GOZ URGED TO 'GET POLICIES RIGHT' AT MINING

UNCLAS SECTION 01 OF 04 HARARE 000417 SENSITIVE SIPDIS AF/S FOR B. WALCH AF/EPS FOR ANN BREITER NSC FOR SENIOR AFRICA DIRECTOR M. GAVIN STATE PASS TO USAID FOR L.DOBBINS AND J. HARMON TREASURY FOR D. PETERS COMMERCE FOR ROBERT TELCHIN ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS E.O. 12958: N/A TAGS: EMIN ECON ETRD EINV PGOV ZI SUBJECT: GOZ URGED TO 'GET POLICIES RIGHT' AT MINING CONFERENCE -------------- SUMMARY -------------- ¶1. (SBU) Presenters at a mining conference organized by the Chamber of Mines of Zimbabwe in Harare on May 7, urged government to implement prudent policies to attract investment and restore the sector to its former position of contributing close to seven percent to gross domestic product. Speakers from the industry made a case for increasing indigenization gradually through the formation of joint ventures with foreign investors rather than through legislation. The experiences of Tanzania and South Africa illustrated how good policies could contribute to the orderly development of the mining sector in Zimbabwe. The examples also highlighted the importance of developing mutual trust between government and the private sector through increased consultation. However, even under good policies, Zimbabwe's mining industry faces the immense constraint of electric power shortages. END SUMMARY. -------------- Significance of the Mining Sector -------------- ¶2. (U) At a mining conference organized by the Chamber of Mines of Zimbabwe on May 7, Alex Mhembere, Chief Executive Officer of Zimbabwe Platinum Mines Ltd ("Zimplats"),told delegates that Zimbabwe has over 60 exploitable minerals but currently produces only two-thirds of them. According to figures from the Reserve Bank of Zimbabwe, mineral exports (excluding gold) amounted to US$684.7 million in 2008 and accounted for 49 percent of total export shipments of goods, down from US$838.6 million and 52 percent of total exports in ¶2007. Economic analyst John Robertson pointed out the importance of the mining sector beyond its contribution to the country's gross domestic product of about three percent, down from a high of about seven percent: Mines provde employment and offer contracts to suppliers, which in turn generates demand for locally produced goods and stimulates production. Mhembere and Chamber of Mines Vice President Victor Gapare of GAT Investments Limited told the gathering that the multiplier effect of mining on the economy can be as high as tenfold. Citing the example of the towns of Shamva and Shurugwi, Robertson also noted that mining companies had built towns in Zimbabwe and taken on responsibilities comparable to those of large town councils. -------------- The Lost Decade -------------- ¶3. (U) Opening the conference, the Minister of Mines and Mining Development, Obert Mpofu, lamented the deterioration of a once vibrant sector. He said Zimbabwe's excellent mineral endowment had the potential to drive economic recovery if the country could attract domestic and foreign investment. Mhembere said that Zimbabwe had failed to Qinvestment. Mhembere said that Zimbabwe had failed to capitalize on firm commodity prices between 1998 and 2008. He noted that out of a total of 88 operating mines in 1998 only 20 were still open in 2008; of those, only three were operating at full capacity. Illustrating the decline in output of a number of minerals during this ten-year period, HARARE 00000417 002 OF 004 Mhembere pointed out that gold production fell from 25 MT to 3.6 MT in 2008, and chrome production declined by more than half from 780,150 MT to 311,970 MT. Almost all the minerals he analyzed showed a similar declining output trend at a time when most commodity prices had been rising. -------------- Poor Policy Environment to Blame... -------------- ¶4. (U) In Mhembere's view, poor government policies were at the heart of the precipitous decline in the mining sector. As a result of the policy failures, very little exploration had been carried out over the past ten years, which would further negatively affect production "not long from now." Mhembere quoted the Fraser Institute Survey of Mining Companies for 2008/2009 which ranked Zimbabwe last in the world with 2.4 points out of a possible 100 in the area of investment environment in the mining sector. ¶5. (SBU) The immediate past president of the Chamber of Mines Jack Murehwa criticized the introduction of the Indigenization Act, which seeks to compel companies to sell 51 percent of their shareholdings to black Zimbabweans. He called the Act regressive and said it frightened away potential investors. He criticized the extension of the Act to the mining sector through the proposed amendment to the Mines and Minerals Act, arguing that no indigenous Zimbabwean could raise sufficient capital to purchase a 51 percent shareholding in a significant mining company given the highly capital-intensive nature of the industry. Paul Chimbodza, Chairman and Chief Executive Officer of Geo-Associates Private Limited, concurred, noting that inconsistent and wrongheaded government policies had failed to stimulate investment. -------------- ... And Electricity Shortages, Too -------------- ¶6. (U) Wayne Waterworth, Managing Director of Falcon Gold Limited, pointed out the negative effect of electric power shortages in the past years on the performance of the sector. Power outages had disrupted production and led to flooding of some mines. Earnest Muchayi, Managing Director of Zimbabwe Electricity Transmission and Distribution Company, a subsidiary of the Zimbabwe Electricity Supply Authority (ZESA),told the conference that even with the mining sector operating at very low capacity, Zimbabwe could not generate sufficient power to satisfy demand. He attributed the problem to a number of constraints faced by ZESA such as old equipment, unreliable coal supply, inadequate working capital, loss of skills, and power cable theft. -------------- What Chance for Increased Investment? -------------- Q -------------- ¶7. (SBU) Niels Kristensen, Managing Director of Murowa Diamonds, described to delegates the four-stage investment cycle in mining and attendant risks. He stated that the payback time for a typical mining project could be as long as five to seven years. Both Mhembere and Kristensen made the HARARE 00000417 003 OF 004 point that no investor would commit money to a project that, in addition to being subject to unclear and vacillating policies, did not have the assurance of property rights, as was the case in Zimbabwe today. In their view, Zimbabwe's investment climate was characterized by high technical, marketing, and political risks that would continue to drive away foreign investors. ¶8. (SBU) Emmanuel Jengo, Chief Executive Officer of the Tanzania Chamber of Minerals and Energy gave an eye-opening account of the Tanzanian mining experience from the colonial period of very low investment through independence, &Ujamaa,8 and the post-1990 era of pro-market reforms. Jengo's message was that pro-market reforms had helped boost investment in Tanzania's mining sector, particularly in gold mining where production had risen from practically nothing to the current level of 50 MT/year. He emphasized the "power of implementing correct policies" on private sector development in mining, and the importance of developing trust between the private sector and government. -------------- Indigenization Lobby Speaks Out -------------- ¶9. (U) A number of small organiations that lobby for indigenous rights were represented at the conference and expressed support from the floor for the proposed indigenization amendment to the Mines and Minerals Act. Supa Mandiwanzira, the President of the Affirmative Action Group (AAG),for example, accused managers of locally-based mining conglomerates of being fronts for foreign owners. In reply, Paul Chimbodza noted that 60 percent of the mining claims in Zimbabwe were, in fact, in Zimbabwean hands. Chimbodza voiced concern that the amended Act would be used to empower only a few highly-connected individuals, as had been the case in fast-track land reform. ¶10. (U) On May 14, the Indigenous Business Women's Organization (IBWO) echoed Mandiwanza's sentiments at a meeting attended by economic specialist. IBWO representatives called on the government to "give" them 51 percent of shares in mining companies. Rising to IBWO's support at the meeting Saviour Kasukuwere, Minister of Youth Development, Indigenization and Empowerment, promised to push for the proposed controversial changes to the Mines and Minerals Act. ¶11. (U) Most vexing to the majority of delegates at the Chamber of Mines conference was the prospect of being forced to sell company assets to meet indigenization requirements. They argued that policy should focus instead on creating opportunities for individuals to start their own businesses, thus widening the country's economic base. Joel Mungoshi of Mvelaphanda Resources Ltd of South Africa told delegates that QMvelaphanda Resources Ltd of South Africa told delegates that the best option for empowerment and indigenization was for government to encourage indigenous Zimbabweans to enter joint ventures with foreign investors rather than set empowerment thresholds. He described how Mvelaphanda Resources had evolved from a minerals extraction company to become a manufacturer of catalytic converters for cars with the help of German investment underpinned by an enabling environment created by government. HARARE 00000417 004 OF 004 -------------- Way Forward -------------- ¶12. (U) Mhembere stated that for the mining sector to contribute effectively to Zimbabwe's economic recovery the investment climate had to be improved by putting in place attractive mining laws buttressed by a supportive regulatory framework and consistent monetary and fiscal policies. On mining legislation, Murehwa and Chimbodza suggested the removal of empowerment limits from the proposed amendment bill to the Mines and Minerals Act. Murehwa also said government's role should be reduced to encouraging business deals between interested parties rather than setting indigenization thresholds. ¶13. (U) The problem of generating sufficient electricity for the industry remains one of the most difficult constraints confronting the sector. Muchayi emphasized the need for industry to pay economic tariffs, but it was not clear whether this step would resolve ZESA's operational deficiencies, including the problems of indebtedness to regional utilities, obsolete equipment at most of ZESA's power stations, plus disruptions in transmission and distribution. It was clear to the delegates that, good policies or bad, without adequate power the mining sector would continue to operate well below its full potential. -------------- COMMENT -------------- ¶14. (SBU) Although the mining sector could be a major contributor to Zimbabwe's economic recovery by generating employment, taxes, and foreign exchange, the poor and uncertain policy environment under ZANU-PF Mines Minister Mpofu and the country-wide power shortages present onerous constraints. Moreover, the proposed amendments to the Mines and Minerals Act with respect to indigenization, while popular with affirmative action groups, constitute an attack on property rights that will continue to inhibit investment in existing mines and scare away new investors. At a time when the private mining sector could be leading economic recovery, Zimbabwe risks more years of missed opportunities in this potential pillar of the economy. END COMMENT. MCGEE