The Multinational Monitor



Zimbabwe Welcomes Heinz

Critics Protest the Deal

by Matthew Rothschild

How can progressive governments coexist with foreign corporations?

This question has been high on Zimbabwe's agenda since the southern African nation achieved independence in April, 1980.

Seeking the foreign exchange and technological skills that multinationals can bring, the socialist government of Robert Mugabe has at last attracted a multinational corporation to invest in the country.

But the specific investment project, and the philosophy behind accepting it, has occasioned a split within the Zimbabwean government.

"There is a debate going on about the involvement of foreign investment in Zimbabwe's development," says Michael Bratton, associate professor of political science and African studies at Michigan State University. This debate is taking place at "the highest policy levels" of the government, Bratton says.

On October 11, the H.J. Heinz Company of Pittsburgh, Pennsylvania, bought 51 % of a food--processing company in Zimbabwe, called Olivine Industries. The Zimbabwean government purchased the remaining 49% of the shares. The Zimbabwean company, which had been locally owned, is a major producer of cooking oils, soaps, margarine, candles, and protein meal.

The $13 million investment by Heinz-famous for slow ketchup-marks the first new foreign investment project in Zimbabwe's short history as an independent nation.

The Zimbabwean government and Heinz hailed the agreement.

The joint venture "bears witness to the realism of government policy in shipping and implementing economic policies for the transformation of the socio-economic system in the interest of all Zimbabweans," said Bernard Chidzero, minister for finance, economic planning, and development. Heinz' senior vice president, Richard Patton, echoed Chidzero's optimism, saying that "the partnership should yield reciprocal benefits for both Zimbabwe and Heinz in the years ahead."

Patton spelled out the benefits Heinz expects to reap. "Zimbabwe provides Heinz with an opportunity to build new markets for its products," he said, adding that the country's "great agricultural potential" could "create new Zimbabwean sources of supply" for Heinz' European subsidiaries.

The gains to Zimbabwe are less clear. In fact, to get Heinz to agree to come into the country, Mugabe's government had to make some unpopular concessions-ones that raise the cost of living for poor people in that country.

Heinz gave Zimbabwe an ultimatum: either lift the price ceiling on cooking oil, or we won't invest. "Heinz wouldn't take over until they got an agreement that they could put up the price of certain edible oils," says Niger Camrie, economic counselor at the Zimbabwean embassy in Washington. After some difficult negotiating sessions, "the government gave way and the agreement was signed," Camrie says.

This decision to allow prices to rise was "politically quite dynamite," Camrie notes. "The government had to do some serious thinking" about making the concession, since it will "affect lower earning groups very much."

The price of cooking oil will rise between 12.25% and 28.25% as a result of the Heinz agreement, a World Bank official says. It was a "precondition for Heinz agreeing to the deal."

Mugabe's government made an additional concession when it signed with Heinz: bending new investment guidelines (see box) to accommodate the ketchup company.

The government published its long-awaited investment code in September. The six-page document, entitled "Foreign Investment: Policy, Guidelines and Procedures," includes a provision stating that foreign investors should not be able to take over locally-owned firms.

"The absolute amount of existing domestic participation in domestic enterprises should not be diluted, in the future, by sale to foreign interests; nor should an existing domestic control level of equity holding be allowed to pass to foreign investors," the document states. In the Heinz case, however, both conditions were breached.

Although the Mugabe government can point to a loophole in the guidelines which states that the takeover restriction is only a "general rule, subject to revision and modification in appropriate cases," the fact that Mugabe went through the loophole in his very first investment decision suggests that the government is bending over backwards to accommodate private foreign capital.

The Heinz investment is in Zimbabwe's best interest, nonetheless, says economic counselor Camrie. Heinz will help us "extend the manufacturing industry to increase our export earnings, Camrie argues, and "we're going to have access to American expertise, high technology, skills, and training of local staff."

"We do NOT need Heinz and Co.," dissents Colin Stoneman, a leading economist at the University of Zimbabwe, in a long critique he published in the Zimbabwean monthly magazine, Moto.

Stoneman's analysis, apparently shared by some members of the nationalist wing of Mugabe's ruling party, claims that on philosophical and economic grounds, Mugabe is losing his bearings.

The idea "that foreign investment is a sort of certificate of good character" is "an old Rhodesian attitude, born of a yearning for respectability in foreign eyes," Stoneman writes. Although this "disquieting" idea "has carried over into Zimbabwean conventional wisdom," it should have no place there, or in any countries "with socialist aspirations, nor in those with nationalist leanings." says Stoneman.

Foreign investment in general should be viewed with suspicion, Stoneman argues, and not only for political reasons. Inviting multinationals is "the most expensive method of borrowing yet devised," claims Stoneman. Foreign firms make an initial investment (comparable to a loan), but they take out of the country - legally and illegally - much more money than they put in.

Foreign investment should be encouraged in narrowly defined cases when "advanced technologies are only obtainable through transnational corporations."

In the case of Heinz, the technology justification doesn't hold water, says Stoneman. "In an industry with relatively simple technology like food processing, in which Zimbabwe has been active for several decades, the existing base could support all the developments that Heinz might offer, (and) at a fraction of the cost."

Stoneman argues, moreover, that Heinz will inflict severe damage on the local manufacturing sector. The Heinz deal is "a recipe for long-term stagnation of domestic enterprises," Stoneman states. "Heinz would certainly force several quite efficient local producers out of business by pre-empting opportunities and stealing markets. Profits that would have accrued to local firms to be invested in Zimbabwe would accrue instead to Heinz shareholders in America."

The arguments of Stoneman and the nationalists within the government did not win the day, however. Their defeat represents the growing dominant role of finance minister Chidzero, who has been advocating what he calls a "pragmatic" approach to foreign investment. The leading officials in the ministry of economics and finance are "fairly conservative" and "technocratic," says one development consultant in Washington, who recently returned from Zimbabwe. They are "increasingly winning out," he says, over the more socialist members of Mugabe's ruling party.

Zimbabwe's New Investment Code

After two and a half years of independence, the Zimbabwean government has published a document multinational companies have been anxiously awaiting: the foreign investment code.

The multinationals "will be reassured," says one World Bank official, citing the existence of the blueprint as being more important than any of the specific incentives. "A lot of business sentiment is a matter of perception," he says.

Zimbabwe fully recognizes and appreciates the important role that foreign investment can play," the six-page document states. As such, the Zimbabwean government "both encourages and welcomes investment from foreign sources."

The code establishes certain provisions for investment:

Income tax: The government has set an "effective rate of 51.75% for corporate bodies"

Remittance of profits and dividends: "Companies may have remitted to them a dividend representing not more than 50% of th4e after-tax profits of the local firm." Mining companies, upon approval by the government will be permitted to remit dividends at a higher rate.

Profit repatriation may occur at the same 50% level: "companies receiving branch profits may receive abroad not more than 50% of the after-tax profit of the local branch."

Local equity participation: "Local participation should preferably commence at no less than 20%," the guidelines state, and any "existing domestic participationů should not be diluted in future by sale to foreign interests; nor should an existing domestic control level of equity holding be allowed to pass to foreign investors."

When foreign ownership would be "extensive," as a result of a new investment by a multinational, that company must show "significant economic benefits and/or significant Zimbabwean participation" that would result for the project.

Protection against expropriation: In the case of expropriation, the code states that "reasonable notice" and "adequate compensation" will be provided.

These guidelines are "not ungenerous," particularly when compared to those of other developing countries, says the World Bank official.

Bail-out, Zimbabwe style

While the Robert Mugabe government was opening the doors to Heinz, it was at the same time doling out funds to one of the leading foreign investors already in Zimbabwe: Rio Tinto Zinc.

Rio Tinto, a giant British mining company operating in the country long before the Mugabe government took over, has threatened to shut down its subsidiary. Falling nickel prices and declining returns on its old Empress nickel mine have caused losses in its Zimbabwe operation.

Rio Tinto Mining Zimbabwe employs about _1,400 Zimbabweans at the mine. In September, the company put 350 on notice that they would be laid off by October 15.

To avert the loss of jobs, and to keep the mine operating, the Mugabe government gave a $3.5 million loan to Rio Tinto.

The company and the government are currently working on a report assessing the future of the mine. The government wants to keep it open until 1986; the company thinks it should be closed at an earlier date.

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