This article was originally published in Africa in Fact, the journal of Good Governance Africa.
By Owen Gagar
The Zimbabwean government has apparently bowed to pressure by effecting changes to its controversial Indigenization and Economic Empowerment Act, which compels non-indigenous investors to cede at least 51 percent of the shares in their companies to black Zimbabweans, but the furor and confusion around the legislation show no sign of abating.
After months of haggling, Finance and Economic Development Minister Patrick Chinamasa and Youth, Indigenization, and Economic Empowerment Minister Patrick Zhuwao agreed to introduce changes to the Act on Jan. 4 this year. The turnaround was seen as an acknowledgment of the need to stimulate foreign direct investment, but has since been attacked by other members of the ruling party.
Despite his apparent agreement to changes in indigenization regulations, Zhuwao has continued pushing for a hardline stance. On March 23, he announced that the cabinet passed a resolution to cancel the licenses of non-compliant companies. “Business has continued to disregard Zimbabwe’s indigenization laws, as if daring our president and his government to do something about their contemptuous behavior,” he said.
The indigenization law was enacted in 2007 ahead of the 2008 national elections, when the ruling party, ZANU-PF, turned to populist policies to shore up its waning support. At the time, the Zimbabwean economy was ravaged by hyperinflation, which peaked at 79.6 billion percent in November 2008, according to Professor Steve Hanke, an expert on exchange rate regimes at Johns Hopkins University. The government said it wanted to economically empower indigenous Zimbabweans by ensuring they acquired controlling stakes in foreign companies.
Economists, business organizations, and diplomats accredited to Zimbabwe questioned the policy, which they blamed for low investment levels in the country as compared to other countries in the region. According to the United Nations Conference on Trade and Development, Zimbabwe recorded $545 million in foreign direct investment in 2014. By comparison, South Africa recorded FDI inflows of $5.7 billion, Mozambique $4.9 billion, and Zambia $2.4 billion.
Nevertheless, ahead of the 2013 elections, the party again based its campaign on the idea of indigenization, under the theme “indigenize, empower, develop, and create employment.” It gained a controversial win at the polls, but businesses have created an obstacle to new investment by resisting the new regulations.
The amendments to the act will maintain a 51/49 percent ratio of local/foreign ownership for resource-based sectors of the economy such as mining, as well as other resources, including water, air, soil, animals, and vegetation. However, non-compliant companies will no longer be threatened with seizure or closure, but will instead be required to pay an indigenization compliance levy as a tradeoff for non-compliance, with a cap of 10 percent of gross turnover.
Previously the act stipulated that foreigners could only hold a majority share for five years from the date of commencing business. The new regulations will allow foreigners to own a controlling stake in companies operating in the non-resources sectors of the economy—including manufacturing, financial services, tourism, construction, and energy—for up to 20 years, which may be extended.
The regulations also make it easier for companies to comply with the legislation by awarding empowerment credits to companies that ensure value addition, skills development, and vocational training, as well as socio-economic development initiatives that include enterprise development, preferential procurement, and housing for workers. Under the new amendments, companies have until March 31, 2016, to submit their indigenization plans to the Zimbabwe Investment Authority.
Critics say the recent amendments change little, given that companies will still be expected to cede 51 percent of their shares. “The fundamental principles remain unchanged and [the amendments] will not remove the impediments to both domestic and international investors,” Eddie Cross, an economist, legislator, and economic advisor to opposition leader Morgan Tsvangirai, told Africa in Fact. “The 10 percent levy will cripple every company in the country if implemented.”
John Robertson, an independent economic analyst based in Harare, believes the government should focus on creating an enabling environment that is conducive for both local and international investors. “Indigenization should be a natural process, not something that is driven by the threat of punishment,” he said. “The amendments [make] everything worse. The new 10 percent requirement will destroy already existing companies and discourage new investors.”
Zimbabwe National Chamber of Commerce chief executive Christopher Mugaga, also an economist, suggests that the term “indigenization” is itself a problem. “It implies majority ownership by local or indigenous people, even if cosmetic changes are applied,” he told Africa in Fact.
Writing in Zimbabwe Independent, a privately owned business weekly, Sternford Moyo, a corporate lawyer who also sits on various boards, called for a balance between the country’s need to stimulate investment and its need to ensure that communities benefit from it. The requirement that investors relinquish a controlling share in their investments is simply unrealistic, he said. “No right-thinking person will feel happy to invest his or her money and immediately lose control over the investment.”
Zimbabwe was experiencing serious liquidity problems, he argued. The country’s economic environment was not conducive to sellers obtaining value for their investments, as demonstrated by a recent collapse in the value of securities listed on the Zimbabwe Stock Exchange. (On December 31st, 2015, the ZSE’s market capitalization plunged to $3 billion from $4.3 billion in January of that year.) A law that made it compulsory to dispose of shares in such an environment, said Moyo, would be inherently unfair.
The government’s attempts to develop empowerment legislation should not focus on shareholdings in existing entities, he added, questioning the logic of the government’s approach to resources, particular in mining. “One cannot have mining companies buying [the right to mine] a mineral in exchange for their shares and at the same time paying royalties for extracting a resource they will have paid for with their shares.”
Like other commentators, Moyo was also critical of the proposed empowerment levy, which would be impossible for most corporates to carry, and would in any case be virtually unenforceable given an environment in which no money was available to purchase shares. He called for further amendments to the act. “Investors need confidence that they will be allowed to control and benefit from their investments,” he concluded.
Currently, Zimbabwe is experiencing a crippling liquidity crunch that has resulted in company closures and high unemployment. Zimbabwe Congress of Trade Unions secretary general Japhet Moyo told Africa in Fact that 95 percent of Zimbabweans were not formally employed, with only 5 percent in formal employment, due to massive job losses. Zimbabwe’s public debt is around $8.4 billion, according to the 2015 Mid-Term Fiscal Policy Review presented to parliament in August 2015 by Chinamasa.
Since his appointment in 2013, Chinamasa has worked to re-engage key institutions, such as the International Monetary Fund and the World Bank, in an effort to create conditions that attract new finance from international lenders. Under the terms of a new program, negotiated by Chinamasa, the IMF has resumed its monitoring of the country, which includes evaluating the implementation of the country’s economic programs.
As part of this, the government has committed itself to clarifying and amending its indigenization law. However, Chinamasa has drawn flak from hardline ministers who view the amendments as an admission that the ruling party has failed to implement the program indigenization and thus that it won the 2013 election on empty promises, according to senior ZANU-PF officials who spoke to Africa in Fact in confidence. These ministers believe that amending the regulations will hurt the ruling party ahead of the 2018 elections.
Chinamasa announced amendments to the indigenization law on Dec. 24 last year. On Christmas Day, Chinamasa was roundly criticized by the empowerment minister, Zhuwao, who accused him of “treachery” for suggesting the changes to the indigenization legislation. Zhuwao was supported by Higher Education Minister Jonathan Moyo, who tweeted that Chinamasa was “out of order.”
Although the indigenization law is yet to be amended, Zhuwao’s March announcement regarding the cancellation of the licenses of non-compliant businesses has added further confusion and uncertainty to Zimabwe’s business environment.
Owen Gagare is the news editor for the Zimbabwe Independent, a business weekly. He has previously worked for two national daily newspapers: NewsDay and the Chronicle. He is based in Harare, Zimbabwe.
[Photo courtesy of HBarrison]