SESSION 3: Other Counties’ Experiences with Privatisation


• PRIVATISATION IN ZAMBIA
  by Mr A Chipwende
• DISCUSSION

• THE ZAMBIAN EXPERIENCE WITH PRIVATISATION:
  Lessons for Zimbabwe,
  by Ms Sue Haley - International Capital Corporation (ICC)
• DISCUSSION

• CRITICAL ISSUES IN THE PRIVATISATION PROCESS:
  Best Practice with a focus on the legal, political and social dimensions of privatisation
  by Patrice Chiwota, UNDP
• DISCUSSION

[page number of print ed.: 33]

PRIVATISATION IN ZAMBIA
by Mr A Chipwende

The Zambian Case

• Nationalisation of 80% of economy & new parastatals
• 14 State Enterprises at independence; over 150 by 1986
• 1970-90 poor performance of all sectors-agriculture only sector to exceed African average growth rate
• Ever increasing accumulated deficit by parastatals financed by state domestic & foreign borrowing (1/3 of parastatal investment from government foreign loans)
• Drain on government resources
• Of some 150 parastatals, only 15 were profitable
• Overstaffed, inefficient industries, jobs at risk
• Gross mismanagement by mainly political appointees

Privatisation Only?

• Privatisation has been the cornerstone of broader reforms
• Opened up to allow domestic firms to compete internationally;
• Improved modern regulatory & legal framework
• Reduced red-tape & de-bureaucratised Government
• Imposed anti-inflationary measures restricting money supply;
• Removed all restrictions on forex on both capital & current accounts
• Ended price & exchange controls and subsidies

Privatisation and Doing it

• Political support for privatisation
• commenced in 2nd Republic by UNIP though unstructured and no political commitment
• part of MMD manifesto in 1991 and made law in 1992
• privatisation based on strong political will to do it and live with the pains and joys
• privatisation supported in political party manifestos for 1996 elections but difference in implementation
• all parastatals to be „privatised"

Additional aspects of Doing it

• No political interference in privatisation
• Speed and public awareness key
• Allowed direct foreign participation
• Created investment friendly climate & legislation responsive to private sector needs
• Tried to avoid perpetuation of monopolies
• Created a warehouse of shares to be floated to Zambians

The Process Followed

• Independent body backed by Act of parliament in 1992
• Cabinet approves companies for privatisation
• Thereafter ZPA process takes over till signing stage
• ZPA reports to Parliament
• Transparency is paramount
• independent valuations

  [page number of print ed.: 34]

• independent negotiations
• press briefings and public forums
• statutory reports to parliament
• random investigations by state security wings

ZPA Establishment

• 12 member independent private sector majority board
• Highly trained staff compliment, business, finance and legal mainly from private sector
• Funding by
• Government
• World Bank (mainly studies and senior staff)
• Donors such as USAID, Norwegians, British, Germans, Danes and Swedes

Progress to Date

• 240 Companies & Units sold, approximately 30 to go!!

Progress to date

• Zambia participation has been 65% of units sold
• Direct participation has included
• Deferred payments (individuals & MBO)
• Deliberate decisions for Management Buy-Outs
• Public floatations & commitments to float in future
• Partnerships with foreign companies
• Non-core assets and consultancies
• Indirect Zambian participation has included
• Supplier opportunities
• New jobs and saved jobs, plus spin-offs
• Tax income, subsidy savings etc

Progress to date

• Foreign participation has been 29% of units sold, 6% liquidations
• Commonwealth Development Corporation
• Anglo American Corporation
• Unilever PLC
• Binani Industries, Tata India
• China Non-Ferrous Metals
• SeaBoard, Phelps Dodge, Cyprus Amax
• African Plantations LCD
• Nitro-Nobel
• Madhvani Group

Some Visible Signs
Isolating Privatisation effect?

• Evidence of improved profitability for privatised firms in manufacturing while that of sector declined 1996/97
• Many privatised companies expanded faster than anticipated
• Created a new entrepreneurial class of Zambians
• Savings on subsidies & debt allowing social expenditure on health, education & broader tax base

[page number of print ed.: 35]

• Growing markets & opportunities locally and sub-region
• Few redundancies due to privatisation
• Failure rate of privatisation is less than 3%
• Failure by individuals & MBO to commitments made

Remaining Activities

• Presently working on the following:-
• Transport sector
• Telecommunications and Postal services
• Electricity
• Hydro-Carbon sector
• Banking sector
• Post Privatisation Monitoring & evaluation on-going
• Deferred payments
• Employment and investment commitments
• Legal cases
• Plan to close shortly
• Commercialisation of Govt departments to be done

On-Going Challenges

• Need to privatise high remaining high profile parastatals or benefits to-date may be lost
• competitive utilities necessary to support industry
• not to lose out to competing countries
• lose out to more efficient private sector competitors
• Continued political will & justification of privatisation required if momentum is to be maintained
• Increased efforts to improve performance by management in companies yet to be privatised

Concluding Remarks

Some Lessons from Zambia

• Privatisation viewed as part of a comprehensive economic reform program than transfer of ownership
• Start with the smaller companies to learn the technicalities and build confidence before the big ones
• Remember that participation is more than ownership
• Do not allow political interference in the programme
• Keep the public informed to gain credibility
• The role of Government should be clearly defined and distinguished from those of the private sector

Contact Information
The Technical Director
Zambia Privatisation Agency
Privatisation House, Nasser Road, Lusaka
PO Box 30819
Tel: (260)-1-227735, 227791, 227851
Fax: (260)-1-225270
email: zpa@zamnet.zm
www: http://www.zamnet.zm/zamnet/zambus/zpa/zpahome.html

[page number of print ed.: 36]

DISCUSSION

Responding to the question on why Zambia undertook to privatise its public enterprises, Mr Andrew Chipwende said that Zambia Airways, for instance, was being subsidised at the rate of $ 14 m per month hence government decision to privatise. The public enterprise was also overstaffed and this was a drain on the fiscus. To move ahead with the privatisation process, Zambia had to drum up political support, and six months after MMD came into power, made the privatisation law in 1992.

Responding to the question on what benefits accrued to the Zambian economy following privatisation, the presenter said that Zambia had reduced subsidies to parastatals and more resources were therefore being directed to the social sector. Privatised companies are now paying corporate tax and therefore contributing to the fiscus. Unemployment in the informal sector up to 1988 / 89 was about 200 000 but by 1990 that number had declined with support from World Bank, meaning that the private sector is now performing well with respect to employment creation. Consumers now have better services including price of utilities Utilities are functioning much better and more profitably.

Asked on what measures Zambia has been taking to encourage competition, the presenter advised that all companies have been subjected to competition through participation of foreign investors and the Competition Act which is now in force. In addition to this, it was noted that Zambia did not necessarily take the highest bidder but also took into consideration such factors as future investment, impact on employment etc. Privatisation was not done as a free throw and there was no special arrangement in the process. This has largely contributed to competition in Zambia.

One participant wanted to know how Zambia ensured the independence of the Privatisation Agency. The reply to this question was that donors who therefore had a lot of influence on the organisation set up the Zambia Privatisation Agency.

As for the question on how Zambia changed parastatal management that was in place before and after privatisation, it was noted that this was done by the parastatal itself rather than government. This was part also of the reform exercise.

[page number of print ed.: 37]

THE ZAMBIAN EXPERIENCE WITH PRIVATISATION:
Lessons for Zimbabwe,
by Ms Sue Haley - International Capital Corporation (ICC)

The presentation will be divided into three main areas

1. The differences between the Zambian experience and the Zimbabwean experience to date
2. What have been the factors for success and failure from the Zambian experience?
3. The Lessons which can be learnt

The differences can be categorised into four main areas

• Circumstances

• Philosophy

• Process

• Outcome

State owned and operated businesses had difference and similarities

Zambia

• 80% of business was state owned
• One parastatal, ZCCM, dominated the economy and accounted for some 90% of export earning
• Parastatal companies operated under an umbrella organisation
• Parastatals losses led to a significant burden on the tax payer
• The debt burden of the parastatals was extremely large and significant capital expenditure was needed

Zimbabwe

• 5% of business is state owned
• No one business dominates the Zimbabwean economy to the extent that ZCCM dominated Zambia
• Parastatals do not operate under an umbrella organisation
• Parastatal losses lead to a significant burden on the tax payer
• Parastatals are indebted and in need of capital expenditure

[page number of print ed.: 38]

• The ‘philosophy’ of privatisation has some significant differences

Zambia

• The business was sold
• The price was determined by the market
• Government retained no shares
• Payment could be deferred
• The ZPA was an independent body subject to minimal political lobbying
• There were no barriers to ownership
• There was a change of management

Zimbabwe

• Shares are being sold
• The price is predetermined prior to sale of shares
• Government retains a shareholding
• Payment cannot be deferred
• The Zimbabwe PA operates within the Office of the President and to date, each deal has been subject to Cabinet approval
• There are barriers to ownership
• Management remains the same

• The different circumstances and ‘philosophy’ led to different processes

Zambia

• Not all companies were dealt with by ZPA - e.g. ZCCM, ZESCO, PTC
• A prospectus was prepared by external consultants who bid for the work; no price was included
• An evaluation process was clearly defined and transparent
• An independent chairperson oversaw negotiations between buyer and seller
• The process was relatively quick

Zimbabwe

• Privatisations to date have been dealt with in an ad hoc way
• The seller chooses the financial institution responsible for preparing the prospectus; the share price is included
• The evaluation process is not clear e.g. YTL
• There is no independent chairperson to oversee the sale
• The process is long and protracted.

• The different approaches produce different end results

Zambia

• The sale of the business rather than shares led to:-
• A better price for the seller
• Better prospects for future investment
• Greater likelihood of change within the company
• New management/ideas/ practices
• Redundancies
• Interest groups e.g. employees/producers of raw materials have the opportunity to strike a deal with the new owner over issues such as carried equity
• The ability of the new owner to make decisions based on financial rather than political rationale

[page number of print ed.: 39]

Zimbabwe

The sale of shares rather than the business leads to: -

• A lower price to the seller I.e. the tax payer
• Uncertainty about future investment and shareholder stability
• Less likelihood for fundamental change in the way the business operates
• Same management from parastatal era
• Redundancies
• Limited ability for interest groups to negotiate a good deal with the new owner
• The danger that business imperatives will be subsumed to political imperatives where government retains more than 25% of the equity

In Zambia some things were done well, others not so well

• The Good things
• The ZPA was independent of government
• There were clearly established processes and procedures
• Good use was made of the local business and professional community
• The process was quick
• There were no barriers to new capital being brought in to the country
• Debt relief was negotiated for parastatals as a whole
• Interest groups were able to negotiate deals with prospective buyers
• Close liaison was maintained with the Zambia Investment Centre

In Zambia some things were done well, others not so well

• The not so good things
• The main driver of the economy, ZCCM, was not privatised first
• Major utilities e.g. power, telecomm, water were not privatised in the first tranche
• Government departments e.g. Parks and wildlife, infrastructure maintenance were not privatised concurrently, and in the same manner
• There was limited professional support available in the ZPA for advising employees on striking a good deal and setting up proper employee share ownership schemes, even prior to privatisation
• The process was often not quick enough to prevent asset stripping
• There was limited advise to employees made redundant on how to set up their own businesses, and link into the micro-finance and SME support sector
• Scope for establishing training to create a business literate workforce was limited
• A comprehensive, inter-linked date base was not established, to assess success and impact in the future

[page number of print ed.: 40]

What can Zimbabwe learn from the Zambian experience?

• The Zimbabwe Privatisation Agency must be independent
• Business, not shares, should be sold
• Relevant Government departments and functions should be privatised concurrently
• Processes must be transparent and make full use of local professional skills
• The interests of specific groups should not take precedence over the interests of the country as a whole
• A comprehensive data base should be established immediately
• In an economy where the public sector controls a larger and larger proportion of a smaller and smaller cake, there should be no barriers to investors willing to risk bringing in new capital and create jobs
• Close links should be maintained with the Zimbabwe Investment Centre
• facilities should be established within the ZPA to represent the interests of employees in establishing Employee Share Ownership Schemes, even prior to privatisation.
• Employees made redundant through privatisation should be encouraged to start up their own businesses, and given support to do so.

DISCUSSION

Responding to the question on what benefit accrued to the Zambian economy following privatisation, Sue Haley advised that there was a significant reduction in subsidies. More resources were therefore directed to the social sector budget. Privatised companies are now paying company tax and thus contributing to the fiscus rather than draining. The private sector is now performing better with respect to employment creation. Better services and prices o utilities to the consumers. Major utilities are now functioning well and profitably too.

On the question how Zambia is encouraging competition, Sue Haley said that all privatized companies have been subjected to competition through the participation of foreigners. Additionally, the Competition Act is now in force. The fact that Zambia did not necessarily take the highest bidder meant that there were other qualifying criteria such as future investment, impact on employment etc. Privatisation was not done as a free throw and there was no special arrangement in the process.

On how Zambia change management of the company to ensure that those who were there before privatisation did not continue to run the company after privatisation, Ms Haley said that the whole process of change was done by the company and not the Government. Furthermore, Zambia drew most skills from the private sector and from outside Zambia and Zambia Privatisation Agency (ZTA) was set up by donors, hence they had a lot of influence.

[page number of print ed.: 41]

CRITICAL ISSUES IN THE PRIVATISATION PROCESS:
Best Practice with a focus on the legal, political and social dimensions of privatisation by
Patrice Chiwota, UNDP

(Hard and disc copy not submitted)

DISCUSSION

The presenter was requested to define the meaning of transparency, and the extent to which we can have a better managed corporation if it is to be divided into a shareholding structure composed of producers, farmers, public, strategic investor etc

In reply, the participants were informed that the public is not getting clear signals on privatisation. On the question of transparency, participants have been questioning deals done behind doors and whether this is being done in the interests of the public or not. Transparency requires that everything be done in the open and be subjected to public scrutiny.

One participant pointed that his expectations from the presentation were that the legalities of privatisation were to be addressed but the presenter focussed on what needs to be done on those PEs that are still to be privatised. Other questions raised by participants were the extent to which we have a supportive legal framework e.g. the Companies Act; who owns what in the privatised enterprise etc

On the question of the financial relationship between the PE and the Government, it was noted that Government provided guarantees for the PEs to be able to borrow on the local or even foreign market. However, failure to reform and thus to repay the loans meant that Government will be obliged to pay the called-up guaranteed loans. The question that now arises is that of who qualifies to receive government guarantees, Another question is what needs to be done in thee event that the PE mismanages the funds through corruption but the public funds are required to pay for the guaranteed loans. How do we deal with contingent liabilities? Can the responsible Board be made accountable?

UNDP advised that we need to think through and make recommendations on the way forward on this aspect. For instance, if corruption is the major stumbling block in implementing reform policies, we need to say it out and thus decisions can be made on how to stamp it out. If corruption is the main problem that hampers the growth of our economy, then the responsible ministers should be told in no uncertain terms.

One participant commented that it is corrupt to rubber stamp wrong policies e.g. what some of our Members of Parliament have been doing for the past twenty years. Parliament therefore has not been representing the interests of the people. They have consequently opened a gate for corruption.

Another participant was of the opinion that there is need to propose that the Privatisation Agency be involved in reviewing the legal and institutional arrangements required for privatisation.