It is now bare knuckles as the fight for the ownership of the dormant Zimbabwe Iron and Steel Company (Zisco) mega-million assets last week took an emotional twist, with the board and a business suitor squaring off over a controversial 2017 deal.
News in depth BY EVERSON MUSHAVA
Last week, The Standard, working with Information for Development Trust, reported that the Zimbabwean government facilitated a US$225 million deal that would allegedly strip Zisco of its critical assets and transfer them to ZimCoke, a little-known entity based in Harare.
ZimCoke paid ZW$1 in May 2019 as a transaction fee to take over Zisco’s signature coke ovens and an array of other assets from the integrated steelworks.
But Gift Mugano, the current Zisco board chairperson, insisted that the deal needed to be reviewed as it did not follow best corporate governance principles and was thus “null and void”.
Government has been the major shareholder, with an 89% stake in Zisco, that stopped operations about a decade ago due to widespread mismanagement and political interference.
After last week’s revelations, Eddie Cross, a former ZimCoke consultant who now sits on the entity’s board, described Mugano as “irresponsible” and “unprofessional”, saying the Zisco board chairperson’s attitude was very “disappointing”.
ZimCoke is not flustered by the repeated refusal by Mugano’s board to let them in and take over the targeted assets, according to Cross, and there is no way the deal will be reversed.
“This deal was approved in May 2017 and signed by both parties in July 2017,” Cross said.
“It then took us two years to negotiate the assumption of the KfW debt and the final transaction was then approved by the Cabinet in May 2019,” Cross told The Standard.
Government, as the major shareholder, owes KfW, a German bank, more than US$200 million that ZimCoke had proposed to take on as its own liability in the disputed deal.
“Transfer documents were signed in July (2017).
“We are now waiting for a rates clearance certificate and a capital gains tax clearance certificate to be issued to take ownership of the (Zisco) site and then we can start work in earnest,” said Cross.
“All the required work has been completed,” he added, “and this process should be complete in the next few weeks.”
From where ZimCoke stands, KfW is happy with the deal and government, through the Finance ministry, agreed to pay the capital gains tax to the tune of ZW$10.2 million based on valuation that the company conducted.
“As far as KfW Bank is concerned, the agreements are concluded and are acceptable to the Ministry of Finance and the Attorney General,” said Cross.
There is still need for an agreement for ZimCoke’s takeover of the Zisco liabilities, but that cannot happen without cooperation from the steelworks’ board and management and, in the absence of that, the former cannot borrow from the banks.
Yet ZimCoke remains ambitious, planning to invest US$500 million, according to Cross, who added that they had already deployed a small team to the project and poured in US$1 million.
So, naturally, he is not happy that Mugano and his board are still keeping them at arm’s length.
“I find his (Mugano’s) attitude very disappointing,” Cross said.
“He has refused to meet us or even get an explanation from us on the nature and details of this deal.
“He shows complete, I think deliberate, ignorance of what has been negotiated and this is not only irresponsible, but unprofessional.”
He said government agreed to ZimCoke’s offer to take over the Zisco liability to KfW, which stood at €168 million and is attracting 6,7% interest per annum.
The debt, Cross said, currently stands at over US$200 million.
The Zisco board, Cross claimed, was ordered to negotiate a deal in 2017 and the assets, including land, plant and machinery, infrastructure, railway wagons and the shares in ZimChem — one of the steelmaker’s key subsidiaries — were valued at US$225 million.
“These valuations were mutually agreed and I am sure that the most recent (December 2019) valuation of these same assets by the Ministry of Local Government for rates purposes will confirm them as reasonable valuations,” Cross said.
He could not hide his contempt for Mugano.
“Ask that chairman of Zisco what his plans are to get Zisco back on its feet.
“All they are doing is selling scrap and waste products. The (Zisco) plant is slowly disappearing,” Cross added.
On the turn, Mugano described ZimCoke as a “rogue investor” plotting to take over Zisco for a song.
“The board will not buy into Cross’s lies that they want to invest close to half a billion dollars on what he calls ‘junk’.
“We will not meet them (ZimCoke) until we are clear on what we are meeting for,” Mugano said.
“We have been given a mandate (by government) to cancel the deal.
“It is a bad deal and we have no apology about that.
“Even if I am going to be fired, I am happy I am accounting to the people.
“If they want us to negotiate, the deal should be cancelled first,” Mugano retorted.
The Zisco board’s attitude is based on the fact that its predecessor was not involved, in violation of the Public Entities and Corporate Governance Act, making the deal illegal.
“The last board, led by Nyasha Makuvise, actually signed exoneration letters to prove that they were not involved in the negotiations,” Mugano told The Standard last week.
It was done by the ministries of Finance, Industry and Commerce as well as Mines. According to the Public Enterprises and Corporate Governance Act, the board plays two roles, the fiduciary role (protecting the company’s assets and money) and the probity role (accounting to the public).
“If the board was not involved, who did the fiduciary and probity roles?
“Rules were flouted and the deal is null and void.”
Mugano said the deal was signed on only three pages with an annexure of 18 items purportedly given to ZimCoke, among them the railway line and technical drawings of Zisco.
And, if the drawings are taken away, the implication is that Zisco will not have that information in the event that another prospective investor comes in.
“Clearly, the deal is about taking over of Zisco and the board realised the deal was not good and we resolved to nullify it,” the Zisco boss added.
“We informed the then minister of Industry, Mangaliso Ndlovu, and the current minister. Sekai Nzenza, and also wrote to the Office of the President and Cabinet as required by the Public Entities and Corporate Governance Act.
“Minister Nzenza took the issue to Cabinet and a resolution was made to have the deal reviewed.
“What we did was to simply inform the shareholder (government) that the deal was shoddy and Cabinet said it should be reviewed.
“We have put that on our first 100-day work plan. The first thing was to get a letter from the Ministry of Finance indicating that the debt has not been taken over.”
Mugano added: “We are aware that the German bank wants a government guarantee to the debt.
“How can government guarantee a debt assumed by a private company (ZimCoke)? That can’t be, that is why we say there is no deal.”
According to a February 17 2020 letter by George Guvamatanga, the permanent secretary in the Finance ministry, to the Industry secretary, there was no communication from KfW agreeing to move the US$200m debt from government to ZimCoke.
Mugano said no due diligence procedures were adopted, while the Zisco management advised him that there was no valuation of assets as Cross claimed.
The only valuation was done by Essar, an Indian investor that abandoned the project out of frustration, in 2016, added Mugano.
“In any event, how did ZimCoke evaluate the deal without management?” he quipped.
“We have responded to them and told them that (transfer of Zisco assets to ZimCoke) will not happen until the deal is reviewed.”
ZimCoke wants to take over the flats, houses, railway, conveyor belts and other items.
“The deal is not going to happen for as long as I am board chair of Ziscosteel. There is unanimity within the board that this deal will not work.
“We don’t want rogue investors who want to take a company for a song. We don’t want investors who waste our time,” said Mugano.
Zisco has 243 workers protecting the company’s assets and doing essential work, said Mugano.
“There is nothing that has been done worth US$1 million,” he said.
“Why would they want to protect conveyor belts, scrap iron, wagons and so forth?
“They should protect only the coking ovens. The deal has nothing to do with conveyor belts.
“The assets are on Zisco land, so is he (Cross) talking of protecting the whole Zisco?”
The Mugano-led board has more problems with the ZimCoke deal, insisting that taking over Zisco’s critical assets would effectively kill the company.
The Zisco units are interrelated and interdependent. The blast furnace uses coke oven gas to function.
The coke ovens use blast furnace gas as fuel too, while the steel plant uses mixed gases from the furnace and ovens.
The coke oven gas is also used as fuel in all the rolling mills.
And the steel plant was constructed in such a way that there is sharing of resources that include the rail network, roads, electricity and water.
In the integrated framework, ovens supply the blast furnace with coke, which is the fuel for the running of the furnace, while ZimChem consumes by-products from the furnace.
The furnace produces the molten iron which is then fed into the steel plant for production of steel billets for rolling at the mills.
The other assets aside, the mere removal of the coke ovens from the integrated structure would disrupt the steelmaking and by-product generation process and render Zisco irrelevant.
“Zisco cannot operate without coke ovens and the ZimCoke deal is a move aimed at taking over the whole of Zisco,” a top official at Zisco claimed.
“Removing the coke ovens is like removing a heart from the body and still expect it to work.
“Both the heart and the body will not work outside each other. The revival of Zisco without the coke ovens is untenable,” said the source.
“It is known that Zisco is an integrated plant whose operations are heavily inter-dependent.
“So if we look at assets that would have been taken by ZimCoke, it is going to be difficult to revive Zisco,” he added.
Zisco would now have to buy the coke to feed into the furnaces from ZimCoke, together with oven gas to run the furnace and mills.
There is no agreement in the debt swap deal that ZimCoke will forgo the lucrative export market and prioritise Zisco.
Next, as promised last week, The Standard will reveal how top government and Zanu PF officials have grabbed Zisco assets.