Taking Stock Kudzanai Sharara
The recently announced planned exit of Pepkor Holdings Limited from Zimbabwe where it is operating a non-grocery retailer, Power Sales, makes sad reading. It makes sad reading that jobs will be lost, while the fiscus will also lose out, if the company was tax compliant as expected from any business entity.
What also makes it sad is the message the pending exit is sending to the international investors that are planning to set base in Zimbabwe.
“We’ve been holding out for as long as we could (in Zimbabwe), but the macro-economics in the country just forced us over time to sort of decrease our business there,” said chief executive officer Leon Lourens in an interview with South Africa radio station 702.
One of the macro-economic challenges highlighted by Lourens is the country’s “weakening currency”.
Since 2016, following the introduction of the bond notes into the multi-currency system, the country has experienced currency instability.
This worsened in 2019 when the country first abandoned the 1:1 parity between the local dollar and the US dollar and later on outlawed the use of foreign currency for most local transactions.
In addition, repatriation of funds or payment of suppliers outside the country has been a challenge for businesses. Some businesses are now saddled with foreign debts running into millions of dollars, while others have simply downsized amid failure to bring in raw materials and in the case of Pepkor, inventory.
This would come as a red flag to any investor. One of the key areas an investor considers before committing capital into any jurisdiction is the ability to remit money outside the country through formal channels. There has to be a guarantee to the investor that if you bring in your investment you will be able to take it out including dividends and profits.
The message that has accompanied the exit of Pepkor is that Zimbabwe is “unmanageable” as an operating environment.
But the exit is also an opportunity to introspect on the kind of investment we want as a country. Do we want fickle investors that are easily discouraged and heard for the exit at the slightest sign of challenges? Pepkor (Power Sales), according to Lourens, only experienced exchange losses last year, R70 million.
“We have always been profitable in Zimbabwe and last year’s loss was due to exchange controls and also currency devaluation,” said Lourens.
Lessons to be learnt
Apart from sorting out the operating environment and fixing the currency issues, there are many other lessons to be learnt here by both Government and would be investors.
For Government this is a wake-up call in terms of policy making and approval of investors in the country. The Pepkor investment failed the test of time because the model was wrong and heavily dependent on imports. The model was only based on the company’s ability to move money in and out of the country without which the model would collapse if that ability is threatened as is the case.
As highlighted above, a number of foreign companies are failing to repatriate funds outside the country. The Reserve Bank of Zimbabwe, through what is called legacy debts, has put the figure belonging to foreign lenders, suppliers and shareholders at US$1,2 billion. The figure is probably more than this now, given the forex challenges still persist.
According to Lourens, Pepkor decided to bail out of Zimbabwe because it no longer made sense to keep sending stock into the country yet fail to take money out as dividend or for more stock.
“It’s very difficult to send stock into a country if you are not sure whether you are going to be able to expatriate your money,” Lourens said.
Had Pepkor been working, to a certain extent, with local manufacturers it would have helped them stay here for longer, as is the case with other South African companies operating in Zimbabwe.
By incorporating local suppliers, the business could have remained self-sufficient, preserving cash by investing in inventory and accelerating capital expenditure, until a time imports can comfortably come in again.
Despite the challenges, Nampak still find reason to stay invested in Zimbabwe and this week said “the cash-generative nature of the Zimbabwean businesses made the country appealing even with its foreign exchange shortages and difficulties in repatriating cash from the country in the past”.
The same goes with PPC Limited, whose group chief executive Roland Van Wijnen said the focus at PPC Zimbabwe will be “to ensure financial self-sufficiency of the business against the backdrop of a challenging macroeconomic environment”. Business models with local or partial local production find it easier to preserve value where if they have extra local resources they direct it to locally produced goods till the dust settles.
As a lesson, Government, in some sectors of the economy must insist that foreign companies have a local component, in terms of procurement to ensure the sustainability of the business. Apart from the taxes and jobs that Pepkor created and sustained while operating in Zimbabwe, there was not much done in terms of sustainable benefit to the economy once they decide to move on.
Businesses that support local suppliers, transfer skills and technology, have more staying power than those that essentially bring in imported products in a container. By sorely depending on imports you leave consumers dry and in the process kill the market.
According to research done by German Development Finance Institution titled, “Unlocking the benefits of local sourcing for companies and society”, by buying goods and services locally, companies support incomes and jobs at local suppliers. Additionally, local sourcing can strengthen the local economy by transferring knowledge and skills, thereby creating opportunities for suppliers to upgrade to higher value added activities.
“Providing private sector companies with the opportunity to increase the local part of their sourcing can have large effects on the money spent and value created in developing markets,” the Research Report says.
The very reason why Pepkor has decided to exit Zimbabwe, currency risk, is what the Research Report says could be avoided by sourcing locally.
“By sourcing from (local) suppliers using the same currency, companies avoid financial risks related to fluctuations in currency exchange rates. Foreign exchange rates can fluctuate significantly over the course of a supplier contract, dramatically affecting prices of imported products. Especially for companies operating in countries with volatile currencies, currency exchange rate risks can be substantial.”