15 February 2013

Zimbabwe: 'Indigenisation Reduced to a Ponzi Scheme'

UNIVERSITY of Zimbabwe Business School head Professor Tony Hawkins says indigenisation deals recently clinched with big mining companies amount to a "Ponzi scheme gone mad".

Hawkins said the transactions between companies like Zimplats, Mimosa and Unki and the National Indigenisation and Economic Empowerment Fund for the transfer of 51% of foreign-owned companies to locals were bad deals for the country because of the unworkable and unsustainable funding arrangements which he likened to Ponzi finance schemes.

He said under the Zimplats transaction, for instance, the country would effectively borrow almost US$1 billion -- 8% of the gross domestic product (GDP). All the deals made so far amount to billions, which means government and its specially selected group of penniless investors would mortgage the whole GDP of the country.

"These deals do nothing to create jobs or increase output and exports, but only ensure majority domestic ownership," Hawkins told an Alpha Media Holdings strategy planning meeting in Harare on Monday.

"However you evaluate them, this Ponzi finance operation is a bad deal for Zimbabwe."

Typically, a Ponzi scheme is an investment scam that appears to be actually paying high returns by disbursing supposed returns out of the affected people's own capital.

"Firstly, the arrangement provides for the repayment of the capital loan and interest from future dividends. Zimplats is presently not paying any dividend and is unlikely to start doing so in the near future," Hawkins said.

Dividends are paid out to shareholders from free cash flows or net income of a business after meeting all of the company's other commitments. However, Zimplats is a company that is still expanding and needs funding to finance growth.

"Technically, a Ponzi scheme is one where you plan to pay virtually all business expenses from uncertain future cash flows. If anything goes wrong within Zimplats to negatively impact the future cash flows of the business, the whole funding model will collapse on itself as the dividend flow will dry up," he said.

Hawkins said the problem with such models is that they "inevitably fail".

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