Minister of Finance Tendai Biti in his budget presentation highlighted re-engagement with the international community, policy consistency and predictability on the key policy fundamentals and overall business confidence as the key achievements of the inclusive government.
In conceding to the incapacitated state of the country to improve service delivery due to limited fiscal space, the need to create and support an environment conducive for investment that addresses issues of equity and equality of opportunity across the country was mentioned.
Although the minister accepted that capital flows through foreign direct investment (FDI) was dwindling across Africa, the situation was pathetic in Zimbabwe, only $125 million was received in 2011.
He highlighted the need to investigate the causes of declining FDI portfolio in Zimbabwe.
Policy consistency issues were affecting the performance of the Zimbabwe Stock Exchange especially the implementation of the Indigenisation and Empowerment Regulations in addition to liquidity challenges in the economy.
The listed companies in the mining, industrial and banking sectors are currently the targets of the regulation.
It is imperative that Indigenisation and Empowerment Regulations are discussed in light of the 2012 budget that acknowledged the need for an environment conducive for investment.
Apart from FDI, government is also looking forward to Public-Private Partnerships (PPPs) that can also involve foreign investors.
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As alluded to in the budget, business in PPPs is currently limited to local players and regional institutions only that understand the politics, the economy and business prospects of Zimbabwe.
As such, the notable source of PPP funding was realised from Development Bank of Southern Africa to fund the highway rehabilitation programme. This implies that the current indigenisation initiatives have their own downside in the development of the economy.
Zimbabwe has increased its risk rating given the socio-economic environment created by the law. By having foreign investors as minority shareholders in PPPs, every prospective investor has a nightmare in terms of the security of his finance.
Lack of majority control in projects would mean that there is no guarantee that the other partner will perform. This is compounded by the fact that the local finance market is still in its infancy from the periods of hyperinflation.
Local money markets are not in a capacity to fund long-term projects and locals alone cannot undertake such projects.
Our country risk is still very high in the areas of legal matters – unattractive policies are passed without taking too much regard to the implications on the economic restoration process.
This affects issues of contract enforcement that are critical in building foreign investor confidence. The issue of property rights put the icing on the cake when we aggregate the factors against FDIs.
Operationally, the risk is very high given the status of the finance markets. The country is running with short-term finance only which is not suitable for infrastructure development.
Due to the economic situation where the majority leave below the poverty datum line, it is inevitable that demand for products and services from PPP projects will be suppressed at the expense of recuperation of projects’ costs.
Consideration of operational and country risk is critical in light of the fact that contracts are based on risks and opportunities.
Joint ventures would be the solution to development of infrastructure in Zimbabwe for as long as they are free-joint ventures based on risk and opportunity.
High risk environment has a tendency of pushing the prices up when contractors hedge against such risks by taking unlimited insurance that has high premiums.
Contractors tend to front-load in such projects. Front-loading is short-term yielding that is meant to harvest too early in the project before the perceived risk is realised.
It is, therefore, important that while local participation through implementation of Indigenisation and Empowerment Regulations is promoted, doors are not unnecessarily closed for FDI.
Nyasha Chizu is a Fellow of the Chartered Institute of Purchasing and Supply (CIPS) and the CIPS Zimbabwe branch chairman writing in his own capacity.
