HomeBusiness DigestGovt tackles US$600m inter-parastatal debt

Govt tackles US$600m inter-parastatal debt

Should this proposal be endorsed by cabinet, Treasury would be empowered to address inter-parastatal debts by deducting money which one parastatal owes another from its budget allocation.

Currently all budget allocations are deposited into each parastatal’s account, leaving them to offset their individual debts but because of the high defaulting rate, some entities are now technically insolvent.

Among the entities which are bankrupt or battling to stay afloat are Air Zimbabwe (AirZim), National Railways of Zimbabwe (NRZ), mobile operator NetOne, fixed line operator TelOne, Cold Storage Company (CSC), Grain Marketing Board (GMB), Zupco and Zesa.

There are about 82 state-owned entities, most of which are struggling or technically insolvent.

The inter-parastatal debt problem has a contagion effect on other state-owned companies and the country’s fragile recovery after a decade of economic meltdown. Without parastatal reforms and efficiency, the economy will continue to suffer.

The choking debts were accumulated due to a myriad of poor policies, among them government interference, mismanagement and failure to adapt to the new multi-currency monetary regime.

Government was warned earlier this year that the huge inter-parastatal debt level was generating negative spillover effects on the whole economy dominated by the state enterprises which used to be the locomotives of growth and employment creation.

According to a comprehensive 13-page document dated February 2012, outlining the extent of the problem, the inter-parastatal debt stood at US$458 639 932 as at September 31, 2011. During this period, various ministries and government departments owed parastatals a staggering US$107 million.

The report assesses the effects of the performance of the state enterprises and proposes recommendations to the Council of Ministers and cabinet on how to deal with the issue.

The document proposes recommendations that are expected to form the basis of the envisaged comprehensive and stakeholder-driven Inter-Parastatal Debt Strategy.

The document further recommends that cabinet issues a directive to ministries and departments to pay off their debts immediately. It also wants cabinet to instruct Treasury to pay directly to the owed state enterprises by deducting the money from the ministries and departments’ 2012 budget allocation.
State Enterprises minister Gorden Moyo (pictured left) confirmed government was discussing how parastatals could liquidate their debts to make them attractive to investors during the government’s privatisation drive. Privatisation of parastatals has been partly stalled by their debt profile and general state of affairs.

“We are currently discussing on the strategy to find a method of settling the debts between and among the parastatals and other outside creditors,” said Moyo.

Moyo did not go into details about the strategies his ministry would adopt to resolve the debt crisis in which most parastatals find themselves in.
However, the document claims the parastatals debt problem was mainly due to customers’ failure to pay, weak debt-recovery mechanisms, failure to comply with agreed payment schedules and decade-long adverse macroeconomic conditions until 2009. It says price controls before 2009 made it difficult for parastatals to make payments to suppliers.

The document also lists the introduction of multicurrency without any recapitalisation from the shareholder, non-compliance to good corporate governance, imprudent policies and weak internal control measures and government directives as some of the major challenges affecting  parastatal debts.

It indicates the transition to the multicurrency system eroded parastatals’ bank balances that could have been used to make payments to suppliers.

The debt situation has also affected the 10 parastatals which the coalition government has earmarked for privatisation since its formation in February 2009. The 10 companies include Air Zimbabwe, NetOne, TelOne, POSB, GMB, CSC, Agribank, Zesa, NRZ and Ziscosteel. Not much progress has been made to privatise these entities, except for Ziscosteel whose deal is at an advanced stage albeit still uncertain.

These 10 companies have a combined debt of US$32 million among themselves. AirZim and NRZ owe other parastatals US$51, 9 million and US$26, 4 million respectively.

The briefing paper proposes possible strategies that include direct payment of debts by Treasury to owed companies, debt service/product swap, debt off-setting, phased debt retirement, moral suasion, disconnect/non-supply, government taking over the debts and development of a secondary market for debt.

Debt service/ product swap refers to the parastatals paying each other by providing service to each other for free to pay off debts. For example, this arrangement may see TelOne giving Zesa free telephone services in exchange for electricity bills.

The creation of a secondary market for debt would see the government create tradable instruments (bonds) that would have a specified interest and redemption date to raise capital to retire the current debts.

Some parastatals like Zinwa, NetOne, TelOne and ZETDC (Zesa) have adopted the disconnecting debt collection strategy and cutting supply to non-paying state owned enterprises.

However, according to the paper the strategy has its own weaknesses, among them the potential to send the indebted companies going into liquidation.
“This debt recovery strategy has worked positively in some cases with the defaulting parastatals making immediate plans to settle their debts,” the paper says, “This option is however detrimental to the operations of state-owned enterprises whose supplies are disconnected.”

The white-paper observes most of these state-owned enterprises failing to pay for utilities are in dire financial problems and disconnections will not make them settle these debts, but will further negatively affect their operations and probability to default on more obligations and, in the worst case, be forced to wind up operations.

Most of the parastatals have experienced severe capacity utilisation challenges, lack of capitalisation and trying to adjust to the new dollarisation era. It has become very difficult for the companies to restore viability and settle their debts.

The report warns: “Given the current financial positions of these two entities (AirZim and NRZ), it is unlikely that they will be able to settle their debts in the foreseeable future.”

The government has taken over AirZim’s US$140 million debt and ring-fenced it so as to give the proposed new state airline a clean slate to start from.
The inter-parastatal debt and the contagion  pose a serious threat to economic recovery.

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