The Socio-Economic Impact of Indigenisation
Written by Economic.co.zw
Statutory Instruments brought the law into effect in February 2010 and, in effect, gave all businesses worth more than US$500 00 and owned by non-indigenous people five years to ensure that at least 51% of their shares became the property of indigenous people. More immediate deadlines were set for the registration of all such businesses and full disclosures of current shareholders, and the proposed sequence of divestitures has to be submitted for approval.
Although this was the first Act of Parliament to feature the word Indigenisation in its title, it was by no means the first policy decision to promote the idea.
In 1980, President Banana decreed that only indigenous people could join the civil service and all non-indigenous civil servants who chose to remain should consider their prospects of promotion to have come to an end.
Then the business sector experienced the effective indigenisation of import licences and foreign currency allocations. Robert Mugabe, then Prime Minister, repeated on many occasions his belief that the transfer of this vital link in the moneymaking chain would ensure that the selected indigenous people would become the industrialists of the future.
That never happened because very nearly all of the beneficiaries of the process found the easiest and quickest way to profit from the licences and allocations was to sell them back to the businesses from which they had been taken.
Land Reform was, at first, very much in line with beliefs in indigenisation, but when some of the people targeted for dispossession turned out to be successful indigenous farmers, this proved the existence of other motives. A growing body of evidence began to suggest that the real purpose was to bring down the rich, rather than to elevate the poor, but as riches mounted exponentially in some quarters, other explanations had to be sought.
The most persuasive of these placed the emphasis on political influence. According to the structure of Zanu PF beliefs, the only people who should be allowed to wield political influence should be those on whom the President has conferred this privilege. And of course, the President would confer such privileges only on his most trusted and loyal supporters.
Therefore, if somebody gained influence by being successful in business, their ability to make plans and carry them through without first getting the President’s blessing was seen to be a potential threat. As the party’s hierarchy and security personnel saw their principal function to be to protect the President, they willingly accepted the task of neutralising all threats, potential or otherwise.
When the Land Reform proposals were first published, the President stated his intention of redistributing about half the area being farmed by large-scale commercial farmers. When the farmers challenged the President by seeking protection from the courts, and helped to fund a new party that promised to overturn this legislation, these actions were treated as not only threatening, but insulting as well.
In retaliation, the President decided to confiscate and redistribute, not half, but all the commercial farmland. He also adopted measures to ensure the early retirement of judges who could not be relied upon to uphold his decisions.
And to prevent market forces from again conspiring to return the assets to those who had lost them, government took agricultural land off the market. The political influence of the farmers was effectively neutralised and their route back to any form of leverage over events was severed.
However, the influence of the business sector in general had also received some attention. Insurance companies were brought under pressure to localise their operations in the 1980s. In the early 1990s the banks were told that new banking licences would be issued to local investors to break the “stranglehold” that the big multinational banks were said to have had on Zimbabwe.
Then in the late 1990s, the “unacceptable powers” of the six major international fuel companies came under attack. Dozens of fuel import licences were issued to local indigenous people. As this step coincided with many other developments at the time, the actions and reactions became massively entangled.
Among these developments were the earlier waves of Land Acquisition Orders, the growing momentum of the MDC, the growing popularity of The Daily News, the launch of the National Constitutional Assembly, the rising strength of the Youth Militia and the electioneering for the 2000 elections. However, the effect most clearly visible to all was the damage done to the economy by the disruptions in fuel imports and distribution.
After the rejection of the constitution proposed by Zanu PF, but before the mid-2000 elections were held, the existing constitution was amended to give legal authority to Zanu PF’s land acquisition moves. The scene was then set for the dispossession of white farmers and any successful black farmers who were not ardent supporters of the party.
After ten dismal farming years, during which most of the re-allocated land remained uncultivated, Zanu PF turned its attention to the remaining spheres of influence that had yet to be brought to heel. With the business sector he Indigenisation and Economic Empowerment Act was passed in Parliament and signed into law just in time to influence the outcome of the 2008 elections.
Zanu PF did not win as many Parliamentary seats as the MDC and the vote for the president was nearly a tie, so a run-off election was planned. This ended up with only one discredited candidate who claimed victory, but after the intervention of SADC, spearheaded by the President of South Africa, Thabo Mbeki, Robert Mugabe was obliged to accept a coalition government.
However, new measures were perceived necessary to swing support back to Zanu PF. Promises of economic empowerment through indigenisation seemed to be the answer.
But from their responses all over the country, the bulk of the population has shown that they are fully aware of the real purpose of the policies: it is to score electioneering points, partly by promising the undeliverable “enrichment”, but more importantly by achieving the disempowerment of all those whose influence is thought likely to be used in support of politicians who are opposed to the policies of Zanu PF.
In other words, the real objective of the indigenisation process is to gain control over the business sector. While the transfer of 51% of the shares from a few hundred non-indigenous companies might appear to empower tens of thousands of new shareholders, the considerable dilution of shareholdings and dividends will amount to, for them, no empowerment at all.
But under government instruction, the new shareholders’ voting rights will no doubt be used to ensure the appointment of boards of directors of government’s choosing.
The reasons why Zimbabwe is now struggling with the consequences of so many of its policies is that most were adopted to meet needs that were identified by people who had lots of influence and wanted to make ensure that this influence would be turned into a formidable power base.
It has to be accepted that they succeeded, but they did so at the expense of everyone else. Their power increased, but we can now see that they were busily acquiring more and more power over less and less. Because they chose not to look at secondary consequences, their power is now over an economy that is a shadow of its former self.
Many donors have shown willingness to help us out of the mess, but they cannot justify offering such help while we continue making – and defending the dumb policy choices that caused the mess, and while we keep telling them to stop interfering with our sovereign right to make them.
They are not denying us our rights, but they see no good reason to give us money to make up for the consequential losses, or to make it easy for us to carry on behaving badly.
The facts that are undisputed are that:
• Investment requires savings
• Zimbabwe’s savings mostly disappeared during the country’s economic collapse and hyperinflation then wiped out what was left
• The savings now needed therefore have to come from abroad
• Foreign investors can choose between more than 200 countries, all of which are competing for the world’s limited investment funds
• Investors will choose countries from which attractive rates of return can be earned
• Investments in high risk ventures require prospects of high rates of return
• Long term investments require stable political and economic environments that inspire confidence
• Current conditions in Zimbabwe offer very few reasons for investors to feel confident, and
• Far from offering security of ownership, Zimbabwe requires new investors to agree to relinquish controlling interests in their companies within five years.
Unfortunately, government seems to believe that it has simply to describe Zimbabwe’s natural endowments and economic potential in an enormously positive light, all of these problems become too small to worry anybody. But this remarkable potential has not proved to be enough to offset investors’ concerns. Investors know what they want and they make their own assessments about whether the investment climate needed to realise the promises is present in Zimbabwe.
Investors look at the present as well as the future. When we have so much going for us, how on Earth did we get into the mess we are in now? The basic answers are simple enough and they are all within easy reach. Potential investors quickly find out that:
• Recent events in Zimbabwe caused a massive decline in agricultural output. This forced the country to become dependent on imported food.
• However, the same events quickly reduced the country’s ability to pay for this food.
• They also damaged output from other sectors, so its ability to pay for most other imports also fell.
• For lack of maintenance, the efficiency of its services infrastructure soon declined as well, reducing further the output from all productive sectors.
• As foreign reserves declined, government reintroduced exchange controls.
• As the Zimbabwe dollar weakened, government imposed fixed exchange rates.
• When inflation rates increased, government tightened price controls.
• When tax revenues declined, government increased its reliance on public sector borrowings.
• When interest rates became too large a burden, government fixed interest rates at a fraction of inflation rates and thus began to erode the national savings stock.
• When lenders could no longer lend enough to close the financing gap, government set Statutory Reserves at figures that confiscated bank balances.
• And when all these sums became too small to sustain government subsidies, transfer payments, salaries and other expenditures, government authorised the printing of the amounts needed.
• The resulting hyperinflation destroyed the Zimbabwe dollar.
• Zimbabwe became reliant on US dollars, but it lacks the ability to acquire enough of these for the private sector to operate efficiently.
• Because the inflows of tax revenues from the crippled economy are also small and the country has disqualified itself from receiving most forms of assistance, government is unable to sustain subsidies or most other transfer payments.
• With its lengthening list of failures affecting its political popularity, and dollarisation imposing constraints on the gifts at its disposal, Zanu PF had need of new means of enticing support.
• Indigenisation, packaged as the people’s entitlement to be masters in their own house, appeared to provide the best answer.
Anyone studying this sequence of events will quickly see that government’s responses almost all dealt with the symptoms, not the causes of the problems. As a result, the ways the problems have been handled have all led to falls in output, the consequences of which have been falls in jobs, export revenues, imports, taxes, electricity, water, education, health and in the quality of just about everything. Indigenisation proposals seem highly likely to repeat the pattern.
Each of the problems has affected output. If we want to start fixing the problems, we have to restore output, which means restoring our ability to produce. And for that we need investment. But the messages we are sending to potential investors is not one that makes them willing to consider Zimbabwe as an option.
Even the former employees of Zimbabwean companies, thousands of whom had to leave the country when the waves of consequences reached them, have yet to hear news that will encourage them to return home.
While we can tie most of their decisions to migrate directly to the consequences of Land Reform, many would prefer to put the emphasis on another, wider issue, the country’s abrogation of the rule of law. These politically chosen moves impacted most directly on civil rights, property rights and contractual obligations. Land was confiscated, but so were financial assets such as pension funds, savings accounts and bank balances.
And now we see the State setting the stage for the confiscation of 51% of the shares in every company that is not already owned by indigenous Zimbabweans.
As full observance of ownership rights forms the foundation of all investment decisions, foreign investors as well as domestic investors are quick to argue that Zimbabwe’s recent departures from international standards of behaviour and normal business procedures can be directly linked to decisions to suspend or cancel investment plans. Unless we can give them reason to change their minds, their investment funds and emotional commitments will go elsewhere.
The opportunity costs of all such reactions will be borne, not by the misguided politicians, but by all those citizens who might have found employment in the businesses and who might have received training in skills that would have served them for the rest of their working lives.
Other opportunity costs might have been measured in local contracts that were never awarded, in taxes that were never paid, in housing and amenities that were never constructed and in export revenues that were never earned.
The activists who currently believe they can easily escape being held accountable for such losses should clearly be subjected to scrutiny and have their motives examined. More immediately, however, most of them are making claims that can be discredited and should be rejected outright.
In terms of these claims, companies are accused of causing environmental damage that is never rectified and of profiting immensely from their exploitation of the host countries’ populations. They are also accused of capturing valuable resources for themselves while deliberately ignoring modern “best practice” standards that would have protected the interests of their abused hosts.
On the strength of these claims, a small group of agitators has already persuaded government to accept harsh amendments to investment licensing regulations. Unfortunately, the politicians and officials who have accepted this thinking have done so without verifying the claims and, by imposing such beliefs, their promoters are reducing Zimbabwe’s prospects of economic growth.
The Minister of Finance, when introducing his proposed mining tax measures, claimed that the current regime was highly favourable to mining companies in recognition of the large capital outlays needed, but suggested that, as a result, the mining sector’s contribution to the fiscus “is minimal, compared to other countries in the region.”
Regrettably, the Minister did not correctly identify the reasons for the lower tax revenues received in recent years. Government’s direct interference in the exchange rate and its inclination to choose official rates that made exports unviable did the damage.
In addition, the gold miners were badly affected by government’s intervention in setting the gold price and by its repeated rejections of requests to allow gold mining companies to retain enough of their own earnings to pay for essential imports.
Without question, these actions reduced mining activity across the board and wiped out very nearly all of the industry’s taxable profits. Exporters of most other goods were similarly affected.
The effects of making Zimbabwe an attractive investment destination would, instead, impact on every facet of the country’s economy and therefore on tax revenues from a wide range of other activities. As soon as a decision is taken to develop a new factory, the investors become users of a wide range of specialist services, many of which are already operating in the country.
As soon as existing or new service providers can prove their capabilities, their supply, maintenance and repair contracts to existing companies would be expanded to meet new challenges and the results would soon include more employees and more income and profits taxes for government.
Many parastatals and official organisations would also receive support from new, successful companies. With new companies opening, many additional opportunities would emerge to offer mechanical, electrical and electronic engineering services to help ensure the continuing efficiency of heavy machinery, transport equipment and processing lines.
Many services currently provided by external companies and requiring the expertise of expatriates would offer openings to Zimbabweans who could take up the challenges, and each successful contractor in these fields would reduce the business’s dependence on external skills and imported supplies.
When successful businesses are formed, many other business opportunities would emerge as they expand, and in the process, as the broadening spectrum of activities leads to the development of larger urbanised communities, yet more companies would be required to cater to their needs and would contribute further to employment and infrastructural development.
As these openings are taken up, yet more jobs would be created and as new skills are acquired, more foreign currency savings would be realised. As has already happened with the road-building consortium that was formed to build the road used by Zimplats, the most successful of these businesses would enjoy prospects of winning contracts in neighbouring countries.
Rising earnings from the employment of many thousands of trades-people as well as the mineworkers would give rise to rapidly increasing disposable incomes. These would lead to increased consumer spending and yet further increases in business opportunities as service providers establish retail stores, workshops, transport facilities and supply depots. These would all help to meet the growing needs of local urban and farming communities.
Some large enterprises built schools, clinics, hospitals and recreational facilities to meet the needs of staff and they often invited other people in the area to use their facilities. Many of these communities have also benefited from improvements to water supplies, roads, telecommunications and employment prospects. As the developments progressed, the communities in the areas enjoyed accelerated advances in their standards of living.
In economic terms, the huge diversity of spin-offs from investments in processing operations can be described as the Multiplier Effect. The multiplier is calculated by measuring the ratio of changes in income compared to changes in expenditure, but it goes further to bring in the downstream consequences of the first transaction.
Whatever a company spends, its real contribution therefore becomes much bigger when the secondary or "multiplier" effects of the contributions are included. Businesses and regional economies enjoy additional benefits when workers spend their wages, when governments spend revenues from taxes and when local communities make use of the roads, power and other infrastructure that the company creates.
However, the total tax collections arising from the activities of successful companies come to many multiples of these direct tax payments. At each stage, as each sum spent in operating the business becomes somebody else’s income, this too is taxed. When the remainder is spent, it provides new incomes that add considerably to the impact of the each successive payment.
In respect of salaries and wages, some of the money will be paid in tax and some might be saved, so the amount spent will shrink and the multiplier effect will be progressively reduced. However, even when this is taken into account, the multiplier effect causes the total of the incomes generated to become significantly more than the original amounts on which taxes were paid.
Exactly how many times more can be determined by assessing the proportion spent. If this averages 75% of the amount received at each stage, the multiplier will be four. For Zimbabwe, as for most developing countries, the figure is likely to be within the three to four range.
Zimbabwe currently has very few new investment projects that can be used as examples, but the most significant is Zimplats, which is proposing to invest an of US$125 million a year for 20 years as they take the mine to its full planned capacity. If the multiplier is four, this will impact on Zimbabwe’s National Income as if it were an investment of up to US$500 million a year. This will dramatically improve the economic and social prospects of many more people than the direct employees of the mine.
International average ratios for Rio Tinto, another of Zimbabwe’s major mining companies, show that they have also provided a strong base for the economic growth of entire areas where they are active. Like Zimplats, Rio Tinto works on extending the ways in which it can bring sustainable socio-economic benefits to the areas and its direct economic contributions can be measured by the sum of taxes paid to the governments of host countries, plus payments to suppliers, and the value additions achieved.
Value added represents the value that a business adds to the materials and services it has bought. It is equivalent to the sum of all labour payments, the taxes and royalties disbursed to governments and others, plus all returns to capital - including interest payments, profits paid out to shareholders, and money retained in the business for future investment and to replace depreciated assets.
In 2008, Rio Tinto's direct world-wide economic contribution was US$58 billion. This comprised payments to suppliers of US$29,6 billion, and value added of US$28,4 billion. The smallest of all of these were the payments of dividends. For some reason, the Government of Zimbabwe has allowed itself to be persuaded that dividends paid to foreign shareholders constitute a huge drain on the Zimbabwean economy.
This extremely shallow analysis goes on to argue that the only way to stem this haemorrhage is to limit the maximum permissible percentage foreign ownership of a company.
However, the fact that costs were incurred in making those profits means that people were being paid. Evidence shows that every one of Rio Tinto’s many payments for services was much bigger than the total of the dividends earned by the people whose investment made their mines possible.
The wages and salaries paid were much more, the taxes paid were much more, and the capital items, which will remain in the countries for the whole of their working lives, also added up to much more. Even if the products were exported, the foreign earnings they generated added up to very much more than the dividends, specially as dividends could be paid only when a profit was made. And the biggest expenditures of all were to local suppliers.
Spending on goods and services offered by local suppliers is the figure most directly affected by the Multiplier, so when it has been elevated to three or four times the size shown, it supports a wide range of other businesses and professions. Apart from providing needed services, these companies employ more people, all of whom pay their own taxes to government.
Another common feature of business activities is that not only are the wages paid to locals far more than the dividends paid to shareholders, the majority of those wages were earned by people who were taught their skills by the company that employs them.
All of them will have responsible jobs that have to be carried out safely to cause no danger to themselves or their fellow workers, cause no damage to expensive machinery and cause no damage to the environment. Every company now trains people whose sole responsibility is to ensure quality standards are met and to ensure the removal of hazards of every description.
When measuring the value of the contributions that business activities might bring to a country, the value of the skills that are passed on to local people must form a very large proportion of the total. The skills acquired become the personal property of the worker, to keep for the rest of their lives. For many of the individuals, these skills will be the most valuable asset they ever acquire.
One of the best things about skills is that they can be shared. When other forms of property are shared, or other so-called wealth redistribution plans are adopted, the receiver ends up with more and the giver ends up with less. When skills are shared, the learner ends up with much more and the teacher ends up with as much as before, plus teaching experience.
The thousands of people who are trained in business therefore become an incredibly valuable resource. After they have been trained, they will help train others who will also pass on their skills in due course. This amounts to a multiplier effect of an entirely different nature.
People trained in Zimbabwe and offered acceptable conditions of service are likely to remain available to Zimbabwean companies for years to come. The place to start is to make the people with the money and the know-how eager to come to Zimbabwe to produce the goods that so readily convert into all these advantages.
But we are in danger of sinking this entire set of possibilities because government wants to limit ownership rights, all the way from the investor who identifies a market opportunity to the technologists who can convert raw materials into finished goods and to the partners in the enterprise who contributed their management, accounting or marketing skills.
The proposals for change might be expected to deliver more control to government, but its control will be over far less, simply because development funding from abroad will stop and the growth of all industries will slow to the levels imposed by Zimbabwe’s lack of resources.
As an indicator of threats, Government’s pre-occupation with dividends and who should be entitled to them is a shallow interpretation of reality because resentment over who is receiving the usually modest dividend payments can completely prevent the start of the sequence that would lead to all other payments. Zimbabwean authorities should become very much more supportive of the basic requirements of business and should appreciate more fully that businesses face problems that government should try to ease, rather than intensify.
They have to contend with risks from the uncertainties caused by market movements, energy costs, labour costs, training costs and technical developments that might reduce the demand for their product and force its price to go down.
As government claims it must share in the rewards without having to share the risks, this being the effect of getting its shares for nothing, it is actually piling political risk on top of the business risks already in place.
In Zimbabwe the political risk goes deeper because it intends to bring 51% of the shares in every company under government’s influence, if not direct control. That means that the board of directors can be voted out of office at the next annual general meeting and replaced with people of government’s choosing. While even the threat of legislation like that hovers in the wings, investment will not come.
Companies with the resources and funding required to produce goods that will compete successfully in local or foreign markets are of great value to any country, provided they meet in full all obligations in respect of environment, labour, safety, quality and tax considerations. These are more than adequately covered by government regulations, so government is already in control over the issues that ensure each company will be a good corporate citizen.
A belief that companies should also be required to release a majority of their shares cannot be linked logically to the fulfilment of any of the companies’ obligations to the host country. On the contrary, the diluted influence of the shareholders – the people with the money and the knowledge and the courage to invest – causes the dilution, if not the elimination of their commitment to the enterprise. This is the exact opposite of what is needed by the country.
As direct consequences of the actions already taken:
- Zimbabwe is no longer able to feed itself
- Foreign exchange needed to pay for essential imports, which now include food that Zimbabweans used to produce, can no longer be earned because of the forced closure of many export companies.
- The shortage of foreign exchange and investor confidence has caused severe shrinkages in output from every other productive sector.
- Having already achieved a cut in manufacturing output of about 35% in the past ten years, the policies are effectively de-industrialising the economy
- The economy’s isolation from all investment flows is reducing the effectiveness of surviving businesses
- Through the destruction of property rights and the cancellation of the collateral value of farmland, more damage has been inflicted on commercial agriculture.
- Further shrinkages are inevitable on this course as, without effective backing or demand from support services and customers, the viability of a widening range of businesses is declining
- Already more than a million economically active people have migrated to improve their earnings prospects. The loss of skills is one of the causes of falling productivity and is threatening recovery prospects
- Zimbabwe’s population is now too big to be provided for by an economy that has been drastically reduced in size
- President Mugabe’s actions have already destroyed the jobs of hundreds of thousands of Zimbabweans and they could soon destroy job prospects for millions more in the rest of the region
- Zimbabwe’s trauma has already slowed the economic growth of the entire Southern African region and this might decline further if Zimbabwe’s policy decisions undermine investor confidence in the prospects of neighbouring countries.