The Role of IDC in the Era of Austerity
Economy, Opinion

When The Industrial Development Commission (IDC) took over 29 firms out of the 33 State Owned Enterprises (SOEs), their board chairman articulated that line ministries would then focus on policy-making. This occurrence thereby gave IDC the direct mandate and authorisation on behalf of the Zambian Government to oversee performance and accountability of the reassigned SOEs.

Incorporated in January 2014 and wholly owned by the Government through the Minister of Finance pursuant to the Minister of Finance (Incorporation) Act Cap 349 of the Laws of Zambia, the IDC’s vision is “to become Africa’s best performing sovereign holding corporation and strategic investment partner”. Furthermore, they were established to create and maximise long-term shareholder value as an active investor and shareholder of successful state-owned enterprises. This is a tall order considering the current macro-economic environment that currently prevails.

With IDC boss, Mateyo Kalaba, at the helm, his mandate could not be far from clear; transform financial performance and efficiency of these SOEs that can ultimately benefit the Zambian people. Fast forward to present times, SOEs are facing a macro environment like no other: anemic economic growth for a developing country like Zambia (expected 2018 GDP of 4% against inflation that’s likely to close at the upper band of Bank of Zambia’s of 6-8% target[1]), high Non Performing Loans (NPLS) in the banking sector, fiscal challenges that have spurred a high domestic interest rate environment, international rating agencies downgrading Zambia’s sovereign debt, Eurobonds yields spiked to north of 14% from comfortably sitting at….risks of contagion as there currently a global aversion to emerging markets, tighter macro policy in the US resulting in a stronger dollar just to mention a few. Of course not everything is glum,

The fiscal debt position remains far from abated, the projected 2018 deficit according to the Ministry of Finance is 7.4% against the 6.1% target. This has led to what now seem like echoes of austerity in the realms of public service. If one takes a moment to look at the rooster of company’s under IDC, it is quick to observe that many if not all form part of the business eco system of the country. From energy to telecommunications to agriculture, IDCs group of companies is right in the mix and middle of all that is happening in the economy.

It was pleasant reading when ZCCM IH’s CEO, Pius Kasolo, presented a dividend K81.4 million cheque to Kalaba. Prior to that Kalaba had also received a cheques from National Airports (K 5 million), Mulungushi Village (K0.2 million) and Indeni Petroleum (K28 million). However, the remaining SOEs are yet to make Mateyo happy. By our predication, he may have to wait a bit longer.

Have SOEs suffered from operational efficiencies issues? Have some  lost their identity by not understanding what business they are in? Are some too big to fail? Evidence exist for those SOEs that continue to hold onto legacy strategy and have found themselves being overtaken by disruptive businesses of current times. What is worse, some may even argue that many often hope for the “Hand of God” to come to their rescue and have no reason for recourse to turn around strategies; they possess management teams that are bounded rational (failure to think outside the box). However, we believe that agency theory can best explain the dilemma faced not just by companies in this ecosystem, but the world over.

Agency theory is a supposition that explains the relationships between principals and agents in business. It is concerned with resolving problems that can exist in agency relationships due to unaligned goals or different risk appetites of the principals and agents. Here in lies what we believe are useful steps that can help IDC, (as a principal on behalf of the Zambian Citizens) identify and solve some of the issues riddling the nonperforming firms (agents):

  • At company level, managers who are bounded rational often exist in a utopia that has them believe that their company is too big to fail and (or) there is no need to watch the numbers. IDC can identify these type of firms by the responses they give regarding questions of return on investment. For example, companies continuously growing their R&D budgets without significant reduction in operating costs can signal to IDC that management teams may be pursing grandiose projects that serve more of an ego boost than value addition to the company. Systems have to be put in place in which management of these companies understand that there are consequences of their actions such that wastefulness will not be tolerated but instead attract sanctions; contracts essentially must be performance based.
  • Clearly establishing who is responsible for cost control is another variable that needs to be closely watched. Reporting structures around how the bean counters get information to a CEO are indicative of who holds the power to effectively inform the executive branch of the business on company cash flows and which cost centers are bleeding cash. Often, Human Resource or Procurement can be seen as the two portfolios that can assist in controlling costs. However, without a firm understanding of what the core cost drivers are, these functions will often generate ideas that have minimal impact in reigning in costs. This is because they are neither equipped nor rightly placed. Conversely, their roles are critical at the tail end of implementation of any cost saving measures that a strategically minded turnaround team that has a strong strategic financial analysis function proposes.
  • Viewing management actions as regards to the business environment of the industry that they are in. That is if a firm is in an environment that is rife with competitions and the firm still conducts business as usual, this is a signal that the management team does not place market research and environmental scanning as top of its agenda when making considerations on strategy are being developed.

We remain hopeful that these are capable individuals who have been handed the responsibility to drive change in the nation through this transition at IDC. We are of the view that this could make for a great case study for Zambian Business Management if executed with true patriotism at heart, fending off corruption and undue political interference.  On the contrary, it could reiterate the very colloquial adage “Boma ni Boma” perpetuating the distrust of integrity, accountability and efficiency from the Government Agencies. For the sake of a better Zambia and a much needed success story for the country, we wish Mr. Kalaba and his team the very best as we keep our fingers crossed and ears to the ground on this transition.

 

 

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