PARASTATALS or state-owned enterprises (SOEs) are commercial entities owned or controlled by the government. They play a pivotal role in employment creation, economic growth and preserving social value.
By Jelousy Chishamba
This assertion is qualified on the premise that they have to utilise taxpayers’ money in the most efficient way to justify their existence.
The success of SOEs reduces their parasitic dependence on government funding and creates fiscal space for developmental purposes. Despite the privatisations that began in the 1990s, companies owned by the government continue to account for a significant share of economic activity and, in many countries, the bulk of public sector assets and liabilities. On the other hand, these entities present the biggest fiscal risks due to their linkages with National Treasury finances.
Whereas the existence of cash-flow generating SOEs is meant to address potential market failures, if poorly managed, they can impose substantial economic and fiscal costs. Many of these entities are pressured to fulfil non-economic objectives and engage in quasi-fiscal activities that bear little relationship to their core commercial operations.
In unfortunate cases, some of these companies have been used as a mechanism for circumventing traditional fiscal controls and as a conduit for financial indiscipline from a macro-perspective. These activities undermine the integrity of public finances, their financial management systems, and the commercial incentives of the companies themselves which is a big fiscal risk and results in economic costs. This has inevitably led to the failure of SOEs in most developing countries, increased burden on the taxpayer and ballooning future inter-generational debt.
The performance of the public sector companies is always a concern to any taxpayer. Although from a holistic view SOEs are not purely evaluated on financial results (profit and loss) but on how they contribute to societal value creation, loss-making entities can be a persistent drag on public finances in the form of government guarantees, subsidies, loans, or capital injections. The liabilities are assumed by the government even though they were not explicitly guaranteed in the first place. Such bailout increases the debt burden on the citizens who might not have benefited from the loans or initial activities of the SOEs. Given that the profits of SOEs are not fungible, the likelihood of fiscal risks materialising from their activities depends on individual companies’ performance. In this sense, the government should assess the financial performance of each entity where it has shareholding and apply appropriate levels of control. In particular, the government must focus its surveillance on SOEs that are large in relation to the economy and the level of impact on the fiscus.
The State Enterprises Restructuring Agency has public information on the number of SOEs in Zimbabwe. Although some of these enterprises are financially defunct, the list of parastatals (both for-profit and not-for-profit) spreads across various sectors, some of which are considered as the mainstay of the economy. Notwithstanding the great potential in the sectors they operate, the obituary of parastatals has not always been a rosy fate. It is public knowledge and well reported in the Auditor-General’s report that failures in most of them have been attributed to corporate governance malpractices. In addition, cost overruns on mega-projects are a highly visible symbol for some of the entities.
In 2015, the Auditor-General’s report emphasised the need to strengthen internal control systems of public entities to safeguard public resources and channel the same to priority areas of development and service delivery. The systems should be developed to enable institutions that have surplus resources to channel the same to areas of need and optimise on the resources that are available. It follows that for the successful resurrection of the economy, parastatals must be the goose that lay the golden eggs to create social value and support the economy. Where possible, creation of social value must be considered to distinguish between policy alternatives on whether to fund them or not.
In recognition of the importance of SOEs, the IMF recommended changes in the Public Finance Management Act and the Procurement Act as part of the recent Staff-Monitored Programme. In the letter of intent to the IMF, the Ministry of Finance acceded to these recommendations which are considered notable milestones in strengthening governance and accountability arrangements to curb financial leakages.
The amendments are geared towards strengthening Treasury’s financial oversight of SOEs and local authorities as well as tighten the public procurement framework and make it more efficient and transparent. There is further need to align the Public Finance Management Act with other related pieces of legislation to strengthen its implementation and ensure adherence to the spirit and letter of the Acts and its changes.
In a more optimistic view, the situation for SOEs is not totally hopeless and the goose can still lay the golden eggs for the economy.
To achieve the intended benefits, the requirement for concerted national effort towards a common goal in making structural changes in parastatals cannot be underestimated. The increase in country risk premium due to various factors has repelled Zimbabwe’s efforts to gain long-term finance. As a policy recommendation, Public-Private Partnerships (PPPs) can be adopted as a prescription to the success of some public enterprises. While there is no clear definition on what constitutes PPPs, they fill a space between traditionally procured government projects and full privatisation.
PPP is a long-term contract between a government agency and a consortium of private sector firms whereby the consortium provides a range of project services and at least some private capital. By using off-balance-sheet financing of PPPs, the government can get around the current internal or external borrowing limitations.
This strategy appears to improve government’s current budgetary position and minimises or reduces the government’s short to long-run deficit. Currently, Treasury is cash-strapped and the possibility of increasing taxes to fund current and long term projects may only increase social agitation. Thus, PPPs provide opportunities to build infrastructure and employment creation in the face of the current binding fiscal constraints.
The key normative justification for PPPs is that the private sector has stronger incentives to deliver services more efficiently and at a lower cost than with traditional government. Although controversial and subject to its own criticisms, the popularity of PPPs as a way for governments to get infrastructure built, continues to grow. In Africa, South Africa has been the main country where PPPs have been used to deliver infrastructure, including hospitals, government buildings, toll roads, and the railway. Private sector participants that bring process or product innovations that lower costs have done so through design or construction innovations. PPPs have the ability to avoid or reduce upfront costs, keep projects on time and let the private consortium arrange financing until the project is complete. The financial risks transferred to the private partners have a powerful effect in keeping projects on track. This will also increase the availability of potential resources for national development.
Zimbabwe has an infrastructure deficit which, among other factors, is the result of a lack of long term funding. If the will and common voice to correct this deficit is there amongst policy makers, PPPs can be used to develop, provide and maintain infrastructure, including roads, water and hospitals among other key amenities.
For instance, the sorry status of the country’s road network is well documented and the first candidates for PPPs would be arguably the Zimbabwe National Roads Administration (Zinara) and the NRZ.
There are available options like finance, built, operate and transfer models which can help the government reduce recurrent funding to keep public goods afloat. One feature of PPPs is that governments provide infrastructure today, but pay for it later through various concessions.
In most cases, once construction is completed, the asset becomes available for use by the line ministry or agency that is the primary operator of the facility. This agency then monitors and enforces the contract during the operation phase of the concession.
The success of PPPs depends on the consistency and certainty of regulation in the business environment.
In the past there have been conflicting policy pronouncements by the various line ministries with regards to the Indigenisation and Empowerment policies. When implementing PPPs, there is need for consensus within policymakers. It is painful that sometimes pride and “sovereignty” issues prevail to overshadow economic sense when negotiating for PPPs.
PPPs must be understood as both a legitimate national budget financing approach that has the potential to deliver public value when used appropriately, and also a governance tool that has the potential to deliver significant benefits to help the goose lay more golden eggs for the economy.
Chishamba is a Zimbabwean banker based in Harare. He has experience in treasury and corporate banking and writes in his personal capacity.