton in 1992 is not conclusive in attracting FDI especially in this dynamic global economy. More and more developing countries are revising their investment policies to try and improve competitiveness of their investment environments. Zimbabwe should emulate countries like Chile currently leading the pack in attracting FDI in the mining sector. There is now fierce competition in attracting investment into a country because now, the investor has more countries to choose from. Zimbabwe should seriously focus on getting rid of all the negative aspects that have seriously affected its economic performance and quickly develop policies that auger well with regional integration and various other NEPAD, SADC and AU policies that underpin African development. The mining sector is a driver for economic development if properly supported as shown within the research. v DEDICATION To my wife, Ruvarashe and daughter, Nicole You have been my inspiration. God bless you vi ACKNOWLEDGEMENTS I am greatly indebted to my supervisor Prof FT Cawood from the School of Mining engineering at the University of Witwatersrand for his unwavering support by providing guidelines and marathon discussions during the execution of the research. Many thanks go to Mr David Matyanga, Mineral Economist, Chamber of Mines Zimbabwe for discussions and sourcing up-to- date information about the sector. Mr T. Nyatsanga, Director of Mining Promotions and Development Zimbabwe helped with information on challenges facing the ministry of Mines and Mining Development. Other centres that facilitated include the MMCZ, ZIC and the Ministry of Finance and Economic Development. This research would not have been successful without lecturers from the University of Witwatersrand, School of Mining who shared with me their talent, experience and passion ultimately gearing me for the challenge to critically analyse issues pertaining to the mining sector. They include Prof. RCA Minnitt, Mr A. MacFarlane, Mr C. Musingwini and once again my supervisor, they have given me the exposure to the knowledge I have placed in this research. Space would not allow me to mention all the individuals who assisted in one way or the other in conducting the research but I sincerely thank you all for your contribution. To Mrs Hester Mey, thank you for the patience in editing the whole script. To my mom, dad and the whole family I wish to express special thanks for always believing in me and your invaluable moral and financial support in my life. You are wonderful parents. Last but not least I wish to express my profound gratitude to my lovely wife Ruvarashe for her support, dedication and deep commitment in holding on despite my long absence from home. I appreciate your encouragement and dedication to help fulfil my dreams. God bless you. vii CONTENTS Page DECLARATION.......................................................................................................ii ABSTRACT............................................................................................................. iii DEDICATION...........................................................................................................v ACKNOWLEDGEMENTS ....................................................................................vi LIST OF FIGURES ..................................................................................................x LIST OF TABLES ...................................................................................................xi LIST OF ANNEXURES.........................................................................................xii LIST OF ABBREVIATIONS .............................................................................. xiii CHAPTER 1 ..............................................................................................................1 1.0 BACKGROUND AND OBJECTIVES OF RESEARCH .........................1 1.1 Introduction.................................................................................................5 1.2 Related Studies and Motivations ..............................................................11 1.3 Objectives of the Research........................................................................19 1.4 Research Methodology .............................................................................19 1.5 Limitations ................................................................................................21 1.6 Conclusion ................................................................................................22 CHAPTER 2 ............................................................................................................23 2.0 THE ROLE OF MINING IN ZIMBABWE .............................................23 2.0 Introduction...............................................................................................23 2.1 Zimbabwe?s Economy ..............................................................................23 2.2 Zimbabwe?s Mining Industry ...................................................................27 2.3 Mineral Endowment..................................................................................34 2.4 Perfomance of the Mining industry - 1993 to 1999..................................39 2.5 Performance of the Mining industry - 2000 to 2003.................................46 2.6 Analysis of GDP contribution of the Mining industry..............................47 2.7 Conclusion ................................................................................................50 viii CHAPTER 3............................................................................................................52 3.0 ZIMBABWE?S INVESTMENT ENVIRONMENT AND COMPETITIVENESS................................................................................52 3.0 Introduction...............................................................................................52 3.1 Summary of Zimbabwe?s Investment Environment .................................52 3.2 Investors? attitude towards investment in Zimbabwe ...............................58 3.3 Mineral Potential.......................................................................................58 3.4 Mineral Legislation...................................................................................60 3.5 Fiscal Regime............................................................................................65 3.6 Political Risk.............................................................................................67 3.7 Business Environment ..............................................................................70 3.8 Conclusion ................................................................................................73 CHAPTER 4............................................................................................................76 4.0 ECONOMIC POLICIES ...........................................................................76 4.0 Introduction...............................................................................................76 4.1 Investment Policy......................................................................................76 4.2 Monitory and Fiscal Policies ....................................................................78 4.3 Economic Instruments ..............................................................................79 4.4 Taxation of Minerals.................................................................................79 4.5 Royalties ...................................................................................................80 4.6 Conclusion ................................................................................................81 CHAPTER 5............................................................................................................83 5.0 MINERAL RESOURCES DEVELOPMENT .........................................83 5.0 Introduction...............................................................................................83 5.1 Sustainable Development..........................................................................83 5.2 Mineral Policy...........................................................................................84 5.3 Mines and Minerals Act............................................................................88 5.4 Current Challenges in Mineral Resource Development in Zimbabwe .....94 5.5 Natural Resources Accounting .................................................................96 5.6 Training and Skills Development .............................................................96 5.7 Research and Development.......................................................................98 5.8 Conclusion ................................................................................................98 ix CHAPTER 6..........................................................................................................100 6.0 RECOMMENDATIONS..........................................................................100 6.0 Introduction.............................................................................................100 6.1 Recommendations on Improving Zimbabwe?s Investment ....................101 6.2 Recommendations on Economic Policies...............................................102 6.3 Recommendations on Mineral Resource Development..........................102 6.4 Conclusion ..............................................................................................104 7.0 REFERENCES..........................................................................................107 8.0 BIBLIOGRAPHY.....................................................................................112 9.0 APPENDICES...........................................................................................113 x LIST OF FIGURES Figure 1 Mining?s GDP growth rates at factor cost ..............................................7 Figure 2 Contribution of mineral commodities to mining GDP .........................33 Figure 3 Inflation and Exchange rates in Zimbabwe ..........................................41 Figure 4 Interest rates developments in Zimbabwe.............................................41 Figure 5 Foreign currency reserves measured as months of import cover..........42 Figure 6 Zimbabwe platinum group metals production and metal prices...........43 Figure 7 Base metals production and prices........................................................44 Figure 8 Gold production and price from 1993 to 2003......................................45 Figure 9 Gold revenue and price in US$.............................................................45 Figure 10 Corruption Perception Index of Zimbabwe ..........................................69 Figure 11 Top African countries Recipients of FDI..............................................87 xi LIST OF TABLES Table 1: Zimbabwe?s average annual GDP growth rates, by period, .................25 Table 2 GDP contribution from main economic sectors....................................47 Table 3 Zimbabwe?s Investment Environment..................................................54 Table 4 Evaluation of effective blend price of gold per ounce..........................72 Table 5 Foreign currency Retention Scheme for Gold Producers .....................72 Table 6 Current mining rights and proposed new order rights in Zimbabwe ....90 Table 7 Proposed fees for new order rights .......................................................94 xii LIST OF ANNEXURES Appendix 1: Fraser Institute Annual Survey of Mining Companies 2001 / 2002 ..114 Appendix 2: Zimbabwe Economic Indicators ........................................................116 Appendix 3: Sector Investment in Zimbabwe (1993 ? 2004)..............................117 Appendix 4: Zimbabwe Mineral Production ..........................................................118 Appendix 5: Zimbabwe Mineral production Revenue............................................120 Appendix 6: Mineral prices: Gold, Platinum, Copper and Nickel..........................121 Appendix 7: Enhanced Platinum Sector Regime (EPSR) for Zimbabwe...............123 Appendix 8: Mines and Minerals Act 1996 chapter 21:05 of 1996 (extracts) .......125 Appendix 9: Fiscal Incentives for Mining in Zimbabwe ........................................139 Appendix 10: Zimbabwe Monitory Policy Statement, December 2003.................142 Appendix 11: Report on the Budgetary allocation to the Ministry of Mines and...144 Appendix 12: Government Budgetary Allocations to ministry of Mines in Z$m ..146 Appendix 13: Zimbabwe redivivus - article by David Mckay ...............................147 Appendix 14: Zim Hostile to Business: Zimbabwe Independent Press..................149 xiii LIST OF ABBREVIATIONS Abbreviations ACP African, Caribbean and Pacific ADB African Development Bank AIPPA Access to Information and Protection of Privacy Act AU African Union BEA Bureau of Economic Analysis BEE Black Economic Empowerment BIMCO Buchwa Iron Mining Company BNC Bindura Nickel Corporation CEO Chief Executive Officer COMESA Common Market for East and Southern Africa CPI Consumer Price Index DCF Discounted Cashflow DME Department of Minerals and Energy DRC Democratic Republic of Congo EEL Exclusive Exploration Licence EIA Environmental Impact Assessment EMPR Environmental Management Program ENR Empress Nickel Refinery EPL Exclusive Prospecting Licence EPO Exclusive prospecting Order EPSR Enhanced Platinum Sector Regime EPZ Export Processing Zone ESAP Economic Structural Adjustment Program EU European Union FCA Foreign Currency Account FDI Foreign Direct Investment GDP Gross Domestic Product GSP Generalised Systems of Preferences xiv GTZ Germany Technical assistance to Zimbabwe ICSID International Convention of Settlement of Investment Disputes IDC Industrial Development Corporation IFC International Finance Corporation IMF International Monitory Fund IMR Institute of Mining Research ITDG International Technical Development Group JORC Joint Ore Reserve Committee MAP Millennium Partnership for the African Recovery Program MEPC Minerals and Energy Policy Centre MIGA Multilateral Investment Guarantee Agency MMCZ Minerals and Marketing Corporation of Zimbabwe MMSD Mines and Minerals Sustainable Development MRPD Mineral Resource and Petroleum Development Mt/a Million tonnes per annum NEPAD New Partnership for African Development NGO Non Governmental Organisation NRA Natural Resource Accounting NRZ National Railways of Zimbabwe NSONR National Sovereignty over Natural Resources OAU Organisation of African Unity OPIC Overseas Private Investment Corporation PGM?s Platinum Group Metals POSA Public Order Security Act PSF Productive Sector Fund PTA Preferential Trade Area RBZ Reserve Bank of Zimbabwe R & D Research and Development SADC Southern African Development Community SAMREC South African Mineral Resource Committee SIA Special Initial Allowance SIRDC Scientific and Industrial Research Development Centre UK United Kingdom xv UN United Nations UNCITRAL United Nations Commission on International Trade Law UNCTAD United Nations Commission on Trade and Development USA United States of America US$ United States dollar VALMIN Valuation of Mineral Assets WTO World Trade Organisation ZESA Zimbabwe Electricity Supply Authority ZIC Zimbabwe Investment Centre ZIMASCO Zimbabwe Mining and Smelting Company ZIMPREST Zimbabwe Programme for Economic and Social Transformation ZIMRA Zimbabwe Revenue Authority ZISCO Zimbabwe Iron and Steel Company ZMDC Zimbabwe Mining and Development Centre ZRP Zimbabwe Republic Police Z$ Zimbabwean dollar (currency) 1 CHAPTER 1 1.0 BACKGROUND AND OBJECTIVES OF RESEARCH This chapter is a summary of the situation in Zimbabwe with regard to the mining sector: the research?s main focus. Recent events in the country have had an impact on the industry, and these events are highlighted. Furthermore the country?s performance in attracting foreign direct investment is discussed. The research also explains the unique characteristics of the mining industry and describes the criteria used for investment, based on competitive measures implemented to rate the country. A list of related studies and motivations to support this research further explains the importance and growing global interest in Zimbabwe?s economic and social environment. The main objectives of this research is to clarify the importance of the mining sector to the economy by critically reviewing its past performance from 1995 to 2003 and by identifying ways and means of encouraging mineral resource development in Zimbabwe through a coherent mineral policy. The reader should note that the cut off date for quantitative results analysed in this research include up to end of 2003. Thereafter more qualitative results and recent developments up to February 2005 are discussed. The country?s negative publicity on the political front has further deterred investors. It is, therefore, important to analyse the country?s policy, legal framework, and fiscal incentives separately from the highly publicised political risk that has overshadowed all its other lucrative and competitive structures. Political risk is a major concern which dominates any meaningful efforts to promote competitiveness. Summary of country profile Country name : Republic of Zimbabwe Area : 390,580 sq km Population : 13 million People : Shona (76%), Ndebele (18%), Batonka (2%), Shangaan (1%), Venda (1%), European, Asian Language : Shona, English 2 Religion : 50% syncretic, 25% Christian, 24% indigenous beliefs, 1% Muslim and other Government : Parliamentary democracy Head of State : President Robert Gabriel Mugabe Major Industries: Mining, agriculture, manufacturing, clothing, tourism Major Trading Partners: South Africa, UK, Argentina, US, Japan Sources: http://www.lonelyplanet.com/destinations/africa/zimbabwe Accessed 15 January 2005 http://encyclopedia.thefreedictionary.com/Economy%20of%20Zim Accessed 15 January 2005 Map of Zimbabwe (overleaf) : Courtesy of Education maps Africa Mineral map of Zimbabwe : Courtesy US Geological Survey 3 Map of Zimbabwe 4 5 1.1 Introduction Zimbabwe is well endowed with mineral wealth. It boasts of having more than forty economic minerals being mined which include precious metals, energy minerals, platinum group metals, and industrial minerals. The mining industry has contributed significantly to the development of the country. Most of the towns and cities in Zimbabwe owe their origins to mining activities (Svotwa, et al., 2001). Since 1999, the annual growth in the industry has taken a downturn and this downturn has been further exacerbated by the perceived political risk in the country (see Figure 1). The country has lost out significantly on Greenfield competitiveness (Tilton, 2000) as illustrated by the number of projects that have been put on hold due to political risks. The Sengwa coal project in the north west of Zimbabwe is one good example. Once a project is put on hold for political reasons, it is difficult, in fact impossible, to restart it without serious policy reviews. Refer to Figure 2 showing the flow of mining investment into Zimbabwe from 1995 to 2003. A survey by the Fraser Institute has put Zimbabwe among the lowest countries in investment attractiveness. This attractiveness index ranks a country?s mineral potential and policy potential in attracting foreign direct investment in exploration. It is interesting to note that the mineral potential index for the country is high, but the overall investment attractiveness is very low because of the policy potential. A country with such a high mineral potential should enjoy the benefits of foreign direct investment in the sector. Refer to Appendix 1. Though Zimbabwe still has functioning mining operations, these operations have been harmed by the closures of some mines, thereby worsening the unemployment situation, mineral production, revenue generation, and foreign currency earnings. Its brownfield competitiveness (Tilton, 2000) is also under threat. If the situation continues, a complete re-evaluation of the situation is required to once again attract investment. Although some companies have braved the harsh political weather and invested in the country, companies such as Rio- Tinto on its Murowa diamond project which is likely to come on line in the near future and Zimplats in Makwiro which is now fully operational, other new and 6 expansion projects have adopted a wait and see attitude until after the 2005 parliamentary elections. However, much still has to be done to attract even more investment. The Murowa diamond project has downscaled its original planning production from 1.2Mt/a to just 0.2Mt/a because of perceived country risk (African Mining Journal, 2004). These developments can only be explained by the high Mineral Potential Index of the country that far outweighs the low Policy Potential Index. The country should strive to attract more investment by improving its low policy potential; certainly the endowment theory only works in exceptional cases (Tilton, 1992). A combination of political disturbances emanating from the land redistribution exercise, poor governance, and lack of incoherent policies has affected the performance of all sectors of the economy including agriculture. From being the custodian of the food security portfolio for SADC, the country has been reduced to importing food. According to projections or forecasts on mining development done in the 1990?s by the World Bank, Zimbabwe was projected to be leading the region in the 2000 era in terms of investment in mining, but it has been overtaken by countries like Namibia and Tanzania which previously could not be compared with Zimbabwe. 7 Figure 1 Mining?s GDP growth rates at factor cost Mining GDP growth in US$ 1990 - 2002 40.1% 31.1% 4.7% 55.8% -54.9% 12.7% 8.8% 72.4% 46.0% -10.5% -7.4% -7.1% -80.0% -60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 Mining GDP grow th in US$ Source: CSO and Reserve Bank of Zimbabwe The mining sector relies heavily on foreign direct investment (FDI) for its growth because very few governments in developing countries can afford such a risky sector with regard to investment. Mining has been classified as unique from other business sectors because of its inherent risk, long gestation periods, uncertainty in ore bodies, and its direct interaction with the global economy. The market volatility of the sector is threatened by world mineral price fluctuations, technological developments that might introduce substitutes for a commodity, and high environmental liability among others threats. 8 Figure 2 Number of new mining projects into Zimbabwe No. of new mining projects in Zimbabwe 30 31 36 33 34 28 13 11 14 4 6 6 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 No of new mining projects Source: Zimbabwe Investment Centre 2004 (2004 projects recorded only up to June 2004) The sector, if properly supported, is a vehicle for development in developing countries. Zimbabwe should endeavour to fully utilise its resource potential for the benefit of the country. With the current southern African region being prone to droughts, it is important to recognise the imminent potential of other sectors, such as mining to supplement the agricultural sector, which is the backbone of Zimbabwe?s economy. The sporadic droughts, coupled with recent political developments, have literally relinquished Zimbabwe of its duty as the bread basket of the SADC region (Food security). The sector?s contribution to export earnings, despite its declining production and underutilisation of capacity, has increased in the past three years due to the frequent droughts experienced in the past years and the effects of the fast track agrarian reform programme on agricultural production, the backbone of the country?s economy. Refer to Figure 3 below. 9 Figure 3 Mining foreign currency earnings as percentage of total exports Mining Total Forex as % of Total Exports 1990 - 2002 29.5% 25.9% 20.5% 20.6% 20.1% 21.6% 18.2% 17.2% 17.0% 15.4% 11.7% 20.9% 21.6% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 Mining total forex as % of total exports Source: Chamber of Mines ?Zimbabwe Vast areas of the country?s endowed mineral wealth still remain untapped. The Great Dyke also hosts world-class deposits of chrome and platinum group metals. It should be borne in mind that a mineral resource is not worth anything if it lies dormant in the ground. It has to be converted into reproducible capital goods. It has become abundantly clear that a rich mineral endowment on its own cannot be effectively competitive without an associated sound mineral policy framework. Although already established mining companies have continued operating in Zimbabwe, new investment has been thwarted by the current political situation as well as the incoherent policies currently hampering the economy. It is, therefore, important to look at the historical performance of the sector from 1990 to 2003 and analyse the trends and possible explanations for these. The solution hinges on understanding what went wrong and the acceptance of the free market economy that is now the predominant determinant in most economies. Comparison of the current Zimbabwean investment environment with other SADC countries is important in order to align it with regional and world trends. 10 In mining, the past has a direct bearing on the future. Policies that discourage Greenfield competitiveness now will be manifested in lack of development of new mines in the future. Mining has long gestation periods, and if preparatory exploration work is violated, the result is self destructive. Countries, such as Namibia, Botswana, and Tanzania to mention a few, that are currently enjoying new mining developments, have had policies in the past that have promoted Greenfield investment which have now become mining operations. The need to promote Greenfield competitiveness should not be overemphasized. What must be taken into account is that the rate of exploration activities that finally develop into mining ventures is generally less than 1 in a 100. The competitiveness of any country is measured by the broad attributes summarised below. The mineral endowment of the country also has a major influence on mining investment. Economic Performance ? Domestic Economy ? International Trade ? International Investment ? Employment ? Prices Government Efficiency ? Public Finance ? Fiscal Policy ? Institutional Framework ? Business Legislation ? Societal Framework Business Efficiency ? Productivity ? Labour Market ? Finance ? Management Practices ? Attitudes and Values Infrastructure ? Basic Infrastructure 11 ? Technological Infrastructure ? Scientific Infrastructure ? Health and Environment ? Education 1.2 Related Studies and Motivations The performance of the Zimbabwean economy has impacted negatively on all its sectors, and mining is no exception. Given its high mineral potential, the country has not lived up to its level of attracting foreign direct investment in the sector. Therefore, it is important to look at the mining sector performance and draw up explanations for these trends and also prescribe corrective action in accordance with strategies for mining development in the SADC region. The sector is faced with the following challenges and problems: decline in mineral production, negative growth, decline in the flow of new investment, reduction in the GDP contribution from the sector, employment creation, underutilisation of capacity, and most seriously, loss in competitiveness. Otto (1998) in his paper entitled ?Mining Policy, Legislation and Regulation? clarifies the importance of having a stand-alone mineral policy document as opposed to interpreting policy from diverse sources of information. A stand-alone policy document is a useful regulatory tool that serves two important functions both to the investor and the government. He describes the stand-alone document as quoted below: First, it provides the mineral industry with a clear statement of the government's expectations and intent towards the industry. Secondly, it provides lawmakers and regulators with broad guidance. Implementation of mineral sector policies is done through many agencies and administrative channels. An important part of the policy implementation framework is the body of laws that will statutorily affect the industry. Investment and government mining policy are closely linked. Even the most highly geologically prospective nations will have difficulty in attracting foreign investment without adequate national policy, regulatory and fiscal systems Otto, (1998). 12 Over the past few years, the level of mineral sector investment has increased in real terms, and those nations that have implemented regulatory systems to reduce or allow a company to manage risks at an acceptable level have, for the most part, enjoyed increased levels of investor interest. Zimbabwe needs to provide this conducive investment platform in all aspects in order to benefit from increased mineral resource development. At present, the country does not have a stand-alone policy document, whose importance has been highlighted above. Matshediso (2002) established the investment criteria for mining companies to decide on investment destinations. It is important to benchmark Zimbabwe on the criteria given. The question is: what needs to be done to boost the country?s position in Greenfield competitiveness? Recent consecutive spells of droughts coupled with the fast track land redistribution program have affected Zimbabwe?s agricultural sector: the backbone of the country?s economy. The country has experienced droughts in 1982, 1992, 2001 and a looming drought again in 2004 and 2005 season. It is high time that the government instils competition within other sectors of the economy to fully promote the potential of other sectors in building the economy. Sector competition should be promoted by fostering a spirit of competition between different sectors in the economy. A number of studies have been done to provide strategies for Southern African countries to attract investment in the mining sector. It is paramount for Zimbabwe, as part of the SADC region, to align itself with the latest developments in the mining sector. The African Development Report, under the auspices of the African Union (AU) and New Partnership for African Development (NEPAD), focuses on transformation and good governance through peer review as the driver to economic development in African countries and also encourages countries to diversify from being one sector-oriented, for example Botswana (mining). Zimbabwe is quite diverse in the economic sectors that contribute to its national economic development. Below are studies and research areas done in an effort to attract investment, not just regionally but even globally. 13 ? Strategies to attract new investment for African mining, (Strongman ?World Bank 1994) ? The Fraser Institute Annual Survey of Mining companies, (www.fraserinstitute.com) ? Mining Taxation in Developing countries (Otto, 2000) a study done for UNCTAD in November 2000. ? Small Scale Mining and Sustainable development within the SADC region ? Zimbabwe (Svotwa) MMSD Report 2002. ? The African Competitiveness Report (World Economic forum 2004 Maputo) ? African Development Report 2004 Research on Small Scale Mining in Zimbabwe Svotwa (2000) highlighted the significant potential that can be realised from the sector, if given proper support and promotion. The number of small scale miners as well as informal artisanal miners has increased dramatically over the past five years, and it is projected that over 500 000 will be engaged in this activity by 2004. The informal miners, better known as gold panners or makorokoza in Zimbabwean circles, mainly concentrate on gold mining, and their operations lack control and organisation. Their operations are permeated with illegal dealings in the minerals. In most cases, the produced gold finds its way out of the country sidelining the normal channels. If all the minerals produced from the sector were properly accounted for by the state, it would have contributed immensely to the economic development. With the unemployment levels now reaching an alarming 70%, the sector can provide alternative employment and reduce other anti-social problems associated with high unemployment, like crime. 14 Informal mining has been negatively perceived because of the associated environmental degradation, dangerous and hazardous operating conditions, and illegal dealings in the minerals. It is, therefore, imperative to assist the sector through the provision of funding, training, and a review of legislation to accommodate the sector as a formal activity. Current developments include constant review of gold support price from Z$71 000 to Z$85 000 and now at Z$92 000 per gram of gold in 2004 to lure illegal operators to sell the metal through official channels, like the RBZ and Fidelity printers. Mining taxation in developing countries (Otto 2000) The paper discusses the objectives of mine taxation by the host government to raise revenue and guide the behaviour of taxpayers. The most important aspect of raising revenue is to decide on how high the tax burden should be. Higher tax burdens imply less profit for the investor, and the governments are faced with the challenge of balancing their share with the firms? willingness to invest. If tax becomes exceedingly low, governments risk losing fiscal revenue. On the other hand, the behaviour of investors has to be guided to align with the nation?s objectives. One way is by using the command and control approach, specifying obligations that are supposed to be met through law. The other way to influence behaviour is by using tax as an incentive to comply with certain requirements that can range from environmental compliance to health and safety. A company emitting pollutants above the threshold limits can be taxed more in order to discourage the practice. Fiscal methods used by governments can be grouped into two categories: the tax type and the incentive type summarised below. General comments about these fiscal methods in most African countries, as studied by Otto, have been added. Tax type: ? Income or profits-based tax (common) ? Import duty (rare: exemptions often available) ? Export duty (rare: exemptions often available) ? Royalty tax (common: unit type, ad valorem type, profit type) ? Application/issuing/registration fees (common: usually minor) 15 ? Surface rentals (common: usually minor) ? Withholding tax (common: loan interest, dividends, and services) ? VAT (common: exemptions or credits usually available) ? Stamp duty (common: usually minor) ? Sales tax (rare: exemptions usually available) ? Local government taxes (common: usually a property tax based on book or assessed value) ? Mandatory payroll-based taxes paid by company: (common) ? Government equity (very rare: except in West Africa region) Incentive type: ? Accelerated depreciation (common) ? Depletion allowance (rare) ? Ring-fencing (common) ? Tax stabilization (used in some large producer developing countries) ? Exploration expense carry-forward (common) ? Deductible environmental, reclamation, closure costs (common) ? Tax holidays ? Loss carry forward (common) ? Loss carry back (rare) The reasoning behind the tax types, such as income tax, royalties, withholding tax, import and export duties, surface rentals, value added tax, are explained precisely so that investors can appreciate their importance. The reasons for including incentives like accelerated depreciation, tax holidays, and ring fencing also show the commitment of governments to share the risk associated with mining. Strategies to attract new mining investment in African countries (World Bank 1992) The paper highlights concerns that African countries are only attracting less than 5% of exploration and capital expenditure of the world mining industry. The reason for this under performance is that Africa has failed to attract and mobilise the risk capital and development funds. Governments need to shift their objectives towards the prime objective of optimum maximisation of tax revenue from mining over the long term 16 instead of putting so much focus on political objectives. It is imperative that governments move from being participatory to regulatory. The historic situation of African mining shows that soon after independence most governments nationalised mining entities in a bid to stress their sovereignty over mineral resources. This nationalisation operated to maximise short-term returns at the expense of long-term growth that would have sustained long-term revenue generation. The large state controlled enterprises have declined in performance, and the neglect of informal mining sectors has resulted in a mushrooming that has supported an increase in uncontrolled illegal mining. The success in Zimbabwe?s mining development in the 1992 has been attributed to private ownership and operation of mining companies. African governments should review their policy environment. The Business As Usual approach will not promote increased investment. Strengthening sector institutions, improving exploration, and promoting investment should be prioritised. The study analyses in detail the specific actions which African governments need to take. The study suggests the following agenda of government action for the 1990s: ? Economic adjustment programs should continue to evolve. In African countries with important mining sectors, the macroeconomic effects of mining must be taken into account fully. Exchange rate policies should be market- based and should be aimed at economic stability. Trade regimes should not be restrictive. ? Governments should clearly spell out their mining development strategies. The private sector should take the lead. Private investors should own and operate mines. The government should promote private investment, establish policies and regulations, supervise implementation of established policies, and monitor the private companies. ? Existing state mining companies should be privatised at the earliest opportunity to improve productivity of the operations and to give a clear signal to investors with respect to the government's intention to follow a private sector-based strategy. 17 ? The incentives for mining investors should be clearly determined in investment legislation. The taxation of mining companies should be consistent with the taxation of other sectors in the economy but should take the specific nature of mining as a resource-based industry into account. Mining taxes should be earnings-related rather than output or input related to avoid distorting investment and operational decisions. Mining taxation needs to take account of tax levels in other mining countries to maintain or establish competitiveness of the national industry. ? Mining legislation should reduce risk and uncertainty for potential investors and ensure easy access to exploration permits and mining concessions. Permits and concessions should be transferable with a minimum of government interference. Investment agreements, where required, should provide additional assurances to protect the investor from unwarranted government interference and provide additional safeguards for the government to ensure that investors will live up to their obligations. ? Mining institutions, such as the Ministry of Mines, Geological Survey, environmental protection and mine safety institutions, in most African countries should be reorganized and strengthened to better perform their promotional, regulatory, and monitoring functions. Government institutions should discontinue operational and marketing functions. ? Environmental and health and safety aspects of mining in Africa have been neglected in the past. To ensure sustainable mining development, appropriate regulations and standards need to be established together with effective monitoring and enforcement capabilities. 18 ? Artisanal mining requires special attention by African governments. Legalisation and improved organisation of artisanal mining would generate income in rural areas and provide revenue to the government. Incentive-based marketing systems would reduce the illegal exportation of minerals by unlicensed traders. The African Competitive report (World Economic forum 2004 Maputo) The report compared the strength and weaknesses of 25 countries in Africa. Statistical data and information collected from chief executives of African countries was the basis of the report. The competitiveness was evaluated based on the following criteria: openness, governance, finance, labour, infrastructure, and institutions. It also showed that small, dynamic, and stable economies with solid export bases performed the best. Examples of these countries in Southern Africa were Botswana and Namibia. Most African countries have been trapped in economic and political disturbances to the detriment of their attractiveness to investment. Those countries with a stable track record of sound management of the economy, sustained growth, and experience in mineral development performed very well. Zimbabwe was ranked 22 out of the 25 countries reviewed. 19 1.3 Objectives of the Research Below are listed objectives to be achieved by this research: ? to clarify the importance of mining to the Zimbabwean economy so that the problems and challenges facing the sector are given due attention by the responsible authorities. ? to critically review the performance of the minerals sector (1995 ? 2003). The sector has suffered a decline in mineral production, growth, and loss of competitiveness. These factors highlight the need to address these problems urgently. ? to analyse the reasons for Zimbabwe falling behind in attracting foreign direct investment in the mining sector . It was envisaged to be leading the region in terms of mineral development, but this has not materialised. ? to enumerate the decision criteria influencing investment in the SADC region and how Zimbabwe can focus its policy revision along the guidelines of the Strategy for Mining Development in SADC (Matshediso, 2002), and the EU and NEPAD initiatives for African development. ? to compare mining taxes in Zimbabwe with other SADC countries and recommend any necessary adjustments that will improve its competitiveness ? to identify ways and means of encouraging mineral development in Zimbabwe and the need to have a coherent mineral policy. 1.4 Research Methodology The research is overall qualitative: however, it is supported by quantitative analysis of Zimbabwean mining industry in explaining the trends observed in the past 8 to 10 20 years. An economic analysis provides a background of the importance of a review in policy. The first approach entailed compiling statistics of the Zimbabwean mining sector and using researched facts to illustrate the importance of mining to provide sound arguments for the research. This approach also entailed consultation with relevant authorities especially in Zimbabwe, including the Ministry of Mines, Zimbabwe Chamber of Mines (ZCM), Zimbabwe Investment Centre (ZIC), and other relevant organisations, such as the Minerals and Energy Policy Centre (MEPC) in South Africa. The second phase reviewed the country?s investment environment and competitiveness with regard to its mineral development policies, taxation system, and fiscal regimes and how these fare regionally, based on investment criteria influencing investment in the region (Matshediso 2002) The third phase looked at a comparative policy impact study of Zimbabwe with other SADC countries in terms of a policy and legal framework to establish how other countries have managed to attract investment. The legal framework of Zimbabwe?s mineral policy, though not properly documented, compares favourably within the region, but the country is still lagging behind other countries. Has the uncertainty in the administration, interpretation, and enforcement of regulations been the cause of the lagging behind? The final phase identifies issues within the policy and legal framework that need to be addressed to put the country back on the competitive list within the region and proposes recommendations based on the findings that will promote mining development in Zimbabwe, primarily focusing on policy formulation, administration of the sector, and support needed to achieve the set goal. 21 1.5 Limitations The research is aimed at highlighting areas from which the problems facing the mining sector emanate. A thorough analysis and comparisons of tax regimes with all regional countries is beyond the scope of this report. Small scale mining, both formal and illegal, require a separate research to conclusively address the problems in this sector: hence further research conducted primarily for this purpose is essential. Information from various other governments? departments essential to the compilation of this report was difficult to access and this posed a problem for conducting the research. Government departments were reluctant to provide vital information on the productivity of individual mines; therefore the analysis has been done on a national level. 22 1.6 Conclusion The country?s political situation has attracted global interest because of its past shining economic performance to its complete near collapse recently. It received global approval and recognition and regional admiration because of the sound policies that reaped results soon after independence in 1980. The country?s recent political problems, stemming from poor governance, corruption, and economic mismanagement, have affected all the main sectors of the economy including agriculture, manufacturing, mining, service sectors, and so forth. Mining has played a pivotal role in the country?s development even before independence. The following chapter analyses the role of the mining industry, its administration, mineral endowment as well as the performance of the sector since 1993 up to 2003. Gold is the highest single mineral export earner: consequently most of the industry?s performance analysis is based on it, although platinum has recently recorded a boom in production contributing significantly to the economy?s GDP. 23 CHAPTER 2 2.0 THE ROLE OF MINING IN ZIMBABWE 2.0 Introduction This chapter describes the developments of Zimbabwean economy since 1995. The mining industry?s administration has been described extensively, including the different departments? responsibilities, the role of the private sector, and marketing of the country?s minerals. The country is well endowed with vast mineral wealth; the most important minerals include gold, PGMs, chrome, base metals, coal, and industrial minerals. A conclusive discussion of these minerals, locations, and operating mines as well as future resource and reserves has been done. See map of Zimbabwe operating mines in chapter 1 of the Background and Objectives section of the report. The performance of the mining industry has been divided into two phases (1993 ? 1999) and then from 2000 to 2003. The division in 2000 occurred when events were suddenly exacerbated by inflation, interest rates, and foreign currency reserves posting unhealthy results. Mine closures worsened the unemployment situation, and the country?s competitiveness has been harmed by these developments since 2000. 2.1 Zimbabwe?s Economy The country?s economy is mainly dependent on agriculture, mining and manufacturing sectors which are arguably the main pillars of the economy. Zimbabwe is historically an agro-based economy, but the recent droughts have significantly affected agricultural output. In addition, the fast track land reform programme has affected the flow of operations in the commercial farming areas. The alarming reduction in agricultural output has even forced the country to import grain for local consumption, an indication of the gravity of the problem, considering that Zimbabwe was mandated with the food security portfolio as part of its SADC responsibility. The government of Zimbabwe faces a variety of difficult economic problems, as it tries to consolidate earlier efforts to develop a free, market-oriented economy through 24 the Economic Structural Adjustment Program (ESAP 1991). The involvement of the government in the war in the Democratic Republic of the Congo has drained the economy of millions of dollars. The unclear position of the country?s involvement has also caused the IMF to suspend its support because of failure by the government to meet budget obligations. Inflation has risen from 32% in 1998 to 59% in 1999 to 60% in 2000 and to about 135% by the end of 2002. The large government deficit, AIDS, and runaway inflation have contributed to the weakening of the economy. The land reform programme, characterised by violence, has seriously affected the commercial farming sector that was traditionally the source of exports, foreign exchange, and employment including the production of most agricultural crops, such as tobacco, maize, cotton, and so forth. The mining sector generates more than 30% of the export earnings, although recently, due to underutilisation of capacity and falling mineral production, this figure has fallen to 21% in 2002. Most of the mineral production has been achieved by the private sector, although Zimbabwe controls the mineral rights and enforces environmental regulations and legislation pertaining to the mineral resource. Zimbabwe, therefore, cannot be described as a mineral-based economy. According to Nankani (1985) and Auty (1993), a mineral-based economy is defined as one in which mining accounts for at least 8?10% of the GDP and 40% of the export earnings. 2.1.1 Political Economy On attaining independence in 1980, Zimbabwe adopted a socialist ideology until 1990 when it introduced the Economic Structural Adjustment Programme ESAP, 1991 to 1995. The programme, prescribed by the World Bank and IMF, was intended to reduce direct controls and let the economy utilise indirect market-based methods of resource allocation, which included the deregulation of the economy, trade liberalisation, public enterprise reform, and fiscal and monetary policy reforms (GoZ 1991). Since the inception of ESAP, the average annual GDP growth rates have consistently fallen. The table below shows the GDP growth rates from 1991 to 2002. 25 Table 1: Zimbabwe?s average annual GDP growth rates, by period, 1991-2003 Adjustment (ESAP) (1991-99) 2000 2001 2002 2003 2.5 -4 -7.3 -12 -9.01 Source: computations from Zimbabwe Central Statistical Office Reports. -9.01 Estimate figure for 2003 Though the ESAP programme facilitated easy procurement and access to foreign currency by the mining companies which helped to replace aging and old equipment, wages and operating costs escalated resulting in retrenchments of the labour force. Unemployment in the mining sector took its toll. The overall unemployment rate is over 70%, while over 60% of the population is living in dire poverty: below the poverty datum (Jowa, 2003). For the past five years up to 2004, the economy has recorded alarming negative growth rates. The main sectors of the economy, including agriculture, mining, and manufacturing, have also recorded negative growth. With the current uncertainty concerning agricultural production due to droughts, it is important for the government to actively promote the development of the mining industry by luring foreign direct investment. The country has arguably the most diverse and developed mineral sector in the SADC region with a variety of over 40 minerals under production. The country is well endowed, and its mineral potential has always been rated highly (Matshediso, 2002). The most striking geological feature is the Great Dyke, a massive volcanic intrusion extending NE/SW over 500 km and with a width of 10 km. The Dyke is host to minerals, such as chrome and platinum group metals. The platinum resource is the world?s second largest after South Africa. Most of the gold is hosted in the Greenstone belts. 2.1.2 Infrastructure 26 Most of the infrastructure currently enjoyed in Zimbabwe is owed to mining. The mines, aided by agricultural activities, formed the centres of commercial activities and finally developed into permanent communities with the basic infrastructure, such as clean water, communication, health, education, and ultimately, local governments. The development of at least 80% of infrastructure and the cities and towns in Zimbabwe are closely linked to mining and agricultural activities (Svotwa, 2000). The Zimbabwean infrastructure is generally good. Road and rail networks are spread throughout the country. There are approximately 19,000 kilometres of roads: 8,500 of which are tarred and over 10,500 of which are not tarred. Local authorities and municipalities administer an additional 61,630 kilometres. The National Railways of Zimbabwe operate and maintain the rail system. The rail networks cover some 3,000 kilometres and provide strategic links with neighbouring countries, especially with the ports of South Africa and Mozambique. Significant rehabilitation of certain railway lines and the entire fleet of locomotives and wagons are required to cope with present- day demands for cost and time-effectiveness. The freight handling section of Harare International Airport has been extensively upgraded to conform to international standards. This upgrading has greatly improved the airport handling of goods. The expansion was made possible by a US$2 million capital injection from DHL Aviation. As of 2000, a 24-hour service (seven days a week) is now provided, with major reductions in handling time of goods. To facilitate efficient handling of goods, the scaling method has subsequently been computerised (Zim Treasury report 2000). Electricity is the main source of energy which is generated at Hwange Power station and Kariba power station. The total country?s electrical output falls short by 40% and the remainder is imported from neighbouring countries, including South Africa and Mozambique. Plans to supplement the shortfall in electricity production was anticipated with the development of the Gokwe North thermal power station at a cost of USD63M in 1999, but the project has since been shelved. This was a joint venture between the Zimbabwe government, Britain, and the World Bank. The project also necessitated the development of the Sengwa coal mine to supply coal to the thermal power station. Indefinite suspension of these projects has dealt a heavy blow on 27 Zimbabwe?s FDI. The perception of Zimbabwe as a lucrative investment destination has slowly been eroded. The telecommunication network is quite substantial, covering almost the entire country. This network has been further improved by expanding the coverage of cellular networks. Over 32 people per every one thousand have access to telephones, either mobile phones or the conventional ground lines (Zimbabwe Treasury, 1999). 2.2 Zimbabwe?s Mining Industry 2.2.1 Administration The Ministry of Mines and Mining Development is the government-led agency in issues relating to the mining sector. The role of the Ministry is to promote the development of the industry as well as to regulate its activities pertaining to environment, health and safety. This Ministry has had different names which dictated its portfolios since 1996. During the period 1996 to 2000, it was called the Ministry of Mines, Environment and Tourism. Concerns were raised from the mining industry through its official mouthpiece, the Chamber of Mines, that the Minister tended to concentrate on tourism and environment at the expense of mining. Interestingly, this period coincided with the time when Zimbabwe was attracting foreign direct investment into the sector, for example the BHP Hartley Platinum Project. The momentum already established needed a strong, dedicated and determined Ministry to forge ahead in further attracting more FDIs. In 2001, its name was changed to Ministry of Mines and Energy. Amalgamation of the two sectors was logical in the sense that the mining industry consumes about a third of the nation?s electricity and combining the two aided in stressing the importance of energy to the viability of the mining industry. Increases in energy charges were evaluated on the basis of the impact to the mining sector. The sole supplier of electricity in Zimbabwe, ZESA, viewed the development as thwarting the tariff increases they had anticipated, hence ZESA advocated for the separation of the two. In 2002 to date, the Ministry has been known as the Mines and Mining Development, a name that shows more focus and commitment to the development of the industry. 28 The Ministry has departments that handle specific functions such as: ? Geological Survey Department ? Mining Engineering Department ? Metallurgy ? Mining Law and Administration ? Minerals Promotion and Development 2.2.2 Geological Survey Department This is an important department as it is the custodian of collated, compiled, and archived geo-scientific information about the country?s geology which can then be used as a marketing tool of its mineral potential. This data is available to both exploration and mining companies. All exploration information from anyone is supposed to be submitted to the Department in order for the Department to continuously update its database with the latest information. Zimbabwe boasts of having one of the most up-to-date geological databases, a major attraction for exploration companies. The department also offers technical services to small and medium-scale miners on mostly geological matters. 2.2.3 Mining Engineering Department The Department works mainly under the Mining, Management and Safety regulations. It is the inspectorate division of the Ministry, covering mine explosives, health safety and environmental regulations with regard to the mining industry. In a bid to support local small scale miners, it provides free advisory technical services to ensure sustainable exploitation of the resource. Apart from being mainly technical, it also plays a financial role in managing the Mining Industry Loan Fund Scheme assisting small scale mines with funds and equipment. 2.2.4 Metallurgy Apparently this Department is not fully utilised since it is merely a referral laboratory for issues relating to metallurgy. Like most other departments, it also offers 29 metallurgical and analytical services to the public, including free advisory services to the small scale miners. If the marketing of minerals is liberalised, that is bypassing the MMCZ, this Department will be responsible for assessing declared export mineral production in terms of quantity, quality, and destination of such. Its critical role will then be to ensure that government is not deprived of revenue. It is a vital department to curb illegal and false declarations of outputs. The declaration of cement copper as a by-product of nickel production by a top mining company has raised serious concerns about professional smuggling of worthwhile by-products of nickel, such as gold, under the pseudo name of cement copper. During the course of investigations into the matter, the Chief Executive Officer of the said company was assassinated by assailants, further raising suspicion of the complexity of the smuggling syndicate. 2.2.5 Mining Law and Administration The department?s main responsibility is the administration of the Mines and Minerals Act. This entails managing the application and processing of different mining titles as well as dispute resolution involving different parties. Lack of adequate funding is a major set back in the department?s service delivery. Of late it has just emerged that the mining claims register is in disarray following double or multiple registry of the same claim. Inadequate funding of personnel is partly to blame, since this has restricted officials to office work, unable to co-ordinate actual field work. 2.2.6 Minerals Promotion and Development The marketing of the country?s mineral endowment in attracting investment through policy development and promotional activities is the sole responsibility of this Department. This Department is the nucleus of the Ministry, since it coordinates all technical departments. Appraisal of projects on technical and economic aspects of mining projects is undertaken by this section. The section provides information to the general public as well as undertaking promotional activities, such as road shows. It is important for this Department to expand its activities beyond the borders by attending 30 international mining trade fairs aimed at marketing the country?s potential and explaining any misconceptions regarding investment in the country. 2.2.7 Private Sector The mining sector is mostly dominated by foreign owners in the form of multinational companies. The government, over the years after independence, has slowly relinquished direct involvement in the control and operations of mining companies. Soon after independence Zimbabwe, like many other African countries, actively participated in the extraction and processing of minerals. This was done through the Zimbabwe Mining and Development Co-operation (ZMDC) and Zimbabwe Iron and Steel Company (ZISCO). In some cases, ZMDC took over collapsing companies, like Mhangura copper mine and Kamativi tin mine, in a bid to resuscitate them but paid dearly for the move and finally also abandoned them. Mining companies that are under its portfolio include, among others, Munyati Copper mine, Elvington Gold Mine, Lomagundi Smelting and Mining, Jena mines, and Sabi Consolidated Mines. By the end of 2002, Munyati Copper mine, the remaining sole copper producer, wound up operations citing viability constraints despite the firming in the copper price. The participatory stance of the corporation has been coming under scrutiny because of the fast reduction in its mines portfolio. Apart from involvement in the operations of mines, ZMDC also offers technical support to small scale mines. The government has a direct influence in the marketing of all minerals through the Minerals Marketing Corporation of Zimbabwe (MMCZ), except for gold which is sold to the Reserve Bank through its subsidiary, Fidelity Printers in Harare. It also assists small scale miners in processing their gold, especially those who lack own facilities. A case study of the corporation revealed that it did not offer any significant benefit to both the government and private sector, apart from allaying fears of transfer pricing which was the main reason for its inception (Musingwini, 1999) The new PGMs have different marketing arrangements, where the companies export the concentrate for further refining, mainly in South Africa, due to the country?s lack of facilities for full beneficiation of the mineral. 31 The private sector, which dominates the industry, is divided into three main groups, exploration companies, mining companies, and individuals and groups providing goods and services to the sector. In most cases, exploration companies are subsidiaries of mining companies, whilst a few are independent junior exploration companies that undertake exploration in their own right for other companies. Most of the mining companies in Zimbabwe are subsidiaries of multinational companies from South Africa, Canada, Australia, and Europe. The mining companies and individuals? category also includes the small- to medium- scale mining sector. This sector has over 1300 producers and over 50 000 players who have mineral titles for gold and base metals. The other sector that has been operating illegally is gold panning with an estimated 1.5 million people involved in illegal gold panning (Svotwa & Mtetwa 2001). Amakorokoza, as they are popularly known, lack the proper organisation, hence they are generally viewed in bad light because their activities are fraught with environmental consequences, unsafe working conditions, and the resultant illegal gold dealings. There is a misconception that small scale miners are all gold panners, but this is not the case. These small scale miners are legally registered operators who declare their production as required by law and contribute significantly to mineral production in tin, gold, chrome, tantalite, gemstones, and limestone. The sub-sector providing goods and services comprises suppliers of mining equipment and consumables, consultants, and analytical services. The sector plays a crucial role to the mining industry by providing valuable inputs necessary to maintain the production cycle. There is currently a shortage of consultancy services as evidenced in recent projects where services had to be brought into the country because of limited local experience or expertise. Investment in this area is quite lucrative. (Jowa, 2003) 2.2.8 Leading Mineral Products Zimbabwe has diverse mineral deposits and currently produces over 40 different minerals. Most of the minerals are essential raw materials for the manufacturing and 32 agricultural industry. Only a few minerals account for most of the export revenue. The highest value of total mineral value comes from gold, nickel, high carbon ferrochrome, coal, asbestos, copper, iron ore, and most recently, the platinum group metals. Despite the high demand of even raw chrome, Zimbabwe, through ZIMASCO, has usurped the opportunity of adding value to the product and mostly export the fully beneficiated product as high carbon ferrochrome alloy (HCFC). 33 Figure 2 Contribution of mineral commodities to mining GDP Source: Chamber of Mines Zimbabwe 2002 Zimbabwe?s mineral sector is a major contributor to the economy?s well being, with gold being the second largest commodity foreign currency earner after tobacco. Recent droughts, coupled with the fast track land reform programme, have adversely affected the agricultural contribution to GDP. Mining?s contribution to the economy has generally decreased its contribution to GDP to less than 1%, employment 3.5% and exports 21%. This contribution is attributed to problems currently facing the country at macro and micro economic levels. The value of mineral production has also been affected by falling mineral prices on the world market as well as closures of old mining operations. The growth in gold trading at the parallel market also resulted in a significant reduction in output. The development is blamed on the RBZ?s decision to reverse the payment of gold production from foreign currency to local currency in 1998. This was done in an effort to increase import cover and boost the country?s foreign currency reserves. Contribution of Mineral commodities to Mining GDP Others 8% PGMs 5% Nickel 19% Coal 11% Chrome 6% Asbestos 7% HCFC 16% Black Granite 2% Gold 26% 34 Traditionally, the mining sector?s contribution to national employment has averaged 4.2%. Its multiplier effect in employment with other sectors is high. In some mining locations, the whole community?s existence is dependent on the mine, and the service infrastructure is extensive ranging from banks, post offices, and other commercial services. The additional employment created is quite substantial. 2.3 Mineral Endowment Zimbabwe has a diverse mineral potential, and it boasts of having over 40 minerals in active production. The endowed mineral wealth has been successfully exploited for the socio-economic development of the country since the times of the Munhumutapa kingdom. Base metals, precious metals, energy minerals, industrial minerals, and the platinum group metals are all mined in the country. The Great Dyke, a massive volcanic intrusion approximately 500 km in length and 10 km in width, hosts world- class deposits of chrome and PGMs apart from other mineral deposits. Gold Gold has been the traditional mineral sought by explorers at the turn of the 20th century. Gold is mainly hosted in the Archean Greenstone belt mainly found in Manicaland, Matebeleland, Mashonaland, and the Midlands provinces. It arguably has one of the best gold yields per square kilometre in the world (Svotwa, et al., 2000). There are also indications that Zimbabwe has a huge resource of refractory gold. The belt still needs to be explored using the modern methods that have been successfully applied in countries like Canada and Australia. The Roasting Plant Project organised by the Scientific and Industrial Research Development Corporation (SIRDC) is currently carrying out extensive research on the processing of refractory gold. Gold production in the country has been declining since 1999, with volume of production falling from 27 tonnes in 1999 to 22 tonnes in 2000, to 18 tonnes in 2001, to 15.5 tonnes in 2002 and further to 12.6 in 2003. By and large, gold still remains the main mineral product in value terms. Base Metals 35 The main base metals mined in the country are nickel, chrome, copper, and cobalt. Cobalt is mainly a by-product of nickel processing and PGMs. Nickel production comes mainly from two mines located on the Greenstone belt, Bindura Nickel and Shangani Nickel mines, whilst the remainder comes as a by-product from PGMs. There are two operational nickel smelting and refining facilities. The one in Kadoma Empress Nickel Refinery (ENR) is currently being utilised on a toll basis to treat nickel concentrate from Botswana. There are very good prospects of investment in this sector. Recently, a low grade deposit has been discovered in Hunters Road near Gweru and is currently being evaluated. Chrome The main mineral associated with the Great Dyke is chrome. This geological feature hosts one of the world-class chrome deposits. A good percentage of formal small scale miners is engaged in chrome mining on a tribute arrangement with ZIMASCO and Zim Alloys. Although Zimasco operates its own mines, it is largely dependent on production from the small scale chrome miners, because production from their mines in Shurugwi and Mutorashanga do not meet the capacity requirements of its smelting plant in Kwekwe. Chrome in the Great Dyke comes in seams averaging 10 cm, and this poses a challenge to large-scale fast production. Beneficiation of the mineral has benefited the country. Despite the high demand of raw chrome on the world market, ZIMASCO has taken a move to export all its chrome after considerable value addition as ferrochrome alloy thereby earning higher returns. 36 Copper Copper has been a major mineral in the last decade with production mainly coming from Mhangura mine, a ZMDC-run operation. Its production declined tremendously from the highs of 8 000 tonnes in 1995 to just about 558 tonnes in 2000 until it finally closed at the end of the decade. The closure was as a result of the depletion of known reserves. A major boost in copper industry came about in 2000 when ZMDC again opened Munyati copper mine and that saw production escalating to 2000 tonnes in 2001. Misfortune surrounded the operation as it closed a year later due to viability constraints, despite firming copper prices. Exploration expenditure in the mineral has almost been non-existent, although there is huge exploration potential in the Makonde and Bikita areas. The firming copper prices can present an opportunity to resuscitate the sector. Iron Most of the iron ore comes from Buchwa Iron Mining Company (BIMCO) in Kwekwe. There is a huge resource with an average grade of 40% which can support the local iron and steel industry for many years. Iron production has dropped sharply from the highs of 1.2 million tonnes in 1990 to just 272 000 tonnes in 2002. The Zimbabwe Iron and Steel Company (ZISCO) has been operating under capacity due to various technical problems. The parastatal?s declining iron ore consumption has not stimulated any growth in the production of the ore. The completion of a rehabilitation programme of the steel works is important for the development of the economy. Platinum Group Metals The discovery of a world-class deposit of PGMs in Zimbabwe has put the country on the world map. Union Carbide successfully mined the first PGMs in 1969 in the Wedza district, but the prices then were not attractive enough to warrant sustainable production. Later, in the 1990s, there was a major boost in platinum exploration that saw the emergence of MIMOSA mine in 1994, and a year later development of the massive Hartley Platinum mine, a joint venture between BHP and Delta Gold. The big investment stopped operations in 1999 citing serious ground condition problems and 37 failure to meet the planned target. The perception was that the Great Dyke PGM resource cannot be successfully exploited. The successful development of the Ngezi and Makwiro mines led to the expansion of the Mimosa mine and the current development of Unki platinum mine. These projects have been very successful and echo sentiments of the importance of mining and the viability of the PGMs sector in the economy. Industrial Minerals A variety of industrial minerals is mined in Zimbabwe and among them are asbestos, black granite, kyanite, limestone, phosphate, and vermiculite. Asbestos is mined at the Shabanie-Mashaba mines, and most of the production is exported. The known resources are able to meet the local and export requirements for a long time. The main challenge is developing new markets for the commodity. The main consumer was France in Europe. However, recent lobby groups from Europe and North America advocating a ban on or restrictive use of asbestos have seriously affected the viability of the sector. Further development of asbestos production hinges on establishing markets for the commodity. Most of the limestone and phosphate produced is totally absorbed by the local industry as these constitute important raw materials for the manufacture of cement, fertilisers, paints, and many other industrial products. There is an abundance of these minerals to meet the country?s current and future needs. Minerals, like lithium and graphite, have limited local demand and are chiefly exported in small quantities. Other minerals, such as kyanite, tantalite, clays, and slates, are also known to occur in large resources irrespective of their current low production. There exist opportunities to develop the minerals on a small scale and a large scale by both local and foreign investors. With the widespread use of these minerals, the serious development of their production can substitute other imported equivalents and thus benefit the economy. The Zimbabwean dimension stone industry is slowly growing. Its distinctive black granite has successfully captured European markets. The identified resources are vast, 38 and these can last the country more than 10 years at current production levels of close to 500 000 tonnes per year. New prospects are also being evaluated in the Manicaland area. It is critical to fully beneficiate the commodity since it is currently exported in block form. Improved value addition through processing of the stone will benefit the country extensively. Diamonds Diamond production in Zimbabwe only started in the late 90?s with almost all the production coming from River Ranch Diamond Mine in the Limpopo basin in Beitbridge. This mine ceased operations in 1998, and no new efforts have been made reopen it. Since the beginning of the 90?s, a big diamond exploration campaign has been underway throughout the country. The campaign has yielded positive results with the discovery of a number of viable prospects. Among these is the Murowa diamond project which has already passed feasibility studies and is currently in the mine development stage. It is hoped that this positive development in the sector will stimulate further growth in the production of the mineral. Energy Minerals Coal Coal is the only major energy mineral mined in Zimbabwe. The vast reserve of this mineral is located in the north-western part of the country in the Hwange area, whilst Limpopo area and Sengwa also have significant reserves. The identified reserve is estimated to sufficiently meet local requirements for domestic heating, agricultural heating, industrial energy including power generation for the next 50 years at current production levels. Wankie Colliery Company is the sole producer of all the country?s coal production. The Wankie coal is of a high quality, allowing the company to further process the low ash coal into coke. Portions of low phosphorous and sulphur coal are dotted within the current mining area at fairly low volumes. Since the company cannot meet the tonnage requirements of metallurgical coal for local consumption, it is necessary to import this coal from South Africa. The Sengwa coal reserve was evaluated for possible development of a coal mine and thermal power station in the late 90?s to supplement the country power supply problem, but political developments discouraged the continuation of the projects. 39 Oil and Natural Gas The country does not have any known production of oil and natural gas, although exploration for both oil and gas are still ongoing. Oil has been explored mainly in the Zambezi basin around Kariba, whilst methane gas, coal-bed methane, is being explored in the Lubimbi area in the Matebeleland north region. The gas can provide an alternative energy source in addition to coal. Several exploration companies working in Lubimbi have indicated the potential viability of the project, which is currently awaiting further development and investment. Coal-bed methane gas can have various uses, providing essential linkages with down-stream industries including pharmaceuticals, ammonia-based fertilisers, and other chemical industries. By and large, Zimbabwe has a strong mineral endowment which can effectively be exploited for the benefit of the nation in terms of growth and for stabilising the economy at both the micro and macro economic levels. 2.4 Performance of the Mining Industry - 1993 to 1999 The period was characterised by prospects of growth, high investor confidence, a sound economic environment and, above all, was a symbol of upcoming developing economy. This was exemplified by expansion of most operations due to availability of foreign currency, new investment, and the acquisition of smaller operations by large multinational companies. BHP embarked on multi-million dollar platinum project in 1995, Reunion mining started operation at the Munyati Copper Mine, and Ashanti took over Fredda Rebecca and most of the resources of Cluff. During the same period, the technical evaluation of Sengwa Coal Mine and Gokwe North power station project were at an advanced stage. All these developments were attributable to the Economic Structural Adjustment Programme (ESAP) (1991 ? 1995) which sought to liberalise the economy in accordance with globalisation. The fundamental benefits to the mining industry, among others, included the availability of the much needed foreign currency for the sector. In 1996, the Reserve Bank of Zimbabwe (RBZ) agreed to pay gold producers 40 in foreign currency. A number of expansion projects and acquisitions took place in the sector. The developments further depicted an economy poised for growth, especially in the mining sector. Considerable exploration was being conducted in the Great Dyke for other metals as well as on the Greenstone belts for gold. The number of registered claims increased as investors and local people alike envisaged the potential growth in the sector. The growth momentum was not given adequate promotional attention through to 1997. Many economic parameters went out of control. Liberalisation awarded by ESAP, on the other hand, triggered hikes in interest rates and the commercial banks? minimum lending rate rocketed from 13.5% in 1995 to 65% in 2000 and peaked at 70% in 2001. Frantic efforts by RBZ in 2001 to provide the industry with affordable debt finance saw the minimum lending rate reduced to 38% in the same year. This came as a result of managing the government Treasury Bill rate downwards and of adopting an expansionary monetary policy since then. The implementation of ESAP also saw the reduction of Consumer Price Index CPI from 42% in 1992 to 18.8% in 1997, but it started to increase in late 1997 and peaked at 525% in 2003. Growth of M2 money to pay war veterans also caused spiralling inflation. The system was also open to abuse by senior government officials who also claimed larger sums than the stipulated $50 000. The value of the Zimbabwean dollar came under renewed international pressure. It also weakened against most major currencies, and it slipped from about around Z$10 in 1997 to an alarming Z$824 to 1US$ in 2003. The government?s involvement in the costly DRC war also seriously affected the economy. In 2004, it was trading at an unbelievable Z$5600 to the US dollar. Contrary to the government?s policy of adopting an expansionary policy, it reverted to the restrictive economic policy resulting in the pegging of the US$ exchange rate at Z$55 from 2001 to 2002. Its devaluation in March 2003 to Z$824 to 1US$ came a little too late because the exchange rate had soared to over Z$2500; this had stimulated an already flourishing black market in foreign currency dealings within the 41 country. The foreign currency shortage took its toll with reserves diminishing to less than one month of import cover. The negative balance of payment widened as a result. Based on the progression of events, there were widespread fears that business would one day run to a grinding halt. The following graphs show the deterioration in major economic indicators, Exchange rate, CPI inflation, and interest rates. The country foreign currency reserves have dwindled to alarming levels. Figure 3 Inflation and Exchange rates in Zimbabwe CPI Inflation and Exchange rate 0 50 100 150 200 250 300 350 400 450 500 550 % P er ce n ta g e 0 100 200 300 400 500 600 700 800 900 E x. r at e Z$ /1 U S $ CPI Inflation 27.6 22.3 22.6 21.7 18.8 31.7 58.5 55.66 71.95 133.2 525.8 Z$/US$ 5.094 6.473 8.658 9.921 11.89 21.41 38.31 38.16 55.00 55.00 824.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Figure 4 Interest rates developments in Zimbabwe 42 Interest rates - Prime & Repo 0.0 20.0 40.0 60.0 80.0 100.0 % P er ce n ta g e Central Bank discount rate 28.5 29.5 29.5 27.0 31.5 39.5 58.0 68.0 30.0 35.0 38.0 Prime Lending rate 37.9 36.4 35.0 33.6 35.3 42.1 72.0 68.5 57.2 52.0 47.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Annual Profile - Zimbabwe 2003 Figure 5 Foreign currency reserves measured as months of import cover Foreign currency reserves (Import cover - months) 1993 - 2003 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Import cover (months) 3.4 2.8 3.7 3.2 1 1.3 1.3 0.5 0.4 0.5 0.1 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Annual Profile Zimbabwe Jan 2004 - Standard Bank http://www.sarpn.org.za/documents/d0000212/P203_Zim.pdf In addition to the local economic turbulence, the weakening commodity prices on the international scene (Asian crisis 1997-99) worsened the country?s dilemma. The average gold price fell from US$334 / ounce in 1997 to US$286/ ounce in 1999. The 43 gold foreign currency revenue was dealt a heavy blow, and this resulted in reduced gold production on the background of spiralling operating costs as well as an acute shortage of foreign currency critical for the mining sector?s day-to-day operations. Gold producers and other producers alike were faced with the challenge of striving to survive at the expense of viability. The trend in falling mineral prices was also felt on all precious metals with the exception of palladium. The price of palladium increased from US$171 in 1997 to US$358 / ounce. PGMs metal prices have a typical tendency or trend: an increase in the price of palladium results in a decrease in the price of platinum and vice-versa. Zimbabwe?s top minerals are gold, nickel, coal, chrome, and the upcoming PGM metal: Platinum. The prices of most of the minerals have been seriously depressed in the period 1997 to 2000 as shown in the graphs below. Figure 6 Zimbabwe platinum group metals production and metal prices Platinum & Palladium (production & prices) 0 100 200 300 400 500 600 700 800 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 P ri ce U S $/ oz - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 P ro d. o z Platinum (oz) Paladium (oz) Platinum US$/oz Palladium US$/oz Source: NMA the American Resource 44 Figure 7 Base metals production and prices Source: United States Geological Survey -http://minerals.usgs.gov/minerals The policy adopted by RBZ to pay gold producers in foreign currency was only implemented from 1996 to 1998 when the Central Bank yet again reversed the policy and paid gold producers in local currency instead. Clearly the repercussions of the change were not satisfactorily addressed or deliberately ignored to the detriment of the industry. Gold is the main foreign currency earner contributing over 40% to the total mineral exports. Its production peaked at 27 tonnes in 1999, despite the prevalent depressed gold price. The problems facing the economy as a whole dates back to 1997, but government took a reactive approach instead of being proactive and this manifested into mine closures from 2000 onwards. The closures alarmed the government, forcing it to act, though the intervention will be best described as temporary measures instead of addressing the real issues. In a bid to discourage more mine closures that were imminent, the RBZ introduced a gold support price. Although it worked well in reducing the number of mine closures, it lacked a long-term focus. Gold prices are notoriously cyclic and the response time for the RBZ to review the prices in line with global trends showed a lack of urgency, thereby costing the operations. The revenue and gold production also slumped as shown in the following graphs. 45 Figure 8 Gold production and price from 1993 to 2003 Gold production and price US$ - 5,000 10,000 15,000 20,000 25,000 30,000 G o ld p ro d u ct io n K g 0 50 100 150 200 250 300 350 400 G o ld p ri ce U S $ Gold (tons) 18,56 20,51 23,95 24,69 24,15 25,17 27,11 22,06 18,05 15,46 12,56 Gold price US$/oz 360.9 385.4 385.5 389.1 332.4 295.1 278.6 279.1 277.9 309.7 310.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Zimbabwe Chamber of Mines Figure 9 Gold revenue and price in US$ Gold revenue and price US$ (nominal terms) 0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 350,000,000 G o ld r ev en u e U S $ 0 50 100 150 200 250 300 350 400 G o ld p ri ce U S $ Gold sales US$m 222,004 247,057 282,077 295,480 260,733 240,196 225,900 195,120 157,230 153,890 125,559 Gold price US$/oz 360.9 385.4 385.5 389.1 332.4 295.1 278.6 279.1 277.9 309.7 310.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Zimbabwe Chamber of Mines 46 The US$ revenue from gold has since declined. Despite all these negative effects, operating mines changed their strategy and focused on painstakingly increasing production so as to increase the recovered metal in the hope of covering rising costs. Most other operations also increased production volumes by stringent cost-cutting measures, resulting in suspension of exploration and development programmes. The apparent shortcomings of these desperate decisions dealt a major blow to long-term viability as some of the mines went on to high-grade, sterilising a significant percentage of ore reserves. The lucrative and much talked about project of the decade, BHP Platinum, also closed and stopped operations in June 1999 further costing the nation expected foreign currency earnings. Production took a slump only to be revitalised by the takeover of the operation by Zimplats which has seen considerable growth since then. The BHP closure which was blamed on bad ground conditions worsened the unemployment situation. Farm invasions by the war veterans also impacted on mining particularly with regard to exploration where, in some instances, field work was disrupted. There were no substantial reports of disruptions in mining operations, despite the chaotic course of the farm invasions, although the situation could have deteriorated under the circumstances. Many companies were extremely apprehensive as they were uncertain of the outcome. 2.5 Performance of the Mining industry 2000 ? 2003 Industry tried its best to stay at least operational up until end of 1999. The short-term decisions taken a few years previously ricocheted. Events did not change in the short term as anticipated, and eventually production started to decline because of ever- worsening shortages of foreign currency and runaway inflation, which caused costs to spiral and resulted in the fixed exchange rate eroding anticipated real earnings in the 2001 and 2002 period. As if these were not enough challenges, erratic electricity supply and a nationwide fuel shortage made the situation extremely difficult even for the large conglomerates. Bigger mining houses then resolved to source their own fuel from neighbouring countries to sustain their operations. 47 Shortage of maize meal affected productivity due to absenteeism, as most employees would rather queue for long hours, even during working hours, to procure the staple diet. Companies were called upon to act as drought relief distributors to their work force to maintain productive work force. ZIMASCO and African Associated Mines actually imported maize from South Africa to feed their employees. The sense of insecurity caused by pre-election violence across the whole country prior to the June 2001 parliamentary elections also gripped the corporate community. The results of the presidential elections in March 2002 further eroded investor and business confidence, with some even basing their decisions to continue operating on the outcome of the election results. Relations with IMF and the World Bank deteriorated as the organisations cited government?s deliberate failure to control its economy. The attitude of the government in disregarding the inevitable need to join the global economy worsened the situation. IMF withdrew its financial support, and the stand off persists to the present date, 2004. Organisations, such as IMF and the World Bank, have a great influence on FDI flows into any country. Undue over-emphasis on sovereignty at the expense of accepting reality and moving with global trends has been detrimental to the economy. On the other hand, closures of indigenous banks on corruption allegations against their top executives have further dented the country competitiveness as well as worsened its Corruption Index. 2.6 Analysis of GDP contribution of the Mining industry GDP contribution from mining averaged 3.14% in the pervious decade, reaching its peak of 5.01% in 1994. It has since then fallen sharply because of the economic hardships being faced by the country. The mining sector?s GDP growth rate has consistently fallen since 2000, together with that of the other main sectors of the economy: agriculture and manufacturing. Table 2 GDP contribution from main economic sectors 48 Year Mining Agriculture Manufacturing Total GDP 2000 -10.5% -3.0% -10.5% -4.2% 2001 -7.4% -12.2% -7.5% -7.3% 2002 -7.1% -12.9% -17.2% -11.9% Source: National Budget Statements The factors that affected the whole economy also heavily affected the mining industry. The decline in mining sector performance is attributed to a substantial reduction in the volume of mineral output. The 2001-2002 drought affected output from the agricultural sector, causing a massive increase in gold-panning activities by the people for survival. The gold recovered from such activities by-passed the normal legal channels and was ultimately traded on the black market, depriving the government of revenue. At 26%, gold is the main contributor of mining GDP. Policies to sustain gold production included the Gold Pool facilities, administered by Stanbic Bank and RBZ in 2000 to 2002. These policies were aimed at facilitating the procurement of imported inputs and consumables. The gold price support scheme was meant to provide a breakeven price for gold producers although it was overlooked that production costs vary from one operation to the other. The foreign currency availed by the Gold Pool facility was not only inadequate but also erratic in its distribution. The adjustments of the gold price support scheme were not in tandem with rate of operating costs escalations, leaving the gold producers to pay the difference. Export incentives awarded to other sectors, including manufacturing and agriculture, to boost export earnings excluded gold mines. Coal was the hardest hit mineral by foreign currency shortages. With production reduced in 2003 to 2 781 962 tonnes, a more than 43% shortfall from its 5 million tonnes capacity, it was still supposed to satisfy the local market before exporting any of its product, thus further denting any of its anticipated foreign currency earnings. All this occurred at local coal prices fixed by the government, which were not in any way related to market reality. NRZ, the national railway operator, failed to facilitate coal delivery to customers causing a bottleneck at the Coal Processing Plant which was already running well under production strength. To alleviate this problem, coal 49 merchants contracted road haulage transporters to deliver coal to customers at an exorbitant price which was further exacerbated by the fuel shortage at that time. 2.6.1 Linkages with Other Sectors Given the strong linkage of mining to other sectors, especially coal with agriculture, tobacco, thermal power generation, smelters, foundries, the effects of foreign currency shortages were also heavily felt by other sectors of the economy. The mining sector also provided inputs for the manufacturing sector ranging from iron ore, limestone for cement production, and phosphate for fertilisers, and many other industrial minerals for construction. On the other hand, the mining industry relies on products from the other sectors including timber, cement, explosives, steel products, and protective equipment. Linkages between these sectors were further weakened during the 2000 and 2003 period as compared to 1997 to 2000. 2.6.2 Employment The employment in the mining industry has slowly been declining due to mine closures. From a contribution of over 4.5% of total national employment in the 1997 to 1999 period, the employment figure stood at just 35 000 in 2002. It has become apparent that most mines have to contemplate mine closure plans for operations like Mhangura, Empress Mine and Filabusi, to name just a few. Such closures have left a legacy of ghost towns. Former mine workers have no other form of employment, because their narrow scope of training was focused only on mining. Given the multiplier effects of mining, many mining-related jobs have been affected. 2.6.3 Funding of the Ministry of Mines by Central Government The funding of the mining ministry has been declining in real terms, further in- capacitating the solid structure of the Ministry in managing the sector. See Appendix 11: Report on the budgetary allocation to the Ministry of Mines and Mining Development ? (Chamber of Mines Zimbabwe, November 2003) 50 The structure of the ministry is well aligned in developing the sector from small scale to large scale. The sector has not been receiving enough support from the Ministry of Finance and Economic Development in terms of budget allocations, worsening the brain drain in the sector. Over 50% of the posts were still not filled in 2003. In such conditions, there is no meaningful advice or contribution the Ministry can make to industry as a whole. Considering that the sector contributes more than 25% of the country?s GDP, its budget allocations has never gone beyond 1% of total budget when compared to Defence, Land and Agriculture, and Education. Efforts to strengthen the Ministry of Mines in terms of personnel have been thwarted by the Finance Ministry in its bid to reduce government expenditure even on such core ministries. It is, therefore, important to consider a policy review so that the intentions of the sector are spelt out, emphasizing its importance. The Ministry has been trailing behind other ministries in the region in activities ranging from administration delivery to competitiveness within its borders and internationally. From a detailed preview of the mining industry, it is paramount to prescribe corrective action to regain the competitiveness of the country in attracting foreign direct investment. The main focus of the following chapters is to identify policy considerations that have to be adopted to improve the country?s image, both regionally and internationally. Having highlighted the performance of the industry and the overall economic performance, it is paramount to proceed with both a policy and a legal framework analyses to enhance the country?s competitiveness. Policy in any sector is heavily influenced by both macro and micro economics: hence the time spent in reviewing the performance of the industry. Competitiveness in attracting FDI has very a solid relationship with politics, economics, policies, and above all, governance. 2.7 Conclusion Zimbabwe?s economy has mainly been dependent on agriculture until the recent droughts in the region, which impelled the need to prioritise other sectors. The economy, as a whole, is faced with a myriad of economic challenges partly caused by the government?s involvement in the costly DRC war. Unaffordable war veterans? compensation amounts, seizures of productive white commercial farming areas, 51 among others, have continuously pushed inflation upwards. Although the country?s infrastructure is good, instead of the flow of FDI pouring into this well-endowed, mineral rich country, it has been directed to emerging economies in the region, such as Namibia and Botswana. Mineral resource development has been seriously affected by lack of capacity despite sound structures for its administration. Funding of the Ministry of Mines and Mineral Development from the central government has declined in real terms and only 50% of the staffing requirement is available to run the Ministry. See Appendix 11. Gold production has declined from 27 tonnes in 1999 to 12.6 tonnes in 2003, causing a slump in gold revenue. Though industry has continued to operate, a significant number of these mines have closed down due to viability problems caused by high inflation, the country?s stand off with IMF and World Bank, the shortage of foreign currency, the Central Bank?s requirement to buy all gold at non market-related prices and unrealistic exchange controls which have resulted in an over-valued currency. All these negative aspects promoted black market dealings in almost anything, including foreign currency, fuel, minerals, especially gold, and even basic commodities like food. The following chapter focuses on Zimbabwe?s investment environment in a policy and legal framework and a discussion on investors? attitude towards investment into the country. 52 CHAPTER 3 3.0 ZIMBABWE?S INVESTMENT ENVIRONMENT AND COMPETITIVENESS 3.0 Introduction This chapter looks at the overall investment environment of the country including mineral development issues. Investors? attitude towards the country has been negative, despite the high mineral potential as reported by the Fraser Institute Annual Survey of Mining Companies 2001 / 2002. A thorough analysis of the mineral legislation and a description of the various mining titles, as per the current Mines and Minerals Act of 1996, shows the liberal and competitive terms of entry for both exploration and actual mining. The mining industry has since been boosted with attractive fiscal incentives through the Export Processing Zone initiative. A review of the foreign currency retention scheme for gold producers has also been analysed, showing that the 10% surrender requirement of foreign currency to the RBZ at Z$824 to the US$ is far below the market rate and is costing the industry dearly. 3.1 Summary of Zimbabwe?s Investment Environment Investment into a developing country is mainly funded through national savings, financial assistance from world bodies, e.g. IMF and World Bank, and finally foreign direct investments (FDI). Zimbabwe is currently at a stand off with IMF, and its national savings are not dependable leaving it with the only option of attracting FDI for meaningful development. Its creditworthiness has been dealt a major blow by its inability to service its international debt obligation. The country?s investment environment compares favourably with most countries within the region. One of the striking attributes is the low corporate tax of 15 % for mining companies, although the nominal corporate tax for other sectors is 30%. This shows a solid intention to support mineral development in the country and to further its importance. The fiscal regime and the mineral development environment are conducive to investment. One then wonders why most of the FDI in the region is skewed in favour of South Africa, with Zimbabwe only registering negative capital 53 inflow. The economy has been battling with recession for the past five years. Although the investment environment shows a positive picture, in sharp contrast, the political governance has acted to the detriment of the economy as a whole. Companies are battling for survival in a harsh economic climate. Below is a summary of the country?s investment environment as shown by geographic and economic indicators as well as investment policies and fiscal regimes. Note the lucrative terms of the fiscal regime and the mineral development environment. The negative factors are apparent on the economic indicators which include high inflation, high interest rates, reduction in GDP, and a slump in gross capital formation, among others. All these can be squarely attributed to poor governance on the part of the government, thereby triggering the deterioration. What have emerged are the repercussions on the economy as a result of the Head of State?s political statements directed not only against the western world but against well-established world bodies and organisations, like the Commonwealth, IMF, World Bank, and others. 54 Table 3 Zimbabwe?s Investment Environment Geographic and Investment Indicators Population ( 2002) 13.4 million Population growth (2001-2015) 0.60% Surface area 391 m2 GDP (2003) US$ 7 100 million (nominal) Average Annual GDP growth (2002) -11.40% Tax Revenue/GDP Not specified Mining Tax revenue Not specified Unemployment (2003) 70% Population below international poverty datum (2003) 60% on US$100m ? production intended for export Conditions/Requirements ? feasibility, financing and marketing plan ? proposals for efficient economic exploitation and treatment of ore ? detailed mineral resource and reserve ? EIA ? Insurance details covering any liability due to mining ? extent of use of local services ? manpower development Duration:- ? min 25 years ? renewable at periods not exceeding 10 yrs Mining Claim Purpose :- ? granted for development and mining to individual syndicates/companies Conditions/Requirements ? EPL holder ? submit supporting field data ? environmental mining certificate ? possibility to upgrade to mining lease Duration:- ? not specified but its rather for a short time approx 2 years. Mining Lease Retained from the old order Special Mining Lease Retained from the old order right Source: Mines and Mineral Act 1996 & draft Regulations Mines and Minerals Act 2004 92 5.3.1 Proposed Changes to the Mines and Minerals Act The draft amendment bill has only focused on mining titles and the introduction of historically disadvantaged persons? participation; however, stakeholders, through the Chamber of Mines, have proposed a thorough review of the complete Act. There is now more focus on the Environmental Impact assessment (EIA) and environmental rehabilitation. An effective Environmental Management Program (EMPR) needs to be established by lawfully setting up a separate fund for rehabilitation, and for any company failing to undertake its ongoing rehabilitation duties, the Minister can have access to all or part of its contributions after informing the titleholder for the said purpose. Any holder of a mining title failing to meet its environmental rehabilitation obligation will be blacklisted. The preservation of mining rights through the issuance of inspection certificates based on assessing production, capital injected or development work involves a rigorous process for which the Ministry currently does not have the capacity. The inspection should rather be based on the final end dump utilisation which will reduce the cumbersome option mentioned above since the concentration will only be on the end: the dump. Conversion of any mineral block should be indiscriminate of mineral and at the discretion of the leaseholder; the current conversion only allows base metals claims to be converted to precious metals. An impediment in the mine development stage, for example during construction, includes the approved plan requirement which has to be gazetted before issue. Such bureaucratic process slows down project development and only the relevant experienced people, including the Mining Commissioner, Regional Planner and other relevant departments, can approve such plans without necessarily gazetting. Currently, according to the Act, only special mining leaseholders are liable for royalty payment. The current incentive on royalty rebate for all mineral products used within 93 Zimbabwe and full beneficiation through approved refineries should be openly advertised. The Minister?s discretional power to review royalty annually should be invoked through a statutory instrument. Royalty exemption seriously undermines government revenue, given the low tax regime in the sector. Royalty is a cost of depleting a non-renewable asset. In a bid to curb the dubious export and import of minerals, all exporting companies should have valid export licences. In local ownership, the emphasis on historically disadvantaged people segregates those born after independence who now constitute a significant number of the working class. It should rather be considered as a local or indigenous participation. The ownership targets have been set at 30% in 10 years scheduled as below: 5.3.2 Local Ownership Targets ? 20% within the first 2 years ? 25% within 7 years ? 30% within 10 years Learning form the South African experience, the local participation should be tailor made to benefit the better part of the ordinary population and to avoid only black elite economic enrichment. In terms of procurement, local people should be given preferred supplier status, provided they meet some minimum standard requirements, and to avoid forcing large companies to be satisfied with inadequate leftovers. Quality should be respected. The South African case has seen some ineffective black people manipulating the BEE, which resulted in them being appointed in top positions in which they were unable to cope to the detriment of the entire country. The proposed Exclusive Exploration Licence requiring Presidential approval is not in accordance with the concept of reducing unnecessary bureaucratic process. The Minister can do this and reduce the turn around time of processing applications. The 94 proposed fee structure for licensing, transfer, and surface rentals has been adjusted accordingly and the following relate to the new order rights. Table 7 Proposed fees for new order rights EPL EEL Application fee Z$50 000 Z$50 000 Surface rental Z$20 000 / 5 hectares Z$20 000 / 5 hectares 6 monthly fee Z$40 000 / 5 hectares Z$50 000 / 5 hectares All mining rights transfer will then attract a 10% fee based on the selling price of the transfer. The annual submission of geological information is important for maintenance of an up- to-date geological database, although the Director of Geological Survey is not allowed by law to publish such results without the consent of the holder if he is still the entitled to the property only, and unless it is for growing public interest. 5.4 Current Challenges in Mineral Resource Development in Zimbabwe In his speech to Cabinet in June 2004, the Minister of Mines and Mining Development highlighted the performance and challenges facing the sector. The challenges stemmed from lack of administrative justice by the relevant authorities to inefficient monitoring of sound systems that are in place. A summary of the challenges include ? Establishing monitoring mechanisms to curb leakages and robberies in the mining sector. The current structure of the Mining Ministry can handle this problem with the assistance of Zimbabwe Republic Police (ZRP), MMCZ and ZIMRA, The Ministry?s capacity is threatened by understaffed departments. Efficient monitoring is required in the different domains of o Exploration ? managing mining titles, renewals, and issuing of mining rights and keeping a real database that translates to issues happening on the ground. 95 o Mining ? monitoring quality of deposits, including reserves and potential for future development, up-to-date recording of production data, and efficient royalty collection o Mineral Processing - maintaining an inventory of all custom milling centres and metallurgical plants and building a PGM refinery in the country similar to Fidelity Printers o Beneficiation incentives ? realising more revenue for the country through its mineral exports if it offers incentives for beneficiation. High value to low volume exports should be promoted as far as is feasible. Currently, most platinum is exported as a concentrate, and iron ore would be more beneficial if exported as steel. Progress has been made in the ferrochrome industry: very little chrome ore is exported but ferrochrome is. o Corporate monitoring ? implementing a database of all mining corporations will facilitate the analysis of the performance of the sector from a regulatory point of view. The current analysis is only done by the Chamber of Mines. The chief government mining engineer?s annual report is a ministry report on the industry and is not published for confidentiality reasons. 96 5.5 Natural Resources Accounting The concept of Natural Resource Accounting (NRA) is gaining greater international acclaim as more and more countries implement it. The Bureau of Economic Analysis (BEA) in USA initiated the program for the USA. NRA mainly tries to demystify the growth illusion by taking a holistic approach to national accounting in which all possible measures of wealth and actions that have an impact on future developments are included. It focuses on long-term development in terms of intergenerational equity. The externalities due to non-renewable resource depletion include, among others, environmental consequences. A thorough knowledge of the resource base, though not feasibly accurate, will help in formulating long-term sustainable development policies taking cognisance of depletion. This avoids a sudden realisation of exhaustion of certain non-renewable resources. NRA will signal critical areas when it is necessary to reinvest a portion of the mineral rent in alternative forms of capital or to slow the rate of depletion to optimal rate (Minnitt, Blignaut & Cawood, 2003) The introduction of the NRA system will assist in valuing the resource rent of a country and how it has been used. The latest development in valuation, including SAMREC code, VALMIN code, and other international reporting guidelines or standards have provided the basis to moving to NRA. 5.6 Training and Skills Development The basis of development of any country relies on a sufficient skills base. To this effect, the tax regimes provides for training allowance of up to 50% of expenses on training facilities and equipment (Cawood, 2004), The mining industry is no excerption, and some of its skill requirements are industry-specific. Most corporate organisations have set up vibrant, reputable training centres for their employees which include training for the general public. Such companies include Wankie Colliery Company, BNC, ZIMASCO, African Associated Mines. Despite all these positive efforts, HIV and AIDS have affected the prime productive sector of the society, 97 hampering the gains anticipated from training and development. The country boasts of having one of the best education systems within the region for primary, secondary, and tertiary education. The country?s education policy adopted after independence is hailed as one of the best in the region as the majority of the population is educated up to O-level though unemployment is rife. The current challenges of the education system include:- ? Infrastructural development and equipping of growing number of tertiary institutions. ? Remuneration and motivation of lecturing staff is very low prompting a massive brain drain. ? Growing resentment amongst qualified people to work in the country because of the economic melt down. 5.6.1 Mining Sector Before the negative political developments, a number of NGOs supported research and development within the mining sector and this resulted in the introduction of the Institute of Mining Research (IMR) and the Faculty of Mining Engineering at the University of Zimbabwe, thanks to GTZ funding. The Bulawayo School of Mines was established soon after independence in the early 80?s to train demobilised soldiers with the idea of re-opening mines that had been closed during the war (Svotwa, 2002). To date, the school is still functioning and offers courses that attract students from within the region. Intermediate Technology Development Group (ITDG) has focused on promoting small scale and artisanal miners with financial and technical support. Since the beginning of the political upheavals, it has withdrawn its support to the sector. Other NGOs that supported the sector include ? EU Micro Project which provided funding for small scale miners ? COMIC RELIEF which provided capacity building funds for National Mines Association. 98 ? SNV- Netherlands NGO focused on developing a vibrant small scale and artisanal mining sector in Insiza ? AFSM (Austria) provided loan funds to chrome mining cooperatives on the Great Dyke All these projects have been suspended indefinitely because of the political developments in the country. Adapted from Svotwa (2002) 5.7 Research and Development Most government funded institutions, such as the IMR, should focus on carrying out research relevant to the needs of the country and industry as a whole which include ? Technology for the extraction of refractory gold-bearing deposits ? Coal fines agglomeration to usable forms ? Funding of schemes for small scale miners and gender issues in the sector ? Production and marketing of industrial minerals since the country is well endowed with the resource ? An overdue mineral policy initiative for the country to market the country?s investment environment. Training of Ministry officials with regard to policy and law issues should be improved. The current calibre, though technically apt, lack that specialised training. More and more women are engaged in small scale artisanal mining but also lack the technical and management skills to run their operations. The Shamva Mining Centre established through the ITDG offers courses earmarked for small scale operators. The University of Zimbabwe?s Department of Mining Engineering and the Bulawayo School of Mines have produced well-qualified graduates throughout the years. The skills development has to be extended further to artisanal and small scale miners to boost their environmental awareness when conducting their activities. 5.8 Conclusion 99 Mineral policy formulation should be based on the principle of sustainable development. This involves multi-stakeholder participation to produce an overall acceptable document. The importance of a stand alone mineral policy document is exemplified by the increase in the number of mineral contracts registered at the Deeds Office in South Africa after publishing its mineral policy document in 1998, followed by the Mineral Resources and Petroleum Development Act (MRPD) of 2002 (Cawood, 2003). Proposed themes for Zimbabwe mineral policy should focus on improving business climate, mineral resource development, regional integration, local indigenous participation in a coherent and orderly manner without disrupting normal economic activities. The current Mines and Minerals Act amendments should not just focus on mining titles and local participation but be a complete review of the whole Act. It should be borne in mind that the Act should supersede the mineral policy formulation not the reverse. Current challenges in mineral resource development include setting up monitoring mechanisms to curb leakages and robberies in the mining sector, beneficiation incentives, corporate monitoring through setting up of database for mining operations that will facilitate analysis of the performance of the industry, up-to-date recording of production data, efficient royalty collection and improved management of mining titles renewals and applications. Research and development has been spearheaded by IMR SIRDC, IDC and the University of Zimbabwe?s Mining and Metallurgy departments through sponsorship from NGOs. Due to political upheavals, these NGOs have frozen most funding causing an almost complete halt in most R&D projects. The following chapter highlights recommendations on the whole research on a chapter-by-chapter basis. These recommendations will help the country regain its competitiveness especially in the mining sector. It will also align the country with global trends in aiming to provide an ever conducive investment environment. 100 CHAPTER 6 6.0 RECOMMENDATIONS 6.0 Introduction A number of forums focusing on African development have detailed requirements for the countries to be competitive. The SADC protocols also give guidelines for economic development within Southern African region. The African Union (AU) born from the Organisation of African Unity (OAU) also provides guidelines for the continent?s co-operation in fostering peace and stability to promote economic development. The recently established NEPAD was inspired by the UN Millennium Declaration approved by 149 world leaders in September 2000, which called for a new partnership and a pledge to assist African countries in their struggle for lasting peace, poverty reduction, and sustainable development. Earlier initiatives, including Millennium Partnership for the African Recovery Program (MAP) together with NEPAD, focus on structural transformation, growth, investment climate, reduction of crime and corruption, regional integration, poverty alleviation, and peer review of governance of member states. These themes, meant to improve competitiveness of African countries in the global scene, require dedicated practical implementation. These themes are applicable in any sector?s policy formulation, including mineral development. The uniqueness of the mining sector will then require heavy emphasis on sustainable development as described in the MMSD report. Beneficiation promotion arises from the fact that African countries produce and only sell raw materials abroad for further processing into final usable goods. It is more beneficial for Africa to export value-added products that will realise better revenue. Some African countries suffer from over dependency on one sector, for example Botswana on diamond mining. Such countries should diversify their economies to include other sectors, such as agriculture, manufacturing, services, to balance the economy. Zimbabwe is fortunate in that it inherited a diversified economy with well-established agricultural, manufacturing, mining and service sectors. Economic and mineral resource development policies, based on broader themes of NEPAD, ADB, SADC as well as home-grown, country-specific solutions, are recommended on the following section. 101 6.1 Recommendations on Improving Zimbabwe?s Investment Environment The fiscal regime and mineral potential of the country are very conducive, but regional co-operation and integration in terms of policy initiatives should be improved. The country should aim for regional and international acceptance through reviving positive relations with the outside world. A diplomatic approach in expressing different views should be respected. The level of political risk, as perceived by investors, is over-stated, though admittedly there is a problem, and it requires a non-discriminatory campaign by the government to market the country by explaining some of the subtle facts. The government?s political attitude should change dramatically. The economic performance for 2004 has improved from 2003 with inflation down to 159% from over 600%. Such momentum should be maintained to re-establish the economy. The government, through the Central Bank, should try to tackle both transformation and growth simultaneously. There is a dire need to have a mineral policy considering the experience the country has in mineral extraction. Such a policy should be based on sustainable development and all its spheres, economic, environmental, social, and good governance. Capacity utilisation in the mining sector needs to be propped up from the paltry 60% by providing an enabling and conducive business environment. This entails a tight grip on producer price index and overall inflation, among other factors. Inflation is considered number 1 enemy to the Zimbabwean economy (Zimbabwe Monitory Policy Dec-2003). The resuscitation of mining companies and other sectors by the Central Bank through provision of loans at concessionary rate through the Public Sector Fund (PSF) loan scheme should be tightly monitored, so that the support serves its intended purpose. 102 There needs to be a reduction of unnecessary bureaucratic procedures in the establishment of business. Policy makers should also be aware of investor?s expectations so that the bargaining process in mining investments is executed from a well-informed platform resulting in a win-win situation. 6.2 Recommendations on Economic Policies ? Royalty is a fee charged for depletion of a non-renewable resource. Scrapping it seriously compromises the solid promotion of intergenerational equity; though it is a competitive incentive for attracting FDI. ? Royalties should be set aside from national treasury and used to promote mineral resource development. ? National budget allocations should also take into consideration the revenue contribution of these sectors to avoid a situation of ?killing the goose that lay the golden eggs.? The Mining Ministry is under funded. See Appendix 12. ? Policy and actions must be harmonised in practice. ? The institutional and regulatory authority of the mining sector should be enhanced to facilitate policy implementation. ? The disparity in tax regimes between non-exporting and exporting mining companies should be addressed in cases where the mineral export is controlled by the government which might attach high priority on satisfying local consumption before exporting. Wankie Colliery Company could have had better earnings from export sales rather than domestic sales. 6.3 Recommendations on Mineral Resource Development The country needs to formulate a separate national mineral policy document that will serve as a marketing tool for the country in mineral resource development. The South African mineral policy themes can be adapted and moderately adjusted to suit the 103 Zimbabwean situation. The themes include a revision of the business climate, participation, people, environment, regional co-operation and integration, and governance. The policy should be formulated in accordance with NEPAD and SADC protocols of economic development, peer review of governance, regional co-operation and integration. Amendment of the Mines and Minerals Act should only be done after a policy has been implemented. The policy should also focus on invoking certain critical principles in the current Mines and Minerals Act which includes the use it or lose it principle. Administrative capacity to enforce this aspect is lacking. Drafting a mining charter will also help in providing more comprehensive avenues of achieving policy thrusts. Vigorous marketing campaigns should be implemented by setting up a Ministry of Mines website for Zimbabwe where any investor can access the policy document as well as the Act, as is the case with the South African Department of Minerals and Energy DME website. The draft revision of the Act should entail a total revision of the whole Act instead of just focusing on the mining titles and the participation of historically disadvantaged Zimbabweans. Considering that the country has been independent for close to 25 years, a suggested appropriate terminology is indigenous or local participation. The Ministry has largely been under funded, with its budget significantly declining in real times. This has incapacitated the Department in discharging its duties efficiently and professionally. In addition to only 50% staffing positions filled, there is also a high rate of staff turnover. Capacity improvement is paramount for proper functioning of the Department as that would facilitate administrative justice in its operations. Policy makers should promote beneficiation so that the country can realise better returns from the sector. Resource rent capture and management and distribution has to be enhanced. A number of robberies involving metal transporting vehicles and also companies exporting minerals under pseudo names have been recorded. The socio- economic development directly associated with mining has mainly been through the investing companies and the resultant knock-on effects with minimal direct 104 government contribution, because the resource rents are collected into national treasury basket and used for other purposes which the government sees fit. Training and development of specialised personnel in mineral policy issues is long overdue. This calls for personnel who fully appreciate the dynamic global market demands and the associated impact on policy. The country?s competitiveness has been mainly affected by the perception of political risk, poor governance, and the head of state?s attitude. All the economic turmoil facing the nation is a result of all of the above. There is need to formalise the activities of small scale miners and diggers since their contribution to the economy can be substantial. If formalised, the sector can access support funds and operate in an environmentally conscious manner. The prevailing mistrust and dislike between the large mining companies and small scale miners and diggers has to be harmonised to promote an exchange of information and technology. This is a major undertaking since the two have always viewed each other as rivals. The government should promote any meaningful FDI regardless of its origin as long as its terms and conditions are met within sustainable development protocols. It is a cause for concern that the Head of State is deliberately contracting his catchment area with regard to FDI with the Look East policy. 6.4 Conclusion Zimbabwe has the potential to improve its competitiveness in line with regional trends. It?s the author?s view that the country?s problems in the mining sector are to a greater extent exacerbated by poor governance and lack of political will to effect change for the benefit of the country?s economic development. Its mineral resource base is the critical sector that can spring bound the country?s economy if properly supported and promoted. The government must show as much considerable commitment to the mining sector transformation as it did with its other reforms. The government ought to understand the importance of global recognition in helping to lure FDI into the country especially in the mining sector. 105 The major critical concern that should be addressed by the government urgently is fostering investor confidence by developing a coherent mineral resources policy document blessed with stakeholder participation. A paradigm shift in political mindset is the only way to gain investor confidence and thereby promoting international acceptance in the global arena. This entails government?s solid commitment in honouring regional and international initiatives that include among others: NEPAD, SADC, COMESA, PTA, AU and UN policies. The hard line stance adopted by the government has worsened the alienation of the country internationally. Zimbabwe as a country, should benchmark itself with regards to mineral resources development with upcoming or developing regional countries like Botswana, Namibia, Malawi, Angola, Zambia and Madagascar just to mention a few. Apparently Botswana a developing country has overtaken South Africa with regards to attracting Australian investors in diamond and gold exploration. Botswana is also currently evaluating developing its vast coal reserves which has not been extensively exploited to date. On the other hand Zambia has usurped the current boom in copper prices by opening up some of the old copper mines and even developing new copper mines in country. The fact that the Democratic Republic of Congo DRC, having a turbulent civil strife is currently enjoying better FDI inflows in mineral resource development than Zimbabwe is a great cause for concern. These countries show good improvements in mineral resources development in Greenfield and Brownfield competitiveness. In conclusion, the structural instruments in place including Investment policies, Taxation regimes, and Mineral rights administration are all conducive to FDI inflows, but all these have been overshadowed by the current political situation as well as a failing economy. The structures in place have sound developmental policies but lack administrative capacity to implement them into action. Recent economic policies implemented by the central bank saw an improvement in the country?s inflation from 623% in January 2004 down to 159 % by end of that year (2004). However, soon after the March 2005 parliamentary elections, inflation has been projected to skyrocket again to 425% by the end of the year. The economic turnaround programme has been undermined by lack of political support to sustain the positive gains that had already been realised by the end of 2004. Zimbabwe?s vast mineral resources if vigorously developed can be the main vehicle for economic recovery. The current 106 bullish performance of most mineral commodities further supports this view. The country should derive maximum benefit from its platinum resource, one of the most valued mineral globally. Finally, by and large the government should avoid the temptation of trying to manage and control the mining sector but focus on adopting a regulatory role of the sector. 107 7.0 REFERENCES A Comprehensive Investment Guide ? Zimbabwe Investment Centre, Harare, Zimbabwe (1 November 2004) < http://www.zic.co.zw A Minerals and Mining Policy for South Africa, October 1998 Department of Minerals and Energy (DME), Pretoria, South Africa Africa Competitiveness Report 2004, Released at the Africa Economic Summit 2004, Maputo, Mozambique, 2-4 June 2004, (5 January 2005)