ZIMBABWE 2006 INVESTMENT CLIMATE STATEMENT

UNCLAS HARARE 000279

SIPDIS

SIPDIS

TREASURY FOR D/BRESNICK, USDOC FOR ITA/SMATHEWS

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV
SUBJECT: ZIMBABWE 2006 INVESTMENT CLIMATE STATEMENT

REF: STATE 20194


1. (U) The Government of Zimbabwe,s misgovernance has
severely crippled the local economy, making it unlikely to
attract or absorb significant foreign direct investment in

2006. Investment prospects in Zimbabwe are bound to remain
dismal due to the country,s unstable economic and political
environment. Government policies and recent constitutional
amendments have eroded rule-of-law and put private property
rights at grave risk.


2. (U) Foreign investors will find few if any sectors
appealing at this time. The government,s Export Processing
Zones Authority reported that within a six month period in
2005 33 agro-based companies ) once the economy,s backbone
) closed down. The World Bank/International Finance
Corporation,s &Doing Business in 20068 survey ranked
Zimbabwe 126 out of 155 countries considered and one of the
worst in southern Africa. Further illustrative of the
deteriorating investment climate, Zimbabwe fell to last place
out of 64 regions and countries surveyed in the
Vancouver-based Fraser Institutes, 2004-2005 report on
mineral policy investor friendliness.

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


3. (U) The government,s intervention in many sectors makes
Zimbabwe 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 a decade ago. Many
others sell their products through certified dealers.


4. (U) The government,s priority sectors for foreign
investment are manufacturing, mining and infrastructure
development for tourism. In these sectors foreign investors
are free to take up 100 percent ownership. New draft mining
legislation, however, now under consideration, would require
foreign investors to cede a 51 percent share in foreign-owned
mines to the government, 25 percent of which would be
non-contributory. In the services sector foreign investors
are allowed to take a maximum 70 percent share holding.


5. (U) The government reserves several sectors for local
investors. Foreign investors wishing to participate in these
sectors may only do so by entering into joint venture
arrangements with local partners. The foreign partners may
take a maximum 35 percent shareholding. The following
industries are reserved for Zimbabwean citizens:

Agriculture/Forestry
a) Primary production of food and cash crops
b) Primary horticulture
c) Game, wildlife ranching and livestock
d) Forestry
e) Fishing and fish farming
f) Poultry farming
Transportation
a) Road haulage
b) Passenger bus, taxis and car hire services of any kind
c) Tourist Transportation
-- Retail/wholesale trade, including distribution
-- Barber shops, hairdressing and beauty salons
-- Commercial photography
-- Employment agencies
-- Estate agencies
-- Valet services
-- Manufacturing, marketing and distribution of armaments
-- Water provision for domestic and industrial purposes
-- Rail operations
-- Grain milling
-- Bakery and confectionary
-- Sugar refining
-- Tobacco packaging and grading post auction
-- Cigarette manufacturing


6. (U) Foreign investors wishing to start a new project in
Zimbabwe must first register with and be approved by the
Zimbabwe Investment Centre (ZIC),which then issues
Investment Certificates. The Export Processing Zones
Authority (EPZA) is the first port of call for any investor
wishing to invest in Export Processing Zones.


7. (U) All private firms are required to incorporate and
register with the Registrar of Companies within the framework
of their investment certificate or exchange control approval.
Foreign investment in existing companies requires Reserve
Bank approval. Applications are submitted to the Bank,s
Exchange Control Department through the investor,s
commercial bank or merchant bank or other authorized dealer.
Foreign investors with valid investment certificates may
acquire real estate.


8. (U) In the mid-1990s, the government identified
privatization of Zimbabwe,s parastatal companies as a
priority, but only two state-owned enterprises have been
successfully privatized since then. The parastatals,
operational inefficiencies, weak balance sheet positions and
their huge debt overhang make it unlikely that privatization
will go forward in 2006.


9. (U) Commensurate with its anti-West stance in recent
years, the government has begun to encourage economic ties
with Asian countries, particularly China, as a means of
arresting further economic decline and combating what it
casts as neo-colonialism. Under this &Look East8 policy,
selected Asian investors have been offered access to reserved
sectors, sometimes at the expense of local or established
foreign investors. Despite the official emphasis placed on
these ties and a few high profile announced projects, Asian
investment overall remains limited, especially compared to
the presence of remaining investors from South Africa, the
U.K, and U.S.

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


10. (U) For the past several years, Zimbabwe has experienced
an acute foreign currency shortage that, among other things,
has caused crippling shortages of fuel and other imported
goods and components, defaults on public and private sector
debt service payments, and a sharp decline in industrial,
agricultural and mining operations. Foreign currency is
difficult to obtain due to the Reserve Bank of Zimbabwe,s
restrictive exchange controls, the country,s declining
ability to generate exports, and the lack of balance of
payments support. The Foreign Exchange Control Act regulates
currency conversions and transfers. It does not prohibit
foreign investors from moving assets between Zimbabwean and
foreign accounts, but foreign exchange shortages and
constraints of the foreign exchange regime impede the
remittance of investment returns. Some local businesses have
credibly charged that the government has raided their foreign
currency accounts to repay past-due IMF debts.


11. (U) As of January 2006, exporters may retain 70 percent
of their foreign currency account balance for their own use
and liquidation on the interbank market within a 30-day
retention period. Of the remaining 30 percent, 12.5 percent
of export proceeds must be liquidated to the Reserve Bank at
the interbank exchange rate (effectively fixed at
Z$99,200:US$ as of January 24, 2006),and 17.5 percent must
be sold to the Reserve Bank at the official auction rate,
fixed in January 2006 at Z$30,000:US$. However,
uncertainties associated with retention requirements and
retention periods, which have been adjusted frequently
without notice, constrain business planning and operations.


12. (U) The Foreign Exchange Control Act extends to
prospective outward investment as well as dividend
remittances. Traditionally, the government has discouraged
investment by Zimbabweans outside their country, and
relatively few Zimbabwean firms have made such investments.

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


13. (U) Despite provisions in Zimbabwe's constitution that
prohibit the acquisition of private property without
compensation, the government has sanctioned seizures of
privately owned agricultural land without compensation since

2001. The government in April 2000 amended the constitution
to authorize the compulsory acquisition of privately owned
commercial farms with compensation limited to the
improvements made on the land. More recently, the government
changed the constitution again in September 2005 to transfer
ownership of all expropriated land to the government with no
recourse to local courts for all those who lost their farms
since the land invasions began. Since the passage of this
recent amendment, top government officials, ruling party
supporters, and members of the security forces have continued
to disrupt production on commercial farms, including those
owned by foreign investors.


14. (U) The President and other politicians have in the past
threatened to target the mining and manufacturing sectors for
similarly forced indigenization. The government's program to
seize commercial farms without either the intention or the
funds to compensate the titleholders, and without recourse to
the courts, has raised serious questions about respect for
property rights and the rule of law in Zimbabwe. Any
potential foreign investors should take into account the risk
of uncompensated expropriation.

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


15. (U) In the event of an investment dispute (excepting the
current 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. This
option so far appears to be untested by investors.


16. (U) The government has 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.


17. (U) Government efforts to influence and intimidate the
judiciary since the late 1990s have raised serious concerns
in this area. The government and ruling elite have ignored
numerous adverse judgments, and senior officials have
reiterated publicly that court orders that are not
politically acceptable to the ruling party will not be
honored. Administration of justice in commercial cases that
lack political overtones are generally impartial. As the
government,s budget constraints deepen, however, court
resources have dwindled and dockets have become backlogged.
A less costly dispute settlement route, which can be
incorporated in contracts between companies, is alternative
dispute resolution. Companies have the option of seeking
alternative dispute resolution in which an independent
arbitration board resolves disputes.

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


18. (U) 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;
-- 25 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.


19. (U) There are no general performance requirements
outside of Export Processing Zones. Government policy,
however, encourages investment in enterprises that contribute
to rural development, job creation, exports, use of local
materials, and transfer of appropriate technologies.


20. (U) There are no discriminatory import or export
policies affecting foreign firms, although the government's
approval criteria are heavily weighted toward export-oriented
projects. Import duties and related taxes range as high as
110 percent. Export Processing Zone designated companies
must export at least 80 percent of output.


21. (U) While official policy supports "the maximum
Zimbabwean participation" in any new investment project, no
specific requirements for local participation have been
defined outside the 35 percent foreign share cap in sectors
reserved for local investment. Nevertheless, experience has
shown that 30 percent local participation is a widely
accepted benchmark minimum.

22. (U) Government participation is required in new
investments in strategic industries, such as energy and
mining, public water provision, railways, and armaments. The
terms of government participation are determined on a
case-by-case basis during license approval. The few foreign
investors (for example from China and Iran) in reserved
strategic industries have either purchased existing companies
or have supplied equipment and spares on credit.


23. (U) Foreign investors are expected to make maximum use
of Zimbabwean management and technical personnel, and 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 are
permitted to remit one-third of their salaries.

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


24. (U) Although Zimbabwean law guarantees the right to
private ownership, this right is increasingly not respected
in practice. The government, as noted above, has seized a
number of farms and conservancies belonging to Americans and
other foreign investors in recent years without due process
or compensation. Most of these property owners held Zimbabwe
Investment Center approval certificates and purchased their
land after independence in 1980. Despite repeated U.S.
protests, the government has not addressed these
extra-judicial expropriations.


25. (U) In each of the last two years, President Mugabe has
reiterated the government,s intention to enact a broad
indigenization law, and there remains a lingering threat that
the government could expropriate non-agricultural property
belonging to foreign firms for the purpose of transferring
ownership to black Zimbabweans.

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


26. (U) The government's demonstrated desire to expand its
control of the economy puts many investments, particularly in
real property, at risk. The government's 2005 Operation
Restore Order resulted in the destruction of many licensed
commercial and residential structures. In addition to the
thousands of agricultural properties seized under land reform
during the past six years, in late 2005, the government for
the first time authorized the seizure of non-agricultural
land for the purpose of constructing residential stands in a
Harare suburb. At about the same time, the government served
eviction notices to neighbors of President Mugabe,s suburban
mansion ostensibly on national security grounds. The
eviction process, which is supposed to include compensation
for dispossessed property owners, is ongoing.


27. (U) 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 due to
a lack of expertise and manpower. We are not aware of any
grievances over such issues, but pirating of videos and
computer software is common. Most videos and computer
software sold on the local market, for example, are pirated
goods.


28. (U) The judiciary generally upholds the sanctity of
contracts between private companies. However, in the case of
contracts involving the government or politically influential
individuals, judgments sometimes appear biased in favor of
the latter.

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


29. (U) The government,s officially stated policy is to
encourage competition within the private sector. That said,
bureaucratic functions in this increasingly controlled
economy lack transparency and corruption within the
regulatory system is increasingly worrisome.

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


30. (U) New portfolio investment in Zimbabwe has been very
limited in recent years. According to the IMF, net portfolio
inflows reached US$2 million in 2004 after a massive outflow
of US$68 million in 2001 in response to the start of the land
invasions. Zimbabwe's stock market has 80 listed companies.
Overall, trading is thin and volatile. The public stock of
many 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. In 2005, the government introduced a 5
percent withholding tax on the sale of marketable securities.
It also upped the prescribed asset ratio of the National
Social Security Authority,s investment to 35 percent at
market value, and the prescribed asset ratio of private
pension funds to 40 percent. Foreign participation in the
bond market is restricted to the primary market and only 35
percent of invested capital may be placed in bonds.


31. (U) Zimbabwe's financial sector is quite large and well
developed by Sub-Saharan African standards. An impressive
variety of financial instruments is traded, though thinly,
including debentures, private sector bonds, bankers
acceptances, treasury bills, and 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 led to the closure of a number of local banks
and a number of top executives have been prosecuted or have
fled the country to avoid prosecution. These failures have
also raised concerns about the oversight capability of the
Reserve Bank.

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


32. (U) The opposition and civil society operate in an
environment of intimidation and repression. Individuals and
companies out of favor with the government or regarded by the
government as aligned with the opposition, suffer harassment
and bureaucratic obstacles in their business dealings. The
government has closed three independent newspapers, for
example, and has denied numerous telecommunications licenses
for apparently political reasons. Domestic businesspeople
out of favor with the government have been incarcerated for
lengthy periods under trying conditions, including alleged
torture, for engaging in illegal business practices such as
externalization of currency.


33. (U) In April 2005, with no notice and in the middle of
the country,s winter, the GOZ embarked upon Operation
Restore Order, destroying the purportedly unpermitted homes,
businesses, or both, of over 700,000 people. Police
demolished or forced victims to destroy their own homes and
businesses, many of which did appear to have all relevant
permits, without providing alternative accommodation or means
of reestablishing their livelihoods. The government then
blocked the efforts of NGOs and international organizations
to provide emergency relief.

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


34. (U) There is widespread corruption in government.
Implementation of the government,s ongoing redistribution of
expropriated commercial farms has substantially favored the
ruling party elite and continues to lack transparency. Top
ruling party officials and business people supporting the
ruling party have received priority in distribution of the
country,s resources, including priority access to limited
foreign exchange and fuel. The government,s campaign to
provide housing plots and vending sites for victims of
Operation Restore Order appears to be benefiting mostly civil
servants, security forces, and ruling party supporters.


35. (U) In January 2005 the government enacted an
Anti-Corruption Act, which established a government-appointed
Anti-Corruption Commission; however, it includes no members
from civil society or the private sector. In the same month,
the government established the Ministry of State Enterprises,
Anti-Monopolies, and Anti-Corruption to investigate and raise
awareness about corruption; however, government officials and
police lack sufficient political backing by senior levels of
the government to effectively investigate the corruption.
The government prosecutes individuals selectively, focusing
on those who have fallen out of favor with the ruling party
and ignoring transgressions by favored elite.

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


36. (U) The U.S. has no bilateral investment or trade treaty
with Zimbabwe. Zimbabwe currently has bilateral investment
agreements with Germany, the United Kingdom, Netherlands,
Belgium, Portugal, Switzerland, Sweden, Malaysia, Mozambique
and China. It is negotiating bilateral investment treaties
with Italy and South Africa. However, as noted above,
commercial farms covered by some of the treaties have been
seized or listed for acquisition, thereby denying the owner
benefits under these treaties.

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


37. (U) The U.S. Government and Zimbabwe concluded an OPIC
agreement in April 1999. Zimbabwe acceded to the World Bank's
multilateral investment guarantee agency (MIGA) in September

1989. Support by the Export-Import Bank of the U.S. is not
available to Zimbabwe. Many other major donor countries have
also suspended their trade finance and export promotion
programs, as well as investment insurance, due largely to
Zimbabwe,s mounting bilateral arrears and deteriorating
investment climate.

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


38. (U) Zimbabwe,s interconnected economic and political
crises have prompted many of the country,s most skilled and
well educated to emigrate, leading to widespread labor
shortages for managerial and technical jobs. At the same
time, the severe contraction of the economy in recent years
has caused formal sector employment to drop significantly.
The best available surveys place formal sector unemployment
as high as 80 percent. As noted above, foreign investors are
encouraged to hire local nationals.


39. (U) The country's HIV/AIDS epidemic is also taking a
heavy toll on the workforce. However, with substantial
support from the U.S. Government and other donors, Zimbabwe
has instituted policies that have contributed to reducing the
adult infection rate from 24.6 percent in 2003 to 20.1
percent in 2005, making Zimbabwe only the second country in
Sub-Saharan Africa to stem the disease,s tide.


40. (U) The government is a signatory to International Labor
Organization (ILO) conventions protecting worker rights,
although the world body recently designated Zimbabwe as a
"notorious country" for its continued attempts to limit
workers' right to organize and hold labor union meetings.
The 1985 Labor Relations Act set strict standards for
occupational health and safety, but enforcement is fairly lax
and inconsistent across the industrial sectors.


41. (U) In light of the hyperinflationary environment (the
inflation rate is widely accepted to have reached quadruple
digits as of March 2006, although the government maintains it
is in the mid-triple digits),employers and workers have
agreed to negotiate wages and other benefits on a quarterly
rather than annual basis. Collective bargaining takes place
through a National Employment Council (NEC) in each industry,
comprising representatives from labor, business, and
government. In addition, the Zimbabwe Congress of Trade
Unions (ZCTU),the country's umbrella labor organization and
traditional advocate for workers to both business and
government. In addition, a Tripartite Negotiating Forum
(TNF) was established in 2001 for labor, business, and
government to tackle macro-social issues. However, these
talks have been fitful and unproductive since their
inception.


42. (U) Beginning in January 2005, the government stepped-up
harassment of the ZCTU and its leadership, and has launched
investigations into alleged financial improprieties at ZCTU.
Under Zimbabwe labor law, the government can intervene in
ZCTU,s internal affairs if it determines that the leadership
is not acting in the workers, interest. The government has
threatened to eliminate the ZCTU, and has taken steps to
marginalize the traditional unions and the formal labor
dispute resolution mechanism. To undercut the strength of
ZCTU, the government has created an alternative umbrella
organization, the Zimbabwe Federation of Trade Unions (ZFTU).
However, outside of government or the state-controlled
media, the ZFTU is not regarded as a legitimate labor
organization. The ZCTU remains the voice of labor in
Zimbabwe and the country,s official and internationally
recognized labor organization.

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


43. (U) The government promulgated legislation creating
Export Processing Zones (EPZs) in 1996. Zimbabwe now has 183
Export Processing Zone designated companies. Benefits
include a five-year tax holiday, duty-free importation of raw
materials and capital equipment for use in the EPZ, and no
tax liability from capital gains arising from the sale of
property forming part of the investment in EPZs. Since
January 2004 the government has generally required that
foreign capital comprise a majority of the investment. The
requirement on EPZ designated companies to export at least 80
percent of output has constrained foreign investment in the
zones. The government has recently drafted legislation,
which, if approved, would dissolve the Zimbabwe Investment
Centre and the related Export Processing Zones Authority and
replace them with a new National Investment Authority.

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


44. (U) Zimbabwe Net Investment Flows 1998-2004 in Million
US$

1998 1999 2000 2001 2002 2003 2004 est,
Direct Investment
436 50 16 0 23 4 9

Portfolio Investment
11 21 -1 -68 -2 4 2

Source: IMF

--------------
Resources
--------------


45. (U)
Zimbabwe Investment Centre
Investment House
109 Rotten Row
P.O. Box 5950
Harare
Telephone: (263) (4) 757931/4
Fax: (263) (4) 759 917
www.zic.co.zw

Zimbabawe Tourism Authority:
www.tourismzimbabwe.co.zw
Export Processing Zones Authority:
www.epz.co.zw
Privatization agency of Zimbabwe:
www.paz.co.zw
Zimtrade:
www.zimtrade.co.zw
Zimbabwe International Trade Fair:
www.ztf.mweb.co.zw

DELL