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Indigenisation in Zimbabwe: When “clarification” is an admission of defeat

April 13, 2016

Alex T. Magaisa

 

 

Last week, I wrote on the ugly feud between two government ministers: Patrick Chinamasa at Finance and Patrick Zhuwao, at the Indigenisation and Empowerment desk http://alexmagaisa.com/zimbabwes-indigenisation-mess/ Zhuwao had given an ultimatum to all foreign companies to comply with the country’s indigenisation law by the 31st March 2016 or face closure. On the eve of the deadline, Chinamasa issued a statement declaring that all foreign financial institutions had complied with the law. Zhuwao disagreed and issued an angry rebuttal. It was a messy public fight.

 

Even worse was that this was the second time in less than four months that the two Ministers were publicly clashing over what is supposed to be a critical economic policy, suggesting policy inconsistency. On that occasion, the dispute appeared to have been resolved, with Chinamasa forced to make a humiliating climb-down after revising regulations he had issued just eleven days earlier. Their boss, President Mugabe did not intervene – he was on holiday in Dubai. This time, however, he has intervened, saying: “It is therefore fit and proper that I provide clarification on this very vital national policy, for the guidance of Government Ministers, the business community and would-be foreign investors”.

 

Between the two Ministers, Chinamasa will obviously be the happier man, his position having received firm backing from his boss. Zhuwao, on the other hand, has to eat humble-pie. All the bravado and aggression of recent months has come to nought.

 

But what does the presidential “clarification” actually entail? What is presented as a “clarification” is actually a policy shift of seismic proportions. In many ways, the statement represents a significant retreat by the Zimbabwe government on its flagship indigenisation policy. In respect of existing businesses, it represents a total abandonment of the current law and policy, even though it is presented more generously as a mere “clarification”.

 

Lame-duck Indigenisation Ministry

 

The “clarification” severely cuts down to size the hitherto aggressive Indigenisation Minister after taking the role of supreme overlord and chief enforcer of indigenisation in the all economic sectors. It states that indigenisation compliance matters are the exclusive mandate and responsibility of line ministries, not the indigenisation ministry. In finance, for example, the Banking Act takes precedence over the Indigenisation Act. As the indigenisation minister has no mandate under the Banking Act, it means he has no power to close banks as he was threatening to do. He was overreaching. The President has just told him that he has not got the power that he was claiming, itself a severe rebuke.

 

Exempting foreign financial institutions

 

A second effect of the “clarification” is that foreign financial institutions are now virtually exempt from the current indigenisation law. They no longer have to concede 51% local ownership. The face-saving measure is that the institutions will be expected to contribute by “financing facilities for key economic sectors and projects, employee share ownership schemes, linkage programmes and such other financial empowerment facilities as may be introduced by the Reserve Bank of Zimbabwe, from time to time”. This is a very broad statement which means nothing because the RBZ does not have the power to run banks. They will do what is economically prudent. The RBZ itself knows its limits and will know not to affect financial stability by forcing banks to do imprudent activities in the name of indigenisation. It’s a complete abandonment of the current indigenisation law in respect of foreign financial institutions.

 

Exempting existing business in the natural resources sector

 

A third clarification is that existing businesses in the natural resources sector have also been given a virtual exemption from complying with the indigenisation law. This is despite the elaborate and aggressive wording in the statement which claims that indigenisation in the natural resource sector is “non-negotiable”. The truth is that the government has just backed down from its previous position by permitting existing businesses in that sector to continue operations without complying with the 51% local ownership requirement, as long as they ensure that “local content retained in Zimbabwe is not less than 75% of gross value of exploited resources”.

 

The “local content” apparently refers to value retained “in the form of wages, salaries, taxation, community ownership schemes and other activities such as procurement and linkage programmes”.

 

Sounds sweet but what exactly does it mean and how will it be enforced? It’s too broad, vague, and indeterminate. There is no definition of what is meant by “gross value of the exploited resources”. Presumably, it gives existing businesses flexibility but it also results in a great deal of uncertainty. What I foresee here is a lot of creative compliance, effectively making the law and policy redundant. Government has just conceded defeat to existing businesses because they know it would be suicidal to close the businesses for failure to comply

But this is also a very fundamental shift in policy, as government is literally exempting existing business from having to comply with the indigenisation law. Its policy prior to this was to insist that they must comply, but some business had resisted. In this regard government has backed down and admitted defeat, even though it won’t say so.

 

Exempting existing businesses in the reserved sector

 

A third significant area where the government makes another retreat is in respect of the so-called “reserved sector” businesses that are supposed to be exclusively for Zimbabweans. Here again the government makes two huge concessions: the indigenisation rules do not apply to existing businesses in these sectors or where a special dispensation is granted by the line Minister. In other words, current businesses don’t have to comply and where a foreign investor wants to operate in the reserved sector, the Minister can give them a special dispensation and therefore avid the indigenisation law.

 

But actually, what this policy creates are massive rent-seeking opportunities for Ministers and government officials, which will only serve to fuel corruption: foreign investors will have to factor in bribes for special dispensations if they want to avoid the indigenisation law. It’s a classic case of a law supposedly created to serve the public interest, which ends up serving private interests of corrupt government Ministers and officials who have leverage over investors by virtue of their legal powers.

 

Creating uncertainty

 

The trouble with all this is that businesses can’t be too comfortable with the statement: the President leaves sufficient room to change again, should it become expedient to do so. “The laws were not set in stone, he said and would be changed from time to time,”
reports The Herald  referring to President Mugabe's statement. “Government shall from time to time decide and publish in the gazette, any changes to the list of businesses falling under the [reserved] sector”  In other words, all this can be easily changed on a whim. It leaves investors guessing, unsure and uncertain and government has been flip-flopping in respect of this policy since it was introduced in 2008. 

 

The trouble is that expediency is often linked to election campaigns. If it becomes necessary to appease the electorate and appear “revolutionary”, all those seemingly pragmatic and reasonable words will be cast way, in favour of more aggressive rhetoric. What we are seeing is that indigenization has never been a firm policy that is backed by belief and conviction, but an election gimmick. It was used in the 2013 elections, complete with fake $10 million cheques, and it will be revived again as we go towards 2018.

 

Why the change in tone?

 

First, the President is reconciling himself with reality of economic collapse. The economy is in the doldrums and there is no movement. You can’t insist on grabbing and destroying the little that you have. He promised 2 million jobs in the 2013 elections campaign but to date all that has happened are job losses. How do you insist on shutting down businesses and losing jobs when you are desperate for new investors?

 

Second, it’s an admission of defeat. When you make a threat and you have a law to back it up, you look silly if you are unable to enforce it. The face-saving strategy is to pretend that you’re clarifying the law and policy when in fact you are admitting defeat. This is why he has said the law should be amended to reflect the new policy. It’ a defeat but it sounds better to call it a policy clarification.

 

Third, President Mugabe is responding to the call from foreign investors who are concerned by the indigenisation laws and the inconsistency in their application. His recent trip to Japan must have been a chastening experience, especially with two of his Ministers engaged in a public feud while he was trying to persuade investors. How do you persuade an investor to come to Zimbabwe when one of your ministers is issuing aggressive declarations threatening to shut down businesses for failing to meet the controversial indigenisation law? It must have been embarrassing, hence the swift action. Yet surely, he must have known about Zhuwao’s ultimatum all along?

 

Fourth, the timing of the change is relevant: this is a safe time to make these changes. The opposition parties are going through a cold winter and are posing no significant threat to ZANU PF. They can afford to make a policy somersault, repudiation of their election promises even, without fear the consequences. The fact that ZANU PF has the audacity to make these fundamental policy shifts mid-way through its term is a demonstration of political arrogance that is only matched by the impotence of its adversaries. They are in a zone of political comfort and they are doing precisely as they please.

 

Conclusion

 

It’s a humiliating moment for Zhuwao, the indigenisation minister who has now been reduced to role of coordinator, after adopting a belligerent tone in recent months. The President has just told does not have the power that he has been claiming. It’s a victory for Chinamasa in that ugly public fight with Zhuwao. But the biggest casualty here is the indigenisation law and policy, which has just been decimated by the presidential “clarification”. For all the bombastic language in the statement, the reality is that for existing businesses, they don’t have to bother anymore about giving up 51%. New investors can also hope for special dispensations and exemptions, a boon for Ministers and officials who will extract rents in the form of bribes.

ZANU PF’s election theme three years ago was “Indigenise, Empower, Develop, Create Employment”: it has not created employment, there has been no empowerment, there has been no development and now, indigenization has just been abandoned in all but name and slogans.

 

As many Zimbabweans are asking: how long before the government flip-flops again on this controversial indigenization policy? They know their government too well, and they are not holding their breath.

 

WaMagaisa

 

Not to be used without express permission. Comment here or if you prefer privacy, write to: wamagaisa@gmail.com

 

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