SESSION 4: Benefits from Privatisation and Financing Options


• PRIVATISATION OF AGRICULTURAL PARASTATALS-
  Small-holder farmers Experience
  by Emmerson Zhou (Agricultural Economist)
• DISCUSSION

• THE ROLE OF PRIVATISATION IN INFRASTRUCTURE DEVELOPMENT:
  Dr P. Robinson
• DISCUSSION

• FINANCING OPTIONS AND ROLE OF FINANCIAL INSTITUTIONS
  by Mr Morgan Nyamukondiwa, Senior Manager Investment Banking, First Merchant Bank
• DISCUSSION

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PRIVATISATION OF AGRICULTURAL PARASTATALS-
Small-holder farmers Experience
by Emmerson Zhou (Agricultural Economist)

1. INTRODUCTION

Zimbabwe has a well-developed agricultural institutional system. The institutional structure for research, extension, input supply and produces marketing has enabled both large scale and small scale farmers to achieve high levels of production and productivity. Government has played and continues to play an active role in the agricultural institutional development process in the country. Prior to the advent of the economic reform programme (ESAP) research, extension, credit and marketing institutions were government owned either as ministry departments or parastatals. A major component of the economic reform programme is the commercialisation and privatisation of these institutions. Given the strategic role that these various institutions have played in the past in the provision of support services to farmers, their future structure and functioning is of major interest to the farmers.

This paper discusses privatisation of agricultural institutions and gives an overview of the experience of smallscale farmers in the privatisation that has been made to date.

2. AGRICULTURAL PUBLIC ENTERPRISES

Agricultural parastatals were established in the 1930s primarily to serve the interests of large-scale commercial farmers. At the time of independence in 1980, a wide range of parastatals existed covering areas of research, finance and marketing. Table 1 shows the main parastatals that existed in the agricultural sector:

Table 1: Agricultural public enterprises

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As can be seen form the above table, government was heavily involved in agricultural marketing with a statutory marketing board for every commodity except pigs and poultry.

Although the agricultural parastatals were originally established to service the interests of large scale farmers and industrialists their role and mandate was widened to serve the needs of small-scale farmers after independence. The reorientation of services to address the needs of smallholder farmers had a positive impact on the development of the sector. The sector's contribution to marketed output increased tremendously for all commodities and in the case of cotton and maize to between 60 and 70%.

To date nine years after the advent of the economic reform programme, parastatals and former parastatals continue to play a pivotal role in the economies of smallholder farmers. The Agricultural Finance Corporation accounts for the largest loan portfolio of smallholder farm credit with the balance coming form the Cotton Company of Zimbabwe and recently from the Grain Marketing Board. The Grain Marketing Board, Cold Storage Company and the Cotton Company of Zimbabwe continue to play important roles in the marketing of smallholder farm produce accounting for over 80% of the produce delivered from the sector.

3. PRIVATISATION OF AGRICULTURAL INSTITUTIONS

Forty-Nine (49) public enterprises (PE) have been identified for privatisation within the ZIMPREST period. Within the agricultural sector six parastatals have been identified viz. Cotton Company of Zimbabwe (COTTCO), Dairiboard Zimbabwe (DZL), Pig Industry Board (PIB), Tobacco Research Board (TRB) and the Agricultural Finance Corporation (AFC). The Grain Marketing Board, Agricultural and Rural Development Authority (ARDA) and the Tobacco Industry and Marketing Board (TIMB) will be retained as parastatals as they are considered to be strategic to the development of the agricultural industry.

The former Cotton Marketing Board, now Cotton Company of Zimbabwe and the former Dairy marketing Board, now Dairiboard Zimbabwe are the only agricultural institutions that have been privatised to date. The other companies are at various stages of commercialisation as shown in table 2 below.

Table 2. Status of Agricultural Institutions targeted for privatisation

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The privatisation of the Cold Storage Company is likely to take sometime given its complicated asset structure as well as an overhanging debt of $1.5billion for which a satisfactory solution is yet to be found. The privatisation of the PIB and TRB is now in the balance given the ongoing debate on the merits of their privatisation. Both the PIB and TRB are research institutions, and many believe that their privatisation is not in the national interest. Privatisation of these two institutions is unlikely to attract investors whose major interest is maximising their returns. Although farmers are an obvious group that maybe interested in participating in the privatisation of these organisations, the structure of the tobacco and the pig industries presents a problem. Large-scale farmers control both pig production and tobacco production. Smallscale farmers account for less than 7% of tobacco production and 3% of commercial pig production. Large-scale farmers therefore are likely to be the only group of farmers who would be able to take up shareholding in these institutions. This will obviously affect research focus of these institutions in favour of large-scale interests and consequently access by smallscale farmers to research results.

Although the above mentioned institutions were the initial target for privatisation, calls have been made for the privatisation of the Cotton Research Institute and the Coffee Research Institute which are currently part of the Department of Research and Specialist Services.

In privatising its former parastatals Government seeks to: -

1. to raise revenue for Government as part of the enterprise reform programme

2. to enable the public to acquire a significant stake in the growth and profitability of the companies

3. to indigenise ownership of the economy

4. relieve financial and administrative burden on the fiscus

5. shed off state assets and allow for private sector participation

4. SMALLHOLDER FARMER EXPERIENCE WITH THE PRIVATISATION PROCESS

Upon privatisation of the Cotton Company of Zimbabwe and Dairiboard Zimbabwe government allocated 20% and 5% of the shares respectively to smallholder farmers. The 20% share allocation in COTTCO to smallholder farmers was in recognition of the fact that the sector accounts for 70% of national cotton production. Smallholder farmers however account for less than 3% of commercial milk production. As a group, farmers had been allocated 30% of the shares in Cottco and 15% in DZL, which would have made them significant shareholders in the two companies. Large-scale producers did not however take up their shareholding in Cotton Company nor did they make any arrangements for warehousing. It is reported that their shareholding was taken up by Old Mutual that is also involved in the warehousing of the DZL shares on behalf of the large-scale producers. The luke warm response by large-scale producers to the COTTCO issue could be attributed to the fact that they had established their own cotton marketing company, COTPRO just prior to the privation of COTTCO.

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Table 3: Initial Proposed Shareholding structure of Cotton Company of Zimbabwe

Source: Prospectus

The various share allocations are currently held by the following institutions either in their own capacity or in a warehousing capacity: GOZ (25%), NSSA (10.32%), Old Mutual (10%), NSS (national Pensions) 10%, HIB Asset Management (6.71%), Employees Trust (5%), TMB 4.06%, Security Nominees 3.15% and National Discount House (1.36%).

Table 4: Proposed final shareholding of Dairiboard Zimbabwe

Source: Prospectus

The various share allocations are currently held by the following institutions either in their own or in a warehousing capacity: GOZ (25%), Old Mutual (10.3), Employees Trust (10), Trust Merchant Bank (10%), HIB Asset Management (8.9), TMB Nominees (7.2%), NASSA (5%), Remo Nominees (1.3%), other (10%).

4.1 Farmers Objectives in participation in the privatisation process

In participating in the privatisation process the objectives of smallholder farmer were inter-alia: -

• to gain a stake in the institutions that handle their products in order to have a say in the marketing terms of the companies

• gain in the value adding process

• political sentiments: large-scale producers have established their own marketing institutions that include Cotpro, Meatmark, Zimace meant to compete with the former marketing boards. The smallscale farmers

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identified as a strategy to invest in the former parastatals which they considered "their companies"

• As an alternative form of investment

4.1 Financing the participation process

It was clear right from the beginning that smallscale farmers were not going to be able to subscribe for their allocated shares within the time period that the share offer was open to the public. This was largely due to the fact that growers had already marketed their crops and many did not understand the concept of investing in shares. It was therefore necessary to develop a warehousing arrangement for these shares. The warehousing agreement that was entered into with the National Social Security Authority (NSSA) had the following features: -

1. NSSA would warehouse both the Cottco and DZL shares for a period of five years

2. During this period smallscale farmers would purchase back the shares at anytime, at the ruling market price.

3. During this period, all benefits arising out of the shares (dividends and share appreciation) would go to NSSA

4. At the end of the five year period, if any shares are still in the warehouse and smallscale farmers fail to arrange an alternative financing arrangement, then such shares would transfer to NSSA

5. smallscale farmers would retain the rights to board representation arising out of the shares

This warehousing arrangement was favourable to small-scale farmers for the following reasons:-

1. farmers could select the timing at which they exercise their rights to purchase back the shares. The timing would naturally be when the share prices are lowest. For example, the first purchase back of the shares was done at 97 cents per share when NSSA had warehoused the shares at 110 cents per share.

2. The agreement had no requirement for a specific number of shares to be acquired on an annual basis. This arrangement allowed farmers to purchase more or less shares annually depending on the performance of the agricultural season.

3. Stop orders could be registered with the relevant marketing institution to facilitate payment for the shares

4.2 Performance of the warehousing scheme

A major education campaign was launched by the ZFU in conjunction with Cotton Company of Zimbabwe to educate farmers to take up their allocated shareholding. At the end of this exercise about 11.000 growers had registered for the Cottco shares.

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Actual payment of the shares was going to be over a three year period through stop orders on their produce delivered through Cottco. At the end of the 1997/98 season about 8.000 growers actually honoured their pledges allowing about $7.5 million to be collected form the growers. This allowed shares worth about $8 million to be purchased back from NSSA (the amount had risen due to interest rate gains). No money was collected from growers during the 1998/9 season largely due to the fact that COTTCO declined to facilitate stop orders sighting the high cost of administering the scheme. Little interest was however shown in the DZL shares with shares worth only about $100.000 having been redeemed todate.

At this rate it is clear that smallscale farmers will not be able to redeem all their allocated shares at the end of the five-year period. The slow uptake of shares can be attributed to the following factors: -

1. poor publicity:

   The concept of investing in shares as a form of saving is new among ordinary Zimbabweans, more so those in rural areas. The benefits to be realised out of holding shares therefore needs to be adequately explained. Whilst ZFU and Cotton Company undertook some publicity, this was only during the few weeks when the share issue was open to the public. This exercise was not maintained thereafter.

2. Absence of stop order facility

   During the 1997/98 season COTTCO was more helpful in making stop order deductions for those growers who had expressed an interest in taking up COTTCO shares. The decision by the company to discontinue this stop-order arrangement seriously affected the operation of the scheme.

3. Viability of Production

   Cotton and dairy farmers have been facing serious viability problems in the past two seasons and have had little surplus to save. Excessive rains in most parts of the country affected production during the 1998/99 season and cottonseed prices were much lower than farmers expected

4. Limited number of producers

   Smallscale dairy is still in its infancy. Commercial smallscale dairy production is currently limited to ARDA's ten schemes under the Dairy Development Programme. Output from these schemes is currently very low.

5. FUTURE PERSPECTIVES

One of the objectives of privatisation was to ensure that the indigenous people, in particular smallholder farmers in the case of agricultural parastatals, participated meaningfully in the economy by acquiring a substantial proportion of the shares in newly privatised parastatals. The progress registered todate in the case of COTTCO and DZL shows that new approaches are required in order to facilitate participation by marginal groups. The following approaches could have been used to facilitate smallholder farmer participation in the privatisation process:-

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1. Allocating the shares for free

   Agricultural marketing boards were established essentially to service farmers. Farmers have in turn ensured the survival of these institutions through subsidising their operations in some years by accepting lower producer prices. Government should have considered giving away for free the shares targeted at smallholder farmers. Allocating the shares for free would have been a bold step towards ensuring that smallholder farmers are guaranteed of their share allocation in the privatised companies. The marketing boards have over the years maintained a registered of growers delivering to each of the respective boards. Government could have used these registers as a basis for allocating the shares to individual growers.

   The experience of Old Mutual in its demutualisation scheme gives some important lessons for government. Old Mutual gave away free shares to its policyholders in proportion to the size of their portfolios and was able to advantage many ordinary Zimbabweans

2. Government warehousing the shares

   Government could have equally considered forgoing immediate consumption from shares targeted at disadvantage groups such as smallholder farmers and giving them time to pay. This could have been achieved though Government holding the smallfarmer shares as part of its own shareholding giving farmers time to purchase back the shares on agreed terms. Farmers could have used income derived from these shares to collectively purchase the shares over time. A suitable vehicle such as a trust could have been established to facilitate this.

3. Education and Publicity

   The slow take up rate of the shares by the farmers can partly be explained by the fact that the farmers donot fully appreciate the benefits of investing in shares. The concept of share price movements, dividends, when to buy and when to sell etc need to be adequately explained to ordinary Zimbabweans. Such an education process must be part of the wider programme of facilitating indigenisation of the economy.

6. CONCLUSION

Given the performance of smallscale farmers to date in taking up their allocated shares the following conclusions cane be made: -

• smallscale farmers have shown limited capacity to acquire shares under a market based financing vehicle.

• The bulk of the shares allocated to smallscale producers will not be redeemed from the warehouse and ownership of the shares will transfer to the financing institution at the end of the five-year period unless an alternative arrangement is put in place.

The experience of smallholder farmer participation in the privatisation process shows that new initiatives are required to facilitate the participation of disadvantaged groups in the privatisation process.

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DISCUSSION

One participant wanted to know what Government was recommending for farmers with respect to privatisation. Reply to this was that proposals have been made to cater for the special needs of small-holder farmers.

Definition of small-holder was one other question that was raised. The presenter said that this refers to people in communal, resettlement and small-scale farms including the small-scale purchase areas.

Will the Zimbabwe Privatisation Agency be a one-stop-shop for privatisation? In reply to this question, the presenter said that it is understood that this will be the case since the ZPA is in the Office of the President and Cabinet so that they can respond timeously to Cabinet decisions. The staff is supposed to have clout, which enable them to demand information and thereby implement Cabinet decisions timeously.

One participant wanted to know the role of the National Economic Planing Commission. This was summarised as that of undertaking the final appraisal of privatisation proposals.

One participant made a recommendation that the ZPA be made an independent body. Another recommendation was that we come up with recommendation on how Government can deal with the fear of losing control over the „going zone".

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THE ROLE OF PRIVATISATION IN INFRASTRUCTURE DEVELOPMENT:
Dr P. Robinson

ZIMPREST INTENTIONS

• „Whatever resources can be found within the PSIP for infrastructure will be used primarily to improve access to infrastructural services for disadvantaged groups".

• „Virtually all major infrastructure investments will have to be sourced from the private sector".

• „A series of institutional reforms are to be implemented to facilitate private sector participation in infrastructure".

ZIMPREST REALITY

• prevarication over institutional reforms;

• various unsolicited proposals from project promoters, non-transparent deals agreed with government, but usually not implemented; no assurance of the public interest being protected;

• very little investment, declining quality of service to existing customers and increasing proportion of the population without access to infrastructure.

WHY DO WE NEED PRIVATE SECTOR PARTICIPATION?

• lack of public investment resources;

• need to improve efficiency and quality of service delivery – through competition and/or clever regulation.

HOW ARE THE INTERESTS OF ORDINARY ZIMBABWEANS TO BE PROTECTED?

• many aspects of infrastructure provision involve natural monopolies – sophisticated regulatory structures need to be in place to protect consumer interests;

• for their to be real change, regulatory agencies have to be autonomous (i.e. independent of government – need for provisions in new Constitution);

• mechanisms need to be included in the reforms to ensure expansion of access to infrastructure for the mass of the Zimbabwe public.

WHAT HAVE ZIMBABWEANS TO GAIN?

• industrialised countries could promise price reductions form reform: in Zimbabwe, past under-pricing and under-investment means that prices will inevitably have to rise;

• the benefits of a properly designed reform strategy are the efficient expansion of the supply of infrastructural services to underpin a growing economy and improve the quality of life of the population.

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SQUARING THE CIRCLE: CAN CONDITIONS TO ATTRACT INVESTORS BE RECONCILED WITH CONSUMER INTERESTS?

• investors in large infrastructure projects want a legal framework which:

• minimises the risks of unfairness in the bidding process,

• assures enforceable contracts and

• provides for effective dispute settlement;

• national interests are best served by having the sort of fair and predictable environment in which competent investors (domestic or foreign) will be willing to submit well formulated bids, confident of:

• a properly adjudicated outcome, and thereafter

• being able to operate their projects in an anticipated and rational way.

EXAMPLE: ELECTRICITY SECTOR REFORMS

• need for reform: ZESA bankruptcy, load shedding & threat of blackouts, no resources for investment & inadequate framework to attract private investors; 65% of the population without access to electricity;

• fundamental requirement: establishment of competent regulatory body (Zimbabwe Electricity Regulatory Commission) in terms of a new Electricity Act;

• commercialisation, unbundling and privatisation of ZESA: need for comprehensive electricity sector privatisation policy.

ZIMBABWE Electricity Regulatory Commission

Composition, Appointment & Tenure: Chief Executive Officer, ex officio, plus six part-time members, appointed by Parliamentary Committee on the Electricity Supply Industry (which also selects Chairperson). Five year-term of office for part-time Commissioners. At least three Commissioners are to be re-appointed (for a maximum of one additional term) to ensure continuity.

Autonomy: ZERC is to be an independent body, accountable only to Parliament.

Objectives:

• to protect the interests of users, particularly in respect of ensuring reliable supplies at least cost;

• to ensure satisfaction of demand;

• to promote competition or otherwise ensure efficiency in service provision;

• to protect investors’ rights.

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Functions & Responsibilities:

• issue licences for companies to generate, transmit and distribute electricity in Zimbabwe;

• regulate tariffs (unless or until competitive conditions exist);

• establish, monitor and enforce engineering, environmental and worker health and safety standards throughout the industry;

• consult with & be accountable to stakeholders, paying particular attention to the interests of electricity consumers;

• safeguard rights of investors;

• resolve conflicts within the electricity industry.

Staffing:

• Chief Executive Officer to be recruited and appointed by the Commission;

• limited staff complement; CEO to recruit suitably qualified staff, with senior appointments to be endorsed by the Commission;

• conditions of service to be similar to the private sector (staff will not be members of the civil service).

Financing:

• funding from licence fees and a small levy on electricity revenues;

• budget to be approved by Parliamentary Committee, accounts to be audited, Parliament to have the right to set up a Commission of Enquiry should it suspect any misappropriation of funds.

• Electricity Privatisation Policy

)Extent of privatisation: through an orderly process, all electricity sector assets are to be privatised in unbundled form (it is intended that the majority of such privatisations will be completed by the end of 2004).

) Strategic investors: particularly in areas where high level technical skills are important, foreign strategic investors are to be welcomed. Subject to negotiation, a strategic investor may hold a majority stake in an enterprise. Zimbabwean investors (people with technical skills and prior experience in the electricity industry becoming entrepreneurs) should in due course be involved.

) Employee ownership: all employees are to be offered shares in enterprises being privatised, if possible on a leveraged basis, making the best use of whatever tax or other invectives may be available.

) Ownership mix: typical ownership mix is to embrace strategic investor with requisite technical skills (foreign and/or local); local portfolio ownership; some foreign portfolio ownership, if the company is listed on the Zimbabwe Stock Exchange and, in some cases, foreign stock exchanges; employee shareholding; government shareholding to remain (with „golden share") only in the transmission enterprise.

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) International competitive bidding: strategic investors are to be chosen on the basis of the results of international competitive tendering procedures.

) Fair price: to ensure that a fair price is offered and received for state assets, tariffs are to be maintained at economic levels without political interference.

) Prevention of cross-holdings: to ensure competition through the industry, the regulatory authority is to prevent investing firms from acquiring holdings across different aspects of the electricity industry (or an excessive share of any one aspect).

) Division of privatisation proceeds: the split in privatisation proceeds between government and the electricity industry is to take into account past contributions by taxpayers and electricity consumers in the build-up of capital within the industry, including any recent contributions government may have had to make to prepare the entity for privatisation.

Source: Draft Electricity White Paper, November 1999.

DISCUSSION

There was general concern over the question of unbundling ZESA before privatisation. In particular was the fear that this will create problems down the line. In reply to this, the presenter advised that this was the most out- reaching method that caters for individuals, institutions and investment funds.

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FINANCING OPTIONS AND ROLE OF FINANCIAL INSTITUTIONS
by Mr Morgan Nyamukondiwa, Senior Manager Investment Banking,
First Merchant Bank

CHALLENGES OF FINANCING PRIVATISATIONS

• Underdeveloped Capital Markets

• Unstable economic environments

• Privatisation linked to Economic Empowerment

• Privatisation targets are large entities

FINANCING OPTIONS
STOCK EXCHANGE

• Most outreaching therefore caters for

• Individuals

• Institutions

• Investment funds

• Supported by institutions

• May be expensive for the Government but

• Most transparent

DEBT

• Appropriate for small targets

• MBO’s financed this way

• Works in stable economy

CONVERSION OF DEBT TO EQUITY

• Fire sale

• Little revenue to government

TRADE SALE

• Suitable buyer must be identified

• Calls for bids / tenders from prospective buyers

• An important source for Foreign Investment

ENTREPRENEURS

• Applies to Small Companies

• Needs financial backing - own resources/banks

FINANCING OF PRIVATISATIONS - THE ZIMBABWEAN EXPERIENCE

COTTCO
DAIRIBORD
RAINBOW TOURISM
ZIMRE
CBZ
LESSONS FROM THE ZIMBABWEAN EXPERIENCE
THE FUTURE OF FINANCING IN ZIMBABWE

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ROLE OF FINANCIAL INSTITUTIONS

• Advisory

• Underwriting / Financiers

EXAMPLE - ROLE OF BANKS IN PRIVATISATION OF COTTCO

• Prepare concept paper

• Develop financing options

• Advise on necessary restructuring

• Seek approvals from Government

• Prepare documentation / prospectus

COTTCO Example: Cont;

• Promote share issue through road shows

• Advise on valuation and pricing of shares

• Arrange debt financing for employees and Farmers

THE WAY FORWARD

• Banks to continue playing key role

• Privatisation financing must be opened up to foreign funds

DISCUSSION

The paper was general well received and participants raised not so many questions for instance, the presenter was asked to explain what leverage financing was, the presenter said that this was debt finance.

Asked to respond to the question of what mechanism is in place to minimise insider trading by bankers since they have access to a lot of information, the presenter said that there is no law against insider trading.