INVESTMENT CLIMATE STATEMENT - ZIMBABWE

UNCLAS SECTION 01 OF 07 HARARE 000168

SIPDIS

STATE FOR OFFICE OF INVESTMENT AFFAIRS - EB/IFD/OIA


E. O. 12958: N/A
TAGS: KTDB EFIN ECON ETRD EINV PGOV ZI
SUBJECT: INVESTMENT CLIMATE STATEMENT - ZIMBABWE



1. The Zimbabwean economy remains very weak, making it
unlikely to attract or absorb signficiant foreign direct
investment (FDI) in 2005. In recent years, FDI has been
less than US$10 million annually, down from US$300-500
million in the mid-1990s. As we note in the more extensive
Country Commercial Guide (septel),foreign investors will
find few if any sectors appealing at this time. In many
industries, wage inflation has made Zimbabwean workers as
expensive as those in South Africa. The overvalued
official exchange rate diminishes the buying power of
foreign investors in Zimbabwe and it renders most of the
country's exports uncompetitive. In addition, the
country's political crisis has harmed the rule-of-law and
put private property at greater risk.

Openness to Foreign Investment
--------------

2. Zimbabwe is generally unwelcoming to foreign investment,
particularly from Western countries. Nonetheless, about 25
U.S. multinationals maintain subsidiaries in the country,
largely holdovers from better years in the recent past.
Many others, such as Caterpillar and Microsoft, sell their
products through licensed dealers. The Government's
official and oft-enunciated policy is to favor FDI from
Asian countries, particularly from China and Malaysia.


3. The Government's guidelines for foreign investors are
found in the volume, "The Promotion of Investment: Policy
and Regulations," commonly referred to as Zimbabwe's
"Investment Code." It has two dominant themes: a)
recognizing that foreign capital has played an important
role in Zimbabwe's development, but b) stressing that
Zimbabweans should participate more fully in the country's
economy. Accordingly, it notes that the Government prefers
majority Zimbabwean participation in new investment
projects and specifies that the degree of local ownership
will be a prime criterion in the evaluation of investment
proposals. This bias toward local control has grown since

2001.


4. The Government will consider majority foreign ownership
in high-priority projects, but will also encourage
arrangements for the eventual transfer of majority control
to Zimbabwean interests. It has often been Government
practice to take part in new investments by entering into
joint ventures with private or domestic investors in
strategic and basic infrastructure projects. However,
given the Government's cumulative deficit and resultant
capital shortage, this type of activity is moribund at
present. Regarding privatization of Zimbabwe's parastatal
companies, progress has been very slow since the Government
identified it as a priority in the mid-1990s, with only
about six out of the 57 earmarked organizations making the
transition. Moreover, arguments about the allowable extent
of foreign investment, retention amount for indigenization,
pricing and means of offering have yet to be clearly or
transparently resolved.

Conversion and Transfer Policies
--------------

5. Zimbabwe is currently experiencing an acute hard
currency shortage that, among other things, has caused fuel
shortages, default on sovereign debt, shortages of imported
goods and components, and a sharp decline in industrial,
agricultural and mining operations. The Foreign Exchange
Control Act does not prohibit foreign investors from moving
assets between Zimbabwean and foreign accounts, but it does
require accommodation exchange at a fixed, artificially low
rate.


6. The Foreign Exchange Control Act extends to prospective
outward investment, as well as dividend remittances.
Relatively few Zimbabwean firms have made investments
outside the country, and most of these are in neighboring
nations. Traditionally, investment by Zimbabweans outside
their country has been something of a sore point with the
Government, which suspects, often correctly, that companies
may actually be simply relocating from Zimbabwe. A case in
point is a number of textile manufacturers who relocated to
Botswana a few years ago in order to take advantage of that
country's easy access to imports and foreign exchange for
the purpose of exporting back into Zimbabwe.

Expropriation and Compensation
--------------

7. Zimbabwe's constitution prohibits the acquisition of
private property without compensation. Nonetheless, the
Government has sanctioned land invasions by "war veterans"
and other "settlers" since 2001 and the Parliament approved
in April 2000 Constitutional Amendment No. 16, which
authorized the compulsory acquisition of privately owned
commercial farms with compensation limited to the
improvements made on the land. Additionally, over the past
few years the President and other officials have made
periodic statements indicating that the Government may next
target the mining sector and/or manufacturing sector for
similarly forced indigenization. It remains to be seen
what parameters and compensation standards will be followed
if this objective is acted upon. Needless to say, any
potential foreign investors should take into account the
risk of uncompensated expropriation


8. Land redistribution has long been recognized as a
necessary step to redress colonial injustices, create long-
term stability and enhance economic participation by
citizens in Zimbabwe. However, the current program fails to
achieve these goals. In many instances, prime properties
went to ruling party cadres. In other instances, the
resettled peasant populations lack the infrastructure,
training, skills and resources to utilize the land they have
been given. Worse still, virtually no farm laborers, who
would have at least had adequate training and skills, have
received any land, and there has been neither transparency
nor an orderly strategy to maintain production.


9. The Government's program to seize largely white-owned
commercial farms without either the intention or the funds
to compensate the title holders has raised serious
questions about respect for property rights and the rule of
law in Zimbabwe. Besides the fate of the country's largest
export producing sector, Zimbabwe's food self-reliance has
fallen dramatically, affecting the entire economy. As part
of this program, the Government has seized for
redistribution a number of farms and conservancies
belonging to American citizens and other foreign investors.
Most of these property-owners held Zimbabwe Investment
Center approval certificates and purchased their land after
Independence in 1980. Despite former repeated U.S.
protests, the Government has not addressed these extra-
judicial expropriations.

Dispute Settlement
--------------

10. In the event of an investment dispute (excepting the
current fast-track land reform program),the Government of
Zimbabwe agrees in theory to submit the matter for
settlement by arbitration, according to the rules and
procedures promulgated by the United Nations Commission on
International Trade Law (UNCITRAL),once the investor has
exhausted the administrative and judicial remedies
available locally. We are not aware of investors who have
resorted to this option.


11. To increase investor confidence, the Government has
also acceded to the 1965 convention on the settlement of
investment disputes between states and nationals of other
states, and to the 1958 New York convention on the
recognition and enforcement of foreign arbitral awards.
Until recently, Zimbabwe's judiciary enjoyed a well-
deserved reputation for fairness and independence.
However, recent Government efforts to intimidate the
judiciary and suspect new appointments to the bench have
raised serious concerns in this area. Additionally, during
2002 many political heavyweights -- including the
Zimbabwean president -- have publicly announced that they
have no intention of honoring court orders if they are not
politically acceptable to the ruling party.

Performance Requirements and Incentives
-------------- --------------

12. Several tax breaks are available for new investment by
foreign and domestic companies. Capital expenditures on
new factories, machinery and improvements are fully
deductible and the Government waives import tax and surtax
on capital equipment. Other incentives for investors
include:

- Investment allowance of 15 percent in the year of
purchase of industrial and commercial buildings, staff
housing and articles, implements and machinery

- Investment allowance of 50 percent in the year of
purchase for training, buildings and equipment

- Twenty-five percent special initial allowance on cost of
industrial buildings and commercial buildings and machinery
in growth point areas is granted as a rebate for the first
four years

- Special mining lease provisions entitle the holder to
specific incentive packages to be negotiated with the
Ministry of Mines.

- The Government also has provided for the refund of sales
taxes (15 percent) for capital goods purchased in Zimbabwe
and intended for use in priority projects or investment in
growth points.


13. Import duties (the reduction of which had been under
discussion with both the IMF and the World Bank) and
related taxes range up to more than 100 percent. Any
investment proposal that involves the employment of
expatriates must present a strong case for doing so in
order to obtain a work and residence permit. Normally, the
maximum contract period for an expatriate is three years,
but this will be extended to five years for expatriates
with highly specialized skills. Expatriates who have prior
permission from the Reserve Bank's exchange control
department will be permitted to remit one-third of their
salaries. We are aware of several instances since 2003
when the Government has refused to renew the visa of a non-
Zimbabwean executive at a subsidiary of a multinational.


14. There are no general performance requirements.
Official policy, however, especially welcomes investment in
enterprises that contribute to rural development, job
creation, exports, use of local materials, and transfer of
appropriate technology. There are no discriminatory import
or export policies affecting foreign firms, although as
noted earlier, the Government's approval criteria are
heavily weighted toward export-oriented projects,
especially from foreign investors.


15. Joint ventures are very strongly encouraged. While
official policy supports "the maximum Zimbabwean
participation" in any new investment project, no specific
requirements for local participation have been defined.
However, experience has shown that 30 percent local
participation is a widely accepted benchmark minimum.
Foreign investors are expected to provide for domestic
equity participation at or prior to startup, and can expect
to be approached early on by a wide range of potential
partners, with some Government officials desiring shares at
no cost. Companies are expected to make maximum use of
Zimbabwean managerial and technical personnel. Subject to
Reserve Bank approval, foreign companies are allowed to
provide capital equipment as an equity contribution to a
joint venture.


16. The Government of Zimbabwe's policy calls for
Government participation in new investments in "strategic"
industries such as energy and mining. The terms of
Government participation will be determined on a
case-by-case basis. However, the Government's lack of
funds (the cause of the dearth of new major investment
projects),means that this policy has not been tested in
practice for some time.


Right to Private Ownership and Establishment
-------------- --------------

17. Although Zimbabwean law guarantees the right to private
ownership, the Government has frequently seized property
without due process. Since 2001, the Government has
stripped about 4,000 of 4,500 white commercial farmers of
their deeded land without compensation. Many of these
farmers were foreigners who held Zimbabwe Investment Center
certificates and were nationals of countries with which
Zimbabwe has signed bilateral investment treaties. In
virtually all cases, the Government has ignored these
certificates and treaties. There is a lingering threat that
the Government could also expropriate property belonging to
foreign firms for the purpose of transferring ownership to
black Zimbabweans.

Protection of Property Rights
--------------

18. We cannot emphasize enough the real risk of
expropriation. The Government has a strong desire to
control as much of the economy as possible. There is
little political will to pursue needed reforms such as
privatization of state-owned companies, liberalization of
foreign exchange policies and removal of price controls
from food, staples and energy. The local ownership
requirement and the large areas of the economy where
foreign investment is not allowed are other hindrances to
business establishment and free cross-border capital and
equity flows. For private firms,


19. Since independence, Zimbabwe has applied international
patent and trademark conventions. It is a member of the
World Intellectual Property Organization. Generally, the
Government seeks to honor intellectual property ownership
and rights, although there are serious doubts about its
ability to enforce these obligations. The Embassy is not
aware of any grievances over such issues, although pirating
of videocassettes and computer software is common.
Remittances for royalties, technical services and
management fees have been suspended by many companies with
overseas ties, due to the severe hard currency shortage.

Transparency of Regulatory System
--------------

20. The Government has established only a few regulatory
bodies. When it resumes its long-dormant privatization
program, it is expected to bring more regulatory agencies
into being.


21. Official policy is to encourage competition within the
private sector. The Government claims to be concerned
about an "over-concentration" of market clout among a few
companies in several industries. However, a greater threat
is that many bureaucratic functions in this still heavily
controlled economy are not transparent and corruption
within the regulatory system is increasingly worrisome.
There are, however, still some regulators who generally
perform their functions, though their numbers dwindle each
year.

Efficient Capital Markets and Portfolio Investment
-------------- --------------
--

22. New portfolio investment in Zimbabwe has been very
limited in recent quarters as the country's macro-economic
outlook and fundamentals continue to decline. Zimbabwe's
stock market (about 80 companies listed) is small, trading
is quite thin, and the public stock float of many of the
smaller companies is closely held. In September 1996, the
Government opened the stock and money markets to limited
foreign portfolio investment. Since then, a maximum of 40
percent of any locally listed company can be foreign-owned
with a single investor acquiring a maximum of 10 percent of
the shares on offer. Foreign participation in the bond
market is restricted to the primary market and only 35
percent of invested capital may be placed in bonds. The
equity market is the major opportunity for foreign
investors.


23. Zimbabwe's financial sector is quite large and well-
developed. An impressive variety of financial instruments
are traded, though thinly, including debentures, private
sector bonds, bankers acceptances, treasury bills,
municipal and utility bonds. Two major international
commercial banks and a number of regional and domestic
banks operate with over 200 branches total. The merchant
banks are quite sophisticated and agile. However, the well-
publicized failure of a number of financial institutions,
primarily due to fraud and inept management, has raised
concern over the oversight capability of the Reserve Bank
and the financial soundness of a number of the smaller
players.

Political Violence
--------------

24. Since the Government's loss in a February 2000
constitutional referendum, ruling party supporters of the
Government have systematically attacked members of the
opposition Movement for Democratic Change (MDC) and anyone
suspected of supporting them. In the months preceding the
June 2000 parliamentary elections and the March 2002
presidential election, the political violence intensified
and ruling party supporters, including liberation war
veterans and Government-trained militia, perpetrated
widespread abuses and killed more than 150 people.
Political repression of dissenters, and non-Governmental
organizations remains substantial, although the Government
seems to have loosened up on media restrictions during 2004
and recorded levels of political violence declined sharply
during the year.

Corruption
--------------

25. According to anecdotal evidence and a survey conducted
by Transparency International-Zimbabwe, corruption, already
at high and chronic levels, is increasing, especially
within the Government. Many companies and the police do
not have appropriate tools or skills for investigating and
checking the corruption, though the legislative and
criminal law framework exists (for example, acceptance of
bribes is a criminal offense). Several U.S. firms have
protested problems involving major Government tenders and
the lack of transparency in the Government tender board's
management of the cases. Tenders in the
telecommunications, power, defense and aviation sectors
have been particularly notorious. Cases involving high or
prominent ruling party or Government officials usually do
not reach court, regardless of the magnitude or
egregiousness of the offense.


26. Parliament has adopted a constitutional amendment that
provides for the creation of an anti-corruption commission,
however, to date it has not been funded or staffed. The
Zimbabwe Republic Police have historically been well
disciplined. Recent instances of show that in many
Government entities, especially the parastatals, corrupt
practices are widespread. Cronyism is also a problem.
Under fast-track land reform, the Government has awarded
farms in party activists in a non-transparent manner. In
the Reserve Bank's twice-weekly currency auctions, firms
with close personal ties to the Government often receive
foreign exchange at preferential rates.

Bilateral Investment Agreements
--------------

27. The U.S. has no bilateral investment or trade treaty
with Zimbabwe. The country currently has bilateral
investment agreements in force with Germany, the United
Kingdom, Portugal, Switzerland, Sweden, Malaysia, Mozambique
and China. It is negotiating bilateral investment treaties
with Italy and the Netherlands. However, commercial farms
covered under some of the foregoing treaties remain listed
for acquisition under current legislation, thereby denying
the owner benefits such as free use and full, market
compensation that are covered in these treaties.

OPIC and Other Investment Programs
-------------- -

28. The Government and the U.S. Government concluded an
OPIC agreement in April 1999. Zimbabwe acceded to the
World Bank's multilateral investment guarantee agency
(MIGA) in September 1989. Many major donor countries have
suspended their trade finance and export promotion
programs, as well as investment coverage, due largely to
mounting arrears caused by Zimbabwe's recent difficulty in
meeting its foreign debt obligations in a timely manner, as
well as the ongoing political crisis. OPIC currently funds
a few projects in country.

Labor
--------------

29. As noted elsewhere in this report, there is a growing
shortage of professional, technical and service skills in
the workforce, caused primarily by emigration brought about
by political and economic crises. Despite this, Zimbabwe
still has one of the best-educated labor forces in Africa.
Shrinkage of the economy in recent years, and the commercial
farm invasions in the same period, have caused formal sector
employment to drop fairly precipitously. With at least
300,000 secondary school graduates or dropouts entering the
job market every year, the unemployment rate has been
steadily rising, and now stands at a minimum of 75 percent.
The reduced business activity, declining profitability of
companies, surplus labor and hyper-inflationary pressures
have caused wage increases to lag far behind inflation. As
a consequence, disposable incomes and standards of living
have drastically fallen for the majority of the formally
employed.


30. The country's HIV/AIDS epidemic, with one of the highest
infection rates in the world, is also taking a heavy toll on
the workforce, with the worst effects of the disease still
to come. The Government takes the epidemic seriously and
has pursued policies to encourage testing, prevention and
care. However, in the short run, the epidemic will almost
certainly worsen.


31. The Government largely adheres to International Labor
Organization conventions protecting worker rights, although
it merited a special paragraph in the ILO's annual report
designating it as a "notorious country" for its continued
attempts to limit workers' right to organize and hold labor
union meetings. The 1985 Labor Relations Act sets strict
standards for occupational health and safety, but
enforcement is fairly lax and not consistent throughout the
industrial sectors. In addition, the Government sets a
maximum workweek and minimum wage. The workweek averages 40
hours, but can go as high as 60. The law mandates a 24-hour
rest period each week. Although minimum wages are
ostensibly set by the Government along sectoral lines, in
practice there is currently no common policy. Due to the
hyper-inflationary situation, each sector negotiates wages
that it can afford to pay. Some workers are also provided
allowances and expenses for food, transportation, and
housing. As already noted, wage increases have lagged far
behind the rate of inflation (currently exceeding 300%),
causing a critical drop in disposable income and purchasing
power.


32. One of the most sobering labor developments concerns the
displacement of commercial farm workers. Due to the
disruptions on commercial farms, there are an estimated
500,000 displaced agricultural workers in Zimbabwe. In
addition to having no work and no income, many of these
laborers - and their families - now have no home. The
ripple affect of this displacement on the economy will
continue to be felt for years, as will the accompanying loss
in agricultural production.


33. Labor relations have become particularly fractious
between labor and Government in Zimbabwe since 1997, as
economic conditions in the country have deteriorated. They
are less so between labor and management. Workers negotiate
wages and other benefits with employers during the annual
collective bargaining season, which runs from approximately
May to July each year. A National Employment Council (NEC)
in each industry, comprising representatives from labor,
business, and Government, is the vehicle through which the
collective bargaining takes place. In addition, the
Zimbabwe Congress of Trade Unions (ZCTU),the country's
umbrella labor organization, consisting of 35 member unions
and approximately 270,000 members, is the traditional
advocate for workers to both business and Government.
Through both the NEC and the ZCTU, workers in all sectors
have demanded repeated salary increases in 2001, 2002, and
2003 to partially compensate for the high inflation and
increased cost of living, in some cases striking until their
demands were addressed. In almost all industries, employers
have approved more than one salary hike per year in response
to the inflation rate.


34. The Government still maintains an historically
paternalistic attitude toward labor, reserving the right to
intervene in issues of concern in the workplace. However,
the high profile and politicization of the ZCTU in recent
years has worked to limit Government's influence over
workers. The Government has threatened to eliminate the
ZCTU, and has taken steps to marginalize the traditional
unions and the formal labor dispute resolution mechanism.
Notably, in 2000, groups of "war veterans" - using tactics
similar to those adopted in the farm invasions - invaded a
number of factories and workplaces, usually claiming to
represent the interests of terminated or disciplined
workers, but in reality attempting to extort money from
management.


35. The Government has since then sought to capitalize on
war veteran efforts by creating the Zimbabwe Federation of
Trade Unions (ZFTU),as an alternative umbrella organization
to the ZCTU. However, no one outside of Government or the
Government-controlled media sees the ZFTU as a legitimate
labor organization, and despite government-backed efforts,
it has failed to dislodge the ZCTU as the voice of labor in
Zimbabwe. The ZCTU still remains the "official" and
internationally recognized labor organization in Zimbabwe.

Foreign-Trade Zones/Free Ports
--------------

36. At the urging of western donors, the IMF and the World
Bank, the Government promulgated legislation appointing an
EPZ authority in 1996. Zimbabwe now has many export
processing zones, but since January 2004 has generally
required that foreign capital comprise a majority of the
investment. A trade performance statute requires eligible
companies to export at least 80 percent of output, a
requirement that has limited foreign investment in the new
zones. Other benefits include a five-year tax holiday,
duty-free importation of raw materials, no tax liability
from capital gains arising from the sale of property
forming part of the investment in designated processing
zones, and duty-free importation of capital equipment for
use in the EPZ.


37. Under the original legislation, the provisions of the
Labor Relations Act (LRA) do not apply within the zones.
However, due to strong advocacy from the labor movement,
the Ministry of Public Service, Labor and Social Welfare
has entered into discussions with the Ministry of Justice
to amend the act so that the LRA will apply.


Foreign Direct Investment Statistics
--------------

38. Foreign investment has played a crucial role in
Zimbabwe's development. However, foreign direct investment
in the last three years has all but dried up, as the
Government's focus on political objectives at substantial
cost to the economy continue and a return to better policies
and practices seems no closer. At the end of the 1970's,
foreigners owned an estimated 70-80 percent of listed
corporations. Today, offshore ownership of shares on the
Zimbabwe Stock Exchange has fallen to approximately 25
percent (about 5 percent individuals, the remainder
institutional or corporate).


39. From independence in 1980 until the introduction of the
precursor of the structural adjustment program in 1990, new
foreign investment amounted to roughly U.S. $27 million. In
the 1990s, by contrast, it reached $400 million/year. A
survey conducted by the Confederation of Zimbabwe Industries
(CZI) indicated that 25 percent of industrial concerns have
some foreign ownership. Because these include many of
Zimbabwe's largest companies, they still account for 40-50
percent of industrial output. Estimates of the value of
overall foreign investment run as high as U.S. $5 billion
(replacement cost).

Web Resources
--------------

40. The Zimbabwe Investment Center (ZIC) is authorized to
approve proposals involving any foreign investor in any
business field. After approval of a project, if foreign
staffing or management is desired, the Ministry of Home
Affairs through the department of immigration is
responsible for the issuance of work permits for expatriate
staff. Both initial and renewal issuance of work permits
has, at times, proved problematic for foreign companies and
investors.

ZIC's address and contact numbers are:

Zimbabwe Investment Centre
Investment House
109 Rotten Row
P.O. Box 5950
Harare

Telephone: 757931/4
Fax: (263) (4) 757937
www.zic.co.zw