Breathing new life into public sector

The following are excerpts of a paper presented by Vice-President Constantino Chiwenga at the National Defence University in Harare last week. The paper is titled “Corporate Governance of State Enterprises and Parastatals in Zimbabwe as a National Security Issue”, and it provides a detailed outline of the approach by President Emmerson Mnangagwa’s Government’s to reforming the public sector.

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In 1980, Zimbabwe inherited 20 SEPs (State enterprises and parastatals) thinly spread across sectors and around 40 percent of GDP.

The number of SEPs has increased over the years to 107 but the contribution to GDP fell to 13,4 percent in 2014, with the contribution of commercial SEPs at 7,7 percent.

The decline in performance of SEPs partly stems from weak corporate governance.

In 2017 a public expenditure review of SEPs was jointly undertaken and published by the Government of Zimbabwe and the World Bank.

The following were the challenges in corporate governance the survey found 38 SEPs sampled.

The boards of all commercial SEPs are appointed by line ministries although the appointment process does not adhere to basic corporate governance requirements on board composition.

This has resulted in relatively weak boards, leading to insufficient oversight.

In addition, though improving, the transparency and financial reporting of SEPs remains problematic.

This, together with the weakness of the boards has eroded performance.

There was evidence in the survey of managerial interference by ministries.

To make matters worse, in some cases, managers from SEPs lacked information on good practices and how to implement the principles of good corporate governance.

Thus the poor performance of some of the SEPs seems to be the result of poor oversight; weak boards and corporate governance.

Nearly all assessed SEPs did not meet statutory financial reporting deadlines, and their financial reports or annual reports were not posted on public websites.

Thirty percent of SEPs surveyed either had no board charters or codes of ethics.

The other problems affecting SEPs boards were:

Entities operating for extended periods without full Boards as exemplified by the Professor Gudyanga one-man board for the Minerals Marketing Corporation of Zimbabwe and the Zimbabwe Mining Development Corporation when he was the Secretary for Mines and Mining Development;

Board membership shifting with changes in line with ministers. Ministers responsible for SEPs appoint directors using criteria that are not standard, resulting in seats being taken up mostly by their cronies, friends and relatives.

As a consequence, these directors become too powerful, lack dedication and are often compromised and conflicted in exercising their fiduciary duties;

Boards having an inappropriate balance of skills; Inadequate board training; Inadequately managed conflict of interest; and

Some members sitting on too many boards (up to seven sampled companies) and without the required professional expertise.

Good SEP governance requires that CEOs are accountable to their boards, insulated from political interference and required to implement strategic plans that make clear CEO and board objectives.

Where performance contracts existed, they were based on inadequate data and reporting, and usually did not include quantitative indicators which makes it difficult to measure or dispute expected outcomes.

In some cases, contacts lacked clarity not only on financial or non-financial indicators, but also the entity in charge of monitoring.

The frequency of monitoring was also not always clear.

Of the 38 assessed SEPs, 17 continued to rely on direct and indirect State support through subsidies, recapitalisation or guarantees.

In addition, the separation between SEPs commercial and non-commercial objectives was not always clear.

As a result of these weaknesses, SEPs reneged on service delivery which is the basis for their creation and operated at low capacity utilisation levels, thereby negatively impacting the standards of living of our citizenry.

One need not look far afield, as the deplorable state of corporate affairs in the National Railways of Zimbabwe, Air Zimbabwe, Zesa, NetOne and Zupco point to poor corporate governance as one of the reasons for the near collapse of the enterprises.

For instance, the balance sheets of these entities are weak and they continue on  the indecorous path of loss-making and a perpetual drain to fiscus.

Treasury is sometimes forced to borrow from both the domestic and foreign markets to bail out these entities, thereby increasing the national public debt.

According to reports by the Auditor-General, SEPs have been incurring huge losses due to irregular corporate governance practices, including failure to produce audited or even unaudited financial statements.

Our country has witnessed successive boards of directors being appointed to turn around the fortunes of SEPs, with little or no success at all.

Poor performance of the SEPs has been attributed to the skewed selection and appointment of directors, who superintend over these institutions.

According to Collier (2000), good corporate governance has a positive impact on the performance of SEPs and economic growth.

Inversely, poor corporate governance in these entities adversely affects their contribution to GDP and employment creation. When the performance of SEPs becomes a drag on economic growth and development, a threat to the well-being of the people and by extension, national security arises.

Given their importance to the economy, ensuring that the SEPs are accountable, transparent, efficient, effective and profitable, where their mandate is commercial, is important. It is also necessary to ensure that they operate on equal terms with their private sector counterparts.

There is however increasing recognition that poor corporate governance practices in SEPS significantly contribute to their under-performance.

The under-performance takes the form of loss making; inadequate, expensive and poor service delivery; and excessive debts.

This results in antiquated infrastructure and capital equipment; inadequate working capital; under capitalisation; skills deficit; vandalism; looting; mismanagement and corruption.

When they perform poorly, SEPS become major sources of fiscal risks and consistently threaten Zimbabwe’s public finances.

The 2017 Public Expenditure Survey on SEPs referred to earlier identified the following fiscal risks in Zimbabwe:

• Though the SEPs total assets were greater than total liabilities, their current assets were less than their current liabilities. This means that the SEPs were not able to meet their short term financial obligations from their current assets;
• 25 out of the 38 SEPs surveyed in 2014 were not liquid and seven were insolvent.

Overall, the net current position of most of the SEPS was precarious raising questions about their sustainability and ability to continue operating as going concerns in the medium term. The situation was compounded by the fact that while total net assets were positive, part of the increase in assets came from non–operational activities, such as revaluation of existing assets (eg dams) making it difficult to validate the true worth of assets; and

Guarantees offered in joint ventures which can expose the Government to the risk of unpredictable obligations to make up for the inability of the SEPs to settle their debts.

Poor economic performance of SEPs causes job losses and unemployment among our youths.

In the same vein, absence of enforceable corporate governance frameworks leaves the determination of remuneration packages at the discretion of executives, who are not ashamed of income inequalities and their potential for causing disharmony and organisational or even national unrest.

The subsequent result is that economic challenges may trigger political instability.

In North Africa, economically motivated uprisings commonly known as the Arab Spring that affected Tunisia, Libya and Egypt are cases in point.

Historically, the right to govern the State has been established by the capability to assert and defend that claim against armed challengers.

However, as the concept of security has evolved, it has been accepted that the military security agenda revolves around the ability of governments to maintain themselves against external and internal threats which can emanate from the economic arena.

A weak economy cannot support strong armed forces adequately.

As the poor economic performance of SEPs due to poor corporate governance leads to a weak economy, herein lies the link between economic performance and the military dimension of national security.

Further, when one considers the human security conception of national security, it should not be difficult to see why the poor SEPs as a result of bad corporate governance practices, becomes a national security concern which can easily develop into a formidable non – traditional threat.

A robust SEP sector is key to the country’s efficient allocation of resources, competitiveness, economic development and poverty alleviation.

SEPs therefore, need to operate in an environment where good corporate governance practices prevail.

SEPs should be subjected to effective oversight and enforcement, in order to maximise their contribution to the competitiveness and development of the Zimbabwean economy.

I have highlighted the performance shortfalls of our SEPs and the national security risks arising from them.

To redress the situation, Government is pursuing a programme of SEPs reform designed to enhance performance, to improve service delivery and to bring more order, discipline and rationality to the sector as a whole.

These include:

. Promoting good corporate governance in the SEPs sector; and

. Undertaking a strategic portfolio review, SEPs performance reviews and conducting forensic audits where the need arises in some SEPs;

The inauguration speech of His Excellency, the President, on 24 November 2017, the subsequent State of the Nation Address, and the 2018 National Budget Statement, gave increased impetus to the development of an SEPs Short and Medium Term Reform Framework (SEPS-SMTRF) to guide the implementation of the national SEPs reform.

As a result, recommendations developed jointly by the CGU within the OPC, the Ministry of Finance Economic Development and the SERA were submitted to and approved by cabinet on 10 April 2018.

Phase 1 of these reforms, scheduled to be complete by the end of June 2018, entails the following:

. Acceleration and completion of the reform processes previously approved and already underway in respect of 16 SEPs;

. Liquidation/dissolution of two Industrial Development Corporation subsidiaries;

. Full privatisation of one IDC subsidiary;

. Partial privatisation of nine Public Entities, 17 ZMDC subsidiaries and five IDC subsidiaries;

. Merger of 14 public entities;

. Demerging of one public entity;

. Departmentalisation of some public entities; and

. Dissolution of the separate boards of Zimbabwe Power Company, Zimbabwe Electricity Distribution and Transmission Company and Zesa Enterprises. A single Zesa board will be established to take charge of the three entities.

To implement the Cabinet decision, line ministries will develop case-by-case “Reform Memoranda” for submission to Cabinet through its Committee on State Enterprises and Parastatal Development – which I chair – indicating how and providing clear time-frames for implementation of the approved reforms measures.

Already, a memorandum for merging the parastatals involved in handling investments has been submitted to Cabinet and was approved on 2 May 2018.

A new one-stop shop Zimbabwe Investment and Development Authority (Zida) will be established to handle all investment related matters.

In addition, the Public Entities Corporate Governance Bill, 2017 which has been passed by Parliament will became law.

 

For more articles on SEPs reforms, see Page A4