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Cablegate: Indigenization Bill - Another Blow to Zimbabwe's

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RR RUEHWEB

DE RUEHSB #0598/01 1861502
ZNR UUUUU ZZH
R 051502Z JUL 07
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 1667
INFO RUEHSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 1639
RUEHAR/AMEMBASSY ACCRA 1507
RUEHDS/AMEMBASSY ADDIS ABABA 1643
RUEHRL/AMEMBASSY BERLIN 0291
RUEHBY/AMEMBASSY CANBERRA 0909
RUEHDK/AMEMBASSY DAKAR 1272
RUEHKM/AMEMBASSY KAMPALA 1699
RUEHNR/AMEMBASSY NAIROBI 4115
RUEHFR/AMEMBASSY PARIS 1469
RUEHRO/AMEMBASSY ROME 2133
RUEHBS/USEU BRUSSELS
RHMFISS/JOINT STAFF WASHDC
RUEHGV/USMISSION GENEVA 0768
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RHEFDIA/DIA WASHDC
RHEHAAA/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1860

UNCLAS HARARE 000598

SIPDIS

SENSITIVE
SIPDIS

AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: N/A
TAGS: PGOV ECON EINV ZI
SUBJECT: INDIGENIZATION BILL - ANOTHER BLOW TO ZIMBABWE'S
BELEAGURED ECONOMY

-------
Summary
-------

1. (SBU) Parliament is scheduled to begin considering the
Indigenization and Economic Empowerment Bill in late July.
The Bill's official purpose is to seek to increase
participation of indigenous Zimbabweans in the economy; its
ultimate objective is for at least 51 percent of the shares
of every business to be owned by indigenous Zimbabweans. The
Bill, to the relief of many in the business community - both
black and white - does not contain any obligation by existing
private businesses to begin to indigenize. Nevertheless, in
light of the already dominant position of indigenous
Zimbabweans in business, it raises concerns about cronyism in
the eventual distribution of company shares and about the
resurgence of a &grab8 mentality. Ultimately the Bill will
discourage new investment and discourage those foreign
investors still on the ground, including U.S. companies, from
holding on longer as the pace of economic decline
accelerates. End Summary.

------------
Key Features
------------

2. (U) The Government Gazette published the long-anticipated
Indigenization and Economic Empowerment Bill on June 22. Key
features of the Bill, which Parliament is scheduled to
consider when it re-opens in late July, are:

- The Government shall endeavor to secure that at least 51
percent of the shares of every public company and any other
business shall be owned by indigenous Zimbabweans. In the
shorter term, the Minister of Indigenization and Empowerment
(N.B. at the moment, Paul Mangwana) will be empowered to
publish regulations prescribing acceptable, but temporary,
lesser percentages and thresholds.

- An indigenous Zimbabwean is defined as any person who
before April 18, 1980 - the date of Zimbabwe's independence -
was disadvantaged by unfair discrimination on the grounds of
his or her race, any descendant of such a person, and any
company, association, syndicate or partnership in which such
persons hold the controlling interest or are the majority of
the members. (N.B. The definition may include Zimbabweans of
Indian descent; there are varied interpretations.)

- Ministerial approval will be required for mergers,
restructurings and acquisitions to ensure a high level of
control by indigenous Zimbabweans. (N.B. The Bill does not
contain any obligation by existing businesses to begin
indigenizing. It does, however, call for an "indigenization
and empowerment assessment rating" of every company.)

- The Bill requires Government departments, parastatals,
local authorities and companies to procure at least 51
percent of their goods and services from businesses
controlled by indigenous Zimbabweans.

- The Bill calls for establishment of an Indigenization and
Empowerment Board appointed by the Minister to advise on
strategy, and a Fund to be set up to finance the acquisition
of shares, management buy-ins and buy-outs, and
capacity-building for indigenous Zimbabweans. It will be
capitalized, among other sources, by the proceeds of levies

on companies and other businesses.

------------------------------------
Benefit to the Politically Connected
------------------------------------

3. (SBU) The USG-funded State University of New York (SUNY)
parliamentary support project considered the economic
implications of the Bill, noting that Zimbabwe's business
sector was, in fact, already quite racially balanced. Most
Zimbabwean companies are owned and managed by indigenous
Zimbabweans. Reminiscent of fast-track land reform, it
concluded the ultimate beneficiaries of the initiative would
be the politically connected elite. MDC Secretary General
Tendai Biti echoed that conclusion in his commentary on the
Bill, entitled "Another platform to loot and plunder." He
called it another avenue of patronage and rent-seeking "by
the big guns in ZANU-PF."

-----------------------------------------
"Grab Mentality" Will Spur Capital Flight
-----------------------------------------

4. (SBU) The SUNY analysis described the Bill as part of the
GOZ's "scramble" to divvy up a shrinking cake. Against a
backdrop of negative economic growth over nearly ten years,
it predicted that the Bill and the levies required to fund
its implementation would spur capital flight and hasten
economic decline. Addmore Chakurira of Imara Capital
suggested it would increase the perceived level of political
risk and thwart development of the country's rich mineral
deposits, which required huge foreign investment.

5. (SBU) The SUNY paper also lamented the mindset that
assets must be taken from others in order for indigenous
Zimbabweans to develop. It called on the government to
create an entrepreneurial environment and allow business
people to choose their own partners freely. It also noted
that the "grab" mentality failed to cultivate business
skills. In a similar vein, Biti's commentary decried the
GOZ's apparent willingness to destroy the remaining pockets
of productivity rather than resuscitate the collapsed supply
side of the economy.

6. (SBU) Doug Verden, Acting CEO of the Chamber of Mines,
told econoff that too much power had been concentrated in the
hands of the Minister, leaving much important detail to be
clarified at the Minister's discretion without Parliamentary
approval. Verden was also troubled by the lack of
information on levies to be charged, the failure to set a
timeframe for indigenization, and the overall vagueness of
the Bill.

-----------------------------------------
Potential Impact on U.S.-Owned Businesses
-----------------------------------------

7. (SBU) Aside from a few dozen distributors of U.S. goods
and some franchisees, only about a dozen large U.S.-owned
businesses remain in Zimbabwe. Unless they seek to merge,
unbundle or make acquisitions, the new Bill does not put them
in danger of forced indigenization. Nonetheless, executives
from the regional headquarters of several large companies
have called on us in the past year, uneasy about sustaining
loss-making ventures in Zimbabwe any longer, and seeking
advice about Zimbabwe's future. For those companies, passage

of the Indigenization Bill and the recent faster pace of
decline could move them to pull the plug on their Zimbabwe
operation.

-------
Comment
-------

8. (SBU) Business in Zimbabwe is already predominantly
black-owned/managed. Rather than robbing from Zimbabwe's
shrinking economic pie to redistribute for patronage,
pro-business economic policies would do far more to attract
investment, spur growth and ultimately increase black
shareholding and entrepreneurship than legislated
indigenization. An example of the GOZ's typical short-term
thinking, however, especially as it heads into an election
year, the Bill will probably find populist appeal and sail
through the ruling-party dominated Parliament and become law
in a few months. Whether it is then rigorously implemented
or shelved is, in the short-term, less significant than its
passage, which alone will have struck another blow to the
economy. In the meantime, the business community's attention
is riveted less on the Bill than on the GOZ's heavy-handed
campaign (septel) to roll back prices, which could
immediately affect day-to-day existence as staples vanish
from shop shelves.
DELL

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