GOVERNMENT’S incremental climb down on the much-maligned indigenisation policy through special economic zones (SEZ) set up around the country where firms would circumvent the empowerment laws would only be effective if key enablers such as policy reforms, infrastructure development and availability of utilities such as water and electricity are addressed.
Repeated calls from business to amend the Indigenisation Act lacking in consistency and clarity seven years after President Robert Mugabe signed it into law — and its tendency to repel investment — have apparently forced government to consider sidestepping its own policy and create the SEZs to woo the much-needed investment.
Under the indigenisation law — the ruling Zanu PF party’s signature policy — foreign-owned companies are required to cede 51% shareholding to locals and remain with at most 49%, a requirement most investors have baulked at. The devastating impact of the law is evidenced by the paltry foreign direct inflows into the country since its promulgation.
According to the Economic Development in Africa Report 2014, FDI stagnated at US$400 million between 2012 and 2013 in Zimbabwe — far below other countries in the Sadc region. Mozambique, received US$5,9 billion, South Africa attracted US$8,1 billion while Zambia received US$1,8 billion during the same period, according to the report. Last year, Mugabe travelled to China and witnessed how the country modernised through SEZs.
In China, SEZ were established by Deng Xiaoping in the early 1980s as part of its “open the door, change-the-system” policy. SEZs are designated geographical regions that operate under special economic regulations depending on the area, such as tax exemptions. However, their creation in Zimbabwe to emulate the likes of China faces daunting obstacles.
These include infrastructure that is rundown through neglect and mismanagement, part of which is the cash-strapped National Railways of Zimbabwe which needs a US$1 billion cash injection for revival, according to Transport minister Obert Mpofu. The absence of a properly functioning railway system is a major obstacle to the successful implementation of SEZ in the country.
Further hampering the development of the SEZ is the lack of reliable and affordable electricity, water and frequent power cuts. Many businesses have had to turn to high-voltage diesel generators to sustain production during lengthy periods of power outages, a move that has increased the cost of production and therefore the competitiveness of products in a market teeming with cheaper foreign products.
The country needs to get its priorities right by addressing these impediments if SEZs are to be successfully implemented, says economist Godfrey Kanyenze. “What we need is to sort out the enablers such as electricity and water,” Kanyenze said. “Our railway system is in bad shape and that is critical for the economic zones to operate.
We need to be clear what comes first, the cart or the horse.” Analysts say the planned creation of SEZ amounts to bringing back the Export Processing Zones (EPZ) — which failed due to discord within various government departments — under a different name. EPZs were initially established under the Income Tax Act where exporters who operated within such regions were given tax exemptions, but otherwise enjoyed no special exemptions from the ordinary laws of Zimbabwe.
In 1995 the EPZ Act was promulgated which established a parastatal responsible for establishing export processing zones, attracting investment to the zones and issuing licences for businesses to operate within them. But in 2007, the EPZ Act was repealed by the Zimbabwe Investment Authority Act. As to why it was repealed Veritas, an organisation, which provides information on the work of the Zimbabwean parliament as well as the country’s laws, notes that “a feature that may have reduced the effectiveness of the EPZ Act was that any premises or place could be declared an export processing zone; even single rooms could be so declared”! “Virtually any manufacturing business which was export-oriented to at least some degree could get a licence under the Act, and many did.
They did not have to move to a special zone to get the tax benefits accorded to them under the Act, but could remain where they were.” For the SEZs to be effective, “excellent infrastructure must be provided within the zones so that businesses can operate with maximum efficiency” and significant involvement of the private sector is needed as well as close links with the rest of the country’s economy, Veritas also said. “It is open to doubt whether our government will be able to meet all, or indeed any, of these conditions in its planned SEZ,” the organisation warns. It is hoped that the concept of SEZ will not be hamstrung by conflicting policy statements from various government officials on its implementation, as was the case with indigenisation.
In one instance Information minister Jonathan Moyo, in an interview with a local weekly last year, claimed the Production Sharing Model and the Joint Empowerment Investment Model had been identified as the foremost vehicles through which the indigenisation policy would now be implemented. Only for then Indigenisation minister, Francis Nhema to dismiss Moyo’s claims saying his pronouncements had left “a sour taste in his mouth”.
Last week Vice-President Emmerson Mnangagwa said SEZ are expected to boost foreign direct investment into the country as part of efforts by government to create a friendly investment climate. “No country can develop on its own,” he said. “Under special economic zones a place such as Bulawayo is of major focus. Bulawayo needs to attract global companies to invest and there are companies which are searching for space to relocate and set up manufacturing firms.” But economist John Robertson has words of advice to government: instead of sidestepping the indigenisation law, government must scrap it altogether.
“The law has totally confused investors,” Robertson said. “Government needs to repeal the Act completely as no amount of amendments will save it.”