Friday, September 17, 2010

(TALKZIMBABWE) Indigenisation will help mining industry

Indigenisation will help mining industry
By: Garikai Chengu
Posted: Friday, September 17, 2010 2:14 am

ZIMBABWE is undoubtedly the richest nation on earth with respect to untapped natural resources per person. With only 13 million people and over 40 exploitable minerals, vast gold deposits, the world's second largest platinum reserves and the capacity to be the world's top diamond producer, the nation will soon become the jewel of Africa.

Zimbabwe's Chamber of Mines expects gold output to rise to 50 tonnes within four years from 3.5 tonnes last year, while platinum output could reach 1 million ounces a year within 15 years from the current 170,000 ounces a year.
Zimbabwe is also expected to account for 25% of the world's diamond production within only three years.

The Indigenisation and Economic Empowerment Act will help, rather than hinder, the mining industry and ensure that 13 million Zimbabweans benefit from the nation's abundant natural resources.

In order to illustrate how the Act will serve as a catalyst for the mining industry, a popular misconception has to be rebuffed. Government's nuanced approach to individual mines as well as the importance of indigenous diamond beneficiation, must also be understood.

The flawed and yet popular misconception is the belief that potential foreign investors in the mining industry will be deterred by the 51percent local ownership requirement.

For a start, there are many extremely successful and wealthy investors that own far less than 50% of the corporations they invest in. For instance Warren Buffet, who is widely regarded as one of the most successful investors, with a net wealth in excess of US$50 billion dollars, does not own more than 50 percent of any corporation with a threshold over $500,000.

Secondly, foreign investors in the mining industry are steadily streaming into Zimbabwe for four main reasons. Firstly, they appreciate that the return on capital in their own nation is not adequate. Secondly, the potential return on capital in a nation whose mining industry is predicted to barrel along at 30% per annum is simply irresistible. Thirdly, they seek to reduce the cost of production by combining their capital with Zimbabwe's low cost labour; and finally, they seek to use Zimbabwe's abundant natural resources near their origin.

The Indigenisation Act will not change any of this.

Infact, in spite of the Indigenisation Act, Imara, the pan-African investment group, has reported steady increases in foreign direct investment (FDI) in the mining sector as old mines recapitalise and new mining projects begin.

RioTinto has announced that it has begun work on a US$300 million expansion programme for its Murowa diamond mine.

There has also been mention of Zimplats committing a further $500 million for a platinum smelter on top of its stage-two expansion of $445 million.

All in all, Zimbabwe's booming mining industry is too profitable to resist: It's a truth universally acknowledged that a zombie in possession of brains must be in want of more brains. International investors with money are no different.

Thirdly, the Indigenisation Act will prohibit high levels of foreign shareholding in mining companies. This is desirable because these levels result in excessive profits and dividends being repatriated by foreign investors and worsens the nation's Balance of Payments position.

Infact, ever since Zimbabwe was under the bondage of colonial misrule, it has failed to prosper from its natural resources - human and mineral - while the companies that mine or otherwise employ those resources have.

Indigenisation and empowerment Minister Saviour Kasukuwere said that last year mines had export receipts of over US$1 billion, but only US$44 million accrued to the State in taxes and royalties.

Opting to raise levels of corporate tax and mining royalties would merely stifle production.

Instead government should ensure that the nation benefits from mining production by making sure that those that produce, employ, pay taxes and are beneficiaries of government spending are Zimbabweans.

Fears that Government would use a bludgeon where a scalpel is needed by blindly enforcing the 51percent ownership rule across the board are overblown and unfounded.

Government has made it absolutely clear that it will not sacrifice much needed investment for indigenisation, nor will it scale back attempts to redress the wrongs of the past for investment. Government can achieve both simultaneously.

In order to achieve both objectives, government has set up 13 sectoral committees to look at the implementation strategies of the Indigenisation Act.

The mining sectoral committee is expected to submit recommendations to relevant authorities about the minimum net asset value threshold for specific mines required to comply with the regulations.

Crucially, the mining indigenisation committee will be flexible and not apply a once size fits all attitude towards the industry.

Such flexibility is shown by the committee's acceptance of empowerment credits that give companies the option to build schools, railways and pave roads in exchange for retaining greater foreign ownership in their businesses.

The final area that illustrates how indigenising the mining industry can catalyse the industry's growth is that of diamond beneficiation and value addition.

Zimbabwe is set to become the largest producer of diamonds in the world by 2013. The nation is expected to produce 40 million carats per year and earn annual revenues of approximately US$ 2 billion.

The importance of focusing on beneficiation lies in the fact that were Zimbabwe to cut, polish and retail the gems internally this figure would quadruple.

Currently, the government is struggling to deliver services and pay civil servants wages commensurate to their contribution on a meagre budget of US$100 million per month. Set alongside this, beneficiation has the potential to transform the nation’s fortunes.

Indigenous beneficiation's potential should be unlocked by firstly, ensuring that as many local small scale miners as possible are awarded claims within the the approximately 66,000 hectares that are potentially diamond rich.

Preference should be given towards women, youths , war veterans, aids orphans and disabled groups. This will not only empower the local population, but also provide a broad based catalyst for economic growth.

Secondly, the establishment of a multimillion-dollar Diamond Technology Centre should provide locals with the opportunity to venture into new industries associated with the cutting, polishing, dealing, jewellery manufacturing, and ultimately retail of diamonds.

Thereby serving as a catalyst for other downstream industries directly or indirectly related to diamonds, such as banking, jewellery making, security, information technology, and even tourism.

It is therefore heartening that the Affirmative Action Group has reserved units within the Diamond Technology Centre exclusively for indigenous people to be active participants in value addition and beneficiation activities.

The Indigenisation and Economic Empowerment Act is not merely a moral initiative designed to redress the wrongs of the past, nor will it hinder the mining industry's future. It serves as a pragmatic growth strategy for the mining industry that is designed to realise the nation's full economic potential.

__________________________
Garikai Chengu is a researcher at Harvard University's Faculty of Arts and Sciences. He can be contacted at chengu@fas.harvard.edu. The views expressed herein are solely those of Garikai Chengu.

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