When the Mauritius-based Essar Africa Holdings Ltd, an arm of India's Essar Group, was selected as the preferred private corporation to take on 54 per cent of Zimbabwe's ailing state-owned steel maker, the Zimbabwe Iron and Steel Company (ZISCO), many breathed a sigh of relief.

Under the terms of the agreement, Essar Africa, which beat out ArcelorMittal and Jindal Steel, will acquire a 53 per cent stake in ZISCO, also taking on board a US$270 million debt. Essar, a medium-sized firm, was allegedly selected by Zimbabwe's Robert Mugabe. Of this debt, US$240 million must be repayed to a German bank, and a further US$30 million to a Chinese bank, to be repaid by end 2011. With a production capacity of one million tonnes annually, and Essar's promise to have the company up and running within 24 months, on the surface, things appear to be looking up for the country, currently receiving Foreign Direct Investment (FDI) of just US$60 million annually.

The deal symbolises the first privatisation under the unity government between Zanu-PF's Mugabe and the Movement for Democratic Change's (MDC) Morgan Tsvangirai. The parastatal is said to be immune from the country's law stipulating that foreign-owned companies must eventually sell 51 per cent of shares to local Zimbabweans.

Once a significant source of foreign currency, in recent time, ZISCO produced just 12,500 tonnes in 2008 (when the parastatal ceased operations) - well below break even capacity of 25,000. No doubt, the increased revenue will greatly aid Zimbabwe's drive to source sustainable development revenue.

With major interests in oil, telecommunications, steel and energy, Essar's presence - and its US$450 million acquisition - indicates that Zimbabwe is now open for business. Yet Essar's operating base - Mauritius - does not bode well. The jurisdiction, a key conduit used for 'round-tripping' (parking wealth in Mauritius before re-investing in India) by Indian corporations, provides almost half of India's FDI, estimated at US$39 billion. With its vast selection of opaque legal and financial secrecy tools, including banking secrecy, zero taxation and almost complete lack of disclosure of beneficiaries, shareholders, directors, company accounts and trusts, Mauritius represents the perfect anonymous environment for regimes eager to exploit resources and siphon revenue through legal paper channels.

Companies not only prefer Mauritius for zero taxation and corporate opacity, but also thin capitalisation. This is a process whereby holding companies internally supply high-interest loans to subsidiaries in developing countries, draining pre-tax profits, resulting in severely diminished taxable income, or even creating losses, despite the health of the business. 'Management' fees, allowing for holding companies to artificially mis-price goods and services procured from the company, is yet another tactic commonly used.

Essar is not the only company active in Zimbabwe to utilise Mauritius. South African scrap metal corporation New Reclamation holds a concession to one of the world's largest diamond field discoveries in recent times: Marange. Through Mbada, a joint venture between the ZMDC and New Reclamation, the company has long begun exploiting diamonds. Yet New Reclamation's Zimbabwean arm - Grandwell Holdings - is a tax exempt Global Business Category II (GBCII) paper company established in Mauritius, which the ZMDC itself stated was immune from government due diligence due to this very fact. Primarily controlled by the Zimbabwean military, Marange's overflowing alluvial diamond resources could well supply the cash-strapped Zimbabwean government with as much as $1.7 billion in revenue annually.

Using the same secrecy tools listed above, not only could myriad war vets and political elites use nominee shareholders to conceal their role in the company, but little of this revenue will reach Zimbabwe's tax base. Given that such environments are selected precisely because of high-level confidentiality, it is unlikely that such companies can be penetrated and held to account.

Consistently ranked one of the world's easiest places to do business, and Africa's leading, by the International Finance Corporation (IFC) and World Bank, also topping the charts on the Mo Ibrahim Governance Index, Mauritius has charmed those seeking a superficial African success story. But what is the impact of such success on the democracies of other African nations? With donor aid of just under $630 million, and life expectancy of 42, Zimbabwe is urgently in need of self-generating sustainable revenue. The way is not through Mauritius.

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* Khadija Sharife is Southern Africa correspondent for The Africa Report.
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