State-owned enterprises turn new leaf under IDC

In what will be a historic case study, companies run by govt are finally in a profit-making spree

By VICTOR KALALANDA, Lusaka June 8, 2021

One of the solar farms established by the IDC, located in the Lusaka South Multi-facility Economic Zone

Finance Minister Dr Bwalya Ng’andu, flanked by IDC Group CEO Mr Mateyo Kaluba (right) and ZAFFICO Board Chairperson Mrs Anne Doma Gray-Kunda, rings the bell to signify the commencement of the trading of ZAFFICO shares on the Lusaka Securities Exchange. ZAFFICO is one of the companies under IDC that has undergone positive transformation.

The site is plush and lush, but you should make no mistake to think that it is a billionaire’s residence in the suburb of an expensive city.

Rather, it is the centre for the administration of Government business and investment, and it is never funded by the National Treasury, but solely through the profits it generates as it ticks all the boxes in unprecedentedly changing the performance of state-owned enterprises (SOEs) from low to high gear.

Governed by a value statement underpinned on professionalism, transparency, integrity, distinction, innovation and team work, it is known as the Industrial Development Corporation (IDC) and the standards of its headquarters in Lusaka seem to say that Government is not mediocre.

In the simplest terms, the IDC is a large company that exists to practically answer the fundamental question: can Government really do business and make its own money?

And so far the answer is a compelling and glowing yes.

After 1974—following the end of an auspicious economic era that is often referred to as Zambia’s fat ten years after independence in 1964—the future prospects of SOEs turned bleak and their reputation became battered due to low profitability, under-investment and high indebtedness, a situation compounded further by the decline in copper prices.

Accordingly, by the end of the 1980s there was a major shift in Zambia’s state enterprise sector and abortive import substitution industrialisation policy, as an economic strategy.

The country abandoned its socialist nationalisation programme, which had entailed direct control of the economy by Government through acquisition of controlling shares in private sector enterprises, like mines, and partnering with investors to set up entirely new industries.

Yielding to mounting pressure from the International Monetary Fund (IMF), World Bank and donors to liberalise the economy and thus embrace capitalism, the Zambian Government swiftly privatised 113 of its 144 existing SOEs, which fell into such categories as large, medium and small enterprises.

The 31 companies retained in Government’s portfolio have since increased in number—in the various fields of energy and infrastructure; transport and communication; mining, agriculture and forestry; manufacturing; banking and financial services; health, tourism and real estate—and they are the subject of interest whenever the viability of SOEs is questioned and criticised as an unnecessary strain on tax payers’ money.

In fact, many scholars have through the years built the case against the creation of SOEs and argued fervently that companies run by the state can never exhibit good corporate governance and should therefore be done away with.

A 2020 study by researchers Misheck Mutize and Ejigayhu Tefera states that “SOEs in Africa are accused of many ills such as monopolising certain sectors, sabotaging of structural reform programmes, gross inefficiencies, poor corporate governance, battleground of political games and being conduits for corruption.”

But the current model of running SOEs in Zambia has seen balance sheets annually ending on a clearly upbeat note and setting a positive precedent like no other.

Since the dissolution of the Zambia Industrial and Mining Corporation (ZIMCO) in the 1990s, as the body superintending over parastatal companies, SOEs in Zambia were managed under direct supervision of the relevant Government line ministries.

Such a strategy, however, was only good enough in ensuring policy compliance, not to guarantee commercial vitality of individual SOEs or to identify investment opportunities on behalf of Government.

Having long bided its time, and with the benefit of hindsight, insight and foresight, Government in 2014 swung into action to incorporate the IDC and charged it with the mandate to create and maximise long-term shareholder value as an active investor and shareholder of successful SOEs, as well as undertake industrialisation and rural development activities through the creation of new industries. It was a way of killing many birds with one stone.

In its quest to create wealth and jobs for the country by revitalising as well as setting up new SEOs, IDC Group dynamic CEO, Mateyo Kaluba, says “We’ve taken a multipronged approach, there’s no one-size-fits-all. In some institutions where the challenge was a bloated workforce, we’ve embarked on right-sizing as the principle of reform. In some companies where the issue was long, outstanding statutory liabilities, we’ve looked to restructure the balance sheets of those companies, either through debt swaps, paying off tax liabilities or making sure that those companies [agree] with tax authority and resolve those issues . . . . We’ve restructured the governance of these companies, the boards are more private-sector based, we’ve also made sure that there is a performance framework existing between ourselves and the boards, so they sign what we call performance management contracts against which we hold them in terms of performance.”

The IDC now has a total of 36 SOEs in its portfolio, some of which include Bangweulu Power Company, INDENI, ZESCO, ZAMTEL, Zambia Airways, Indo Zambia Bank, ZANACO, KAGEM Mining, Kawambwa Tea Industries, Marcopolo Tiles Company, Mununshi Fruit Company, Lusaka Trust Hospital and Mukuba Hotel, with government ownership in being total in some and in others shared with investors.

As a specific example of what impact the IDC’s transformation agenda has had on SOEs, there has been an increase in profitable companies in the whole IDC Group from eight in 2015 to 15 in 2018.

Furthermore, the transformation in subsidiaries is also evidenced by the increase in the number of companies declaring dividends to the IDC, from one in 2015 to eight in 2019, with a total amount of K633, 837, 000 declared as dividends. The subsidiaries are moving from being predominantly dependent on the Treasury, to delivering returns on investment to the country.

In fact, currently there is no subsidiary receiving direct or indirect financial support from the Treasury, thus saving the Government sizeable funds that have been used to bankroll other areas of strategic socio-economic importance.

As notable success stories, two subsidiaries—namely ZSIC General Insurance Limited and Mpulungu Harbour Corporation Limited—recorded profit for the first time in 2017, whereas ZAFFICO successfully listed on the Lusaka Securities Exchange, with millions raised for expansion of the company’s forest plantations.

And for the first time in the history of SOEs in Zambia, more than 70% of companies have audited financials within the year immediately preceding the financial year, which is a far cry from being 10 years behind in their financial reporting.

By implication, not only does this show that companies are now better governed and better managed than before, but it also indicates that their respective boards are becoming more assertive in holding management accountable for financial performance.

For a self-sustaining corporation that has been in existence for just seven years, with the first four of those spent on establishing its operations, such accomplished feats demonstrate that IDC is not here to put up a façade or ostentatious display of business expertise. They know what they are doing in the interest of the Zambian people.

“We have exited those companies that didn’t have a good business case, case in point Medical Stores, it’s now an agency, [and] ESCO is becoming a Government department. So for those where we couldn’t argue a business case, we essentially gave them back to Government,” says IDC’s dynamo of a CEO, Kaluba, a University of Zambia graduate with enormous experience in business administration and public administration.

A firm believer in the maxim that “teamwork and intelligence win championships,” Kaluba’s apparent enthusiasm about public service is infectious and seems to have trickled down through the IDC staff compliment.

From scratch, IDC has created companies like INFRATEL and invested in solar power parks and greenfield projects such as Mununshi Fruit Company, with the revival of Kawambwa Tea and Zambia Airways.

In his opinion about what commercial value Zambia Airways has, he says “it’s not just about the national airline. It’s about the value chain that the national airline creates, it’s about its impact on your tourism, its impact on your conference and events business, it’s about flying your country. The challenge is about doing it profitably.”

“We’ve created over 13,000 jobs as a result of our investment activities between 2017 and 2020,” Kaluba says. “We saw over 600 million dollars in investments from our partners, case in point the solar projects in the Lusaka South MFEZ (Multi-Facility Economic Zone), the first grid scale solar projects in the country, where we put in our investment but attracted even more investment from our partners [and] we’ve seen more value chains being created.”

Over the next five years, Kaluba states that IDC intends to “attract about a billion dollars in new investments, that is, through joint ventures and partnerships . . . . We expect our direct investment to create fifty five thousand jobs, we expect to have a portfolio that is seventy five per cent profitable.”

And the IDC strategy so far is consistent with the Policy Monitoring and Research Centre (PMRC) 2019 recommendation that “Government should implement effective monitoring and evaluation mechanisms that target financial performance, governance and risk mitigation through periodic reporting to ensure corrective measures are continuously implemented” among SOEs.

Chaired by President Edgar Lungu, it is clear that IDC is becoming a perfect example of how to run SOEs, and that with time, this investment arm will have a positive impact on every sector that can create wealth and jobs for Zambia.