22 September 2017

Zimbabwe: Govt Has Duty to Protect, Promote Large Corporates

opinion

While it is accepted that small to medium enterprises (SMEs) have been carrying the country in the last few years, it should equally be noted that the SME route has not been a route of choice for many people, but rather a route of convenience.

In many cases, those that we now describe as SMEs are more of informal businesses and awkward arrangements people find themselves in so as to make a living. Notwithstanding this, it is undeniable that SMEs and informal businesses do rely on large corporates for survival.

After failing to stimulate the economy, government now wants to play the role of a secondary school headmaster. This is evidenced by the proposed ban or rather restriction in sale of alcohol. Government needs to consider the implications of its actions in this regard. In the end it could promote a shadow market and the rise of shebeens, drinking hideouts long famous for promoting nefarious activities. Alternatively, it could drive business into unsustainable losses and cause further retrenchments.

The alcohol sale restriction could have an impact on the country's major alcohol maker and distributor, Delta Corporation.

Why should the country worry about this company? It is because it is one of the biggest companies in the country contributing immensely to the fiscus and to job creation. It is the largest company by market capitalisation dwarfing its next rival, Econet by over 50%.

Available public information states that Delta, an associate of Anheuser-Busch Inbev, employs 4 800 people. The multinational giant owns 38% of Delta since SAB Miller was sold. But Delta employs far much more people indirectly. The impact this company has on economic activity can be seen when one visits Machipisa in Highfield. This place is densely populated with alcohol retailers, some of whom would have ventured into this business following loss of employment.

In the FY ended March 31 2017, Delta sales per segment were split into 38% for lager beer, 29,5% for sparkling beverages, 32% for sorghum beer and 0,6% for all the other segments. This compares with FY March 31 2016 where sales by segment were 37% for lager beer, 31,1% for sparkling beverages, 30,5% for sorghum beer and 1,4% for all the other segments.

These numbers show the dominance of beer in the portfolio of this company and could be an indicator of how the entity is so intertwined into the economy to the extent that upsetting the system could result in it breaking down. Beer is the main drink in entertainment and outdoor economic activities.

In FY ended March 31 2017, all the key ratios and metrics pointed southwards for the company. Revenue went down 10% to close at US$483 million, operating income dipped 15% to US$82 million, earnings before interest, depreciation and armortisation (Ebitda) slipped 13% to US$112,8 million, earnings per share (EPS) was down 12% to US$5,70 while attributable income was down 13% to US$69,9 million.

The company also reported that lager beer volume was lower than the previous year by 7%, sparkling beverages by 11% while sorghum beer was down by 3%. This is significant in that it points out that the so called alcohol abuse that the government is worried about is not because people are drinking too much beer because it is cheap, but rather there could be an underlying cause of abuse which most probably could be linked to the current economic hardships. In fact, the numbers show that people drank less beer in the year under review. Government should fully assess the impact of the non performing economy on alcohol abuse or moral behaviour.

In his commentary to the shareholders of the company board chairman Canaan Dube said the company "experienced significant challenges during the year; characterised by constrained aggregate demand, limited access to cash, changes to payment platforms and delays to foreign remittances. The country received heavy rains, which although welcome, limited market access and significantly inhibited outdoor consumption occasions. As a consumer facing business, these challenges impacted the fortunes of the company". This lends credence to the theory that at a time when such a significant retailer of beer is feeling the economic hit; surely beer cannot solely be held responsible for moral decadence.

Delta reported that VAT and discounts were US$79,9 million in 2017 compared to US$94,7 million in the prior year while excise duties and levies to government dropped from US$57,9 million to US$52,7 million. Income tax expense dropped from US$28,8 million to US$18,5 million. Income tax paid in 2017 was US$29 million. The minister of finance should take a keen interest in these numbers and advise government accordingly as this entails that the collections by government in respect of revenue from this business are dwindling and would dwindle further should they go ahead with the so called alcohol ban.

Meanwhile, Implats could close Mimosa should government implement a 15% export levy on concentrates. The levy is being used to push platinum miners to build a local refinery. Platinum miners have said that the levy would render their operations unprofitable while at the same time they cannot afford constructing the smelter.

In 2016 Zimplats had 5 444 employees and of these 3 041 were permanent. Between 2002 and 2016, the company utilised cash amounting US$4,8 billion and of this nearly US$2 billion was utilised on procurement costs while US$1,4 billion was spent on capital expenditure for the expansion of operations with US$420 million being spent on employment costs. Interestingly US$34 million of this amount was advances to the Reserve Bank of Zimbabwe.

In the five years from FY2012 to FY2016 Zimplats' income tax expense averaged US$50 million, peaking at US$130 million in FY2015 and in that period it only recorded a loss in 2015. While the general profitability has been stochastic over the period, what is clear is that profitability over the period has been very low with the company posting a mere US$7,3 million in FY2016. From this it can be appreciated that the company is not exaggerating when it says the 15% export levy will render its operations unprofitable or when it says they cannot afford the refinery. Indeed its gross margin has fallen from a high of 53,5% in FY2012 to its lowest of 17,2% in FY2016.

On one hand, the Kwesé TV saga is both suspicious and sad. Suspicious in the sense that it becomes the second time a Strive Masiyiwa-linked company has to fight for the licence to operate in Zimbabwe even as it has been allowed to operate in other countries, including Botswana. It is sad in the sense that Kwesé TV will provide a healthy competition to the MultiChoice-dominated pay television while at the same time providing the much-needed jobs.

MultiChoice subscriptions are not commensurate with the service provision. Perhaps the good service they now provide more than anything else is soccer channels. This monopoly needs to be broken if customers are to get a good deal. Other countries have come to realise that and have embraced Kwesé TV.

In a country starved of jobs and investment, government continues to demonstrate its heavy handedness against businesses.

This will be damaging to the efforts being made to attract foreign direct investment. There are other remedies that can be pursued by government in seeking redress than taking a television station off air. It is insensitive to the investors who would have financed the business and to the employees who will be trying to make a living out of these ventures. In the long-term, government should realise that it will be dampening its chances of expanding its dangerously small and dwindling tax base.

The assessment of US$27,8 million raised by the Zimbabwe Revenue Authority for the period 2019-2014 after disallowing expenditure on royalties and technical assistance against Delta could be a desperate attempt to raise cash. The board of this company decided to fight this assessment in court as they believe they acted within the law.

Such methods of squeezing taxpayers can be avoided if government focuses on expanding the tax base. The heavy-handedness of government on business can only drive away investors and thus even fail to sustain an already thin tax base.

Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications.

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