Intricacies of Privatization and the Quest for Public Private Partnerships in Zambia

Table of Contents

1 Introduction
1.1 Background
1.2 Statement of the Problem
1.3 Focus of the Study
1.4 Methodology of the Study

2 Review of Literature
2.1 Private Sector Involvement
2.2 Conceptual definition of Privatisation and PPPs
2.3 Privatization Interpretation
2.3.1 Public Private Partnerships (PPPs) interpretation
2.4 Modes of Privatization
2.4.1 Acquisition by Pre-emptive Rights
2.4.2 Public Offering of Shares
2.4.3 Management Buy Out (MBO)
2.5 PPP Options
2.5.1 Service Contract
2.5.2 Management Contract
2.5.3 Lease Management Contract
2.5.4 Build-Operation- Transfer (BOT)

3 Practicality of Privatization and PPPs in Zambia –Study Findings
3.1 Advent of Privatization in Zambia
3.2 Privatization Outcome in Zambia
3.2.1 Privatization Status - SOEs Portfolio
3.2.2 Mining Sector Privatization
3.3 Pros and Cons of Privatization
3.4 Government’s Quest for PPPs
3.4.1 Zambia‘s PPP Legal and Institutional Framework
3.4.2 PPP Project Implementation

4 Concessioning of Border Infrastructure
4.1 Kasumbalesa Border Post Project - Case Study
4.1.1 Study Observation and Comments on Kasumbalesa Border Project
4.1.2 Implications of the termination of Kasumbalesa Border Project Concession
4.1.3 Options for Government
4.2 Challenges

5 Conclusion

Abbreviations and Acronyms

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1 Introduction

1.1 Background

Zambia was among the first of the developing countries in Africa to have embraced privatisation in the early 1990s. This was perceived as a means to revitalise its ailing industrial sector which was then heavily dominated by State Owned Enterprises (SOEs). Privatisation of SOEs in most of the developing countries was in response to the broad based public sector management reforms that followed the world economic crisis of the 1980s. These broad based reforms embraced structural adjustment policies which promoted market based economies away from centralized and planned economies. As Fundanga and Mwaba (1997) put it, “many developing countries especially in Africa were coerced by the IMF and the World Bank to the idea of privatisation as part of the structural adjustment and stabilisation programmes of the mid-eighties and the nineties”. The quest for privatisation was for improved service delivery, effective response to domestic external pressures and effective approach to globalisation challenges of the 1980s. As for Zambia, the broad based economic reforms took prominence following the accession to power of the Movement for Multiparty Democracy (MMD) government in 1991.

The structural adjustment policies which the MMD Government embraced encompassed trade liberalization and privatization among others. However, privatization took the centre stage in the reforms as it was envisaged as the most plausible alternative to industrial sector revitalization. The anticipation was that with privatization the industrial sector would be recapitalized through injection of private sector financing.

1.2 Statement of the Problem

Before the advent of the economic crisis in the 1980s, most of the SOEs in Zambia were well sustained by the revenues from copper proceeds. But with the advent of the economic crisis in the eighties, this greatly affected the sustainability of nearly all of the SOEs as the government treasury could not afford to support them as before the crisis because of the dwindling of treasury revenues to lowest levels. This followed the drastic reduction of copper revenues from where most of the foreign revenues were generated. The reduction in the treasury revenues made it difficult for government to continue providing financial support to SOEs. Lack of financial support coupled with internal inefficiencies rendered most of the SOEs unsustainable business ventures (Fundanga and Mwaba, 1997). The only practical solution was either to recapitalize them at huge cost to government or to go for outright privatization. Government found privatization as the most practical taking into consideration the status of most of these SOEs in the period of the crisis.

Despite the privatization being found as the most practical, its implementation had its own positive and negatives effects on the Zambian economy. With a lot of extremities experienced with privatization, the Zambian government decided to take the Public Private Partnerships (PPPs) route to complement its privatization agenda in infrastructure development mostly in core economic sectors such as energy and transport. However, the early analysis of the PPPs revealed that its implementation had been skewed towards political expedience.

Practically both Privatization and PPP are specific to the role of government or public entities in the delivery of public goods and services. There are just alternatives available to government for delivery of a public service. This differs with the usual “traditional method of public procurement where government is directly involved in the procurement process using public resources” (Ford and Zussman as quoted in Palmer, 2003). Savas (2000) on the other hand described “privatization as a situation where the government role in service delivery reduces whilst increasing the role of other institutions in the delivery of the same or similar services”. Practically, the change of portfolio entails most of the government’s original activities being undertaken at minimal levels whilst allowing the private sector to take the leading role. This eventually leads to government reducing its size in the delivery of public services.

1.3 Focus of the Study

The study focused mainly on the general assessment of the effectiveness of the privatization policy in the period of its practical implementation and the eventual adoption of the PPP initiative as an alternative avenue for private sector involvement as a compliment to government’s economy agenda. The study’s hinged on the analysis of possible successes and failures of privatization in Zambian and the political and economic implications of the maladministration of PPPs for political expedience. Further it presented an analysis on the economic implication of the government decision to terminate an existing concession agreement for an operational facility (Kasumbalesa border post) without putting in place termination mechanisms.

1.4 Methodology of the Study

Arising from the availability of sufficient data on privatization and PPPs in Zambia, the desk study method was found most ideal. This method was found to be the most appropriate and objectively focused. To validate the data for its authenticity, interviews were conducted with selected key stakeholders in Privatization and PPP agendas. Key stakeholders included officials from the Ministries of Justice; Finance; Transport, Works, Supply and Communications; Commerce, Trade and Industry; Lands, Natural Resources and Environmental Protection; Zambia Revenue Authority (ZRA), Zambia Development Agency (ZDA), Zambia Chamber of Commerce and Industry (ZACCI), Truckers Association of Zambia (TAZ), Clearing Agents, Zambia Federation of Employees (ZFE), Zambia Congress of Trade Unions (ZCTU); and Local Authorities (under the Ministry of Local Government and Housing).

2 Review of Literature

2.1 Private Sector Involvement

Literature showed that private sector has for a long time involved itself in one way or another in the delivery of public services. Initially private sector focus in the delivery of public services was in economic infrastructure. But over the years, the private sector changed its focus to the delivery of social infrastructure assets and associated non-core services.

Through PPP initiatives, the private sector started to take active roles in the delivery of public services across sectors of the economy. The eventual globalisation of PPPs in service delivery has been perceived to have accelerated growth in many economies. This was because PPPs were presumed to be economically focused and its financial mechanisms gave government fiscal space to concentrate resources to other non-economically viable activities. Through PPPs, economies have encompassed a broad range of sectors into the infrastructure development agenda. Even social infrastructures such as health centres, schools and other amenities have now taken the centre stage in infrastructure and service delivery through PPP initiatives.

Literature has shown that private sector engagement in delivery of public service has greatly increased innovations into the process. These innovations are presumed to add significant value to public procurement and efficiency in service delivery. In UK for example, literature has shown that private sector engagement in public procurement was greatly influenced by the government’s introduction of the Private Finance Initiative (PFI) specifically meant to finance the private sector in the provision of infrastructure and other social service delivery. With the use of PFI in many other countries, most of the private sector came on bound to implement infrastructure projects to enhance service delivery. Ireland, Australia, India, Japan and the Netherlands are cited as some of the countries that have used PFI in the delivery of several infrastructure projects such as highways, housing, pipelines etc. For Africa, it was equally noted that most of the public sector infrastructures were being provided through one form of Private sector involvement especially in the water, energy and transport sectors.

As for PPPs, Literature has further shown much support given to the PPP initiatives in many developed economies where economy efficient gains were mostly visible. This was attributed mainly to the fact that in a PPP arrangement, the private sector has much leeway to pursue private gain in any infrastructure or social service delivery by capitalising on its economies of scale and economic efficiency. The private sector does so by always undertaking a critical analysis of the value for money aspect in every delivery of infrastructure and services. The expectation of the private sector is that to every delivery of service, there must be a return to investment.

2.2 Conceptual definition of Privatisation and PPPs

Review of literature on Privatisation and PPPs revealed very little conceptual distinction between the two terms. The difference was only in the terms of their applicability. The applicability is based on the fact that the two terms were both linked to private sector involvement in the government’s economic agenda. In other worlds, privatisation and PPPs were only “alternative service delivery arrangements to traditional procurement” (Ford and Zussman as quoted in Palmer, 2003). Fundanga and Mwaba (1997) described privatisation simply as “a transfer of ownership of public asset into the control of private sector”. In their view, this transfer would either be in total, partial or functionary. The term “public–private partnership” on the other hand could simply imply combination of relationships between the public and private entities in the delivery of infrastructure and other services. Similarly in situations where private sector capital uses or is combined with that of the public sector and are aimed at improving the delivery of public services or facilitate the management of public assets, these could be equally termed as PPPs (Grimsey, 2003).

2.3 Privatization Interpretation

The term privatization presents many different interpretations. In Australia and UK, for example, the term is traditionally and interpreted as the “transfer of physical assets from public to private ownership” (Grimsey, 2003). In other words, it could be the act of de-nationalizing public entities from government control to that of the private sector. In this situation, it is the interest or equity held by government directly or indirectly in the SOEs wholly or partly owned by government that is transferred to the private sector (Zambia Privatization Act, 1992).

To every privatization, there is always one kind of change that takes place and this change has to do with the transfer of public ownership or control of a public entity into that of the private sector. The change is usually realized by the transfer of ownership of public assets, such as land and buildings through partial or complete sell to the private sector. The purpose of the change of ownership is mainly to enhance efficiency in the delivery of public services by taking advantage of private sector efficiencies and financial capabilities.

2.3.1 Public Private Partnerships (PPPs) interpretation

In line with the PPP Act of Zambia, a PPP could simply be interpreted “as a partnership between the parties in form of a contractual obligation given to the private party to execute a public function by undertaking some shared technical, financial and operational risks in the period of the contractual agreement”(PPP Act,2009). PPPs hinge mainly on the allocation of tasks, obligations, and risks among the public and private partners. The structure of the partnership is usually designed to allocate risks to the partner who is best suited and competent to handle them to enhance effective management of the project. The purpose is to ensure that costs are minimized but with assurance of improved performance from the private party.

PPPs could be classified according to ownership, funding and control. In this sense, ownership could be public, private and joint. Funding refers to the amount of capital investment expected from each of the partners in the project. It greatly hangs on the partner who is expected to take full control of the operations and maintenance activities of the project. It could therefore be implied that a PPP is determined by combination of different degrees of ownership, funding, and control. In a PPP, a number of public and private partners are usually involved. Public partners would include government public or business entities. Government ministries, departments, local authorities and public businesses (SOEs) form part of public partners. International businesses or investors, on the other hand, form part of the private partners. These include local or international partners with technical or/and financial expertise relevant to particular projects.

The essence of PPPs is the recognition of certain advantages of each party relative to the other in the performance of specific tasks. For example, the public partner may have the advantage to lobby for political support for the project and the ability to ensure that an enabling environment for investment is provided. The private partner, on the other hand, could have the ability to capitalize on its expertise advantage in areas of commerce, operations, innovation and the capacity to provide the much needed capital for the effective and efficient management of the business or project. These factors distinguish a PPP from privatization (Grimsey, 2003). This differs with the notion in privatization where the private sector assumes full responsibility for service delivery immediately after the privatization of government entity is completed. This distinction clearly differentiates PPP from the traditional public procurement and outright privatization by virtue of the private sector being solely responsible for project financing.

2.4 Modes of Privatization

Typically, privatisation is mostly applicable to situations where a service which was previously provided by the public sector gets to be provided by a private entity on a commercial basis. Each application is dependent on the mode of privatisation adopted. Literature provides a number of applicable modes of privatisation. The Zambia Privatisation Act (1993), for example, lists a number of modes of privatisation that are applicable such as acquisition by pre-emptive rights; the public offering of shares; private sale via negotiated and competitive bids; dilution of government holding of shares; sale of assets; management /employee buy-out. Among the many modes of privatisation, the most common ones relevant to the study are acquisition by pre-emptive rights; public offering of shares and management/employees buy outs.

2.4.1 Acquisition by Pre-emptive Rights

Acquisition by pre-emptive rights provides an opportunity to existing shareholders of the public entity to acquire more shares to recapitalize the business. In other words, a pre-emptive right is simply “a contractual right provided to existing stakeholders to consider acquiring certain property prior to it being offered to other persons or entity” (Wikipedia, 2012). It is simply a "first option to buy” offer to the existing shareholders. The purpose is to allow existing shareholders to maintain their proportional ownership of the company without diluting their stock of shares. The existing stakeholders however are not obliged to exercise the right to shares before public offer. It is a matter of choice.

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