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Saturday, July 11, 2020

IDC doomed to fail without new business model

Columns IDC doomed to fail without new business model

IDCBy 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

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  1. Well written article. The other matter worth noting is that the government has far neglected ZDA which is a proper development tool. It would have worked to better the investment environment which in turn would have drastically helped to change the fortunes of these state run institutions. ZDA has not been properly funded and the funds raised during privatisation were moved to IDC and organisation that did not even need the funds in the first place. Further worsening the ZDA’s capacity. The newly formed Business Regulatory Review Agency could have been also been just a department under PACRA or even ZDA its self with a rephrased name and mandate.Bottom line is the whislt IDC is a client of the investment agency, it should not seen to be taking on new ventures without first cleaning the…

  2. Kalima, your excellent articles have gone to waste because we have “I-know-it-all” leadership in our government, even PF cadres on this site won’t see the sense in your articles because them & their master are connected to one central neural system. They are of the same mind, everything is just okay with them.

    But anyway, thank you for sharing your knowledge, am sure someone will save it on their electronic device & use it when Zambians decide to change government.

  3. Good article. Nkonde is very right. It is all about adopting correct principles and practices such as Independence and competence of the board and professionalism and competences of the management team. For starters, the President should consider hand over the Chairmanship of IDC to a competent Zambian. IDC in its current form is like INDECO with known end-result.

  4. State participation must be considered from a positive side, particularly in Developing Countries. Any form of qualifications or reservations will bring down the project even before it starts. Second, in the initial stages the orientation ought to emanate from government. As the business grows, then the business will increasingly take business decisions where government can sit back. The problem in Africa is doubting Thomases that lack confidence to take initiative and succeed. There is space for technical cooperation between IDC and similar entities in Singapore, Norway or even France and UK. Success needs to be rewarded and failure needs to be stopped. It is a matter of the right incentives from government to the technocrats. Why make money for government without a bite of cake?…

  5. Well written artical ba Nkonde!!! Informative and educating at the same time. Big up! Let the powers that be not shy away from such raised ideas for discussion while this project IDC is still in its infancy. Zambia definately needs IDC in like models of South Africas IDC…critical as well, and correct is too have independent minds; qualified not just on paper but exposed and well experienced individual to be a the helm of this entity. Its not too late to debate, rethink the management models articulated in this artical…Its been slightly over a year if am correct this institution was anounced, and to the majority of us, we still struggle to grasp clear direction, mandate of IDC.

  6. Mr. Nkonde, you are a joker, first you criticize the IDC then propose models such as temasek of Singapore knowing very well that IDC is modeled on this particular entity. The International Finance Corporation (IFC) and other major players are currently working with the IDC while you criticize and write articles which are totally un-researched and clearly expose you as someone who hasn’t done their homework. Anyways good luck with your day dreaming.

  7. Good, well articulated article. Problem is that even with well thought out plans, Zambia fails at implementation stage. This refugee mentality of grabbing what I can for myself is what has made seemingly brilliant ideas fail. It is all doing things to please self, family and political friends.

  8. The article is well written. And what about the slowing done of the the Chinese economy? Have you researched and realised that the chinese economy slowing down is as result of a dosage from Usa that promotes internal consumer demand as opposed to external(export) demand. As a result China is now turning its population into consumers than entrepreneurs.
    Your article must look at this also. The Usa government turned its population into bigger consumers(using the same dose) of their own goods and services and for the past 50years had driven the world economy. Now this has come to an end as they have surrendered the baton to China.
    Therefore for China to lead the next wave of global( previously called world) economic growth,she must do it like Usa did it but this time with a bigger…

  9. Why didn’t they leave the parastals aline without being IDC? IDC should concentrate on promoting industrialization as proposed without taking on the extra burden of running bloated unprofitable inefficient parastatals. What was wrong with doing the things that will make parastatalss nation to work efficiently and profitably and leave them alone? Let IDC start on its own. I don’t see IDC succeeding in the format adopted, it’s just a copy and paste from somewhere and heading nowhere.
    This country is funny, we know what to do and what not to do in order to succeed and we are simply not doing the right things. And cadres don’t get me wrong, I am not saying that UPND can do it better, for actually I foresee calamity befalling the nation if UPND were to assume power. The writing is on the…

  10. And cadres don’t get me wrong, I am not saying that UPND can do it better, for actually I foresee calamity befalling the nation if UPND were to assume power. The writing is on the wall for all to read and we choose not to read: UPND is NOT a viable alternative, it will take us on the path of a super parastatal called The Cartel Limited, with power entrenched in an unelected default leader called Mr Mmembe. Watch.
    UPND is no longer the same party that it was barely a few months ago, or better still, a few years ago when it toed Mr Mazoka’s principled leadership. UPND is now indistinguishable from The Cartel Ltd, HH has sold UPND for a cheap price of the chance to be in state house even without power to run the nation. Watch.

  11. Well written article Mr Nkonde!…How i wish our Political Leaders would think this way because everything in Zambia now seems to be Politicized, just look at how inefficient State owned companies like ZESCO, ZAMTEL,ZSIC….etc are. They leave much to be desired,If our Political Leaders were responsible, by this time the Zambian Govt. would have had a diverse pool of resources to tap into for economic development and that borrowing would have been to minimal levels……the problem is that Politics is in everything even where it is not necessary.

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