The state of Corporate Governance in Zimbabwe’s State Enterprises: Can the situation be rescued?

The state of Corporate Governance in Zimbabwe’s State Enterprises: Can the situation be rescued?


Keynote Address by

The Minister of State Enterprises and Parastatals

Honourable Gorden Moyo (M.P)

At

IIA Annual Conference

Elephant Hills Resort

Victoria Falls

13 September 2012

Chairperson, Organisers of the Conference, Captains of the Business Sector, Distinguished Guests, Ladies and Gentlemen.


It is my pleasure to be part of this important conference and am grateful to the organizers for the invitation to address delegates on the very topical subject of corporate governance as it relates to State Enterprises and Parastatals in Zimbabwe. This invitation is coming at a time when the Government is implementing a number of reforms aimed at transforming the Parastatals sector so that they efficiently deliver their respective mandates.

Ladies and Gentlemen, it is important to note that State Enterprises and Parastatals, are a entities created by Governments all over the world to carry out certain activities, which by their nature do not attract investment from the private sector either due to the fact that the return on investment is minimal, takes long to recoup, or the infrastructure required is expensive to construct and maintain. At the same time the activities are such that they cannot be ordinarily carried out by a Government Department efficiently.

State Enterprises and Parastatals provide diverse services to both the public and corporate institutions thereby providing a platform upon which other economic activities can ride and grow such as telecommunications or ICTs, transport services and infrastructure, energy and power, these are activities that facilitate the creation of wealth through the industrial and manufacturing sectors including the financial and retail sectors. Provision of electricity generation and water reticulation in developing economies does not readily attract private capital investments for reasons related to costs including tarrifs.

In essence Ladies and Gentlemen SEPs are key enablers that facilitate economic growth and sustainable development.

Ladies and Gentlemen, these entities, despite their strategic importance, have not been performing to expectations due to a number of well known constraints ranging from very limited flow of foreign direct investment and a very difficult operating environment characterized by liquidity constraints arising from a number of conditions including the adoption of the multi-currency system.

This situation has been compounded by general weaknesses arising from weak corporate governance enforcement mechanisms.

As a result, institutions have been established and countries, as well as groupings of countries have developed corporate governance standards to improve the way corporations are governed and controlled as well as mitigate against occurrences of failure.

Some of the most prominent efforts so far include the following:

• Corporate Governance Framework for State Enterprises and Parastatals

• Malawi Code

• The Organization for Economic Co-operation and Development (OECD) Principles of Corporate Governance (2002);

• The King Report on Corporate Governance for South Africa (1994) including King II (2002) and King III (2009);

• State Owned Enterprises Governance Act of Namibia (2006);

• The New Economic Partnership for Africa’s Development (NEPAD): African Peer Review Mechanism (2003).

Some initiatives have also been made through the Pan African Consultative Forum on Corporate Governance, The United Nations Economic Commission for Africa (UNECA), The African Development Bank, African Union, The Common Market for Eastern and Southern Africa (COMESA), SADC, and ECOWAS.

The turn of the century witnessed the stunning collapse of a number of business organizations worldwide. Most prominent among these, being the extensive corporate (financial) sector failure in South –East Asia (1997) and more recently a number of major corporations have failed in the United States such as Enron (2001) and AIG (2008) corporations. The majority of failures in both regions have been attributed to an absence or dereliction of efficient corporate governance. In Zimbabwe a number of corporate failures has been recorded especially in the financial sector, which are still to be resolved by way of Judicial Management.

As Minister responsible for Cross-Cutting policy issues related to the administration of SEPs, I note, with great concern that will still have some SEPs which continue to ignore the requirements of the law as provided for in the enabling pieces of legislation as well as the provisions of the Corporate Governance Framework launched by the Government in November 2010 particularly the requirement to hold Annual General Meetings (AGMs).

Annual General Meetings are critical in keeping company performance under scrutiny and in defining strategic issues covering, among others, further development of the business. The AGMs create an opportunity for Shareholders to interrogate the performance of the entity and approve new projects.

Ladies and Gentlemen, let me appreciate the recent holding of the first Annual General Meeting in 81 years by the Grain Marketing Board. This is a positive development and is in line with the Corporate Governance Framework for State Enterprises and Parastatals.

Ladies and Gentlemen, allowing SEPs, for whatever reasons, to operate without boards creates not only a leadership vacuum, but also legal constraints for the validation of policy decisions and approval or authorisation of programmes. It is worrying for State entities to operate without boards for long periods because management are then left to operate without accountability, a situation which may compromise the efficiency and effectiveness of an entity due mainly to the absence of an effective oversight function. This calls in some instances for changes in leadership structures and renewal in SEPs for better performance, financial reporting and audit systems.

Ladies and Gentlemen, the question is, “Can the Corporate Governance situation in our State Enterprises and Parastatals be rescued?”

The answer is, yes, the situation can be rescued and it can be done if every one of us with a hand in the running of SEPs play their part and if all institutions play their respective roles and behave as good corporate citizens.

This requires a paradigm shift and movement away from traditional ways of selection of both Boards and Management to the adoption of systems that take cognisance of the need for the right skills mix, professionalism, the introduction of public accountability and self monitoring mechanisms. This is precisely the reason the Government has therefore introduced Board Performance Agreements and Performance Contracts for CEOs of SEPs.

Ladies and Gentlemen, enhancing transparency and accountability in SEPs is central for improving the corporate governance compliance. It is one of the efficient entry points for governance reforms. It is also a central recommendation of the Organisation for Economic Co-operation and Development (OECD) Guidelines. The Government needs to be kept accountable for the way it exercises its ownership rights: “The state should act as an informed and active owner ensuring that the governance of state-owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness" (OECD Main Guideline, Chapter II, p. 13).

Ladies and Gentlemen, corporate governance developments both locally and around the world have reaffirmed the board’s responsibility for ensuring the effectiveness of their organisation’s internal control framework.

These developments have highlighted the key role that internal audit can play in supporting the board in ensuring adequate oversight of internal controls and in doing so form an integral part of an organisation’s corporate governance framework.

The key role of internal audit is to assist the board and/or its audit committee in discharging its governance responsibilities by delivering:

• An objective evaluation of the existing risk and internal control framework.

• Systematic analysis of business processes and associated controls.

• Reviews of the existence and value of assets.

• A source of information on major frauds and irregularities.

• Reviews of operational and financial performance.

• Recommendations for more effective and efficient use of resources.

• Assessments of the accomplishment of corporate goals and objectives.

• Feedback on adherence to the organisation’s values and code of conduct/code of ethics.

However in attempting to adequately discharge their responsibilities, internal auditors often find themselves in an anomalous position. They report to senior management within the organisation, yet are expected to objectively review management’s conduct and effectiveness. The only satisfactory solution to this problem is for internal audit to report primarily and directly to the board and its audit committee rather than to senior management.

In the UK, a report by Sir Robert Smith on the Combined Code Guidance for Audit Committees (the Smith Report) states that “…management is responsible for the identification, assessment, management and monitoring of risk, for developing, operating and monitoring the system of internal control, and for providing assurance to the board that it has done so – except where the board is expressly responsible for reviewing the effectiveness of the internal control and risk management systems.”



In Australia, the ASX Principles of Good Corporate Governance has a bet each way. It recommends that internal audit “…should report to management and should have all necessary access to management and the right to seek information and explanations.” However, the ASX Principles then go on to suggest that “…companies should consider a second reporting line from the internal audit function to the board or relevant committee.” Under the ASX Principles it is also recommended that the audit committee have access to internal audit without the presence of management.

If we look to the financial services industry, we also find that the Basel Committee makes no distinction in its guidelines as to the natural reporting line for the internal audit function except to note that “…the principle of independence entails that the internal audit department operates under the direct control of either the organisation’s CEO or the board of directors or its audit committee”.

Ladies and Gentlemen, the structure and reporting lines adopted for the internal audit function should promote independence, objectivity, consistency and business understanding. This can be achieved by combining the concept of a clear reporting line to the board/audit committee with an organisational structure that allows internal audit to operate independently of other functions within the organisation.

The Internal Audit function is one management tool that, if given its proper place, would propel our State Enterprises and Parastatals to greater heights as one of the biggest problems in the entities is one related to wastefulness, leakages and improper management of both financial and material resources.

Therefore Mr. Chairman, Internal Audit Units should not only focus on risk management and control systems, but also dedicate attention to the whole spectrum of governance issues as well as keeping abreast of new developments and standards on the subject.

So, full implementation of best practices in corporate governance coupled with other reform initiatives in the management of SEPs, I am convinced Ladies and Gentlemen, should bring back the “engines of growth” status to our SEPs.

Ladies and Gentlemen, to reduce the occurrence of corporate governance failures in our entities, let us all embrace and inculcate into all our institutions a culture of good corporate governance practices, revive the African philosophy of Ubuntuism that fosters togetherness, righteousness, a sense of belonging and mutual accountability for the achievement of community objectives and the desired well being of society.

I have reflected on the roots or sources for the development of a culture in corporate governance context and taken the conclusion that, for any particular mode of behaviour to become part of a culture, that behaviour must be a product of not just commitment but also passion.

A culture of corporate governance means that the principal players, the directors, care deeply about the corporation and about its governance processes. The mode of behaviour of the principal players in governance systems, i.e. the directors, shareholders, officers (and other stakeholders) must reflect a deep and abiding commitment to good governance principles and a strong desire to be associated with good things, and the promotion of good morals in individual institutions and society at large.

Various initiatives such as the restructuring of SEPs with the view of establishing joint ventures, review of the regulatory and operational environment and strengthening of performance Management systems are equally important for the successful transformation of our SEPs.

With regards to restructuring of SEPs, the Ministry, through State Enterprises Restructuring Agency (SERA), is working closely with line Ministries to identify and effect appropriate restructuring options for SEPs.

The adoption of restructuring strategies for public enterprises is one of the key economic reforms that will strengthen the role played by the public enterprises sector in economic growth and development.

I would also want to assure you that, since the adoption of the Corporate Governance Framework for State Enterprises and Parastatals in November 2010, there have been positive developments in the way corporate governance practices are being embraced. We have seen new Boards being appointed timeously with the appropriate skills mix, and the number of SEPs holding AGMs has increased.

Ladies and Gentlemen, compliance with the Corporate Governance principles benefits both the Shareholders and employees of companies as it increase transparency and disclosure. When a company is doing well every stakeholder benefits in one way or another. Also, adopting good Corporate Governance practices leads to a better system of internal control, thus leading to greater accountability thereby improving access to capital and financial markets.

Many businesses seeking new funds often find themselves obliged to undertake serious corporate governance reforms at a high cost and upon the demand of potential investors. When the foundations are already in place investors and potential partners will have more confidence in investing in or expanding the company’s operations.

“If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country suffer the consequences.” (Arthur Levitt, former chairman of the US Securities & Exchange Commission)

Overally, Mr Chairman, there has been a significant improvement in as far as compliance and performance reporting is concerned giving the Government the confidence that our SEPs can be brought back on track in one form or another for the benefit of all Zimbabweans.

In closing I would like to point out that Corporate Governance must be taken seriously at all levels, the Government, through its various arms must take a lead in ensuring that good corporate governance becomes a culture in SEPs. In instances where there are no Boards and substantive Chief Executive Officers, these must be appointed as a matter of urgency since the absence of these institutions in an organisation diminishes its ability to execute its mandate and brings into question issues of legitimacy and validity of decisions made under such circumstances.

Until the launch of the Corporate Governance, it was not a requirement for Parastatals governed by individual Acts of Parliament to hold Annual General Meetings. It is however good practice that they do so, and is now a requirement in terms of Section 4.1.1 of the Corporate Governance Framework.

Ladies and Gentlemen, when fully implemented, good corporate governance ensures that SEPs are well-run institutions that earn the confidence of investors and lenders. The practice safeguards against corruption and mismanagement, while promoting fundamental values of a developing democratic society.



Philippians 4v8 “ Finally, brethren, whatsoever things are true, whatsoever things are honest, whatsoever things are just, whatsoever things are pure, whatsoever things are lovely, whatsoever things are of good report; if there be any virtue, and if there be any praise, think on these things.”

LADIES AND GENTLEMEN, I THANK YOU FOR YOUR ATTENTION

ADDRESS BY HON. G. MOYO, MINISTER OF STATE ENTERPRISES AND PARASTATAL AT THE ZIMBABWE MINING INDABA 2012; 12 - 14 SEPTEMBER 2012: HARARE INTERNATIONAL CONFERENCE CENTRE, RAINBOW TOWERS, HARARE, ZIMBABWE

ADDRESS BY HON. G. MOYO, MINISTER OF STATE ENTERPRISES AND PARASTATAL AT THE ZIMBABWE MINING INDABA 2012; 12 - 14 SEPTEMBER 2012: HARARE INTERNATIONAL CONFERENCE CENTRE, RAINBOW TOWERS, HARARE, ZIMBABWE






‘State owned mining enterprises as drivers of a modern developmental state’

1. I am very delighted to have been invited, not only to be part of this special occasion, but also to be given an opportunity to share views and ideas at this Mining Indaba, at a time when debate on the developmental role of state enterprises has gained worldwide prominence. In the mining sector, the subject has also received wide publicity due to its social, economic and political significance. Indeed policy pronouncements in this sector impact on multinational corporations’ relevance across the world as well as in national economies and the well being of the country’s citizens.



2. Over the past years, the degree of government’s interest in the mining sector reflects to a large extent the cyclicality and success of the sector. In the 1960s and 1970s, the developing countries pinned their hopes on the socioeconomic development potential of mining, based on the industry’s economic performance over the preceding decades, the period between the Second World War and the mid-1970s was a period of growth in metal production and metal prices. In this period, ferrochrome, nickel and copper, to name a few, were considered strategic for the reconstruction of Europe and Japan after the Second World War and the industrialization of the Soviet Union. With independence, developing countries recognized the importance of the mining sector as a source of revenue to fund national development projects. This triggered nationalizations of mining companies toward the end of boom period to the mid 1970s.



3. From the mid 1970s, reconstruction demand decreased, and the next 30 years saw metal prices in an almost continuous decline. Profits fell and the industry could no longer meet its societal responsibilities and, in some cases, became a burden to the fiscus. Mining state enterprises were now being described as inefficient and poorly managed and ought to be privatized. Indeed a number of state mining enterprises were privatized during this period of downturn.



4. Thus developing country governments entered the industry when the prices were high and exited when the prices were down.



5. Now today, metal price have been on the increase from about 2003/2004. The impact of the financial crisis in 2008 was shot lived, as recovery of metal prices continued from late 2009 through today. Demands for an increase in the sharing of the profits are now coming from civil society groups, political parties, trade unions in almost all developing countries. The renewed political interest is being expressed in several ways:

• increase in taxes and royalties in several countries including industrialized countries;

• legislation to transfer ownership in the interest of broad based empowerment;

• concerns over security of supply of metals and minerals;

• discussions and actions to limit foreign ownership of strategic resources;

• re-negotiation of mining agreements;

• establishment of state mining development enterprises to function as an alternative to the private enterprises; and

• Review of mining legislation.



6. State ownership of a mining enterprise is not necessarily bad. At independence, Zimbabwe considered it prudent to create two state mining enterprises, one responsible for the control and promotion of marketing activities for all minerals produced in Zimbabwe with the exception of gold, with the objective of improving revenues to the country; and the other responsible for mining activities particularly to take advantages of those mineral deposits which were considered unattractive for private investment, and yet strategic for industrial development. Today the Zimbabwe Mining Development Corporation is very active in diamond mining operations, in gold mining, platinum and chromium development among others. Government, in partnership with private investors, is also in coal mining.



7. Policy makers now need to focus on developmental strategies that will achieve national goals through improved contribution from both private and state mining enterprises to ensure equitable and sustainable growth.



8. Distinguished Guests, Ladies and Gentlemen, let me emphasise that state enterprises in developing economies are the engine that drives national economic growth, and state mining enterprises have an important role in macroeconomic development and stabilization. Indeed, developing countries are now emphasizing the need for minerals to be further beneficiated within their countries to add value before export, to create employment opportunities, and support industrialization based on minerals as raw materials and also to support local supplier industries.



9. The success of state mining enterprises is determined by the governance framework/structure, assets, and capital base. In this regard, the Ministry of State Enterprises and Parastatals has developed and produced two important policy documents; The Corporate Governance Framework for State Enterprises and Parastatals and The Restructuring Procedures Manual.



10. The Corporate Governance Framework addresses issues of reporting lines, responsibilities and relationships among key stakeholders in the management and administration of State Enterprises and Parastatals. There is no more room for indecision and policy vacillations on our part and, therefore, state enterprises’ managers have no excuse either.



11. It is, however, important that are all stakeholders are aware of their roles in the exercise of good Corporate Governance; stakeholders include Governments, Boards of Directors, Chief Executive Officers of enterprises among others; whose actions or inactions have an impact on the seven pillars of good corporate governance which are:



• fairness,

• responsibility,

• accountability,

• transparency,

• discipline,

• independence; and

• social responsibility.



I have always emphasized that, it is only when an organization observes these principles that it can be said to be practicing good corporate governance. Boards of Directors, as custodians of Corporate Governance, must ensure proper governance in the organizations they lead.



12. Boards of State Enterprises and Parastatals should therefore have the necessary authority, competencies and objectivity to carry out their function of strategic guidance and monitoring Performance of senior management and the organization as a whole. Members of Boards are expected to act with integrity and should be held accountable for their actions.





13. Communications and reporting lines must be clear, and this is valid for all enterprises and not specific for the mining sector. The owner providing its input at the AGM and through its Board members. The Board must oversee that, the strategy of the enterprise and its plans for the future are developed and executed. Decision making power over the use of the cash flow should be the prerogative of the Board, and not the treasury department of the parent ministry. In the mining sector, it is particularly important that sufficient re-investments are made to secure the long term performance of the enterprise. It is equally important that the day-to-day management is placed in the hands of experienced and motivated professional managers.



14. Some governments, under certain conditions, believe that confidentiality and opacity or non-transparency are important to manage and operate a state enterprise. In the long run, the opposite is true. A state enterprise should be fully transparent and follow the most stringent reporting rules, even if it is not required to do so from a formal point of view. In fact, a state enterprise should be a model for private enterprises rather than the opposite.



15. Revenue from a state mining enterprise ought to be budgeted for by way of declared dividends, and not to cover budgetary deficits or other demands for money, skills or capital elsewhere in the national economy. Contributions to the national economy must be appropriate compared to the size and profitability of the enterprise. Mining, and in particular sustainable mining, demands re-investment in exploration and development to maintain current reserves and to provide for future production, which includes developing at least 5–10 years of ore reserves.



16. Once established, both state and private companies assume social responsibilities for the provision of public utilities, health facilities and road networks for the mine and the surrounding communities. It becomes the nucleus for development in those usually remote areas.



17. Our role, as Ministers, is therefore, to ensure that an independent Board of Directors consisting of members with sufficient experience and knowledge of the mining sector including mining financial engineering is constituted in a manner that is transparent, a prerequisite for success. If such persons are not available within the country they have to be attracted from abroad.





18. Ladies and gentlemen, mining is highly capital intensive industry with high risks of failure for a new project. If the enterprise does not have a sufficient size and capital base to attract the necessary expertise and to operate for a number of years without positive cash flow, it will fail. In order to be successful in an international competitive environment, only enterprises with the best management and resources will survive and this is regardless if the owner is a state or private investors. This bring me to the importance of The Restructuring Procedures Manual.



19. Restructuring of State Enterprises and Parastatals has been ranked high on economic reform agendas of many developing countries as a strategy geared at improving performance and efficiency of state enterprises in the production and delivery of public goods and services, among other reasons. The success story of democratic developmental states is premised on reformed state enterprises that respond to domestic and external pressures, and timely to meet the challenges of globalisation. In that regard, restructuring of state enterprises offers new management mechanism and new ownership structures that support more dynamic economic growth.



20. The broad objectives of restructuring include, among others: promoting economic efficiency by promoting competition; reducing the financial burden of loss-making enterprises, thereby releasing limited state resources for financing other demands; and to spread share ownership. For Zimbabwe, the restructuring of state enterprises is seen as a crucial step towards enhancing the contribution of state enterprises to economic growth through efficient service provision to other industries along the value chain.



21. Furthermore, restructuring help to attract new investment; particularly foreign investment, new technology and management skills, that can help transform the fortune of many of our state enterprises.



22. In that regard, my Ministry together with the State Enterprisese Restructuring Agency, has produced a Restructuring Procedures Manual with the main objective of providing various stakeholders with the requisite information on the process and basis on which the implementation of the programme can be assessed as well as to give investors the needed confidence to transact business with Government in a manner that is transparent to all.



23. Most mining state enterprises that are 100 percent state owned are in need of capital for exploration and development work. Thus for new and expantion projects, it would be of interest to create a mixed capital type of enterprise with a set timetable for gradual transfer of ownership from the state to private national entities and investors on a jointly agreed timetable.



24. Listing of a state owned enterprise is another way to share the burden to raise capital particularly in countries where the government’s capital-resources are limited. A listing will also subject the enterprise to more stringent reporting.



25. A state enterprise must be subjected to the same competitive conditions as its international peers. Taxes, royalties and other fees should be levied as per the industry standards in the country. If a state enterprise is given exceptional treatment for example reduced environmental standards it will affect its competitive position and hence its ability, in the long term, to perform compared to the rest of the industry. A level playing field, as provided for by a conducive regulatory framework, is therefore of paramount importance.



26. In conclusion, ladies and gentlemen, restructuring policies and strategies to enhance efficiency and effectiveness of our state mining enterprises require continuous assessment to ensure relevance to prevailing social, economic and political environments. Given our current circumstances it is prudent to pursue inclusive restructuring policies and strategies that brings together strength from all stakeholders, in particular our abundant mineral resources and financial resources both from foreign investors and our own domestic savings.



27. In addition it is important that governments continue with intervention strategies in line with the need to promote exploration activities, the exploitation of strategic minerals, and the need to bring development in mineral reach remote areas of our regions.



28. It is my sincere hope that as we deliberate on matters that have a bearing on the effectiveness of state mining enterprises, we will not only come up with strategies for successful management of these entities, but also be able to link the strategies to concepts of the developmental role of mining enterprises.





29. “Finally brethren, whatsoever things are true. Whatsoever things are honest, whatsoever things are just, whatsoever things are pure, whatsoever things are lovely, whatsoever things are of good report, If there be any virtue; and if there be any praise, think of such things and work for such things”. I will add believe in such things and work to achieve them (Philippians 4 vs 8)







Hon. Gorden Moyo

Minister of State Enterprises and Parastatals