INDIGENIZATION BILL - ANOTHER BLOW TO ZIMBABWE'S

UNCLAS HARARE 000598 SIPDIS SENSITIVE SIPDIS AF/S FOR S. HILL NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS E.O. 12958: N/A TAGS: PGOV ECON EINV ZI SUBJECT: INDIGENIZATION BILL - ANOTHER BLOW TO ZIMBABWE'S BELEAGURED ECONOMY -------------- Summary -------------- ¶1. (SBU) Parliament is scheduled to begin considering the Indigenization and Economic Empowerment Bill in late July. The Bill's official purpose is to seek to increase participation of indigenous Zimbabweans in the economy; its ultimate objective is for at least 51 percent of the shares of every business to be owned by indigenous Zimbabweans. The Bill, to the relief of many in the business community - both black and white - does not contain any obligation by existing private businesses to begin to indigenize. Nevertheless, in light of the already dominant position of indigenous Zimbabweans in business, it raises concerns about cronyism in the eventual distribution of company shares and about the resurgence of a &grab8 mentality. Ultimately the Bill will discourage new investment and discourage those foreign investors still on the ground, including U.S. companies, from holding on longer as the pace of economic decline accelerates. End Summary. -------------- Key Features -------------- ¶2. (U) The Government Gazette published the long-anticipated Indigenization and Economic Empowerment Bill on June 22. Key features of the Bill, which Parliament is scheduled to consider when it re-opens in late July, are: - The Government shall endeavor to secure that at least 51 percent of the shares of every public company and any other business shall be owned by indigenous Zimbabweans. In the shorter term, the Minister of Indigenization and Empowerment (N.B. at the moment, Paul Mangwana) will be empowered to publish regulations prescribing acceptable, but temporary, lesser percentages and thresholds. - An indigenous Zimbabwean is defined as any person who before April 18, 1980 - the date of Zimbabwe's independence - was disadvantaged by unfair discrimination on the grounds of his or her race, any descendant of such a person, and any company, association, syndicate or partnership in which such persons hold the controlling interest or are the majority of the members. (N.B. The definition may include Zimbabweans of Indian descent; there are varied interpretations.) - Ministerial approval will be required for mergers, restructurings and acquisitions to ensure a high level of control by indigenous Zimbabweans. (N.B. The Bill does not contain any obligation by existing businesses to begin indigenizing. It does, however, call for an "indigenization and empowerment assessment rating" of every company.) - The Bill requires Government departments, parastatals, local authorities and companies to procure at least 51 percent of their goods and services from businesses controlled by indigenous Zimbabweans. - The Bill calls for establishment of an Indigenization and Empowerment Board appointed by the Minister to advise on strategy, and a Fund to be set up to finance the acquisition of shares, management buy-ins and buy-outs, and capacity-building for indigenous Zimbabweans. It will be capitalized, among other sources, by the proceeds of levies on companies and other businesses. -------------- Benefit to the Politically Connected -------------- ¶3. (SBU) The USG-funded State University of New York (SUNY) parliamentary support project considered the economic implications of the Bill, noting that Zimbabwe's business sector was, in fact, already quite racially balanced. Most Zimbabwean companies are owned and managed by indigenous Zimbabweans. Reminiscent of fast-track land reform, it concluded the ultimate beneficiaries of the initiative would be the politically connected elite. MDC Secretary General Tendai Biti echoed that conclusion in his commentary on the Bill, entitled "Another platform to loot and plunder." He called it another avenue of patronage and rent-seeking "by the big guns in ZANU-PF." -------------- "Grab Mentality" Will Spur Capital Flight -------------- ¶4. (SBU) The SUNY analysis described the Bill as part of the GOZ's "scramble" to divvy up a shrinking cake. Against a backdrop of negative economic growth over nearly ten years, it predicted that the Bill and the levies required to fund its implementation would spur capital flight and hasten economic decline. Addmore Chakurira of Imara Capital suggested it would increase the perceived level of political risk and thwart development of the country's rich mineral deposits, which required huge foreign investment. ¶5. (SBU) The SUNY paper also lamented the mindset that assets must be taken from others in order for indigenous Zimbabweans to develop. It called on the government to create an entrepreneurial environment and allow business people to choose their own partners freely. It also noted that the "grab" mentality failed to cultivate business skills. In a similar vein, Biti's commentary decried the GOZ's apparent willingness to destroy the remaining pockets of productivity rather than resuscitate the collapsed supply side of the economy. ¶6. (SBU) Doug Verden, Acting CEO of the Chamber of Mines, told econoff that too much power had been concentrated in the hands of the Minister, leaving much important detail to be clarified at the Minister's discretion without Parliamentary approval. Verden was also troubled by the lack of information on levies to be charged, the failure to set a timeframe for indigenization, and the overall vagueness of the Bill. -------------- Potential Impact on U.S.-Owned Businesses -------------- ¶7. (SBU) Aside from a few dozen distributors of U.S. goods and some franchisees, only about a dozen large U.S.-owned businesses remain in Zimbabwe. Unless they seek to merge, unbundle or make acquisitions, the new Bill does not put them in danger of forced indigenization. Nonetheless, executives from the regional headquarters of several large companies have called on us in the past year, uneasy about sustaining loss-making ventures in Zimbabwe any longer, and seeking advice about Zimbabwe's future. For those companies, passage of the Indigenization Bill and the recent faster pace of decline could move them to pull the plug on their Zimbabwe operation. -------------- Comment -------------- ¶8. (SBU) Business in Zimbabwe is already predominantly black-owned/managed. Rather than robbing from Zimbabwe's shrinking economic pie to redistribute for patronage, pro-business economic policies would do far more to attract investment, spur growth and ultimately increase black shareholding and entrepreneurship than legislated indigenization. An example of the GOZ's typical short-term thinking, however, especially as it heads into an election year, the Bill will probably find populist appeal and sail through the ruling-party dominated Parliament and become law in a few months. Whether it is then rigorously implemented or shelved is, in the short-term, less significant than its passage, which alone will have struck another blow to the economy. In the meantime, the business community's attention is riveted less on the Bill than on the GOZ's heavy-handed campaign (septel) to roll back prices, which could immediately affect day-to-day existence as staples vanish from shop shelves. DELL