The Sunday Mail
Zwelibanzi Lunga
I have argued that a multi-factor approach, or balanced-score-card approach, is the only way the constitutionally guaranteed duty to empower citizens can be achieved in an economically sensible manner.
In the first part of my analysis of the recent changes to indigenisation law, I looked at the manner in which the law has been changed to promote certain Government policy objectives. The critical issue to emerge from the new amendments is the drive towards decentralisation of indigenisation and empowerment.
I also highlighted that following the decentralisation, each line ministry is now required to produce its own framework in the form of statutory notices, detailing the minimum requirements of indigenisation in each sector. As I indicated, this is yet to be done.
In this series I show firstly, that the sector notices are key not only to indigenisation and empowerment objectives, but also to converting these objectives into long-term, sustainable and economically relevant affirmative action.
Secondly, I argue that while decentralisation is good, a sound unitary approach is nevertheless indispensable to the successful implementation of indigenisation and empowerment, and that the National Indigenisation and Economic Empowerment Board (Nieeb) and the Ministry of Indigenisation need to play a key role in the evolution of new requirements and new sector laws on indigenisation and empowerment.
In fact, this role remains intact in the indigenisation legislation, albeit with a slight need to be appropriately redefined.
A consistent, clear and unambiguous approach to indigenisation and empowerment is vital if the much-needed foreign investment is to be attracted while at the same time creating opportunities for locals to remain economically-competitive.
Transforming indigenisation and empowerment into sustainable affirmative action
The basis of this idea is to be found in the Supreme Law, the new Constitution of Zimbabwe itself. Section 14 of the new Constitution states that:
The State and all its institutions and agencies of Government at every level must endeavour to facilitate and take measures to empower, through appropriate, transparent, fair and just affirmative action, all marginalised persons, groups and communities in Zimbabwe.
This provision lays the foundation for a sustainable affirmative action programme, and requires that Government take such steps as are necessary and fair and lawful to ensure the achievement of constitutionally guaranteed empowerment objectives.
Here, one needs to note that the Constitution uses the broad term “empower” as distinct from the term “indigenise”.
While it is easy to conceive that indigenisation in the narrow sense is also a form of empowerment, the constitutional emphasis is on a broad, balanced and all-encompassing approach to empowerment that is not limited to a straight-jacket equity model.
The sector frameworks are, therefore, important instruments for achieving what the Constitution says should be Government’s empowerment objective. Through these sector-specific objectives, Government and line ministries have a duty to ensure the form of affirmative action going forward is broad and balanced, and is economically relevant.
Also, the new approaches should not conflict with other provisions of the Constitution such as the protection of private property, which is guaranteed in the bill of rights.
This last point underscores the fact that going forward, the sector-specific laws must not be seen to be an exercise in expropriation or deprivation of other people’s properties.
So what sort of approaches satisfy the above criteria?
I have argued that a multi-factor approach, or balanced scorecard approach, is the only way the constitutionally guaranteed duty to empower citizens can be achieved in an economically sensible manner.
Indigenisation and empowerment as an event versus indigenisation and empowerment as a process
It is hard to miss the apparent static nature of indigenisation and empowerment under the current model.
The current legal framework is predicated on achieving the goals of indigenisation and empowerment by a certain date, or within a fixed and non-variable time frame.
This static approach fails to recognise the dynamic and changing nature of economy and commerce, and assumes a rigid frame within which economic goals are pursued. Without doubt, this is a wrong approach to a dynamic and responsive affirmative action, which, as it should, must be a process rather than an event.
Ownership and interests in private and public corporates continually change, capital by its very nature is dynamic, and so are the continuous needs of empowerment and support of local populations.
This weakness in the current legal framework appears as a fundamental limitation on indigenisation and empowerment going forward, and creates confusion in the compliance monitoring and audit processes.
However, once indigenisation and empowerment is assumed to be a process rather than an event, a new framework will naturally develop ways of monitoring compliance, implementation and achievement of thresholds effectively.
This is what the proposed multi-factor approach does.
Its proposed compliance mechanisms are such that the prevailing conditions of commerce will compel continuous self-assessment and compliance, and the businesses themselves will yearn for and seek, rather than be pushed towards compliance.
There will be more to be gained from compliance by businesses and investors than not.
The multi-factor approach proposed in this document will, therefore, address the three shortcomings identified above in that:
The framework adopts a broader approach to indigenisation and empowerment, which is not limited to equity only and provides for a balance and flexibility that will be attractive to investors.
The framework addresses the expired or expiring instruments and notices and provides a basic legal frame for new regulations.
Finally, the framework is consistent and clear, both from the point of view of a business that wants to indigenise, and from ministries assessing and approving indigenisation plans. The framework highlights clear elements of an indigenisation and empowerment plan and sets out objective assessment criteria for decision-making, thereby eliminating the need for arbitrary analysis and decision-making.
The framework also establishes clear timelines for submission of plans, assessment and approval and monitoring. This predictability is good for commerce, and relieves any burdens associated with rigorous and rigid compliance.
The Multi-factor approach
Period of compliance
In proposing the adoption of a flexible approach to indigenisation and empowerment through the new sector-specific notices, my initial suggestion is that the different ministries must provide for longer periods of compliance.
As observed, the old notices carried unrealistic and inflexible time periods for compliance, in most cases within one year, or even less.
This approach did not make sense and will not make sense going forward, for the reasons already highlighted.
Different investment projects are conceived, and develop and mature at different rates, and this must be taken into account.
Also, it is good practice to allow an investor a return on investment within a reasonable time before asking them to comply with indigenisation and empowerment objectives.
My proposal is as follows:
Mining
Investment above US$10 million — Investors to achieve compliance after 10 years of operation.
Investment less than US$10 million — Investors to achieve compliance after five years of operation.
Manufacturing
Investment above US$1 million —Investor to achieve compliance after 10 years.
Investment less than US$1 million — Investor to achieve compliance after five years.
Energy — Exempt
Banking and Finance — Exempt
Other sectors
Investment above US$1 million — Investor to achieve compliance after 10 years.
Investment less than US$1 million — Investor to achieve compliance after five years.
The above criteria should apply with respect to new investments, or alternatively transactions governed by Section 3 (1) of the Indigenisation and Economic Empowerment Act.
Submission of indigenisation and empowerment proposals
In all cases, businesses should be allowed a maximum time of 12 months to prepare and submit indigenisation and empowerment proposals to be implemented in accordance with the above-proposed time frames.
Businesses must be given a choice to both propose and achieve progressive implementation within the relevant time frames, or to implement their proposals, once approved, after the expiration of the relevant time frames.
Elements of the indigenisation and empowerment proposals
While the principal objective of indigenisation and empowerment can remain as 51 / 49 percent, businesses should have a choice to achieve this through direct equity, or a combination of both equity and empowerment credits, provided that for those sectors that are not exempt, the minimum direct equity should always be 26 percent.
This means the maximum possible credit that a business can get at all times will be 25 percent.
A business should be able to demonstrate implementation and achievement of its empowerment proposals within the relevant time frames in order to be awarded the empowerment credit.
The 25 percent credit can be earned for any one or more of the following:
Community Responsibility and Assistance programmes with an annual aggregate value of, in the case of mining companies, US$20 000 per annum or above, and in all other cases, US$10 000 per annum or above;
Local procurement with an annual aggregate value of, in the case of mining companies, US$50 000 per annum or above, and in all other cases, US$20 000 and above per annum;
Infrastructure development with a value of over US$10 million and above;
Skills development and training, if a business or investor achieves accredited training of over 100 employees, or any other recognised form of training with emphasis on vocational skills set and self-help ability, done either through the enterprise or as part of the community responsibility and assistance programme;
Employment creation where the number of persons within a period of five years exceeds 1 000 persons.
Community Trusts and Employee Trusts
A business should be given a choice to vary the nature; type, rights and interests of community and employee trust shares in order to maintain economically viable capital structures.
This should only be done so long as these trusts can acquire preferential treatment in distributions or dividend share, or alternatively where there is a right to a steady periodic royalty equivalent to the proposed trust shareholding.
This proposal is based on the fact that in the last five years, it has become apparent that communities and employees are less interested in the governance and management of enterprises than in the financial benefit from those enterprises.
Communities and persons prefer money to shares, in most cases, and it makes sense to guarantee constant sources of money than shareholding, which may not provide dividends in a long time.
Conclusion
I submit that the above proposals modified appropriately and as is necessary will bring much-needed flexibility and clarity to the indigenisation and empowerment laws and policy.
In addition, the proposals will defer to the investor to determine the most appropriate and suitable form of indigenisation and empowerment, taking into account their plans and investment motives.
Once implemented across the board by all ministries, the proposed multi-factor approach will be clear, certain and economically sensible so as to attract the much-needed foreign investment into the country.
My next instalment will look at the indigenisation and empowerment assessment rating and show how a new rating is crucial for the achievement of the indigenisation and empowerment objectives while at the same time operating as a tool to attract and retain significant foreign capital.
Zweli Lunga is a partner at Lunga Gonese Attorneys, a law firm specialising in investment, commercial and corporate law practice.
