A major requirement in much of the Zimbabwean economy, and in particular the productive sectors, is a lot of capital investment, both to modernise and replace machinery and equipment and to expand capacity to ensure that economic growth does not just reach the higher levels now predicted but accelerates.
While some existing concerns do generate the required levels of cash that can be converted to capital, and while some new investors, mainly foreign but with a local component, have cash holdings, there are many industries and mines that need more funds, and agriculture is going to need huge investments in irrigation equipment and the like.
The paths chosen tend to be borrowings or a reliance on the Government to increase its capital spending. There are limits to both. Interest rates are still high and, in any case, banks tend to be very conservative when it comes to loans having finally escaped from the days of severe bad debts and now being like reformed alcoholics and very unwilling to take much risk, or even any risk.
At the same time the Government has no inexhaustible supplies of money. Fiscal discipline and prudent budgeting has finally created the opportunity for capital programmes, but even here there are limits. When we come to infrastructure, the prime responsibility of Government we see that more money is needed.
For example, complex financial arrangements are being put in place to complete the upgrade of the Harare-Masvingo-Beitbridge highway, which now includes the interchange or flyover, to replace the Mbudzi roundabout, easily the biggest choke point on that highway. Prudence is insisted upon, with revenue streams, which must mean tolls, linked to the repayments. That fits in with the dictum of the Treasury that borrowing must be limited to capital spending, and even then must be limited to capital spending that produces revenues that can be used to retire the debt.
So even with the sort of budgeting we have now there is not that much left once infrastructure has been funded, or the annual requirements for agriculture input schemes have been sorted out. And in any case growing State equity in the economy is not always a brilliant idea. Too many State controlled entities are pits for money, rather than producers of revenue and profits, although this is now changing.
One area where Zimbabwe falls short is the use of equity markets to raise capital. The Zimbabwe Stock Exchange functions well and it now has that foreign currency subsidiary, the Victoria Falls Stock Exchange. But new listings are few and far between, and in recent times the number of initial public offerings are about zero. The ZSE is improving a lot of systems but these are designed to make buying and selling the small pool of shares available for dealing better and easier.
The bulk of shares, in fact the overwhelming majority, are locked up mainly by institutional investors such as pension funds and life insurance companies, but in a small range of companies by large private investors, often the founders of the firm.
Rights issues are these days very rare, although for a soundly-managed company with excellent prospects they would probably be a cheaper way of raising new capital than going to the banks.
Everyone agrees that a properly-run stock market needs to make it easy for people to enter and leave the markets. What amounts to a high rate of liquidity in equity of quoted companies is essential for a respectable and properly functioning stock market and without that level of what amounts to liquidity it would not be able to do its second and more important job, or raising new equity capital, either through rights issues or through new listings.
Yet this seems to be an opportunity whose day is coming. But it may well require a new mindset among many present and potential investors. The stock market has been seen as way of making money, by carefully churning portfolios and moving from shares whose price is likely to sink, or at least not grow very fast, into shares that seem underpriced.
So most dealing daily on the ZSE are looking for capital gains.
Yet the basic theory behind equity investment is looking at dividend income. The institutional investors largely sue this approach, following a model where over a decent breadth of holdings they can maintain their capital in real terms and collect dividend income as revenue. There used to be people who kept the bulk of their savings in “blue chip” equities and lived off the batches of dividend cheques they received twice a year. These are the sort of people who now rent out rooms, flats or houses.
Economic meltdown, bad managements who sometimes saw any company profit as something to distribute in the executive dining room, and hyperinflation made this traditional model a dead letter. But the changes over the last year, built on the steps taken in the previous year, have altered this and open the door to a new model that goes back to basics.
One huge source of capital is the that US$1,7 billion sitting in nostro accounts doing absolutely nothing. It does not seem impossible to figure out investment opportunities using the Victoria Falls exchange to tap some of that cash. Even 10 percent would be useful. The Victoria Falls exchange is not for every company, or even for many.
But it seems that it could be used to float companies whose revenue is 100 percent exports, or close to 100 percent. The obvious place to start would be those parts of the mining industry that do export every gramme of production.
We already have gold mining companies that are looking for new investment to reopen mines that appear to be viable and potentially profitable, but need a whole lot of new equipment and pumps. Our existing platinum mines are foreign owned, and even the new one under now being dug has its local investor being the State. But there is absolutely nothing to stop a group of smart Zimbabweans opening yet another mine.
Foreign investment is fine, and in fact is absolutely essential if our economy is to grow. But we also have local funds, just sitting in banks that could be mobilised as well. There might need to be some minor changes to monetary policy rules to release a chunk of this totally unproductive cash, but the case is strong.
On the local front the ZSE has rules, including the minimum size of a listed company. But many other countries have a minor exchange for smaller concerns and in aggregate these can raise large sums of cash.
Private placement of shares is all very well, but are hardly liquid or even close to liquid. Private proprietor-owned companies are common, and in fact are almost essential to encourage people to start businesses since they do offer that limited liability if something goes wrong.
There are no guarantees that a start up will be successful, and experience shows around the world that many fail. But the minority that make it crate new wealth that more than compensates for the wealth destroyed by the bankrupts.
Unlike many other investments, stock markets allow even quite small investors to spread their risks quite widely, and this would be absolutely essential for a subsidiary stock market that was catering for smaller companies and start-ups. Where a couple of winners would make up for a dozen losers.
The ZSE is built on such exchanges set up in the early colonial days. IT was a bit wild west, and modern accounting rules and the like are now absolutely essential, but it did allow the original colonial economy to at least start operating and growing. We can put the same ideas to use, with modern disclosure and auditing rules.