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ZimAsset: Industrialisation Key Part 2
30/03/2014 00:00:00
by Clive Samvura
 
 
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Economy: Radical proposals for growth (Part 3)
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Economy: Radical proposals for growth (part 1)

THIS is a continuation from my previous article which can be read here:
http://www.newzimbabwe.com/business-14739-Zim+asset+Industrialisatio+key/business.aspx

By strategically investing as “little” as $1.5 billion in specific sectors, an additional $10 billion a year can be added to our economy in less than 5 years. If my guestimate is correct, by reinvesting in SME’s geared to value addition around these specific sectors the economy could be grown exponentially by an additional $40-$50 billion within 7 years. I’ll provide a breakdown at the end of this article to try to explain how.

A certain commentator was kind enough to let me know that what I was suggesting in part 1 of this article was actually called “Import substitution industrialisation”. Thank you for that clarification, we now have a nice name for it. I believe it was Einstein who once said if you can’t explain your idea to a six year old, then you yourself don’t understand the idea. With this in mind I’ve decided to dumb this article down even further to try to reach a wider audience and to open people’s eyes to the opportunities out there. Never underestimate the power of ideas or how they are passed on. I was pleasantly surprised to see this article the other day:  http://www.zimbabwesituation.com/news/zimsit_exports-only-way-to-zim-dollar-return/
wherein a deputy minister was quoting from one of my previous articles posted on this website called “Economy: Radical Proposals for growth Part 3”. I suggested constructing a Lithium-Ion Battery Plant using Lithium mined from Bikita and he had obviously read my previous piece so let’s not always assume that no one is listening.

With regards to Zimbabwe’s current economic situation, some see the glass as half-empty and others see the glass as half-full; yet I see the glass as too long. No one is going to help us out of our current economic situation so we need to come up with the solutions ourselves. The Zimbabwean government needs to draft a separate industrial policy to turn the economy around. Since “clusters” are all the rage right now for economic policies, I would suggest the following five clusters on which to base the industrialisation economic policy:



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  1. Iron and Steel+ heavy machinery cluster – operationalise NewZimsteel, build another large stainless steel plant as I suggested in part 1 of this article. Then reinvest in SME’s which use the steel from these two plants to add value to the steel up to the final product.
  2. Pharmaceuticals and biotechnology cluster – make a large capital investment in this sector to expand on existing operations.
  3. Energy and Gas cluster – by exploiting our methane gas reserves, we can create a new industry altogether in downstream value addition and SME’s will create themselves in the process.
  4. Ethanol cluster – with strategic investments in ethylene production, we can open up a new industry which is geared towards export
  5. Mining cluster with “real” value addition – with strategic investments in complete value addition we can substitute certain imports.

I’ve chosen these five sectors from a purely strategic point of view. They each have a high branching effect, fall under the most labour-productive sectors and have the potential for maximising value addition. Most importantly for our particular situation, these will all contribute to the “Import-Substitution-Industrialisation”.

The following is a sampling analysis from the Zimstats website which details the statistics of our imports (see link http://www.zimstat.co.zw/dmdocuments/Trade/Imports.pdf) and the statistics of our exports (see link http://www.zimstat.co.zw/dmdocuments/Trade/Exports.pdf). The government should be concentrating on the labour productive sectors, which simply means the sectors which will return more cents on dollars invested. The most profitable sector is Pharmaceuticals & Biotechnology, followed by Banking, Diversified Financial Services, Software & Services, Telecoms, Food and Beverage, Oil & Gas and Heavy Machinery. Since I already detailed the Steel Industry, and showed how stainless steel production could be worth more than expected diamond revenues in part 1 of this article, I will now go on the other sectors:

2.    Pharmaceuticals & Biotechnology Cluster

The irony with our economic situation is that Pharmaceutical products are one of our biggest imports, whereas deliberate investment in this sector alone would not only provide import substitution, but could also provide much needed Forex through exports. Data extracted from the Zimstat website for imports of Pharmaceutical products shows that we are importing $10 to $30 million a year in Pharmaceutical products (human vaccines, veterinary medicines and varied medicaments). According to this report http://apps.who.int/medicinedocs/documents/s18701en/s18701en.pdf, Zimbabwe’s pharmaceutical industry is currently only providing 47% of all pharmaceutical products in the country, yet has the potential to supply 100% plus exports, so what are we doing wrong?

If the Pharmaceutical and Biotechnology sectors are supposed to be one of the most profitable sectors why are CAPS Private Limited, Datlabs, Plus Five Pharmaceuticals and Varichem Pharmaceuticals underperforming? Why are they not replacing the millions of dollars of imports detailed above? Better still, why are they not expanding even further to reach levels of surplus for export? Why are these 4 companies not driving our economy? Whilst a lack of capital to fund the gap between supply and demand may be largely to blame, there has also been lack of government support. It is unfortunate that the government is not cognisant of the fact that the correct policies and financial support of this sector will provide more profitable returns than the mining sector or any other sector as a matter of fact.

The individual companies will also need to play their part as the report states that they are not keeping up to date with global pharmaceutical developments. According to the 2005 Medicines Prices in Zimbabwe Survey, it was found that there were cumulative mark-ups added to medicines to the final consumer which went as high as 138%. The report revealed that the most significant mark-ups added to medicines included an average 40% at the wholesale level, a 50% retail mark-up, import duties, insurance and freight. For medicines imported through agents, additional mark-ups included finance costs and an agent mark up of 40%. This is the main reason why the cost or our pharmaceutical products are much higher than the region. Government needs to overhaul this section and look to copy India’s model to make Pharmaceuticals one of our biggest industries. 

3.    Energy and Gas Cluster

Data extracted from the Zimstat website for imports of propane, butane, petroleum gases, anhydrous ammonia, urea and ammonia nitrate indicates thatwe are importing $1 million per month of propane, butane and petroleum gases yet we have the largest reserves of Coal Bed Methane (CBM) gas in southern Africa. We are also importing anhydrous ammonia of up to $25 million per year. We are importing $0.5 million to $2.4 million per month in urea. We are importing between $1 million to $10 million per month in ammonia nitrate (NH fertilizer). We are importing almost $1 million per month in double salts and mixtures of calcium nitrate and ammonia nitrate.

Propane and Butane are by-products of CBM gas extraction and processing, and by exploiting our CBM gas reserves these imports could easily be substituted. As I’ve mentioned in previous articles, for as little as $200,000 the drilling exploration for CBM gas can be carried out, a third party certificate obtained and finance secured to begin CBM gas production. CBM gas has the greatest branching off effect as I’ll show shortly. In my previous article: http://www.newzimbabwe.com/opinion-13928-Economy%20Radical%20options%20for%20growth%20(Part%202)/opinion.aspx#news - I explained how the first branch for value addition of CBM gas could be electricity generation via a gas power station. I myself have not been able to enter this sector up to now, due to a lack of investment, but I’ll keep trying either way.

The second branch of value addition for CBM gas would be to construct a steam-methane-reformer to convert methane gas to hydrogen. Hydrogen has numerous uses and its main application is in the processing of fossil fuels. The number of SME’s that can be set up to use the hydrogen produced from CBM gas is endless, just to mention a few: methanol production, hydrochloric acid production, hydrogen fuel cells for hybrid cars, hydrogenated vegetable oils (margarine and butter), food and chemical industries, methyl alcohol for varnishes and paints, hydrogen peroxide etc. This is the branching effect I mentioned earlier.

Another important branch which would come from hydrogen production would be ammonia. Hydrogen can be converted to ammonia via the Haber- Bosch process using. Ammonia also has endless uses. The main one being ammonium nitrate which we use for fertilizer. All the fertilizer that Zimbabwe is importing could easily be replaced, with an even larger amount for export by building an ammonia plant. Endless SME’s could be set up around ammonia production, to name just a few products - cotton defoliants, anti-fugal agents, preservatives for high moisture maize, metal treatment and extraction chemicals, nitric acid, certain alkalis such as soda ash; dyes; pharmaceuticals such as sulfa drugs, vitamins and cosmetics; synthetic textile fibers such as nylon, rayon and acrylics; and for the manufacture of certain plastics such as phenolics and polyurethanes. Ammonia is also used in water and waste water treatment, paper and pulp industry, food and beverage, commercial and household cleaners.
It is self-evident that the multiplier effect in each step of the value addition chain of CBM gas through to the final product will have a cascading effect and create more SME’s, employment and revenue.

4.    Ethanol and its derivatives cluster

Data extracted from the Zimstat website for imports of plastics and polymers shows that we are importing $4 million to $12 million per year in polyethylenes, polyvinyl chlorides, polyesters and ethylene polymer tubes, pipes, adhesive tapes, strips, foil etc. Now, ethylene can be derived from dehydration of ethanol. We all know that Green Fuels produces ethanol, and it appears that another company is going to venture into ethanol production as well. An opportunity for value addition exits in ethylene production which has wide range of uses in the chemical industry e.g ethylene oxide, ethylene dichloride, ethylbenzene and polyethylene.

So the imports sampled above could be substituted by converting ethanol to ethylene/polyethelene. Ethylene can also be used to make vinyl chloride, which can be converted to Polyvinyl chloride. Polymers can also be made from ethylene, so it is self-evident that there is huge potential for converting ethanol into ethylene and its derivatives. These are products that not only have a local market, but also have an international market if produced in large enough quantities. So again by simply connecting the dots we can start new industries here in Zimbabwe, starting off small by plugging the imports and then expanding to export markets.

6.Mining cluster with “real” value addition

Data extracted from the Zimstat website for imports shows also shows the following:
Asbestos – why are we importing asbestos in large quantities yet we have Shabanie Mashava Mines (SMM) which has collapsed due to political interference and mismanagement? The government needs to return SMM to its rightful owner and bring this back into operation. SMM was worth $267 million at its peak and would easily be able to supply the local market and to generate forex through exports.

Phosphates - Zimbabwe Phosphates Industry (Zimphos) and Chemplex are both operating at 20% capacity, yet we are importing Phosphates. This is an area which needs timely government intervention.

Potassium – we haveimports of 300,000 to $3 million per month in Potassium chloride, and $500,000 to $2 million in Potassium Sulphate,other fertilizers - $1 to $3 million per month.

Sodium Hydroxide - can be manufactured from soda ash. We are currently importing the soda from the Makgadikgadi Basin through a company called SAB in Botswana. Can we not explore for soda ash here in Zimbabwe to substitute these imports and make the sodium hydroxide here in Zimbabwe?

Salt - Zimbabwe is currently importing US$1 million in salt per month. Don’t we have the Bari salt pans near the Matusadona National Park and other salt pans near the border with Botswana? Why are we not mining these salt deposits? I believe this is an avenue which needs further exploration as salt mining could be used to substitute these imports.

Conclusion

Our economic recovery and growth will not come about by focusing on agriculture and mining. It’s not just about resources ownership, as we continue to hear from supposed intellectuals. It’s about owning the complete value addition chain from start to finish, i.e. owning the resources, owning the refineries, owning the manufacturing plants and even owning the transportation companies which ferry freight to its intended destination. Why can we not be ship-builders using steel manufactured at NewZimsteel? Those who’ve been following my articles will connect the dots. Where others fear to tread, Zimbabwe has been there and back (i.e. land reform), we have the scars to show for it. We are now trying to chart new territory in wealth redistribution through indigenisation so let’s get it right from the start this time.

I have a question. Is indigenisation not indigenisation even if you call it by a different name? My humble suggestion would be to repeal the law under its current “name” and replace it with exactly the same thing and just say you are implementing “Binary Economics”. Instead of saying foreign companies with a value of over $500,000 should cede 51% to indigenous entities, simply say “All companies (indigenous or not) shall set up 50% Employee Share Ownership Plans”. As I’ve said before, the government should provide a tax cut to allow employees to buy into these ESOPs. You can raise corporate tax from 25% to 30%, then offer a tax cut of 5% to all companies for their employees to buy shares in the companies. Just use tax commutation. You see indigenisation is essentially putting binary economics into practice, however the racial connotations have drawn negative attention and so this should be repealed.

If we want monetary help from the IMF, World Bank or Africa Development Bank we need to propose bankable projects i.e. those projects that are assured a high return on investment in a short period of time, which will generate employment and provide exponential growth, even under severe risks as is our case. They’re not going to loan us money to pay for an over-bloated civil service with over 70,000 ghost workers, they’re not stupid. How are we going to pay it back? If I had about $1.5 billion and I had to make strategic investments in bankable projects, this is what I’d invest in:

  1. Under the gas cluster - 300MW power plant at a cost of $150 million which would take 2 years to construct. At the current electricity tariff rate of 9.83c per kW it would generate $258 million per year in electricity sales. With electricity sales from the first year of operation I would then reinvest this money in expanding the capacity by another 300MW to a total of 600MW, generating $516 million per year in electricity sales.
  1. Under the gas cluster - 1000 tonne per day ammonia plant at a cost of $250 million, which would take 2 years to construct. It would operate for an average of 320 days per year, and at the current price of anhydrous ammonia of $600 per tonne this would generate $1000 x 320 x 600 = $192 million per year. With revenues earned from the first 2 years I would reinvest in doubling the capacity to 2000tpd which would result in $398 million per year of ammonia sales. I would reinvest another $100 million in downstream SME’s around hydrogen and ammonia production which would quadruple revenues through value addition.
  1. Under steel and heavy machinery cluster – 500,000 tonne per year stainless steel plant for $250 million, which would take 3 years to construct, and at an average of $2500 per tonne for stainless steel would generate $1.25 billion per year. I would reinvest about $100 of this revenue into setting us SME’s for value addition of stainless steel i.e. a tube and fittings factory, cutlery manufacturing factory etc and this would quadruple this revenue.
  1. Under the pharmaceuticals cluster – I would invest $250 million in expanding the Pharmaceutical Industry, this direct investment could generate Pharmaceutical product sales of at least $500 million per year.
  1. Under the ethanol and its derivatives cluster - I would invest $250 million in an Ethylene plant, which would essentially be converting ethanol to ethylene opening up a whole new industry. This plant could generate $500 million per year in ethylene, polyethylene and PVC production. This revenue could then be reinvested in setting up SME’s in this sector for value addition, polyethylene for packaging, or PVC for piping ad other accessories.
 
  1. Under Mineral real value addition cluster - $100 million in a Lithium-Ion (Li-On) car battery manufacturing plant, specifically targeted at Li-On batteries for electric cars. This could generate $250 million per year in Li-On battery sales to electric car manufacturers.

My idea would be to have these 5 or 6 strategic national projects as detailed above, and then use the revenues generated to reinvest in setting up downstream SME’s to maximise value addition. I am going to go against the grain with regards to the current company closures, and say let them close down. Most companies are currently only lining the pockets of the CEO’s and directors, whilst the workers are paid a pittance, so let them shut down. It may be temporary unemployment for a few, but out of the ashes we should build a solid foundation of real heavy industries and labour productive sectors. We want a new model for the Zimbabwean economy in line with Binary economics. Part of this would involve companies operating in Zimbabwe being obliged to incorporate 50% Employee Share Ownerships Plans as standard and redistributing the wealth equitably to workers. This will increase our consumer spending and demand for goods and services. It sounds simple because it is simple. What’s not simple is to untangle our economy from our politics so we can secure the capital required to fund these types of projects and a new economic dispensation.

And finally to the dear reader, please do not try to put me into a box; you will be disappointed to find out that my thinking falls outside of that box. I’ve been asked many times why I bother writing articles. I’ll try to explain. Those with a very good knowledge of Zimbabwean history will know where the surname “Samvura” comes from. For those who don’t know, you can read one of my previous articles here where I explained it: http://www.newzimbabwe.com/columns-14474-Refocussing+tourism+Great+Zimbabwe/columns.aspx

As a “Samvura” I do not have the same gift as my predecessors, however by simple deduction and reasoning, I can point the way to an economically emancipated Zimbabwe. In my next instalment I’ll look into which raw minerals we are exporting and ways in which these can be incorporated in the clusters mentioned above and maximise value addition.

Written by Clive Samvura who can be contacted on cliveks1@yahoo.co.uk


 
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