Zimbabwe Sets Racial Quota for Business Ownership

UNCLAS SECTION 01 OF 02 HARARE 000116 SENSITIVE SIPDIS AF/S FOR B. WALCH E.O. 12958: N/A TAGS: ECON EFIN EINV PGOV PREL ZI SUBJECT: Zimbabwe Sets Racial Quota for Business Ownership ¶1. (SBU) SUMMARY: A Government of Zimbabwe (GOZ) minister from President Mugabe's ZANU-PF party has issued regulations meant to force "indigenization" of businesses. The new rules, published on February 5, say that any business worth US$500,000 or more must explain how it will "cede a controlling interest" to "indigenous Zimbabweans." The regulations are to take effect on March 1. Existing businesses will have 45 days to submit their indigenization plans. Failure to comply will be punishable by a fine or up to five years' imprisonment. While the regulations remove some of the uncertainties created by the thus-far unenforced Indigenization and Economic Empowerment Act of 2007, they also raise new questions. Prime Minister Tsvangirai and his Movement for Democratic Change (MDC) oppose the regulations. This latest indigenization scare is bound to put another dent in Zimbabwe's battered reputation and give investors another reason to stay away. END SUMMARY. ¶2. (U) Statutory Instrument 21 of 2010, dated January 29 but released on February 9 by Minister of Youth Development, Indigenisation, and Empowerment Saviour Kasukuwere, says that every business in Zimbabwe with an "asset value" of at least US$500,000 must submit an "indigenization implementation plan" to his Ministry. The deadline for existing businesses is 45 days after the regulations take effect on March 1. New businesses will have 60 days to submit a plan. The goal of each plan must be to transfer within five years a controlling interest in the business to indigenous Zimbabweans, who are defined in the Act to be any person "disadvantaged by unfair discrimination on the grounds of his or her race" before April 18, 1980, or the descendant of such a person. A business need not submit an indigenization plan if it can show that it does "development work," adds value to raw materials for export, brings new technology or skills to Zimbabwe, or will "achieve any other socially and economically desirable objective." ¶3. (U) The regulations list 14 industries "reserved against foreign investment." These include agriculture, transportation, retail and wholesale trade, grain milling, advertising, bakeries, tobacco processing, and milk processing. Given that the underlying legislation explicitly provide for minority foreign ownership of businesses, the regulations appear to have the effect of excluding all foreign investment in the 14 designated industries. There are also other ambiguities in the regulations. It is not clear whether "asset value" is net or gross. And the regulations do nothing to clarify the definition of an indigenous Zimbabwean, which does not obviously include all black Zimbabweans or necessarily exclude everyone who might be considered white or of some other race. Another disturbing source of uncertainty is how the Minister may choose to interpret the broad exemptions in the regulations. Nor do the regulations spell out what might become of businesses that do not meet the five-year indigenization deadline. ¶4. (SBU) So far there have been few public reactions from the business community. One mining company has advised shareholders that it is "studying" the regulations and noted that they provide for future issuance of lower indigenization quotas for specific industries. The Chamber of Mines, the mining companies' main lobbying group, has long been engaged in discussions with the GOZ on indigenization rules. Private reactions range from alarm to resignation. One prominent businessman sees the issuance of the regulations as a political ploy by Kasukuwere to curry favor with Mugabe. In his view, the regulations do not have broad support within ZANU-PF and are likely to be withdrawn or modified. But he acknowledged that news of the regulations could have a devastating effect outside the country on potential investors. Other business contacts have expressed doubts about the capacity of the GOZ to implement the regulations. If there is a high degree of compliance with the reporting requirement, Kasukuwere's ministry could collapse under an avalanche of paper. But that could also have the effect of making enforcement all the more arbitrary. ¶5. (U) Press reports say Tsvangirai has called the regulations "null and void" because they were not approved by the cabinet. His MDC party released a statement on February 11 calling the statutory instrument "provocative" and "a deliberate attempt to undermine the country and its people." The MDC called on the GOZ to withdraw the regulations. HARARE 00000116 002 OF 002 ¶6. (SBU) COMMENT: With ZANU-PF's popular support draining away, release of the indigenization regulations now could be a move to curry favor with the electorate. But sooner or later, the indigenization law will give way to Stein's Law: "If something cannot go on forever, it will stop." Until then, intermittent indigenization scares will help keep Zimbabwe a high-risk zone for lenders and investors, choking off the financing needed to rebuild a battered economy. Zimbabwe's macroeconomic recovery is already starting to look like a dead-cat bounce: the economy is better now mainly because it could not have gotten worse. Investors and lenders were already staying away in droves before Kasukuwere made his move. Even if the just-issued indigenization rules disappear or are watered down before March 1, Zimbabwe's battered reputation will carry a new and lasting dent. If the rules stay in place, prospects for meaningful economic growth this year will dim significantly. END COMMENT. RAY