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