Corporate Governance of SOEs in ZambiaPRESENTATION AT THE HIGH LEVEL MEETING OF STATE OWNERSHIP AUTHORITIES,LJUBLJANA, SLOVENIA5-6 SEPTEMBER, 2011

Dr. Fortune KamusakiMINISTRY OF FINANCE AND NATIONAL PLANNING

PRESENTATION OUTLINE

Background Role of SOEs Portfolio Review Mode of Supervision and Monitoring Challenges Measures to improve performance of SOEs Conclusion

BACKGROUND

Supervision of SOEs prior to privatisation Zambia was a socialist oriented country prior to 1991. Most of the

economy was in state hands. Supervision of SOEs was centralised and exercised through sector group

companies, Findeco, Mindeco etc. In 1970, the Zambia Industrial and Mining Corporation Limited (ZIMCO) was

incorporated for purpose of maintaining direct ownership and management of a large number of state-owned enterprises (SOEs) following the declaration of the Mulungushi and Matero economic reforms by the Zambian government in 1968 and 1969 respectively

BACKGROUND

As of 1992, ZIMCO Limited was in direct control of over 110 separate companies organised and managed through a group structure.

Government equity holding in the individual SOEs ranged from just over 50% to 100% ownership.

This represented the control of approximately 80% of the companies in the

country leaving the remaining balance of only 20% to the private sector.

BACKGROUND

By the late 1980s to early 1990s the Zambian Government could no longer sustain the inefficiencies and the cost of running SOEs which was reflected in low or negligible reinvestment in most SOEs.

As a result of this situation, the Government embarked on a privatisation programme starting in 1991 in order to fully divest its interest in SOEs.

To implement the privatisation programme, the Zambia Privatisation Agency (ZPA) was established following the enactment of the Privatisation Act in 1992 with the main task of planning, managing, implementing and controlling the privatisation of SOEs.

During the privatisation programme about 300 SOEs were privatised by ZPA

BACKGROUND

During the privatisation process instead of facilitating the process ZIMCO became a major obstacle as its personnel withheld information from ZPA.

this increased the costs and contingent liabilities of companies to be privatised.

Subsequently, this culminated in the dissolution of ZIMCO Limited on 31st

March 1995 and the establishment of the Directorate of State Enterprises (DOSE) on 1st April, 1995.

BACKGROUND

DOSE was created to manage the transition of the privatization and commercialization of SOEs and act as a surrogate shareholder in SOEs.

The legal status of the Directorate of State Enterprises was derived from the provisions of the Minister of Finance (Incorporation) Act CAP 588 of the Laws of Zambia.

The rationale behind the creation of DOSE was to create a team of competent staff to assist the Minister of Finance to effectively monitor and supervise SOEs. This function was to be undertaken in liaison with ZPA.

BACKGROUND

The functions of DOSE were: Act as an agent of the shareholding Minister in matters pertaining to the

efficient and effective supervision of the Government’s interest in SOEs; Forecast, collect and record receipts of dividends from SOEs; Monitor the performance of SOEs by receiving and analyzing periodic

financial and qualitative information from SOEs and comparing this with performance indicators

Report to the shareholding Minister and other relevant organizations on the performance of the SOEs and recommend appropriate actions. Monitor the implementation of such actions , once approved;

Ensure that all SOEs, conclude Annual General Meetings (AGM) within the time stipulated in the Companies’ Act;

Approve the Annual Reports of each SOE during AGMs; Assist in privatization of SOEs; Assist in commercialization of Government departments.

BACKGROUND

DOSE was meant to reduce its staffing levels in line with the decreasing responsibilities until it could be finally phased out upon completion of the privatisation programme.

However, there was a policy change in Government which stated that some SOEs were not going to be privatised immediately, but were going to be commercialised then privatised later on.

Further, the cost of running DOSE had become unmanageable and liquidations of SOEs were taking too long to conclude. As a result, the Directorate of State Enterprises was abolished in 1999 and its functions were fused in the Ministry of Finance and currently fall under the Investments and Debt Management Department (IDM).

ROLE OF SOEs

SOEs play an important role in the Zambian economy in terms of employment creation, contribution to government revenues through taxes and GDP.

SOEs operate in a range of industries(energy, communications, transportation, mining and media) and include some of the largest formal sector employers

PORTFOLIO REVIEW

The Government has a relatively diversified portfolio of 41 State Owned Enterprises(SOEs) comprising undertakings that differ greatly in nature and size, some listed, others non-listed, corporations and public undertakings, etc., across different sectors of the economy.

The portfolio also consists of 17 SOEs that are either in liquidation or receivership

In addition to managing SOEs, IDM deals with matters pertaining to other Statutory Boards. There are 6 statutory Boards under the direct supervision of the Ministry of Finance while about 20 Statutory Boards exist under specific line Ministries

Currently there are 4 SOEs that are tranched for privatisation

Of the 41 operating SOEs, only 8 declare dividends regularly

MODE OF SUPERVISION AND MONITORING OF SOES

Dual Supervision between shareholder ministry and line ministry.

Shareholder Ministry Shareholder deals with financial oversight,

appointment of Board Members (for those SOEs directly under the ministry).

Attendance of Annual General Meetings (AGMs).

Line Ministry

Deals with day to day matters involving policy and technical supervision.

Appoints Board Members for SOEs directly under the line ministry.

Parliament

Parliament exercises some oversight through receipt of annual reports and deliberations of Parliamentary Committees.

CHALLENGES

In general Government and SOEs face a number of challenges which include the following:

The participants in the current system have confusing roles and accountabilities.

At the government level, there is no strong focus on SOE ownership and governance.

Units that oversee SOEs are focused on policy and regulation, not on being an effective shareholder or ensuring the state derives the most benefit from its assets.

CHALLENGES

Government cannot say that it is getting the best return for its investment. Some SOEs continue to perform poorly.

In the past, SOEs were unprofitable and a significant drain on the national budget.

This situation has improved but remains a problem in some companies.

CHALLENGES

Information on SOEs available to the owners is relatively limited.

Company monitoring is carried out mainly through board attendance, and little information is centrally available.

While some SOEs regularly produce annual reports available to the public, much of the state-owned sector is opaque.

SOEs generally do not have explicit objectives, targets, or performance monitoring for their boards or management.

CHALLENGES

At the company level, some companies have notable governance weaknesses.

While boards have improved in the past few years, some companies suffer from specific problems, such as the absence of a board or CEO for extended periods.

CHALLENGES

ownership functions in SOEs are shared between the Ministry of Finance and an “administrative” Ministry assigned to the SOE based on sector.

One consequence of this arrangement has been the duplication of duties between the Shareholding Minister and the line Ministry and as a consequence poor supervision of SOEs.

There is also lack of specific legislation or guidelines on operations and supervision of SOEs.

Measures to improve performance

At SOE level

- Civil Servants do not chair Boards of SOES

- Board Members are drawn from the private sector on

a professional basis

- Amendments of articles of Association

- Implementation of Corporate Governance Practices e.g

establishment of audit Committees,

Measures to improve Performance

At National LevelAn Inter-Ministerial Committee was formed by the Secretary to Cabinet to come up with modalities of setting up an SOE Agency

The modalities include

- Restructuring of the Investment and debt Management to separate the

functions of Government Investments Management from Debt

Management

- Staffing levels and funding modalities for the SOE Agency

- Development of an SOE Policy and Act - At the moment there is no Government policy on SOEs. Further, SOEs have been operating in Zambia without any SOE specific legislation.

CONCLUSION

SOEs will continue to play an important role in the Zambian economy despite the challenges they are facing.

Given that there is a change in government policy to retain some SOEs, there is need to improve the performance of SOEs by strengthening the monitoring and supervision mechanisms, developing SOE specific legislation and policy.

Thank You