July 23, 2007
PRIVATISATION OF PARASTATALS

With the liberalisation of the economy during the 1990s, a new economic concept appeared on the Zimbabwean scene. ’Privatisation’ is a legacy of the Thatcherite era and the Chicago School of Economics that appeared on the world economic scene after the end of the 1970s. Its popularisation could not have come at a better time when Zimbabwe’s government expenditure and the Public Sector Borrowing Requirements (PSBR) were seen as the main culprit responsible for the economic ills and particularly for the current high inflation.

In his report of the 1993-94 financial year, the Comptroller and Auditor-General commented that the size of Zimbabwe’s public debt stood at Z$27.86 billion in the middle of 1994, compared to Z$1.67 billion in June 1980. If borrowing by parastatals was included, the debt would have exceeded Z$70 billion which is more than 100% of GDP quoted at Z$65 billion.

Figures show that on June 22 2007, government debt surged to Z$6.8 trillion, from Z$2.1 trillion at the beginning of the month. This is bound to raise fresh fears of renewed turbulence in the crisis-sapped economy, battling with hyperinflation. The domestic debt was likely to rise further because of increased borrowing by the government to finance unbudgeted expenditure arising from promises by President Mugabe to subsidise manufacturing firms and commercial businesses after ordering prices to be reduced by 50%.

By the late-80s, almost every ministry in Zimbabwe had a “couple” of parastatals under its “roof”. A typical example is the Ministry of Transport and Energy which “accommodated” Air Zimbabwe (Airzim), the National Oil Company of Zimbabwe (Noczim), National Railways of Zimbabwe (NRZ), the Zimbabwe Electricity Supply Authority (ZESA) and Zimbabwe Iron and Steel Company (ZISCO).

The majority of the parastatals, like Noczim, are non-profit making concerns. They are referred to as “strategic” concerns created to empower Zimbabweans and to control strategic sectors in the economy. Many economic analysts believe that because of their loss-making nature, they had to be got rid of in order to mobilise funds needed to service the snowballing domestic debt.

Parastatals have gobbled up huge sums of public resources. In 1998 alone, they cost the government more than Z$11 billion in subsidies, contributing to a ballooning budget deficit which has, over the years, remained one of the sticky areas in Zimbabwe’s negotiations with the IMF. In 2002, the government spent Z$43 billion, a growth of about 290% since 1998.

In 2004, the Reserve Bank of Zimbabwe proceeded to dangle about Z$165 billion worth of loans to state enterprises and local authorities, which they could only access after meeting stringent conditions. Parastatals set to benefit included Air Zimbabwe (Z$7.5 billion), The Zimbabwe Broadcasting Corporation, which has been transformed into ZB Holdings and has not made a profit since 1980 (Z$7.5 billion), ZESA (Z$30 billion), NRZ (Z$20 billion), ZISCO (Z$30 billion), Wankie Colliery (Z$15 billion), the Zimbabwe United Passenger Company (Z$10 billion) and the Agriculture Rural Development Authority (Z$25 billion).

It is to be noted that the parastatals also have more than US$755 million owed to international creditors, which they cannot pay because of the shortage of foreign currency.

Consensus has it that public enterprises in Zimbabwe make heavy drafts on the national budget and are a drag on the economy. Their losses represent about four per cent of GDP and account for over 40% of the budget deficit. One line of argument is that whereas losses are incurred at the public enterprise level, private firms are subsidised in the process. For example, although ZISCO or the NRZ are criticised for making perpetual losses, consumers of steel and related products and of rail services benefit handsomely. In spite of this, there is no social accounting matrix which clearly represents this relationship. The benefits are, therefore, not reflected both on the market and on the balance sheets of the beneficiaries.

However, it must be pointed out that the primary problem with parastatals is that they are protected by law and the regulatory process from having to deal with competition in the marketplace. This leads to inefficiency, maladministration and unresponsive to the needs of consumers. Of course, some parastatals are created with the desire to apply government control over what the government of the day sees as strategic operations. Both Noczim and the Mineral Marketing Corporation of Zimbabwe (MMCZ) are such creations. Both add nothing to the welfare of the country's community and have grown to such a size that they represent a major drain on the taxpayer while producing nothing of value. The same could be said for many other marketing boards.

In order to create an enabling environment for the mobilisation of financial resources, the government should reduce its consumption expenditure and accelerate the privatisation processes so as to reduce the budget deficit. The reduction of the budget deficit would create macro-economic stability, which is conducive for productive investment and mobilisation of financial resources. The role of multinational companies is emphasised by the direct investment of foreign capital which enables the country to gain access to extra national financial resources, new or widened marketing facilities, modern technology and know-how, and managerial skills and services and by sharing the risk of new economic ventures with foreign partners.

The most appropriate way to privatise some of the parastatals would be to allow competition in those arenas of operation where the public would benefit by improved services, reduced costs and much reduced drain on the tax base. For example, if Airzim, Noczim, MMCZ, or the Posts and Telecommunications Corporation (particularly the telecommunications branch) was faced with competition, one of three things would happen: each one of them would rise to the challenge and prove its worth; each would settle into a reduced market share and have to stay efficient to be there or; each would fail and thus vanish.

Zimbabwe’s privatisation initiative was first mooted during the first phase of economic reforms introduced in 1991. However, the problem was that it was never clear who exactly was responsible for the process of privatisation between the Minister of State responsible for parastatal reform and indigenisation, the Planning Commissioner, the President’s Office, the Finance Ministry and the line ministries responsible for the different parastatals. The setting up of the Privatisation Agency of Zimbabwe (Paz) in September 1999 brought in a new dimension to the privatisation process. Paz was set up to sell government’s shareholding in about fifty companies it either partly or wholly owned.

The role to be played by Paz had its own political overtones within members of the Cabinet. The old guard wanted the Cabinet to approve and monitor every step of the privatisation process while reform-inclined members preferred that the government only laid down policies and procedures and then leave the Paz to handle the actual privatisation. There was a need for an Act of Parliament to clearly stipulate the terms of reference for the Paz. This was the case in other countries like Zambia where an Act of Parliament defines the terms of reference of the agency and clearly spells out where government comes in and ends its role. There was also a need to create an autonomous privatisation body as in Zambia, but the Zimbabwe government decided to house Paz under the President’s Office.

It is not surprising that government efforts to privatise the parastatals through Paz have borne no fruit. Paz failed to come up with proper mechanisms to speed up the privatisation of the loss-making parastatals.

There are many Zimbabweans (including ZANU-PF MPs) who felt that commercialisation cum privatisation had been hijacked by the ruling elite and their cronies in the name of indigenisation. Generally, the people heading the commercialised parastatals were the same people responsible for the dismal performance of the same enterprises. In most cases they were shuffled from one parastatal to another like cards in a poker game. By the time these parastatals are privatised, these chief executives would have been well conditioned to take care of the shares of the privatised corporations. The taxpayers’ money is used during the whole process of privatisation, there-by increasing the budget even further.

Speaking in Parliament at the end of May 1999, ZANU (PF) Hwange West MP, Allan Elliot, likened state coffers to a garden, saying: “We grow rows of lettuce and we put rabbits there to manage them and when there is nothing left, we grow another lettuce and we put the same rabbits there. We keep on doing that.” He went on to say that the indigenisation process apparently “turns individual black businessmen into overnight millionaires when they sell onto the private sector. I would, therefore, caution, let us not hide behind any of these slogans”.

During the period June 2000 to June 2001, economic analysts observed that there was disposal of parastatal (government) property at knockdown prices to party functionaries and the sale of shares in state-owned companies to foreign interests under conditions of total secrecy.

In June 2001, it came to light that top government officials, including some of President Mugabe’s cabinet ministers, were lobbying for local businessmen linked to ZANU (PF) to be granted licences to operate fixed networks by the Postal and Telecommunications Regulatory Authority of Zimbabwe (PTRAZ). PTRAZ was launched at the beginning of 2001 as the only legitimate board to issue any licence. Here, politicians realised that despite the telecoms sector being capital-intensive, the returns were exceptionally good and could be accrued within a short space of time.

Furthermore, a number of transactions of equities in privatised companies went through over the past few years in which the same consortiums and people benefited from the sale of government shares in listed companies. For example, shares changed hands in Zimbabwe Stock Exchange-listed concerns in which the government owned substantial shares. These included Astra Holdings, the Jewel Bank, formerly the Commercial Bank of Zimbabwe Limited (CBZ), Cairns Holdings, the Financial Holdings Limited, Rainbow Tourism Group (RTG), Zimbabwe Newspapers (1980) Limited, ZimRe Holdings Limited and Wankie Colliery Company.

It seems obvious that most of these businesspeople are feeding from Zimbabwe’s deeply rooted political patronage system. For some of these people, it is not their acumen but their political connections and back-scratching relationships that have thrust them into company ownership. Some will argue that evidence to this is as yet sparse and anecdotal. But a cursory glance at the company take-over syndicates suggests otherwise. Most of these syndicates have, albeit as silent partners, politicians who are known for their love for influence peddling. These are groupings formed to wrestle companies from their owners using the political muscle under the façade of black economic empowerment. It is indeed a sad reflection on Zimbabwe that all we have done is dispossess the few whites and replaced them with a privileged black clique.

Modern-day economics dictates that it is the private sector’s duty to manage businesses. Government’s role is increasingly being restricted to the creation of a conducive environment for business to function properly. In return, governments benefit from privatisation through improved tax revenue to run their systems more effectively.

This brings this analysis to the current price control or price war (Operation Dzikisa Mitengo) where the government has ordered commercial businesses and manufacturing firms to slash product prices by 50%. It is quite clear that the beleaguered Zimbabwean economy would ultimately pay dearly for the ongoing government action. In order to cover the escalating manufacturing costs and other service costs such as transport and telecommunication, the government will have to put in place subsidies to support commerce and industry. Among the main candidates for subsidies will be the beef and fuel industries.

The government withdrew licenses from private abattoirs in the country in mid-July 2007. In other words, the Harare authorities restored the monopoly of the state-controlled Cold Storage Company (CSC) that now has the sole responsibility to buy cattle from farmers. However, the cash-strapped government would have to pump out money to entice farmers to sell their cattle to the CSC that offers less than what private abattoirs used to pay. The result is beef has disappeared from the formal market since the government withdrew permits from private abattoirs.

The same fate has met the fuel industry following a directive to slash petrol and diesel prices by up to 60%. The state fuel procurement agency, Noczim, has failed to meet demand while private fuel importers have gone underground where a litre of petrol costs up to Z$500,000 compared to the gazetted Z$55,000 a litre. The perennially loss-making Noczim has had a chequered history in the past eight years, characterised by an over-dependence on government subsidies and inability to supply adequate fuel to meet the country’s industrial and household needs.

Any future subsidies exert greater pressure on inflation, officially estimated at more than 4,500%, while the subsidies would nudge the country's already huge budget deficit set at 17.6% of GDP in the 2007 national budget.

The other side effect of subsidies is that they encourage corruption by those in authority. Over the past decade since 1997, the Grain Marketing Board (GMB) has been distributing government inputs some of which were accessed by non-qualifying beneficiaries and resurfaced on the black market. The parastatal has often failed to recover the loans from many of the beneficiaries. Maize being imported was subsidised and resold with the GMB often selling the maize back to some of the companies who had imported it, but at a fraction of the price originally paid.

In what could be the most callous abuse of power yet by Zimbabwe’s ruling elite, some ministers in President Robert Mugabe’s Cabinet, top ZANU (PF) officials, the party’s Members of Parliament and state security commanders used their political clout to buy maize from the GMB at heavily subsidised prices. They then resold the maize at highly inflated prices or exported it mainly to neighbouring Mozambique where there is a thriving black-market for the staple grain. The government’s Ministry of Anti-Corruption and Anti-Monopolies revealed in a report, compiled in October 2005, that this had been going on since November 2004.

Not surprising, the same picture has been revealed with the subsidised fuel. Politicians and well-connected business people were buying diesel and petrol from Noczim depots claiming that it is for their agricultural operations. Some have appeared in court to answer charges of having sold the fuel on the black market at exorbitant prices.

There is no doubt that the privatisation of parastatals would affect economic growth through its effect on domestic savings and the efficient allocation of capital among competing entities. This is the time for the government to seriously expedite the privatisation programme so as to alleviate the fiscal burden from the households and private business. These companies are not natural loss-makers, but the environment they do business in guarantees a continuation of loss making. The now privatised state-owned enterprises bear testimony to this assertion - with contributions of over Z$1.5 billion to the Treasury during the year 2000.

The state-owned companies that have been privatised have, to a large extent, turned around from low profit-making or outright loss-making entities to important contributors to the fiscus. Parastatals that have been privatised include the Dairy Marketing Board (Dairyboard Zimbabwe Limited - DZL); the Cotton Marketing Board (Cotton Company of Zimbabwe - Cottco); the Commercial Bank of Zimbabwe (CBZ), The Rainbow Tourism Group Ltd. and The Agricultural Bank of Zimbabwe Limited.

The Agricultural Marketing Authority (AMA) was privatised in 1994 and changed its name to the Marketing Finance Corporation (MFC). London bankers immediately backed Zimbabwe’s new privatised export marketing facility. A Z$90 million loan to MFC was arranged by Chemical Bank, ING Bank and Union Bank of Switzerland. The loan was over-subscribed; showing international bankers had confidence in the privatised body. The May 1994 policy changes were widely perceived as ushering the marketing boards into a new era where they would have to stand on their own.

By allowing foreign investors to participate in the privatisation process, the government benefited two-fold, as it got the much needed foreign currency and funds for the domestic financing of its budget. One example that immediately comes into mind is the strategic alliance deal between the Rainbow Tourism Group and Groupe Accor of France where Groupe Accor released US$5.9 million (Z$220 million) to pay for its equity of 35% in RTG.

Instead of providing huge amounts of public funds to parastatals, the government was now receiving substantial sums from privatised companies. With the international financial institutions and donors reluctant to release aid to Zimbabwe, it was apparent that the government would raise funds from parastatals to get the economy back on track.

Unfortunately, the state’s approach to privatisation was, at best, half-hearted. In most instances it was only prepared to effect a partial sell-off, although there was no credible reason for retention of equity participation. The entities divested from cannot be considered to be of national strategic importance, no matter how substantive their actual economic contributions or potentials were. There could not, therefore, be a strategic justification for government retaining some of the shares in the enterprises.

Concurrently, the government was clearly reluctant to pursue a concerted programme of asset disposal and, more pronouncedly, of public enterprise disinvestment, because of the widespread (albeit misplaced) perception that doing so would disinherit Zimbabwe of its national heritage. Such a perception was, and is, totally without foundation. Alternative wealth is generated by privatisation, by way of cash inflow into the exchequer, to be applied to the reduction of debt or to national development, and more often than not the privatised enterprises yield a progressively greater contribution to the fiscus and the economy, whilst no longer relying upon the state for loan-funding or guarantees.

The government was also hesitant to progress with privatisation enthusiastically, because of its belief that it was politically necessary for any privatisation to be focussed towards indigenisation. However, few of the indigenous population had the resources necessary to invest meaningfully into the enterprises and hence, undoubtedly, the farce of the establishment of the National Investment Trust. The Trust could only invest with funding provided by the government - to all intents and purposes, money merely moved from one pocket to the other; and, equally farcical was the warehousing of shares with financial institutions, as no likelihood exists of transferral to the indigenous within a reasonable time period.

Neither tactic achieved any effectual economic empowerment of the indigenous population. It was the conceptualisation of indigenisation that also deterred the government from permitting any major investment by non-residents of Zimbabwe. Of course, this could have generated very considerable foreign exchange inflows, significant realisation of proceeds for the government, the benefits of strategic partnerships, introduction of new technologies and, in relevant instances, access to export markets and import inputs.

It is not government’s role to be an investor or a speculator, and its parlous financial circumstances, which are tantamount to those of insolvency, render it unlikely that investment or speculation motivated the state to remain a shareholder in the various “privatised” entities. Under the current Operation Dzikisa Mitengo (price war), where more than 4,000 business owners and executives have been arrested, not much comfort can be derived from the government's threats to take over manufacturing concerns, retail businesses and abattoirs when it has failed over the past seven years to restore agricultural production to what it was before the 2000 land occupations. It is also yet to build houses for the hundreds of thousands of people it rendered homeless under Operation Murambatsvina despite the so-called Operation Garikai/ Hlalani Kuhle.

• For more on privatisation of parastatals, read A Crisis of Governance: Zimbabwe, Algora Publishing, New York, 2004.