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How businesses are surviving Zimbabwe's chaos
Business in Africa
August 2005

Business survival in Mugabe’s Zimbabwe requires skill, cunning, guile and manipulation, and the nerve to step outside the law every now and again.

Reports that President Mbeki, the United Nations and the EU intend taking a harder line with President Robert Mugabe have brought hope to economically beleaguered Zimbabweans that light is glimmering at the end of a very long tunnel, and that a return to the halcyon days of a decade ago might not be so much of a dream after all.

Equally, any hint of a way out of the nightmare is manna for the estimated 1.5 million Zimbabweans, 70 000 of them whites, who have fled the country and are living around the world, most of them in South Africa.

Chances are though that those days are gone forever, and life in a post-Mugabe Zimbabwe will be a far cry from the productive, carefree and unique existence that Zimbabweans enjoyed for nearly 20 years after the country was returned to global legitimacy in 1980. The phoenix that rises from Zimbabwe's ashes will be "anything from a properly-elected democracy that works, to the warlord situation that exists in Somalia, or something in between", according to a businessman born and bred in Zimbabwe.

But for now, an extraordinary commercial and industrial climate has bred businesspeople endlessly inventive in their struggle to survive the convoluted commercial environment, and swim against economic currents that grow stronger and more perilous each day.

Australian Lee John enjoyed the fruits of innovation and hard work with enormous commercial success in Zimbabwe. The 35-year-old Brisbane-bred mining consultant and trouble-shooter was sent to Zimbabwe in 2000 by Canadian First Quantum to restore profitability to an ailing gold mine, and ended up staying on. During his tour he found a plethora of claims and failed gold mining operations that could be bought for a song and quickly turned into profitable mining ventures. In just four years, his companies - Biometallurgical Zimbabwe and Homestake Zimbabwe - owned more than a thousand gold mining claims, including the Globe and Phoenix mine, near the town of Kwekwe about 160km west of Harare. And he has the titles, covering some 4 800ha, to prove it.

John reckons that he invested around US$7 million in time, his own money and ploughback in the enterprise. It turned over US$10 million in 2002 "and doubled that in 2003", he told Business in Africa. He launched his gold mining operations at the full tide of Mugabe's land-grab, and admits to nervousness that his mining properties would go the same way as many white-owned Zimbabwe farms. He believed, however, that he had pre-empted the problem by allowing indigenous groups to mine on his claims in a property and income sharing arrangement. He developed a system of assisting artisanal (very small scale) miners in which both the "grubber" and the bigger commercial operation could work together profitably.

"I signed mining contracts with cooperatives that allowed them to work our properties. They surface mined their ore and we processed it, taking 40% in toll treatment costs and for working our claims. It was a commercial and political arrangement that worked. The co-ops were happy and we made a reasonable profit out of it."

The system exploits the thousands of ore deposits too small for commercial mining, but is well suited to grubbing. Small, low-grade deposits of 1 000 tons are of no interest to bigger operations, but can sustain an artisanal miner for a year or two.

John's unique, and initially successful, solution and working synergy with the locals proved a false dawn. After just two years it turned turtle. "It's capsizing was the doing of an unworkable exchange rate, out-of-control inflation and of greedy Zimbabwe businesspeople and government officials, and their backers in South Africa," he says.

Cracks appeared in John's booming gold mining operation last year as the currency exchange system underwent major convolution with the burgeoning of the currency black market and the development of the parallel market that pushed the informal exchange rate to around Z$20 000/US$.

"Today the real value of gold is US$14+ a gram, but if you take the government's Z$ rate of Z$195 000/g divided by the parallel rate of Z$20 000 you'll arrive at about US$9/g against US$14, the real price, a loss of about US$5/g or about 35%."

For mines making a marginal 10%-15% on revenue, survival is impossible. All of John's gold mines, except one, are in mothballs. "It's cheaper to shut up shop and pay the workers' wages by selling off assets than to continue the operations," he maintains.

A latterly introduced gold support rate did nothing more than foster a huge black market for gold, John reports. "The government pays Z$195 000/g, whereas it can quite easily be sold on the black market for Z$250 000/g, about US$ll/g, smuggled out of the country and sold externally for US$15/g. The US$4/g profit is brought back into the country, converted at the parallel rate of Z$20 000/US$ and used to buy more gold, creating a fabulous round-tripping profit for smugglers."

Another Zimbabwean miner with base metal concessions described it as "a crazy situation and a road to nowhere." Price control is blamed as the major reason why Zimbabwe finds itself in its economic pickle. In 1999 the government pegged the price of maize. Inflation soon made maize farming unviable and farmers switched to other crops to survive. "Gold," says John, "is in the same league."

"We survived for two years by stopping our underground development and running our stores and inventory down to rock-bottom, but eventually we had to collapse."

John says there was no direct government attempt to seize his mining properties, but he came under pressure from local consortia headed by powerful ex-government members, backed by South African companies, to take over his claims.

"Their conditions of purchase were laughable," he maintains. "They offered to buy a mine with reserves of Z$250 billion for Z$2 billion - not even US$100 000. But they recognise that they can't simply take mines the way farms were seized. Mining is sacrosanct in Zimbabwe because of the number and size of foreign companies involved in mineral extraction, and mining is Zimbabwe's last source of reasonable foreign income.

And that's where we are today. The mines still belong to me, the consortium is still in the background trying to tie the sale down and I'm negotiating with other interested buyers, including some black empowerment groups in South Africa."

John and others like him are keen to return to Zimbabwe.

"Right now I'm consulting for a company in Zambia," says John, "but I'm not walking away from Zimbabwe. I'll go back when I can see the way forward in the politics and economics. I'm hoping for the best for Zimbabwe so I can pick up where I left off. The potential there is simply incredible." "Zimbabwe as a country has seriously de-industrialised over the last four or five years," notes a Harare businessman in the communications industry.

"Many small firms have closed, many manufacturers have gone under and a lot of major multinationals have shut up shop. Essentially, Zimbabwe has become a nation of traders.

"There is no forex," he adds. "If you run a business that relies on importation of any kind, you have a serious problem. The official exchange rate makes exports uncompetitive and imports extremely expensive because there's a disparity of about two and a half times between the real exchange rate and what the government is prepared to let you have. There is a forex auction, but the money doesn't necessarily go to the highest bidder and the currency released for auction falls way short of the funds the commercial and industrial sectors need to survive."

Canners, for example, can't import the tin plate they need to pack their product into; and traders can only export at the official rate, yielding unworkable returns. Exporters operate a foreign currency account and are allowed to keep 50% of the foreign exchange they earn. The rest must be surrendered to the government at the official rate. Forex earned must also be used within 21 days or be forfeited to the state at the official rate.

Until recently, companies made up cash shortfalls by buying on the parallel market. But new laws with harsh penalties have been introduced that restrict such money trading, effectively drying up the parallel market as a source of funds.

"The bottom line," says the businessman, "is that there are very few companies in Zimbabwe that can export and make a profit, so they don't export."

The rand rate tends to be stiffer than other hard currencies because there's more demand for it as the currency of Zimbabwe's biggest trading partner."

At the official exchange rate, Zimbabwe is an expensive country to invest in. It's also regarded as high risk, a situation not improved by warnings by Zimbabwe opposition leader Morgan Tsvangirai that deals struck with the Mugabe government would not necessarily be honoured by successive regimes.

So the question has to be asked of those people trying to eke out a living in Zimbabwe: "Why are you still there?"

"Because there's nowhere else for us to go," is the stock reply. "Some are waiting for big pension payouts and hope it will be enough to live on, either in Zimbabwe or elsewhere. The white population has dwindled to just a few thousand. And those still in the country are all in the same boat. They have assets stuck in the country. Zimbabwe has become extremely unliveable, but we suspect something is about to break."

That something is the anticipated external political pressure and the possibility that Mugabe is ready to step down because of ill health. Would-be external investors have a more optimistic perception of business opportunity in Zimbabwe than those businesspeople actually living and working there.

"I'd like to set up an operation in Zimbabwe," says a Johannesburg entrepreneur in the chemicals business who has identified "an excellent opening in the processing field" in Harare. "The problem is getting investors in South Africa interested enough to put up the funds."

A Zimbabwean claiming close connections with the ZANU-PF government in Johannesburg, seeking investors for a timber operation near Mutare, says South Africans have the wrong impression of Zimbabwe and the recent slum clearing operations were "viciously twisted by the South African media". He insists that Zimbabwe's economic woes are a result of an anti- Mugabe crusade, led by British Prime Minister Tony Blair and bought into by the media, the United States and the white Commonwealth element.

Asked if he'd had any success in raising investment funds for his lumber enterprise, the Zimbabwean conceded that he was returning empty-handed. "Everyone is interested," he says, "but no-one will commit."

No one except the Chinese, that is, if reports emanating from Zimbabwe prove correct. The one to hold most water is that China supplied military aircraft and equipment worth hundreds of millions of American dollars in return for a significant Chinese presence in the country and a slice of Zimbabwe's mineral reserves.

Apparent credence came with a report in a July edition of ZWnews.com that the government was talking platinum with Chinese investors. Central Bank governor Gideon Gono confirmed to the state-owned Herald newspaper that Zimbabwe was soliciting China's help in developing the economy, particularly in mining the country's platinum deposits, valued at around US$50 billion, spooking Impala Platinum's Zimplats, holder of 84% of the country's reserves.

So, apart from big platinum and diamond mining companies that call the shots, and the Chinese with long range ambitions and their unique way of cutting a deal, investors with ready money are few and far between. Opportunities in companies lying fallow are legion. All are dying a quickening death for want of economic sustenance. Investors smell blood. And the stampede will be on at the first sign of change.

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