The legislative history of Zimbabwe has few statutes which have generated as much controversy as the indigenisation law. Another significant feature of this legislation is that it has not generated as much litigation as other controversial statutes.
STENFORD MOYO CORPORATE LAWYER
This points to the fact that most right thinking Zimbabweans have remained confident that it is possible to achieve the legitimate aspiration of affirmative action in favour of previously disadvantaged groups whilst at the same time creating an investor friendly environment.
Balancing the interests of investors and the interests of communities where the investment takes place has become an issue of great importance in global investment debates. It has been correctly observed that the issue is tied to an emerging norm, namely the right to development. This is particularly so in the area of extractive industries where depletion is the inevitable consequence of extraction.
Even investors no longer advocate for a situation where resources are extracted and the communities remain with nothing to show but a hole in the ground as evidence of the fact that the land was, prior to depletion, generously endowed with resources.
On the other side of the coin, no one benefits when a country generously endowed with resources allows the resources to be sterilised in the ground due to lack of capital required to ensure extraction so that people may benefit from the resources and develop their communities.
Extractive industries, particularly mining, are capital intensive. Allowing the resource to remain in the ground gives rise to a danger of substitutes being developed and loss of value and benefits of the resource.
Consequently, the correct approach is one that makes the country investor friendly whilst ensuring that the communities do benefit from the investment. The following will have to change if the law is to succeed:
The requirement that investors dispose of 51% or the controlling shares in their investments is simply unrealistic. No right thinking person will feel happy to invest his or her money and immediately lose control over the investment.
Presently, Zimbabwe is experiencing serious liquidity problems. The collapse of values of securities listed on the Zimbabwe Stock Exchange is testimony to the fact that our environment is not conducive to sellers obtaining value for their investments. Consequently, a law that makes disposal of shares compulsory in such an environment becomes inherently unfair. Account has to be taken of the fact that there are corporate law restrictions on companies financing the purchase of their own shares.
The law itself allows investors to choose their indigenous partners. An indigenous Zimbabwean is widely defined to include any person who was disadvantaged by discrimination prior to April 18 1980. However, in the mining sector the minister has purported to confine beneficiaries to designated state related entities. Our history of state participation in mining is not a chronicle of successes. It is understandable that investors have displayed a reluctance to forge partnerships with state related entities.
Government already controls large mining claims. What is needed is development of the mines and operating them as profitable concerns. The current approach, with all due respect, will have the effect of spreading corporate failures instead of resuscitating the failing projects. In this regard, government energies may be said to require redirection.
Empowerment should not focus on shareholding in existing entities. In extractive industries, it generally becomes necessary to raise money to fund the development of projects such as nose in the mining sector. Corporate action is one way this can be achieved. Where some of the shareholders do not have the financial resources to follow their rights, it becomes very difficult to achieve growth and development.
In mining, government has insisted on valuations that take into account the value of the minerals in the ground. The minerals in the ground belong to the state. All that mining companies acquire, is a right to mine. For that right, they pay royalties to the state based on levels of extraction. Royalties are paid in recognition of the fact that they are extracting a resource owned by the state. The requirement that the value of the mineral in the ground be taken into account when valuing mining companies for the purposes of indigenisation transactions is based on a premise of acquisition by the companies of ownership of the mineral in the ground. That premise is not correct. If it were, the theoretical basis for charging royalties would fall away. In other words, one cannot have mining companies buying the mineral in exchange for their shares and at the same time paying royalties for extracting a resource they will have paid with their shares.
Where a company desires to sell its shares and there are no buyers with financial resources to purchase the shares, it becomes unreasonable to penalise the company for having failed to sell its shares within the timeframe given by the state. The implementation of our indigenisation laws does not appear to take this into account.
It would have been better for government to expand the economy by encouraging the creation of new successful companies supported by the state instead of focusing on acquisition of shares in companies which are largely undercapitalised and facing a multiplicity of challenges to remain operational.
The proposed levy will aggravate the current corporate failures. Although it will be reduced in proportion to a company’s compliance with indigenisation laws, the starting point at the proposed 10% of gross turnover will prove virtually impossible for most corporates to carry. In any event, achieving compliance will be problematic in an environment where there is no money to purchase shares in these companies.
There is need to amend the Indigenisation and Economic Empowerment Act. Without such amendment, the laudable efforts of some of our ministers to attract much needed investment into our economy will continue to face obstacles. Investors need confidence that they will be allowed to control and benefit from their investments.
The Indigenisation and Economic Empowerment Act, as it currently stands, is not a framework within which such confidence can be built.
Moyo is a respected corporate lawyer and sits on boards of leading firms in the country.