By Mwansa Chalwe Snr

In Zambia, government economic performance reviews and planned measures to grow the economy, rarely mention the role of State Owned Enterprises (SOEs). This is in spite of the potential material impact on the economy they can have. The latest 2023 Mid-Year Performance Review and 2024-2026 Medium term Budget Plan held on 22 August, 2023, is the case in point. The different Zambian administrations, post privatisation programme, have not sufficiently focused on utilising SOEs to influence economy. These are a powerful tool in any government’s tool kit in the 21^st Century, especially after the Covid-19 experience.

This article will try and demonstrate how SOEs can be reformed so that they can improve their efficiency and performance. SOEs can help grow the economy, create jobs, earn foreign exchange and contribute to the mobilisation of tax revenue, like they have done in other countries.

Poor performance of SOEs and the Privatisation craze

SOEs are renowned for low productivity, poor performance, poor quality services, high costs and the employment of incompetent and inefficient officials based on political patronage rather than technical and managerial competence. Consequently, they constantly require State intervention through financial support to ensure that they are kept operating. These underperforming SOEs drain scarce resources required to provide essential services to citizens. Out of the 36 subsidiaries in the Industrial Development Corporation (IDC) portfolio, there are only about ten (10) companies that are making profits. Zambia, with its current debt mountain, requires the never tried before new business model for managing State Owned Enterprises.

In the 1980s and 90s, the poor performance of state enterprises led to calls by the Washington Consensus for private-sector-led growth. Privatization was provided as the panacea to developing countries’ economic ills. The IMF and World Bank imposed the Structural Adjustment Programme (SAP) on highly indebted countries like Zambia. It was accompanied by an extreme and rushed Privatisation Programme, whose impacts – positive and negative – are still being felt decades on.

Today, following the failure of privatization to provide answers to job creation, inclusive economic growth, industrialization, poverty reduction and human capital development in Zambia, there has been some debate as to which way to go with the remaining SOEs. However, with the success of reforms of SOEs in China, Vietnam, Latin America and other countries, some objective analysts, including this writer, are recommending that Zambia should follow the reform route for its current SOEs. There is empirical evidence that suggests that with a properly designed reform program in governance and management, SOEs can be a conduit for sustainable economic growth. They can also facilitate government to achieve other social and economic objectives.

Proposed Industrial Development Corporation (IDC) Reforms

In the past, the solution to the poor performance of SOEs was a one size fits all – straight privatisation or restructuring and then privatisation. And even now, there are many voices especially in the Zambian Private Sector – with vested selfish interests – who are calling and vying for companies like Zamtel, Zesco, Zaffico and other attractive national assets to be privatised, so that they could buy them to grow their business empires. Privatisation as a solution to IDC subsidiaries is sub optimal, because it presupposes homogeneity in the portfolio. What is required, are multidimensional solutions. And if one carried out extensive research on the performance of SOEs around the World, they will find that in the 21^st Century, privatisation is just one of the solutions among the myriad of solutions in what should be contained in a comprehensive reform package of SOEs.

In order for the Zambian government to change the fortunes of SOEs, there is a need to change its current business model. The new recommended business model is what I have coined as: “Delegated Revitalization Model (DRM)”. This model entails changes in governance and management practices. The government has to abandon the current traditional model of patronage, and replacing it with the recently established multidimensional accepted best practices of running SOEs efficiently.

In the new model, the DRM, the shareholder – the Government – has to lay its hands off SOEs’ operations and let professional managers do their job – like other successful countries such as German, Malaysia, China, Vietnam and South Korea to name but a few, have done. And if the Board of Directors and Managers fail to meet the Key Performance indicators (KPIs) given to them, they should be fired like the private sector does! And in order to apply the DRM, there is need for major reforms in how SOEs are currently run.

Benchmarks of Success of SOEs

In order to ensure that the proposed model and its inherent SOEs reforms are not completely dismissed out of hand by critics and disciples of privatisation, it is important to cite some benchmark countries who have successfully implemented some of its package of reforms, and made SOEs efficient and profitable. Zambia’s policy makers can learn from such countries – made up of both developed and developing countries – about the important role that efficient SOEs can play in the growth and economic development of the country in the 21^st Century.

These countries have found a rational, pragmatic and fine balance between the Private sector and SOEs as drivers of economic growth and development. The two sectors, are complementary.

“Despite a wave of Privatisation in the last 3 decades, SOEs still contribute significantly to economic growth of both developed and developing countries. For example, SOEs account for about 30% of gross domestic product(GDP) in the People’s Republic of China(PRC),38% in Vietnam, 25% in India and Thailand and about 15% in Malaysia and Singapore”, Wrote Chul Ju Kim and Zulfiqar Ali in their paper: Efficient Management of State-Owned Enterprises in 2017.

There are many countries in Africa, Asia, Europe and Latin America that have carried out reforms to ensure that SOEs improve their efficiency and performance. But only four countries have been used as benchmarks for successful reforms of State Owned Enterprises. The four benchmark examples of countries, and a region, with successful SOEs, for illustrative purposes are: German, Malaysia, China, South Korea and Latin America

Germany may surprise many people in Zambia by the fact that Europe’s biggest economy, and the World’s fourth largest economy, has a thriving SOEs ecosystem, which has immensely contributed to its growth and development. This was confirmed by Leibniz Centre for European Economic Research.

“We document that SOEs are highly relevant for the German economy. Recently, SOEs have gained in relevance even further with increasing levels of government intervention in the economy during the Covid-19 crisis. In Germany, about half of all economic sectors have at least one enterprise with state ownership. When measured by the number of employees, they account for almost 40 percent of the overall public sector and hold 35 percent of public credit market debt. Most new SOEs operate in the energy provision sector, have a private legal form, and are classified as market producers –
exemplifying a trend towards more independent SOEs,” Leibniz Centre for European Economic Research wrote in their 2022 paper: State-owned enterprises in Germany and their implications for the core public sector.

Malaysia is another country which is a democracy with a Capitalist economy. It was bedevilled like Zambia, with poorly performing SOEs and embarked on reforms which were very successful according to the Asia Development Bank Institute (ADBI) study.

“Malaysia provides a successful example in SOE reforms for other Asian countries to follow. In 2004, the Government of Malaysia embarked on the Transformation Programme for Government Linked Companies (GLCs).These reforms helped instil a performance-based culture and improved SOEs management through better utilization of capital and other resources, all of which translated into higher profitability. Inspired by the success of the GLC transformation program, the government initiated the New Economic Model which required GLCs to expand their operations globally. By 2014, GLCs had operations in 42 countries and the 20 largest SOEs operating overseas had tripled their revenue to $22billion”, The Asia Development Bank Institute (ADBI) wrote in its 2017 paper, on the efficient management of State Owned Enterprises.

China’s economic miracle provides valuable lessons to Zambia about the important role that State Owned companies can play in a country’s economic development. In a period of 40 years, China managed to transform itself into the second largest economy in the world. It removed 800 million people out of poverty within that period. This would not have been possible had its SOEs not survived through multiple stages of multifaceted critical reforms including exposure of SOEs to market discipline, in order to improve their governance and management. The Chinese SOEs are currently superintended over by the State-Owned Asset Supervision and Advisory Commission (SASAC). And one of the main features of the Chinese Model of SOEs management, is their independence from its political masters. The Chinese state owned companies that Zambians see doing business here, like AVIC International, China Jiangxi Corporation, China Development Bank (CDB), Sino Hydro, China Non- Ferrous Mining Company, China Exim Bank and many others, are quite independent of the government and no Ministers or Permanent secretaries intervene in their management.

South Korea is a Capitalist country. The country has been industrialized by leveraging on SOEs.

“Korea has seen SOEs’ participation not only lead to better services for citizens, but also in helping to promote industrialization in strategic sectors. The Korean government has made successful transitions that demonstrate how effective and important this sector is to our national economy and the global economy,” said BONG-HWAN CHO, Executive Director Korea Institute of Public Finance, when addressing the International Symposium on Governance, Performance, and the Best Reform Practices in State-Owned Enterprises in Latin America and the Caribbean and Korea in 2015, Seoul.

In Latin American countries, SOEs in the region were renowned for low performance, low-quality services, and high costs that constantly required State intervention. Consequently, in the 1980s and 90s, an intense wave of liquidations and privatization of SOEs was carried out in almost the entire region. But the privatization of SOEs did not succeed in some countries, and therefore, a process of renationalization occurred, particularly in infrastructure and natural resource businesses. And the latest data shows that Latin American countries have a substantial number of SOEs. These include the top five (5) economies – Brazil (147), Argentina (112), Mexico (68), Columbia (35) and Chile (30).

“Over the last decade, several countries in the Latin American and the Caribbean (LAC) region have strengthened the management of their state-owned enterprises (SOEs) through a pro­cess of reforms,” Wrote the Inter—America Development Bank (IDB) in its report on: Governance, Performance, and the Best reform practices in State-Owned Enterprises in Latin America and the Caribbean and Korea.

Latin American countries’ big economies of Brazil, Argentina, Chile, Mexico, have learnt and adopted the best reform practices for state Owned enterprises. These reforms have include: how to improve the organization and effectiveness of oversight, how to secure monitoring and evaluation based on performance and results, as well as how to ensure professionalism in management.

The list of countries above debunks the fallacious notion held by some disciples of pure Capitalism that State Owned Enterprises (SOEs) are a socialist phenomenon, and that Zambia should get rid of all of SOEs through privatisation. The reality on the ground is that, even some of European’s democratic and capitalist countries like German, France, Scandinavian countries like Sweden, Norway, Finland, Denmark, Iceland and many others, do have SOEs.

Conclusion

On the basis of the experience of some developed, and many developing countries, the Industrial Development Corporation (IDC) is well advised to devise a well-researched, thought out and sequential reform program for its portfolio of SOEs in order to improve their efficiency and performance.

The reforms should encompass multifaceted measures such as implementing good corporate governance principles specific to SOEs as per OECD guidelines, allowing SOEs management more autonomy in their business operations, strengthening monitoring and evaluation, restructuring, equitization and marketization of others through exposure to the discipline of the market, among other reforms. The details of the reforms required, are beyond the scope of this article.

Needless to say that SOEs are important controllable tools that any government needs to use to intervene in order to influence the country’s social and economic trajectory and correct market failures. The Private Sector cannot deliver everything. Markets do fail as the 2008 financial crisis showed in USA. We have also seen suspected market failure in Zambia in the banking industry in their pricing of money, as well as recently with the price of mealie meal by millers. Greed does play a major role with some Private Sector players’ decision making. This is the undeniable reality, if we are to be honest and objective.

The overriding caveat is that, for DRM reforms to work and stimulate economic growth, create jobs, earn foreign exchange and contribute to taxes, it requires unprecedented political will, and mind-set change by civil service bureaucrats.

The writer is a Chartered Accountant and Author. He is an independent financial commentator, Analyst and a Semi-retired MSME Consultant. He is also an Op-Ed Contributor to the Hong Kong based, Alibaba owned, and South China Morning Post (SCMP). Contact: [email protected]

Analyts anticipate that mining investors will flock to Zambia, still one of the biggest copper producers globally, especially since President Hakainde Hichilema came into office in August 2021 and announced a range of incentives, such as a sliding royalty rate for mines, to lure back investors.

Hichilema, or ‘HH’ as the investor community call him, has announced that he wants Zambia’s mining sector to be the country’s foremost revenue generator. He subsequently set a target to increase its copper production from 800,000 tons a year to three million tons a year in the next three years – a bold aim, especially since the Konkola and Mopani copper mines haven’t resumed production yet.

But overall, Zambia’s mining sector appears to be on track for renewed activity from international mining companies. In 2022, First Quantum Minerals announced $1.35bn worth of new projects in the country, while Anglo American announced a return to full-scale copper exploration after it signed a provisional joint-venture agreement with Aim-listed mining and exploration company Arc Minerals. In addition, KoBold Metals, a Californian-based metals explorer, is busy raising $200m to develop the copper reserves it recently acquired in Zambia, the Wall Street Journal reports.

The projects announced by both these miners are a sure vote of confidence in the Hichilema administration.

Exploration is an equally important aspect of Hichilema’s investment drive into Zambia’s minerals sector and the government is currently doing geological mapping for the remaining 45% of the country, while the existing 55% will be updated.

Unfortunately, Hichilema has also had to deal with numerous problems since he took over the reins from the Lungu presidency, an era in which mining companies faced insecurity of tenure, high royalty rates, and the withholding of VAT refunds.

Delivering on promises has been harder and slower than anticipated, says Marcus Courage, CEO of Africa Practice. It has involved drawn-out negotiations with creditors for debt restructuring, cleaning up the country’s cadastral system after widespread licensing corruption, restructuring Mopani, settling the Konkola disputes, and addressing the power crisis. “These things are all taking much longer than anticipated,” says Courage.

The mining cadastre was subject to a detailed audit over eight months. They went through every single major licence with a fine toothcomb and threw out those that hadn’t been properly awarded – Nick con Schirnding

The administration is doing its best to clean up various practices and set the country on a new course, says Nick von Schirnding, director and executive chairperson of Arc Minerals. “But changing a supertanker takes time.”

Investor perception also takes time to change, and the dubious way in which mining and exploration licences were acquired under the Lungu presidency could still deter investors. Also, under previous presidencies, mining rights were at times taken away. “This can put investors off. Once bitten, twice shy,” said one mining executive who asked to remain anonymous.

The best thing Zambia can do for its investor community is secure a stable policy environment, even though its taxes are some of the highest in the world.

Peter Leon, partner and Africa chairperson at Herbert Smith Freehills, said the country’s debt issues have not been a significant deterrent for would-be investors, but rather its ever-changing royalty rates, which needs to be fixed.

Leon’s view is that Zambia’s mineral legislation is sound, the government is committed to good governance and the rule of law, while the country has a lot more policy certainty than South Africa.

Time is of the essence though. There is a question mark over how realistic a three million tons a year copper production target is, says Leon. He also notes that Hichilema has two years left in office and if the economy hasn’t grown as he has promised he might not be re-elected, although Zambia’s recent debt deal is just what is needed.

A rosy future?

The good news is that, after lengthy negotiations that lasted close to three years, Zambia finally secured a deal on 22 June to restructure its more than $6bn debt. In terms of the restructuring agreement, Zambia’s debt will be rearranged over more than 20 years with a three-year grace period during which only payments on interest are due, Reuters reports. The agreement with its official creditors means the country will receive a $188 million loan from the International Monetary Fund as part of a $1.3bn package that was approved in August 2022.

There are also indications that the long-standing issues with Konkola and Mopani respectively will be resolved by the end of 2023. An insider close to the process said an agreement between Vedanta and Zambia Consolidated Copper Mines, which is 77%-government-owned, is imminent on Konkola. “In government we’re saying: ‘You can’t mine in the courts.’ You have to be pragmatic. The negotiations have been difficult, but the intention is to reach an agreement by the end of the year.”

Konkola currently produces less than 100,000 tons of copper a year, because of a lack of investment. But once a deal has been concluded, the Konkola Deep Mining Project, which has a nameplate capacity of 300,000 tons a year, can be initiated.

With Mopani the process is less complicated, and the Zambian government is currently in possession of bids from four shortlisted potential buyers: China’s Zijin Mining and Norinco Group, Sibanye- Stillwater, and an investment vehicle owned by former Glencore employees. A final bid will take place in mid-July and a deal is expected to be in place in October this year. Mopani’s production is currently around 80,000 tons a year – a far cry from its potential 225,000 tons.

“We have seen similar moves in Botswana and Namibia towards transparency through a public mining cadastre — and even some movement in South Africa in this direction. So Zambia’s success in rolling out this facility certainly seems to be having a positive effect across the region — Desmond Mossop, SRK.

Both Konkola and Mopani are in the fortunate position that they’re not resource-constrained and with more investment, production could be ramped up.

With the clean-up of Zambia’s mining cadastral portal completed, the country is well-positioned to attract new investment, says Courage. “The queues outside the cadastre office stretched around the block.”

“We have seen similar moves in Botswana and Namibia towards transparency through a public mining cadastre — and even some movement in South Africa in this direction,” says SRK Consulting partner Desmond Mossop. “So Zambia’s success in rolling out this facility certainly seems to be having a positive effect across the region.”

Von Schirnding says he is thoroughly impressed with the speed with which the Zambian government is turning things around. “The mining cadastre was subject to a detailed audit over eight months. They went through every single major licence with a fine toothcomb and threw out those that hadn’t been properly awarded. They replaced almost the entire staff complement of that office. It’s real proof that there’s a desire to change.”

Zambia and the DRC’s plans for collaboration on electric vehicle battery production are also gaining momentum, with the US and Afreximbank “waiting in the wings” to provide concessional funding. Feasibility studies are being conducted to establish two special economic zones for battery manufacturing purposes, Courage adds.

“Many of the world’s largest mining companies like what they hear from Hichilema. They see a government that understands the needs of investors. The president recognises the opportunity to capitalise on the surging demand for copper,” says Courage.

Hichilema is a breath of fresh air, says Von Schirnding. “The government is being very sensible and proactive. When you operate in any jurisdiction you need an established mining framework which governs the awarding of licences and mining regulations. The second thing is you need the rule of law that will enforce those regulations. Those are the key building blocks when entering into any country.”

Source:Miningmx