Maravi

(NEWZIMBABWE) Gono explains counter indigenisation model

Gono explains counter indigenisation model
06/06/2012 00:00:00
by Gideon Gono

THE economic prosperity of any nation is a function of the economic prosperity of its citizens. In this regard, it follows that poverty anywhere in our country, is poverty everywhere. So our vision for a $100 billion economy will be difficult to realise for as long as the majority of our citizens are not genuinely economically empowered.

For the avoidance of doubt, may I categorically state upfront that the Reserve Bank is not against indigenisation, neither are we opposed to empowerment. Our long history of empowerment programs is testimonial to our resolute commitment to the economic upliftment of the majority of our people.

Our understanding, which we believe is a shared view, is that indigenisation is a process of transferring ownership of the resources of a country to its rightful owners, who are the indigenous people. It is our view that indigenisation is a medium-to-long term aspiration whose journey must begin now.

Empowerment on the other hand, is a multi-dimensional socio-economic process of opening up opportunities for livelihood, growth and prosperity to the greater majority of people in an economy regardless of whether the source of opportunity is non-indigenous or otherwise.

An individual is economically empowered when they have both the ability to succeed and advance economically, and the power to make and act on economic decisions. Empowerment is thus immediate and ongoing. In our view, it is the responsibility of everyone who has been empowered yesterday, today and tomorrow, to empower others.

We are concerned as a central bank that while great attention is being paid to the equity approach, very little, if any, attention is being paid to the empowerment side of things although the law provides for it.

The Reserve Bank’s views on economic empowerment are based on past experience in supporting key sectors of the economy. Over the years, the Reserve Bank initiated a number of empowerment programs such as the Productive Sector Facility (PSF) and Agricultural Sector Productivity Enhancement Facility (ASPEF). A cumulative amount equivalent to $710.10 million was disbursed by Reserve Bank since 2002.

The implementation of these facilities resulted in the following:

* avoided company closures due to high cost of borrowing;
* stimulated employment creation through support of new and expansion of projects and providing funds for capital expenditure;
* stimulated additional export earnings;
* provided low cost production to targeted primary producers in the agricultural sector;
* enhanced capacity utilisation, infrastructure development and output; and
* ensured food security and import substitution.

All these facilities, Ladies and Gentlemen, have either benefited the same people, or failed to provide the requisite impetus to stimulate sustainable economic activity.

According to the FinScope survey on Financial Inclusion conducted in 2011, it was established that 65% of our population live in rural areas and on average 80% of the adult population earn less than $200 a month, while about 17% do not have an income.

In addition, 64% of the population is below the age of 40 years while 60% of the sampled population under the FinScope survey is women.
The FinScope survey also revealed that 51% of the rural folk are excluded from the banking system.

The supply side approach will, therefore, result in decentralisation of economic activity and collective empowerment, thereby reducing challenges of marginalisation.

Empowerment of indigenous people should improve their basic welfare and reduce poverty in line with the millennium development goals (MDGs) namely:

* the eradication of extreme poverty;
* support towards the achievement of universal primary education;
* promotion of gender equality and empowerment of women (and the youths);
* reduction of child mortality;
* improvement in maternal health;
* combating of HIV/AIDS, malaria and other diseases;
* ensuring and assisting environmental sustainability and
* assist in the development of global partnerships for development.

The country’s ownership and empowerment struggles must, therefore, be anchored on these absolute necessities which put differently, relate to the indisputable Maslow’s Hierarchy of Needs.

Hierarchy of needs

Demographic statistics reflect a situation where the majority of the country’s population have unmet basic or physiological needs (lowest level needs) according to the renowned Maslow hierarchy of needs.

The supply of raw materials and inputs by indigenous people immediately addresses their basic, low-level physiological needs notably food, shelter and clothing. Higher-level needs such as self-actualisation are long term in nature and do not immediately impact on the livelihoods of the generality of the population.

From the MHON model, it is clear that the majority of Zimbabweans are still at the bottom of the ladder in both rural and urban areas. About 85% of the total population is in the lower ranks of the MHON.

Equity ownership resides in the realm of both esteem needs and self-actualisation, the smallest of the five (5) components in the MHON Pyramid while the other three bottom segments constitute the crying need for the majority, 85% of the population. These segments, especially the bottom two, are the concern of the UN Millenium Development Goals.

Self actualisation needs, such as the acquisition of equity and majority shareholding in companies, have minimal short-term benefits to the indigenous people and, should therefore, be the medium to long-term national goal.

Equity or shareholder benefits also accrue once dividends are declared, which is normally annually, bi-annually or even at longer intervals, thus depriving indigenous people of much-needed immediate and basic requirements. The situation is worse in an environment like ours, where most companies are making losses or insignificant profit levels.

RBZ Position

The Reserve Bank has maintained its usual stance on the indigenisation and empowerment strategy since 2007. In the October 2007 Monetary Policy Statement, the Reserve Bank proffered advice on indigenisation and empowerment strategy that empowers the majority of Zimbabweans through the introduction of enabling statutes that expand wider involvement of the people in the mainstream economy.

In that statement, the Bank advocated for a fine balance to be struck between the objectives of indigenisation and the need to attract foreign investment necessary to grow the economy so that the same economy starts registering growth that will in turn enable the majority of our people to start experiencing real participation.

The Bank also called for a gradual approach where the local-foreign ownership thresholds must be taken and implemented as down the horizon targets, as opposed to overnight conversion events on the back of very little personal or national savings available to support the empowerment process.

Specifically, the Bank recommended the following timeframes for the indigenisation process. This gradual approach promotes fair valuation, reasonable return of initial investment outlays by investors, as well as smooth learning curve and various culture transitions between old to new shareholders.

Beyond pre-agreed time thresholds foreign shareholding can then be diluted on a gradual win-win basis, in line with the otherwise noble objectives of indigenisation and empowerment.
Supply-Chain Strategy

The Government may with immediate effect, institute a supply chain empowerment strategy by putting in place explicit procurement policies to ensure that predominantly, Government departments, Public Enterprises, Local Authorities and other companies outsource or buy their inputs from indigenous suppliers.

The supply of raw materials and other critical inputs immediately empowers Zimbabweans by smoothening the ownership of the means of production and mainstreaming previously disadvantaged indigenous people into active participation in economy building.

This empowerment strategy ensures that indigenous people realize immediate benefits through receipts from guaranteed supply of goods and services to companies, as opposed to waiting for annual dividend payments, which are contingent upon the companies making profits and declaring such dividends to shareholders.

Assuming a national cake of US$1bn and 68% (US$680m) is spent on raw materials and inputs and that 75% of this is supplied by indigenous players, this translates US$510m that can be available to indigenous people. This yields higher benefits compared to dividends accruing to the indigenous population of US$5.1m under the equity approach, assuming a 10% dividend policy.
Government supplies

In the pronouncement of national budget statements, the procurement of Government goods and services should be reserved for the indigenous people. This measure would create a niche market for the indigenous people, while at the same time empowering them to participate in economic activity.

Equally, a significant quota should be reserved for the indigenous people in the area of service provision. Government should, thus minimize outsourcing of service provision to foreign owned businesses and prioritise competent indigenous providers.

In cases where indigenous companies do not have capacity to procure, Government should encourage strategic partnerships between existing foreign owned and indigenous companies, so as to strengthen local expertise and ability.
Government should set a time line for capacitating indigenous companies to meet all procurement standards.

The country’s Parastatals and Local Authorities provide a range of services, which heavily rely on intermediate inputs. There is, therefore, great scope to empower the indigenous people by reserving the supply of water treatment chemicals, computer consumables and other requirements needed in the day to day running of the Local Authorities and parastatals.
Financing Strategy

One way to ensure adequate financing to indigenous people is to put in place measures that ensure indigenous people have access to capital from the financial sector for both operational and capital spending with little or no traditional type of security for the loans.

Financial institutions can provide indigenous people with the requisite financing under order financing facilities in the short to medium term. Opportunities exist in the long term for indigenous companies to be nurtured to grow and withstand a competitive environment.

Procurement financing involves the financing of purchase orders by a financial institution to a company that has secured an order to supply goods and services but does not have enough ready cash available to execute the order. Under such circumstances, the bank will provide the funding to meet the order costs.

A maximum value of the cost to supply the order will be disbursed and an arrangement will be entered into on the mode of loan repayment with the client. Usually, the payments will be made directly to the supplier of goods and services.

After the goods have been delivered, the company will pay the supplier through the bank, which will in turn pay the indigenous company after deducting the loan amount and processing fees. This arrangement does not require monthly repayments and collateral security.

Parties Involved
Indigenous enterprise: This is the company or individual with a tender to supply goods to government departments, public enterprises, mining or manufacturing company.

Buyer: This is the firm purchasing the raw materials or goods. This might be government departments, public enterprises, mining company, or a manufacturing company.
Seller: This is the firm selling the goods or raw materials.

Financial Institution: The financial institution can be a bank or a microfinance institution providing financing against the purchase order from the indigenous enterprise.
STEP 1

The indigenous enterprise obtains a tender to supply goods to Government departments, public enterprises, mining or manufacturing companies. The buyer gives a purchase order to the indigenous enterprise.

STEP 2

The indigenous enterprise uses the purchase order to apply for a loan from the financial institution. The purchase order gives the bank some degree of certainty that a sale will be made, thus giving the purchase order some collateral status. The bank will also be responsible for collecting the sale proceeds from the buyer after execution of the sale order.
STEP 3

The financial institution provides finance to the indigenous enterprise against the purchase order as collateral and charges some processing fees for the service rendered. The financial institution will pay the money directly to the supplier of goods.

STEP4

Upon receipt of the funds, the seller will supply the goods to the buyer through the indigenous enterprise.

STEP 5

The buyer will pay the indigenous enterprise the full amount through his bank upon receipt of the goods.

STEP 6

The bank will then pay the indigenous enterprise the balance after deducting the full loan amount and loan processing charges.

Benefits

The order financing strategy will immediately empower the disadvantaged indigenous people particularly, women and the youth with limited access to finance due to lack of adequate collateral. Order financing is also attractive because it will enable indigenous people to benefit from supplier discounts for early payment of goods.

In the order financing arrangements there is no need for banks to require stringent collateral arrangements as a confirmed order would be self liquidating and paid through the financing banking institution.

Fiscal rebates

Government could also introduce tax rebates to benefit companies that source input supplies from indigenous people and firms. The tax rebates would incentivise foreign-owned entities to seriously consider engaging the local communities in the supply of their inputs.

Such fiscal rebates will achieve the twin objectives of empowering the indigenous people while at the same time enhancing the viability of foreign enterprises through special tax exemptions.

Securitisation

Financial constraints may severely undermine the capacity of the indigenous people’s ability to supply inputs to foreign owned companies. In such cases, securitisation arrangements can be established to enable the mobilisation of financial resources by local people.

In this regard, foreign-owned companies can provide guarantees on behalf of the indigenous supplier who furnishes financial institutions with the requisite suppliers’ contract. Under this arrangement, the indigenous supplier will borrow from a bank on the strength of the guarantee provided by the foreign entity, acquire and supply inputs, then service debt obligations accordingly.

Capacitation

The indigenous people should be capacitated to adhere to proper business practices, to ensure efficient and timely delivery of high quality inputs.

Lack of reliability and timely delivery of inputs will delay production processes and result in the loss of lucrative contracts secured by foreign owned entities.

Against this background, the empowerment of the indigenous people should be accompanied by orientation programs geared at capacitating the local people to efficiently supply goods and services.

Capacity development programs should focus on mentorship, training, management, marketing as well as tender and procurement procedures.

Opportunities

Lucrative empowerment opportunities are also abound in the key sectors of the Zimbabwean economy notably, manufacturing, mining, construction, tourism, retail, distribution, transport, telecommunications, financial and the public sectors.
Banking sector

An analysis of the banking sector financial statistics at 31 December 2011 indicates that foreign banks accounted for 34% of the sector’s total revenue (turnover) of $870 million while indigenous banks accounted for the balance of 66%.

The revenue drivers for the banking sector include interest income, foreign exchange fees and commission, ledger and handling fees as well as management and establishment fees.

For the same period, total costs incurred by the banking sector amounted to about $800 million. Out of the total expenses of $800 million, foreign owned banking institutions accounted for 32% of expenses.

The major cost drivers in the banking sector were salaries and employment benefits, interest expense and other non-interest expense.

Management and service fees accounted for 2% ($16 million) and these relate to periodic fees paid to service providers for software licences and electronic payment platforms including Visa, Mastercard, Paynet, Zimswitch and SWIFT.

Occupancy (net of rental income) which accounted for 4% ($32 million) relates to rentals paid on leasehold property.

Other non-interest expenses for the banking sector amounting to $320 million accounted for 40% of total expenses and these include:

* Advertising and marketing expenses;
* software licence fees;
* computer repairs and maintenance;
* stationery and computer consumables;
* motor vehicle repairs;
* security;
* auditing fees;
* cleaning services;
* canteen services;
* credit reference bureau;
* external credit rating services;
* travel and accommodation;
* training;
* card and cheque production;
* consultancy fees;
* uniforms and protective clothing.

Supply-chain approach

The non-interest expenses listed above present empowerment opportunities through outsourcing to indigenous enterprises. There is scope therefore, for indigenous people participating on the input side of the value chain i.e. non-interest costs ($320 million).
Given the above, the supply-side approach is progressive, provides a broader scope for indigenous participation and offers better returns in the value chain of banking institutions.
Equity approach

For the year ended 31 December 2011, total banking sector revenue amounted to $870 million, while total expenses were $800 million, resulting in net profit of $70 million.
Out of the total profitability of $70 million, foreign banks accounted for 52% ($37 million), while indigenous banks had the balance of 48% ($33 million).

Based on the foreign banks’ share of profitability amounting to $37 million, if indigenous participation were to be based on profitability alone, the indigenous investors would be entitled to $19 million being 51% of $37 million.

Further, assuming a dividend of 10% is paid on the $19 million, indigenous investors would be entitled to a paltry dividend of a $1.9 million per year if the equity based approach is followed.

This is in contrast $320 million supply-side participation, which is available throughout the year and has the added benefit of the multiplier effect of reinvested profits.

Branch Network

Although most branches are concentrated in major urban centres as shown in the table below, there are about 64 localities with at least a branch throughout the country. The various country branches provide immense empowerment opportunities for the people throughout the country to participate in supply side empowerment programs.

The anticipated increase in economic activity via supply side empowerment is expected to result in the expansion of banking services to previously excluded areas.

Mining Sector

The mining sector currently contributes about 5% to real GDP. The sector is capital intensive and requires huge initial capital outlay. The initial capital is required for prospecting and exploration, resource definition and actual mining development.

It takes about 15 years for the mine to recover all the sunk costs used for mining development. While mines make huge operating profits, the profits would not be used as dividends as the money is usually used to offset the huge initial capital outlay.

According to the estimated distribution of mining revenues in 2011, by owning 51% equity, indigenous Zimbabweans would participate in 11% of total revenue through profit after tax, translating to 5.6% of total mining revenue.

The absence of long term capital emanating from the current liquidity crunch implies that mining firms partly rely on retained earnings as a source of cheap finance. In addition, mining firms would request fresh capital injections from shareholders, and with 51% shareholding, Zimbabweans may face challenges in raising the required capital.

Further, since not all profit after tax will be distributed as dividends, indigenous Zimbabweans may receive less than 5.6% of total revenue.

Under the Supply and Distribution Empowerment Model, mining firms will be required to source a significant and fixed percentage of inputs and consumables from indigenous suppliers.

The input and spares category contributes about 53% of the cost into mining production, and this proportion can be targeted to empower local people through the supply of inputs, spares, additives and chemicals, and other consumables into the mining companies.

Under this framework, mine operators will be required to source inputs and maintenance spares from indigenous suppliers, up to a minimum of 75% of total requirements.

Mechanisms will be put in place to ensure that indigenous suppliers adhere to strict quality assurances, and that in exceptional cases where locals are unable to immediately supply specific requirements by miners, a window for limited importation of such inputs and spares is allowed.

This framework has immediate downstream benefits to the whole economy including employment and associated increases in aggregate demand.

Manufacturing Sector

The sector is made up of various sub-sectors such as foodstuffs, tobacco and beverages, clothing and textiles, wood and furniture, paper printing and publishing, chemical and petroleum products.
The major cost drivers in the sector are electricity, labour, raw materials, inputs and maintenance.
Within the value chain approach, locals will participate in the provision of raw materials and other consumables, resulting in immediate benefits accruing to the indigenous people.

Government must therefore work on legislation that ensures that a significant percentage of raw materials for companies operating in the country is accessed from indigenous SMEs in order to optimize benefits from the empowerment policy. The awarding of such contracts to locally registered indigenous companies will reduce informalisation of the sector and boost Government revenue.

Moreover, policies on recruitment of personnel across the sector must be structured in a way that ensures benefits accrue to the indigenous people. Government should only allow foreign expatriates in the industry by adopting a quota system based on the scarcity of certain skills.

Tourism Sector

The main cost drivers in the tourism sector are raw materials and finance costs. Small to medium indigenous enterprises (SMEs) could be capacitated to provide raw materials to the sector.

The distribution sector is characterised by a complex set of economic activities which link producers and buyers of goods and services. The sector includes retail and wholesale traders.

Its cost structure presents numerous opportunities for indigenous firms to participate as the key suppliers of goods and services, transport, marketing and logistics services.
Construction

The construction industry contributes about 2.4% to Gross Domestic Product (GDP). The industry consists of Architects, Quantity Surveyors, Real Estate Agents, Project Managers, Engineers and Contractors. The largest construction companies in Zimbabwe include Costain and Murray & Roberts. The major cost drivers of the construction sector are raw materials (79%) which comprise of cement, bricks, steel and equipment.

Indigenous companies can, therefore, be capacitated to provide these critical raw materials to the construction sector.

Transport
The current investment laws in Zimbabwe allow for a maximum of 35% foreign ownership in the transport sector.

The passenger and freight sub-sectors are dominated by indigenous players as they do not require large capital outlays, compared to sectors such as mining and manufacturing.
Indigenous firms can provide key raw materials in the transport sub-sector, as well as maintenance and other services.
Implementation

In implementing the supply side approach to indigenisation, there are a number of considerations which need to be taken into account to ensure the approach achieves its desired objectives. These considerations include quality of services, financing, transparency, among others.

The supply side approach should be implemented through collaborative efforts by all stakeholders including the government, private sector, banking institutions and development partners.

The following preconditions are necessary to ensure the approach achieves its intended objectives of empowering the marginalized indigenous Zimbabweans:
creation of an indigenous suppliers database by Government at national and regional levels;

training and capacity building of the accredited indigenous suppliers by the responsible Government ministries, financial institutions and donor agencies;
transparent tender process procedures through public disclosure;
provision of financing by financial institutions and government to accredited indigenous suppliers; and

formulation of appropriate legislation and regulatory framework to guard against ‘front running’ and corruption in the procurement process.

Implementation of the supply side approach requires a crosscutting strategy that touches upon many areas such as capability of stakeholders to develop conducive microeconomic business environments, inter alia, through adequate legal and regulatory frameworks, transparency through public disclosures and thereby curbing ‘front running’, provision of finance, adequate infrastructure, capacity building and skills development to enhance the competitiveness of indigenous companies.

Thus, the approach should be integrated in the broader national development strategy and/or poverty reduction and growth strategy of indigenous companies in Zimbabwe.

The supply side empowerment approach can also be fine-tuned to address the quota system requirements for youths, women and special interest groups, and is also auditable, and transparent with a quick turnaround in terms of visible benefits that address basic needs of individuals and communities in which the economic cake is being generated.
Conclusion

The indigenous people should be empowered in a way that preserves and grows the stock of already existing wealth, while at the same time increasing their participation in the various economic sectors.

This can only be achieved by ensuring that indigenous people take an active part in the supply of goods and services to Government departments, public enterprises, local authorities and private entities.

The supply chain based strategy will enable indigenous people to raise seed capital for the purchase of equity in the medium to long term.

A cautious approach is, however, required in sensitive sectors such as the banking sector, where confidence should be retained at all costs.
To give fruition to these suggestions, there is need to put in place explicit procurement policies to ensure that predominantly, companies outsource or buy their inputs from indigenous supplies.
There is also need to put in place policies that ensure that indigenous people have access to capital from the financial sector for both operational and capital spending.

Industry specific indigenous empowerment charters should, however, be developed to recognise the peculiarities of the different sectors and industries.

When the empowerment drive has been achieved through the supply chain based strategy, Government could then move a gear up or accelerate ownership of companies by indigenous Zimbabweans, having accumulated capital through the procurement process, through a carefully planned indigenization implementation framework.

Labels: GIDEON GONO, INDIGENIZATION AND EMPOWERMENT ACT (ZIMBABWE)

posted by MrK @ 3:46 PM