Zimbabwe in Focus: What s next?

August 2013 Zimbabwe in Focus: What s next? As businesses await the president s inauguration speech to shed further light on ZANU-PF s economic agenda, and the all-important cabinet appointments, the private sector is building scenarios of what the next five years will look like under a ZANU-PF regime with little MDC counterweight. Is all the panic justified or will ZANU-PF come right on its election manifesto to deliver economic growth through indigenisation? ZANU-PF and MDC Election Manifestos Since the unity government between ZANU-PF and MDC was formed in 2008, Zimbabwe s economy has stabilised. The phasing out of the Zimbabwe dollar and introduction of a multicurrency regime saw inflation drop from over ten digits to single digit levels. Gross Domestic Product growth peaked at 10.5% in 2011. However, growth was stifled by the structural flaws of a unity government, which by its very nature was not ideologically aligned, manifesting itself in schizophrenic policy pronouncements. If the unity government was the reason for lack of policy clarity, will one political party holding the reigns clarify policy? Shoul d you wis h to discuss wit h the author, pl ease contact: Risho n Chim bo za : rc him boza@ africapractice.com or Kathr yn Brooks: kbro oks@africap ractice.com africap ractice advises ind u s try and gover nments; hel p ing them t o ide ntify opp ort unity, mana ge risk and overc o me critical commu nications. A c c r a - C o n a k r y - D a r e s S a l a a m - H a r a r e - J o h a n n e s b u r g - L a g o s London - N a i r o b i - S y d n e y

One of the biggest challenges for any current or potential investor in Zimbabwe is to try and differentiate between political posturing and an actual intention to act and implement. As the president looks to build his legacy and the young turks make their mark on the party, this challenge is unlikely to go away any time soon. Who has really indigenised? In December 2012, the Minister of Indigenisation and Economic Empowerment, Saviour Kasukuwere asserted that the government s sovereign wealth fund, the National Indigenisation and Economic Empowerment Fund (NIEEF), created by ceded stakes from indigenised companies was worth US$4bn. The quantum of the figure assumes the majority of multinationals in Zimbabwe have complied with the law. However, this is at odds with the statements coming from the private sector. As late as June this year, various companies made announcements that they are currently finalising their indigenisation plans. This apparent contradiction in statements between a private sector that is yet to fully comply and the minister stating the companies have complied to the tune of US$4bn poses the question of which companies can be considered indigenised. The answer lies in the fact that when the minister says a company has indigenised, this is a catch-all statement. It can range from a company that has an approved Indigenisation Implementation Plan (IIP) that outlines a roadmap of how the company will reach its quota, to one that has implemented 51% plus local ownership. Indigenisation categories Compliance of companies in the private sector was not finalised prior to elections, therefore there are five distinct categories of companies. i. Those that rushed to comply with the legislation and possibly sold their 51% stake at discounted price; ii. Those that submitted IIPs that were approved by government; iii. Those that delayed negotiations until after elections so that they could reach an agreement with government without the pressure of elections; iv. Those that submitted IIPs that were rejected and are now waiting for direction from government on whether the policy will be implemented more aggressively or relaxed; and v. Those that have not complied at all. When looking at the levels of compliance, indigenisation has clearly been carried out on a sectoral basis, starting with the most productive sectors of the economy. Large-cap companies that operate in sectors that are not highly visible have more easily been able to buy time from the government to negotiate.

Other companies have bought time, albeit inadvertently, by proactively approaching the government with indigenisation mechanisms that are not adequately captured by the existing legislation. An example of this being companies that are proposing to indigenise through the local stock exchange. Speaking with one voice Whilst most ZANU-PF cadres unanimously agree on the principle of indigenisation, consensus on its implementation is not as straightforward. Earlier this year there was a rift between the Reserve Bank governor and Minister of Indigenisation, which was played out in public. It is important to note that these government officials are not presenting personal positions; rather, these are symptoms of a rift within ZANU-PF on how the policies will be implemented. In March this year, the president criticised Kasukuwere for failing to negotiate robust agreements with mining companies, arguing that the 51% should consist of free carry shares: i.e. the Government of Zimbabwe should not have to pay anything for its 51% stake. Curiously, Gideon Gono, whilst not opposing indigenisation argued that indigenisation in the banking sector should be handled more sensitively as confidence in the banking sector is still low. In addition, most international banks hold Zimbabwean depositors funds, therefore indigenisation on local banks would have to focus mainly on the bank s capital base and fixed assets. This would not have the desired impact of transferring wealth to Zimbabweans. This public spat between these two high profile ministers further muddied the waters for investors, with little clarity which policy would carry the day. What came to the fore during these disagreements is the need for inter-ministerial dialogue when discussing indigenisation agreements. Whilst responsibility for the drafting and implementation of the legislation to meet the quotas lies within the Ministry of Indigenisation, each sector has its parent ministry, the Ministry of Finance, Ministry of Agriculture or Ministry of Mines and Mining Development for example. Most companies failed to take heed of this dynamic and were caught in a turf war. Going forward the government will look to streamline the process to prevent similar fallouts that have not only confused investors, but publicised internal disputes between rival factions within government. Reserve Bank Governor, Gideon Gono (left) and Minister of Indigenisation, Youth Development and Indigenisation, Saviour Kasukuwere (right) publicly disagree on implementation of the indigenisation policy

What changes can we expect to see? Considering the policy ambiguity, the number of outstanding indigenisation applications that are yet to be finalised and the differing messages that are coming from government, the private sector is awaiting guidance from the government on how it should implement the law. What is clear from ZANU-PF s election manifesto is that the law is not going be reversed. Going forward the following characteristics are likely to emerge as the government seeks to tie-up the loose ends. A sector specific approach is more likely A one-size-fits-all and indigenisation-at-all-costs methodology is unlikely as the rush to indigenise resulted in flawed agreements as each party sought to protect its own interests. In sectors such as agriculture, especially at primary production stages, empowerment credits could become a viable option as agriculture by its very nature is broad-based, therefore initiatives that empower the community could be seen as a contribution towards local equity. It is worth noting that the Chamber of Mines had initially proposed empowerment quotas for the mining sector about five years ago, but these were rejected. In response the mining sector proposed vendor financing schemes and this was de rigueur for the mining sector. Following the president s disapproval of vendor financing, supply-side models for indigenisation could gain currency in the sector, considering capacity utilisation within Zimbabwe industry. With this approach, part of a company s empowerment credits would be based on how much it procures from the local supply chain. Improved inter-ministerial coordination The spat between Gono and Kasukuwere laid bare divisions on the policy within government. They also made public the turf wars between the different ministries. Each ministry wanted to have full control of any initiative taking place that would impact its activities; going forward, a cluster approach with the involvement of several key ministries likely. Methods of valuing local stakes This is a contentious point as the president insists Zimbabweans should not have to pay for their 51% - by Zimbabweans he is referring to the NIEEF as opposed to the private sector that will need to pay for its shares. Whilst an all-out land-grab is unlikely, seizure of land or assets belonging to mining companies that are not considered to be fully utilising their claims is credible. More vigorous implementation of Statutory Instrument 66 On 21 June the Ministry of Indigenisation released Statutory Instrument 66. This requires companies in specific sectors to have an indigenisation compliance certificate or risk imprisonment. The law comes into effect in January 2013. The government is likely to pursue this vigorously; the challenge of how to monitor compliance will remain. Constitution of an agency to monitor implementation and enforcement Government has a lot of loose ends that it needs to tie up to ensure that there is a modicum of credibility and consistency in how the policy is applied. It will also need to ensure that companies that are supposed to have complied have actually done so. Specifically, there have been discussions of a ratings agency being established and it s likely that this will take place sometime in 2014.

Policy clarity This is easier said than done and unlikely to take place in the next two months. Cabinet ministers will be chosen; they will need to familiarise themselves with their ministries; new laws have to be tabled; and parliament will need to sit. Granted, some decisions will be made faster because of the reduced number of opposition MPs, however, policy decisions on contentious issues such as indigenisation will take a long time to resolve. In addition, industry has a number of points on which they require clarity. In a best case scenario industry will put together a unified position, on a sector-by-sector basis, which the government will consider whilst not prejudicing companies that have already complied. Five key appointments How the indigenisation policy will evolve and ultimately be implemented is in large part down to the ministerial appointments that will be made. The president s inauguration speech will be a beacon of the government s ideological position for the next five years. His pronouncements on how ZANU-PF will deliver on its manifesto will be closely watched. In addition, if the tone of the speech is conciliatory towards the opposition, then this will be mirrored through economic policy as he seeks to integrate some MDC ministers into the government. However, as the MDC has already appealed the election result with the Electoral Court and vowed not to participate in any government with ZANU-PF, so it is unlikely that the tone toward the opposition will be conciliatory. There are five key appointments to watch out for: 1. Minister of Finance: This was previously an MDC position held by Tendai Biti. Considering Biti s position within the party, it is unlikely he will defect or join a ZANU-PF government. He had had much success in re-opening lines of credits with Development Finance Institutions and the Bretton Woods organisations. Locally, he was instrumental in curbing the quasi-fiscal activities of the Central Bank, in bringing stability to the banking sector and tried his best to run a balanced budget. Any replacement would need to have similar international and domestic credibility to retain confidence in the ministry. As such, there is a strong possibility that either an outsider or a party cadre without previous ministerial experience might be brought into this role. Together with the Ministry of Mines, this is one of the most strategic appointments as the government looks to inject diamond revenue into the economy. 2. Reserve Bank Governor: Current governor Gideon Gono s ten year term has expired and there is a possibility of a ministerial post for him. Private sector and stock market confidence will depend on this appointment. Historically, technocrats without prior government experience have been appointed to the Central Bank. The preference has been to appoint a former banker. 3. Ministry of Mines and Mining Development: There is a strong possibility that current minister Obert Mpofu will retain his role. Although questions remain regarding management of diamond revenues, under his tenure output from the sector has grown. It would be a masterstroke for government to inject this revenue into the fiscus, quickly strengthening its narrative of growing the economy; doing so under an MDC minister might have strengthened the opposition. 4. Ministry of Youth Development, Indigenisation and Economic Empowerment: Considering the loose ends that need to be tied up and pending negotiations with the private sector, it s likely that the current minister will retain his role. However, there have been messages from within the party that the minister would need to be replaced by a more mature pair of hands that can negotiate without deterring investment. As a result the ministry could be split into one for youth affairs and another to focus strictly on indigenisation.

The way forward The evolution of the indigenisation legislation is critical to Zimbabwe s economic direction postelections. At this stage the following statements are true: Indigenisation is not a barrier to growth and it can be managed Clarity on indigenisation will be the key determinant on whether to invest/increase investment Indigenisation remains a deterrent to investment Although the stock market took a knock in the first week post-election, companies that generate cash, particularly in telecoms and FMCG will remain strong picks for international investors. If the indigenisation policies are ratcheted up, these companies will still attract investment, but the risk premium will be higher. Unlisted companies operating profitably in Zimbabwe will also adopt the same approach. Their familiarity with the policy terrain and an ability to sift between political rhetoric and government intent means they are likely to stay put. For the second category of investor, as well as companies that are already operating in Zimbabwe but awaiting clarity on policy, they are likely to remain in limbo for the rest of year as the new government settles in and ZANU-PF spells out its economic vision. For these companies it is imperative that they lead discussions with government to get the clarity they need rather than wait for government to get its house in order. The ambiguity of the indigenisation legislation and the haphazard timetable with which companies are targeted is a latent risk for any company that has not complied. In the short-term the tone of the president s inauguration speech and any new ministerial appointments will shed further light on what businesses can expect from the next five years.