SESSION 1 : INTRODUCTION


• OPENING REMARKS BY THE PRESIDENT OF THE MASHONALAND CHAMBER OF INDUSTRIES
• WELCOME REMARKS BY DR. FELIX SCHMIDT, RESIDENT DIRECTOR, FES
• KEYNOTE SPEECH BY THE BRITISH HIGH COMMISSIONER, MR PETER LONGWORTH.

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OPENING REMARKS BY THE PRESIDENT OF THE MASHONALAND CHAMBER OF INDUSTRIES

His Excellency, the British High Commission

Distinguished participants

Privatisation has been pursued as part of economic reforms in many parts of the world for many years. The drive to privatise state owned enterprises has been influenced by the fact that state owned enterprises have failed to operate efficiently and have contributed significantly to the fiscal deficits which have stifled economic growth in developing countries. The results of privatisation have been mixed with the best examples of successful privatisation being that of the United Kingdom. In recent years large scope privatisation has been carried out in Eastern Europe. In the region, Zambia has succeeded in privatising a large proportion of state owned enterprises. Privatisation experiences to date show that strong state action is a prerequisite for successful privatisation. Where privatisation has been undertaken without commitment from the State and other stakeholders, the results have been that former state owned enterprises have been privatised and some of the enterprises that had been privatised have collapsed.

Narrowly defined, privatisation is any action that serves to dilute or eliminate Government equity ownership or managerial control of an enterprise. In its broader sense privatisation includes the elimination of government monopoly or monopsony and the reduction of government controls generally in factor or product markets.

In Africa the setting up of state owned enterprises was heavily influenced by deeply rooted statistic attributes and structures of the colonial periods as well as the anticapitalist and socialist ideals cherished by many countries after the demise of colonilise. There was a pervasive belief that the State should be the major instrument of economic development and the major guarantor of social welfare and equity. African Governments perceived a need to control the ‘commanding heights’ of the economy in order to protect themselves from imperialists and multinational predators. The private sector was almost non-existent in the early part of the century and African Governments felt a desperate need to compensate for this inadequacy.

Apart from the economic reasons, political considerations were also important for the growth of the parastatal sector. State owned enterprises proved to be very useful in generating loyalty and support, for constructing patron-client networks and as sources of extractable resources for political and private gain.

Both pull and push factors have influenced moves towards privatisation in Africa. The major pull factors have been significant budgetary drains and sever foreign exchange scarcity in conjunction with fiscal and debt crisis, general economic decline as well as the demonstrated economic inefficiencies of state owned enterprises.

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The Chief push factors for privatisation has been considerable external pressure from multilateral donor such as the IMF and World Bank. Donors believe that providing assistance without major macro economic policy and structural changes would not be beneficial to the recipients whose economic performance would not improve such that they would not require assistance in future. Privatisation is one of the conditions that donors have insisted on for provision of aid.

The aim of any privatisation programme is to achieve economic efficiency. Economic efficiency form privation comes in two forms. The first is productive efficiency when a given level of output can be produced at a lower cost. The second is allocate efficiency which is achieved when resources can be reallocated to better meet economic and social objectives.

In Zimbabwe, public enterprise reform was launched in 19991, as part of the Economic Structural Adjustment Programme. The objective of the reform of public enterprises was to improve efficiency of their operations so that they would cease to be a burden on the fiscus.

The state enterprises sector at the start of reforms consisted of forty enterprises. Public enterprises were classified according to the type of action required to achieve the objective of weaning the enterprises from State financial support. The following classifications were proposed: -

1. Strategic public enterprises, which are viable, would remain in State hands. Included under this classification were parastatals such as the Grain Marketing Board, and NOCZIM.

2. Non-strategic viable or potentially viable commercial or industrial public enterprises-which would be operated on a commercial basis and for which full or partial divestment will be sought. Examples are -Dairiboard Zimbabwe Limited, Commercial bank of Zimbabwe and Cotton Company of Zimbabwe.

3. Non-viable public enterprises with no strategic or social function-which will be liquidated. Examples are Zimbabwe State Trading Corporation and Zimbabwe Development Corporation, which are in the process of winding up operations.

4. Public enterprises with a social or developmental role which overlaps with another public enterprises or Ministry or which is no longer required to be closed down or emerged with other entitles.

5. Non-commercial parastatals with a necessary social role, which will require budgetary allocation, will be determined according to national priorities as part of the budget preparation process.

Progress with privatisation ahs been very slow. To date only five parastatals have been privatised. These are Dairiboard Zimbabwe Limited, Cotton Company of Zimbabwe, Zimbabwe Reinsurance Company, Commercial Bank of Zimbabwe and Rainbow Tourism Group. The Government realised about $760 million from the privatisation of the Dairy Marketing Board (DMB) and the Cotton Marketing Board (CMB) Eight major parastatals including ZESA NOCZIM, ZRZ, CSC and ZISCOSTEEL generated loses amounting to $10.7 billion. By June 30, 1999, major parastatals had accumulated losses amounting to $14.8 billion. Parastatals continue to

impose a heavy burden on the fiscus and the privatisation Agency has just been established and it is hoped that this will assist in accelerating the privatisation process.

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Privatisation parastatals will release a substantial amount of resources for use in needy areas such as education and health. The efficiency gains from privatisation will be quite substantial and will boost economic growth. Experiences with the privatisation of the five parastatals indicate that the obstacles to privatisation are of a political nature than economic.

There is need to overcome these political hurdles for the privatisation process to proceed at greater speech. Indigenous communities have participated effectively in the privatisation process and they are beginning to reap the benefits of their investment.

One of the issues that are of concern to Government and other stake holders in privatisation is how to maximise the benefits from the process. Experiences in other countries show that the benefits from privatisation are much more than the proceeds which the State realises from the disposal of its assets. In the former East Germany, the proceeds from privatisation feel short of expectations. Yet the efficiency gains from privatisation are outweighed the lower than expected privatisation proceeds.

There is a need for much more commitment by the state to privatisation. The country is going through serious economic crisis, which has had negative effects on all sectors. A connected and resolute effort to privatise state enterprises would be a significant contribution to alleviating this crisis. I hope that the discussions over the next one and half days will bring for the viable recommendations that will be useful to the policymakers in charting the future course for privatisation.

Thank you!

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WELCOME REMARKS BY DR. FELIX SCHMIDT,
RESIDENT DIRECTOR, FES

Your Excellency Mr Peter Longworth, The British High Commissioner

Honourable Members of Parliament

Mr Chihota, President of Mashonaland Chamber of Commerce

Distinguished Guests and Participants

It is my great pleasure to give some welcome remarks at today’s seminar, which in my view is furthering continuos, dialogue between parliamentarians, business community, labour movement, the media and civil society. My foundation feels greatly honoured to have been associated with this workshop whose importance can not be over emphasized.

I note that some of you may be attending a seminar at which my foundation is involved for the first time, and a few words of introduction would be appropriate.

The FES is a non-governmental German political foundation whose main objective is to contribute to the building of democracy and peaceful development the world over. It is named after the first democratically elected German Republican President, Friedrich Ebert, who put all his energy into the building of a peaceful and prosperous social democratic German society. The Friedrich Ebert Foundation is the oldest political foundation in Germany. It was founded more than seventy years ago as the legacy of President Friedrich Ebert after his death in 1924. The central philosophy of the foundation is that peace and social justice can only be attained if society involves all groups of people in the formulation of policy. In other words political decision-making should not be the exclusive preserve of the rulers alone but should be a process in which all key groups of society participate.

Such an approach underscores the foundation conception of democracy as not only the holding of periodic marginalised groups of society to enable them to participate in policy formulation. A key example of such a programme is the foundation’s support to the trade union movements in many countries. In Zimbabwe, para-legal training and other trade union issues are crucial areas of support. However the foundation is also involved in assisting important groupings in society as they seek to create and enhance a more open and democratic society.

I indeed think that there is a link between an open, democratic society and the privatisation process. Individual decision making, be it in the economy under private ownership or be it in the free choice of political alternatives are interlinked.

This seminar we are holding today can be seen as a follow up to a three day workshop held in early May this year in Nyanga jointly organised by the ZNCC Parliamentary Advocacy Office consisting of the ZNCC itself, Parliament of Zimbabwe and the Zimbabwe Congress of Trade Unions, the Zimbabwe Council of Churches and the

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Friedrich Ebert Stiftung. The title of that workshop was Zimbabwe’s Debt Crisis and its Impact on Development. The meeting agreed that the debt burden was one of the most pressing problems facing Zimbabweans and one that need to be tackled on both the domestic and foreign front. Possible solutions were debated and all stakeholders present at Nyanga unanimously agreed that the solution needed to get all stakeholders getting involved.

Here are brief highlights of that workshop:-

• Zimbabwe has to accept that there is debt crisis that is impacting adversely on development.

• A continued high budget deficit is the major cause of the debt crisis. There is need to speedily implement fiscal policies that will reduce the deficit. This will entail the privatisation of state enterprises and the rationalisation of the civil service.

• With inflation and interest rates hovering around 50% (in April 1999 then) and the fall of the Zimbabwe dollar, the macro-economic situation does not permit economic growth. It is necessary to reduce domestic debt in order to bring down inflation as well as interest rates. The possibility of converting domestic debt into foreign should be considered. Such a conversation is taking into consideration that Zimbabwe’s external debt is still considered reasonable to the external debt is still considered reasonable to the extend that it does not qualify for HIPC initiative.

• Debt relief initiatives such as debt conversions for democracy, nature, development; the Jubilee 2000 and the IPC initiative should be considered seriously.

• Parliament’s role in debt management was called into question, while the constitution and the law gives Parliament power to stop excessive government borrowing, its weak position was highlighted.

• Foreign currency reserves need to be boosted by promotion of the tourism, agriculture and mining industries.

I have deliberately repeated the highlights of the Debt Crisis workshop not to bore you but to emphasize tat the six key issues raised ten are still with us - only that the situation is getting worse. For example

1. inflation is now over 70% as compared to 50% in April 1999

2. Foreign Currency; we do not appear to even have any foreign exchange left

3. Please for donor support; we do not appear to be sending the right signals to our key donors

4. Reduction of the budget deficit by speeding up privatisation of state enterprises and rationalisation of civil service. The Minister of Finance acknowledged in his Millennium Budget statement that out debt situation is being made worse by the high interest rates. Dr. Murerwa promised to arrest the situation by stringent budget discipline and also use of proceeds from sale of government assets. However the Minister of Finance did not give a timetable of how and which public enterprises are going to be sold and in which months. The Finance Minister confirmed in the same Millennium Budget Statement that the five major parastatals including ZISCO, NOCZIM, PTA and ZESA had accumulated losses of Z$14.8 billion as at 30^th June 1999. I am sure the figure has risen considerably by now. It is unfortunate that the senior management from these loss-making parastatals has turned down an

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   invitation to share wit us their successes and frustration in trying turn around their organisations. Some of these parastatals have been in the headlines in the media for flouting tender procedures and cases of corruption.

I am please to note that the board of the National Investment Trust is now in place and working and the chairman of the NIT will be making a presentation tomorrow morning. The Zambian experience with privatisation by a senior official from Zambian Privatisation Agency should provide a useful lesson for Zimbabwe. We all know the famous saying by President Friedrick Chiluba of Zambia - he does not mind the colour of the cat as long as it catches the mice.

It is also pleasing to note the announcement by the Minister of Finance that the government has finally established the Privatisation Agency. This will hopefully speed up the privatisation process by providing the technical services. However once again it is disappointing that the senior officials from the Zimbabwean Privatisation Agency have turned down an invitation to present a paper at this very important seminar. I hope that it is not bureaucracy that is already affecting this new organisation.

I hope that over the next one and half days all the participants will think through the privatisation experiences made so far and come up with the way forward. I wish you well in your deliberations.

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KEYNOTE SPEECH BY THE BRITISH HIGH COMMISSIONER,
MR PETER LONGWORTH.

A great privilege for me to be invited to make this keynote speech on privatisation. Also something of a challenge.

I am not an economist, not a businessman and, above all not a Zimbabwean.

Why should a foreign diplomat, a fully paid-up member of the public sector, venture to comment on highly specialist issues, particularly when the thrust of the argument for privatisation must be that business knows what ‘s the best for business?

And is privatisation here any of MY business? Particularly in view of the admirable speech to last week’s Constitutional Conference by the Commonwealth Secretary General in which he cautioned that there is „a well-founded suspicion in Zimbabwe, and Africa as a whole of anything smacking of superior wisdom from outside."

This is not a text I would choose if I were giving a sermon.

So I should like to use this speech, not to preach the joys of privatisation, nor to comment on the firm position which the IMF is taking on this issue with regard to Zimbabwe, but to offer some thoughts on the process based on the British experience, in the hope that this might be helpful to those who are embarking on privatisation in this country.

It is difficult to recall that 15 years ago the term privatisation did not exist. There was the occasional de - nationalisation as the British Conservative governments reversed the compulsory purchases made by their Labour predecessors, but it was not until the 1980s when the UK embarked on a systemic programme aimed at placing the management of public enterprises into the hands of private entrepreneurs.

Today, privatisation is in progress in nearly every country in the world, and even in the small number of countries, which continue to resist its advance, there is an expectation that their turn will come.

So is there any point in making a case for privatisation? Perhaps, in case doubts remain, it is worth recalling pre-privatisation Britain where loss-making public enterprises, not only drained the national exchequer, but also put a dead hand on innovation and progress in British industry.

Today the British Economy is one of the most successful in the developed world and an important factor in this success has been the recognition that it is not a function of government to run businesses, neither is it within government’s competence to run them effectively.

The benefits, which the UK has drawn from privatisation, are varied:

• It has been a key element in reducing public debt and expenditure: Public companies ion the UK which cost our government millions of pounds per month

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  in subsidies and support are now, as privatised entities, paying millions of pounds in taxes into the fiscus;

• privatisation is a locomotive for growth in the broader economy. Not only does it bring new capital, management techniques and technology into the industries concerned, but these benefits impact onto other market players;

• privatisation attracts investment in other sectors of a country’s economy because it demonstrates the willingness of the authorities to think in contemporary business terms and address the reality of global trends.

But to be honest, this is only the picture as it has emerged over the period. The process in the UK has had its setbacks. Mistakes were made. I suspect that if the privatisers of the mid - 80s were starting today with the advantage of hindsight they would go about the process very differently.

So against this background I should like to focus on some points which I believe need to be put straight from the onset.

1. A basic principle: Government needs to be clear about its objectives.

Privatisation is not a quick fix for countries with deficit problems. It must be seen as one part of a more general economic reform and in particular it must be part of the process of bringing greater competition into the business sector.

One lesson from the UK experience was that in privatisation some of Our utilites we did too little at the time (and subsequently) to introduce competition. This was particularly true of gas privatisation, and to a lesser extent of electricity privatisation also. Not only does it reduce the effectiveness of the enterprise, but transforming a public monopoly into a private one is difficult for the public swallow.

There are big gains from getting competition into what were previously monopolistic industries, both in terms of immediate consumer advantages (reducing prices and improving service) as well as the dynamics of an industry. Industries will change more quickly where they are fully subjected to competition, and for vital infrastructure services this can often be critical to the other parts of the economy dependent on them.

2. The need to get a coherent process in place. If privatisation is to make progress, investors and others need to be convinced it will take place. Otherwise, they will shift their interest elsewhere. That means that Government should have a plan and stick to it. It needs to organise itself (eg with a central privatisation unit) in away that produces a transparent, speedy and coherent set of transactions. While privatisation is about getting the private sector into previously state-owned or operated bits of the economy, to be achieved successfully, it demands the government improve the way it operates. In this, the role of outsider’s advisors can be crucial.

3. Where utilities are privatised, and depending on the amount of competition introduced, there needs to be regulatory certainty and transparency. In the UK we have sought to provide this through our system of independent regulation, with regulators appointed by government for a period of (usually) five years but left to

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   get on with the job and to be accountable themselves to public and Parliament. This takes politicians out of the loop, except to the extent that there are social or environmental obligations, which they separately lay on the Industries.

4. Involve the employees. Under the previous UK government’s approach there were employee share schemes on privatisation which involved employees receiving some free shares but also being given rights to receive further discounted shares (eg through a matching scheme). These went some way to giving employees a stake but it is worth giving more thought to ways of making these more effective through incentives to employees and managers to work with the government in the run-up to privatisation in such a way as to maximise the value of the assets to be sold. Effectively this means creating a greater alignment of all stakeholder interests. This may involve, for instance, creating some sort of shareholder entitlements prior to privatisation (rather than at privatisation).

5. Tailor solutions to particular industries. There is unlikely to be a model which suites every industry. Some require strategic partners (perhaps from abroad) to help the government to improve the performance of the industry before the remainder is sold. Others may be floated directly. The important thing is to recognise this as a commercial process and while politics inevitably plays its part in deciding what needs to be privatised and when, discussions need to be clearly aligned with the requirements of the business and of the potential investors.

These are very specific practical issues, which must be considered by all Governments involved in a privatisation process, although the details will differ from country to country. For example, in Zimbabwe, the whole question of stakeholder participation brings in the very complex issues of indigenisation and it is not for me to comment on this here.

But I think the core issue is that in any country the authorities need to accept the full logic of privatisation from the outset. It is not a matter of tinkering with the system, it requires a fundamental change in macroeconomic thinking. Industry needs to be unshackled from politics if it is to run effectively and create the wealth the nation requires - and politicians need to be relieved of the politics of managing public enterprises: for in the list of their priorities, the temptation will be to rate the politics above the economies of the enterprise.

The trick in safeguarding the public interest is not through managing the enterprise; it is through establishing the regulatory framework within which it operates. And here the balance must be struck between public imperatives and the entrepreneurial need for a satisfactory return.

It follows from all this that the implementation of a programme of privatisation is resource intensive. And this is why I am particularly pleased that the British government, through their Department for International Development are providing over Z$120 million towards the running of the government’s Privatisation Unit. We believe that success in the privatisation process will be one of the key to Zimbabwe achieving its economic potential.