STATE-OWNED enterprises and parastatal (SEPs) losses have practically doubled since 2011, with the majority requiring public subsidies and becoming a major drain on the fiscus. This comes as executive compensation doubled between 2011 and 2015, according to the World Bank’s latest economic update on Zimbabwe.
The development also comes at a time a 2016 audit report of SEPs done by Auditor-General Mildred Chiri, released yesterday, found there were extreme cases of weak corporate governance resulting in huge financial loses and misappropriation of funds. Chiri’s report highlighted several weaknesses in SEPs, among them, governance issues, revenue collection, debt recovery, employment costs and procurement of goods and services.
In a report released this week, the World Bank says that SEPs have had a limited impact on the economy because of their poor financial and operational performance although they are supposed to play a pivotal role.
Zimbabwe has 107 SEPs, but only 43 are wholly commercial enterprises.
“SEPs represent about 14% of Zimbabwe’s GDP, with commercial SOEs contributing about 7,5%. SEPs’ combined share in GDP fell from an estimated 16,4% in 2009 to 12% in 2014, while the contribution of solely commercial SEPs slid from 8,3% to 6,9%,” the World Bank said.
The World Bank report says that SEP expenditure rose by 5,9% per year between 2011 and 2014 while annual revenue grew by just 2,9%. Aggregate annual expenditure averaged US$3,5 billion during the 2011-15 period, while personal costs, which account for about a fifth of SEP spending, increased by 5,5% on average.
Debt service costs also increased by 6,1%.
“These trends severely weakened the finances of commercial SEPs, as aggregate net loses nearly doubled each year during 2011-14,” the World Bank said.
“Overall, commercial SEPs moved from close to the break-even point in 2011 to reporting combined losses of just under US$340 million (or 2,1% of GDP) in 2015. Some sectors, such as agriculture and water, consistently registered losses, while others such as mining have seen their profitability decline in recent years.”
The report says the large SEP financing gaps posed significant macro-economic fiscal risk as they are expected to contribute to government revenue while also advancing policy objectives.
The poor performance of SEPs resulted in their net contribution to Treasury being negative as transfers from government exceeded dividends and taxes paid.
“Public transfers to SEPs averaged US$135 million between 2011 and 2015, while SEP taxes and dividends amounted to just US$50 million. Dividends plummeted from US$73,4 million in 2011 to US$7,3 million in 2015, with only four of the 38 commercial SEPs paying into Treasury,” the report says.
“Annual SEP tax payments have been much more stable, averaging about US$20 million, but tax liabilities have more than doubled from US$32 million in 2011 to US$69 million in 2015.”
The World Bank said during the period under review, contingent liabilities also grew, with explicitly government-guaranteed debt representing 90% of quantified contingent liabilities of SEPs. Implicitly guaranteed debt of strategically important SEPs made up the remaining 10%.
“Infrastructure investment financed by external loans but guaranteed by MoFED (Ministry of Finance) drove the accumulation of contingent liabilities, which rose from US$1,6 billion in 2011 to an average US$2,1 billion during 2014-15,” the report notes.
Some SEP contingent liabilities have become public debt after being unserviced by government or relevant SEPs since 2000.
“Approximately US$1,1 billion of Zimbabwe’s external payment arrears to bilateral and multilateral creditors stem from government guaranteed SEP debt,” the report adds.
The report says that the governance of commercial SEPs had deteriorated despite extensive oversight structures which involve many institutional actors.
“The appointment process of SEP leadership often fails to comply with basic corporate governance requirements, resulting in boards of directors that are not well-equipped to manage their respective SEPs. Thirty percent of commercial SEPs have neither a board charter nor a code of ethics. Numerous boards have had little training, and do not effectively manage conflicts of interest. Some members sit on as many as seven different SEP boards,” it says.
Despite the poor performance of SEPs, the World Bank said executive compensation doubled during the period under review.
Senior managers, the report says, generally set their own remuneration levels and in many cases ignore statutory limits.
In her report, Chiri said many SEPS failed to comply with statutory requirements.
“Some fringe benefits were processed outside the payroll and not subjected to tax. These cases were noted for Zimra, Civil Aviation Authority of Zimbabwe, Zimbabwe National Roads Administration (Zinara), Mineral Marketing Corporation of Zimbabwe and National Museums and Momuments,” the Chiri report states.
“I noted instances of un-vouched expenditure in some entities. Zinara could not support project expenditure amounting to at least US$2,1 million and Zimbabwe National Statistics Agency could not support census expenditure amounting to US$28 million.”
Chiri’s report also says the Grain Marketing Board diverted grain purchase funds amounting to US$7,9 million.
It also notes that there was lack of due diligence in procurement, as well as non-compliance with procurement regulations.
“CMED (Private) Limited procured 1 million litres of fuel without going to tender, Tobacco Industry and Marketing Board incurred excess escalation costs amounting to US$7 million not sanctioned by the State Procurement Board. GMB procured goods and services worth US$1,5 million without following tender procedures,” the Chiri report says.
“NRZ procured goods worth US$1,4 million that were not delivered, some of these date back as far as 2011.”