VZCZCXRO2277
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0116/01 0431052
ZNR UUUUU ZZH
O R 121051Z FEB 10
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0050
INFO SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

UNCLAS SECTION 01 OF 02 HARARE 000116 
 
SENSITIVE 
SIPDIS 
AF/S FOR B. WALCH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV PREL ZI
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. 
END SUMMARY. 
 
 
 
¶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 
objective." 
 
 
 
¶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 
regulations. 
 
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. 
RAY