New Zimbabwe.com

The trouble with Zimbabwe’s indigenisation policy (Part 1)

PRESIDENT Robert Mugabe likes to be seen as a great champion of the rights of African people and in return, many Africans across the continent have embraced him as such. More often than not, he is warmly received in his travels around Africa. Two of his flagship policies, which define his philosophy, are land reform and indigenisation of foreign businesses. Both policies – which are grounded on notions of social justice and fairness in the exploitation of natural resources – divide opinion sharply, making Mugabe a villain to some and a hero to others. Those who like the policies like them passionately while those who despise them do so with high levels of resentment.
This article assesses the policy and practice of indigenisation and concludes that despite the rhetoric and the controversy around it, the policy has actually yielded very little in practice, apart from inflicting significant reputational harm upon the country in the international market of investors.
For a glimpse of the controversy and confusion that plagues the indigenisation law, in place since March 2008, one only has to consider the apparent tensions within Zimbabwe’s Cabinet. On the one hand, the recently appointed Minister in charge of indigenisation and empowerment, Patrick Zhuwao, is ratcheting up pressure on the implementation of the policy, but on the other hand, his counterpart at the Finance Ministry, Patrick Chinamasa is singing a different tune, promising a review of the law. There will be no review of the law, snipes Zhuwao in return. Instead, he is proposing a new levy on all foreign-owned businesses, as a stick to whip them into line.
What is the indigenisation law?
To put it in very basic terms, Zimbabwe’s indigenisation law requires all foreign companies with a minimum asset-value of at least $500,000 to give up 51% of their ownership to indigenous Zimbabweans. This means, in effect, a foreign investor is only permitted to hold 49% ownership of a business. This applies to existing investors, who must readjust the ownership structure of their businesses and incoming investors, who must obtain an indigenisation compliance certificate from Government.
The object of the law, according to Government, is to redress imbalances in the ownership and exploitation of resources, a circumstance blamed on the colonial system which marginalised black Zimbabweans. Indigenisation is defined in the law as “a deliberate involvement of indigenous Zimbabweans in the economic activities of the country, to which hitherto they had no access, so as to ensure the equitable ownership of the nation’s resources”. An indigenous person is defined as “any person who before the 18th of April 1980 [independence day] was disadvantaged by unfair discrimination on the grounds of his or her race, and any descendant of such person.”Advertisement

The law applies to all economic sectors, although in 2014, the Government seemed to move in the direction of a sector-based approach, with a new law giving responsibility for setting indigenisation targets and measures to line ministries responsible for different aspects of the economy. Thus recommendations for granting indigenisation certificates are now made by line ministries. Previously, the process was centralised, with the indigenisation ministry applying an impractical and unreasonable one-size-fits-all approach to businesses in all sectors of the economy. It didn’t make sense, so thankfully there was a move to correct that. Nevertheless, it’s not clear whether and how many ministries have actually taken steps to set indigenisation targets and measures for their respective sectors.
In the past, Government reserved the power to select the local investor to partner with a foreign investor in an indigenisation deal. This was heavily criticised on a number of grounds. First, it was not only unreasonable but forcing persons into a business partnership with government-selected persons was also tantamount to violation of the constitutional freedom of association. Second, this power created too many rent-seeking opportunities which fuelled corruption among public officials. This has now been relaxed and a foreign business is at liberty to select its own partner.
High-Profile Support
The notion of indigenisation has high-profile supporters on the African continent, apart from its chief driver, Zimbabwe’s President, Robert Mugabe. In August 2013, Mbeki applauded the indigenisation policy, seeing it as a bold move by an African country to take greater control of local resources, which are often exploited by Western-based multi-national companies, with the majority of the profits being repatriated to their home countries. Mbeki viewed, Zimbabwe’s problems as emanating from punitive measures “powerful forces”, by which he probably meant Western countries, who thought by taking that route, Zimbabwe was “setting in the minds of some a sad example which must be defeated.”
“The Zimbabweans are now talking about indigenisation and I can see that there is a big storm brewing about indigenisation,” said Mbeki. “But what is wrong about indigenisation?” he asked. “What is wrong with saying “Here we are, as Africans, with all our resources, sure we are ready and very willing to interact with the rest of the world about the exploitation of all these resources, but what is the indigenous benefit from the exploitation of this, and even the control”.
In Mbeki’s view, African intellectuals have a duty to mount a robust intellectual defence for such policies like indigenisation which were being pursued by Zimbabwe. Baffour Ankomah of the New African, a London-based pan-African oriented magazine, another strong supporter of Mugabe’s policies also wrote in early 2014 that there is “huge potential for indigenisation to become a liberating force not only for Zimbabwe but also for the whole of Africa”.
Resource Nationalism
In the intellectual realm of ideas, indigenisation falls within the broad framework of resource nationalism, where governments seek to assert more control over natural resources within their jurisdiction. As The Economist magazine noted in 2012, there is nothing particularly novel about resource nationalism with big oil business in the Middle-East and elsewhere having “suffered periodic bouts of nationalisation” over the years.
Indeed, according to The Economist, sometimes big and long-term oil contracts have sometimes been shredded and re-negotiated in the Middle East. The Economist also helpfully shows that this is not a feature that is unique to developing countries, with countries like Australia raising billions through new taxes on mining companies. As Mbeki said, some Western countries have in the past resisted takeovers of strategic businesses by foreign-owned companies.
In any event, the idea of national resource benefitting local populations has popular appeal among the ordinary people. It makes sense to them given the unpopular pattern where big multinationals have often benefitted their home countries and local communities often have little to show despite the exploitation of natural resources in their areas. Most African countries have in recent years moved to re-assert greater control over natural resources, with the aim of extracting more favourable terms in deals with multinational businesses.
In countries as diverse as Namibia, Ghana, Nigeria, Guinea and Zambia, they have all sought re-negotiation of mining deals in their jurisdiction, so as to extract more from the exploitation of their natural resources. So really, Zimbabwe is not alone in these efforts to assert greater control over natural resources.
Nevertheless, Zimbabwe has probably been the most vocal and also most aggressive on the issue of resource nationalism. Yet, as I demonstrate in this article, the country has not reaped rewards that are commensurate with the high volume of its rhetoric.
Why then, despite the moral appeal of resource nationalism in Zimbabwe and developments elsewhere on the continent has Zimbabwe’s indigenisation policy been the subject of so much controversy, which has placed its relevance and utility into doubt? What is the problem with the indigenisation policy in Zimbabwe?
State of the economy & Foreign Investment
The first major problem is that indigenisation is seen as incongruous with the call for greater foreign investment in a country that is in desperate need of such investment. Indigenisation dictates terms which are seen to dissuade foreign investors, worried by the insecurity of property rights. Part of the problem is the parlous state of the economy in Zimbabwe, which weakens the country’s bargaining power because of its desperate need for capital injection from investors.
Zimbabwe’s economy has contracted sharply in the last 15 years, with estimates suggesting a decline of 45% in the decade up to 2009, a period in which Zimbabwe gave the world the first hyperinflation in the 21st century. According to Steve Hanke of the Cato Institute by mid-November 2008, Zimbabwe’s annual inflation rate was pegged at a ridiculously high rate of 89.7 Sextillion percent. The Zimbabwean currency became virtually worthless and in early 2009 Government officially ditched it, opting for a multi-currency regime, with the US Dollar and the South African Rand being the dominant currencies.
In recent days, the Minister of Industry and Commerce has stated that industry utilisation capacity across the country stands at a miserly 39%. Most companies have closed shop, while the remaining ones are struggling with old and inefficient equipment. Unemployment is higher than 80% and recent dismissals in the wake of a Supreme Court judgment allowing businesses to sack easily on notice sent more workers into the streets. There is a serious energy crisis which is also forcing businesses to cut production. Most Zimbabweans have retreated to the informal sector, where they survive by vending and odd jobs.
Zimbabwe is saddled with huge arrears amounting to nearly $10 billion. The Reserve Bank of Zimbabwe says the Government Debt to GDP was 77 percent in 2014.  Traditionally investors used Government debt as a percent of GDP to assess the ability of a country to meet future debt repayment obligations. This therefore affects the country’s costs of borrowing, which in the case of Zimbabwe are exceedingly high.
In any event, lenders are coy over extending credit to Zimbabwe or its businesses. Zimbabwe is a notorious bad debtor and the country has earned itself a bad-credit rating. It does not service its debts. The IMF/WORLD Bank stopped lending to Zimbabwe in 1999 after Zimbabwe fell behind and neglected its debts.
Against this context, it is quite evident that Zimbabwe is in dire need of investment and does not have the luxury of setting strict standards that scare investors away. What it needs most is to lure investors.  To re-tool industry and resuscitate dying businesses, Zimbabwe needs foreign investment. But indigenisation is seen as an impediment. This much is acknowledged by industry associations.
A few years ago, Mike Ndudzo, the long-serving CEO of the Industrial Development Corporation, a parastatal told a parliamentary committee on industry and commerce that the indigenisation law was blocking foreign investors. He gave the example of Olivine Industries, where he said out of a total of 78 potential investors, only one had shown some interest but he added that the investor had eventually pulled out. “After about 3 months he just writes a small love letter saying I am sorry we are not going ahead with this transaction,” said an exasperated Ndudzo.
Ndudzo is not alone in thinking that the indigenisation policy is an impediment to foreign investment. As I have already stated, Patrick Chinamasa, the current Finance Minister has been making overtures to the international investment community, promising that the indigenisation law would be reviewed. It is this that has attracted a severe backlash from his Cabinet counterparts, among them the new indigenisation minister Patrick Zhuwao and Chris Mutsvangwa, the minister for war veterans.
In a scathing attack directed at Chinamasa, Zhuwao warned Government officials who “promise white people after drinking their wine at western embassies” that indigenisation laws would be revised. Clearly the two are pulling in opposite directions. There is no sense of balance in the demand for indigenisation and the call for foreign investment.
Policy inconsistency
From its inception, the indigenisation policy has suffered the triple burdens of inconsistency, confusion and lack of clarity. This isn’t helped by the fact that in the 7 years the law was established, the indigenisation portfolio has been handled by 5 different ministers, each with their own brand:
The first was Paul Mangwana, who presided over the passing of the bill into law in March 2008 and at the time, while talking the language of “revolution” was more cautious, acknowledging that it would need time for implementation, allowing businesses to readjust. He had no time to make any serious impact as the law was passed just before the March general elections.
However, his successor, Saviour Kasukuwere took a more combative approach during the period of the Inclusive Government, when Zanu PF was in a coalition with the MDC parties. Indeed, the implementation of the indigenisation policy, which the MDCs opposed, highlighted the policy attrition and dysfunctionality of the Inclusive Government, which consisted of parties with very different ideologies.
Undeterred by the MDCs resistance, Kasukuwere ramped up the pressure on foreign businesses, getting them to commit to indigenisation deals and to set up community share ownership schemes. He also set up a national Youth Fund which was supposed to also promote empowerment of the young people.
However, after the 2013 elections, President Mugabe shifted the combative Kasukuwere to the environment portfolio and replaced him with the softer and calmer Francis Nhema, a former financial services executive. As expected, Nhema toned down the rhetoric and took a more conciliatory approach. This softer approach was designed to manage perceptions over indigenisation and in this regard, he was in sync with the new Finance Minister, Chinamasa who was also keen to court the Bretton-Woods institutions and to reduce the negative perception among foreign investors.
However, Nhema’s reign was short-lived as he was sacked in January 2015 accused of being aligned to former Vice President Joice Mujuru, who had also been fired in December 2014. His replacement was Christopher Mushowe, whom, as this article shows later, had been implicated in a scandal over indigenisation deals in the Marange diamond fields in Manicaland. Mushowe’s short term in that portfolio was largely uneventful and unremarkable. Before he could even stretch his feet, he was replaced in August 2015, a few months after his appointment, by Patrick Zhuwao, a nephew of President Mugabe.
Zhuwao has taken a combative approach reminiscent of the days of Kasukuwere. One of his first major announcements was that he intended to impose a new indigenisation levy on all foreign companies, which will be used to fund indigenisation initiatives. His aggressive approach is a marked departure from the conciliatory approach of the Nhema era. Furthermore, Zhuwao has been highly critical of Chinamasa, the Finance Minister, whose efforts to build a cosier relationship with Western countries and the IMF have included promises to review indigenisation laws to make Zimbabwe investor-friendly. Zhuwao has a completely different message on the issue.
The Ministerial changes have not helped to build a consistent line in regard to indigenisation, with each new Minister bringing in his own way, often different from the predecessor’s. This has caused uncertainty and unpredictability for investors, especially those interested in long-term, capital intensive sectors. It’s hard to plan because the change of Minister might bring with it a change of tone and emphasis on key aspects of the policy.
It is not helped by the fact that while Government has raised the rhetoric over indigenisation, they have also played a blind eye to the same law in relation to business deals. As the Mail & Guardian reported a couple of years ago, the Government’s sale of its 63,25% stake in Astra Holdings, an a Zimbabwe Stock Exchange registered industrial company to a Japanese company Hemistar Investments got approval despite clearly not meeting indigenisation quota.
Similarly, the disposal of 67% of another Government stake in another manufacturer Cairns Foods to a foreign investor went the same way. The apparent by-passing of indigenisation laws brings confusion and uncertainty. In what circumstances will the Government turn a blind eye to the indigenisation laws?
These inconsistencies between rhetoric and practice are unhelpful and confusing to investors. This is why it is often said that the problem for investors is not that the indigenous policy exists, but that its implementation is mired in inconsistency, confusion and lack of predictability.
This article was first published on www.alexmagaisa.com Follow on Twitter @wamagaisa Contact at wamagaisa@yahoo.co.uk