The Office of The Auditor General (OAG)’s 2019 Report: Key Accountability Issues for ZCDC and MMCZ


28 June 2021


The Office of The Auditor General (OAG) recently released its Audit report for the year ended 31 December 2019 on State Owned Enterprises and Parastatals. This paper delves into the findings of the Auditor General to gauge how State-Owned Enterprises (SOEs) involved in the mining sector managed to fulfil their   mandates and statutory obligations during the period under review. The Auditor General Report on State Owned Enterprises gives insights on some of the accountability challenges that can hinder the country’s ability to translate its mineral wealth into tangible development in line with the aspirations of the African Mining Vision (AMV).

The 2019 Audit report is very important as it provides audit performance of SOEs during the first two years of the “Second Republic”. The overarching thread from the OAG’s findings from previous audits is, the performance of mining SOEs is a huge disaster. Several governance issues that the Auditor General Mrs Mildred Chiri has been raising for SOEs have been continuing unabated. A new trajectory on the governance of SOEs is highly anticipated given the prioritisation of SOEs focused governance reforms in the Transitional Stabilisation Programme (2018-2020). The TSP was grounded on the promises that the new Government which came into power in November 2017 made around improving access to justice, transparency, and accountability for sustainable development in Zimbabwe. Apart from digging deeper into how well the SOEs managed to fulfil their mandates and statutory obligations, this analysis will also recommend corrective action to improve governance of SOEs. This analysis focuses on two SOEs namely, Zimbabwe Consolidated Diamond Company (ZCDC) and Mineral Marketing Corporation of Zimbabwe (MMCZ).

Mandates of ZCDC and MMCZ

  1. Zimbabwe Consolidated Diamond Company (ZCDC)

Zimbabwe Consolidated Diamond Company (Private) Limited (ZCDC) was incorporated in 2015 and commenced operations in 2016, in line with the Government of Zimbabwe’s policy to have one state owned company in the country that mines diamonds. The Company is wholly owned by the Government through the Ministry of Mines and Mining Development. The Zimbabwe Mining Diamond Corporation (ZMDC) gave birth to ZCDC and the government’s main drive for establishing ZCDC was to ensure transparency, accountability and optimal commercial exploitation and marketing of Zimbabwe’s diamonds[1]. Part of its mandate involves enhancing adequate investment in diamonds beyond alluvial, enhancing contribution to the national fiscus and community development. For ZCDC, this is the second time it is being audited separately as a SOE since its formation in 2015. Its inaugural audit report was released in 2018.

  1. Mineral Marketing Corporation of Zimbabwe (MMCZ)

MMCZ is 100% owned by the Government of Zimbabwe and falls under the ambit of the Ministry of Mines and Mining Development[2]. It is an exclusive agent for marketing and selling of all minerals produced in Zimbabwe except silver and gold. The Minerals Marketing Corporation of Zimbabwe (MMCZ) was established by statute in 1982 to act as the sole marketing and selling agent for all minerals and to provide for the control and regulation of stock piling of minerals. MMCZ is a critical player in Zimbabwe’s mineral sector as it is responsible for marketing minerals, they are a critical stakeholder in the 12 billion Mining Strategy roadmap to ensure that the country can translate its mineral wealth to development which resonates well with the Africa Mining Vision. Three functions of MMCZ are to act as the sole marketing and selling agent of all minerals produced in Zimbabwe, to purchase and acquire any minerals for its own account and to sell such minerals and encourage local beneficiation and utilization of any minerals[3].

Key Accountability Issues for ZCDC and MMCZ

  • ZCDC failed to account for its debts and investments

The Auditor General failed to verify the valuation of amounts owed by related parties with a balance of $304 258 953 on the Company’s statement of financial position. According to the OAG, some of the companies that owe ZCDC are no longer in existence. The management of ZCDC could not provide satisfactory answers on how and when these amounts would be recovered. The amounts that ZCDC is failing to properly account for, and recover have been growing since 2016 and this a cause of concern. In 2016 and 2018, the figures  stood at $ 20, 307,027 and  $24 347 454, respectively. There is a huge risk that ZCDC could have been using non-existent companies as a conduit for siphoning public funds. The names of ZCDC’s debtors must be revealed.  

On the other side, the Auditor General revealed that she was not able to verify the valuation of ZCDC’s investment stated amount of $ 178 799 841 in its subsidiary company named DTZ OZGEO (Private) limited. ZCDC failed to provide the financial statements of its subsidiary company to enable the Auditor General to assess the fair valuation of the company’s investment in the subsidiary. The same issue was picked in the entity’s Audit Report for the year ended 31 December 2018 when the figure was stated at an amount of $ 20 295 856. This could be a tip of an iceberg on the transparency bottlenecks that surround ZCDC’s investments. Parliament must dig deeper into ZCDC’s investments in other related entities. 

  • Risks of Illicit Financial Flows ( IFFs) Exposed

The audit revealed that during the year under review, ZCDC was instructed by the Ministry of Mines and Mining Development (MMMD) to sell diamonds to local customers in local currency (Zimbabwe Dollars) instead of United States Dollars (US$). This directive was said to be in compliance with SI 33 of 2019 which promulgated the 1:1 exchange parity between the US$ and the Zimbabwean Dollar (ZWL$) (between the RTGs FCA and the Nostro FCA).  However, the 1:1 parity between the US$ and the ZWL$ never existed on the ground. The US$ was valued more than the ZWL$ on the parallel exchange market and this created arbitrage opportunities. Since arbitrage opportunities were existing at that time, there is a possibility that the local buyers benefited from buying diamond in local currency and exporting it to diamond markets (which are normally India, South Africa, Belgium  and Dubai) in  US$  resulting in  undervaluation  of the entity’s sales  and tax payments to government. These are Illicit Financial Flows (IFFs) risks  that warrants more investigation.

In addition, the findings from the Auditor General revealed that MMCZ’s monitoring manuals did not cover issues to do with quality analysis of the value addition processes in the production of High Carbon Ferro Chrome and Ferro Silicone. A concern was raised that this was exposing the country to IFFs (loss of Mining royalties) through  under declaration.  In response to this, MMCZ indicated that quality checking is an ongoing process, and the monitoring manual will be reviewed.  There is a danger  the outdated manual can pose to the effective inspection and monitoring function of MMCZ even if quality monitoring is being done. The quality monitoring procedures that MMCZ is carrying out might be inadequate to allow for correct valuation of High Carbon Ferro Chrome and Ferro Silicone. The Chrome sector has been susceptible to Illicit Financial Flows (FFs) due to trade mispricing [4]. The government’s move to scale up value addition and beneficiation in the chrome sector is commendable and this present an opportunity for the country to fight Illicit Financial Flows ( IFFs) and generate a fair share of revenue   from the sale of its chrome products.  Efforts to ramp up value addition and beneficiation in the mining sector are in line with the African Mining Vision (AMV). However, beyond value addition, there is need to plug out all loopholes that facilitate IFFs.

One of roles that is played by MMCZ isto ensure that there is effective accounting of national mineral resources through sound inspectorate and monitoring strategies. The entity has an inspectorate and monitoring mechanism in place where inspectors are deployed at major mining houses to witness production, weighing, packaging, and sealing of minerals[5]. To compliment inspectorate and monitoring mechanism, samples of minerals are collected from time to time and are sent for assaying to determine the content or quality of minerals. This is something that the Parliamentary Portfolio Committee on Mines must investigate. The committee must visit all chrome mining and smelting companies and monitor the systems that MMCZ has put in place to curb IFFs. 

On the positive note, MMCZ is making efforts to fight IFFs in low weight -high value minerals.  Recently, the entity made a progressive move to open the gemstone market[6]. Smuggling and illicit trade has been rife in the gemstone sector. The policy move to open up the sector for buying and selling if implemented properly will go a long way in curbing illicit trade of gemstones and smuggling.  

  • Diamond Stock Reconciliations loopholes raised

The findings revealed that ZCDC was not preparing a variance report after the diamonds stock count had been held at Sort House. There was no evidence of a documented formal process of reconciling physical stock counted with the theoretical or anticipated stock. The Auditor identified three (3) anomalies in respect of diamond stocks which then necessitated post year-end adjustments to the financial statements which had been presented for audit. These were;

  • In 2019, 297 660.41 carats of diamond stock held at MMCZ was not counted at the time of the stock count. These parcels were packed for customers and held at MMCZ. However, at year end, during the stock count, these stocks were not included in closing inventories.
  •  In 2018, 41 699.85 carats of diamond stocks held at MMCZ were excluded from the stock count. It was assumed at the time that these stocks had been sold to customers.
  • An additional 13 222.85 carats were excluded from the final stock sheet in error.  

This means that before the adjustments were affected, ZCDC’s financial reports were not reflecting the true and fair position in terms of profitability and tax performance of the entity. In response to the findings, ZCDC indicated that a Diamond Stock Controller will be engaged to manage diamond stocks and, Management will ensure stock diamond reconciliations are done on a monthly basis. Parliament should follow up on this recommendation

  • Audit reveals Failure to comply with tender Rules on the sale of diamonds

The Auditor revealed that there was a customer parcel that was yet to be collected at the time of the audit in April 2020 and the parcel had not yet been paid for. The sale was made to a local customer in September 2019. ZCDC failed to comply with its tender rules on the sale of diamonds.  The tender rules stated that a customer should pay for their parcels within three days of winning a tender. However, eight months from the date of sale, the customer had not yet paid for the parcels or collected same.

  • Diamond Leakages at MMCZ raised   

The audit revealed that the Corporation could not account for five (5) carat diamonds worth USD2 075 belonging to a producer which went missing during a weight verification exercise.  The findings of the audit revealed that MMCZ could not ascertain how the five carats of diamonds were lost because the CCTV video footages could not be retrieved as there was an internal control system failure. There is a high possibility that the diamonds were stolen. Diamonds are prone to smuggling and theft due to their low weight and high value nature. This clearly points to the failure by the Corporation on its role to ensure effective accounting of natural resources and curb mineral leakages.

In response to the issue, the Corporation indicated that it had upgraded its storage capacity for CCTV recordings up to a maximum period of six months before having the information deleted.  The Parliamentary Portfolio Committee on Mines must urgently make a visit to MMCZ to investigate the adequacy and functionality of MMCZ’s systems of preventing diamond leakages. The focus of their investigation should be on systems and procedures that relate to prevention of leakages, capacity of the Corporation in maintaining records relating to production, storage, movement and sale of minerals, systems and procedures that relate to prevention of corrupt practises and collusion by officers in the system.

  • Weak Mining Royalties Administration and Reconciliation Systems cited

Until recently, when the government made a policy shift[7], MMCZ has been collecting royalties on behalf of the Zimbabwe Revenue Authority (ZIMRA). During the period under review, the Auditor General revealed that the corporation failed to do reconciliations for mining royalties on time as some were still being prepared as at July 17, 2020. In addition, the amounts for mining royalties that the Corporation remitted to ZIMRA were not reconciled with the payments and returns for the period January to December 2019. There is a risk that possible errors and omissions may have gone undetected.

  • Poor Governance Issues cited at ZCDC and MMCZ

The Auditor General noted that ZCDC does not have independent directors as all board members in the interim board have interests in other related parties. For instance, three (3) of the five (5) board members are also directors of Zimbabwe Mining Development Corporation (ZMDC) (a former shareholder in ZCDC with related party balances with ZCDC), the other director is Chairman of the Minerals Marketing Corporation (MMCZ), whilst the fifth board member is an official at the Ministry of Mines and Mining Development (MMMD). In its response to this finding, ZCDC indicated that a request to appoint a substantive Board was submitted to the appointing authority in line with the relevant laws and corporate governance best practices. The appointing authority recommended that the entity should consider reconstituting the Company’s Board to ensure that the majority of the board members are independent in line with good corporate governance principles. Citizens and parliament should follow up on this recommendation.  

In the case of MMCZ, the entity has failed to comply with its Board Fees and Allowance Policy. Inthe year under review, the corporation paid board fees and allowances that were above the approved rates. This is an act of mismanagement of public resources.

  •   Profit and Loss Position Disclosure Issues for ZCDC 

The utility of the 2019 Auditor General’s is devalued by the fact that there is no disclosure of comprehensive financial statements for ZCDC for the year 2019.  Since it is directly involved in the mining sector, the entity is supposed to contribute to mineral revenue generation through paying dividends to government apart from payment of statutory taxes such as royalties. Citizens have no idea not only on the entity’s profit position but also on the amount of taxes that the entity paid to government in 2019. In 2020, the entity made a progressive move to publish its annual audited financial reports for 2016, 2017 and 2018 online[8] allowing citizens to have a clue on the entity’s profit or loss position and its performance towards contributing towards royalties, custom duty, withholding taxes and Pay As You Earn ( PAYE) between 2016 and 2018.  In 2016, the entity made a loss of $ 7.4 Million whilst in 2017 and 2018, the entity reported losses of $19.6 Million and $57 Million respectively[9].  Regrettably, the momentum was not sustained since its 2019 Annual report is yet to be published online.

Public disclosure of the entity’s 2019 annual report would have made it possible for citizens to have a clue on how the entity performed on profitability issues. Considering that the entity was established with the objective of improving transparency and accountability in diamond mining in Zimbabwe, the entity was expected totimely release its 2019 annual report for public scrutiny. Section 194 (1) (h) of the Constitution on basic values and principles governing public administration notes that, transparency must be fostered by providing the public with timely, accessible, and accurate information.

Unlike its peers such as Zimbabwe Consolidated Diamond Company (ZCDC) and Zimbabwe Mining Development Corporation (ZMDC), MMCZ discloses its annual reports constantly and these are publicly disclosed on its website[10].

Other Accountability Issues

  • Outstanding Audited Financial Reports for DTZ OZGEO and Mining Development (Private) Limited

There is a concern that some SOEs are lagging behind when it comes to submission of financial statements to the OAG. In the latest OAG’s report, the Auditor General revealed that audits for DTZ OZGEO and Mining Development (trading as Elvington Mine) for the years 2018 and 2019 were outstanding because the entities had not yet submitted their financial reports to the OAG. Mrs Chiri cited COVID-19 pandemic as key obstacle to SOEs’ compliance with the statutory financial reporting timelines. According to Section 49 of the Public Financial Management Act (PFMA), subsection (1) (c) requires public entities to submit an annual report and financial statements for auditing within two months after the end of each financial year.

The release of the audit reports for DTZ OZGEO Private (Limited) would have enabled the Auditor General to reconcile or verify the fair valuation of ZCDC’s investment in the Subsidiary. On the other hand, the inclusion of the Mining Development (Private) Limited in the recently released Audit report on SOEs would have afforded citizens with the opportunity to assess the SEOs’ financial performance in 2018 and 2019. The Auditor General’s report released in 2018 for the Mineral Development (Private) Limited’s financial statements for the year ended 2017 revealed that the entity was in dire financial distress.

Key Recommendations

  • Given the fact that several issues raised in OAG’s report are a tip of an iceberg, the Parliament Committee on Mines must immediately carry out an in-depth investigation on the issues that were raised on ZCDC and MMCZ. 
  • The OAG is recommended to carry out special audits of the financial accounts of ZCDC and MMCZ.
  • The Parliamentary Portfolio Committee on Mines should urgently visit all Chrome mining and smelting companies and monitor the systems that are available in a quest to close loopholes promoting mineral leakages. The visit must focus on monitoring systems and procedures that relate to prevention of leakages, capacity of the Corporation in maintaining records relating to production, storage, movement and sale of minerals, systems and procedures that relate to prevention of corrupt practises and collusion by officers in the system at MMCZ.

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For Further Information, Please Contact:

Zimbabwe Environmental Law Association

26 B Seke Road, Hatfield,Harare,Zimbabwe

Website :  |Twitter: @ZELA_Infor | Facebook: Zimbabwe Environmental Law Association

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