(NEWZIMBABWE) Indigenisation: aiming for fuller participation

Friday, February 15, 2013

(NEWZIMBABWE) Indigenisation: aiming for fuller participation

Indigenisation: aiming for fuller participation
14/02/2013 00:00:00
by Gideon Gono

Reserve Bank governor Gideon Gono has been an outspoken sceptic of the indigenisation and empowerment drive. Writing in the Financial Gazette on Thursday, he warned that elements of the current model being pursued by the government are unlikely to have the required impact of alleviating poverty among Zimbabwe's poor:

EVER since the promulgation of the Indigenisation and Economic Empowerment legislation in 2007, the initiative has been at the centre of emotive debate among various stakeholders from within and outside Zimbabwe.

While some quarters, especially and understandably, those from outside Zimbabwe have been totally against the initiative, the debate among Zimbabwean stakeholders has not been on whether or not to indigenize the economy and empower locals but rather on how best to sustainably indigenize the economy and empower the indigenous population beyond today’s and tomorrow’s generations but well into posterity.

It is , therefore, within the context of optimising both the individual and collective empowerment benefits to the indigenous population of Zimbabwe that this paper seeks to explain how the implementation of a supply and distribution based indigenisation and empowerment model can effectively and permanently transform the lives of a wide cross section of indigenous people within a very short space of time.

Noting the guiding pillars and shared national objectives behind the Government’s Indigenisation and Economic empowerment drive, the country’s economic empowerment strategy should be done in a manner that immediately reduce poverty for the majority of Zimbabweans, and enhance societal welfare. The program should ensure the equitable re-distribution of wealth across a broad spectrum of societal groups notably, women, youth, chiefs and the physically handicapped.

The model must also respond to, and tackle, each of the eight (8) United Nations (UN) 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.

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This paper, therefore analyses the impact of a hypothetical policy directive by Government directing all companies with a minimum capitalization of US$ 500,000 to procure at least 51 percent of their consumables, spares and raw material supplies from indigenous small to medium enterprises with capitalization levels of below US$200,000.

In order to build context, It critical that a recap of the basic tenets of the supply and distribution based indigenisation and empowerment model is done before an impact analysis of the afore-described hypothetical policy directive is carried out.
SUPPLY AND DISTRIBUTION BASED INDIGENISATION MODEL (SaDIE): THE BASIC FEATURES

The SaDIE model is premised on the authorities leveraging the immense value of supply contracts within the economy’s entire supply and distribution chain in order to unlock wealth and scope for profitable participation of a broad spectrum of Zimbabwe’s indigenous population in the various lucrative sectors of their economy.

The SaDIE model is inspired by the recognition of the fact that only a few can fit or benefit from the equity-ownership model currently being pushed under the Indigenization and Empowerment Act with the overall implication being the unsustainable alienation of the majority of indigenous people from the noble indigenisation and economic empowerment drive.

Under the SaDIE framework, Government, through law, directs that indigenous owned Small to Medium Enterprises (SMEs) are accorded the exclusive right to supply a given proportion of all inputs relating to a specific economic sector. This strategy therefore, effectively empowers indigenous people to control downstream industries through the supplying of raw materials, services and other inputs.

The model also envisages a gradual approach towards attainment of the company ownership thresholds by indigenous Zimbabweans, in a manner that ensures sustainable empowerment, inflows of much-needed foreign capital and minimal disruption to economic activity.

It would therefore, be beneficial to the greater majority as well as future generations to spread compliance with the 51 percent equity threshold to up to twenty or so years while the 51 percent input supply, distribution and service provision model is activated with immediate effect in order to unlock the practical benefit of ensuring regular income flows for the majority of our people, while generating popular and local stakeholder involvement.

The supply of raw materials and other critical inputs immediately empowers indigenous Zimbabweans through ownership of the means of production and mainstreaming previously disadvantaged indigenous people such as women and youth into active economic participation.

The model thus 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.

Current non-indigenous supply/distribution/marketing contracts can be negotiated over to indigenous people, without affecting or compromising price competitiveness to the company, quality specifications, delivery efficiencies and all other existing criteria required by the companies, parastatals, local authorities, Government Departments and Ministries.

Where there are short-comings in terms of the skills of indigenous people, mentorship programs and smart-partnerships arrangements could be put in place, in transparent ways which are auditable by ZIMRA or Exchequer/and which mentorship programs should observe the need for participation by locals, women, youths and special groups, while avoiding cases of duplicating beneficiaries.

Imported inputs to the industries also ought to be indigenized and appropriate steps taken by the companies concerned to mentor/hand-hold newcomers to the game.

Banks are more likely to lend to a group of people or individuals who are accredited suppliers of say, Zimplats, with the understanding that they will get paid by Stop-Order directly from the beneficiary company. This allows them to securitize that relationship, thereby obviating the need for primary security from the individual or group of individuals who do not have any collateral to give in the first place.

One major feature of the SaDIE approach is that even loss making companies necessarily have to consume raw materials, inputs and other services monthly or periodically, thus contributing towards the day-to-day empowerment of the indigenous people, a factor that eliminates the need, under the predominance of equity-type empowerment model, to receive dividends only once a year or so.

The diagram below illustrates the immediate benefits of the SaDIE model assuming a foreign capital injection of US$ 1 billion and a government directive for the procurement of 51 percent of all raw materials, spares and consumables from indigenous owned SMEs.
ILLUSTRATION OF THE EMPOWERMENT STRATEGY UNDER SaDIE

As can be shown in the diagram above, there are more broad based empowerment benefits, employment creation and collective value addition in US$ 331.5 million worth of raw material, consumables and other services supply contracts than in simply sharing a US$ 10.2 million dividend (51 percent of the 20 million declared dividend in the event of a good financial year).

In view of the above illustration, it becomes clear that the SaDIE model of empowerment ties up with the Government’s long standing arch-objective of uplifting the basic standards of living of indigenous Zimbabweans through eradication of extreme poverty in line with the Millennium Development Goals MDGs.

In addition, the extent to which the SaDIE model address the needs of the majority of ordinary Zimbabweans can be illustrated using the Maslow’s hierarchy of needs model as shown below:
THE MDGs, INDIGENISATION & EMPOWERMENT AND MASLOW’S HIERARCHY ON NEEDS

As has already been mentioned in this paper, empowerment of indigenous people should improve their basic welfare and reduce poverty in line with the internationally recognized millennium development goals (MDGs) whose achievement Zimbabwe and other members of the entire United Nations family voluntarily committed themselves to pursue.

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

The supply of raw materials and inputs by indigenous SMEs immediately addresses their basic, low-level physiological needs notably food, shelter education, health and clothing.

Higher-level needs such as self-actualization are long term in nature and do not immediately impact on the livelihoods of the generality of the population.
MASLOW HIERARCHY OF NEEDS

Equity ownership resides in the realm of both “esteem and self-actualization needs”, the smallest of the five (5) components in the MHoN Pyramid, while the other three bottom segments constitute the crying needs of the majority of Zimbabweans. These segments, especially the bottom two, are the concern of the UN Millennium 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 goals under the indigenization framework.

Equity or shareholder benefits also only when 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.

This approach can also be fine-tuned to address the quota-system requirements for youths, women and special 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 such as mines.

The SaDIE Model empowers indigenous people in a way that gives them dignity, improves their basic welfare and reduces poverty in line with the Millennium Development Goals (MDGs) while extending beneficial mileage to the majority of the people.

Higher–level needs such as self-actualization and esteem needs are also very important as long as it is understood that they are long-term in nature and do not immediately impact on the livelihoods of the generality of the population.
ILLUSTRATION OF THE IMPACT OF IMPLEMENTING THE SaDIE MODEL IN SELECTED ECONOMIC SECTORS

SaDIE MODEL IN THE MINING SECTOR

According to the 2013 budget statement, the mining sector’s share of Zimbabwe’s Gross Domestic Product GDP is estimated at an average of 16,9 percent between the years 2009 to 2011.
The cost structures in the mining sector can generally be approximated as in the diagram below:

Average Mining Sector Cost Drivers

Basing on the nominal GDP for the year 2012 which is estimated at US$ 11427.4 million, the mining sector had a sectoral GDP of approximately 16.9% of the total GDP which translates to approximately US$ 1931.2.

In view of the above, approximately US$ 522 million (US$1931.2 million x 53% x 51%) worth of supply contracts would be reserved for indigenous SMEs in the event of Government directing the mining sector to procure at least 51% of its inputs from indigenous SMEs.

It is critical to note that 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.

Mechanisms would, however need to be put in place to ensure that indigenous suppliers adhere to strict quality standards 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.
SaDIE MODEL IN THE MANUFACTURING SECTOR

The Manufacturing sector’s contribution to Zimbabwe’s GDP is estimated at 15% which translates to a sectoral GDP of approximately US$ 1714.11 million based on the estimated GDP for the year 2012.
The average cost structures in the manufacturing sector are estimated as in the diagram below:

Manufacturing Sector Cost Drivers

In view of the above, Indigenous people can be empowered to the tune of US$498 million per annum, through supply of inputs and services to the manufacturing sector.

This measure should be accompanied by procurement guidelines to ensure that indigenous-owned firms meet acceptable minimum quality standards required by the different sub-sectors.
SaDIE MODEL IN THE CONSTRUCTION SECTOR

The construction industry contributes about 1% to Gross Domestic Product (GDP). The industry consists of Architects, Quantity Surveyors, Real Estate Agents, Project Managers, Engineers and Contractors.
The cost structures in the construction sector are estimated as in the diagram below:

Construction Sector Cost Structure

The major cost drivers of the construction sector are raw materials (79%), which comprise of cement, bricks, steel and equipment.

US$ 46 million worth of supply contracts in the construction sector would be reserved for indigenous players should the Government adopt the SaDIE model at a threshold of 51%.
SaDIE MODEL IN THE TOURISM AND DISTRIBUTION SECTOR

The contribution of the Tourism and Distribution sector to Zimbabwe’s GDP is estimated to be at least 10%.

The main cost drivers in the tourism sector are raw materials and finance costs as shown in the diagram below.

Tourism Cost Structure

Small to medium indigenous enterprises (SMEs) could, therefore, be capacitated to provide raw materials to the sector.

The distribution sector is characterized by a complex set of economic activities which link producers and buyers of goods and services. The sector includes retail and wholesale traders.
Cost Structure of a Retail Firm

Such a cost structure presents numerous opportunities for indigenous firms to participate as the key suppliers of goods and services, transport, marketing and logistical services.

From the two cost structures presented above, assuming an average share of inputs of 36%, it can be concluded that the Tourism and distribution sectors presents a minimum combined opportunity for supply contracts worth approximately US$210 million dollars that can be exploited by indigenous SMEs in the event of Government adopting the SaDIE model at a threshold of a minimum of 51% of supply contracts.
SaDIE MODEL IN THE TRANSPORT AND COMMUNICATIONS SECTOR

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.
Transport Cost Structure

Although the sector is largely indigenised, there remains scope for reserving 51% of the supply contracts for indigenous SMEs for the supply of key raw materials in the transport sub-sector, as well as maintenance and other services.

The telecommunication industry is capital intensive and this presents a barrier to entry for many would-be indigenous participants. Raw materials, inputs spares and maintenance services, however, constitute 77% of total cost of production.
Telecommunications Cost Structure

There are opportunities for local companies to specialize in repair and maintenance of telecommunications equipment, supply corporate wear, offer transport & courier services and other non-core activities.

The transport and telecommunications sector is estimated to contribute approximately 12% of Zimbabwe’s GDP and hence based on the estimated GDP for the year 2012 (US$ 11427.4 million) and an average share of raw materials in the cost structure of 69%, the transport and distribution sector has the potential to offer supply contracts worth approximately US$ 482.6 million to indigenous SMEs.
SaDIE MODEL IN THE FINANCE AND INSURANCE SECTOR

The major cost driver in the financial sector besides staff costs are operational expenses which contribute about 42% and include stationery, ICT, uniforms, staff transportation, marketing and consultancy, advertising materials, among goods and services requirements.
Financial Sector Cost Drivers

There is potential for indigenous SME to participate in 42% of the business in the financial sector through the supply of consumables and accessories.

In this vein, procurement programs can be designed to assist indigenous SMEs in tendering for financial service business. This can also be achieved by reserving certain areas of procurement for indigenous people.

The finance and insurance sector is estimated to contribute approximately 3% of Zimbabwe’s GDP and hence based on the estimated GDP for the year 2012 (US$ 11427.4 million) and an average share of services and consumables in the cost structure of 42%, the finance and insurance sector has the potential to offer supply contracts worth approximately US$ 73.4 million to indigenous SMEs in the event of Government adopting the SaDIE model at a threshold of 51%.
SaDIE MODEL IN THE GOVERNMENT SECTOR

Through the Annual National Budget Statements, Government could ensure that it deliberately targets indigenous people and companies in the procurement of goods and services for Government operations.

For example, by end of September 2012, cumulative operational costs for the Government of Zimbabwe for the year 2012 amounted to US$483 million. These operational costs involve a significant portion of supplies that can provide a viable empowerment avenue if sourced from the indigenous SMEs.

Similar arrangements can also be applied to parastatals and local authorities in order ensure that the indigenous population is mainstreamed to fully participate and benefit from their economy.

OVERALL POTENTIAL IMPACT OF THE SaDIE MODEL ON THE SOCIETY IMMEDIATE OPPORTUNITY FOR ZIMBABWEANS TO PARTICIPATE IN THEIR ECONOMY

As has already been articulated in this paper, through the Supply and Distribution based indigenisation and Empowerment model, supply contracts worth more than US$ 2 billion can be availed to indigenous SMEs if Government implements the SaDIE at a procurement threshold of 51%.
The approximate values of supply opportunities for some selected sectors are shown in the table below:

Potential Volume of Business for Indigenous People (Based on 2012 estimated GDP of US$ 11427.4 million)

ACCELERATED EMPOWERMENT OF WOMEN, YOUTH, THE DISABLED AND OTHER CURRENTLY DISADVANTAGED SOCIAL GROUPS.

In the Zimbabwean context, women and youth continue to occupy the peripherals when it comes to gainful participation in the mainstream economy and yet empowering these two critical groups would be the first major step towards the Country seriously advancing towards the attainment of the cherished Millennium Development Goals.

With Government making it mandatory that all firm procure at least 51% of their inputs from indigenous SMEs, it is practically possible for the Government to economically empower the youths, women and other disadvantaged groups such as the disabled through provision for an enforceable quota system which leaves a specific portion of goods and service supply contracts reserved from indigenous SMEs controlled by women, the youths and the disabled respectively.

In addition, international and local Non Governmental Organizations would also be encouraged and even required to prioritize Women , youth and the disabled Groups in the provision of consultancy services, supply of goods and other services such as maintenance of vehicle fleets, equipment and machinery, as well as in their intervention programmes and projects.
EASING OF LIQUDITY CHALLENGES AND IMPROVEMENT OF BALANCE OF PAYMENTS POSITION FOR THE COUNTRY

Alternatively, the SaDIE approach to indigenization and empowerment can be viewed as a form of progressive import substitution since there would be emphasis on capacitating local firms to provide the essential services required by industry instead of merely buying from the very same foreign entities.

In view of the above, the country’s liquidity and balance of payments positions would stand to improve from the progressive internalization of demand for inputs and services as the proceeds would now find their way into the local banking industry and other productive economic sectors as opposed to external economic agents as is currently the case.

For example if at least 51% of the currently balance of payment deficit could be redirected to indigenous players, then the country’s liquidity situation would improve by close to US$ 1.5 Billion dollars per annum.
CREATION OF NEW WEALTH AND INCREASED CAPACITY UTILISATION IN THE LOCAL INDUSTRIES

To the extent that implementation of the SaDIE model increases the contribution of the indigenous population of Zimbabwe to actual production, the model enhances the creation of new wealth and growth of the economic cake for common good unlike the case with equity based indigenization and empowerment initiatives which involves only the transfer of pre-existing wealth.

The increase in local production, therefore serves to improve local industrial capacity utilization thereby improving employment, reducing crime and uplifting the general social and economic welfare of the people of Zimbabwe.

CRITICAL POLICY ADDITIVES TO ENHANCE THE EFFECTIVENESS OF THE SaDIE MODEL IN ZIMBABWE SECURITISATION OF SUPPLY CONTRACTS TO UNLOCK AFFORDABLE CREDIT TO THE INDIGENOUS SMEs

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

Securitisation of supply contracts can take the form of foreign owned companies can providing guarantees to the effect that in the event of the relevant inputs or services being supplied by the respective indigenous SME, a specified sum would be paid directly to the financier within a specified period of time on behalf of the indigenous supplier.

Under this arrangement, the indigenous supplier will, therefore, borrow from a bank on the strength of the guarantee provided by the foreign entity, acquire and supply inputs, then service debt obligations accordingly.
MENTORING AND CAPACITATING OF INDIGENOUS FIRMS

There is need, through sectoral and even industry specific mentoring and training initiatives to capacitate the indigenous SMEs to adhere to proper business practices, to ensure efficient and timely delivery of high quality inputs and services.

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.
CONCLUSION

The Country’s indigenisation initiatives draw their national relevance and significance from their capacity to answer to the immediate economic imperatives that confronts the majority of the indigenous people of Zimbabwe.

Zimbabwe’s indigenisation and economic empowerment methodologies and philosophies should, therefore be guided by the need to deliver a meaningful, sustainable and immediate response to the vagaries of extreme poverty, unemployment and underemployment affecting an estimated over 70% of the local population.

In addition, it is in the national economic interest that the indigenous people are be empowered in a way that preserves and grows the stock of already existing wealth, while at the same time increasing indigenous participation in the various economic sectors.

In view of the above, the Supply and Distribution based Indigenisation and Empowerment initiative, where at least 51% of input supply contracts in the entire economy are reserved for indigenous is a practical and immediately beneficial avenue through which the majority of Zimbabweans can be permanently empowered economically.

To give fruition to these suggestions, industry specific indigenous empowerment charters should be developed to recognize the peculiarities of the different sectors and industries.

The SaDIE model does not seek to do away with the equity based empowerment initiative but comes as s sequencing tool to ensure that every Zimbabwean is first mainstreamed to fully participate in the economy before we advance to the higher levels in our national hierarchy on needs such as full equity ownership. When the empowerment drive has been achieved, Government could then move a gear up or accelerate ownership of companies by indigenous Zimbabweans, through a carefully planned indigenization implementation framework.

Dr Gideon Gono is the Governor of the Reserve Bank of Zimbabwe. He writes here in his personal capacity

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