INDIGENISATION REGULATIONS AMENDED

INDIGENISATION REGULATIONS AMENDED


Statutory Instrument 116 of 2010 was gazetted on Friday 25th June

under the title: Indigenisation & Economic Empowerment

(General) (Amendment) Regulations, 2010 (No. 2)

The regulations giving force to Zimbabwe’s Indigenisation and Economic Empowerment Act have been amended to allow for different circumstances that might affect companies in different sectors and a few definitions have been tidied up. However, the basic unacceptability of a law that confers upon the State the power to dispossess targeted individuals or companies of productive assets is not addressed. The revised wording and more precise definitions do not make the legislation any less damaging to the investment process, nor do they make the claimed “economic empowerment” objective any less dishonest.

The belief that indigenous people are entitled to success, for which they should not be expected to work, remains unaltered. The belief rests solely on the unchanged definition of an “indigenous Zimbabwean” being “any person who, before the 18th April, 1980, was disadvantaged by unfair discrimination on the grounds of his or her race, and any descendant of such person.

This definition does not embody proof that the people so defined were prohibited from forming companies and acquiring assets before April 1980, and claims that “this goes without saying” can be disproved by the citing the many successful indigenous business people who had emerged before that date.

Arguments that they should have been successful in far greater numbers can easily be made, but the reasons why many thousands more did not make fortunes were linked more directly to cultural constraints than to racial discrimination. This remains the case today, thirty years after independence.

While non-indigenous Zimbabweans might ascribe their relative successes to a wide range of issues, the most important of these was a set of advantages that underpinned all the others. These can be briefly described as the existence of, and respect for, individual, bankable property rights. However, a longer description would show how these rights supported everything that matters to the business of generating wealth.

Colonial governments usually had no difficulty accepting and retaining traditional feudal structures and even worked with the local Chiefs to reinforce them, knowing that they would slow the growth of political aspirations.

For the same reason, the leadership ranks of traditional indigenous cultures all over Africa are hostile to the concept of individual ownership rights. When these leaders had overcome the power of colonial governments, many of them systematically removed ownership rights in an effort to increase their own authority. Zimbabwe is no exception.

Even though the leverage of property rights made possible the capital accumulation and investment that transformed production and brought vitally important technologies within the country’s reach, Zimbabwe’s government has sought to dismantle the process that made these developments possible.

Government pretends that its objective is the empowerment of the masses, but by enforcing a process that cuts off both the ability and the inclination to invest, government is actually trying to prohibit the empowerment of everybody other than those in authority. And as a prior objective, government sees the need to dis-empower those who already wield influence through their ability to run successful businesses.

On this basis, the conclusion has to be that the real objective of the Indigenisation and Economic Empowerment Act 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.

In this regard, an important amendment outlines the procedure that government will adopt to consider whether transfers of percentages lower than 51% might be more appropriate. In terms of this addition to the regulations, the Minister is required to set up about 50 sector and sub-sector committees, under the eight business classifications identified in the original Statutory Instrument. These committees have to be formed after consultations with the Ministers responsible for the sectors, these being manufacturing, mining, tourism, finance, transport, communication, construction and energy.

Once established, these committees of between nine and fifteen people will have three months to recommend to the Minister ‘the appropriate minimum net asset value threshold above which a business in the sector or sub-sector concerned is required to comply with these regulations’.

Where socially and economically desirable objectives can be identified, the wording suggests that indigenous Zimbabweans would be prepared to settle for shareholdings of less than 51%. This provision was referred to in the original Statutory Instrument and the socially and economically desirable objectives are listed as:

(i) the undertaking of specified development work in the community in which the business in question carries on its business; and

(ii) the beneficiation to a specified extent of raw materials that are extracted in Zimbabwe by the business in question before it exports them; and

(iii) the transfer to a specified extent of new technology to Zimbabwe by the business in question; and

(iv) the employment to a specified extent of local skills or the imparting of new skills to Zimbabweans to a specified extent; and

(v) any other socially and economically desirable objective not mentioned above.

The committees are also expected to submit to the Minister their recommendations on the policies needed to overcome specified barriers and challenges to indigenisation in any sector or sub-sector of the economy.

In this regard, the nature of indigenisation as a philosophical concept calls for some examination. Will the committees be allowed to point out that the word indigenisation has no meaning in the context of economics?

In trying to describe a process of indigenisation, government appears to believe that the only possible active sequence amounts to measures necessary to displace, limit or exclude non-indigenous people.

As such, it is a political concept. However, identifying the policies needed to overcome specified barriers and challenges to indigenisation could lead to a very productive economic debate, provided government does not specify the subject of property rights to be off limits.

The fact that the indigenous population, which is more than a hundred times the size of the non-indigenous population, did not totally overwhelm the business ventures of the non-indigenous is entirely related to the question of property rights.

The vast majority of the population lives and works on land that has no monetary value or collateral value because traditions prohibit land from being placed on the market and prohibit individual ownership.

Without access to funds and without security of tenure, the people on such land cannot become involved in the process of capital accumulation without taking very high risks. The modest number who made fortunes before independence had to live with the difficulties of pledging movable assets as bank security, so many of them ran transport fleets that, with the backing of carefully built good reputations, made the individuals acceptable credit risks.

Since independence, government had every opportunity to sweep aside these barriers and challenges to indigenisation, but they have chosen not to do so, claiming that the ways of the colonisers have no part to play in a post-colonial country and the time-honoured traditions must be respected.

But the real issue is that these traditions deliver enormous power to the authorities. For that reason, they prefer to retain them, and to claim that they are remaining true to cultural values, so the masses should respect their motives – and their authority.

The claim now being made on the shareholdings and control of businesses started by non-indigenous people is no less a property rights issue than was the claim that commercial farmers should be rightfully dispossessed of their land and equipment, or that pensioners could be legitimately dispossessed of their savings.

For us today, the core issue is that the enforcement of this Act and its regulations will prevent new inflows of venture capital and will prevent the recovery of the productive capacity that previously enabled the country to earn the export revenues that helped to fund and maintain an improving infrastructure.

The country’s dependable foreign earnings also gave it access to credit that supported growing industries, job creation and training, improving social services and further investment inflows, but these have also been compromised by government’s various attacks on property rights.

The other amendments to the enabling legislation more carefully define certain words. ‘dispose’ means to sell/donate/otherwise dispose; a ‘management share ownership scheme/trust’ is to enable managerial employees to acquire stock/shares/debentures and receive income; a ‘managerial employee’ is a principal executive officer, corporate secretary, CFO, HR manager, whether or not also a director, or any employee directly answerable to the board of directors, or any employee who can hire/transfer/promote/suspend/lay-off/dismiss/reward/discipline/adjudge grievances of other employees.

Net asset value means net worth, i.e. total value of fixed and other assets minus liabilities; a ‘share option scheme’ is an arrangement where shares are offered to employees for purchase at a future date at a price fixed in advance; and the definition of ‘qualifying scheme or trust’ is changed to ‘an employee, management or community share ownership scheme or trust that qualifies in terms of section 14, 14A or 14B for the purposes of being used to assess the extent to which a business that is a company has achieved or exceeded the minimum indigenisation and empowerment quota’, these references being to paragraphs in the original Statutory Instrument.

Under Objective of regulations, the word ‘cede’ is replaced with ‘dispose of’.

Under Notification of compliance with indigenisation, the changes are to insert ‘non-indigenous’ between ‘every’ and ‘business’ and to insert a cross-reference to subsection (1) into subsection (2), to confirm that the regulations only apply to businesses with a net asset value of US$500 000 or more.

The word ‘provisional’ is now to be written before ‘indigenisation implementation plans’; and the new section 5A deals with sector and sub-sector committees referred to earlier.

Employee share ownership is now extended to include new sections 14A, which identifies ‘management’, and 14B, which identifies ‘community’ share ownership as means of achieving the minimum indigenisation quota. Community schemes would apply particularly to companies exploiting natural resources in ‘distinct communities’, such as Rural District Council areas.

Counterparties to notifiable transactions are identified in Section 15, confirming that the ‘Fund’ set up in terms of section 12 of the parent Act will be financed by levies on businesses will be the purchaser of last resort in cases where an indigenous buyer of shares on offer cannot be found.

For the valuation of businesses, Section 16 changes ‘value of its assets’ to ‘net asset value’. This also requires that any ‘valuator whom the Minister may appoint’ must be a person ‘registered in terms of the Public Accountants & Auditors Act (Chapter 27:12)’.

For companies that have not submitted Form IDG 01 by tomorrow’s deadline, June 30th, they should wait until they have received notification from the Minister’s office that the absence of their submission has been noticed. If a business that has been identified in this way then fails to submit the forms during the following 30 days, penalties may be invoked.