How IDC Reforms can grow Economy, boost Job Creation and Tax revenue

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]