Zimbabwean finance minister Patrick Chinamasa said on 22 April the government would propose new regulations for the implementation of the Indigenisation and Economic Empowerment Act (IEEA) for non-mining sectors.
IHS perspective | |
Significance | Indigenisation is the Zimbabwean government's flagship economic policy, which has been only partly implemented in the mining sector. The policy has hindered foreign investment. |
Implications | A relaxation of the indigenisation policy is likely in non-mining sectors. Platinum miners face severe risk of confiscation, without compensation, and imposition of further local content requirements. |
Outlook | Indigenisation's inherent problems indicate no final resolution of its implementation is likely until President Robert Mugabe has left office. |
On 22 April, Zimbabwe's finance minister, Patrick Chinamasa, announced the government would propose new regulations covering the implementation of the country's Indigenisation and Economic Empowerment Act (IEEA) for non-mining sectors. The IEEA was proposed in 2008 and implemented in 2012, requiring foreign-owned companies to transfer majority-ownership of their local subsidiaries owning assets worth more than USD500,000 to indigenous Zimbabweans. The legislation has been arbitrarily implemented, hindered government efforts to secure foreign lending, and deterred foreign investment. Since 2011, under previous indigenisation minister Saviour Kasukuwere, a one-size-fits-all application of the IEEA was applied across all sectors. A number of indigenisation agreements have been agreed with the local subsidiaries of multinational mining corporations Impala Platinum Holdings (Implats), Anglo American Platinum (Amplats), Aquarius Platinum, Rio Tinto Group, and Mwana Africa. Outside of the mining sector, indigenisation agreements have been concluded with the local subsidiaries of British American Tobacco, Pretoria Portland Cement, and banks such as Barclays and Ecobank Transnational Inc. However, strong opposition from the former governor of the Reserve Bank of Zimbabwe, Gideon Gono, who left his post in November 2013, prevented the full implementation of the IEEA in the banking sector.
In September 2013, the more moderate Francis Nhema replaced Saviour Kasukuwere as indigenisation minister, triggering speculation that the governing Zimbabwe African National Union-Patriotic Front (ZANU-PF) party will begin to relax its flagship indigenisation policy. IHS had previously forecast that, although Nhema's appointment is unlikely to herald a reversal of indigenisation, it does indicate a more flexible implementation of the IEEA as favoured by Gono (see Zimbabwe: 7 November 2013: Zimbabwe unlikely to relax indigenisation policy, placing investors at increased risk of arbitrary implementation). In the context of a rapidly deteriorating financial and liquidity crisis (see Zimbabwe: 14 April 2014: Liquidity squeeze in Zimbabwe leaves economy in deflationary grip), the government has made increasingly conciliatory (and often contradictory) statements on the implementation of the IEEA outside of the mining sector.
Three problems with indigenisation policy
Three factors underline the lack of success of ZANU-PF's flagship economic policy. Firstly, several companies that have agreed indigenisation deals have since struggled financially. Secondly, indigenisation has slowed foreign direct investment into Zimbabwe, particularly in the platinum mining sector. Implats, Amplats, and Aquarius Platinum have been planning to construct a USD3-billion platinum refinery in Zimbabwe, while an additional USD5 billion will be needed to ramp up production, according to the Chamber of Mines. Such investment is unlikely to be forthcoming as long as uncertainty over indigenisation prevails.
Thirdly, the government has been unable to make appropriate compensation payments for the share transfers. Indigenisation agreements between mining companies and the government have been based on about 20% being transferred to community and employment funds on dividend paid loans. An additional 31% share transfer to an indigenisation fund has to be fully compensated at prevailing market rates. The value of shares transferred to such an indigenisation fund has been estimated at between USD372 million and USD1 billion for the Implats deal alone. It is IHS's understanding that no market-value compensation has been made to any of the companies involved, thus stalling the complete share transfer.
Meanwhile, political supporters of ZANU-PF are calling increasingly for tangible benefits from indigenisation, i.e. faster redistribution of wealth, while political opponents of the policy and social commentators have claimed that indigenisation has only benefited politically connected companies and the ruling elite. Various foreign companies outside of the mining sector have been able to stall negotiations on the IEEA's implementation until now, such as agri-business firm Tongaat Hullett.
Political stalemate will delay final resolution of IEEA conundrum
The problems with the IEEA and recent contradictory public statements over the IEEA's future implementation underscore a serious political crisis concerning the political succession of President Robert Mugabe, who is 90 and reported to be in ill-health. Since 2010, two main factions have emerged in the succession race within ZANU-PF, and relations between them have become increasingly acrimonious. One faction is headed by First Vice-President Joyce Mujuru, who enjoys strong support from ZANU-PF provincial organisations. The other is led by Minister of Justice Emmerson Mnangagwa, who headed the powerful Joint Operations Command that de facto governed Zimbabwe during the disputed elections in 2008. Several figures close to Mujuru favour rapprochement with the political opposition and have taken a less hardline stance on farm expropriations and the IEEA than Mnangagwa (see Zimbabwe: 11 April 2014: Zimbabwe's first lady emerges as key "kingmaker" in succession race while consolidating family assets, raising expropriation risks). Any decision on the implementation of the IEEA in the interim period ahead of President Mugabe's departure from office is unlikely to be final, as the various factions seeking to succeed him disagree over the policy's benefits.
Outlook and implications
The remainder of Mugabe's presidency is likely to be marked by confused and arbitrary implementation of the IEEA.
Platinum mining
Any proposed relaxation of the IEEA is unlikely to impact on the mining sector. Political pressure is likely to increase to confiscate platinum and gold mining firms that have failed to fully apply the IEEA in the five-year outlook. Within the mining sector, indigenisation has been applied selectively and arbitrarily. Consequently, wholesale nationalisation is unlikely to be applied as a blanket policy. Productive and profitable mines, especially those targeted under existing IEEA legislation, will be at highest risk of confiscation. For example, the Implats-owned Ngezi mine, which is due to expand production by another 174,000 ounces, will be at severe risk of confiscation. There have also been allegations of widespread corruption, and any company that is exposed to any such demands for large kickbacks will face a raised reputational risk and the risk of corruption probes by home regulators. Companies with sound relations with political influencers will be able to negotiate lower share transfers - such as, New Dawn Mining Corporation at a reportedly reduced shareholding transfer of 42%.
A secondary risk is derived from the government's promotion of local beneficiation in the mining sector, including requirements to refine locally, or the scaling back of planned output increases. The government has already imposed a ban on chrome ore exports in 2011. A key indicator for mining sector confiscation would be refusal by platinum and chrome companies to meet such government demands. IHS Pricing & Purchasing forecasts that platinum prices could move higher based on Zimbabwe's efforts to restrict platinum ore exports and encourage a domestic platinum refining industry.
Banking
The risk of indigenisation is lower in the banking sector. Even under the previous coalition government, ZANU-PF was reluctant to irritate foreign-owned banks such as Barclays, Stanbic Bank, Standard Chartered, ABC Holdings (BancABC), Ecobank Transnational Inc, MBCA Bank (Nedbank Group), and Old Mutual. This is because these banks help to fund Zimbabwe's large current-account deficit of 36% of GDP (2011) and total debt burden of 116% of GDP, which drive the current financial and liquidity crisis. Indigenisation agreements that are concluded over the next five years are likely to be applied on a case-by-case basis.
Other sectors
In the manufacturing sector, the threshold for indigenisation has been reduced, with only 26% of shares required to be transferred in the first year, as compared to the mining sector requirement of 51%. Banks, service industry firms, and factories, as well as tobacco farmers, are unlikely to be compelled to comply fully with indigenisation laws.