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Thursday, 10 September 2009

National Assets (Guest Blog)

Zamtel is in focus again and alongside it are Nitrogen Chemicals, the railway systems, and Maamba Collieries in the Southern Province. The political arena is packed with concerns, recommendations and new ideas for some of Zambia’s few remaining national assets.

The decision to sell 75 percent of Zamtel while is welcome to attract new investment into the company, should not be thought of as the proverbial automatic magic bullet that will pull the company out of its economic doldrums.

Zambia and several other developing countries have experienced supposedly good investors taking up equity in state enterprises with the promise to resurrect the institution and provide the goods or services that the company was initially set up to do. The reality is that many such expectations were never realized as companies folded and the assets were sold off to other countries or sent to the scrap heap to release the land and buildings for real estate purposes.

As others have commented, Zamtel needs more than just money. It needs a focused development plan, it needs a committed management team, it needs a total restructuring of its services to become efficient and relevant to the economy.

There are no guarantees that an outside investor will turn Zamtel around for the better without a strong partnership with the people of Zambia who must have a say in the way forward.

Zamtel has been a good catalyst for consumer protection in the mobile telephone industry as all private service providers have had to compete with Cell-Z and bring their local call rates down from around 60US cents per minute to the current average of 25US cents per minute.

It will be prudent for Government to put together a team of sincere and patriotic experts to consider the partnership options for Zamtel to avoid repetitions of experiences of the Indeni Petroleum Product sale, the Zambia Bottlers sale, the Mansa Batteries sale, the Zamcargo Limited sale, and many other state enterprises that punctuate the country as sore reminders of what once was, and now is no more.

In this cut throat global economy, multinational giants eat up small countries by buying state enterprises and closing them down so that the entire country descends into dependency on imported goods and services. One need only consider the expansion of South African supermarkets on the African continent to get a glimpse of the multinational phenomenon. These companies do not take prisoners. All non-performing or under performing investments are soon wiped out irrespective of the impact on the welfare of the host nation and its people. That is just how modern business runs today; the profit margin line dictates everything.

What options are there for Zamtel? Yes, privatize and take the risk of previous privatization efforts is one way to go. Split the company up into individual entities and look for strategic equity partners both in the local economy and outside is another option. ZSIC has done this quite successfully so far. Look for a Government to Government financing and management agreement with a committed country is yet another option.

Which ever option we decide to take, one thing is obvious, Zamtel will only really turn around if there is political will, investment, and oversight within Government to ensure that the end result is for the benefit of the country as a whole.

There is room for a timely warning about the ongoing discussions and negotiations with the German investors considering Njanji Commuter Services, African Explosives looking to invest in Nitrogen Chemicals, and the prospective investors targeting Maamba Collieries. If the Zambian team does their work diligently and professionally then the country will have been well served. Anything short of this will be a recipe for another privatization disaster.

Njanji Commuter Services has the potential alleviate traffic congestion in Lusaka and offer low cost transport to and from the city out of the various residential suburbs. We have all seen it happen before. NCZ offers many options for manufacturing agriculture inputs and mining processing chemicals as has been done in past decades. Maamba Collieries has over 100 years of coal reserves to be used as fuel for the furnaces in the mining industry and he new steel processing investments cropping up. All these attributes can be realized with careful planning and management of the investment profiles going into the various entities.

Zambia needs to attract and negotiate with investors from both in the domestic economy and abroad with the goal of breathing new life into our national assets that have potential to serve the economic development needs of the country.

Special emphasis must be made about the need to sustain and grow the national assets so that both the investors and the Zambian people can reap the benefits of privatization.

At the end of the day the buck stops with the person with the power to sign on the dotted line on behalf of the nation. The quality and impact of this signature will reverberate through Zambia’s history books and either praise a peoples hero, or as is so common, tell our grandchildren the story of yet another plunderer in the family.

Yusuf Dodia
(Guest Blogger / Lusaka)


The Author is the Chairperson of the Private Sector Development Association
P O Box 33850,
Lusaka, Zambia.
E-mail: psda@coppernet.zm

9 comments:

  1. Yusuf,

    "What options are there for Zamtel? Yes, privatize and take the risk of previous privatization efforts is one way to go. Split the company up into individual entities and look for strategic equity partners both in the local economy and outside is another option."

    The ICT Bill 2009 forbids cross-subsidisation, therefore I think a future Zamtel could not exist without being spilt up either operationally or completely.

    I would be interested in your opinion of how to split it up.

    I think the general consensus so far on this forum is that privatisation should proceed but not without transparency over the entire procedure. I for one have called for the current consultation with RP Capital to be scrapped and the whole process started over, because public confidence is lacking in it, given what's come to light. The govt digging in their heels will not help.

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  2. I am not an economist, but what about listing the company as a public enterprise on the LuSE and allow the Zambian Public to own a share of their national telecommunications asset, instead of allowin some chap currently based in Shanghai who doesn't care even an ounce about the country and it's people and the people's welfare, to invest and grab 75% of the share of the asset.

    Don't we as a Zambian public have that kind of capital put together?

    I am a Software eng based in Cape Town and would like to open up an IT related outsourcing business based in LSK but I can't do that till the Broadband issue is sorted out.

    Thanks guys

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  3. Yusuf Dodia,

    How about the separation of the state and the government. A parastatal like ZAMTEL can be very well run, as long as there is no political interference and sabotage.

    For instance, the government should not be allowed to: run up bills to parastatals without paying them; appoint family members into management or technical positions; these parastatals should not be run from the ministry, nor should management decisions have to go through the ministry.

    There has to be a separation between the political class and the civil service. As well as a separation between the government and the party in government. Those are issues of law and of the constitution.

    This is what has ailed them. If the civil service made promotions strictly from it's own membership and did so on merit, and only the top civil servant was a political appointee, that would be all the change necessary to transform not only ZAMTEL, but the civil service itself.

    Ishan Pathan,

    I don't know who the Zambian public would be that would buy up all these shares, especially with 70% of the population earning $1,- per day. I would be comfortable about pension funds and the like owning some of it, but just putting shares on the market is an invitation to international capital to start buying up Zambian companies. I am not a neoliberal, and I do not believe that the stockmarket is a way to run the country or an economy.

    Look at what would have happened of GW Bush had had his way, and privatised for instance Social Security. What would have happened to that, when the Dow goes back through 6700 and lower?

    I agree with you on the local broadband and radio/licensing issues. The market should be opened up - but only internally.

    How about putting 49% limit on foreign ownership of any company in Zambia? That would encourage joint ventures, instead of the takeover of the Zambian economy.

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  4. MrK - Thanks for the info and the comment

    "How about putting 49% limit on foreign ownership of any company in Zambia? That would encourage joint ventures, instead of the takeover of the Zambian economy." - That's sounds reasonable if the country's rich cannot come up with the capital to fund the transition from Govt to private hands.

    I am a little skeptical about these so called Investors ... something that Michael Sata labeled as 'Bogus', who have no social consciousness. I have noticed that, mainly among South African investors that are doing their bit in the re-scramble-for-Africa, take that BIG retails outlet in Zambia like Shoprite, they import almost 90% of their produce without supporting the local industry and they give nothing back to the country in terms of social and uplifting initiatives, yet they do so much in South Africa.

    So may be the a solution could be as you mentioned 49% in the hands of a foregin investor but tighten the investment law such that they are oblidged to show some uplifting initiatives towarsd their employees and may be even the poor and the youth and sports. And also tighten the grip on the outflow of forex from Zambia. Most of these investors put huge profit margins on their product and stack their profits in their native countries or invest in other countries, Just a thought.

    A Quick question, how feasible is it to implement trace laws like 'Profit Margin Control'? Not Price-Control. A Law that would not allow companies to put prices that allow them to make a net-profit of more than 100%. Take Clover brands in South Africa, they admitted to putting a profit margins of more than 200% on their milk produce.

    An economist will have a much more clearer way of doing this, if at all possible.

    Thanks

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  5. Just to add on, when I said the Zambian public must be allowed to own 70% of the privatised parastatal, I didn't mean the 70% that live on below $1/day, I meant the other 30%. It would also be great for the economy if the government would provide incentives and benefits to the 30% to invest more of their savings in Zambia rather than other countries or just keeping their savings under the mattress, another thing is also lowering the cost of borrowing, which will allow small businesses to blow into the economy and increase the rate of economic growth from 4% to 6%.

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  6. Ishan,

    Your idea of net profit margin limits is intriguing, and is appealing in many ways. All options present hurdles to overcome, but that certainly shouldn't stop us from considering and trying to chart alternatives. One difficulty I see immediately however involves vertically integrated companies and value-added processing. What I mean is that once a raw material has to undergo multiple processing steps prior to being priced for the consumer, it becomes difficult to track the exact ratio of value-addition and markup. So Clover or other vertically integrated operation could argue that it isn't really a 200% markup, but rather ~30% by the subsidiary that collects milk from dairies, another ~30% by the bottling/canning plant, ~30% on top of that by the wholesale distribution network, and ~30% by the marketing department. If pressed, they could break the subsidiaries off into stand alone entities and add as many intermediaries to the supply chain as required to achieve the desired total profit margin without any one step violating limits.

    To be fair, Clover and other SA milk companies are not necessarily getting away with their pricing practices under current competition laws, and so far the rulings have not gone their way: http://www.comptrib.co.za/comptrib/comptribdocs/78CACJul08.pdf (66k)

    Of course to be equally fair, Clover is still appealing and objecting by any means available, and is entitled to present their case as well: http://www.clover.co.za/content/2559/competition-commission/

    I like the way that you are thinking, but closing the loopholes in any attempt to constrain the unadulterated profit motive is crucial. On paper, I likewise find that 51-49% splits are desirable, however one must be on the lookout for signs of loophole exploitation there as well, such as loans to the joint company by the international partner for consideration other than stock, operating contracts which effectively externalise profits as expense items, and so forth. People get really creative about these things because of course there is a lot of money to be made.

    I think that MrK may be on to part of the total solution with his idea of taxing outputs instead of declared profits (e.g. x per tonne of copper concentrate refined, y per head of cattle butchered, z per cell phone assembled). Of course this can rapidly get overcomplicated, and we wouldn't want grocery clerks to have nervous breakdowns trying to incorporate hundreds of different tax rates into retail prices for different goods sold under the same roof, or rates so high that small and medium sized companies are priced out of certain sectors due to lack of sales volume or vertical integration. But as MrK has pointed out, certain sectors such as bulk mining and refining are more amenable to output taxation than others.

    Still another option is input taxation, for example if the government had charged mining companies no taxes at all, but instead charged them for electricity at the same or higher tariff charged to small commercial customers rather than a preferential "bulk rate", then the country would have retained a far larger share of copper industry revenues than taxation has produced. Such a tax would be practically unavoidable given contractual obligation to purchase power from designated utilities, monitoring of generation for own-use, and similar input taxation of other energy/fuel sources. Existing development agreements however protect mining companies against paying disproportionately high utility rates as well as specific variances from existing income taxes. The current tariff increase schedule will actually bring the big consumers into parity with residential and commercial users at last, and to a large extent it would have been impossible to do so without raising everyone's rates in spite of public outcry because of these contracts.

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  7. Ishan Pathan,

    A Quick question, how feasible is it to implement trace laws like 'Profit Margin Control'? Not Price-Control. A Law that would not allow companies to put prices that allow them to make a net-profit of more than 100%. Take Clover brands in South Africa, they admitted to putting a profit margins of more than 200% on their milk produce.

    Please check out this story:

    Rachel Maddow Tax shelter crackdown

    US corporations pay almost no income tax - and these are often the same corporations doing business in Zambia.

    The ZRA has no hope of actually finding what these corporations really earn, there are too many loopholes, from tax shelters to capital goods depreciation, and too many lawyers working on their side for them to ever pay a tax on earnings.

    On the other hand, it is easy to monitor the loads of ore leaving Zambia's mines, and if necessary, confiscate every 5th load and call it a tax. It is easy to monitory and easy to collect.

    Yakima,

    Still another option is input taxation, for example if the government had charged mining companies no taxes at all, but instead charged them for electricity at the same or higher tariff charged to small commercial customers rather than a preferential "bulk rate", then the country would have retained a far larger share of copper industry revenues than taxation has produced.

    Labour could be taxed, as the government already rolled the tax burden away from capital and onto workers through PAYE income tax.

    In South Africa, a miner earns his company $17,50 an hour, but is paid $0,50 per hour. You could institute (for instance) a 50% income tax by raising the mininum wage in the mines to $8,75 an hour and then collecting a high rate of taxes from miners. You could even raise the miners wages that way.

    But it still would not be as straightforward as collecting raw materials. Such a tax could replace all other taxes - capital goods, fuel, labour, etc.

    And the government could use the collected raw materials to build reserves, which would bolster the currency (there could be the Copper Kwacha).

    Such a tax would be practically unavoidable given contractual obligation to purchase power from designated utilities, monitoring of generation for own-use, and similar input taxation of other energy/fuel sources.

    I can already envision them setting up cole or nuclear powered generators, just to avoid the taxes though.

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  8. And there is another thing. There are two major economic cycles going on. This is the cycle between paper assets, and real assets. Over the last 29 years, we have been the appreciation and inflation of paper assets - stocks, currencies. We have started to enter a new cycle, one where population growth, currency and credit deflation are going to put prolonged upward pressure on the demand for real world goods.

    I hope the South Africans realise that they are sitting on world's most attractive commodities after food - gold and diamonds. These are going to be the real value when the global economy starts falling apart.

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  9. MrK,

    I admit that I am confused, which major economic cycles are you referring to and what is the evidence to indicate that these are repetitive and therefore cyclical phenomena? Also what would make diamonds and gold so valuable without high end consumers of jewelry?

    ReplyDelete

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