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PRIVATISATION IN ZIMBABWE
In 1990 the Zimbabwe Government discarded its socialist-guided principles to pursue a free-market economy. This was against the background of negative macro economic growth, high inflation, high unemployment, massive foreign exchange shortages, price controls, an over-valued currency, and other economic ills that were afflicting the economy. International donor pressure led by the International Monetary Fund (IMF), largely forced the government to join the bandwagon of economic reforms. The government adopted the Economic Structural Adjustment Programme (ESAP), a five year revival programme whose goal was to rejuvenate the economy, stimulate foreign direct investment, and generate economic growth through the liberalisation of trade in the previously closed economy.
As part of the analysis of the economic problems,. Government critically re-examined the performance of state owned enterprises and established that they were loss making and heavily draining the fiscus. Experiences elsewhere (eg in Asia, Britain and Latin America) tend to suggest that privatisation often leads to the creation of competitive and dynamic enterprises which will grow over time through their success in the market place. As part of the ESAP package, government decided to privatise its parastatals as one of the turnaround strategies.
What is Privatisation?
Privatisation entails the transfer of parastatal ownership and control from the public to the private sector. The transfer techniques can take the form of trade sales to a strategic investor, a public offer, joint venturing, liquidations, employee/management buyouts or a combination of some or all the techniques.
Benefits of Privatisation
Some of the benefits to be derived from privatisation:-
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2. DZLS PRIVATISATION EXPERIENCE
DZL is a successor company to the Dairy marketing Board (DMB), a parastatal company that was established in 1953 to receive all milk supplied by registered producers, process and distribute the milk and milk products at prescribed prices. The Government would determine the producer and consumer prices, employee conditions of service, and would fund capital investments and operational deficits.
Due to heavy protection against entry of foreign dairy products DMB grew to be the only dairy company in the country with all the attendant features of an inefficiently run monopoly. The company incurred huge operational deficits due to price controls, which were not timeously reviewed and would always be focussed on political balance. Employee conditions of service were poor and this resulted in poor staff retention.
As accompanied DMB was one of the several loss making parastatals that were heavily draining the fiscus. Between 1978 and 1990, the operational deficit grew from Z$2 million to Z$60 million. The government then realised that it could no longer afford these huge losses and it decided to appoint a new Board of Directors that was to turn around the organisation.
Strategies for Turnaround
The new board analysed the business and came up with the following problems:
During the period 1991 to 1994, DMB was turned around from a deficit of Z$60 million to a profitable company. Some of the strategies were:
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Commercialisation Stage: 1994 to 1997
The government showed its confidence in the new Board of Directors that had turned around DMBs fortunes by retaining the same board to lead the company through privatisation. Dairboard Zimbabwe Limited (DZL) was fully commercialised and registered under the Companies Act in July, 1994 with government retaining 100% equity.
The benefits that came along with the successful commercialisation of DMB were as follows:
As a precursor to successful privatisation, it was important to establish a good track record for the company. The period 1994 to 1997 saw the company gaining public confidence. DZL was now viewed as a well managed organisation with a respectable Board of Directors. DZL established itself as a transparently run organisation.
DZL was successfully listed on the Stock Exchange in September, 1997 making it the first Parastatal to be privatised and, as a show of public confidence in the organisation, the counter was oversubscribed. Today the ownership structure is as follows:-
The benefits of successful privatisation can aptly be summed up by the current status of DZL:
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In conclusion, it must be noted that the whole process of privatisation must be viewed within the broad macro economic incentives designed to stimulate growth, otherwise privatisation on its own is not a total solution to all our economic problems.
Responding to the question on what advice can be given to Confederation of Zimbabwe Industries (CZI) members on privatisation, DZL advised that first and foremost, the parastatal needs to be segmented into business units. The staff should be organised and prepared to participate in the privatization process and that the financial community should give a better response to this.
On the question of DZL monopoly in the market and the extent to which monopoly power has explained DZL profitability, DZL advised that the company to date has had several competitors following the deregulation of the sector by Government.
However, DZL has also gone an extra mile to create a product that is a delight, which customers can enjoy. Government has deregulated the marketing environment and the market has responded accordingly. Today, DZL believes that they have an above average market competitiveness.
Responding to DZL comments on how the 2000 Budget and other government policies are affecting business operations, one participant wanted to know why the 2000 Budget was put out/announced if it was not well thought through.
To this question, DZL replied that the announcement of the Budget has become something like a ritual, and just government effort to ensure that this ahs been done. This is so as evidenced by supplementary budgets that are proposed before year- end. This was viewed as not reflecting commitment on the part of government. DZL went further to cite examples of targets set in the 2000 Budget which, in his opinion, will not be achieved vis;
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DZL therefore, said government should give a budget that has some semblance of guidance, which the 2000 Budget does not do.
Responding to the question raised with respect to how DZL financed its manpower rationalisation programme, Mr Mandiwanza informed the seminar that use was made of own resources. Additionally, DZL prepared a severance package for company employees. This was considered quite attractive; thus many people were encouraged to leave. 3 600 employees were reduced to 1 200.
On the question of DZL identifying a strategic partner, DZL advised that about three years after privatisation, the company now needs to finalise the deal. The process takes some time.
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PRIVATISATION IN ZIMBABWE
THE COTTON COMPANY OF ZIMBABWE LIMITED
Summary of Events
Valuation/Pricing of shares
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Responding to the question on what advice can be given to Government following COTTCOs privatization experience, COTTCO cited the profit sharing Scheme as something to be emulated. This, to a large extent, assisted towards purchase of employee shares. Secondly, employees organized Investment Trusts in 1994, and at the same time, employees were encouraged to invest in other companies/. Employees contributed to the Investment Trust on a monthly basis and at the time of privatization, there was a substantial amount that enabled financial institutions to assist.
On the question of why the parastatal had to be privatized, COTTCO advised that this was done to raise revenue for Government, hence the company was sold at a premium. The government had a political objective that sought to promote economic empowerment (workers, public and farmers). The economic objective was that COTTCO should have a technical partner, which in government circles, was viewed as synonymous to efficiency required for the growth of business.
One participant congratulated COTTCO for encouraging privatization. Reference was then made to increased turnover and high levels of retrenchment experienced by COTTCO, after which a question was raised on what schemes COTTCO had for the retrenched. Furthermore, the participant wanted to know the number of people who have been employed by the new company.
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In response, COTTCO advised that whilst from a national point of view, people had been thrown into thew streets", this was not the case for COTTCO, for what was seen employment" before privatization was ion actual fact False employment". During privatization, staff was granted hefty severance packages to an extend that most of them are running very successful businesses. In addition to this, business is seasonal at COTTCO. In fact COTTCO allow some of the retrenched staff who are employed as seasonal staff. This is viewed as a double benefit hence more staff is still expressing interest in taking good exit packages.
The new capital projects that COTTCO has embarked upon after privatization more than makes up the numbers retrenched. COTTCO is thus convinced that this time real jobs" rather than False jobs" were created.
One Member of Parliament requested that those with expertise in certain areas should advise rather than rave Government at this and other workshops. Need for constructive criticism was emphasized.
Responding to a question on the time frame required for commercialisation and whether this was pre-requisite for privatisation, the seminar was informed that commercialisation helps to build confidence in the company before it s exposed to competition. However, the time required for commercialisation varies from company to company.
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PRIVATISATION IN ZIMBABWE
The Chief Executive of CZI and Fredrich Ebert Stiftung,
Ladies and Gentlemen,
I would like to welcome you to this important occasion where we are gathered to discuss a very important subject, as we gear ourselves for the new millennium: The Privatisation of State Enterprises.
Wealth distribution patterns in many developing countries are largely a function of a given countrys political history. For Zimbabwe, the colonisation background created a situation where the indigenous population in Zimbabwe had no control aver capital and means of production.
Wealth was concentrated in the hands of the minority groups and with the advent of independence, Government acquired shares in some companies in the industrial and commercial sectors on behalf of the disadvantaged. However, overtime the Governments ownership of these assets has been questioned. Government also had holdings in strategic parastatals, most of which were inherited from the previous regime and losses in most of these organisation are a burden on the fiscus. To rectify this, the Government has embarked on a programme for their commercialisation and privatisation.
OBJECTIVES OF THE PRIVATISATION PROGRAMME:
OBJECTIVES FOR THE PRIVATISATION OF ZIMBABWE REINSURANCE COMPANY
The Government of Zimbabwe established ZIMRE in 1983 through an Act of Parliament with an issued share capital of only $2.5 million. It had a clearly defined objective: To have the local insurance industry developed, and for the local insurance industry and the economy to benefit from the premiums generated locally.
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The investment Government made at the inception of ZIMRE has benefited all parties concerned. The country and local insurance market have benefited through the building of local capacity and the retention of local premiums for the development of the local insurance industry. This has served the country millions of dollars in foreign exchange that otherwise could have been paid in the form of retrocessions. ZIMRE has been able to mobilise resources that have been invested to the benefit of the economy at large. Investments have been made in the real estate industry residential and commercial areas, further enhancing the company and the country's insurance capacity. As we all know, without the requisite assets to support the underwriting base, an insurance industry will only at as conduit for outflows of scarce foreign exchange reserves, as the country tries to buy protection or security in other parts of the world.
With the formation of ZIMRE, the level of external dependence on reinsurance has come down. The situation is still prejudiced by some insurance companies that still continue to negotiate their treaties externally despite the fact that local re-insurers have the capacity for those treaties.
ZIMRE was the first parastatal formed in Zimbabwe with a limited liability, and was mandated to operate commercially. Since inception, ZIMRE has operated as a commercial entity and never made a fall back for more capital on the shareholder. They have continued to make profits, declare dividends every year, a measure of a worthy investment.
Against this background it should be noted that main objective for the privatisation of Zimbabwe Reinsurance Corporation was to raise money for the Fiscus and at the same time invite the public (including the marginalised groups) to buy shares in the profitable Zimbabwe Reinsurance Company.
PREAMBLE TO ZIMRE PRIVATISATION:
Under the second phase of the economic reform programme ZIPREST Government was determined to implement parastatal reforms as planned and in later part of 1997, the Government of Zimbabwe made a decision to make an initial disinvestment of 49% of its shareholding in ZIMRE.
To kick off the Privatisation of Zimre, a limited company Zimbabwe Reinsurance Company Limited was registered in March 1998. A new logo was developed to reflect the companys new status and on 23 September, 1998, the Honourable Minister of finance Comrade Herbert Murerwa officially launched the privatisation of ZIMRE.
THE PRIVATISATION PROCESS FOR ZIMRE:
The first step was to set up a privatisation tea, which included Lead bankers and issuing house, Financial Advisors, Bankers, Underwriters, Transfer Secretaries, Public Relations Organisations, Advertising Agencies and Stockbrokers. The most issue top mention on the composition of the ZIMRE Privatisation team, is the inclusion of the POSB in the team. This was to fulfil; the objective of broadening the
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shareholding and the Post Offices were used as agents to that, even people in the rural areas could participate.
Various share issue meetings were held with leading institutions to drum support for the privatisation. For the general public, two cocktails were held in Harare and Bulawayo on 16 February and 18 February 1999, respectively.
This was very important exercise, because this was a chance for the ZIMRE Privatisation team to get feedback on the exercise.
The main concerns raised by people on the Zimre issue were:
THE RESULT OF THE PRIVATISATION
The 49% Government offloaded in ZIMRE were distributed to the best advantage of all Zimbabweans as follows:
This was in line with the objective of broadening ownership.
The privatisation process of ZIMRE was concluded on the 29 March, 1999, with a presentation of a cheque of $276 million to the Minister of Finance. This occasion is largely remembered as TIME TO HARVEST", as spelled out by the chairman of Zimre Professor Chetsanga in speech on that day, when he likened the payment of the share proceeds to Government to harvest: This event marks the harvest of a phenomenal return from a seed capital of $2.5 million that the Government invested as start up capital for Zimre in 1984."
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At this point it is important to note that, the major objective on privatising Zimre (i.e. raise money for the Fiscus) was in no doubt achieved.
However, there is one objective that was not achieved on the Zimre Privatisation. The capitalisation of the company was not addressed. As a rule of thumb, capital base for a reinsurer is US$100 million and ZIMRE is operating at about US$20.5 million base.
POST PRIVATISATION EXPERIENCE FOR ZIMRE:
After privatisation, Zimre continued to pursue its goal of growth through diversity. During the year, Zimre added to its portfolio, three more subsidiaries: Zimre Unit Trust, Zimbabwe Actuarial Consultant Company (ZAC) an actuary company, and Zimre Zambia, which will spearhead reinsurance operation in Zambia.
As mentioned before, one of the concerns raised by investors, was the ability of Zimre maintaining acceptable business growth, after the scraping of legal cessions. I am happy to inform you that Zimre has managed to secure most of the business, which was ceded to it during the legal cessions period. The company increased its profit before tax by 108% from $35 million to $72 million in the first half of 1999. This followed a revenue growth of 83% from $584 million to $1 069 million.
As mentioned before the resources for the Company are still inadequate but besides this hurdle, the Company continued to post more profits and declare dividends to its shareholders as before, but the good thing is that those who invested in Zimre are already receiving a return on their money. The discipline of giving a dividend to shareholders all the time is highly regarded in Zimre. As part of an on-going exercise on part of the Government to broaden the ownership on the economys assets, the Government is still committed to embark on the second phase on the Zimre privatisation. This will see Government reducing its shareholding to around 20% and raising further capital for the company to enhance Zimre' underwriting capacity.
May I point out that the Privatisation exercise required a lot of teamwork from the Government and the institution being privatised, advisors and others. The important issues to watch out for during the privatisation exercise is:
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In conclusion, Privatisation should take the same course as Nationalisation. In both exercises, objectives should be set and at the end assess whether they have been achieved, before changing direction. Nationalisation and Privatisation should target at wealth creation for the people and the country, and it should not be an end in itself. If any of the targets is not achieved, find ways of meeting them.
In the sixties, nationalisation was seen as an end and not a vehicle to the upliftment of many countries. It was fashionable to announce the companies nationalised. The end result was that at the end of the exercise, and after many years those countries economies" performed dismally. The same should be watched in the new fashion of privatisation, that the exercise should be seen as a vehicle of wealth creation and not an end in itself. We read these days that such a country has privatised so many institutions. We should measure the outcome as those newly created institutions add value to the country as opposed to what they did in their post status. Zimbabwe Reinsurance Company is such an institution, which wants to continue to add value to the insurance industry, its shareholders and the country, and is confident to do that.
I thank you.
Responding to the question of why Government lacks commitment to privatisation, ZIMRE responded by saying that it as all due to politics in the country since loss of power and authority is quite painful. Again, nobody wants change.
On the contrary, COTTCO felt no resistance from government but attributed this to the benefits some people get from the status quo; they do not want change. COTTCO thus holds the opinion that target groups should also play a leading role in facilitating the process. Their experience facilitated and encouraged competition. If a company privatizes without making adequate preparations, privatization will flop like nationalization said Nguni. Mr Nduna further supported this argument that privatization in the UK only began 20 years after World War II and we should therefore, put privatization into proper context.
One participant praised ZIMRE, COTTCO and DZL for being pioneers in privatization. He encouraged others to emulate their example.
Another participant expressed concern over diversification" taking place in Gokwe following extensive cotton growing in the area. Interest was expressed on what COTTCO is doing to ensure that the people of Gokwe will have developed over time. In other words, what is the social responsibility of COTTCO in Gokwe?
Responding to this question, Nguni advised that COTCCO can be viewed as a public - private company in that the company is involved in a number of public private activities. For instance, in the 1999 Budget, COTTCO provided for Z$1 billion to be lent to cotton farmers at 27% - 40% interest rate, what other banks have failed to do under the current macro economic environment. COTTCO employs own 30 extension officers who, in addition to assisting farmers in any way possible, educate and train farmers on how best to grow or utilize the land. COTTCO is playing a part,
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may be not in a big way but they are confident they are doing more than AGRITEX can do with respect to cotton industry.
One Parliamentarian argued that Parliamentarians view the commercialization process as being too long to an extent of promoting such things as insider trading. The question therefore, was whether commercialization should remain and continue to be a prerequisite for privatization. Additionally, the Parliamentarian wanted to know government was maintaining majority shareholding in all privatized enterprises and that was the case, what Government intention was.
Responding to the question of how COTTCO identified a strategic partner, the participants were informed that the company did all the work and Government was not involved in the exercise.
With respect to the question on how the DZL staff rationalisation exercise was financed, t was noted that this was done from the DZL resources. They prepared a voluntary severance package for company employees. This was very attractive therefore it encouraged people to leave. 3 600 employees were thus reduced to 1 200.
ZIMRE was requested to respond to the question on what caused the delay in the implementation of the second phase of the ZIMRE privatisation whish entails further reduction of Government shareholding from 51% to 30%. ZIMRE advised that this was partly due to fear of the unknown, in addition to the fact that what the private sector wants to have is what the Government wants too. However, the workshop was further informed that on 22.11.99 ZIMRE had been successfully floated on the Zimbabwe Stock Exchange (ZSE) and Government had advised that they are still finalising arrangements leading to an effective reduction to 20% shareholding. ZIMRE was further requested to respond to the question on why the second phase of their privatisation i.e. reduction of government shareholding from 51% to 30% was delayed. ZIMRE informed that this was mainly due to fear of the unknown by the Government as well the general tendency that what the private sector would like to have so does the Government
© Friedrich Ebert Stiftung | technical support | net edition fes-library | August 2001