Tuesday, June 2, 2009

Feasibility of public-private sector partnerships in Zimbabwe

Thursday 14 May 2009, by Witness Chinyama for The Financial Gazette

Last week I attended a capacity building workshop on Public Private Partnerships (PPPs) which was officially opened by the Prime Minister, Morgan Tsvangirai and chaired by the Deputy Prime Minister, Arthur Mutambara.

On the first day we listened attentively to live presentations on the experiences of other countries with respect to PPPs while on the second we had an opportunity to hear Zimbabwe’s experiences, reasons for low uptake and way forward.

I told myself that indeed history repeats itself because what was said at the workshop is what many analysts including myself had all along been singing about — what the authorities needed to be done to improve service delivery. One such article appeared in The Financial Gazette of April 3-9 2002 which I reproduce here in full and without reservations.

Although the Zimbabwe Government managed to dismantle the price control system and open up the economy to foreign competition, the whole economic reform process has failed to put the economy on a sustainable growth path. This has forced the Government to go back to the drawing board to evaluate where it went wrong in its noble efforts to align the economy with the global economy.

Although its diversification of the macroeconomic policy arsenal to include supply side policies designed to dampen the effect of inflation through agrarian reforms to complement its traditional demand-side policies (monetary, fiscal, exchange rate policies), bolters its policy prescription, still the cause of the failure of the economic reforms that have been implemented since 1991 has not been addressed. So what went wrong with ESAP, ZIMPREST and MERP (i.e. if it had been implemented)?

One major pillar of the reform programme has still not been addressed —Public Sector Reform. As a result the chronic budget deficits continue to haunt the Government in its efforts to stabilise the economy and the whole reform process continues to be characterised by significant macroeconomic volatility.

Inflation continued high and this has stunted growth in most productive sectors like manufacturing. Given the poor performance of the export sector, the balance of payments situation has deteriorated, a situation that has seen a progressive fall in the gross foreign reserve position.

Moreover, the current macroeconomic distortions have created conditions for arbitrage in the financial and commodity markets through parallel markets with the resultant speculative tendencies and corrupt practices in both the public and private sectors having become widespread, thereby compounding the economic problems. For instance, the continued fall in foreign currency inflows due to the erosion in our export competitiveness and the absence of donor funds have resulted in serious foreign currency shortage and the eruption of a parallel market where a unit of the US dollar is bought for more than Z$350.

Given that these are the rates being used by the private sector, this has had serious implications on prices and, therefore, inflation as companies have been forced to increase their prices so as to cover costs. However, the cost recovery efforts have been impaired by price controls a situation that has seen marginal producers going out of business while other companies have pursued mergers and buy-outs to remain afloat.

On the other hand, the continued expansionary monetary policy through low interest rates of around 30 percent against an environment of high inflation of more than 110 percent has caused an increase in the demand for assets other than money market ones like shares, foreign currency and property as inflation-hedge efforts by investors. Given that most of these transactions take place outside the banking sector, this has caused significant financial dis-intermediation, a development that negatively affects the potency of monetary policy.

It is against this background of the need to accelerate and complete the public enterprise reform that the Government has decided to revisit its Public-Private Sector Partnerships (PPP) policy first introduced in 1998 seeking the assistance of the private sector in the provision of infrastructure and other public services.

Adequate, reliable and economical supplies of basic infrastructure such as electricity, telecommunications, transport, water, schools and hospitals are crucial to economic growth and development, as this provide the necessary crowding-in effect.

The central government and the state-owned enterprises, which traditionally supplied these services, have now found it increasingly difficult to meet the growing demand both in terms of quality and quantity due to fiscal and capacity constraints.

In a letter to private sector associations such as Bankers Association of Zimbabwe (BAZ) dated April 15 2002 the Secretary for Finance and Economic Development notes the following as some of the advantages of the PPP policy: (a) reduction of fiscal pressure through sharing the burden of building infrastructure and other developments projects; (b) increasing efficiency in investment; (c) promotion of access to modern technology, skills and expertise, which are required to run large and complex enterprises in a commercial manner; (d) creating opportunities for capital market development; (e) promoting and stimulating inflows of direct foreign investment; (f) enhancing economic empowerment of indigenous people through promoting indigenous entrepreneurs and enlisting local community participation in the infrastructure and development projects; (g) promoting the use of local resources in the development of the country.

However, the fact that the programme was launched in 1998 and no significant progress has taken place shows that something is amiss in the PPP policy matrix. From a private sector point of view the major issue is that of lack of confidence in Government’s commitment to implementing policies designed to put the economy of Zimbabwe back on a sustained economic growth path.

As already noted, business confidence has fallen significantly during the past few years on the back of continued macro-economic deterioration. As long as the Government continues to give priority to political objectives at the expense of the health of the economy, it will continue to be difficult to get the much-needed helping hand of the private sector. In fact, a vicious circle has been created because the private sector, which the Government is looking for help has also become cash-strapped by the difficult operating conditions the country has found itself in.

In order to make any Government policy workable given that the economic situation has deteriorated as stated above it is still our view that the Government should continue with its economic reforms it started in 1991. In fact, what is now needed is a holistic or comprehensive approach to solve Zimbabwe’s problems — both political and economic.

On the political front, the current continued turbulent post-election political environment shows that there is more to the political solution than just the elections. What is needed in Zimbabwe is for politicians to put national interests first. It is clear that the two dominant post-election political parties, ZANU-PF and MDC, have important roles to play in shaping the future of this country especially if we take into account the current hostile international environment.