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Indigenisation: From bad to worse

This columnist, and many others, leaders of Zimbabwe’s business community, investment specialists and advisors, economists, national and international bankers and financiers have repeatedly voiced their concerns at the manner in which Zimbabwe has sought and continues to pursue indigenisation and economic empowerment of the populace.

Eric Bloch

No one is opposed to the principle of indigenisation and its aims to eradicate poverty and suffering afflicting of most Zimbabweans. However, in expressing their well-founded reservations about Zimbabwe’s laws and policies for economic indigenisation, critics say such laws and policies not only violate property rights, but are also counterproductive in the extreme. Not only do these laws and policies discourage and alienate much-needed foreign direct investment (FDI) and investment by non-indigenous Zimbabwean residents, but have heretofore only been geared towards enriching the favoured, politically well-connected few.

The manner in which indigenisation has been carried out has intensified business closures and downsizing, fuelled unemployment within the formal sector, worsened widespread poverty, hardships and suffering that afflict most Zimbabweans. Moreover, those policies have effectively been a very major contributor to the withholding of critically-needed international lines of credit, and especially so because they run counter to many Bilateral Investment Promotion and Protection Agreements (Bippas) entered into between Zimbabwe and other countries.

Tragically, despite the extensive and authoritative advice given to government by many as to both the devastating effects and consequences of the existing legislation and the application thereof, and as to how constructive and beneficial indigenisation and economic empowerment could be achieved, the political hierarchy consistently and intentionally and obtusely disregards that advice and persist with their destructive policies. Moreover, they exacerbate and compound the damage done by those endlessly making inflammatory statements and demands, including frequent threats of reneging upon agreements that entered into with business parties which, despite the negatives of the policies, seek to be compliant therewith.

Recently there has been a very prime example of such threatened reneging of a lawfully and morally binding agreement; that of government’s intent to reject the agreement it had entered into with Zimbabwe’s largest and one of the world’s biggest platinum producers, Zimplats.

Having reached an approved and legal agreement, statements by President Robert Mugabe imply an intent to renege on that agreement. He apparently claims the agreement is illegal or invalid, in that it prescribes payment for shares acquired, or to be acquired, by the sovereign wealth fund, whereas that payment has already been effected by virtue of the mineral resources availed to Zimplats. That fuels a query as to how often must a mining enterprise pay for mineral resources?

At inception it has to obtain, against payment, the mining claims and attendant licences. Thereafter, as it extracts the minerals, it has to pay royalties. Then, when it makes a profit from its operations, it is subjected to corporate tax. Thereafter, when it distributes any of such profits to shareholders, dividend withholding taxes are applied. In addition to all that, it is also subject to diverse indirect taxes, including value added tax (Vat) and customs duties, as well as periodic licence renewal fees.

Although the threatened reneging on the agreement with Zimplats has not yet occurred, and that company has said it is interacting with government and seeking legal advice, nevertheless, it has intensified the distrust and concerns of the international community in general and of potential investors in particular. This is constraining attainment of any substantial economic recovery for the debilitated state of the economy, to an ever-intensifying extent since 1997, critically requires as one of the key components of recovery, very extensive investment.

Such inflows are greatly needed to ensure a net favourable international trade balance, instead of imports vastly exceeding exports, with consequential negative effects upon diminishing Zimbabwe’s magnitude of international debt. Most of all, without investment, and without comprehensive business confidence in the future, Zimbabwe cannot create, and thereafter continue, needed formal sector employment.

Thus not only does Zimbabwe very urgently need to repeal the negative indigenisation legislative provisions, substituting therefore positive and constructive motivation and facilitation of wide-ranging (albeit progressive) economic empowerment, but to do so in a manner that encourages investment throughout the economic sectors, instead of deterring it. Key to so doing will be unequivocal investor security, with total observance of all fundamental provisions of property rights, inclusive of incontrovertible assurance of full compliance with Bippas.

Also necessary are investor-conducive taxation legislation and incentives. Most essential of all is that government be completely transparent in honouring and complying with any and all agreements it enters into, and that such agreements be justifiable internationally in world-recognised, courts of law. In addition, government needs to facilitate, enable and motivate ready transition of enterprises from the informal to formal sector by removing many barriers to formal sector operations.

A very slight amelioration of the threatened governmental disregard for agreements it has entered into, and for rescission thereof, or payment defaults, was a statement by the President last week, that the indigenisation mandatory threshhold for banks should be lowered, although he only envisaged a very marginal reduction in the threshhold from 51 % to either 49 or 50 %.

In reality, if Zimbabwe wishes its banks to have access to adequate international lines of credit for, and loans to, its banks, it has to ensure complete investor and lender confidence, and hence the mandatory indigenisation threshhold in the financial sector should not be greater than 25%. Nevertheless, it must be hoped that the Presidential statement is a moderate move forward to a practical, realistic and effective policy regime for indigenisation and economic empowerment, and will lead to further policy changes, including withdrawal of any intents to nullify or breach agreements that government has entered into.

Failing a major transformation in the legislation, policies, and implementation and enforcement thereof, the Zimbabwean economy will continue struggling, and the circumstances of most of the populace, already horrendous, will decline from bad to worse!

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