Essar deal: What went wrong?

Felex Share Senior Reporter
The announcement by Finance Minister Patrick Chinamasa during the presentation of the 2016 National Budget that Government will terminate the contracts for Ziscosteel employees is a clear confirmation that the investment, commonly referred to as the Essar deal, has collapsed.

In fact, Minister Chinamasa was candid and said Government needed to secure another investor as soon as possible through private placement.

What this means is that we had another phantom investment proposal in the house.

Reviving the giant steelmaker is a must as it has upstream and downstream benefits for the economy.

The firm was a major economic force in Redcliff and Kwekwe.

Statistics show that at the peak of its production, Zisco produced one million tonnes of steel and employed over 4 000.

This was before the capacity was affected by financial constraints of 2008.

Realising the company’s strategic importance to successful turnaround of the economy, Government engaged Indian firm Essar Africa, which had committed to invest a record $750 million.

But the deal kept running into blind corners including sticking issues over iron ore reserves to be given to the Indian firm, guarantees for access to power, water and railway system and its huge stock of domestic and foreign debts.

Government had agreed to sell 54 percent of its shareholding in Zisco and 80 percent of its stake in BIMCO, which holds the iron ore mineral rights, to Essar Africa.

The deal was signed in 2010, but up to date little had happened in terms of Government’s objective to revive the firm.

Who is to blame?

Both Government and Essar Africa are to blame.

While we all sympathise with the 1 200 workers set to lose jobs with effect from next Tuesday (December 1), it is also a fact that one cannot continue accumulating debts from unproductive workers.

But the worry is why has Government allowed itself to be led up the garden path for more than four years?

Yes, the deal has been riddled with problems from the time of the inclusive Government, but it is sad that current Industry and Commerce Minister Mike Bimha took this long to realise that this was just another phantom investment.

He came in and tried to paint a rosy picture of the deal and on many occasions gave hope to parliamentarians and journalists who took him to task over the issue.

It took ages for Government to confirm the demise of the deal but Minister Chinamasa, tasked with spearheading economic revival, has come out in the open.

The script is now clear.

Essar led the Zimbabwean Government up the garden path for close to five years.

The investors were even asking for more time.

Now they have come clean that they do not have the money, which leaves one to believe that they only wanted to export the country’s iron ore.

Mind you, Zimbabwe is blessed with vast iron ore reserves.

From the look of things, it seems the steel plant was just a sideshow because at the time the deal was first initiated, the price of iron ore was more than $200 per tonne but now it has gone down drastically.

For starters, it never made any business sense, the figures just didn’t add up.

How can a serious company inherit a debt of Government of about $300 million and on top of that the company wants to invest in a steel plant which costs not less than $700 million?

So from the onset, it means Essar had a liability of more than $1 billion if we factor in salary arrears for employees.

How would they have made money and compete on the global market, assuming their money was either their own investment funds or they were raising the money from banks and fund managers?

Surely, which fund manager would say go and inherit a historical debt and then on top of it I give you money to invest in a project?

In the meantime, the iron ore, coal and chrome are lying idle on the ground waiting for kingdom come from Essar.

But it is not Essar alone, Government should also take blame for the death of the multimillion- dollar deal.

While Essar kept giving Government hope that something positive would come out of discussions to resolve sticking issues, it was also important for Government to agree to some of the investors’ demands.

This is particularly the case considering the admission by Minister Bimha that the investor had expressed reservations about Zisco’s massive catalogue of debts, which Government insisted Essar had to assume.

Admittedly, Government has responsibility to enter into agreements that are cognisant of and protect the State’s socio-economic and political interests, but in the case of the Essar deal, Government officials negotiating the deal should have pulled all the stops to ensure the deal materialised.

This, Government would have achieved by conceding some ground considering the potential benefits across the economy and the cost of the deal falling through, as happened with another major potential investor, Global Steel Holdings, also from India.

No country in the history of economic growth and development has successfully industrialised without access and adequate supply of steel and Zimbabwe is no exception given its infrastructure backlog.

Government negotiators should also have looked at the number of jobs that were going to be created if the deal had taken off.

This was all happening yet we have serious steel players in the country bigger than Essar, like Afrochine of China.

The Asian company is already in the country and asking for the same resources which Essar has been given and is sitting on.

They want to do business yesterday and as a demonstration of their sincerity they have, in less than two years, become the biggest ferrochrome smelter.

If we are to attract investment, we have to be brutally frank about who we identify as competent global partners because our resource base is top class.

With our platinum, gold and diamond, we are in the top tier in the world.

The collapse of the deal with Essar Africa becomes the second major deal involving Zisco that has failed to materialise after another one with Global Steel Holdings failed under unclear circumstances in 2004.

The point is when we look for partners, let us look for those who are competent, with commensurate capabilities.

Government should also not expose indecision and be ready to concede ground especially when the deal comes with much benefits to the economy.