PRIVATIZATION EXPERIENCE IN ZAMBIA Presented by: Evelyn Mutandwa, Principal Auditor, Public Debt and Investments Direct

1. PRIVATIZATION EXPERIENCE IN ZAMBIA Presented by: Evelyn Mutandwa, Principal Auditor,Public Debt and Investments Directorate PWG Meeting, Moscow,2009

2. During the first decade after independence (1964-73) Zambia followed a development policy of import substituting industrialization, and nationalization of Enterprises away from the market economy.

3. BACK GROUND - CONTD The import substitution industrialization policy was supported by the abundant mining revenues, which Contributed half of GDP, and almost all export earnings (copper alone accounted for more than 90 percent of foreign exchange earnings).

4. BACKGROUND - CONTD Under the nationalization program 80 percent of the economy came under the control of state owned companies. Since 1973, Zambia experienced deterioration in the terms of trade, collapsing copper prices, soaring oil prices, lack of capital investment and significant internal mismanagement.

5. BACKGROUND - CONTD Zambia undertook huge external borrowings and by the end of the 1980s external debt was over US $ 6billion. Zambia�s economic position deteriorated to such an extent that the country became unable to service its obligations and to support its deteriorating domestic industries.

6. STEPS TAKEN BY THE NEW GOVERNMENT In 1991, the Movement for Multiparty Democracy was elected into Government. The new Government made a fundamental decision to attempt to stem the economic decline of Zambia through private, rather than state Enterprises. In order to achieve this, two major policy initiatives were implemented; The first was to establish an �enabling environment� for the private sector to thrive; the second was to sell off state owned companies.

7. STEPS TAKEN�CONTD The new Government removed most of the restrictions on foreign currency transactions; and Passed into law in 1992 the Privatization Act , which among other things established the Zambia Privatization Agency (ZPA), an autonomous private sector led agency whose mandate was to implement the privatization program. Specifically its responsibilities were to plan, implement and control the privatization of state owned Enterprises in cooperation with the Government.

8. OBJECTIVES OF PRIVATISATION The stated objectives among others ,of the privatization program in Zambia are to: Scale down the Government�s direct involvement in the operations of Enterprises; Minimize state bureaucracy in Enterprise operations; Reduce the costs of capital expenditure and subsidies from public funds; Promote competition and improve efficiency of Enterprise operations;

9. OBJECTIVES OF PRIVATISATION - CONTD Encourage wide ownership of shares; Promote the growth of capital markets; Stimulate both local and foreign investment; Promote new capital investment Derive capital income for the Treasury.

10.  CURRENT STATUS ON PRIVATISATION  As at 31st December 2008, 262 formerly state owned Enterprises had been privatized out of a total portfolio of 284 companies. The remaining companies are mostly those from the key sectors like energy, postal ,telecommunication and rail transport.

11. THE PROS AND CONS OF PRIVATIZATION The privatization program in Zambia had both positive and negative effects.

12. GOOD SIDE OF PRIVATISATION PROGRAM- CONTD There has been increased investment in some sectors such as transport; Competition has increased leading to improved efficiency; Increased private participation enhanced competition and infrastructure development; Removed political interference;

13. GOOD SIDE OF PRIVATISATION PROGRAM- CONTD

14. NEGATIVE EFFECTS /CRITICISM The privatization process has been donor-driven and lacked transparency. It has no broad-based domestic ownership and support. It encouraged corruption; The process was rapidly introduced without adequate attention to the social consequences; Company assets were stripped and the companies were eventually sold at give away prices and not at their market values; There was no information and proper plan to utilize the sales proceeds; Contributed to high poverty levels due to delays to effecting compensation packages;

15. CRITICISMS -CONTD Productivity has remained elusive; The program was ill-timed in the sense that nearly all privatized companies had almost collapsed at the time of privatization; Implementation of the program was done in haste and some companies were sold to fraudulent individuals whose interest was only asset stripping; The program contributed to economic contraction and not economic growth because the proceeds have not been used to empower citizens to start business ventures which could contribute to economic growth; Increased capital flight since there was no restrictions on foreign investors on capital repatriation; No social safety nets to take care of the social consequences.

16. REMEDIES FOR PROBLEMS IN THE PRIVATISATION PROCESS There has been a shift from wholesome privatization to Partial Privatization commercialization, concessions and public private partnerships (PPPs). This has brought in some relief as the companies are still regarded as private companies but with an element of pubic interest. In some cases like the water utility companies, telecommunication and electricity generation and distribution the government has ruled out privatization because of the effect that this will have on the general populace.

17. REMEDIES FOR PROBLEMS IN THE PRIVATISATION PROCESS - CONT It has been felt that privatizing these companies will deny the rural population of facilities like postal services, electricity etc. In the year 2008 Government launched the first ever PPP Policy and is in the process of enacting the PPP legislation.

18. ROLE OF OFFICE OF THE AUDITOR GENERAL The Office of the Auditor general in Zambia is mandated by the Constitution and Public Audit Act of 1980 to audit any institution receiving government grant, subsidy or subventions. It is the mandate of the office to audit the Companies that still have government interest in terms of Funding, Donor Financed Projects, and Statutory bodies. However, once a company has been privatized it automatically falls outside this mandate.

19. ROLE OF OFFICE - CONTD

20. EXPERIENCES GAINED IN THE AUDIT OF PRIVATIZATION AND PPPs EXPERIENCES GAINED Below are some of the experiences gained in the process of auditing Privatisation and Public Private Partnerships; Generally most of the foreign direct investments are powerful multinationals who dictate their own terms. In this regard it has been very difficult to audit these institutions particularly where Government has minority stake. In cases were we have succeeded to audit institution with minority Government stake, it has been practically difficult to have our recommendations implemented.

21. EXPERIENCE GAINED -CONTD Lack of proper guidelines (regulatory framework) on privatization, post privatization reviews and how to utilize the proceeds has been a major barrier to effective audits. Obtaining information on privatization and PPPs has been difficult due to poor record keeping and access rights.� Before the launch of the PPP policy, PPPs projects mushroomed at institutional level without proper coordination. Compilation of the data base of the existing PPPs has been a big challenge.

22. EXPERIENCE GAINED -CONTD Lack of legislation on PPPs has made it very difficult to ascertain the appropriateness of the PPP contracts. It was observed during the audit of PPP projects that most of the contracts had flaws resulting into failure by the concessionaires to inject the capital commitments. Supervision on the part of Government was also generally weak. �

25. FUTURE PLANS- CONT Beginning this year the Office has planned to be involved from the initial stage of privatization and Private public Partnerships. For instance we intend to audit the contract for the PPP project on the construction of the border post infrastructure before the construction commences.

26. Conclusion The Zambian community looks up to the SAI of Zambia to address a number of issues relating to accountability of public resources. The Privatization working group and its guidelines will therefore continue to be the main source of information for the improvement of our audit methodologies.

28. INTERACTIVE VOTING QUESTIONS Question 1 Do you think the early involvement of our SAI in the audit of Privatization or PPPs can be done without raising issues of conflict of Interest during the audit of the outcome of the project? No Yes Maybe

29. Interactive voting questions - Cont Question 2

30. Interactive voting questions - Cont

31. Interactive voting questions - Cont