Indigenisation: Misses accounting logic

By The NewsDay | Apr. 9, 2013 | 7 Min read

Even indigenisation transactions are not immune from the principles of accounting, ie for every debit there must be a credit and vice versa.

Mutumwa on Tuesday with Mutumwa Mawere

Accordingly, the books of accounts must always be in balance.

With respect to the Zimplats Indigenisation (ZI) transaction, the agreed purchase price for the indigenisation shares is $971 million and this is to be provided as a loan by Zimplats Holdings (Pvt) Limited (ZHL) to the three indigenous entities.

In terms of accounting principles, every dollar of liabilities is accounted for by another dollar of resources or assets. This should be true also for indigenisation transactions.

What really will the balance sheets of the three indigenous entities reflect? It is reasonable to assume that National Indigenisation and Economic Empowerment Fund (Nieef), community and employee trust vehicles used to acquire shares from ZHL are nominally capitalised as it is common cause that the three beneficiary entities have no assets or liquid funds at their disposal.

In the circumstances, the possible scenario is that they are capitalised at no more than $100.

It is also reasonable to assume that even the initial subscription capital was provided by donors, as there is no evidence that the empowerment deals are being driven by the intended beneficiaries. Although it has been disputed that the ZI transaction is concluded, the framework agreed is no different to the other transactions that have been concluded to give one a sense of what is expected to be the final position on this deal.

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The seller in the ZI transaction is ZHL. The purchasers are the indigenous entities. The sale and purchase of shares agreement will be concluded between the purchaser and seller.

The shares will transfer hands from the current holder, ZHL, to the indigenous entities. The purchase price is known.

In the books of the indigenous entities, a combined liability of $971 million will be reflected in the books as a long-term liability expected to be repaid in 10 years assuming that the projected income is not only generated, but that the subject company, Zimplats does not need the same money to grow.

What then would be the contra account in the books of the indigenous entities?

The books of these entities will necessarily have to show an asset of an equivalent amount for there to be a balance in the books. The asset will have to be the value of the shares now held in Zimplats.

Now turning to the repayment mechanism, it is common cause that the debt incurred in acquiring the indigenous shares will be settled through the waiver of the right to receive 85% of dividends paid to the indigenous entities.

It is generally assumed that shareholders own companies, but in reality companies are incapable of being owned as they exist in their own right.

They are indeed juristic persons and as such it cannot be said that shareholders have a right to income. The Zimbabwe Revenue Authority (Zimra) has a better claim to income than shareholder and the same is true to the company. The net income generated by the company after paying taxes to the fiscus belongs to the company and not to shareholders.

Shareholders have, therefore, no contractual claim on the earnings of a company in which they hold shares.

A dividend has to be declared by the board of the subject company who in terms of the law, control the company and not shareholders. The declaration by the company is necessary to inform existing creditors of this development as creditors have a better claim on the assets of a company than shareholders. It is only after dividends are declared that they become a property of the shareholder.

One has to assume that in relation to indigenisation transactions that there is no mischief which is difficult to do in any transaction involving human beings.

In this case, the indigenous entities are imposed as shareholders outside the confines of the company. Transactions between shareholders do not have a direct impact on the affairs of the company.

One can take the example of listed shares that daily exchange hands between buyers and sellers.

Such exchanges do not affect the company in question.

Accordingly, the indigenisation transactions involve an exchange of paper in the form of share certificates from ZHL to indigenous entities against a promise that the seller will be paid from non-contractual claims on Zimplats.

By now it is abundantly clear that the 10:10:31 indigenisation formulation does not give control to indigenous entities, rather it leaves control with the very party that must work hard to generate the revenues that can legitimately convert inert to real control.

What incentive could conceivably push ZHL to want Zimplats to accelerate dividend declarations and in turn payments to the indigenous entities? There appears to be no rational basis that would compel ZHL not to play mischief either in terms of invoking the shareholder funding obligation in respect of new mining projects that will surely see the indigenous entities naked with no mechanism of defending the synthetic control achieved in the first phase or in diverting pre-tax profits.

The claim by ZHL to the indigenous entities is contractual and yet the source of income to make good on this obligation is non-contractual and solely under the control of Zimplats, that in turn will remain under the effective control of ZHL during the vendor financed period of 10 years.

The proposition that shareholders have no real legal claim on the earnings of a company in which they hold shares applies to even companies in which a single party holds 100% of the issued share capital.

Companies are controlled by directors and, therefore, such directors have a duty to the company and not simply to its shareholders. The game of empowerment by focusing on shareholding has its own legal limitations that may escape the attention of its ardent supporters and enthusiasts.

If shares do not give control, why is it that the current indigenisation framework focuses on shareholding? In the case of Zimplats, control remains with the largest single shareholder, ie ZHL.

What is important is that in the generation of income, only ZHL will continue to play a part as a provider of management services. Unlike employees, ZHL’s income will come in form of management fees.

The workers will be paid above the line, ie before taxes in the first instance and if they become unruly they know that the door that they came through will always be open when they wish to leave.

ZHL cannot be fired. However, the community will have no legal connection with Zimplats other than the shareholding connection and presumably a beneficiary of corporate social responsibility projects. As such, it can be expected that the community will continue to play a residual role in the affairs of Zimplats.

That then leaves the Nieef to be the true independent custodian of indigenisation.

It is also the case that the balance sheet of Nieef will show a liability to ZHL but as an entity, there appears to be no framework that will see the entity being able to generate its own earnings outside the indigenised entities.

Any director of Nieef as well as the other indigenised entities would necessarily have to address the solvency and liquidity issues. There can be no dispute that the only source of funds for the indigenous entities is the indigenised companies that they do not control.

Accordingly, for any director of the indigenous entities it would be important to apply one’s mind to the fundamentals of the deals. From the outset, the indigenous entities have no income or even prospect of receiving any income without the generosity of the companies that they now purportedly control on an aggregated basis.

Even financially illiterate persons would agree that without a defined income stream, the indigenous entities will not be able to function as going concerns.

As such they cannot be expected to employ people to assist in ensuring that no mischief will characterise the vendor financed journey.

One can safely assume that all indigenisation deals are not voluntary and, therefore, no goodwill can be expected to exist between the parties.

Without goodwill, profitable and win-win outcomes become academic. The reduction of indigenisation and empowerment transactions to academic games is really unfortunate not only because so much hope is now placed on a programme that is evidently still born.

Following the conclusion of the indigenisation deals, it is evident that spirited attempts are being made to defend the ground covered ignoring the key and fundamental shortcomings that when left unattended to can derail the programme.

The attempt to limit the space of conversation on indigenisation will leave the room with empty elephants while the future of the majority is surrendered to half-baked concepts about the design, structure and financing of deals that involve exchange of shareholding.

We all know that zero plus zero will never produce a positive outcome. The shareholding engineering experiments are premised on a misunderstanding of the capacity and competency of the state and its actors to prosecute the indigenisation and empowerment agenda.

The State has been under the control of the same people for 33 years to give direction to anyone interested in a secure and shared future of Zimbabwe about where the country is heading.

If the architects of indigenisation are drawn from a new generation that should know and act better, then there can be hope.

Mutumwa Mawere is a businessman based in South Africa. He writes in his personal capacity.