HomeBusiness DigestCorporate governance and state entities decay in Zim

Corporate governance and state entities decay in Zim

THE unfolding corporate governance scandal at power utility Zimbabwe Electricity Supply Authority (Zesa) provides a hint of how the country’s state entities and parastatals (SEPs) have been run down over the years. Despite stern warnings on re-appointing former board members to the Zesa board and creating an all-powerful executive chairpersonship post, government ignored those warnings and violated the Public Entities Corporate Governance Act enacted in May 2018.

Victor Bhoroma

The Act (under Part 3 of Section 11) states that no person shall be re-appointed to a board if he or she has already served on that board for one or more periods, whether consecutive or not, amounting in the aggregate to eight years. The national code of corporate governance of Zimbabwe contained in the same act states explicitly on three separate points that the chairperson of the board of directors should not double up as the state entity’s chief executive officer in order to ensure separation of powers.

Electricity generation and distribution is a key enabler to economic production for every country. Zimbabwe endured 12 to 18-hour power cuts from May 2019 to April 2020 due to limited generating capacity at Kariba Power Station, sub economic tariffs, mismanagement of funds and lack of investment in electricity generation over the years which left the power utility relying on old equipment that frequently breaks down.

The 2019 power cuts triggered immense decline in productivity with capacity utilisation in key sectors of the local economy such as mining, manufacturing and tourism dropping by 20-30% between June and December 2019.

Cost of production also went up as businesses had to make use of equally scarce diesel to power generators so as to stay afloat. Currently, Zesa is producing 1 081MW of electricity and importing about 500MW from Sadc countries to meet local demand.

Like most state entities, Zesa is no stranger to corporate governance ills. The Auditor-General’s Report of 2018 on SEPs revealed that the Zimbabwe Electricity Transmission and Distribution Company (ZETDC), a subsidiary of Zesa procured transformers worth US$5 million in April 2010 from a company called Pito Investments. The transformers had not been delivered nine years after the supplier received payment. Another subsidiary of Zesa, the Zimbabwe Power Company (ZPC) entered into a supply agreement in 2016 with the same supplier above and paid US$562 000 for transformers that were never received.

ZPC also paid York International US$15 000 in 2014 for gas that was not delivered by the supplier. In 2015, Zesa paid Intratrek Zimbabwe US$5,6 million without bank guarantees as upfront payment for the Gwanda Solar Project. The project was never implemented and Zesa has not yet recovered the money it paid to the supplier.

The Dema Power Plant

One case that epitomises corporate governance decay at Zesa and corruption in Zimbabwean parastatals is the Dema Power Project, which was controversially awarded to Sakunda Holdings in 2016 despite the fact that the company had not participated in the tender process. The project involving installation and construction of a diesel power plant was won by an American company called APR Energy Holdings.

However, it was later handed over to Sakunda Holdings, which was politically connected. After winning the tender, the inexperienced Sakunda subcontracted Aggreko, which had been disqualified by the State Procurement Board (SPB) because of its high costs and failure to meet technical specifications. The cost of the project later escalated from US$249 million to US$498 million after the government directed the suppliers to double output from 100MW to 200MW at a cost of US$166 million per year despite the fact that Zimbabwe was failing to import cheaper electricity from regional suppliers in 2016.

APR Energy later revealed that Zimbabwe could have saved US$200 million over three years had it explored the use of liquid petroleum gas instead of diesel-powered generators at Dema. Currently, the Dema power plant is mothballed as its electricity costs US$0,1545/KWh (when duty free diesel is used) as compared local power production and imports from the region which cost less than an average of US$0,0736/KWh.

Corporate governance

For the past seven years, the Auditor-General’s Office has unearthed gross violations of basic tenets of corporate governance and abuse of public funds in state entities. The 2018 Audit Report highlighted that Zimbabwe could have been prejudiced of more than US$100 million in fictitious loan repayments and overstated supply contracts for goods paid for but never supplied.

The report pointed that Grain Marketing Board (GMB) made an advance payment of US$1 million for maize to an unidentified supplier who did not deliver the maize.

Air Zimbabwe (AirZim) could not account for more than US$14 million in expenditure, while Allied Timbers operated eight bank and mobile money accounts that were not registered in its name. Government on its part failed to account for more than US$52 million paid to bail out AirZim, Civil Aviation Authority of Zimbabwe (Caaz) and Central Mechanical and Equipment Department (CMED).

Zimbabwe National Roads Administration (Zinara) approved over 51 contracts that prejudiced the road administrator of more than US$39 million in collusion with rural district council officials. The National Social Security Authority (Nssa) forensic audit report ordered by the Auditor-General to cover the period between 2015 to 2018 exposed shocking corporate governance flaws, corruption, theft and abuse of office that resulted in Nssa being prejudiced of over US$175 million through off-take housing contracts and investment deals awarded without going to tender.

Most of these contracts were parceled to politically affiliated suppliers. Cases of corruption, profligate spending on executive perquisites, insider loans, lack of adherence to audit reporting guidelines and outright disregard of tender procedures have been reported at Zimbabwe Broadcasting Corporation (ZBC), National Railways of Zimbabwe (NRZ), Zimbabwe Revenue Authority (Zimra), Minerals Marketing Corporation of Zimbabwe (MMZ), Zimbabwe United Passenger Company (Zupco) and Zimbabwe School Examination Council (Zimsec), among others.

Zimbabwe has a total of 107 SEPs which currently contribute less than 2% of the country’s Gross Domestic Product (GDP). In the mid-1990s, SEPs accounted for more than 40% of the country’s GDP and employed thousands of employees. Political interference in the running of state entities has also contributed to their declining performance and escalation of debts.

As of July 2018, state enterprises and parastatals owed Zimra over US$491 million. Currently, the government is making frantic efforts to offload underperforming state entities but its efforts are being thwarted by high consultancy fees, bureaucracy, debt overhang, a hostile investment and economic environment that chases away potential investors.

In light of the recent revelations at Zesa and other state entities, it is imperative that the Public Entities Corporate Governance Act be amended to cap remuneration overheads for SEPs to not more than 40% of realised annual revenue.

The act should also be explicit in pointing that the chairperson of the board of directors cannot under any circumstance hold an executive position. Equally important is legally weaning SEPs from funding parent ministry expenditure, a facility which has been relentlessly abused in the past.
Corporate governance reforms and recommendations from the Auditor-General’s reports have to be implemented comprehensively. Most SEPs have lost track of their core mandate and continue to be feeding troughs for the politically connected while piling more debt of the struggling taxpayers.

Bhoroma is a marketer by profession, freelance economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.

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