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Introduction

This chapter covers the background of the study, the statement of the problem as well as aim of the research. The research objectives are also highlighted followed by the significance of the study, justification of the study, assumptions and delimitations. Definition of terms and conclusion constitute the final part of the chapter.

1.1 Background of the Study
Zimbabwe Iron and Steel Company (ZISCO) is one of the largest iron and steel companies in the Southern region. It started in 1938, formed by private members. In 1942 the government formed the Rhodesian Iron and Steel Commission (RISCOM), a statutory body which then took over the Bulawayo plant, Kwekwe lime works and adjacent limestone deposits. In 1946, a small plant was established in Redcliff and it commenced production. After independence the commission was named ZISCO with a capacity of one million tones of liquid steel per year being produced. The company became the pillar of Zimbabwe since it became one of the largest foreign currency earners in Zimbabwe operating above 50%. Since then the company began to face some difficulties. In 2001 its plants became disintegrated and mills stopped functioning. The blast furnace number three stopped functioning due to lack of finance and spare parts Apart from what was taking place in-house, there was unreliable supply of coal from Hwange caused by lack of adequate equipment. This led the company to operate below capacity and resulted in it failing to finance the projects of bringing back No.3 blast furnace and mills into function. In addition to the above the whole plant began to deteriorate. All the refurbishment required foreign currency but before dollarisation the company could not possess foreign currency even though 70% of its outputs were for export. Therefore the company could not raise the required capital. The government of Zimbabwe (the major shareholder of the company) failed to rescue the company. In 2006 the government clinched a $400-million Zimbabwean dollar management deal with Indian Steel maker Global Steel to help loss making firms like ZISCO but the deal collapsed within two months. In 2007 the company had to raise 5.4 trillion Zimbabwean dollars for plant operations but

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failed although there was capital injection by the government and a number of strategies by the company. On January 19 2008 blast furnace No. 4 stopped functioning due to the load shading of December 2007, which affected the coke oven batteries leading to the collapse of coke ovens. The batteries needed to be resuscitated and the furnace was also due for relining but the company could not finance the projects and it seize production. In September 2009 the company’s chief executive officer reported that the company is saddled with large debts of about US$ 18.5 million. The company need about US$78 million to operate viably. The capital projects need about US$54 million. These include recapitalisation of its wholly owned subsidiary (Buchwa Iron Mining Company). The company has got seven subsidiaries and need to rescue the troubled ones. Ramotswa, one of them ceased operating in September 2008 partly because it had not been getting steel from ZISCO. The regional subsidiary companies are indebted to the tune of US$ 5 million and some creditors have instituted legal actions against them with the possibility of these subsidiaries being taken over if the parent company does not step in to rescue them. The company has lost 1 006 workers since 2007 because of the general hostile economic environment which has compromised the company’s ability to pay competitive salaries on time. Funding Requirements All equipment related to the production process has to be refurbished. No. 4 Blast furnace is the major project that needs funding. In addition to that all ancillary equipment has to be refurbished. Plant equipments to be refurbished are; Sinter Plant, Iron Plant, Steel plant, Bar Rod Mill, Medium and Light Mills, Carters 1 and 2 and the lime kilm. There is need to purchase new locos, gondola coal wagons and refurbishment of No. 3 Coke Oven Battery.

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Immediate funding requirements In order to turnaround the fortunes of the company, an immediate capital injection is required to adequately fund the following projects and working capital.

Capital Projects US$ No. 4 Blast Furnace Refurbishment 6 000 000 No. 3 Coke Oven Battery 3 000 000 Lime kilm 2 Reline 340 000 Turnaround projects 4 841 000 • Slag splashing 1 022 000 • Lance Tip Improvement 148 000 • Casters Improvement 731 000 • Medium + Light Mill 720 000 • Br Rod Mill 1 220 000 • Constancy Fees 1 000 000 Catch-Up-Maintenance 28 800 000 Bimco Projects 11 200 000 Subtotal 54 181 000 Working Capital (per annum) Coal 500 000 Coal Railage 720 000 Iron Ore 500 000 Salaries + Wages 2 500 000 Steel Imports 770 000 Subtotal 4 990 000 Total 59 171 000 Source: Zimbabwe Iron and Steel Company, Proposed Turnaround Strategies, (2009) The company embarked on the following strategies to raise capital:  Asset reduction Assets such as land, buildings and equipment not essentially to the basic activities of the business were sold. Some houses in Redcliff Rutendo and Torwood were sold to employees of ZISCO. Redcliff Hotel was also sold to the minister of Defence Ho. E Mnangangwa. All these belonged to ZISCO and it was meant to increase working capital. However the No. 3 Blast furnace and rolling mills which need refurbishment were not financed after this strategy.

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Reduction in operational costs

The company had to reduce costs through cost effective measures. It engaged into contract of leasing assets rather than purchasing them. It leased locomotives and front end loaders from Dusty ltd. This was to ensure that instead of buying these the money is reserved for the rolling mills and to bring back No.3 blast furnace into operation.  Selling of anything liquidable The company had mounds of waste material from steel production which was being pilled since the company started production. Zero production and lack of capital led the company to realise that what it termed waste was not but important by-products to the company. The waste includes coke, chilled pool iron, scrap steel and slag. These are used in other steel furnaces for steel production and slag is used for cement manufacturing. Toll Manufacturing

In 2008 the company faced difficulties that it could not afford to pay its workers. It entered into contract of toll manufacturing with SteelMakers Thus ZISCO provides Steelmakers with steel scrap to produce steel on its behalf. This strategy managed to raise some capital but could not manage to finance the projects in question. Reducing working hours and cutting salaries

The company negotiated with its workers to reduce working hours and cut salaries by half. Currently ZISCO employees are working for two weeks and are given half salaries. This is to the exception of those directly involved in working towards the accomplishment of the projects in question. The strategy was aimed at giving priority to projects of bringing back the plant into operation. Contract Selling

The company agreed with some of its customers to make advance payments on ordered products. These customers include; Metma, Bold Moves and Reclamation. This was done to quickly raise the required capital since old ways of payment were taking long to raise the capital.

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 Consignment Stock The company obtains consignment stock from Steel Source Company in South Africa. Thus ZISCO acts as merchant to Metma and sell the products locally. This is done to raise capital for the recapitalisation rather than to rely on by-products and toll manufacturing.

Strategic Partnership

The company realized that all the above strategies are failing to bring back the company into operation. The majority shareholder decided to find strategic technical partner so as to carry out the recapitalization program together and timeously. Six foreign steel producers had been identified by the government to bid for the shareholding, and had all completed due diligence on ZISCO. The final bidder is yet to be formally announced. ZISCO is not the only company in Zimbabwe that faced recapitalization challenges. Steelmakers Zimbabwe, ZIMASCO, Dyno Nobel Pvt Ltd, Sable Chemicals only to mention a few faced such challenges but managed to come up with successful strategies. ZIMASCO had one of its furnaces accidentally burnt in June 2006 and it required US$36million to bring it into operation. The company could not raise such amount using sales of products from remaining two furnaces. The owners (Chinese) contributed some of the money and the company introduced unpaid leave to its employees. It is prohibited to export chrome ore without value addition but the company negotiated and agreed with the government to export chrome ore which was to be used in that furnace. This was done in order to raise capital to refurbish the furnace. Had it not been the Zimbabwean economic crises and world recession which effected prices and demand of chrome ore and chrome the company could have managed to raise the money early last year. However, the company is only left with a third of the required capital. Dyno Nobel Private Limited, the country’s sole manufacture of explosives faced problems in rising capital for plant refurbishment and to import 80% of its raw materials (cuesell and sodium) from South Africa. The company did toll manufacturing with some of its customers (Shabani Mine and Cycle Cement). Thus the customers could source raw materials for Dyno to produce on their behalf.

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In April 2009 the company received loan from Kingdom bank and generator from Dyno NobelZambia. The company managed to refurbish its plant and to import raw materials and it is now producing above 50% capacity. In 2007 some transformers at SteelMakers were accidentally burnt. The company leased some transformers from ZESA while the burnt ones were under refurbishment. It also received capital assistance from its headquarters in Kenya and its sister company in India. Having recognized the above challenges and strategies implemented by other companies, the researcher is triggered to carry out a research to find out what is exactly behind these eternal recapitalization challenges at ZISCO and to come up with strategies effective enough for the company to climb out of the mess.

1.2 Statement of the Problem
Since 2001 ZISCO is facing recapitalisation challenges. It implemented a number of strategies to raise the required capital but up to today the company is undercapitalised. With all the implemented strategies, why the company’s performance still precarious? Sub problems
   

What strategies were used in attempt to raise capital? Did the company raise adequate resources for recapitalisation? What challenges were faced by the company in trying to raise the required funds? What are the recommendations in strategies to source the funds?

1.3 Aim of the research
To identify major recapitalisation challenges facing the company and come up with effective recapitalisation strategies to address the problem.

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1.4 Research Objectives
 To identify recapitalisation strategies implemented by the company?
  

To find out whether the company raise adequate resources for recapitalisation To identify challenges faced by the organisation in raising the required funds. To come up with recommendations in recapitalisation strategies that can be used in sourcing adequate resources.

1.5 Significance of the Study

To the researcher

In carrying out the research the researcher will analyse a variety of recapitalisation strategies and come up with best strategies to address the problem thus enabling thinking and enhancing analytical skills. After carrying out a detailed research the researcher will gain experience and hence serve as a foundation for future management. Also, the research is to be carried out to fulfil the requirements of Midlands State University Business Management department. It is a prerequisite that every forth year student carries out such a project before graduating.  To ZISCO The project will provide information on how best the recapitalisation challenges can be addressed. Thus ZISCO management can use the findings as a guide in implementing recapitalisation strategies. The findings will be used as basis for improvement if any loopholes in the implemented strategies are identified. To the public and other organisations

Future researchers can use the document as reference. The research is focused on management challenges hence its relevance to management students. Most management students write/ wrote on either financial or marketing aspects ignoring challenges in the program they are studying. It is the researcher’s hope that by reading this work, such students will focus more on their area of study.

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The research can also be used by other companies faced by recapitalisation challenges. For example companies like Dorowa Minerals Ltd which is currently facing recapitalisation challenges can use the findings from this research to effectively implement strategies to address them.

1.6 Assumptions

The sample size to be chosen will be a representative of all ZISCO employees and adequate enough to deduce more accurate findings and conclusions.

 The company is yet to find solution to its recapitalisation challenges.

Limitations to be encountered will not highly affect the viability of the research

 All employees are literate that they can read and understand the questions.  The business environment in which the researcher operated remains constant.

All respondents will provide true or correct information.

1.7 Delimitations
The research is going to look at recapitalisation challenges for a manufacturing firm. The study to be undertaken will cover the period from year 2001 to date. The research will be carried out in Redcliff at ZISCO in January 2010. Both management and frontline employees are going to be interviewed. The departments that will be interviewed include the marketing, production, human resources and finance department.

1.8 Limitations
Most ZISCO management were ever busy that some delegated the answering of questionnaires to junior staff. This limited the accuracy of findings. To minimise this I gave them ample time to answer the questionnaires.

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Some management were unwilling to disclose internal and sensitive information. To obtain enough information I specified to them that the data collected was purely for academic use not for other intensions. Since this was my first time to carry out such a research, I face problems in gathering and analysing data due to lack of experience. To minimise the effects of this I intensively refer to research textbooks and seek assistance of the supervisor and colleagues who have done this before. I also ensured that I reserved much time for this project in order to meet the deadline for submission. MSU library and internet facilities were not provided to students during the vacation. I was forced to opt for internet café and town libraries which are very costly and it limited the amount and quality of information I used on this research. Also typing and printing services were very costly. To minimise effects of these I seek assistance from relatives and friends with free access to these services.

1.9 Definition of terms

Recapitalisation- minimum capital requirements and solvency capital requirements. Strategy- a course of action including specification of resources required to achieve specific objectives. Toll Manufacturing- when a company provides raw materials to the other company to produce on its behalf on a certain charge/toll.

Conclusion

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This chapter looked at the background of problem, statement of the problem, significance of the study and objectives. It revealed that the research will look at recapitalisation challenges of an organization in the steel manufacturing industry and strategies to overcome. It also looked at the assumption on which the study was carried upon. It was also the purpose of this chapter to outline the limitations and delimitations of the study. Literature review then follows in the next chapter.

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