Managing Risk and Obstacles in the Zimbabwe Economy

Political Risk – The Background

In order to understand the nature and extent of current political risk in Zimbabwe it is necessary to have some knowledge of political developments in the country since Independence in 1980. Zimbabwe was ruled by a single political party, the Zimbabwe African National Union (Patriotic Front), more commonly referred to as ZANU(PF), continuously from 1980 to 2008. The party has had the same leader, Robert Mugabe, since the mid-1970s. There is no doubt that the party had widespread electoral support in the 1980s and its achievements in the development of social services, particularly health and education, for the population as a whole were impressive.

Some political opposition to ZANU(PF) appeared in the early 1990s but it was the formation of the Moverment for Democratic Change (MDC) under the leadership of Morgan Tsvangirai in 1999 that led to rapidly escalating political tension. ZANU(PF) has a long history of treating its political opponents ruthlessly and with no qualms as to the methods used. The highly visible support given by white commercial farmers to the MDC at the time of a referendum on a new Constitution for the country in 2000 was a significant factor in the subsequent implementation of the “fast-track land reform” programme in Zimbabwe, which was aimed at removing the white commercial farmers as a political and economic force. The economic consequences were dire, ending eventually in an eighteen month period of hyper-inflation.

ZANU(PF) won controversial election victories over the MDC in 2002 and 2005. On both occasions allegations were made of widespread vote-rigging and voter intimidation. An election in 2008 led to an inconclusive result, which in turn led, as a result of South African mediation, to the formation in 2009 of a Government of National Unity incorporating ZANU(PF), the MDC and a smaller MDC splinter group. One of the objectives of this coalition government has been to prepare the way for a further election which will be seen to be free and fair and produce a result accepted by all parties. This alone has been fraught with difficulties and obstacles, largely as a result of the determination of ZANU(PF) to retain power. The situation has been further complicated by the declining health and advanced age of President Robert Mugabe. It is becoming increasingly unlikely that he will be fit to run for a further term of office, particularly if the election is delayed beyond the middle of 2012.

Thus the current political climate in Zimbabwe is strongly focused on the forthcoming election, its timing and who will be the presidential candidate for ZANU(PF). It is an atmosphere of uncertainty and, as with any pre-election situation, one marked by a high volume of political noise, much of which can be discounted as such.

Political Risk – Perception and Reality

To the foreign investor looking for a relatively low risk investment opportunity, Zimbabwe is perceived as a high-risk country. Much of this perception is based on the chaos of the “fast-track land reform” programme and the resulting economic turmoil. In reality the situation has changed considerably for the better. There is no political party now in a position of sole power where it can change the law unilaterally to achieve its political goals, as was the case prior to 2008. In addition the adoption of the US dollar (together with other foreign currencies) as the currency of the country in place of the defunct Zimbabwe dollar has led to economic stability.

The major source of political risk at present is uncertainty about the pending election and its outcome. Fears remain that a ZANU(PF) victory could lead to a return to economic instability. The MDC’s ability to manage the economy as a post-election government remains to be tested. A contested result will lead to further uncertainty. Perceptions of risk in Zimbabwe are enhanced by events such as the election in Cote d’Ivoire in 2010 and the subsequent refusal of the defeated incumbent there to leave office.

However, these are uncertainties and risks that are not peculiar to Zimbabwe. As events in countries such as Cote d’Ivoire and, earlier, Kenya among others have shown, Africa is a continent that remains haunted by political instability. Africa in general remains a high risk investment destination. The fact that it is attracting increasing amounts of direct foreign investment does not necessarily testify to lessening risk but to better perceptions of opportunities. Capital may be timid, but it will always flow to where opportunities are seen to outweigh risks.

Indigenisation Policies in Zimbabwe

A law was enacted by the Government of Zimbabwe in 2007 (prior to the formation of the Government of National Unity) that set as an objective that all businesses in Zimbabwe should have a majority shareholding by indigenous Zimbabweans. This law empowered the Minister responsible for its implementation to issue regulations aimed at achieving this objective. Such regulations have been issued in 2010 and 2011. The basis requirements of the law and regulations are as follows:

• All existing businesses with a net asset value of US$ 500 000 or more must achieve a majority shareholding by indigenous Zimbabweans within five years.
• Businesses affected by the legislation are required to submit plans to the Minister as to how they intend to achieve the required level of indigenous shareholding in the required time period.
• All new investment, both domestic and foreign, must have a majority shareholding by indigenous Zimbabweans.

More stringent requirements have been made for the mining sector.

However, there are certain important points to note:

• There is no provision in the legislation for the Government of Zimbabwe to forcibly take over or nationalize any business.
• There is no provision in the legislation for any Minister to withdraw the operating licence of a business simply because its indigenization plan is not deemed to be satisfactory.
• There is provision in the legislation for a lesser share of indigenization than 51%, or a longer time period, in order to achieve other socially or economically desirable objectives. Corporate social responsibility, or “social credits”, may be taken into account in the indigenization process.
• The Minister responsible has the power to authorize a lesser level of indigenization in the case of new investments. It must be seen as significant that the recent investment by an Indian company, Essar, in a steel manufacturing company in Zimbabwe, valued at US$ 750 million, has given the foreign investor a 54% shareholding in the local company.

The current emphasis on indigenization by the Minister responsible should be seen in the context of the current pre-election political climate in Zimbabwe. It is both part of the pre-election campaign by the Minister’s party, ZANU(PF), as well as a campaign on his own part to be seen as effective in implementing the party’s strategy and to thereby strengthen his own position in the party. Despite threats he has made against the mining sector in particular the Minister’s powers are limited and the threats should be seen as part of pre-election political noise.

The economic implications of the current policy and the economic damage currently being done are clearly understood by the MDC and indeed by many in ZANU(PF). Whether any party will see indigenization in its present form as a long-term policy remains to be seen. In May 2011 the Government issued a Medium Term Plan for the economy for the period 2011 – 2015. This included a section on indigenization which made no mention of a 51% shareholding threshold, but rather referred to broad-based economic empowerment with the following objectives:

• “Economic empowerment of indigenous Zimbabweans by increasing their ownership of productive assets in the economy so as to create more wealth and reduce poverty.
• “To create a conducive environment that will allow the indigenous Zimbabweans to participate in the economic development of the country and earn themselves self-respect.
• “To develop a competitive private sector that spearheads economic growth and development.
• “To develop a self-sustaining economy.”

Doing Business Indicators for Zimbabwe

Zimbabwe does not feature well in the Doing Business Indicators published annually by the World Bank. In the 2011 Doing Business Report Zimbabwe was ranked 157th out of 183 economies, one place down from the previous year.

The Doing Business indicators measure the relative ease (or difficulty) in the procedures, time and cost involved in the following business activities in a country, and some of the institutional strengths related to them:

• Starting a business.
• Paying taxes.
• Dealing with construction permits.
• Trading across borders.
• Registering a property.
• Enforcing contracts.
• Getting credit.
• Closing a business.
• Protecting investors.

The Doing Business Indicators have the specific aim of measuring the regulation and bureaucracy relevant to the life-cycle of a domestic small to medium-size firm. They do not measure all aspects of the business environment that matter to firms or investors, or all factors that affect competitiveness. Theydo not assess the strength of the financial system or financial market regulations. Neither do they take into account an economy’s proximity to a large market, the quality of its infrastructure services, its macroeconomic conditions or the strength of all underlying institutions.

In particular foreign investments or projects geared towards imports and exports are not covered by the measures of the Starting a Business indicator.

What can be seen, therefore, is that while Zimbabwe’s poor position in the Doing Business Indicators does indicate the existence of some obstacles, there is a lot more that a potential foreign investor should be looking at to judge the country as an investment destination.

The Zimbabwe Investment Authority

The Zimbabwe Investment Authority (ZIA) is the body established by the Government of Zimbabwe to promote and facilitate both foreign direct investment and local investment. All investments, both foreign and local, that necessitate the expenditure of foreign currency, are required to be approved and licensed by the Authority.

The ZIA’s functions include the following:

1. Planning and implementing investment promotion strategies for the purpose of encouraging investment by domestic and foreign investors.
2. Facilitating and processing investment applications for approval.
3. Identification of sectors of the economy with potential for investment for the purpose of attracting domestic and foreign investment.

The ZIA has set up a “One-Stop Shop” for the convenience of potential investors, at which all the necessary bureaucratic procedures for setting up a business in Zimbabwe can be processed under one roof. This makes it easier for the potential investor to start to do business in Zimbabwe than would be suggested by the World Bank’s Doing Business Report.

More information about ZIA, its activities and investment opportunities in Zimbabwe can be found on its website, http://www.zia.co.zw.

That there is a growing appetite for investment in Zimbabwe has been demonstrated by statistics from the Ministry of Economic Planning and Investment Promotion, reported in the Zimbabwe press on 19 September 2011, showing that the ZIA approved investment projects to the value of US$ 2,8 billion in the first six months of this year. The sectors in which these investments are being made are as follows:

Mining US$ 1,7 billion
Agriculture US$ 450 million
Construction US$ 271 million
Manufacturing US$ 201 million
Services US$ 159 million
Tourism US$ 22,5 million

While it has to be said that approval of a proposal is not necessarily the same as commitment of investment funds, and many of the approved projects are undoubtedly from local and existing foreign investors (particularly in the mining sector) rather than new foreign investors, the value of projects approved (around 35% of GDP) and the range of sectors involved clearly show improved perceptions of the business investment climate in Zimbabwe by both local and foreign investors.

Infrastructure in Zimbabwe

Zimbabwe’s economic difficulties have taken their toll on the country’s infrastructure, but there have been positive developments among the negative.

In a report on Infrastructure and Growth in Zimbabwe published by the African Development Bank earlier this year, several basic findings were given regarding the state of the country’s infrastructure:

• Inadequate levels of funding for routine and periodic maintenance of infrastructure networks have led to a sustained deterioration in the quality of these assets.
• Infrastructure services in road transport and communications are now more expensive than in neighbouring countries.
• In sectors such as power, rail transport and fixed line communications where parastatals have been dominant, service prices have been kept low, resulting in large operating losses.
• Deterioration in the physical infrastructure has been compounded by a substantial loss of skills in the public workforce.
• As a result of institutional and regulatory inadequacies there has been a minimal amount of investment by the private sector in basic infrastructure. This is an area that the Government has promised to address, but results are yet to be seen.

Inadequate electricity supplies have had probably the most profound effect on the productive sector in Zimbabwe. Zimbabwe’s installed domestic power generation capacity is 1 920 MW. However, during the past decade average availability of power was 64% of capacity, with a range between 53% and 72%. This is due to the age of some power stations coupled with lack of regular maintenance. During the past 10 years Zimbabwe has imported an average of 29% of its power supply from neighbouring countries, but the availability of imported power is constrained by developing regional power shortages as well as by arrears in import payments to suppliers by the Zimbabwe power utility.

The result has been regular load-shedding and power cuts. Businesses make do as best they can, and large power users can and do negotiate direct contracts for uninterrupted power supplies with the power utility. The situation will not improve in the short term, due to the long lead time involved in the implementation of power generation projects. However there are numerous opportunities for increased power generation in the country, including large hydroelectric schemes on the Zambezi River, large coal deposits that can be used for thermal power generation and the possible development of mini- and micro-power generation schemes by private sector investors.

Zimbabwe has an established but dilapidated rail network that links all major economic centres and provides transport for bulk raw materials, finished goods and passengers. Zimbabwe’s second city, Bulawayo, is a hub for rail networks serving the region. In addition to the state-owned National Railways of Zimbabwe there is a private-sector concessionaire which operates a rail link between Bulawayo and the border with South Africa at Beit Bridge. The Government has plans to rebuild the freight-carrying capacity of the rail network to its original design capacity of 18 million tonnes per year over the next decade. In 2009 the network carried 2,7 million tonnes.

The result of the poor condition of the rail network has been the extensive use in the country of road freight. There are 17 400 km of paved roads in Zimbabwe of which 2 300 km are part of regional corridors. A portion of the Pan-Africa Highway passes through Zimbabwe and the country occupies a key position in regional transport links and networks. Road density in Zimbabwe is about 0,23 km per square km, which is high compared to many developing economies and is comparable to that of the high-income, non-OECD countries and lower middle-income countries.

The condition of the road network in Zimbabwe has declined significantly since the mid-1990s, with most of the deterioration occurring on urban roads and on the unpaved rural road network. Of the paved roads forming regional corridors, 85% of the network was estimated to be in “good” condition in 2009 and only 5% in “poor” condition.

In Zimbabwe fixed line telephony remains a monopoly operated by a parastatal, Tel One. However it now plays a relatively small role in the provision of telecommunications services. There are three mobile telephone networks, two of which, Econet and Telecel, are in the private sector and one, Net One, is state-owned. There are also four active data network operators. Econet is the market leader and offers GSM and 3G services. It has 4,2 million subscribers, and claims approximately 70% population coverage. Official figures from the Postal and Telecommunications Regulatory Authority of Zimbabwe (POTRAZ) suggest that the mobile penetration rate in Zimbabwe is 65%, which compares favourably to the rate of 53% for the whole of sub-Saharan Africa. Zimbabwe is ranked 7th among the 15 countries of the Southern African Development Community (SADC) in terms of penetration of mobile telephone services.

However prices of mobile telephony services remain high by regional standards. The average price of a mobile call in Zimbabwe is US$ 0,24 per minute compared to US$ 0,16 in Uganda, US$ 0,09 in Tanzania and US$ 0,03 in Kenya (2010 prices quoted by the World Bank).

With regard to Internet connectivity Zimbabwe now has relatively extensive fibre-optic networks and rapidly improving access to international fibre-optic cable networks, through Mozambique to under-sea cables in the Indian Ocean and through South Africa and Botswana. There are a number of different network infrastructures, including 3G wireless networks, WiMax wireless networks, UHF wireless networks and Digital Subscriber Line (DSL) networks. Some large companies now have fibre-optic connections to their premises, but this is costly and only available on a limited basis.

While Internet usage in Zimbabwe is still low by regional standards, there is a high degree of competition at both the infrastructure and service level which is driving network expansion and improving customer service. Retail prices remain high but wholesale bandwidth prices are falling rapidly.

The Facilitators

Where does the potential investor in Zimbabwe start? He is faced by perceptions of high political risk, poor performance by the country in terms of international economic indicators, the prospect of facing burdensome bureaucracy and red tape and uncertainties in the availability of basic utilities. At the same time he can see a country that offers economic opportunity and is well-endowed with a wide range of resources.

The first suggestion to be made to this potential investor is, come and see it for yourself. Do not depend on the vagaries of the international press or second- and third-hand reports from other businesspeople and business organizations. Zimbabwe is open for business and there is no substitute for an examination of the situation on the ground.

There are organizations in Zimbabwe that are willing and able to assist the potential investor. Apart from business associations such as chambers of commerce, industry and mining there are, for example, the accountancy firms. All of the major accountancy firms, including PricewaterhouseCoopers, Ernst and Young, Deloitte and KPMG are active in Zimbabwe and are willing to provide services to potential investors in the country. There are investment companies and advisors as well as several leading international banks, including Barclays Bank, Standard Chartered Bank and Standard Bank of South Africa.

The potential investor arriving at Harare Airport for a preliminary visit to Zimbabwe need not be alone. Helpers and facilitators are available. The risks and obstacles are by no means insurmountable and the opportunities are there. Zimbabwe is open for business.