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The Indigenisation and Economic Empowerment (General) Regulations – Bill Watch 6/2010
Veritas
February 22, 2010

The Indigenisation and Economic Empowerment (General) Regulations [Statutory Instrument 21/2010]

Introduction

These regulations, which were gazetted on 29th January, have caused consternation in many quarters. Economists and business commentators fear they will discourage foreign investment at a time when Zimbabwe desperately needs it, and some foreigners who were intending to invest in the country have indicated that the regulations are a significant obstacle to their plans.

The Prime Minister claimed that neither he nor the Cabinet had seen the regulations before they were published; they were therefore null and void. He assured business executives that they would not be punished if they failed to comply with the law. The Minister responsible for the regulations, on the other hand, said he had consulted widely before preparing the regulations and that they had indeed been considered by the Cabinet. In any event, he said, the regulations merely implemented the indigenisation programme set out in the Indigenisation and Economic Empowerment Act, which had already been passed by Parliament.

Last week Acting Prime Minister Khupe told an investment conference that the responsible Minister and the Minister of Economic Planning and Investment Promotion had agreed “to return to the drawing board” on the regulations. But public statements of this sort, even by the Prime Minister or Acting Prime Minister, do not unmake the regulations. The latest statements by the President that they are “irreversible” and the responsible Minister that there is “no going back” make it clear that at best there may be amendments to the regulations to take account of concerns.

Legally, these regulations will remain on the statute book until they are properly repealed by another statutory instrument gazetted by the Minister of Youth Development and Economic Empowerment.

Were the regulations validly promulgated?

The regulations were made in terms of section 21 of the Indigenisation and Economic Empowerment Act, which allows the Minister to make regulations providing for “all matters … which, in his or her opinion, are necessary or convenient to be provided for in order to carry out or give effect to [the] Act." There is nothing in section 21 of the Act obliging the Minister to consult the Prime Minister or the President before making the regulations; all he has to do is consult an advisory board called the National Indigenisation and Economic Empowerment Board. While it is the general practice for all regulations which are likely to have a significant impact on society to be submitted to the Cabinet Committee on Legislation before being promulgated, and for really important regulations to be considered by the Cabinet, this is merely a practice and not a legal obligation. The Inter-party Political Agreement, as embodied in Schedule 8 to the Constitution, states that the Prime Minister must “ensure that … Ministers develop appropriate implementation plans to give effect to the policies decided by Cabinet”, and obliges Ministers to “report to the Prime Minister on all issues relating to the implementation of such policies and plans” [Article 20.1.4(e)]. But the Agreement does not make the Prime Minister’s consent a prerequisite for the publication of regulations [although in the spirit of the GPA, the Minister should have brought the regulations to the PM]. If a Minister publishes regulations in accordance with an Act of Parliament, therefore, but fails to keep the Prime Minister properly briefed, the failure does not invalidate the regulations. The Prime Minister’s assurance that people will not be punished if they disobey the regulations is legally invalid, because he has no power to exempt anyone from compliance with the law.

The problem is that the Act, passed when ZANU-PF had a majority in Parliament, gives the Minister inordinately broad powers to make regulations, and he has exercised them to the full, at a time that is most unpropitious for the recovery of the economy and damaging to the inclusive government. This is a political issue which must be resolved politically. Meanwhile, the regulations will remain in force.

What do the regulations say?

Application of Regulations, and Definitions: The regulations apply to all businesses in Zimbabwe with an asset value of or above US $500 000 [sections 3 & 4]. The term “business” is defined in the Act as meaning companies, associations, syndicates and partnerships whose object is the acquisition of gain; effectively this covers everything other than literary and charitable associations. The term “asset value” is not defined, however, and is not at all clear: does it mean net assets, share capital [issued or nominal] or what?

The term “indigenous Zimbabwean”, as defined in the Act, is also unclear. It means anyone who, before Independence, was subjected to unfair discrimination [presumably in Zimbabwe] on the ground of their race, and includes a descendant of such a person. So more people are covered than would ordinarily be regarded as indigenous Zimbabweans: Indians and Chinese suffered discrimination before Independence, so they and their descendants must be regarded as indigenous Zimbabweans for the purpose of the Act and the regulations.

Businesses Must Submit Forms to Minister by 15th April: Under section 4 of the regulations, all businesses with an asset value of more than US $500 000 must send the Minister a form [which is set out in the regulations] showing the extent to which they are indigenised and, if they are not majority-owned by indigenous Zimbabweans, their plans for indigenisation; these plans must conform with guidelines provided in the form [though in fact there aren’t any such guidelines]. Existing businesses must submit the form to the Minister by the 15th April but it is not a criminal offence to fail to submit the form — if a business fails to do so, the Minister can send it a form and order the business to complete it; only if the business fails to comply with the Minister’s order will it commit an offence [section 4(4)].

Minister’s Response to Forms: Having received a form from a business, the Minister has 45 days within which either to approve the business’s indigenisation plans or to make his approval dependent on the plans’ conformity with a notice which the Minister is supposed to publish in the Gazette before the 1st March 2011 [see section 5(1) & (4)]. Since the Minister has not published such a notice, and since there are no guidelines in the form indicating how indigenisation plans are to be prepared, the effect of the regulations is that the Minister must approve all plans submitted to him. That may not be what was intended, but it is certainly the effect of section 5. And if the Minister makes no “positive response” [whatever that means] to a plan that has been submitted to him, the plan is deemed to have been approved [section 5(5)].

Indigenisation when Businesses Merged or Split Up: Section 6 deals with the indigenisation of businesses that are merged, where the merger falls within the purview of the Competition Commission under the Competition Act. In such cases the merger is subject to the Minister’s approval, which will be granted if he considers that it conforms to targets set out in an approved indigenisation plan.

Section 7, similarly, deals with the splitting up of businesses whose asset value exceeds US $500 000. The resultant businesses will have to conform to indigenisation targets set out in a plan approved by the Minister.

Indigenisation when Controlling Interest Relinquished: If a person or company that controls a business whose asset value exceeds US $500 000 relinquishes control over the business, the transaction will have to be approved by the Minister, and the approval will be conditional on the transaction conforming with indigenisation targets set out in an approved indigenisation plan [section 8].

Effect on Investment Licence Applications: Under section 9, anyone who “projects or proposes an investment for which an investment licence is required in terms of the Zimbabwe Investment Authority Act” will have to obtain the Minister’s approval before obtaining such a licence, and “any investor requiring a licence in terms of the Zimbabwe Investment Authority Act” will have to obtain the Minister’s approval before investing in sectors of the economy which are listed in the Third Schedule [these sectors include agriculture, transport, “wholesale or retail trade”, barber shops, advertising agencies and milk processing — it is a rather disparate list]. Although the section does not say so, one must assume that the Minister’s approval will be conditional upon satisfactory provision for indigenisation. The problem with this section is that it presupposes that investors need a licence from the Investment Authority before they can invest in Zimbabwe. That is not so: there is no such requirement. As a result, people can invest in any sector in Zimbabwe without complying with the regulations, so long as they avoid obtaining a licence from the Investment Authority. If, however, their investment creates a business worth more than US $500 000, they will have to prepare an indigenisation plan in accordance with section 4 of the regulations.

Procurement Contracts: Much the same anomaly occurs in section 12, which deals with the sub-contracting of procurement contracts. Under the section, if goods or services are obtained from a supplier under the Procurement Act and the supplier is not controlled by indigenous Zimbabweans, the supplier must subcontract to competent indigenous businesses — but only if the supplier “is required by the Act [i.e. the Indigenisation and Economic Empowerment Act ] to subcontract to businesses whose controlling interests are held by indigenous Zimbabweans.” The problem is that the Act itself does not require anyone to subcontract to indigenous Zimbabweans; it merely allows regulations to impose such a requirement [see section 3(1)(g) and (4) of the Act]. Hence there is no situation in which section 12 can operate, and parties to procurement contracts can subcontract freely to indigenous or non-indigenous contractors.

Regular Reports to Minister: Under section 13, businesses will have to satisfy the Minister annually that they are indigenising in accordance with the law.

Official Database of Would-be Indigenous Partners: Under section 15 the Minister will establish a database of people who want indigenous Zimbabweans to acquire an interest in their businesses, and of indigenous Zimbabweans who wish to “partner” those people. There is no provision allowing the Minister to compel businesses to take on particular indigenous Zimbabweans, and there is no such provision in the Act. It is not correct, therefore, to say that the Minister will be able to foist politically-acceptable “partners” upon reluctant businesses.

Can the Regulations be Legally Challenged?

Constitutional Validity: Are the regulations constitutionally valid? They are certainly discriminatory, in that they favour indigenous over non-indigenous Zimbabweans and the discrimination is based on race. On the other hand, they are intended to implement an affirmative action programme for the advancement of people who were previously disadvantaged by unfair discrimination, and as such they are authorised by section 23(3)(g) of the Constitution.

It might be argued that the regulations contravene section 21 of the Constitution, which protects freedom of association. That freedom extends to commercial activities such as the right to form companies and partnerships. Partners have a fiduciary relationship with one another and it is obviously important that they should have the greatest freedom to choose their fellow-partners. Much the same applies to company directors. A law which compels partners and directors to take someone into their partnership or company on the ground of that person’s race, or on the ground that that person had previously suffered unfair discrimination, undoubtedly limits their freedom of association. This argument has some merit, but it is unlikely that a Zimbabwean court would adopt it in order to declare the regulations unconstitutional.

Unreasonable penalties? There is one further ground on which the regulations could be challenged: the penalties prescribed in them are out of all proportion to the conduct sought to be penalised. In every case, whether the prohibited conduct consists in the making of a false statement or merely failing to submit a form to the Minister, the penalty is the same: a fine of US $2 000 or five years’ imprisonment, or both. That is the maximum penalty the Minister is allowed to prescribe in the regulations, and by prescribing it in all cases he has laid himself open to this challenge.

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