By Kalima Nkonde
The Industrial Development Corporation’s (IDC) Chief Executive Mr. Andrew Chipwende has dispelled the perception that IDC is the same as INDECO and gave examples of South Africa and Botswana as having the similar institutions which is correct . The majority of critics, however, may find it difficult to buy Mr. Chipwende’s assurance given Zambia’s political environment, which is totally different from that obtaining in South Africa and Botswana.
My article will discuss some ideas on the concept of the IDC, which in itself may not be a bad idea per se if we followed successful benchmarks.But I have reservations whether it will work in Zambia given the knack of politicians interference in State institutions.
In his budget Presentation on the 9th October,2015, Minister finance, Mr Alexander Chikwanda stated that Government had transferred 29 out of 33 State Owned Enterprises to the Industrial Development Corporation(IDC) with the objective to promote economic diversification and increase non traditional exports by investing in strategic non mining sectors.
But early indications seem to suggest that the new Industrial Development Corporation and its subsidiaries are likely to fail to achieve their intended objectives. The reason is that they are structured in almost similar ways as the State Owned Enterprises under UNIP, except for the change of name from Indeco/Zimco to IDC. There appears to be no apparent difference in the modus operandi from the previous parastatals.
For a start, President Edgar Lungu, a politician, is the Board Chairman of IDC just like President Kenneth Kaunda was of ZIMCO and one wonders whether he is qualified for such a corporate job and whether he will have the time to read and assimilate board papers, while at same time running a country in economic turmoil! The President gave instructions that all Boards of Directors of state owned companies that were transferred to IDC should be dissolved. It is not rocket science that the new board members are likely to be made up of political appointees and cronies and will not be merit based. It will be jobs for the boys as usual. The new IDC in its current form, is a clear case of planning to fail as the old UNIP business model with negligible tinkering is still being put in place for political objectives. This article would suggest an alternative business model which has succeeded in other countries to be adopted..
It is important that we look at the IDC issue from the historical perspective in the first instance, by highlighting the business model that UNIP followed and why it failed. Parastatals under UNIP were based on the socialist business model and it followed countries like old USSR now Russia, old China, Eastern Europe, Cuba and others. The UNIP government owned about two hundred and fifty companies(250). As everybody knows, State ownership under this model has been discredited as it miserably failed mainly because of political interference from the ruling party, mismanagement , appointments to key positions being based on political patronage rather than merit. There was also over employment in State Owned Enterprises. These factors led to poor performance and loss making and consequently resulting in huge government subsidies and the build up of mountains of debts for the State Owned Enterprises.
In 1991, the MMD started privatizing over two hundred (250) State Owned Enterprises. Currently, there are only about thirty three(33) companies that are owned by the State. The MMD followed the liberal capitalism business model to the extreme. They believed that the State has no role to play in the economy and it just needed to put in place policies that created an enabling environment and ensured that the private sector flourished. The reasoning was that market forces should drive the economy and take care of everything. Zambia’s experience of acute unemployment, tax evasion by multinationals, acute poverty and illicit foreign exchange outflows has shown that the market alone in a third world country like Zambia cannot bring development and social justice.
Zambia’s experience has discredited the unfettered capitalism business model. The liberal capitalism model has also been discredited by the 2008 financial crisis caused mainly by the sub prime mortgage lending rates which led by the collapse of the Lehman Brothers, an investment banker and other companies which threatened the global economy .The financial crisis demonstrated that left to its own devices, the market is not a responsible force and cannot do things for the common good. State intervention of some form, including more regulation is important. It has also been demonstrated by the new comers to industrialization – Indian, China, Turkey and Brazil- who all had no choice but to intervene in local markets to achieve their objectives.
It is apparent that UNIP went to the extreme of socialism through its State ownership of almost all the means of production. The MMD, on the other hand, went to another extreme of liberal capitalism of blindly believing in market forces to sort out the economy. The behavior of the mines of not bringing back all the foreign exchange from sales of copper, the threats to retrench and close operations at the drop of the hat, the resistance by mines to legislation which is the best interests of Zambia, the tax evasion and illicit foreign exchange externalization by multinational corporations have all proved that the market cannot be left to its own devices to deliver to the masses of the people.
It has become apparent that there is a role for the State in the economy for an emerging country like Zambia; but the question is what model should Zambia follow? Zambia’s 27 years experience with the socialist experiment of UNIP and the 20 years experiment with pure capitalism under the MMD, should be in a position to learn from the two experiences and look for a business model appropriate for the 21st century which should facilitate the diversification of the economy and spur economic development.
The writer believes that Zambia should consider adopting the 21st Century State Capitalism business model which was pioneered by Norway, followed by Singapore and recently by China to name but a few successful State Capitalist countries. The newly established Industrial Development Corporation (IDC) and the management of State Owned (SOEs) companies under its control should follow the principles that these countries have used in the management of State Owned Enterprises and what the Organisation for Economic Corporation and development(OECD) recommends on Corporate Governance of State Owned Companies.
The government of Norway has ownership stakes in many of the country’s largest publicly listed companies, owning 37% of the Oslo stock market, and operates the country’s largest non-listed companies including Statoil and Statkraft. In his book recently published, “the Government as a Capitalist” , the former CEO and Chairman of the State oil company Statoil, Harald Norvik explains that Government ownership in Norway is surprisingly successful because it is not more controlling and activist as a co – owner. The Government had decided to partner with other private owners , and manages the companies with other owners through independent boards, follows good corporate governance and management principles and uses the Stock market. It operates companies as if they were private companies with no interference. The government also operates a sovereign wealth fund, the Government Pension Fund of Norway – whose partial objective is to prepare Norway for a post-oil future.
Singapore got independence from Britain almost at the same time as Zambia, led by the the visionary founding father Lee Kuan Yew -the only leader to take leave to go and study business at Harvard while in office so as to learn the good things in a capitalist system with a view to adopt them in his country. Lee Kuan Yew died at 92 in March 2015. The country achieved developed world status within 50 years. The Singapore Government has controlling shares in many government linked companies and directs investments through sovereign wealth funds. The Singapore government formed Temasek, which like IDC is a holding company for State owned enterprises which they call Government Linked Companies (GLCs). Temasek applies stringent governance and operating guidelines to Government linked companies. Singapore’s GLCs are well managed, efficient and profitable. They have played a vital economic role in transforming Singapore from a developing third world country to a developed first world country.
The country has at the same time adopted business friendly legislation which has attracted some of the world’s most powerful companies. The close cooperation of private business and the ownership of government linked companies defines Singapore’s version of State capitalism. The Chinese are said to have copied from Singapore and adopted the State Capitalism model which is responsible for their economic miracle but under a socialist political system!
China is another example of State Capitalism in the 21st Century. The Communist Party uses capitalist tools such as listing state-owned companies on the stock market in order to achieve its objectives. The State uses various kinds of state-owned companies to manage the exploitation of resources that they consider the State’s crown jewels and to create and maintain large numbers of jobs. The government also uses sovereign wealth funds to invest their extra cash in ways that maximize the state’s profits. The Chinese Communist Party is so good at using capitalist tools to achieve its desired ends that instead of handing industries to bureaucrats or cronies, it turns them into companies run by professional managers. According to Andrew Grant, head of McKinsey’s China practice, many of the successful companies in China have what he calls a “hybrid” structure, mixing features of private and state companies.
It is apparent from the analysis that as a nation, we need to learn from other successful countries and use them as benchmarks when we want to implement major policy decisions. The introduction of IDC is in itself a noble cause but the Party in power should be patriotic and nationalistic in approach and not be motivated by narrow short term political objectives in setting up such institutions. It is in the government and public interest that all SOEs are professionally run and apply good corporate governance practices as per OECD guidelines. I would therefore suggest that the IDC should adopt fully the State Capitalist business model and ensure that the following best practices of the model are adopted:
Independence of management and the Board of directors from political interference Management and Board appointments should be based on merit Professional managers and not bureaucrats or party cadres should run the institutions The Government should partner and sale shares to private partners and enter in some form of Private Public Partnership with a view to infuse management expertise
The State owned companies should list some of the shares on the Stock market (Lusaka Stock Exchange) when they qualify so that Government dons the straight jacket of market discipline.
I would also recommend that the companies that IDC has taken over need to be restructured and turned around and their balance sheets cleaned up so as to make them attractive to private investors in preparation for listing in three to five years’ time.
The writer is a Chartered Accountant by profession and a financial management expert. He has lived in the diaspora in England, South Africa and Botswana for over 25 years. He is an independent and non partisan financial and economic commentator