Project Finance 2019 Second Edition

Last Updated November 04, 2019

Zimbabwe

Law and Practice

Author



Scanlen & Holderness is a full-service firm that handles matters throughout Zimbabwe from its offices in the capital city, Harare. It is frequently involved in landmark, precedent-setting cases, and provides legal services to a large number of Zimbabwean and international corporates. Areas of practice include corporate and commercial law, mining, dispute resolution and litigation, employment law, environmental law, and conveyancing and property law.

Project finance in Zimbabwe has tended to centre on financing for infrastructure projects in sectors such as energy, transport, telecommunications, road construction, airport development and water supply. Section 11 of the Public Debt Management Act Chapter 22:21 provides, inter alia, that:

"The Minister may borrow money in terms of section 11 for the following purposes only:

(a)       to finance national priority infrastructure and productive sector projects with high economic and social impact; provided debt shall only be incurred on projects that can generate sufficient revenue to repay the loan". 

A number of projects in the area of energy, dam construction and road construction have been planned but work has not commenced because of funding challenges. In general, Zimbabwe infrastructure requires renewal because of many years of neglect.

In recent years, Afrixembank, Africa Development Bank, Chinese financial institutions and other international banks have tended to dominate the market as sponsors and lenders. Before the year 2000, the dominant players were European banks on the back of guarantees provided by the British Export Credit Guarantee Company. Multilateral institutions were also active.

The British Export Credit Guarantee Company was a regular supporter of infrastructure projects pursued under government-to-government arrangements between the British government and the government of Zimbabwe. When Zimbabwe embarked on a fast-track land redistribution programme in the year 2000, the Export Credit Guarantee Company, an arm of the British government’s Department of Trade, ceased to be active in the market. Consequently, loans to support infrastructure from British and other European banks dried up. The USA also made it difficult for multilateral institution to remain active in the market because American foreign policy required that some democratic and human rights reforms be put in place before any financial support could be extended to Zimbabwe.

Consequently, lack of funding has been a major impediment to implementation of planned infrastructure projects in Zimbabwe.

Public-private partnerships have tended to be in development of infrastructure in Zimbabwe. Prior to May 2016, these were governed solely by contracts. In 2015, a Joint Ventures Act – which became operational on 27 May 2016 – became law. It established a joint venture unit to:

  • consider project proposals submitted to it and assess affordability, value for money, provision for transfers of technical, operations and financial risks to the other contracting party;
  • examine requests for project proposals to ensure that they conform to feasibility studies;
  • advise government on joint venture projects generally;
  • develop best practice guidelines in relation to all aspects of joint ventures;
  • assist in the formulation of policy in relation to joint ventures;
  • develop awareness of joint ventures in Zimbabwe as a vehicle for economic development and delivery of public services;
  • make recommendations on project proposals submitted to public entities, undertake monitoring and evaluation of joint venture projects and, where necessary, make appropriate recommendations concerning such projects to relevant public entities.

The Act recognises the following types of joint ventures:

  • Build and Transfer (BT);
  • Build, Lease and Transfer (BLT);
  • Build, Operate and Transfer (BOT);
  • Build, Own and Operate (BOO);
  • Build, Own, Operate and Transfer (BOOT);
  • Build, Transfer and Operate (BTO);
  • Contract, Add and Operate (CAO);
  • Develop, Operate and Transfer (DOT);
  • Rehabilitate, Operate and Transfer (ROT);
  • Rehabilitate, Own and Operate;
  • Build, Own, Operate and Maintain Contract;
  • Lease Management Contract;
  • Management Contract;
  • Service Contract;
  • Contract for Services;
  • Supply, Operate and Transfer.

The following have to be taken into account when structuring a project finance deal.

Most of these transactions involve the state or state institutions as interested parties. Consequently, consideration has to be taken of the following constitutional requirements – Section 298 of the Constitution of Zimbabwe requires that:

  • there must be transparency and accountability in financial matters;
  • public funds must be expended transparently, prudently, economically and effectively;
  • financial management must be responsible, and fiscal reporting must be clear; and
  • public borrowing and all transactions involving the national debt must be carried out transparently and in the best interest of Zimbabwe.

Section 315 (2) of the Constitution provides the following.

"An Act of Parliament must provide for the negotiation and performance of the following State contracts:

(a)       Joint venture contracts;

(b)       Contracts for the construction and operation of infrastructure and facilities; and

(c)       Concessions of mineral and other rights;

to ensure transparency, honesty, cost-effectiveness and competitiveness."

Most of these contracts involve foreign entities as lenders and service providers. Consequently, account has to be taken of Section 327 (3) which provides that:

"An agreement which is not an international treaty but which:

(a)       has been concluded or executed by the President or under the President’s authority with one or more foreign organisations or entities; and

(b)       imposes fiscal obligations on Zimbabwe."

Borrowing powers have limitations contained in Section 11 of the Public Debt Management Act particularly in that:

  • the Minister of Finance has to be authorised by the President;
  • he can only borrow for purposes listed in the Public Debt Management Act Chapter 22:21;
  • the aggregate amount that may be borrowed cannot exceed a limit set by the National Assembly;
  • the guiding ratio which cannot be exceeded is 70% of the gross domestic product;
  • in exceptional cases, the National Assembly may authorise a ratio exceeding the 70% limit.

Assets such as immovable property, minerals and general revenues of Zimbabwe are typically looked at by lenders requiring security. Bonds over immovable property are registered by the Registrar of Deeds. The general revenues of Zimbabwe provide security in the form of sovereign guarantees.

The law allows universal security over all present and future assets of the borrower.

Although moveable assets and other incorporeal properties are generally used as security in commercial transactions, it is not common to take this type of security in large infrastructure projects, particularly those supported by government guarantees.

The following are the costs associated with registration of security: (i) purchase price or value of property or amount of bond, whichever is applicable; (ii) fee for conveyance of immovable property; and (iii) fee for mortgage bond:

  • On first USD10,000 and under:
    1. USD400;
    2. USD300.
  • On next USD10,001 – USD250 000:
    1. 4% of the purchase price or value of the property;
    2. 3% of the amount of the debt secured by the bond.
  • On next USD25,001 – USD500, 000:
    1. 3% of the purchase price or value of the property;
    2. 2% of the amount of the debt secured by the bond.
  • Over USD500,001 – USD1,000,000:
    1. 2% of the purchase price or value of the property;
    2. 1% of the amount of the debt secured by the bond.
  • On next USD1,000,001 and above:
    1. 1% of the purchase price or value of the property;
    2. 0.5% of the amount of the debt secured by the bond.

The conveyancing fee is subject to 15% value added tax payable to the government.

The costs of registering collateral security are the same as the cost of registering the primary security. These are detailed in 2.2 Charges of Interest over All Present and Future Assets of a Company. Mortgage bonds are subject to a stamp duty charge payable to the government of USD4 per every USD1,000 of security being registered. There is also a USD20 for every document registered.

In respect of mortgage bonds, the asset has to be individually identified. A notarial general covering bond over moveable property allows for a general description of the assets mortgaged. However, to facilitate effective enforcement, identification of the items of property is essential.

The following apply to the validity of security in Zimbabwe.

  • The validity of security is dependent on the existence of a valid principal debt.
  • The Minister of Finance can issue a sovereign guarantee for repayment of amounts borrowed, expenses and charges incurred where the purpose of the loan promotes employment or development of natural resources or tourism industry or is otherwise in the public interest. He or she may also issue a sovereign guarantee to support borrowings by a public entity.
  • The aggregate of amounts guaranteed by the state may not exceed the limit set by the National Assembly. The limit may, however, be exceeded with the authority of the National Assembly.
  • The Minister is empowered to grant tax exemption in respect of loans by the state or loans guaranteed by the state.
  • Although the power to issue guarantees is wide enough to include guarantees issued to private companies, in practice, sovereign guarantees are issued in respect of loans by state entities.

Although mortgages have to be registered by the Registrar of Deeds, other forms of security are not, in practice, registered. Lenders have to conduct due diligence exercises to establish the status of the assets of the borrower.

The release of security such as mortgage bonds registered at the Deeds Office involves a formal filing of a consent to bond cancellation. It is filed by a conveyancer on behalf of the lender. The title deeds will then bear an endorsement indicating that the relevant bond registration has been cancelled. That procedure applies to mortgage bonds over the immovable property and covering bond over movables. Where the security is in the form of a pledge, return of the pledged item releases the security.

A secured lender can enforce security in cases of default. However, where the debtor is in liquidation, the leave of court is required to institute proceedings.

Foreign law will be enforced as the governing law if the parties choose it to govern their contract. However, a Zimbabwean court will treat foreign law as a matter of fact requiring expert evidence.

Foreign judgments are enforceable in Zimbabwe without the necessity for a retrial of the merits of the case. All that is required is to register the foreign judgment. An application for registration is made to the High Court of Zimbabwe. Equally, foreign arbitral awards are enforceable. Zimbabwe ratified the New York Convention on enforcement of arbitral awards.

Under the common law, the general requirements for the recognition and enforcement of foreign judgments may be summarised as follows:

  • the foreign court in question must have the requisite international jurisdiction of competence according to our law;
  • the judgment concerned must be final and not have the effect of res judicata according to the law of the forum in which it was pronounced;
  • the judgment must not have been obtained by fraudulent means;
  • it must not entail the enforcement of a penal or revenue law of the foreign state;
  • it must not be contrary to public policy in Zimbabwe; and
  • the foreign court must have observed the minimum procedural standards of justice in arriving at the judgment.

The choice of foreign law by contracting parties and the submission to the jurisdiction for foreign courts is generally upheld in Zimbabwe.

Foreign judgments are enforceable in Zimbabwe without the necessity for a retrial of the merits of the case. All that is required is to register the foreign judgement. An application for registration is made to the High Court of Zimbabwe. Equally, foreign arbitral awards are enforceable. Zimbabwe ratified the New York Convention on enforcement of arbitral awards.

Payment abroad or repatriation of capital by foreign investors requires prior exchange control approval. Furthermore, due to the fact that the country is experiencing a severe shortage of foreign reserves, it takes time before one is able to pay even after the approval will have been granted.

Maintenance of off-shore foreign currency accounts requires prior exchange control approval.

Loans binding Zimbabwe require Parliamentary approval and Zimbabwean residents require exchange control approval to incur indebtedness to pay a foreign resident.

The granting of security or guarantees is also affected by the above restriction.

A Zimbabwean resident requires exchange control approval to incur any liability to pay a foreign resident. That includes the giving of security to a foreign resident.

The state of Zimbabwe requires Parliamentary approval before it can enter into any agreement with a foreign resident imposing fiscal obligations on Zimbabwe.

Zimbabwe is presently open for foreign investment. The Indigenisation and Economic Empowerment Act, which required foreign investors to dispose of 51% of shareholdings to indigenous Zimbabweans is now confined to the diamond and platinum sectors only. However, the following sectors are reserved for investment by indigenous Zimbabweans:

  • agriculture – primary production of food and cash crops;
  • transportation – passenger buses, taxes and car hire services;
  • retail and wholesale trade;
  • barber shops, hairdressing and beauty salons;
  • employment agencies;
  • estate agencies;
  • valet services;
  • grain milling;
  • bakeries;
  • tobacco grading and packaging;
  • tobacco processing;
  • advertising agencies;
  • milk processing;
  • provision of local arts and craft, marketing and distribution.

Payment abroad or repatriation of capital by foreign investors requires prior exchange control approval. Furthermore, due to the fact that the country is experiencing a severe shortage of foreign reserves, it takes time before one is able to pay even after the approval will have been granted.

Maintenance of off-shore foreign currency accounts requires prior exchange control approval.

Financing and project agreements approved by exchange control authorities do not require to be registered or filed with any government authority or to comply with any local formalities to be valid and enforceable.

Ownership of land does not require any licence. Mining rights require acquisition of the same in the form of claims or licences or special grants. This is applicable whether the rights are owned by Zimbabweans or foreigners.

Agents and trusts are recognised in Zimbabwe. Agency arrangements are generally regulated by contract. Trusts are regulated by constitutive trust deeds.

Secured creditors enjoy priority in the event of insolvency. The order of payment is:

  • liquidation costs, which have to be paid even if it means creditors proving claims making a contribution;
  • employees' pay not exceeding three months;
  • statutory deductions;
  • secured creditors;
  • all other creditors participate pro rata in the residue.

A project company operating in Zimbabwe is required to register a branch of a foreign company or a subsidiary in Zimbabwe.

Business Rescue

Recently, business rescue was introduced into Zimbabwean law. The new Insolvency Act provides for business rescue. Unfortunately, because it took longer to amend the Companies Act than it did to amend the Insolvency Act, provisions relating to judicial management are still in Zimbabwe's Companies Act.  The situation is expected to change when the amendment to the Companies Act becomes law. Business rescue is detailed as follows.

Commencement of business rescue

A company is placed under business rescue either by a resolution of the directors or by a court order following an application.

Where it is placed under business rescue compulsorily by a court order, creditors or employees or shareholders may apply for such an order. A court order placing a company under business rescue should be notified to all affected persons.

Time of commencement of business rescue

Compulsory business rescue commences when the business rescue application is filed with the court whereas voluntary business rescue commences when the papers are filed with the court.

Duration

Business rescue lasts for three months. There is, however, provision for an extension with the support of the majority of the creditors. The Act is still too new for us to be able to estimate the duration in practice.

Business rescue practitioner

A business rescue practitioner takes control of the company. Directors are answerable to him or her. All decisions made in connection with the affairs of the company require the approval of the business rescue practitioner to be valid.

Proof of claims

Due to the fact that the Act is still very new, we are still to observe the practice regarding proof of claims. It is, however, reasonable to assume that the current practice regarding filing of proof of claims in respect of companies under judicial management will continue. Creditors are likely to be expected to prove their claims either during the first or second meeting of creditors. The business rescue practitioner is, however, required to consult with all creditors when preparing his or her business rescue plan.

Consequences of business rescue

  • It gives rise to a general moratorium on rights of creditors to enforce their claims against the company or property of the company.
  • The claims of the creditors are crystallised as at the date of commencement of business rescue.
  • Shareholders retain their rights in the company. There may be no change in the shareholding except in the ordinary course of business or in pursuance of the plan or a court order.
  • Contracts entered into by the company prior to business rescue remain valid although the business rescue practitioner has suspension rights in respect of obligations arising therefrom.
  • Contracts of employment remain valid. Variation can only take place in the event of agreement. Labour laws continue to bind the company under business rescue.

Business rescue plan

The plan is the centre of business rescue proceedings. It is expected to set out in detail the situation of the company and proposals made for its rehabilitation or removal from distress. The plan has to be voted on by creditors. Acceptance is by 75% in value of the creditors voting in favour of the plan. The vote is subject to any aggrieved person making an application to court to order differently from what will have been voted upon. Otherwise an acceptance plan is binding on all creditors. The plan may incorporate compromises or a scheme of arrangement with creditors although provisions relating to compromise or schemes or arrangement are still provided for the in the Companies Act which has not yet been amended.

Terminations

Termination of business rescue occurs when:

  • the court will have set aside the resolution in terms of which business rescue proceedings will have commenced; or
  • the business rescue practitioner will have filed a notice of termination of the business rescue.       

Liquidation in the event of failure

Where the business rescue fails or conditions precedent of the plan are not fulfilled, the company may be placed under liquidation.

Other business rescue provisions in the Companies Act still to be amended

There are, basically, three other types of business rescue plans in Zimbabwe. One is by the directors of the company in distress arranging a scheme of arrangement or a compromise or assignment. The other is by judicial management – that is to say, a judicial manager appointed by the court. In 2004, the government of Zimbabwe introduced a statute dealing with the reconstruction of state-indebted companies. The reconstruction process begins with an administration order by the Minister of Justice.

Process required to commence a scheme of arrangement or compromise

The process required to commence an arrangement or compromise assignment is a resolution by members or creditors made under the scrutiny of the court in the sense that the court appoints a chairperson who will ensure that the meeting of creditors or members, as the case may be, is conducted in terms of the law and the court order authorising the convening of a scheme of meeting. The chairperson will report to the court after the meeting has been convened and the court will issue an order sanctioning resolutions made at the scheme meeting. The resolution becomes effective and binding only after registration by the Registrar of Companies.

The issue of a liquidation or sequestration order by a court has the effect of staying any legal proceedings against the company in liquidation. The proceedings may not be proceeded without court approval.

Creditors have to prove their claims. They are paid in accordance with an order of preference. Where the assets are insufficient, they are paid a pro rata portion of their claims. Where the assets are insufficient to meet the liquidation costs, creditors contribute towards the costs of liquidation on a pro rata basis.

The major risk for lenders, in the event of insolvency, is that the value of the security provided may not match the amount secured in an environment characterised by liquidity challenges.

Statutory entities established by Acts of Parliament are wound up by Parliament exercising its legislative authority. A creditor cannot apply for liquidation of a statutory body.

There are no restrictions on policies over project assets.

Exchange Control approval is required for insurance proceeds payable to foreigners to be paid. The incurring of liability to pay foreign residents itself requires exchange control approval.

A risk arising in Zimbabwe cannot, under Zimbabwean law, be placed with an external insurer without the approval of the Commissioner of Insurance. The Commissioner of Insurance will not grant the approval unless it can be shown that there is no local insurer capable of insuring the risk.

The local insurer has to be registered and licensed to carry on insurance business in Zimbabwe.

There is no withholding tax on repayment of the principal loan. Furthermore, to encourage investment inflows, withholding tax on interest on foreign loans was repealed. There is, however, withholding tax on fees.

Technical fees and administration charges are subject to withholding tax. The level of withholding is determined by the double taxation agreement between Zimbabwe and the lender’s home jurisdiction.

In the calculation of Income Tax, interest on loans is allowed as an expense.

Zimbabwe has a thin capitalisation rule. The applicable ratio is 3:1.

The Commissioner General of the Revenue Authority can disallow interest resulting from violation of the thin capitalisation rule.

Stamp Duty is charged on all security documents being registered at the Deeds Office. There is a USD20 registration fee per document. In addition, the duty works out to USD4 per thousand of the security being registered in terms of the document.

For non-resident lenders related to Zimbabwean borrowers, it is important for lenders to ensure that the arm's-length principle is observed otherwise the interest deduction by the Zimbabwean entity will be disallowed. Furthermore, it is important to ensure that documents are maintained by the borrower and can be produced within seven days of request by the Commissioner General. The documents should contain:

Income tax transfer pricing regulations 109/2019 required documents:

  • overview of business operations;
  • organisational structure, detail to include shareholding percentages;
  • description of controlled transactions and comparability factors;
  • explanation for selection of transfer pricing method;
  • comparability analysis and process undertaken;
  • industry analysis;
  • advance pricing agreements;
  • any information which can impact the arm's-length principle.

Usury laws apply to registered money lenders in Zimbabwe. However, as foreign loans require exchange control approval, the levels of interest is an aspect exchange control authorities will look at.

In Zimbabwe, interest may not exceed the capital amount because of the in duplum rule. Collection mitigates the impact of the in duplum rule because the rule applies to accumulated interest only.

Project agreements are typically governed by Zimbabwean law. Joint venture agreements entered into in terms of the Joint Ventures Act [Chapter 22:22], have to be governed by Zimbabwean law. These are joint venture agreements entered into with Zimbabwean public entities.

Financing agreements are typically governed by law chosen by the parties. In practice the law chosen by the lender is the applicable law. Most lenders choose English law.

Domestic law typically governs all regulatory matters, land lease agreements, water or power purchase agreements.

Scanlen & Holderness

13th Floor CABS Centre
74 Jason Moyo Avenue
Harare
Zimbabwe

+263 242 799636 42

+263 242 702569

moyos@scanlen.co.zw www.scanlenandholderness.com
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Law and Practice

Author



Scanlen & Holderness is a full-service firm that handles matters throughout Zimbabwe from its offices in the capital city, Harare. It is frequently involved in landmark, precedent-setting cases, and provides legal services to a large number of Zimbabwean and international corporates. Areas of practice include corporate and commercial law, mining, dispute resolution and litigation, employment law, environmental law, and conveyancing and property law.

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