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Friday, 23 November 2007

Strategic Industries (Guest Blog)

It is wrong to blame our politicians and civil servants for messing up and disrupting fuel supplies and thereby harming the economy. Why do I say this? Because government servants lack business and technical training and experience, and are therefore bound to make mistakes, or to act from political rather than business reasons. What is wrong is not that they mishandle matters affecting vital fuel supplies, but that they handle them at all.

It is often said that governments must manage certain key sectors of the economy, because these sectors are strategic. This has been said at one time or another of agricultural inputs, banking, maize marketing, mining, railways and the supply of electricity and petroleum products. All these areas of economic activity are commonly described as 'strategic', and therefore to be managed and controlled by government.

In reality, however, the strategic nature of these areas of activity is the very reason why government should not attempt to run them, but should leave them to be managed by professional people. The organisations concerned are then likely to be efficient and well financed partners in the country's economy. They will probably make substantial taxable profits, instead of hindering economic development and making huge hidden losses. In the unlikely event of large private sector businesses making losses, these will be borne by their own shareholders, not by the Zambian taxpayer. The change would also remove opportunities for corruption.

How long before we acknowledge that strategic industries ought not be run by governments but by independent and professional businesses?

Murray Sanderson
(Guest Blogger & Kitwe Resident)

4 comments:

  1. Perhaps I can be permitted to add to my own piece! The reason is that it was sent as a letter to The Post (published 12.10.07), so had to be kept short.

    The difference between business professionals and politicians/bureaucrats, when it comes to controlling businesses, is not just one of knowledge. Another major difference concerns incentives. The business professional stands to gain personally through ownership or promotion by contributing to profitability. The politician or official has little or nothing to gain from profitability. He stands to gain most from

    1. Employing his own family or friends or those of his superiors.
    2. Pleasing his superiors in other ways.
    3. Abuse of office.

    Different incentives are just as important as different levels of knowledge.

    Of course incentives which are financially negative can also play a part in privately owned businesses, but they are certainly the exception rather than the rule. Positive incentives predominate. But when a large company is government owned, the main incentives are almost always negative from the economic point of view.

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  2. Murray,

    This is a very important issue indeed. Unless we get right the management of these "strategic industries" then very little progress can be made for the economy as a whole.

    Just a few issues I thought I might explore with you, to hear your opinion.

    One relates to Ownership versus Management. Where do you stand on the question that the two may not be mutually exclusive? For example Government could well own the mines or ZAMTEL, but this could be managed independently? Do you think this feasible in Zambia today? I have always opposed such framework because the incentives are always never strong enough. The bail out of "rail track" in the UK was a classic example which cost tax payers lots of money.
    But I am wondering whether there are models which can work in Zambia e.g. local authorities owning these companies etc. I would value your opinion on this.

    The second is what we do about those companies that single ownership is advantageous but yet it could be detrimental e.g. ZESCO. The problem there is one of a weak regulator. And this problem is also one of culture. ERB for example is a pure regulator with a lot of power, but the power for the Minister to dissolve the board has really weakened it. I see no alternative. The problem appears to be Ministers who working within the law, have no regard for the long term credibility of ERB. Just how do we fix this?

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  3. Cho asks my views on joint ownership. Should ownership and management be mutually exclusive? No, I don't think so.

    When I came to Zambia in 1963 I wanted to demonstrate that business owners and employees could work together as partners. Medwich Clothing was set up with that in mind, and most workers became shareholders. This worked well until the company's profitability was destroyed by inflation.

    How about government ownership, combined with independent management, presumably under contract? I don't see this as advisable. In Zambia poliicians always interfere with state owned enterprises, and that destroys profitability. It is better for the managers either to be owners themselves, or to be responsible to private shareholders, who, unlike governments, insist on financial performance.

    If there are losses the owners foot the bill, while profits benefit the state through taxation. So in either event the government is protected. State enterprises, on the other hand, usually become "large, uncontrolled and unpredictable sources of budget deficit", to quote George Saitoti, former Kenya Minister of Finance.

    Local government in Zambia is always cash-strapped, so I don't see local authorities having surplus funds to invest.

    You mention the ZESCO monopoly. It would be hard to split up, but I believe generation and distribution could be separated, as was the case before about 1970, when distribution was taken from local councils. Private ownership, as with CEC, would surely be better than the current situation with its poor management and abuse of office.

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  4. Murray,

    The problem with private ownership is that stronger corporations can "capture" weak governments.

    On the issue of local authorities, I actually think that while they may be weak individually, they could come together to form sort of Rural Development Corporations that would allow them to own companies jointly.

    Incidentally, I think the challenge is not necessary investment, since Government can help with that, but management of these investments. So it is possible for government to contribute X amount into a local company and hand over the management to the local authority or RDC.

    ReplyDelete

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