HomeBusiness DigestAt The Market with Tetrad - Gulliver's travels fail to excite

At The Market with Tetrad – Gulliver’s travels fail to excite

Brian Mugabe

THE agricultural authorities have over the past few weeks or so been quoted in the press as saying that the resuscitation of Agricultural Marketing Boards is something that they will be look

ing at closely in the near future in a move they believe will ultimately benefit agricultural production through providing adequate pricing mechanisms for growers.

Theoretically, this probably seems fair and fine but would paradoxically seem to fly against the economic principles that led to the abolition of some of them in the first place and the successful privatisation of the likes of Cottco and Dairibord.

The problem with the establishment of such boards is that, unfortunately, implicit in their nature in this country has been the provision of subsidies.

These subsidies usurp the role of the market and competition in setting prices and in so doing introduce inefficiencies into the system. They generally lead to prices that do not reflect the true scarcity of resources or the costs of consumption or production. Also, while the benefits of subsidies are sometimes reported as accruing to consumers through lower prices and are thus of benefit to the populace, it should not be forgotten that, ultimately, whether through higher taxes or levies, which could be better utilised in social or infrastructural development, or by increasing the budget deficit, creating a gap which must be funded through the printing of money thereby fuelling inflation, the consumer still ends up paying for the subsidy.

Corruption is another problem that has tended to arise in Zimbabwe thanks to subsidies, particularly where the subsidised commodity is in short supply. What has happened in the past is that those who have had access to commodities at below market prices have then on-sold them at significantly higher prices to “black markets” created by the shortages. Consumers are thus hit by a double whammy, as they then don’t benefit from a subsidy they have indirectly paid for already!

Noczim and the GMB, whose history has provided ample examples of incessant drains on the fiscus, come to mind as prime examples of marketing authorities whose role, particularly in the case of the former, has increasingly become superfluous. One hopes these factors will be adequately reviewed lest we return to a path we all thought we had well left behind.

Turning to results, the batch we look at this week mirrors the trend set in last week’s article, ie abysmal, as the December to February fallout continued to take more victims. Starting with Gulliver, turnover for the half year to March was up 318% to $9,1 billion, as the now well documented industrial and consumer demand meltdown led to volumes being just 63% of what they were in the first half of the 2003 financial year. The decision to cut down on exports in the pre-exporter support price period also played a role in limiting turnover. The reduction in turnover against a background of continually rising costs, most notably the cost of electricity, meant that the operating margin came right down from 23% to 9%, and operating profit rose a meagre 60% to $806 million. After then factoring in the surge in interest costs from $10 million to $345 million, the company at that stage had made approximately $34 million less than half-year 2003.

This position was changed however by an $840 million profit arising from the disposal of 50,82% of the group’s shareholding in property development subsidiary, Residential Suburbs. As a result of this leg up, attributable earnings of a more respectable but nevertheless disappointing $1,1 billion were recorded, a 288% rise on the comparative period.

PGI, like Art and to some extent Gulliver before it, showed a not too disturbing top line that was then heavily diluted come the bottom line. Turnover for the year to March was up 624% to $172 billion, with domestic sales up 648% while exports grew by 563%. The growth in exports as with all the other “export component” companies was restricted by losses recorded in the fourth quarter following the auction induced appreciation of the local currency. This was also compounded by the fact that some of the group’s exports, for example timber destined for the US, could not be paid for in less than 120 days as delivery alone takes 100 days, thus reducing the forex available for retention, and therefore input requirements, under the “carrot and stick” RBZ measures as they then existed.

Operating profit before finance charges of $35 billion was still looking reasonably good, representing growth of 458%. What turned out to be an overly aggressive stock build up programme prior to the Christmas period, stock which the company was not able to sell quickly enough to generate cash, led to a massive interest bill of $22 billion, compared with just $419 million in 2003. The end result was attributable earnings of $8 billion for the year, up a lowly 74% on 2003. Highlighting once more the impact of the aforementioned meltdown was the fact that these earnings represented earnings per share of $28,98, compared with $57,01 recorded at the half year stage!

The group has since the year-end purportedly seen an improvement in demand, thus helping to reduce stocks and improving working capital management. Also, 70% of its debt is now in the form of “cheap'”productive sector finance. This should ensure that finance charges in the 2005 financial year will be far more sustainable. Steps have also been taken to move to a prepayment basis with the bulk of the group’s export customers which will enable PG to get the full benefit of the forex auction price. Management expects these and other changes in the business model to bear fruit going forward. Given the extent to which the results have disappointed it would seem the only way for PG to go from here must be up.

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