The cost of Zimbabwe’s company grab
Posted by CM on November 11, 2007
Like the continuing effects of how land redistribution has been done that continue to affect us almost 10 years after it began in earnest, the recently passed indigenization law will have far-reaching consequences, for better and for worse.
That Zimbabweans would want to have “control” over their resources cannot be in doubt. But the so far disastrous effects of land reform have shown us that benefiting from natural resources or fixed assets is a lot more than about physical possession of them. It as much about strategy and management.
In this regard, the track record of the Mugabe government is far from encouraging. With control over land and resources that everybody agrees should give Zimbabwe a great comparative agricultural advantage over many other countries, the country has been reduced to accepting World Food Program maize handouts sourced from Malawi this year!
So no matter how noble and politically expedient it is to talk about wanting control over other sectors of the economy, there is nothing to give one confidence that the Mugabe government will manage the process any more competently than they have “managed” change in the agricultural sector.
Then there is also the point about the inherent contradiction between wanting local control, and giving foreign investors enough control over their interests to attract them in the first place. Clearly the war veteran who is recently reported to have ingratiated himself with the authorities by saying something to the effect that 51% local control of businesses was not good enough, “we want 100%” did not seem to understand or care about these details.
Here’s an article in MiningMx about how some foreign investors see the issue:
A confidential document circulated in Zimbabwe last year estimated its mining industry was worth around US$20bn. Localisation of 51% of total assets would mean the Zimbabwean government would have to dish out a collective $10bn. There’s scepticism in the Zimbabwe Chamber of Mines that that can be achieved. It said: “It’s the perception that neither government nor historically disadvantaged persons can raise the amount.”
Douglas Verden, CEO of SA’s Chamber of Mines, says: “We’re extremely concerned with this issue.” That’s a sentiment echoed by Zimplats, which is 87% owned by Impala Platinum. In May 2006, Impala struck a pact with Mugabe’s government to swap mineral resources in return for 19,5% localisation “credits” and $51m in cash. Alternatively, credits of 29,25% would be attributed to Zimplats if no cash were received.
Impala CEO David Brown says no cash was ever paid. Obviously, that underlines the problems it would have enforcing the new legislation. Brown added that Impala is also due credits for investment in Zimbabwe. “We built a 77km road and invested in housing and schools in Zimbabwe.” He says those efforts would provide Impala with extra credits.
Meanwhile, Impala is sticking by its former agreement with Zimbabwe’s government, which states it has security of tenure to support production of at least one million oz/year of platinum production from that country. Impala is potentially one of the largest investors in the country. A phase 1 expansion at Zimplats is under way, with combined full production of 160 000 oz/year of platinum expected by 2010 at a cost of around R3bn.
Zimplats chairman Mike Houston expressed his personal concern last month that the draft Bill didn’t appear to take cognisance of an agreement the Zimbabwean government had struck with the company. Stuart Murray, who is invested in Zimbabwe’s platinum industry through Mimosa, a highly profitable mine, says the matter has become too complex and too delicate to warrant comment. Though the Bill is final in demanding 51% localisation, recent comments by Zimbabwe Central Bank governor Gideon Gono asked for a phasing in of the legislation.
Says Murray: “Anything I say at the moment could be wrong. This issue is in the hands of one man. It’s a real moving target.”
Andrew Mackenzie, CEO of Rio Tinto’s diamonds & minerals group, says R1,75bn ($250m) in future investment in Zimbabwe turned on how “indigenous empowerment” was phased in. Rio Tinto, which has been in Zimbabwe’s mining sector for 50 years, has spent $100m expanding its Murowa Diamonds since the discovery of diamonds 14 years ago. The operation, which is 77,8% owned by Rio Tinto, is capable of producing 300,000 carats/year of diamonds. The balance of the mine is already owned by Rio Zim, an independent local company listed on the Zimbabwe Stock Exchange.
In a speech to the American Business Association of Zimbabwe, Mackenzie said: “I believe the best way forward would be for the government to consider indigenous empowerment at a similar pace and scale to the South African process.”
Not all are so pessimistic. Greg Hunter, CEO of Central African Gold (CAG), says the company would effectively roll with the punches. “We haven’t signed anything yet, so there’s less risk for us in terms of indigenisation. In our discussions we’ve heard a figure of 30%.” CAG is listed on the ZSE, with 15% of the company owned by Zimbabwean retail and institutional investors. Says Hunter: “Zim is looking all right. Concessions have been announced for the mining industry. We can pay staff in foreign currency, there’s compensation offered for boreholes and the fiscal side of the country is looking pretty smart.”
Interestingly, none of these mining concerns are hysterical about the concept of significant indigenous ownership, perhaps because many of those quoted are South African and have got used to the idea of BEE. Hunter at the end (“Zim is looking all right”) sounds more upbeat than anyone else I have heard talking about any aspect of the Zimbabwean economy in a long time!
I found the part about “credits” to be awarded to investors for equity they give up to be painfully naive. In the current judicial environment of Zimbabwe, how are they going to enforce whatever agreements they entered into with the Mugabe government? Those guarantees will simply be ignored when they are found to be inconvenient, and there will be absolutely nothing the companies will be able to do about it.
Going back to what we continue to see with land reform, the overall idea may have merit, but if its execution is poor, then you end with the disaster that Zimbabwe has already become.