Zambian Privatization: Some Truth, Not Myths

We have been hearing for many years from a lot of pundits about how privatization supposedly destroyed the once vibrant Zambian economy. I contend that this is just a myth. Let us give some proper perspective by critically analyzing the big claims of the anti-privatization crusaders.

CLAIM: Privatization destroyed Zambian industry. We used to produce glass (Kapiri), batteries (Mansa), bicycles (Chipata), motor vehicles (Livingstone), etc.

ANSWER: This claim ignores the history of Zambia’s economy in terms of sequence of events. At independence in 1964, the Zambian economy was largely private sector driven with manufacturing industries well established in many sectors. The United National Independence Party (UNIP) government nationalized these profitable colonial-era companies in the early 70s and then grossly mismanaged them and run them into the ground.

Within a short time, they were loss-making and full of cadres because the earlier professional management was largely replaced by incompetent political appointees. By 1985, the Zambian economy was in the ICU (Intensive Care Unit) and Zambian industry was to all intents and purposes dead.

By the time the Movement for Multiparty Democracy (MMD) took over government in 1991, parastatals were totally destroyed and a shell of their former past in colonial times. They were part of a huge parastatal conglomerate consisting of ZIMCO, MINDECO, FINDECO, INDECO, ZCCM, ZAL Holdings, etc. They were insolvent and most of them were subsidized and kept alive by government borrowing and moving money around the conglomerate.

The Zambian treasury was bankrupt with no capacity to recapitalize them and no ability to borrow from international money markets at favourable interest rates. The only rational thing you do to an insolvent company is to either liquidate it or sell it off. Some companies like Zambia Airways and UBZ were liquidated while many others were privatized like Zambia Sugar and National Milling.

It is disingenuous to argue that privatization in the 90s destroyed Zambian industry when it was already destroyed ten years earlier! It is like blaming the death of a cancer patient on chemotherapy which they took too late. Zambian industry could have been saved had corrective measures (ie privatization) been taken in the late 70s to early 80s.

Once privatization and liquidation kicked in, it was impossible to save all the companies. It was also impossible to keep all the employees since Zambian parastatals were over-staffed. The job losses that occurred during privatization were inevitable and unavoidable. The alternative was to keep the parastatals until they became bankrupt the way Zambia Airways did with every employee losing their job.

Privatization at least saved some jobs and got the companies profitable again so that they could later on expand and contribute to the treasury. The privatized companies were recapitalized using private money and no taxes were used.

A lot of the privatized companies after being bought off have gone on to become quite profitable such as Zambia Breweries, National Milling Company, Premium Oil Industries (formerly ROP), etc. Others failed to take off after being sold because the economic conditions of Zambia changed and some industries were no longer profitable. China, India and other emerging economies have taken over manufacturing such that not even huge economies like the USA have been spared.

A more recent example of a successful privatization was Zamtel which had about 2,000 employees as a parastatal but under LAPGreeN, it had only about 700 and yet it more than quadrupled its subscribers and doubled its value within 18 months before it was nationalized by the Patriotic Front (PF) government. It has been a disaster since then. Yet people see this before their very eyes in the last 5 years but they still ignore reality and come up with explanations why Zamtel should be owned by the government.

CLAIM: Privatization is just another way of control by imperialist nations.

ANSWER: We are now in a global village where multinationals rule the world. They are no longer following what the politicians are saying in their home countries. Many companies are now jointly owned by shareholders from many different countries. Many companies and brands even in developed countries have been bought out by “foreign” companies (eg Hummer, Lenovo, Rover, etc). It is unlikely that all these different shareholders can somehow have their interests aligned with one particular government.

Whilst it is entirely possible that a group of powerful businessmen can form some sort of global cartel based around business interests, this is very different from what is claimed with respect to so-called “white imperialism” or “neo-colonialism”. Considering that billionaires keep arising from many nations (China, Russia, India, Brazil, etc.), it seems unlikely a global business cartel can be sustained.

CLAIM: Zambia was better of with parastatals controlling and exploiting our resources.

ANSWER: This is laughable and is not supported by empirical evidence. Currently, only 7 out of 42 parastatals are profitable and the pattern has been worse before. Even when parastatals are profitable, they tend to do worse than their private counterparts. For instance, ZANACO as a parastatal was profitable but its financials were often worse than similar private banks. Same with Zamtel which as a parastatal has always been far worse than Airtel or MTN.

From the time of nationalizing the mines in 1972, copper production dropped from 750,000 Tonnes to about 250,000 Tonnes at the time of privatization in 2000. By 2001, production was again up and today it is approaching a million Tonnes. How can any rational person argue with these irrefutable facts and claim that privatization of the mines was a disaster and they should have remained in government hands?

CLAIM: The mines were sold for a song.

ANSWER: Most commentators tend to use hindsight to pass judgement on past events. How many times have we all made decisions based on the information available and unique circumstances at the time? Just because conditions change after the fact does not mean the decisions made earlier were wrong.

For example, you may be forced to sell you car cheaply because you have no money and you need quick cash to pay for your child’s hospital bill. If later on your situation improves and you have money, does it mean the decision to sell the car cheaply at the time was wrong? If the person you sold the car to resells it later at a huge profit, would you start complaining that you sold him the car “for a song”?

Copper prices were at their lowest in 1999 after 20 years of decline. The mines were sold in 2000. Based on 20 year data, it was very difficult to accurately forecast that there would be a commodity boom just a few years later when the price of copper went up significantly. The persistently declining price of copper meant the value of the mines when they were sold in 2000 was low.

The Zambian government was in a position of huge weakness partly because they had taken too long to sell off the mines. The treasury was bleeding to the tune of one million Dollars per day to keep the Zambia Consolidated Copper Mines (ZCCM) parastatal afloat at the worst point of the Zambian economy in 1999. The foreign mining companies that bought ZCCM most likely used this to push for a better deal for themselves.

If the Zambian government had refused to sell, the private mining companies would have simply waited for things to get more bad and then make a worse offer. It appears this is what may have happened in 2000 after several earlier failed potential deals.

An always overlooked point is that because the Zambian government was losing millions of Dollars per year to keep ZCCM afloat, even giving away the mines for free would have instantly saved them money to be channeled into other more important things. Does it make sense for any responsible government to hold onto huge loss-making parastatals and keep wasting tax-payer money on them while citizens are dying in hospital for lack of drugs?

No government can justify wasting millions on a bottomless pit. The decision to sell off the mines was a perfectly rational one. We can argue all day about whether the selling price was “fair” (whatever that means) or how the proceeds were used (or misused), but this does not invalidate the rationale for selling.

CLAIM: Privatization was wrong because there was corruption involved.

ANSWER: It is fairly obvious that many corrupt people (inside and outside government, including consultants) benefited from kickbacks during the privatization era. This however does not invalidate the reasons for selling loss-making parastatals which were a drain on the treasury.

CLAIM: Privatization has failed.

ANSWER: If the Zambian economic statistics (per capita GDP, poverty, life expectancy, etc.) pre and post privatization are anything to go by, this is patently false. Moreover, privatization is not a panacea to cure all economic ills. A government can correctly implement it but still do many other wrong things which can cause problems in an economy. Singling out privatization for blame out of many factors as the cause of problems is poor analysis.

For example, a government can privatize everything but still keep huge barriers to entry and maintain a corrupt governance system with low economic freedom. They can also have a poor legal system. Such factors work against an economy even if all parastatals are privatized.

CLAIM: We should keep parastatals because even rich nations are doing it.

ANSWER: A policy is not validated just because rich nations are doing it. The same rich nations also do many things that are counter-productive but they still prosper inspite of, but not because of, those actions. For example, many rich nations have generous welfare systems that lead them into huge debts. For a season, everything seems alright but eventually these nations become bankrupt.

The USA for example has a national debt more than 100% of GDP. Japan is far worse and they are in huge problems. Countries like Portugal, Italy and more recently Greece have run into problems because of their unsustainable generous welfare systems that are bankrupting them. Greece in particular is completely bankrupt. So imagine if we copied what these nations did just because they are economically better off. Therefore, the decision to keep parastatals should be based on a sound analysis of the pros and cons, not because America or Europe is doing it and we copy blindly.

CLAIM: Some of the best performing companies in the world are parastatals, and we should therefore have more of them. Examples are Emirates Airlines, Qatar airways, Singapore Airlines and many Chinese parastatals.

ANSWER: It is true that there are some parastatals that do well, but in the long run, parastatals tend to become inefficient and are used by politicians for political mileage. When parastatals get into problems, governments have to bail them out using tax payer money. Even when insolvent, parastatals are kept because closing them down is political suicide.

For every successful parastatal, one could probably list ten failures. Many if not most parastatals the world over were originally private companies that were nationalized, eg The Bank of England was once a private bank. British Rail was nationalized in the 1940s and was destroyed by the British government who privatized it later on under Prime Minister Margaret Thatcher.

So bad was the parastatal driven British industry in the 1970s that the economy crashed. Thatcher’s privatization drive was successful and the British economy rebounded. The Labour government of Tony Blair continued with her privatization programme. Of course there were problems after privatization since nothing is perfect and parts of British Rail were put under government control later on.

Emirates Airlines has been run quite unlike a parastatal. The United Arab Emirates (UAE) government pumped money into it and it turned a profit after three years of running and they have left it alone since then. In contrast, Singapore Airlines has been in trouble for six years now as these articles show.

Will Singapore Airlines Shrink Into A Regional Carrier?

Struggling Singapore Airlines fights back to boost growth

Chinese parastatals are benefiting from big credit lines from the Chinese government but one wonders how long this will last. The Chinese economy is already in problems after running a bubble for about a decade which will pop anytime from now. It is difficult to make any strong conclusions for Zambia based on the performance of parastatals in other countries.

I can only authoritatively comment on Zambian parastatals which are far less professionally run that those from rich countries. Our history is replete with failed parastatals because our morally bankrupt leaders cannot resist the temptation to abuse and misuse parastatals.

ZESCO and Zamtel are routinely abused to impress the electorate during by-elections. I recall in the late 1990s during a by-election in Kabwata, ZESCO suddenly put up street lights which had not happened for 20 years. No one cared how this would impact the budget of ZESCO. Other times, Zamtel broadcasting towers are suddenly constructed where there is a by-election. Stories abound of parastatal vehicles being used for campaigns for the ruling party and it is not inconceivable that even cash is sometimes siphoned out of parastatals.

CLAIM: Some companies like ZESCO cannot be privatized because they are a strategic asset that we cannot leave to foreigners.

ANSWER: Who would you trust between a foreign rich greedy capitalist businessman or the Zambian government in terms of professionally managing a company to provide a good service at a low price and turn a healthy profit?

CLAIM: Private owners of a strategic company like ZESCO can hold the country to ransom by turning off power.

ANSWER: Very unlikely. They would lose millions for every day the power is off. It is very easy to deal with them by withdrawing their investment license for example.

CLAIM: If we sell off certain parastatals like ZESCO, we shall no longer have the rural electrification programme and electricity will not be taken into villages since they are poor and cannot afford it.

ANSWER: The Rural Electrification Programme can still run using a different model. For example, a privatized ZESCO can be given tax breaks in exchange for continuing the programme. Or other different companies can be contracted by government to continue extending the grid to villages.

But in any case, a fully liberalized electricity industry with ZESCO unbundled into generation, distribution and retail will end up producing cheaper electricity over time as new players are attracted. The resulting expansion of the electricity industry will improve incomes of Zambians as the economy grows and this will make it cheaper for private companies driven by profit motives to take more electricity to more people at a faster rate than anything government is currently doing.

CLAIM: Our economy will be controlled by foreigners to our disadvantage if we sell off all parastatals.

ANSWER: The “control” by foreigners is not necessarily negative. Maybe they can teach us how to do things properly since we keep failing at almost everything! As stated above, there will be so may different investors from so many different countries that a business cartel is simply impossible. They will all be pursuing their own interests and will have no time to scheme about disadvantaging us. Moreover, no one is stopping Zambians from bidding for parastatals on sale.

By Michael Chishala

P/S – I am of the opinion that we should sell off every remaining parastatal (there are 42 left). If you think otherwise or there is something I have not addressed, please email me: michael [at] zambia [dot] co [dot] zm.