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Privatization plans off rails

07 May 2021 at 15:41hrs | Views
In November 2018, the Zimbabwean government set out a privatization plan to dispose completely and partially privatize over 23 state entities and parastatals (SEPs). According to the Auditor General Report of 2017, at least 23 of the targeted SEPs were loss making and technically insolvent. This means that these entities depend on the taxpayers for funding while piling more debt. About 12 commercial entities were set to be listed on the country's main bourse, the Zimbabwe Stock Exchange (ZSE) to improve efficiency while others needed overhaul in terms of corporate governance reforms. Privatization formed a vital part in the success of the then austerity biased economic blueprint, the Transitional Stabilization Program (TSP) which expired at the end of 2020.

Who, When & How?
The target was to raise at least US$350 million for treasury coffers with Telone, NetOne, Telecel, ZimPost and the People's Own Savings Bank (POSB Bank) at the forefront for disposal within 12 months (up to December 2019). The Zimbabwe Mining Development Corporation (ZMDC) mines that include Kamativi, Jena, Sabi, Mhangura, Elvington, Golden Kopje, Alaska, Sanyati and Lutope mines would be partially privatized within 18 months to June 2020. The National Railways of Zimbabwe (NRZ), Agribank, Infrastructure Development Bank (IDBZ), Air Zimbabwe, Industrial Development Corporation (IDC), Petrotrade and Road Motor Services would be partially privatized through enlisting strategic partners and listing the last 3 firms on the ZSE within 2 years. The government would also dispose completely loss-making entities such as the Zimbabwe United Passenger Company (ZUPCO), Cold Storage Commission (CSC) and Willowvale Motor Industries in the same period.

Economic burden
The planned privatization would gradually reduce the budget deficit to 6.4% of Zimbabwe's Gross Domestic Product (GDP) by end of 2019, further reducing it to 4.3% in 2020 and ultimately to less than 3.8% by 2021. Zimbabwe has a total of 107 SEPs with 43 of these being commercial entities while the rest are state universities, agencies, and regulatory authorities. The SEPs now contribute less than 2% of the country's GDP. In 1998, SEPs output accounted for over 40% of the country's GDP and directly employed thousands of employees. However mounting debts, systemic corruption, maladministration, and political interference in management operations have reduced most state entities to tax parasites. An audit report from June 2017 showed that 38 state entities made losses totaling US$271 million in 1 year. As of July 2018, SEPs owed the Zimbabwe Revenue Authority (ZIMRA) a combined US$491 million in tax arrears. As it stands, a number of these insolvent state entities do not release audited results periodically.

Privatization sweeteners
In 2017, Cabinet approved the takeover of debt worth over US$1 billion by the taxpayer for struggling entities such as Air Zimbabwe, ZiscoSteel, National Railways of Zimbabwe (NRZ), Civil Aviation Authority of Zimbabwe (CAAZ) and others as a strategy to clear off their balance sheets and lure investors. The Air Zimbabwe debt which totaled over US$379 million then is now being settled as ZW$349 million for the local component and US$30 million for foreign debt. The airline failed to find potential investors despite frantic efforts by the appointed administrators and is now relying on government to inject fresh capital so it starts over again despite the shadow of COVID-19 travel restrictions.

Success Stories
The privatization plan also included weaning off Silo Food Industries (SFI) from the Grain Marketing Board (GMB). The Zimbabwe Investment Authority, the Special Economic Zones and the Joint Ventures Unit would be merged into the Zimbabwe Investment and Development Agency (ZIDA). The Civil Aviation Authority of Zimbabwe (CAAZ) would be demerged into a new regulatory arm and the Airports Company of Zimbabwe. The government has managed to deliver on these 3 as the new entities are now operational. It seems non-commercial entities have less bottlenecks on privatization.

Advisory fees bump
The planned disposal of ZUPCO and Telone has stalled because the companies have failed to raise consultancy and advisory fees to the auditors appointed as transactional advisors. The same fate also fell on POSB, Petrotrade, Telone and Netone. The last two telecommunications outfits were on the shelf as a bundle to attract investors. To address the advisory fees issue, the government is now seeking consultancy services for targeted entities from the International Finance Corporation (IFC), a unit of the World Bank. The IFC does not need upfront payment of a fixed fee as their fees are success based.

Lack of investor appetite

Investors have generally taken a wait and see approach on Zimbabwe as an investment destination as reflected by the country's low foreign investment inflows. The country is still regarded as a risky and hostile investment destination with most foreign investors pessimistic about the country's ability to uphold investor property rights and respect the rule of law. Similarly, the independence of the country's judiciary has been questioned on several occasions when the government muscled its way into private property through cancelling licenses or tenders, seizing assets and parceling awarded mining permits to controversial investors despite pending court orders. The political interference in the suspension of the country's stock exchange market and unprocedural delisting of multinational companies in June 2020 all but confirmed the investor fears.

Addressing investor concerns
Apart from debt assumption, the country's foreign exchange regulations and inconsistent monetary policies have been a pain to most investors on the local and international market. Several foreign investors have significantly reduced their portfolios locally while others have divested totally. Multinational corporations operating in the country have found it difficult to repatriate dividends to their foreign shareholders or settle foreign obligations in the last 3 years. To attract investment in state entities, investors need guarantees that they will be able to repatriate their dividends through formal banking channels and exit the market (if necessary) without regulatory bottlenecks. Zimbabwe needs free market policies that allow free movement of capital in and out of the local market (subject to standard banking regulations). Lastly, the government needs to address the issue of political interference and bureaucracy on the privatization and operations of various state entities. Ideally, privatization transactions would have been handled via the independent State Entities Restructuring Agency (SERA) to avoid parent ministry sabotage which is evident on commercial entities. Political risk in most of the state entities earmarked for privatization remains extremely high. For privatization to succeed, there is need for political will in removing excessive government control, curb corruption and allow private investors take up controlling stakes. Very few investors would be interested in having a minority stake in highly indebted assets where political and legal risks are rife.

The local economy has volatile, and the constant change of government policies has only but entrenched a sense that Zimbabwe is not yet prepared to wean off its loss-making state entities. Privatization has remained more of rhetoric with limited political will to see a turnaround in the affairs of state-owned enterprises. Political goals have become a priority at the expense of the dire need to resuscitate SEPs for the benefit of the nation and economy. It is imperative to point that capital has the same rules globally and investors look at markets where they can be able to repatriate their capital without overregulation or policy discord from the host government. There has been limited quality investment enquiries on the assets to be privatized in Zimbabwe due to known political, legal and governance risks.

Investors envisage an investment environment where their property is protected by the rule of law (through an independent judiciary) and not by political interests as those can shift overnight. As of now, privatization plans remain an aspiration which is pretty much off the rails.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.



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Source - Victor Bhoroma
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