Zimbabwe gets ready for indigenisation

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In a country that needs foreign capital not to grow but to survive, Zimbabwe’s indigenisation law defies understanding.

Although the recent sale by the State of a 54% stake in the Zimbabwe Iron and Steel Company (Ziscosteel) to a Mauritian-based Indian company, Essar Africa, shows that some foreign investors, especially from Asia, are more equal than others, mining companies, regardless of size, have since been singled out for special treatment.

They have been given until the end of September not just to submit “empowerment” proposals but to actually give up majority ownership, though the deadline will surely pass as negotiations continue.

The regulations first published in February 2010 stipulate that any foreign-owned business with net assets of more than $500 000 must divest 51% of its shares to indigenous Zimbabweans within a five-year period.

An indigenous Zimbabwean is defined as a person who suffered under colonial-era racial discrimination and their children born after independence in 1980, which in practice means mainly black Zimbabweans.

Business leaders and diplomats, including the former British Ambassador, have said that while they agree with the “principle” of indigenisation, they have reservations over the practicalities, most notably the time-frame and the payment terms.

Some officials mooted the idea of “leveraging” mineral deposits by borrowing against them to pay for the shares, while Indigenisation minister Saviour Kasukuwere has hinted that the government might pay nothing, simply valuing the mineral deposits as its share of the equity.

That the authorities rushed the regulations into print without considering the ramifications is evident not just from the goalpost shifting still taking place, but also from disagreement within the fractious administration.

Members of Prime Minister Morgan Tsvangirai’s Movement for Democratic Change (MDC), the former opposition party that is part of the ruling coalition, say they support the principle of indigenisation, but are playing down the idea of expropriation, although they have produced no alternative formula.

Meanwhile Robert Mugabe, the 87-year-old President, and the firebrand Kasukuwere (dismissed by many critics as “a Julius Malema wannabe”, a reference to the extremist South African politician advocating nationalisation) have ratcheted up the pressure with threats of nationalisation and, most recently, the cancellation of operating licences.

While miners are at the top of the indigenisation programme, all foreign and minority-owned companies with assets worth more than $500 000 are in the frame, including the banks Barclays, Standard Chartered and South Africa’s Stanbic, and manufacturers such as Cargill, BAT and Nestlé.

Ministers from President Mugabe’s Zanu PF party, which governed the country from 1980 until the coalition was formed in February 2009, insist their aim is to empower the black majority.

Their previous “empowerment” exercise, land resettlement, resulted in the halving of per capita incomes, the loss of half a million formal sector jobs and the emigration of two to three million Zimbabweans to South Africa, the UK, Australia and North America.

Given that precedent, businesses might be expected to speak out. Not so.

Some business people say they are “playing it long”, hoping they can force delays that will prevent implementation before the next elections in 2012 or 2013.

Others say the indigenisation plan is mere political theatre and that as officials realise the enormity of the problems involved, they will back off.

The less sanguine fear the miners have played the wrong card. Rather than confronting a political party most have at last written off, recent polls put Zanu PF’s support at about 20%, and most of that in a few remote rural areas, miners have tried to compromise, offering 26% equity participation rather than 51%, though on what terms is unclear.

The miners want their social investments, schools, clinics or houses, treated as “empowerment credits”. They argue that in so doing they have seized the moral high ground, but that is true only if economics is ignored.

Indeed, all sides appear to have lost sight of the mess Zimbabwe is in. Mining accounts for two-thirds of exports.

External debt has not been serviced for a decade and the country is insolvent, with foreign debts equal to 108% of GDP of which 80% is in arrears.

It is ineligible for loans from the multilateral institutions and in the World Bank’s “shadow” sovereign ratings published last month,
Zimbabwe was ranked bottom of the pile with a rating of CC- to CCC. Domestic savings were largely wiped out by hyperinflation in 2007-08 when inflation reached billions of percent a year.

In sum, the country has nowhere to go to finance recovery and development other than offshore.

The insistence on majority local ownership, however it is achieved (whether through employee share ownership, community share ownership or even listing on the Zimbabwe Stock Exchange) will reduce the availability of capital while raising its cost.

It will mean less investment and slower growth.
The mining industry says it has plans to invest $5bn to $6 bn expansion over the next five years while Zimplats, owned by South Africa’s Implats, talks of investing between $5bn and $10bn over an unspecified period.

That indigenisation will slow growth and perpetuate poverty in Zimbabwe without empowering the majority is obvious, which makes it all the more puzzling that mining executives and Tsvangirai’s MDC, supposedly a party preparing for government, are prepared to go along with it.