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The trouble with Zimbabwe’s indigenisation policy

The trouble with Zimbabwe’s indigenisation policy

mugabe from the photo

By
Published: 22 October 2015

ZIMBABWE – 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 the 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.”

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.

Too much talk, but no action

In line with policy inconsistency, the Government talks too much but does very little to back up its rhetoric. The result is the country suffers reputational damage, while gaining little from the indigenisation policy.

In September 2015, Zhuwao announced that of the 61 community share ownership schemes countrywide, only 20 are operational and out of the $116 million pledged by companies to fund these schemes, only $40 million had been paid to date.

Further, while the law requires the establishment of a National Indigenisation and Economic Empowerment Fund (NIEEF), the CEO of the National Indigenisation and Economic Empowerment Board (NIEEB) disclosed to a parliamentary committee that the fund did not exist. This is 7 years after the enactment of the law and endless rhetoric about indigenisation and yet not a single penny exists in the fund which is supposed to assist indigenous people to buy shares in foreign companies.

The CEO said the establishment of the fund had been stalled by the poor state of the economy. This is probably the fund that Zhuwao now wants to capitalise by the imposition of a new levy on foreign companies. The challenge is that the levy will be seen as yet another ‘tax’ on companies that are already struggling in a depressed economic environment.

But why has less than half the community share ownership schemes been established and so little that was pledged been paid? According to a report in The Herald, the state daily, abuse of funds by community leaders, including chiefs and politicians, and the failure by companies to honour pledges are part of the reasons for this gap.

Way back in 2013, after his appointment as head of the ministry, Nhema, pledged to investigate the abuse of funds, but it all came to nought. When the parliamentary committee on indigenisation quizzed Kasukuwere over indigenisation deals during his tenure, his response was to accuse the committee Chairman of conducting a witch-hunt.

The fact of the matter is that there is a big mismatch between Government rhetoric on indigenisation and the actual practice where little to nothing is being done but the net effect of the rhetoric is to scare away potential investors.

Lack of a suitable model

Part of the problem is that Zimbabwe has struggled to settle on a model of indigenisation that works. It is a model that would meet the local demands while also making foreign investors more comfortable. It is a model that must be clear and certain, whose implementation is not subject to the whims of a Minister.

The lack of an agreeable model was evident in the debate a few years ago between former indigenisation Minister Saviour Kasukuwere and former central bank Governor Dr Gideon Gono, over the former’s attempts to force banks and financial companies to implement indigenisation. Gono stood firm against the Minister’s demands, defending banks and warning of the dire consequences of forcing them to indigenise using the prevailing model.

He made propositions of a model. Eventually, the matter ended without resolution although the Minister failed to force indigenisation in the banks. This struggles within Government do not inspire confidence in the investment community but the search for a suitable and sensible model is a necessity.

Rent-seeking behaviour

The indigenisation policy and its implementation have provided numerous rent-seeking opportunities, fuelling corruption and abuse of funds. All this gives rise to extra-legal costs which businesses must bear when investing in Zimbabwe.

Persons at various stages of the investment application process are trying to extract a rent from an investor and the indigenisation certification process only adds a new layer of opportunities for seeking these rents, adding to the costs of doing business in Zimbabwe.

Brainworks Scandal

An excellent example of rent-seeking behaviour and corruption is the scandal concerning a company called Brainworks Invetsments, which was contracted by Government ostensibly to provide advisory services in the indigenisation deals with various companies.

One of the deals was over the indigenisation of Zimplats, a platinum mining company owned by Implats of South Africa. In early 2013, Zimplats announced that it had agreed an indigenisation deal with the Government, worth $971 million. This deal was later heavily criticised by President Mugabe who lambasted Kasukuwere, the then Minister, for getting a poor deal.

The rent-seeking issue arose when Brainworks Investments, sent a bill of $17 million to Implats demanding payment for what they called “fees for provision of advisory services to the Government of Zimbabwe and the NIEEB in the implementation of the Zimplats indigenisation plan”.

What was in fact happening here was a private company contracted by Government to advise it on the indigenisation deals was billing the foreign company for services that it had not sought. There was no contract between this Brainworks Investments and Zimplats and yet Zimplats was now expected to meet the bill for services rendered. Quite reasonably, Zimplats refused to pay. It would be tantamount to paying one shareholder over others, which would be unfair and unlawful, they added.

The problem was exacerbated by the fact that the appointment of Brainworks to take on that role had not followed the rules of public procurement as required by law. They had just been appointed without following tender procedures, raising a breach of the law and suspicions of preferential treatment and corruption.

For a company to earn such a lucrative contract, there is a high likelihood that senior politicians were involved in the deal. Nevertheless, despite these clear breaches of the law, and impropriety, absolutely no action has been taken by Government.

Marange Diamonds 

Another deal that has raised a stink involves the Marange-Zimunya Community Share Ownership Trust (MZSOT), in the diamond fields of Manicaland. In early 2013, President Mugabe was the guest of honour at the launch of the MZSOT. There, he was presented with a dummy cheque for $50 million, representing a $10 million pledge by each of the 5 diamond mining companies operating in the diamond fields.

Nevertheless, it later emerged that these pledges had not been met. When they appeared at a parliamentary committee hearing, the company executives flatly denied that they had ever made those pledges, meaning the whole ceremony at which President Mugabe had presided had been one big charade.

It turned out to have been an electioneering gimmick used to court political support before the 2013 elections. Yet none of the leading characters faced any action for these gross and fraudulent misrepresentations to the President, the nation and the Marange-Zimunya communities, who were led to believe the trust would be receiving $50 million.

Mushowe, who was the Minister of State for Manicaland, was also accused of having directed companies to pay some funds into a bank account that he controlled. His representations to the parliamentary committee were inconsistent and farcical. He denied having written letters but when he was confronted with written evidence could only manage to stutter and say “I had forgotten that I wrote the letter …” Instead of dealing with the enquiry, he accused the committee of conducting a witch-hunt.

While one would have expected President Mugabe to take decisive action in light of potential impropriety, Mushowe was instead promoted to Minister of Indigenisation and Empowerment, the very same portfolio in respect of which he was being accused of improper conduct and abuse! It is hard to see how that was supposed to instil confidence in the policy of indigenisation or among investors.

It is these high levels of flagrant corruption and abuse that raise a stink around indigenisation, which is perceived as an opportunity for grand looting by senior politicians. Added to this are allegations of senior officials extracting bribes and extorting foreign companies, executives and potential investors, with promises of preferential treatment. These extra-legal fees raise the costs of investment and doing business in Zimbabwe. Further, this behaviour increases internal resistance and opposition to the policy and this internal attrition reflects badly outside the country.

Conclusion

In his New African article, Baffour Ankomah thinks “there is stiff resistance by the metropolitan powers to indigenisation in Zimbabwe”. This is expressed in various ways, he says, including by “multi-national companies refusing to invest or threatening to pull out of Africa”.

President Thabo Mbeki also thinks President Mugabe and Zimbabwe are being punished for daring to be different and for challenging the established economic order in terms of resource ownership and that the bold policies on land and indigenisation are perceived by “powerful forces”as setting a “bad example” for the rest of Africa.

Their support of resource nationalism is understandable. Indeed, the global economic order is patently unequal and skewed in favour of the powerful countries. The issue of multinationals unfairly exploiting natural resources in developing countries has been topical and relevant for many years. It is important for African countries to maximise on their natural resources for development. There can be no doubt that these are important issues that require robust analysis and engagement.

Yet ultimately, analyses that focus only on the external relationship between Zimbabwe and the West or Africa and the West, and neglect the internal challenges, miss the fatal flaws that plague the implementation of the ideas. The problem is not with the ideas, which otherwise have popular appeal, but with implementation, which is plagued by inefficiency and corruption.

Zimbabwe has pursued the idea of indigenisation, but it has not designed a model that is commensurate with its circumstances – a policy that seeks to promote social justice in relation to resource exploitation while at the same time attracting investors to take part in the exploitation. In this regard, Zimbabwe stands as a supreme example of the flaws in the system that undermine the ideas.

Economically, Zimbabwe is struggling to make ends meet. Its problem right now is not a shortage of areas in which the local people can invest, but that the local people have no capital. In Harare and Bulawayo and across the country, there are hundreds of industries which are dormant and in need of revival.

The reason why locals cannot revive them is simply that they lack capital. They could go and occupy those industries, as thousands did on land, but without capital, nothing will be achieved. The simple fact is that Zimbabwe is in dire need of foreign investment and rather than have policies that scare away investors, it needs investor-friendly policies that make Zimbabwe attractive.

But there are serious weaknesses, as explained in this article – rent-seeking behaviour, including bribery, corruption, extortion, and outright theft, by public officials and politicians and the indigenisation policy and implementation have only opened up new rent-seeking opportunities. There is also policy inconsistency and lack of clarity.

Furthermore, there are mixed and confusing messages over indigenisation, all of which suggest dysfunctionality at the highest levels of Government. One Minister says one thing on indigenisation and the next minute another Minister says a totally different thing.

In addition, oft-times, the rhetoric is not matched by what actually happens in practice. If Zimbabwe benefitted from indigenisation while making those bombastic statements, it would be far better, but the reality is that nothing of substance has actually materialised in the 7 years since the indigenisation law was promulgated.

Yet, simply on account of the threats and noise around the policy, Zimbabwe has suffered reputational damage in the community of investors, losing and scaring away investors at a time when it is in desperate need for investors’ attention.

Like land reform, Zimbabwe’s indigenisation policy has significant moral pull among the subalterns of this world, in particular those who have suffered historical disadvantage on grounds of race and gender. This is why renowned pan-Africanists like President Mbeki applaud and defend it. But also like land reform, indigenisation is an idea whose moral appeal is diluted by poor planning and grossly inefficient and corrupt implementation.

More importantly, indigenisation is lacking a model that properly and equitably balances the competing demands of satisfying local participation in business while at the same time keeping investors comfortable, interested and willing to invest in Zimbabwe. It is this urgent task that must occupy Government.