For Zimbabwe investors, an overlooked potential benefit of indeginization

Jul 22, 2011

There is nothing at all unusual about governments legislating laws to ensure that their countries are attractive for foreign investors, but that at the same time the investments are structured in ways which maximally benefit the locals. In the controversy over the peculiarities of Zimbabwe's similar efforts, one key potential benefit for investors of greater local shareholding is being overlooked.

While local 'empowerment' requirements of one type or another are hardly unusual anywhere, Zimbabwe's is controversial in some circles for particular reasons to do with its recent history.

It is feared that the proposed 51% local shareholding requirement, which will almost certainly be modified and revised downwards, will be a 'company grab' in the same way that the Robert Mugabe government 'grabbed' white farms without compensation. There is an understandable, justified emotionalism and fear with which present and prospective investors listen to the Mugabe government's assurances that this is not its intention. The government's 'deniability' is very low because of the memories of the land reform process, in which violence featured and dispossessed farmers with title deeds were denied legal recourse.

Legal issues aside, the white farming community also found that they no longer had 'political cover.' They did in the early post-independence years (1980 to the 1990s) when they were recognized (and implicitly politically protected) as a key economic bloc. In return for accepting the new black majority rule order they were left in peace (and supported) by the Mugabe government to prosper. But when they en-masse switched allegiance to the newly formed MDC party in the late 1990s, an outraged Mugabe/ZANU-PF effectively declared the old 'live and let live' pact with the white farmers over. 

Overnight the white farmers went from being a government-protected special group to being an especially government-persecuted one. Land reform had remained largely unattended-to business, but that it was then effected in the sudden and punitive-to-the-white farmers way it was done by a cornered government fearing challenge was for these political reasons.

The white farmers found that having fallen out with their erstwhile political mentor, there were no other political blocs they had alliances with to 'save them.' The new one they were attempting to form with the then newly formed MDC was swiftly, ferociously nipped in the bud. The white farmers found that though economically/financially strong, they were suddenly completely socially and politically vulnerable. Their relative isolation meant that once they lost the political patronage of the ruling authority, they had no alternative potentially protective indigenous alliances. The hope of supporting the MDC into power for protection only infuriated Mugabe/ZANU-PF more, quickening and worsening the government backlash against them.  

A similar danger/challenge faces large foreign investors, especially in politically fraught sectors like mining and farming. Yet the foreign investor does not have the option of openly aligning with one or another politically-powerful group, except perhaps for the one in power at any given time, but in the event of change that too can be problematic.

How then can a foreign investor hedge their political risk? How can they reduce the chances of their being demonized as foreign exploiters who extract and export wealth while leaving little behind?

One answer is well-structured local partnerships.

For a long time the extent of the local 'partnerships' of many foreign companies has been to retain well-connected individuals as board members or as political 'fixers' when needed. This will clearly no longer be enough in the indigenization-driven environment. There is now the expectation of local engagement that is deeper and has more visible and widely-felt 'empowerment' of the locals.

 'Social credits' like the building of local community infrastructure (schools, clinics, roads, etc) may play some role, but it is probably not realistic that there can be a widespread private takeover of a role that is after all primarily government's.       

The purchase of equity in foreign companies by well-to-do locals is also unlikely to give significant 'political cover' because of the small numbers of such locals with access to significant capital. The government's suggestions that it may ‘suggest’ local partners for the foreign investor unable to find them on his own is obviously grossly unpalatable on many counts, and isn’t talked about much anymore. 

Meikles Limited may be onto something by its plans to offer employees shares in the Harare- listed company in order to give black Zimbabweans greater control.

Obviously there is nothing new about the idea of partial employee ownership, but it is an old idea that more companies interested in doing business in the new political environment of Zimbabwe might want to re-examine. It satisfies the authorities' demand for local ownership, but does so with 'known' local partners that the foreign investor can be reasonably sure will have the companies' best interests at heart, rather than being a  shareholder by virtue of some murky political criteria.

By making employees part owners, the company immediately gains that number of educated, middle class and voting locals as defenders of the company’s interests against ‘grabbing’ or any other kind of political skullduggery. Those part owners will in turn have families and other kinds of networks also interested in and benefiting from their part-ownership of the company.

Employee ownership may work for a company like Meikles in a way that may not be so easy for a new-to-Zimbabwe investor. Meikles has a long history in Zimbabwe, its founders benefiting from the colonial ‘grabs’ of land and cattle from Africans a century ago. There has been plenty of time for the current owners to form relationships of trust with their employees which can now be turned into shared ownership fairly smoothly.

What Meikles has shown is that it is possible to meet the new local ownership requirements by being bold and innovative, without having to resort to going to bed with the political vultures lurking in the wings.

By seeking smart partnerships with well-matched locals, companies that today may find the word ‘indigenization’ frightening might find that it actually gives them the kind of social and political cover the white farmers did not have, and which it would be difficult for a political demagogue to use against them.  


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