Friday, April 6, 2012

Zimbabwe Govt tackles US$600m inter-parastatal debt

http://www.thestandard.co.zw/

Thursday, 05 April 2012 10:12

Paidamoyo Muzulu

GOVERNMENT is considering a cocktail of measures to tackle staggering 
inter-parastatal debts amounting to US$600 million by directing Treasury to 
deduct arrears from the individual companies’ 2012 budget allocations.
Should this proposal be endorsed by cabinet, Treasury would be empowered to 
address inter-parastatal debts by deducting money which one parastatal owes 
another from its budget allocation.

Currently all budget allocations are deposited into each parastatal’s 
account, leaving them to offset their individual debts but because of the 
high defaulting rate, some entities are now technically insolvent.

Among the entities which are bankrupt or battling to stay afloat are Air 
Zimbabwe (AirZim), National Railways of Zimbabwe (NRZ), mobile operator 
NetOne, fixed line operator TelOne, Cold Storage Company (CSC), Grain 
Marketing Board (GMB), Zupco and Zesa.



There are about 82 state-owned entities, most of which are struggling or 
technically insolvent.

The inter-parastatal debt problem has a contagion effect on other 
state-owned companies and the country’s fragile recovery after a decade of 
economic meltdown. Without parastatal reforms and efficiency, the economy 
will continue to suffer.

The choking debts were accumulated due to a myriad of poor policies, among 
them government interference, mismanagement and failure to adapt to the new 
multi-currency monetary regime.

Government was warned earlier this year that the huge inter-parastatal debt 
level was generating negative spillover effects on the whole economy 
dominated by the state enterprises which used to be the locomotives of 
growth and employment creation.

According to a comprehensive 13-page document dated February 2012, outlining 
the extent of the problem, the inter-parastatal debt stood at US$458 639 932 
as at September 31, 2011. During this period, various ministries and 
government departments owed parastatals a staggering US$107 million.

The report assesses the effects of the performance of the state enterprises 
and proposes recommendations to the Council of Ministers and cabinet on how 
to deal with the issue.

The document proposes recommendations that are expected to form the basis of 
the envisaged comprehensive and stakeholder-driven Inter-Parastatal Debt 
Strategy.

The document further recommends that cabinet issues a directive to 
ministries and departments to pay off their debts immediately. It also wants 
cabinet to instruct Treasury to pay directly to the owed state enterprises 
by deducting the money from the ministries and departments’ 2012 budget 
allocation.
State Enterprises minister Gorden Moyo (pictured left) confirmed government 
was discussing how parastatals could liquidate their debts to make them 
attractive to investors during the government’s privatisation drive. 
Privatisation of parastatals has been partly stalled by their debt profile 
and general state of affairs.

“We are currently discussing on the strategy to find a method of settling 
the debts between and among the parastatals and other outside creditors,” 
said Moyo.

Moyo did not go into details about the strategies his ministry would adopt 
to resolve the debt crisis in which most parastatals find themselves in.
However, the document claims the parastatals debt problem was mainly due to 
customers’ failure to pay, weak debt-recovery mechanisms, failure to comply 
with agreed payment schedules and decade-long adverse macroeconomic 
conditions until 2009. It says price controls before 2009 made it difficult 
for parastatals to make payments to suppliers.

The document also lists the introduction of multicurrency without any 
recapitalisation from the shareholder, non-compliance to good corporate 
governance, imprudent policies and weak internal control measures and 
government directives as some of the major challenges affecting  parastatal 
debts.

It indicates the transition to the multicurrency system eroded parastatals’ 
bank balances that could have been used to make payments to suppliers.

The debt situation has also affected the 10 parastatals which the coalition 
government has earmarked for privatisation since its formation in February 
2009. The 10 companies include Air Zimbabwe, NetOne, TelOne, POSB, GMB, CSC, 
Agribank, Zesa, NRZ and Ziscosteel. Not much progress has been made to 
privatise these entities, except for Ziscosteel whose deal is at an advanced 
stage albeit still uncertain.

These 10 companies have a combined debt of US$32 million among themselves. 
AirZim and NRZ owe other parastatals US$51, 9 million and US$26, 4 million 
respectively.

The briefing paper proposes possible strategies that include direct payment 
of debts by Treasury to owed companies, debt service/product swap, debt 
off-setting, phased debt retirement, moral suasion, disconnect/non-supply, 
government taking over the debts and development of a secondary market for 
debt.

Debt service/ product swap refers to the parastatals paying each other by 
providing service to each other for free to pay off debts. For example, this 
arrangement may see TelOne giving Zesa free telephone services in exchange 
for electricity bills.

The creation of a secondary market for debt would see the government create 
tradable instruments (bonds) that would have a specified interest and 
redemption date to raise capital to retire the current debts.

Some parastatals like Zinwa, NetOne, TelOne and ZETDC (Zesa) have adopted 
the disconnecting debt collection strategy and cutting supply to non-paying 
state owned enterprises.

However, according to the paper the strategy has its own weaknesses, among 
them the potential to send the indebted companies going into liquidation.
“This debt recovery strategy has worked positively in some cases with the 
defaulting parastatals making immediate plans to settle their debts,” the 
paper says, “This option is however detrimental to the operations of 
state-owned enterprises whose supplies are disconnected.”

The white-paper observes most of these state-owned enterprises failing to 
pay for utilities are in dire financial problems and disconnections will not 
make them settle these debts, but will further negatively affect their 
operations and probability to default on more obligations and, in the worst 
case, be forced to wind up operations.

Most of the parastatals have experienced severe capacity utilisation 
challenges, lack of capitalisation and trying to adjust to the new 
dollarisation era. It has become very difficult for the companies to restore 
viability and settle their debts.

The report warns: “Given the current financial positions of these two 
entities (AirZim and NRZ), it is unlikely that they will be able to settle 
their debts in the foreseeable future.”

The government has taken over AirZim’s US$140 million debt and ring-fenced 
it so as to give the proposed new state airline a clean slate to start from.
The inter-parastatal debt and the contagion  pose a serious threat to 
economic recovery.

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