Cablegate: Zimbabwe Sets Racial Quota for Business Ownership

DE RUEHSB #0116/01 0431052
O R 121051Z FEB 10



E.O. 12958: N/A
SUBJECT: Zimbabwe Sets Racial Quota for Business Ownership

1. (SBU) SUMMARY: A Government of Zimbabwe (GOZ) minister from
President Mugabe's ZANU-PF party has issued regulations meant to
force "indigenization" of businesses. The new rules, published on
February 5, say that any business worth US$500,000 or more must
explain how it will "cede a controlling interest" to "indigenous
Zimbabweans." The regulations are to take effect on March 1.
Existing businesses will have 45 days to submit their
indigenization plans. Failure to comply will be punishable by a
fine or up to five years' imprisonment. While the regulations
remove some of the uncertainties created by the thus-far unenforced
Indigenization and Economic Empowerment Act of 2007, they also
raise new questions. Prime Minister Tsvangirai and his Movement
for Democratic Change (MDC) oppose the regulations. This latest
indigenization scare is bound to put another dent in Zimbabwe's
battered reputation and give investors another reason to stay away.

2. (U) Statutory Instrument 21 of 2010, dated January 29 but
released on February 9 by Minister of Youth Development,
Indigenisation, and Empowerment Saviour Kasukuwere, says that every
business in Zimbabwe with an "asset value" of at least US$500,000
must submit an "indigenization implementation plan" to his
Ministry. The deadline for existing businesses is 45 days after
the regulations take effect on March 1. New businesses will have
60 days to submit a plan. The goal of each plan must be to
transfer within five years a controlling interest in the business
to indigenous Zimbabweans, who are defined in the Act to be any
person "disadvantaged by unfair discrimination on the grounds of
his or her race" before April 18, 1980, or the descendant of such a
person. A business need not submit an indigenization plan if it
can show that it does "development work," adds value to raw
materials for export, brings new technology or skills to Zimbabwe,
or will "achieve any other socially and economically desirable

3. (U) The regulations list 14 industries "reserved against foreign
investment." These include agriculture, transportation, retail and
wholesale trade, grain milling, advertising, bakeries, tobacco
processing, and milk processing. Given that the underlying
legislation explicitly provide for minority foreign ownership of
businesses, the regulations appear to have the effect of excluding
all foreign investment in the 14 designated industries. There are
also other ambiguities in the regulations. It is not clear whether
"asset value" is net or gross. And the regulations do nothing to
clarify the definition of an indigenous Zimbabwean, which does not
obviously include all black Zimbabweans or necessarily exclude
everyone who might be considered white or of some other race.
Another disturbing source of uncertainty is how the Minister may
choose to interpret the broad exemptions in the regulations. Nor
do the regulations spell out what might become of businesses that
do not meet the five-year indigenization deadline.

4. (SBU) So far there have been few public reactions from the
business community. One mining company has advised shareholders
that it is "studying" the regulations and noted that they provide
for future issuance of lower indigenization quotas for specific
industries. The Chamber of Mines, the mining companies' main
lobbying group, has long been engaged in discussions with the GOZ
on indigenization rules. Private reactions range from alarm to
resignation. One prominent businessman sees the issuance of the
regulations as a political ploy by Kasukuwere to curry favor with
Mugabe. In his view, the regulations do not have broad support
within ZANU-PF and are likely to be withdrawn or modified. But he
acknowledged that news of the regulations could have a devastating
effect outside the country on potential investors. Other business
contacts have expressed doubts about the capacity of the GOZ to
implement the regulations. If there is a high degree of compliance
with the reporting requirement, Kasukuwere's ministry could
collapse under an avalanche of paper. But that could also have the
effect of making enforcement all the more arbitrary.

5. (U) Press reports say Tsvangirai has called the regulations
"null and void" because they were not approved by the cabinet. His
MDC party released a statement on February 11 calling the statutory
instrument "provocative" and "a deliberate attempt to undermine the
country and its people." The MDC called on the GOZ to withdraw the

HARARE 00000116 002 OF 002

6. (SBU) COMMENT: With ZANU-PF's popular support draining away,
release of the indigenization regulations now could be a move to
curry favor with the electorate. But sooner or later, the
indigenization law will give way to Stein's Law: "If something
cannot go on forever, it will stop." Until then, intermittent
indigenization scares will help keep Zimbabwe a high-risk zone for
lenders and investors, choking off the financing needed to rebuild
a battered economy. Zimbabwe's macroeconomic recovery is already
starting to look like a dead-cat bounce: the economy is better now
mainly because it could not have gotten worse. Investors and
lenders were already staying away in droves before Kasukuwere made
his move. Even if the just-issued indigenization rules disappear
or are watered down before March 1, Zimbabwe's battered reputation
will carry a new and lasting dent. If the rules stay in place,
prospects for meaningful economic growth this year will dim
significantly. END COMMENT.

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