Implementing ‘indigenization’ that is also beneficial to Zimbabwe

OPINION – The full details may be yet to be clarified, but it looks like Zimbabwe is set on a path of some kind of radical shareholding 'localization,' including of the mines.

Zimbabwe is neither the first nor the only country to seek to maximize the benefits of its natural resources. Nor is it the first to be suspicious that there are ‘leakages’ that take place in the way foreign-dominated sectors like mining are run.

But the history of forced takeovers (even though it has been denied this is what it will amount to) that mirror Zimbabwe’s situation do not provide encouraging signs that the desired results of widespread economic ’empowerment’ can be achieved this way. 

A few decades ago Zambia under then president Kenneth Kaunda was similarly able to whip up nationalistic fervor by carrying out ‘Zambianization’ of the country’s copper mines. The arguments for doing so were exactly the same as those heard in Zimbabwe today, and just as valid. 

But the remedies proposed often ignore the complicated, messy larger picture of how these foreign-dominated sectors came into being and are presently globally structured. How much a country benefits from mining an ore or growing a crop can depend far more on distant global factors that have little or nothing to do with how production is done. For instance, where a crop or metal’s global marketing is controlled by a monopoly or cartel, that can influence the producer’s fortunes far more than any other factor. Failing to adequately take all these factors into account can lead to bigger problems than the localization was designed to correct, as happened with Zambia’s nationalized copper sector. 

The Zambian government under founding president Kenneth Kaunda took over control of the copper mines in the early 1970s. For the first time Zambians began to occupy managerial positions which had mainly been the preserve of expatriates, causing much local resentment and frequent labour tensions. 

It soon became clear that taking over shareholding was the easy part. At takeover time there were fantasies of the country prospering on the planned more equitable use of copper proceeds. But then world copper prices plunged, throwing askew the whole Zambian economy. A dominant economic sector that had been expected to lift the rest of the economy now actually needed to be subsidized. The government and the economy simply didn’t have the capacity to do so.

Instead of the copper sector lifting up the Zambian economy, it actually dragged it down. Production plunged because of the global copper glut that made prices fall. But the mines continued to need expensive maintenance until copper prices firmed up again. When that day would come was not predictable. The cash to keep the mines going was no longer coming in from revenue; there were no ‘copper savings’ to speak of, and it wasn’t possible to take the money from other sectors, nor to borrow the funds indefinitely.

The copper industry had huge social, economic and therefore political importance (the country’s major employer and tax payer, the downstream industries that depended on it, etc.) It was therefore not an easily realistic option to simply shut down or downsize the mines, like a private company would have had no choice but to do. For a time, just to keep the industry churning until the hoped-for price/profitability turn-around, the country produced and exported copper at a net loss. This obviously couldn’t go on for long, and it didn’t. In the end the crisis went on so long the mines had to be shut down for a time anyway.

It is a long, complicated saga which set Zambia back in ways that some would say it has not fully recovered from even now, decades later. Years later a post-Kaunda government had to sheepishly invite foreign capital to please come back, take over and revive the mines! The western mining companies that once ‘owned’ Zambian (and the rest of African mining) were not much interested, but that just created an opening for the Chinese. For now copper is said to be ‘booming,’ but boom and bust cycles are normal in mining. Governments salivate during the boom times but are almost always unprepared for the inevitable bust periods. 

You end up with a situation similar to that with ZISCO, the Zimbabwe Iron and Steel Company. After years of poor and declining performance under indigenous (government) control, the company had to shut down. The asset remained under indigenous government ‘ownership,’ but that kind of ‘indigenization was obviously a farce when the asset was non-operational!

Shift forward to the year 2011. The present responsible minister basically has said, ‘we had to almost give that asset away to a foreign investor (Essar Group of India) because of the huge debts and recapitalization requirements the state couldn’t hope to pay.’ The country’s own rules (51% local mining shareholding) have to be bent because government on its own can’t raise the capital, nor can private locals on their own. In any case the ESSAR deal is an example of indigenization ideology having to give way to capitalist reality. 

It is ironic that the Zimbabwean government declares ZISCO to be of ‘no value’, while a foreign investor sees enough value to be willing to take over a reported US$340 million debt owed by the company, and to spend more to revive it. Clearly these two parties have widely divergent evaluations of ZISCO’s worth! 

Whatever the factors that got ZISCO to sink, the point is that as a fully indigenously-owned asset it failed to give full value to the nation. The ZISCO fiasco is not an argument against indigenization. But it does show that if by indigenization we mean the country getting the best possible value for a given resource, majority or even complete local ownership is not the only way to do it. It might be in some cases, but not in others. 

In theory one benefit of partial/full nationalization is to weigh strict profitability against social imperatives like employment. The idea is that a private, strictly profit-driven investor (i.e ‘greedy insensitive capitalist’) would downsize/shut down as soon as cost/revenues numbers no longer matched. But a heroic ‘peoples government’ would keep people employed for social/political reasons even ahead of profitability/viability. 

However, this can only work as an expensive bridging measure, until the industry in question gets back to being profitable. If it doesn’t, or if the time to do so is beyond the ‘peoples’ government’ ability to keep on subsidizing that industry, that industry’s collapse may be delayed but will still happen. And the longer the delay (perhaps just until after the next election!), the eventual collapse is often with even worse socio-economic consequences than if the shutdown/downsizing had been done earlier. 

We don’t have to like this reality of business/economics. It’s just how things are. Unless we are somehow able to create and successfully show new ways of doing business that bypass this imperative, we will just have to accept this reality. But for political reasons, both noble and self-serving, governments are very reluctant to accept reality when an industry in which they are heavily invested starts to go down and needs to be cut loose, or needs intervention they are incapable of. 

Deep government involvement in key economic sectors (as shareholder/manager rather than as watchdog/regulator) sounds good in theory. It may work in good times (e.g. when the mineral’s price is good) but in bad times (supply glut, low prices, huge capital innovation needs, etc) governments are not so well equipped to implement tough, necessary decisions. The bad consequences (sector collapse; lost jobs, revenue, markets, etc) still come, but later and often, more disastrously. 

If the resource is globally important and in-demand enough (e.g. oil) and the shareholding government has enough cash reserves (Saudi Arabia and other major oil powers, etc and to a lesser extent secondary oil producers like Venezuela), it can ride out the bad times. The country can do so by dipping into those reserves to keep the strategic industry ticking even when it is not producing profitably, waiting for demand/prices to firm up again. Or it might be able to borrow the money to keep the industry ticking even at a temporary loss, because the asset in question (e.g. oil) is considered good enough collateral. 

Poorer countries like Zambia and Zimbabwe with different sets of natural assets do not have the same options during market slumps. So as soon as the key industries the government has significant shareholdings in get a cold, the whole economy gets pneumonia. 

"Ah," you say, "but in Zimbabwe we are not talking about government nationalization as such, just a bigger share for private locals."

This doesn’t significantly change the point I am trying to make. The locals are expected to share in the equity (i.e. share in enjoying eating the profits when they exist.) It has been said the locals will be expected to buy their majority equity, not to be given it on a platter.

If this were realistic option one could ask why this was not aggressively pursued in the case of ZISCO before seeking a foreign rescuer. But majority shareholding also means that in tough times of non-perfomance, these majority shareholders will be expected to inject funds for maintenance/recovery. In the event of failure to do that, it is they who will have to make the decision to downsize, sell or close. 

How would this play out politically? One suspects that in Zimbabwe’s over-heated political environment the ‘beneficiaries’ of indigenization would be expected to keep ‘their’ mines running no matter what. That or be accused of acting like the ‘greedy foreign former capitalist owners’ and ‘reversing the gains of the revolution’ by downsizing or closing their mines just because they were making losses! They would be accused of all sorts of sins; hounded, arrested, exiled or worse. They would be accused of ‘putting profits before the people,’ an impossible charge to defend against because a private company can’t and shouldn’t continue unless it is making a profit. 

If a decision is made to sell, hopefully there would be enough locals with the funds/interest to take over the majority shareholding and try to revive the struggling firm/industry. In turn their ability to do so depends on whether the firm is struggling because of local factors (e.g. technical or management expertise, funding) or because of global factors beyond any locals’ control (e.g. a slump in prices because of global oversupply, or being nationally out-competed). When this is not possible, you have a ZISCO situation: having to almost give a potentially valuable national asset away to whoever will take it. 

"You’re just being negative; look at how we forcibly indigenized agriculture. There was a lot of opposition but see, the tobacco sector is recovering under new farmers, and with good rains we will soon be self-sufficient in maize again. So indigenization in that regard has begin to show positive results, proving all your neo-colonialist nonsense wrong." 

That depends on by what standards we judge it. Certainly, landholding in Zimbabwe today is much more ‘democratic’ and nationally representative than during the heydays of the white farmers, even if we take into account the disproportionate grabbing of the best established farms by the ruling elite. And it is a welcome development that the tobacco sector is annually recording strong gains. Drought is probably the new climatic norm for southern Africa, so we should be moving away from dependence on maize for food security. But if and whenever the rains are ‘normal,’ overall maize production will likely creep up every year. 

But all these production ‘regains’ are at the cost of the economy moving back from being semi-industrialized to being a subsistence producer of primary commodities. The person/company/economy/country that is able to do value-addition/processing always gains far more than the primary producer of the same product. One severe drought can wipe out a rain-dependent primary producer/farmer no matter how well he did the year before. On the other hand the processor (of the tobacco, maize, whatever) has at least the possibility of going to source his raw materials from another producer or economy.

So without significant processing capacity, even large primary crop gains have relatively little national economic benefit. In Zimbabwe’s case there are many new farmers, many of the working very hard, but almost all at the level of being primary producers. Yet the country continues to lose the value-addition/processing/manufacturing ability that should accompany its slowly recovering crop production. 

It is far from simple, easy or guaranteed that the country can recover from these bigger processing/manufacturing losses. You may get your factory running again, but fail to compete on price/market familiarity with foreign producers whose bigger capacity, lower costs, export subsidy support and so on allow them to price below local products. As an example, refer to the many troubles local poultry producers are facing to compete with cheaper South African products. 

So while any recovery in Zimbabwe’s agriculture is to be celebrated, there are ways in which the country is making two steps forward at the cost of three steps back. There are as yet no significant steps to reverse the backward steps, the de-industrialization caused by the loss of Zimbabwe’s secondary agro-industries. 

It is simply not enough for us all to be great maize, tobacco and chicken farmers. Much greater economic impact will be felt when the economy can turn these primary products into various processed goods, like Zimbabwe used to do very well until a few years ago. 

At least the vague possibility of revival remains with regards to agro-processing, if government policies and many other factors are right. And that is a very big ‘if’ which is not likely to be realised as long as the politicians are pre-occupied with non-productive issues like who will be Speaker of parliament or government deputy prime minister.

Their priorities are very far removed from issues of production and economic revival. 

But the possibilities of Zimbabwe significantly value-adding its minerals are far more remote than that of value-adding its agricultural produce. For reasons of cost, technical capacity and so on, for the foreseeable future Zimbabwe’s mining sector will simply and mainly be digging the ores out of the ground. They will then be sold in mostly raw form for others to process and make the bulk of the profits from them. 

At Zimbabwe’s mostly non value-adding stage of mining development, maximizing the benefits of its mineral wealth may not necessarily depend on who the shareholders of the mines are, although that is not an irrelevant concern. Government or private locals could have all or most of the shareholding, and in today’s poor political environment that alone might be enough to declare indigenization a ‘success.’

But if the local shareholders, government or private, don’t have the wherewithal to keep the mines going in tough times, to grow them and to develop secondary industries, that is a very limited, shallow kind of indigenization. 

To use the example of ZISCO, it has been fully ‘indigenized’ (government) for years but bringing no value to the nation from its vast iron ore wealth because it was shut down! One could say Indian group ESSAR’s recently agreed-to majority acquisition of ZISCO is a ‘loss’ to indigenization as currently defined (who owns what). But if ESSAR have the means to revive it (meaning employment, tax revenue, downstream industries, etc), the shareholding ‘loss’ is overwhelmingly compensated for by the gains to the nation of having this company run, and profitably (dividends, taxes, employent-creation, etc). So national benefit isn’t just about ownership, it is also about capacity to make the asset perform and pay the nation various benefits. 

Even with full indigenous ownership, the bottlenecks to viability/profitability/national gain could instead be at the London Metals Exchange, the more efficient mines/policies/regulation of a competing country, and so on. The rise or fall of a primary industry may depend far more on buying/consumption trends in the target market countries than what the producer country does or doesn’t do. This is what many countries that have tried forced localization of one kind or another have discovered, and were poorly prepared for in the jingoistic excitement of takeover fever. 

The principle of maximizing gain from a nation’s resources is entirely noble. All over the world, the large mining multinationals have been closely tied to colonial and post-colonial exploitation. So it not very convincing for them to argue that the best interests of their host nations are served when they are left alone to run their businesses without careful regulatory scrutiny and oversight. 

Yet likewise, scores of examples from within Africa and beyond have shown that how to balance deriving maximum national gain with giving private enterprise, local or foreign, enough room to be successful and profitable can be tricky. Many governments have gone too far in one direction or the other, usually in the direction of excessive control, at ultimate loss to the nation. Study the examples of ZISCO and Zambia’s copper industry, but of many others in both countries, as well as in many other countries. 

Of course, the joy of local ownership is not merely about material dividends, important as they are. It is also the pride of control, another way of a country showing its ‘sovereignty’ over its assets, although in globalized business terms that is an increasingly irrelevant concept because of how easily money and stakeholding can change hands.

But surely there must be a reasonable balance between the two. 

Will Zimbabwe learn from and avoid the lessons of many other countries in its latest approach to indigenization? Will it learn from its own expensive recent lessons in the way it tries to get more benefits from its mining sector? Will it be one of those countries that strikes a good balance between a significant local shareholding and the flexibility to attract needed foreign partners? Or will it go in the direction of having ‘control’ of economic sectors which merely end up being empty, non-productive shells? Will Zimbabwe be one of those countries that will be satisfied with an indigenization radicalism, but at the cost of under-capitalized, collapsed, non-performing mines that will then have to be given away later for a song, just like ZISCO? 

The issue is not whether to institute indigenization or not. It is whether enough thought has been put into doing it in a way that will actually achieve the expressed broad aim of a ’empowering the nation;’ or whether a belligerent, ultimately impoverishing emotionalism will rule the day.