On 6 February 2009, The Post newspaper of Zambia published an article about the recent award of a government contract to RP Capital Partners (Cayman Islands) Limited. The contract was to undertake a valuation of the assets of Zambia Telecommunications Company Limited (ZAMTEL), the state-owned telecommunications operator, as a precursor to a subsequent privatisation of ZAMTEL.
The Post alleged that the contract had been irregularly awarded to RP Capital Partners by the Honourable Dora Siliya, MP, Zambia’s current Minister of Communications and Transport. The article ignited a firestorm of controversy and recrimination which continues, unabated, up to the present time.
Precisely how and where this firestorm will end is, as yet, unclear. However, this should not prevent the Government of the Republic of Zambia (GRZ) and the Zambian public from grappling with the important issues around the privatisation of ZAMTEL.
In particular, the issues of why ZAMTEL should be privatised and how ZAMTEL should be privatised must carefully considered.
Why should ZAMTEL be privatised?
Zambia must rank among the best qualified candidates to give the last word on the true nature of that oxymoronic beast, the state-owned enterprise. By the time the Movement for Multiparty Democracy (MMD), the current ruling party, was elected into government in 1991, Zambia had undergone decades of increasing state ownership and state control of the economy.
The result was unmitigated economic disaster. Soon after their 1991 electoral victory, the MMD embarked on a bold programme of economic deregulation, liberalisation and privatisation. The transition from a state-owned and state-controlled economy to a free market economy has not been an easy one. Nor has the transition been completed.
The Zambia Privatisation Agency (ZPA) was established in 1992 to privatise all state-owned companies, including ZAMTEL. Today, 17 years later, a fair number of these companies, including ZAMTEL, remain state-owned; dinosaurs in a kind of government-sponsored Jurassic Park. A costly experiment in avoiding extinction and avoiding the adaptation required for economic survival.
In her Ministerial statement to Parliament on 13 February 2009, prepared in response to a point of order on the engagement of RP Capital Partners, Ms. Siliya highlighted a number of very sobering facts about ZAMTEL’s current condition:
- ZAMTEL is technically insolvent with liabilities, as of December 2008, of approximately US$ 125 million, up from about US$ 100 million in January 2008. So not only are the liabilities massive, they are growing.
- 70% of ZAMTEL’s 2008 revenue of approximately US$ 49 million went towards staff-related costs. (ZAMTEL currently has a workforce of 2,623.)
- ZAMTEL had a 2008 operational expenditure shortfall of approximately US$ 17 million (which, presumably, had to be provided by the government).
- ZAMTEL experienced some significant operational difficulties in 2008, including major disruptions to international voice and non-voice services and serious industrial unrest.
To these can be added the following:
- After more than 40 years in operation, ZAMTEL has only managed to install some 90,000 fixed telephone lines. (ZAMTEL has a state-sanctioned monopoly in fixed line telephone services.) Compare the well over three million mobile telephone lines that have been installed by the three mobile phone operators (two private operators and ZAMTEL’s Cell Z) in the last 10 years. This, in itself, is a powerful object lesson in why ZAMTEL should be privatised.
- ZAMTEL also has a monopoly on international gateway services for voice traffic. (International gateway services for data traffic have already been liberalised.) It should come as no surprise that Zambia has some of the highest international call tariffs in the world. And some of the poorest quality international calls.
- ZAMTEL’s infrastructure is aging; staff retention, morale and productivity is low; and the quality of its services is generally poor.
The foregoing are, of course, merely symptoms. The disease is state-owned enterprisitis. The cure is privatisation.
It has been estimated that every 10% increase in mobile penetration in a developing country produces a 1.2% increase in the annual GDP growth rate. In many African countries, where communications and transport infrastructure is generally poor, the full economic and social impact of such increases in telephony penetration is probably even greater. Thus the privatisation of ZAMTEL will contribute to the economic development of Zambia through increasing the penetration of telephony and other telecommunications services.
There are three objections that always tend to be raised against the privatisation of ZAMTEL.
The first objection is that ZAMTEL is a strategic asset in a strategic economic sector and should therefore not be privatised. But what does the term “strategic asset” really mean? Strategy is to do with the planning and direction of activities and resources to achieve an overall set of major objectives. So what the “strategic asset” argument is really doing is dressing up state ownership and state control in a new suit of clothes. By the criteria and reasoning of the strategic asset doctrine, there is no limit to the economic sectors that may deemed to be “strategic”: Transport is strategic; Agriculture is strategic; The media is strategic. And so is virtually any other sector of the economy.
The second objection is that the privatisation of ZAMTEL will compromise national security, since ZAMTEL currently runs the only international gateway. The apparent reasoning here is that government needs access to the international gateway for intelligence and national security purposes. As we noted earlier, ZAMTEL only has a monopoly on international gateway services for voice traffic (meaning all voice calls originating and terminating on telecommunications networks in Zambia must go through ZAMTEL’s satellite facilities at Mwembeshi earth station). International gateway services for data traffic are liberalised. Since voice calls can now be carried as data traffic in the form of Voice over Internet Protocol (VoIP) and other packet-based voice services, it is a serious mistake, as far as national or any other kind of security is concerned, to focus merely on traditional voice services. Another major problem with this objection is that it tends to ignore all the illegal or unlicensed telecommunications traffic entering and leaving Zambia. There are other ways to meet the nation’s intelligence and national security requirements on telecommunications such as lawful intercept (LI) laws and technologies.
The third objection is that if ZAMTEL is privatised, telecommunications services will not be rolled out to the rural areas, since these services are supposedly commercially unviable or unprofitable in such areas. There is one irrefutable answer to this objection: the commercial viability or profitability of an economic enterprise is not an option, it is a necessity. Any company that cannot operate profitably will not be in operation for very long (unless, of course, it happens to be state-owned, in which case government handouts can provide indefinite life support for a clinically dead patient). Without profits, no company can repay its cost of capital or generate surpluses for future investments. Any economic venture that violates the law of out-in-up-down is doomed (The law says: When your outgo exceeds your income, your upkeep will be your downfall). The correct response to an economically unviable venture is to scrap it, or otherwise redesign it so that it becomes economically viable. Interestingly, ZAMTEL’s privately owned competitors have done a pretty good job of taking telecommunications services to the rural areas. So this objection, like the previous two, is spurious.
How should ZAMTEL be privatised?
1. ZAMTEL should be fully privatised, i.e., 100% ownership should be transferred into private hands. The partial privatisation or “commercialisation” model being considered by government would be a serious mistake. We have well over a decade of empirical evidence from the Zambian telecommunications sector that clearly demonstrates that GRZ’s simultaneous roles an owner/operator (through ZAMTEL), policy maker (through the Ministry of Communications and Transport) and regulator (through the Communications Authority of Zambia (CAZ) and the Zambia Competition Commission (ZCC)) is a very bad idea. GRZ should completely withdraw from its role as an owner and operator in the telecommunications sector and focus on implementing its own declared set of policies, i.e. deregulation, liberalisation and privatisation. In addition, when we analyse all the companies that have been privatised by the ZPA and their subsequent fortunes (and misfortunes), we tend to find that those that were only partially privatised (with government retaining a “golden share”, for instance) have fared worse than those that were fully privatised.
2. ZAMTEL should be privatised in unbundled form. The company should be divided into separate operating units, each of which can be run as a viable business on its own. For example: mobile telephony; fixed telephony; terrestrial broadband transmission (including microwave transmission and optical fibre transmission); satellite services; directory services (including directory enquiries and yellow pages); Internet services; and events and training (via ZAMTEL’s conference and training college facilities). Privatising ZAMTEL in unbundled form should make the sector more competitive. How to optimally unbundle ZAMTEL is debatable. However, with a technology-neutral unified licensing regime in place, the buyers of the separate units can freely expand their service offerings into other areas. Some restrictions might be necessary to promote competition and new entrants e.g. the exclusion of the existing private mobile operators and their associates (such as parent global companies) from buying Cell Z.
3. ZAMTEL should be privatised as quickly as possible, without sacrificing integrity, transparency or efficiency. The apparent speed and urgency with which Ms. Siliya has set about the task of privatising ZAMTEL is commendable. (We should recall, in this regard, that the privatisation of ZAMTEL has been on the government’s agenda for well over a decade.) However, speed and urgency should not be allowed to trump integrity, transparency and efficiency.
4. ZAMTEL assets should be privatised using a properly designed auction. The alternative privatisation mechanism that is often used in such privatisation exercises, the so-called “beauty contest”, is frequently subject to bias, corruption and other defects, in a way that a well designed auction is not. It should be noted that the valuation exercise that has been commissioned by Ms. Siliya cannot really determine “the true value of [ZAMTEL] on the open market”. Strictly speaking, the notion of the “true value” of a telecommunications asset, or any asset for that matter, is meaningless in economic terms. If, however, Ms. Siliya was referring to the “market value”, this can only really be determined by the market itself (or, more precisely, a market itself, since differently designed markets can produce different valuations for the same good or service). Anything else is educated guesswork at best and mere speculation at worst. Take the example of the UK government’s auction of third generation (3G) mobile licenses in 2000. Prior to the auction, Her Majesty’s government worked out a total reserve price of GBP 500 million. By the end of the auction, the five 3G licenses had been sold for a total of GBP 22.5 billion. I leave it as an exercise for the reader whether this was an instance of educated guesswork or mere speculation. The valuation exercise will probably be more useful as an analysis of ZAMTEL’s assets and liabilities and a basic due diligence than as a “market valuation” exercise as such.
5. ZAMTEL assets should be privatised using a properly designed auction. Auction theory and design is a specialised field. Unless an auction is designed properly for the given scenario, it can lead to all sorts of unintended and undesirable effects such as collusion, deterrence of new entrants, “gaming” of the auction rules, and so forth. The objectives of the auction should be to: promote competition in the Zambian telecommunications sector; encourage (or at least not discourage) local participation in the sector; and get the highest prices (the proceeds of the auction can be used to settle some, or with luck all, of ZAMTEL’s huge liabilities).
6. The privatisation of ZAMTEL should be accompanied by other steps towards fully deregulating and liberalising the telecommunications sector: liberalisation of fixed line telephony; liberalisation of international gateway services for voice traffic; introduction of a unified and technology-neutral telecommunications licensing regime; and so forth.
Santayana’s Law of Repetitive Consequences states that “Those who cannot remember the past are condemned to repeat it”. The one lesson of Zambia’s economic past is surely this: Government has no business in business. That’s the lesson. But has it been learnt?