Monthly Archives: January 2014
As presented by John M. Kasanga during a public discussion organized by Economic Association Of Zambia (EAZ)
On 24th January 2014, the public media reported that the IDC had been officially incorporated, based on an announcement posted on the President’s Facebook page on the social website.
The key elements of this announcement are that:
ü The IDC has been incorporated under the Company’s Act with an initial authorized capital of K20 million of which, K10 million has already been paid up using proceeds from the Privatisation Revenue Account;
ü The IDC will be the holding company for SOEs incorporated under the Companies Act and, the Banking and Financial Services Act; and,
ü A Sovereign Wealth Fund (SWF) to be created immediately that will be supported by the IDC. 75% of the dividends from the IDC and its subsidiaries are to be paid into the SWF.
The establishment of the IDC has drawn a myriad of reactions, both for and against from a cross section of the public including: politicians, academicians and economists (discussed later).
By establishing the IDC, it can be inferred that the Government wants to be an active player in the business environment rather than focusing on providing an enabling environment for private sector-led growth. Amongst the questions that can be asked are
- Is it necessary for the Government to take up this active role in business, establish the IDC and invest in an increased number of SOEs? and,
- Since the IDC has been established, what can be the perceived risks and benefits?
2.0 THE ROLE OF AN IDC IN THE GLOBAL CONTEXT
In his New Year message at the end of 2013, the Republican President, HE Michael Chilufya Sata announced the decision of the Government to establish the Industrial Development Corporation (IDC). The President indicated that the IDC will focus on: “developing labour intensive industries and enterprises in agriculture, construction, manufacturing, tourism, science and technology, among others”. The President also said the Government will continue to promote an open economy to attract investment and expand the country’s export opportunities.
In a subsequent statement issued early January 2014, the President said that the IDC will be a tool for the modernization and diversification of the economy. The state through the IDC will maximize the value government assets by establishing a Sovereign Wealth Fund (SWF). The SWF will focus on stimulating investment in strategic non-mining industries, thereby expanding the country’s investment portfolio and creating jobs. The IDC will also boost the contribution of State-Owned Enterprises (SOEs) to national development by placing them under one umbrella holding entity to deepen their reform, enhance efficiency and maximum returns.
The PF manifesto on page 40 states that…….”commerce, trade and industry is an engine for economic growth and thus it is strategic for raising the incomes, consumption and living standards of the people”. Among the measures that the manifesto indicates that PF government would undertake is to establish an “Industrial Development Commission to identify and initiate industries”.
A curious point to discern from the above is whether the establishment of the IDC as a corporation is what the PF Manifesto refers to as the Industrial Development Commission – can also be abbreviated as “IDC”! The IDC will not only act as a holding company for other SOEs but will invest in and run industries whilst also managing the SWF, i.e. like a super SOE!
In most countries that have established industrial development corporations, this role is distinct from actual running of industries or acting as a holding company in the management of other SOEs. For the other countries, the IDCs operate as Development Finance Institutions (DFIs). Examples include South Africa, Zimbabwe, Norway, India among others.
In the countries cited, the IDCs largely operate as DFIs and/or special purpose vehicles for investment promotion/facilitation (as the case of ZDA in Zambia) making strategic investments in infrastructure deemed as critical for facilitating development of private sector led enterprises.
The investment activities of the conventional IDCs are based on strict adherence to economic criteria aligned to broader national development priorities. They also apply business and financial viability principles without political influence, as they have to achieve returns from investments directly or through social contributions agreed in advance and reimbursed by their governments. As a general practice, they do not engage directly in the running of enterprises or supervising other SOEs.
The Zambian IDC model is however broader and encompasses: investment financing and management of the SWF; identifying industries to establish and directly managing such enterprises; and, supervising other SOEs as a holding company. This also means that the Zambian model creates the IDC as the “super or apex” SOE with a “mixed grill” portfolio that will also act as a creator cum manager of industries and, supervisor of other SOEs whilst also engaging in conventional DFI functions.
The establishment and management of the SWF under the IDC however give it a face similar to international models. The SWF can be an important mechanism for facilitating the channelling of surplus state funds (including proceeds of the Privatisation Revenue Account and BOZ reserves) into strategic long-term investments that drive growth of the economy.
Whether the Zambian IDC model can deliver the expected results is clearly a matter of speculation at this stage. It is however worth noting that the IDC has been established without the detailed strategic and business plan being availed to the public, if this was actually done. In an ideal situation, the establishment of the IDC should have been preceded by a detailed study informed by nationally agreed industrialisation and economic diversification policies and strategies. In this case, policy intimations contained in the President’s New Year message appear to have been rapidly translated into action without adequate analytical grounding. This can be a typical recipe for failure.
3.0 IS THE IDC MODEL AS PRESENTED BY THE GOVERNMENT NECESSARY?
In addressing this question, it is important to firstly establish the gaps that presently exist in investment financing, creation of industries in strategic sectors (and parts of Zambia), and corporate governance of SOEs which the IDC will fill. In other words, what is it that is broken that the IDC intends to fix? In providing a perspective for discussing this question, it is necessary to review each of the intervention areas that the IDC will be expected to address.
3.1 Provision of Investment Finance
The IDC will not only manage the SWF but carry out strategic investments in the economy to create industries it will identify whilst also acting as a financing intermediary. The information availed so far does not indicate whether the IDC will finance private sector projects or limit this to those presented by SOEs. Outside of the formal banking sector, there already exists the Development Bank of Zambia (DBZ) which is Zambia’s DFI and pursues similar objectives as the IDCs in South Africa and Zimbabwe.
Another institution presently existing for financing is the Citizens Economic Empowerment Commission (CEEC), which was established under the Citizens Economic Act No. 9 of 2006. Apart from CEEC, there are various other windows for micro financing that are privately managed but supported by donors as part of bi-lateral aid which includes an SME facility managed by the Zambia Development Agency (ZDA).
From the aforegoing, there already exists DBZ as Zambia’s version of a DFI which can potentially undertake the investment financing activities that the IDC is now set to do. This is more so when consideration is also given to the complementary role of CEEC as an MFI operating side by side with DBZ.
National Development is not an event but a longitudinal process that should succeed generations of political leaders and governments. What is key, is to interpret national aspirations into cogent development goals plans and strategies to be implemented methodically, supported by the prudent allocation and management of resources by the government of the day.
The establishment of the IDC as pronounced by the government is likely to have far reaching consequences in how national resources are allocated and, economic development and growth are driven. Zambia is emerging from the effects of economic dislocation arising from the first republic socialist oriented policies and, the process of market transformation is still “work in progress”.
Since ideology plays a role in influencing the development model adopted, the PF government needs to clearly state its ideological orientation and specific policy measures that will guide economic management, especially resource allocation and industrialisation. Employment creation is an outcome from economic activities and needs to be aligned to industrial development policies and strategies.
 e.g. whether it will be free market; command/planned economy where business activities and the allocation of resources are determined by the government rather than market forces; or, mixed economy where specific sectors or large sole investment activities are undertaken by the government, side by side with the private sector.
The Zambian Government is on course with all external debt obligations and both external and domestic debt levels remain below the international thresholds of 40% and 25%, respectively. The Government will continue to be mindful of the need to maintain debt sustainability to safeguard macroeconomic stability.
The economic development programme of the Government is now in full gear but a lot of effort is expected from respective Ministries, Provinces and other Spending Agencies to ensure that planned programmes are executed in a timely manner. Consistent with ensuring the speedy implementation of development programs throughout the country, the Ministry of Finance will continue to ensure the compliance with high standards of resource governance.
Looking back to the end of 2013, preliminary estimates indicate that the total debt as a percentage of GDP stood at 28%. Of this, external debt stood at US $3.1 billion [approximately K17 billion] or 13.7% of GDP, whilst domestic debt stood at K17.6 billion or approximately 14% of GDP. Debt service (principal and interest payments) stood at K11 billion or 1.2% of GDP (and approximately 6% of domestic revenue). In this regard, external and domestic debt levels are below the international thresholds of 40% and 25%, respectively.
By compliance with the provisions of the Loans and Guarantees (Authorization) Act Cap 366 of the Laws of Zambia, all debt charges arising from loans contracted under the Act shall be charged on the general revenues of the Republic of Zambia. It should be noted that the Ministry provides for debt service in the national budget as constitutional obligations of Government.
Commenting on Zambia’s external debt, The Acting Republican President, who is substantively the Minister of Finance Alexander Chikwanda said the assertions by some sections of society over the last few days, creating an impression that the Government had defaulted on debt obligations to Brazil, Iraq and China, should be discarded as they are not based on empirical evidence.
“The correct position is that, the figures being quoted in the public domain are not as a result of delinquency but on account of the special bilateral arrangements between the Government of Zambia and the concerned creditors, which arrangements have been structured under what are referred to as Paris Club Agreed Minutes of 2005; the benchmark for providing debt relief under the Heavily Indebtedness Poor Countries (HIPC) Initiative,” said Mr. Chikwanda.
The special bilateral arrangements entered into with Brazil, Iraq and China, allow for suspension of debt service payments during the period of bilateral negotiations – pending signing of debt relief agreements. The resultant debt payment arrears are what are referred to as ‘Technical arrears’.
In order to resolve the outstanding ‘Technical arrears’, the Zambian Government has been negotiating with the Governments of Brazil, Iraq and China with a view to signing bilateral debt relief agreements. The resultant agreements will stipulate the mode of effecting debt forgiveness under the HIPC Initiative. The three bilateral creditors are the only remaining creditors that are yet to deliver their share of debt relief to Zambia under the HIPC Initiative.
The Acting President also clarified that since the Zambian Government had not yet signed debt relief agreements with Brazil, Iraq and China, the eligible obligations to these countries would continue to be recorded as ‘Technical arrears’ although no actual money is expected to be paid out by the Zambia Government.
“It is as a result of such arrangements that although the Zambian Government is accumulating the ‘Technical arrears’, neither Brazil, Iraq nor China has been sending demand bills for debt service for settlement. Without demand bills for debt service, there can be no settlement of a debt; therefore, Zambia is not in default in any way,” said Mr. Chikwanda.
The current status of bilateral negotiations on the delivery of debt relief with the three creditors is as follows:
1. Debt owed to Brazil
The Government of Zambia and the Federal Government of Brazil have agreed that the outstanding debt of US $67. 1 million owed to Brazil will be treated through the special bilateral arrangement. Under this arrangement, 80 percent will be cancelled while 20 percent will be repaid on terms of the agreement to be signed between the two parties. The debt relief agreement between Zambia and Brazil is expected to be signed in December 2014.
2. Debt owed to Iraq
The Government of Zambia and the Government of Iraq have agreed to settle the outstanding debt of $37 million under the Paris Club VIII debt write-off framework. Under this arrangement, Iraq will cancel 90 percent of the outstanding debt stock, while the remaining 10 percent will be repaid on terms of the agreement to be signed between the two parties.
3. Debt owed to China
In 2011, the Government of China, through a protocol, delivered partial debt relief by cancelling the outstanding amounting of RMB Yuan 247 million which represented 50 percent of the debt forgiveness from China. The Government of Zambia has commenced negotiations with Government of China on the cancellation of the remaining 50 percent of the outstanding debt. It is expected that the negotiations will be completed by the end of this year and a debt relief agreement signed in 2015. Total outstanding debt to China stood at US $19. 2 million as at end of 2012.
Upon an unbiased analysis of the active reappearance of INDECO in Zambia’s economic prose, following President Michael Sata’s pronouncements in his New Year address that the government will re-introduce INDECO as part of their economic restructuring process in 2014, an annotation is hereby submitted.
The birth of INDECO can be traced to as far back as the late 1960’s. Its existence came into being after the Mulungushi Reforms of April 1968: the government, under UNIP, declared its intention to acquire equity holdings (usually 51% or more) in a number of key foreign-owned firms, to be controlled by a parastatal corporation named the Industrial Development Corporation (INDECO), now defunct, the state-owned conglomerate, together with the Finance and Development Corporation (FINDECO) and the Mining Development Corporation (MINDECO), formed ZIMCO (the Zambia Industrial and Mining Corporation).
These parastatal bodies allowed state control of all insurance, building and mining societies etc.
In his address to the nation on New Year’s Eve, President Michael Sata said the motivation for resurrecting INDECO was to fight unemployment and encourage growth in the economy.
The new INDECO, he said, would focus on developing labour-intensive industries and enterprises in sectors such as agriculture, construction, manufacturing and tourism.
Following the Government pronouncements and Parliament address that the Government has established the National Industrialization and Employment Creation Strategy Policy through which the industrialization of Zambia would be achieved and challenges of youth unemployment addressed, last year in September 2013, the Government through the National Economic Advisory Council launched and presented to the public the Zambia Integrated Youth Employment Creation (ZIYEC) Model which will cost a fortune K2.209 Billion Kwacha and generate about 462,000 jobs annually. This employment creation model will operate at four levels of implementation phase.
Perhaps, we dare say, it is against this background that the government desires to resuscitate the defunct INDECO.
It is worth noting that President Sata’s intention of reducing unemployment and growing the economy are a very welcome deportment. However, the manner in which this is being done makes us hesitant to jump on the band-wagon.
At this juncture we would like to pose a few questions into the INDECO resurgence.
Has there been adequate research undertaken in establishing the viability of reviving the parastatal body? How sustainable would such an undertaking be?
It must be carefully analyzed, the background from where we are coming from as a nation before we take a step forward:
It would appear that re-introduction of the INDECO parastatal would firstly, mean going against the very agenda of private sector development which has been advocated by all governments since 1991, including the PF.
Secondly, this would be tantamount to transposing a futile UNIP policy from 46 years ago and assume it can be ingrained into today’s economy. Herein lays the danger.
The initial INDECO ultimately collapsed after years of incurring losses which left thousands of workers unemployed and the country hampered by the ever-increasing debts. This occurred around the time the Zambian economy had come under intense pressure from the declining copper export earnings and the rising oil prices on the international market.
The consequence of all this, was an increased dependence on international financial institutions by the Kaunda government to try and sustain meager public finances. During this era, the country fell from having one of the highest GDP per capita rates in Africa to one of the lowest in 1996. In the same year, the IMF initiated the Highly Indebted Poor Countries (HIPC) program to try and salvage the declining economy.
However, ZIMCO did not exclusively collapse due to the harsh economic externalities. It suffered more severely from poor management and a lack of accountability. This was as a result of the indistinct line between the Party and the State.
What belonged to the corporation belonged to the party. The President had appointed himself Chairman of ZIMCO. This meant management in these parastatals was not given the autonomy to operate like proper business entities. And thus, lacked the professionalism needed to sustain them.
In view of this, it is soundly dreaded that the re-introduction of INDECO will be a walk back into another economic woe for a number of reasons:
1. This will crowd out private investors
In his 2014 Budget Speech last October, Minister of Finance Alexander Chikwanda said that because of better incentives to the manufacturing industry under the Private Sector Development Program, the sector was expected to grow by 4.3% in 2013. Manufacturers, he pointed out, were managing to import capital items at relatively lower costs. So the question is. With this improvement, why does government feel the need to interfere in this sector?
2. This will result in a chaotic economic landscape
The INDECO ‘revamp’ policy was not mentioned in the recent 2014 Budget Speech by the Minister of Finance. What then is the implication on the Treasury? Surely, the re-establishment of INDECO will undoubtedly involve substantial expenditure. This kind of Policy incoherence will spurn away investors.
3. The national debt needs to be kept in check
Currently, the country is already struggling with an unnecessarily large budget deficit – 8.5% of GDP, 4% higher than was estimated. Where will the Minister source the necessary funds to finance such a huge project?
4. INDECO Part II will be more accountable to the party than to the public
Appointmentees to this Board are likely to pledge their allegiance to the appointing power, which will be the government. . Unchecked, this will only continue with the re-establishment of another defunct INDECO. The fact that President Sata is set to chair the new corporation “to ensure effective results” is a clear step in that direction.
It is for these reasons and many, that renowned authorities such as Prominent Economist Oliver Saasa has expressed doubts on intentions by the Government to re-establish the Industrial Development Corporation (INDECO) and advised government against taking that route.
He is of the contention that the creation of a parastatal body might be contrary to the liberalized economic policies that Zambia has been implementing and wondered why the PF Government was keen on establishing parastatal bodies which were inefficient and loss making during the UNIP era.
“The fact is that we have been down this road before and these parastatals were loss making, surely you don’t want to make the same mistake,” Prof Saasa said.
Prof. Saasa has since advised Government to undertake a feasibility study on the possibility of reviving the parastatal body.
And opposition Alliance for Democracy and Development (ADD) president Charles Milupi has charged that it will be madness to reintroduce the Industrial Development Corporation (INDECO) in the country and expect different results.
Mr Milupi said that it is on this basis that he does not expect anything different from the reintroduction of INDECO under the PF government because it has already indicated that INDECO will be used to create employment, when the purpose of creating a company should be to make profit and making profit creates employment.
The government’s announcement that it plans to establish the Industrial Development Commission (INDECO) has raised a lot of debate among many stakeholders and the general public. The pronouncement has also received condemnation from some quarters while others have welcomed the move. According to the government officials INDECO will help in identifying and initiating industries that would promote job creation in the country. INDECO will also support the initiation of industries in all parts of the country based on a comparative advantage of each region.
It is important to note that INDECO came into existence as part of the economic reforms embarked on by UNIP under Dr Kenneth Kaunda. But when the MMD came into power in 1991, they began to liberalize the economy through privatization of state owned companies.
But what is INDECO and how did the large conglomerate fail to perform during the UNIP regime?
The primary rationale behind the creation of INDECO was to promote Zambians into running companies. At independence Zambia had fewer than 200 university graduates. This therefore meant that there were fewer competent Zambians, compared to foreigners, to manage companies. But the creation of INDECO witnessed a deliberate policy by the government to employ many Zambians as managers of the state owned companies as government took over all companies. The term Zambianisation was invented and it was synonymous with nationalization of the economy.
At its inception INDECO was used as a vehicle to promote industries especially in remote areas of the country. Under INDECO there were several companies that were initiated in rural areas. Among them were the Chipata Bicycle Plant in Eastern Province, Mansa Batteries and Kawambwa Tea Factory in Luapula Province, Mwinilunga Pineapple Factory in North-western Province, Kapiri Glass Factory and Mulungushi Textiles in Central Province, Livingstone Motor Assembly in Southern Province and Cashew Nut Factory in Mongu, Western Province. Others were Kafue Textiles and Nitrogen Chemicals in Kafue.
These and other industries that fell under INDECO were aimed at promoting industrialization in the country and therefore create job opportunities for many rural people. It is estimated that at the time INDECO was at its peak in the early 1980’s it employed about 75,000 workers.
As Zambia’s economy began to decline due to both external and internal reasons such as the low copper prices on the international market, poor management of state owned companies and political interference, most of the companies under INDECO were not spared. Companies that were being poorly run began to be subsidized by those that were making profits. A vicious circle was therefore created with more loss making companies under INDECO receiving support from fewer companies that were profitable. In an effort to mitigate the losses under INDECO government resorted to external borrowing, a move which did not yield any positive results apart from leading the country into a serious debt trap.
After the 1991 elections which ushered in the Movement for Multiparty Democracy (MMD), the new government embarked on the liberalization of the economy through privatization and promotion of entrepreneurship. This was done under the IMF administered Structural Adjustment Programme (SAP). Under this programme INDECO and other state run conglomerates were phased out by the Zambia Privatization Agency (ZPA) which later merged with the Zambia Investments Promotion (ZIP) to become Zambia Development Agency (ZDA). In the current set up therefore ZDA operates in “similar” lines to INDECO.
Against this background a lot of questions are begging answers. How will INDECO operate differently from ZDA and how will it be financed?
The Minister of commerce, Emmanuel Chenda, was recently quoted in the media assuring the public that the soon to be created INDECO will be different from the one under the UNIP regime. He added that government was aware of the pitfalls that led to the defunct of INDECO during the UNIP era and will pick up good lessons from the past. But the creation of INDECO has received skepticism from some economists as it was neither reflected in the president’s address to the national assembly nor the presentation of the 2014 budget by the Minister of Finance. So how will it be financed and is it another PF major policy shift like the removal of fuel and fertilizer subsidies?
Indeed the fact that a major policy decision like the creation of INDECO was not announced by the president or the minister of Finance does ring a bell. However, according to the PF Manifesto under “Commerce, Trade and Industry Development” the party pledges to quote …“create an enabling environment that will create opportunities, encourage higher rates of investment and growth of the economy and protect consumer interests through” among other things to:
• Establish an Industrial Development Commission to identify and initiate industries;
• Reviewing the Zambia Development Agency Act so as to provide uniform incentives for both local and foreign investors and to promote trade for small scale business enterprises;
Establishing INDECO will come at a huge cost believed to be in the range of between US$10 to $15 million. This amount is not in the 2014 national Budget. The PF government may either borrow from multilateral donors or get funds from the privatization Trust Fund Account under ZDA. The latter looks the most likely option.
Setting up INDECO will be one task but sustaining it will be another huge mountain. Economists warn that political interference poses a major threat to the sustainability of INDECO. This stems from the fact that the conglomerate will be under the head of state. It is feared that political patronage will take centre stage in determining the people to run INDECO. Government, they contend, has no capacity to run enterprises but should concentrate on creating a conducive environment for business to flourish. Further, economists caution that in a liberalized economy, creating government institutions would send mixed messages to investors including the fear of nationalization. Recently the IMF cautioned the government against policy uncertainties that have characterized the PF regime. In its latest country report for October 2013 the organisation is concerned at the significant policy uncertainties coupled with the rising debt.
However, another school of thought maintains that even in developed economies, governments still have a role to play in the running of state owned companies. What is needed is prudent management through adhering to good corporate governance practices. The question is, can the PF government respect corporate governance of these companies at the expense of their political expediency?
Clearly the fall off INDECO during the UNIP era will provide useful lessons to the PF government as it earmarks on a similar path. How INDECO will be governed will determine its future prospects. Unlike many other polices that the government has implemented without consulting, it is important that the PF government conducts a lot of consultations before implementing this INDECO policy.
By: Nicolas Bwalya