Indigenisation Without Discouraging Foreign Investors - By Charles Shonayi
Charles shonayi on zimbabwe indiginisation
Foreign owned firms operating in Zimbabwe with a net asset value of US$1 were given a deadline of up to the 25th of September 2011 to submit compliance plans to the gazetted Indigenisation and Empowerment Act.
The need to rectify the skewed ownership of productive assets which are largely controlled by multinational companies at the exclusion of the indigenous people is giving rise to the indigenisation process. The indigenization or economic empowerment program in Zimbabwe is being pursued to create conditions that are conducive for previously disadvantaged Zimbabweans to participate in the economic development of the country through productive investment in key sectors of the economy.
The foreign owned firms are expected to dispose 51% stake to locals. The transfer of ownership of this magnitude is however too radical as it entails relinquishing control over the enterprise. With the investment sunk in development, the bargaining power is now in favour of the Zimbabwean government, which now wants to increase its fiscal revenues by unilaterally changing the terms of the original investment which is typically resource nationalism.
The Government through the indigenisation initiative is seeking to maximise revenue through various instruments especially in the mining sector by altering the terms of investment for future output. However, if property rights are not observed it will dissuade foreign investors who place a lot of value in policy stability and the sanctity of contracts. This comes at a time when the country desperately needs to attract FDI investment in order to bring production to pre-2000 economic crisis level.
The nationalization of mines will result in the increased perception that the country is a high risk investment destination thereby negatively affecting a number of subject areas in the economy. These include the country’s national income, foreign exchange earnings, government revenues and flow of investment.
It is anticipated that the country’s tentative and fragile economic recovery will be derailed. The country’s economy grew by 8.7% in 2010 and is forecast to grow by 9.3% in 2011. A key contributor to this growth is an increase in production output of the country’s mining sector which recorded a 47.0% increase in production output in 2010 and is expected to grow by a further 44.0 % in 2011.
The country’s ability to service its external debt with Multilateral Financial Institutions such as the IMF might be compromised further following reduced foreign currency earnings in the ensuing years. At present, the country has a weak balance of payments and is struggling to expunge its external debt which is estimated to be US$7 billion. The poor credit ratings with Multilateral Financial Institutions will negatively affect the country’s market access to fresh low cost funding.
As the state seeks to increase control of mining sector, production output is anticipated to fall. The government of Zimbabwe is cash strapped and lacks the expertise to successfully run the mines. The government’s ability to secure or rasie the $5 billion required for mining sector recapitalisation will be negatively affected. Similar to the land reform, the lack of exploration and continuous mine development will lead to creation of shallow production assets. Key mining companies such as Zimplats who had the board approved outline plans to undertake the $500 million Phase 2 expansion program are expected to retool their investment projects. A key case to note is the fall in production following the nationalization of mines in Zambia in the 1970s.
The mining sector is anticipated to shed jobs due to viability problems in the ensuing years. Programs to facilitate the transfer of knowledge for local mining professionals through apprenticeship or training will be hampered. Skills shortages are likely to result as skilled professionals migrate to higher paying countries. The government does not have the capacity to retain highly skilled professionals.
The availability of capital in the local market to finance the equity transfer deals is non existent. The financial sector is struggling to survive in the face of liquidity problems resulting in short term lending at exorbitant interest rates which is not sustainable in the long run. To close the funding gap, foreign capital is required to sustain investments in the mining sector which are long term and capital intensive in nature. The vast majority in Zimbabwe are poor and do not have the resources to participate in high value deals in the mining space. A case to note is failure by indigenous companies to take up the 15 per cent empowerment quota which was reserved by Zimplats and government as part of its conditions to set up and operate the mines in 2003. The shares were held in reserve long before the promulgation of the Indigenisation Act. The capacity of the indigenous population or entities to raise huge sums of money to invest is limited.
Mining contract reviews for foreign owned firms are anticipated to lead to higher taxes and royalties. Mining companies are also expected to release mining claims to the government. In May 2006, Zimplats released to the government part of its undeveloped mining claims. Offshore foreign currency accounts especially for platinum producers are likely to be localised. These were operated to give comfort to the lenders.
The Government of Zimbabwe has refused to adopt a hybrid indigenisation model which takes into consideration the corporate social investments. For example, Zimplats has invested $163 million in community projects which include roads, housing for employees, clinics, electricity infrastructure. Companies such as Zimplats expect the government to take social investments into consideration during the renegotiations.
The lack of a clear policy framework and operational guidelines of the program is leading to the view that the initiative is likely to advance the interests of the few elite rather than the disadvantaged population.
Mixed signals from the Government of National Unity on the indigenisation framework are not helping the process with MDC T saying that no expropriations will occur. On the other hand, ZANU PF is seemingly advocating for radical implementation modalities which include non payment for the assets taken over.
Institutional capacity within government to implement the indigenisation program in a credible manner that will benefit the disadvantaged proportion of the population is limited.
I am of the view that Zimbabwe is unlikely to benefit from this exercise owing to the observations cited above. The situation is further exacerbated by infrastructural challenges facing the country following a decade of underinvestment to replace or maintain existing infrastructure.
Foreign companies considering investing in Zimbabwe will need to gain a deeper understanding of the unique challenges facing the country and assess risk comprehensively.
Balancing both investor and government expectations in any economy is crucial to achieve a win-win situation. In particular, changing the legal and regulatory environment to make it more conducive to indigenisation without discouraging foreign investors.
South Africa embarked on comprehensive indigenisation or economic empowerment initiatives, albeit, at a varying degree. It can be argued that the BBBEE has resulted in an increase in productive investment in economic activities by previously disadvantaged South Africans, but it is not without its shortcomings.
In this respect, there is need to undertake comprehensive research to assist governments on the continent to identify best practices from countries with successful indigenisation programs. This is in order to articulate practical policy, financing strategies and technical aspects to support the development of the indigenisation policy.
Charles Shonayi, Frost & Sullivan Africa