via Foreign investment an economic necessity – The Zimbabwe Independent April 25, 2014 by Eric Bloch
FOR some time now government has been adamant that economic activity in the country should be owned and controlled by Zimbabweans.
The emphasis of the contention has especially been on mining and agriculture, but nevertheless the contention of Zimbabwean ownership being a must has extended to other economic sectors, albeit to a marginally lesser extent.
Foreign investment in such sectors would be tolerated, provided that it would not exceed 49% of the relevant ventures.
A consequence of that stance has been to alienate the interest of potential foreign investors in pursuing Zimbabwean investment opportunities, notwithstanding the recognised and highly desirable potential of those opportunities.
Concurrently, due to almost 17 years of economic erosion and the demonetisation of the local currency very few Zimbabweans have resources for investment, and as a result an investment-stimulated economic upturn has not materialised.
Almost exclusively, such investment has come from Far East investors who were able to negotiate with government for relaxation of the investment constraints, although such relaxations were exclusively extended to the specific investment projects of those few investors.
The resultant prejudices to Zimbabwe achieving the long-awaited economic revival include:
Numerous enterprises in general, and especially in the manufacturing sector, desperately in need of investment recapitalisation, have been forced into closure or considerable downsizing;
Much needed employment creation has not been forthcoming, and in fact the employment market contracted further, exacerbating the vast numbers of unemployed due to consequence enterprise closures and downsizings;
As a result of the contraction of the manufacturing sector resulting in unemployment and lack of salary and wage increments, levels of consumer spending have diminished, thereby worsening the economy yet further;
Export volumes have declined, save for minerals and tobacco, whilst import volumes increased, significantly worsening Zimbabwe’s trade balance;
The decline in the economy sharply diminished inflows to the fiscus of direct and indirect taxes (concurrently with excessive and generally unproductive government expenditures), resulting in pronounced government bankruptcy exacerbated by intensified public sector corruption;
The state’s resources diminution is a major contributing factor to its failure to fund parastatals adequately, precluding infrastructural maintenance and enhancement, with consequential poor service delivery especially in respect of energy supplies, rail and air services, and water resources for agriculture, urban areas, and telecommunication services.
It was therefore heartening that, at a recent all stakeholders’ conference on Special Economic Zones (Sez) the Minister of Finance Patrick Chinamasa told journalists that the country must motivate, attract, and facilitate investment in general, and foreign investment in particular.
Suddenly, if belatedly, government is beginning to sing a different tune and hopefully will take action commensurate with the tune now being sung. To some extent, in propounding the need to attract investment in general and into the proposed Sez (yet to be established) Chinamasa said the investment sought should be both domestic and foreign.
Unfortunately, for the forseeable future, the extent of domestic investment will be very limited due to the minimal availability of investment resources.
However, some of the investment-facilitating measures Chinamasa identified included Zimbabwe reforming its Indigenisation policies.
This is incontrovertibly necessary, for very few (if any) foreign investors are prepared to invest 100% of required capital, and transfer state-of-the-art technologies, only to be reduced to 49% holdings in the ventures with no assurances as to when, or whether, they will be compensated for the forfeited 51% of capital.
Moreover, they are unprepared to be reduced to minority shareholder status, devoid of any authority in the policy determinations and management operations of the ventures.
They would rather select their co-investors, instead of government imposition in determining the identity of some of the majority shareholders.
Thus the minister’s acknowledgement of the need to reform the Indigenisation policies is commendable.
The key revisions required if foreign investment is to be substantially forthcoming are that the prescribed 51% Zimbabwean holding must be diminished to a lesser level, or wholly removed, and that intending foreign investors identify their own Zimbabwean co-investors.
Secondly, Chinamasa is correct in saying there is a need to introduce incentives for investors. Essentially, any genuinely new enterprise or other economic entity should qualify for incentives, over and above such incentives as may from time to time be extended to the economy in general.
The incentives that should be introduced for the benefit of investors into new investment ventures, and to enhance, develop and grow existing ventures should include:
A period of tax-free entitlement of the venture into which investment is made, being not less than three years from date of investment;
Waiver, for a prescribed period of not less than five years, of withholding taxes on dividends accruing, and interest paid, to the investors, and of such taxes on royalties, management and administration, and directors’ fees payable to the investors during the first three years after investment;
Assured incentives for exports effected by the enterprise in which investment is made;
Extension of the period for which tax assessed losses can be carried forward, from three to five years;
Commitment, enforceable in law, that dividends, interest, royalties and fees payable to foreign investors will, if so required by the investors, be remittable in international currencies;
Enforceability, through an international court of law, of any and all foreign investor entitlements in respect of the Zimbabwean investment venture;
Waiver of capital gains tax in the event of any future disposal by foreign investors to Zimbabweans of any of the foreign investors’ equity holdings in Zimbabwean ventures.
If such incentives are legislatively introduced, Zimbabwe will get substantial foreign investment.