Difficult Decisions

The last few weeks have been characterised by rumblings and upheavals in the global economy and some new challenges in the domestic economy.

Banks and Insurance companies have run to their Governments in the developed world to seek financial support to remain solvent while others have chosen to remain mute while their businesses face collapse. Some businesses have been allowed to close their doors because they were poorly managed and became a liability to the economy.

In Zambia, we have had upheavals in respect to the privatisation of Zamtel, our exchange rate is on a free fall manoeuvre, some parastatal companies are unreasonably over exposed, copper mining companies are planning to close some plants and retrench workers, and there is a Mealie Meal shortage experienced in Lusaka and several other towns.

In the face of these economic rumblings Zambia is preaching about Economic Zones and new investment as the magic bullet to lift our economy out of the doldrums brought about by low copper prices and low market demands.

The 2009 budget is very dependent on tax collection in the areas of import customs duties, VAT, PAYE, company tax, and excise duties. Another huge component in the budget is the 24 percent budget support pledged by the pool of international collaborating partners.

It is quite evident that as the Kwacha depreciates against the US Dollar, and as businesses slow down because of the global recession, there will be less tax to be collected during the year. In addition, as our international collaborating partners find themselves having to support their own economies more than they had anticipated at the time when they made pledges to support the Zambian budget for 2009, some pledges may not materialise into cash on the table for Zambia.

Zambia has to therefore engage in a process of making those difficult decisions that may hurt some sectors in the short term but will ultimately support the development of the economy in the medium to long term. There are some economic sectors that with the right focussed support and facilitation can bring about quick wins in an effort to continue to market Zambia as a good investment destination for both local and foreign investors. Tourism, Manufacturing and the Services sector are on the top of the list for quick wins.

The tone for a tightly managed economy starts from the top. The President must be the first person to lay down the agenda for managing Zambia during the current global recession. His message must be clearly understood by his Finance Minister, his Cabinet, and his Government. With this lead the necessary work must be done on the ground to ensure that Zambia will be well run, will not tolerate rogue behaviour within its ranks, will get the work done to stimulate economic activity, and will move into action in areas of private sector activities that may undermine the development of the country and her people.

All companies are already engaged in this process. Those Directors and Managers that are not working in the best interests of a company are immediately being laid off. Many companies are tightening their expenditure budgets. Staff is being re-trained and re-skilled to become more productive. The level of service is being raised in order to keep existing customers and attract new business. The management teams are constantly re-grouping to make sure that they are focussing on the same goals, and any team member that is not working by the set rules is dismissed. This needs to be emulated in the Government machinery too.

At the national level, we are facing upheavals with the foreign currency situation and the Bank of Zambia must act to bring sanity to the sector. The issues in the Ministry of Transport and Communication and at NAPSA must be decisively dealt with for the purposes of clarity and nation building. The plight of the bulk of Zambian owned businesses which fall into the Small and Medium Enterprises sector must be addressed decisively. Any accusations of impropriety aimed at the family of the Head of State must be responded to in a manner that does not disadvantage any party, but commits to accountability and transparency.

The country is currently given some breathing space as the mining companies reduce their demand for electricity. The occurrences of blackouts and load shedding have reduced, and the upgrading works in the power stations have brought more power on line. What happens when the situation turns around and the demand increases again? Will Zambia go back to load shedding? This is the time for the difficult decisions. Let us decide to get on with it and find new partners to build the Kafue Gorge Lower power station. Let us decide whether we can continue with the almost derelict railway system in Zambia, or do we find some new partners to develop and upgrade this infrastructure? Let us decide to get Maamba Collieries up and running again with an injection of new capital or new partners. Let us decide to move Nitrogen Chemicals and Mulungushi Textiles from sleeping giants to productive industries. Let us decide to open our minds to new options beyond those constantly being drummed into our minds by the World Bank and IMF. Let us consider what is going on in South America with Venezuela and Brazil and learn a few lessons from them on how we can take our country forward. Let us decide to encompass our own people in national development in the role of investors and not just labour resources. Let us decide to empower our people and private sector with a more robust mechanism than that of the CEEC which is subject to budgetary allocation. Let us take the bold step of making the DBZ a special purpose vehicle for citizens economic empowerment so that Zambians can invest in the new Economic Zones that demand a minimum investment of almost K3 billion. Let us decide to amend the ZDA Act, the new Public Procurement Act, and any other legislation, so that Zambian businesses are supported and facilitated to become part of the greater economy.

Zambia will be no exception in addressing the challenges brought about by the global economic recession. Zambia will be left out and left behind if the leadership does not consciously make those difficult decisions.

Published 24 February 2009

Fair Share

The world of business is very intriguing, sometimes confusing, and many times brings up issues that defy what appears to be common logic.

There have been several cases in which a huge company is sold for one US Dollar just so that the shareholders can be rid of the enterprise that is laced with problems of labour and liability.

The media has often reported instances of ‘hostile takeovers’ in which outside parties buy enough shares to take control of a company and finally drive the business in a direction that they see fit.

It is not unusual for banks and other financial institutions to provide venture capital to a company and thereby take a share in the business for a period of time after which the financier pulls out with a profit by selling shares back to the remaining shareholders.

During times of economic crisis, several countries have experienced situations where businesses have borrowed from the banks and because of rapid foreign exchange appreciation or depreciation, the borrower either puts the business into irrecoverable debt, or makes a hefty unexpected profit respectively.

When things go well for any business the shareholders can simply smile and grow their business as opportunities open up for them.

On the other hand, when things go wrong or the expectations are not realized, then many businesses either re-structure and re-focus, or they go belly up.

In recent months we have seen several prominent businesses go through the grueling and agonizing twists of facing the choices of re-engineering the business model or sinking to a grinding halt.

The mining sector has experienced these difficulties, the airline sector has also not been spared, and many manufacturing and trading enterprises have been challenged by the simple ‘swim or sink’ options.

Some businesses have survived by changing the way they operate, others by changing the range of goods and services, and yet others have opted for an injection of venture capital or equity partners.

Many of these choices require the shareholders and owners to bite the bullet, push ego aside, and do what has to be done for the sake of keeping the business afloat.

Privately owned companies have transformed themselves into corporations with new equity partners that own more than half the company because of the cash injection that they have put in. The company becomes stronger, more productive, and even the minority shareholder original owner finds her/himself financially much better off than before. This supports the old saying that ’10 percent of something is better than 100 percent of nothing’.

Developing countries often try to attract foreign joint venture partners to bring large capital into their businesses. The irony is that the small business owner of 20 employees’ demands to head and run the larger joint venture business that now employs 200 employees. The foreign business partner is injecting a huge amount of money into the joint venture, has more experience and skills in international marketing, has more export experience, already employs a large complement of workers in her/his head office overseas, and has obviously managed colossal sums of money in previous investments. The final result in such a situation is that the joint venture partner backs off, or the partnership goes through many difficulties as the management tries to do miracles. In the above case the norm is for the joint venture to fail and each partner goes their separate ways.

The question businesses must address is that of ‘A Fair Share’. All investors needs to ask themselves that question and answer it to themselves in as truthfully a manner as possible. What is my value in this business and how can I quantify and justify it? Where is my business going at present and where can it go with an injection of capital or expertise? How much time do I have to make things work before my enthusiasm runs out or I burn out? What is the impact of new and emerging technologies on my business? These are some pertinent questions for any business person to ask themselves as they develop a strategy for making the business more successful.

Sometimes the basic logic of ‘It’s my business’, ‘I founded the company’, ‘I am Zambian’, ‘It’s my country’, ‘I am younger and stronger’, ‘I am older and wiser’, ‘I have the money’, ‘I have the ideas’, ‘I have the know how’, are not enough to make the business a success.

The business world has become much more sophisticated over the years and some seemingly illogical ideas and strategies can produce the best results.

A case in point is a large and well established household goods shop that has been around since the 1960’s and primarily focused on the logical issues of cutting down on shoplifting theft by employing an army of shop assistants that followed customers along every isle of the shop floor. The business soon became stagnant and business topped quite quickly with an eventual impact of negative growth over the last 15 years. The owners have worked themselves to the bone without ever achieving their dream of success. Not far from this business another newly established company offering similar products focused on customer care and satisfaction, and used technology to monitor theft thereby allowing shoppers to freely and happily wander around the shop without harassment. This new business which is barely 10 years old is flourishing and expanding very rapidly. The shareholders are scattered across the world and what the shop turns over in one day is equivalent to the whole month’s business for the nearly 50 year old counter part.

As more and more Zambians consider going into business or look to expand their existing companies, it important to think about what constitutes a ‘Fair Share’. The Fair Share is what it takes to make the business run profitably and sustainably. The Fair Share is what will grow the business to offer a bigger share to all the shareholders. A Fair Share is sometimes visible as in the case of a monetary investment, but in many cases it is invisible and intangible as it represents several important but non financial inputs that transform a limping company into a vibrant and profitable business.

Published 17 February 2009

Enticing Business

Zambia appears to be in the international spotlight in recent weeks as evidenced by the hourly BBC World Service radio announcements that Lusaka listeners can tune in on 98.0Mhz. In addition, top ranking officers of the World Bank, Japanese industry, and the United States diplomatic corps have put Zambia on their international tour agendas for the first quarter of 2009.

A quick stock take of the region does reveal that Zambia is indeed a safe and hospitable place to visit compared to; Zimbabwe which is in a political and economic crisis; Malawi that is entering into a controversial Presidential race; Kenya a country which is currently crisscrossed with corruption issues; the Democratic Republic of Congo which is in the middle of a civil war of some sort; and Uganda the east African nation dogged with rebel insurgents and issues of democracy.

Zambia in comparison is that oasis of safety in the middle of a desert. It may be the explanation for the centre stage attention that the country currently enjoys.

Now that we have the world’s attention, how can we make it work for our economy and for our people? This should be the preoccupation of every Zambian whether in Government, in the opposition, in the private sector, or in the streets. How can we convert this scenario into cash in our pockets and jobs for our people?

The obvious short answer is tourism. Open our doors to tourists. Give them the red carpet treatment, and take the money out of their pockets by the plane load. Bring down visa fees to USD20 per person irrespective of where they come from except for our traditional Commonwealth and Regional brothers and sisters who should continue to enjoy visa free entry into the country. Make arrangements for visa procurement at the airport or any other port of entry to allow for hassle free tourist travel plans to Zambia. Promote as many tourism focused businesses across Zambia that will offer accommodation, transport, entertainment, uniquely Zambian experiences, and cultural foods, so that any visitor to Zambia not only feels welcome, but enjoys some real Zambian hospitality.

The opportunities are abound in tourism but we must make some concerted efforts to make it all happen. The 2009 budget attempts to articulate the development of tourism but falls short of carrying out the necessary ground work to motivate and stimulate investment in this sector.

It is a night mare for many Zambians to go to Durban or Dar-es-salaam to purchase a used Japanese vehicle and have it shipped to Zambia by car carrier trucks only to find that the wheels have been changed, the music system has been pilfered, some body parts have been removed, and the vehicle is no longer the same as when it was purchased. The Zambian importer is sold short, and has to spend more money at spare parts shops trying to replace the lost items. Why don’t we take the bold step of opening our doors to Dry Ports in Zambia? Kapiri Mposhi would make an excellent site for a used car dry port that would initially site 1,000 vehicles of all descriptions to be marketed in Zambia and our neighbours in the DRC and Malawi. The business options for spare parts shops and repair workshops at Kapiri would soon be taken up by our own people in an attempt to upgrade all those vehicles being cleared from Customs and going into peoples businesses and homes. Kapiri would soon transform into a city with the influx of new businesses that would support the motor vehicle industry. The impact on Tazara would result in more business and more profitability in the rail transport system. The opportunities are too numerous to mention. South Africa did it with Durban, Tanzania has done it with Dar, Mozambique is doing it with Beira albeit in a small way, why can we not do it in Zambia?

The 2009 budget puts much emphasis on agriculture. Again, there are many options in Agriculture that have not yet been tapped. Food processing and packaging is still in the infancy stage. The cotton processing value chain was stopped at ginning and there is a lot to be done to develop the value chain towards fabric production. In the recent past there was the foolish notion that Zambia could not produce world class fabric. We may not be able to currently produce suiting fabric, but our Chitenge, Cotton Fabric, and Calico are special fabrics for special African and household products. That is where our attention may need to be directed. We need to be looking for strategic partners in this regard and promoting Zambian investors in this direction if we are to reap some long term benefits that will contribute towards uplifting the lives of our people.

Zambia must start to market her good side. The days of primarily focusing on our good people, our stable environment, and our 44 years of peace are over. We need to offer more. We need to offer opportunities for good business, options for value addition, special incentives for green field investments of varying sizes, and hassle free processes for entering into the business world.

We have started 2009 on a cautious note. We recognize that the global recession will affect our economy negatively. Now we must adjust our thinking and our planning to be much more proactive in an effort to make business more prominent and absorb the shocks that 2009 will no doubt deliver to Zambia.

This is the year when we should be enticing business and investment into Zambia in a way that will create more jobs and economic activity to counter the job losses and lost production that the mining sector is now preparing to undergo.

Zambia has two years to build some economic fat and sustainable enterprises. In the third year the country will be preoccupied with General and Presidential elections and no appreciable economic activity will take place except for spending vast sums of money in the election campaigns.

The next twenty four months must be managed carefully and diligently so that Zambia attracts as much investment as possible be it local or foreign. And in so doing, we must sharpen our competitive and comparative advantages all the time. Our cheaper hydro energy , our educated people, our better English speaking ability, our abundant water resources, our vast arable land, our mineral resources, our tourism potential, and our central location are but some of the attributes that will entice investment into the country. If Zambia allows these attributes to slip and become hurdles, then we only have ourselves to blame for the hardships that our people will endure in the future.

Published 10 February 2009

Dream Budget

Friday 30^th January, 2009 was Budget day and the Finance Minister spent much of the afternoon reading his budget speech to a packed house and public gallery in the Parliament building.

The first information given to the public was that the theme of the 2009 budget is 'Enhancing growth through competitiveness and diversification'

The budget speech also alluded to the uncertainty in the world economy and the effects of the lower copper prices on the Zambian economy.

The 2009 budget looks to a Zambia where Zambians are well nourished, have decent housing, and have access to clean water and sanitation. In addition, the budget looks to developing paved roads with adequate drainage, access to reliable and renewable energy sources, and the provision of quality health care and education.

The 2009 budget strategy includes economic diversification programs, lower dependency on the mining sector, and for the Government to play its role in creating a conducive and competitive environment for wealth creation and poverty reduction.

The budget seeks to attain 5 percent economic growth and to maintain inflation at 10 percent within a framework that will limit domestic borrowing to no more than 1.8 percent of GDP.

The budget policy highlights a focus on Agriculture, Tourism and Manufacturing as key economic drivers. The policy aims to provide a steady food and fuel supply during 2009. The budget takes into account an expectation that oil prices will remain low during 2009. Resources will be channeled to infrastructure and social services with a prudent domestic borrowing policy. Government plans to incur foreign debt to develop water sources, sanitation, energy sources and roads. An emphasis is placed on undertaking non concessional borrowing for energy development and entering into Private Public Partnerships through the guidance of a bill to be passed during the year. Several instruments are envisaged that will assist Government deliver development to the country, and these include devolution of service delivery to the Local Authorities, the take off of the Decentralization Implementation Plan, the Local Government Capacity Building Plan, and the expediting of the National Decentralization Policy.

The tangible events that will be undertaken during 2009 in agriculture include the development of a 155,000 Hectare farm block in Serenje, and the promotion and facilitation of processing and packaging in Zambia. To this end the budget raises income tax on exports of cotton from 15 percent to 35 percent, much agriculture machinery and equipment will be zero rated, cotton seed export tax will be increased from 15 percent to 20 percent, and boring and sinking equipment will be zero rated.

Tourism development programs include the development of Kasaba Bay to include roads, air strip and electrification, and a tourism zone in Livingstone. The rehabilitation of airports and roads within the infrastructure allocations for 2009 will impact positively on tourism development. The budget allocation to tourism is K77 billion which is a sizeable upgrade from the K26 billion allocation in 2008.

Key developments to enhance manufacturing include the development of Economic Zones across the country, the promotion and facilitation of value addition for selected primary raw materials produced in Zambia, the zero rating of imports for dehullers, windmills, and refrigeration and cold room equipment. Crude vegetable oils, gray fabric, and packaging materials will be re classified to attract lower customs duties in a bid to support manufacturing.

Major infrastructure programs to be funded in 2009 include rehabilitation of the Zimba Livingstone road, seeking investment to develop the Kafue Gorge Lower Power station, a rural electrification initiative, a PPP package for Tazara, the development of the railway systems in Zambia, airports renovations and extensions, and road drainage works.

The 2009 budget seeks to ease the pressure on the mining industry during the copper recession by the removal of windfall taxes, the provision of capital allowance of 100 percent, the reduction of customs duties on heavy oil fuels by 50 percent, and the zero rating of many copper and cobalt processing inputs.

Some attempts to make ZESCO more commercial have been captured in the budget by promoting a tariff increase that will allow ZESCO to experience cost recovery revenues by 2010. Our competitive advantage as a low cost energy centre will be eroded and our attraction for Foreign Direct Investment will be undermined. Furthermore, rural electrification will put pressure on the already overloaded national grid and if tariffs are too high then charcoal burning and deforestation will continue.

The budget places emphasis on converting two teacher training colleges into University Colleges whilst investing in the rehabilitation and development of trades training institutes in Mongu, Kaoma, Ukwimi, Mwinilunga, Lusaka, Solwezi and Chipata. This is a good initiative to raise the skills levels of many Zambians.

The total budget for 2009 amounts to K15.2 trillion, of which K11.7 trillion is from domestic financing, and K3.5 trillion is from foreign grants and loans. In 2008, 25 percent of the budget was foreign financed and in 2009 we expect 24 percent to be foreign financed even in the face of a global recession. Pledges and delivery are two different issues and our 2008 experience informs us that the pledges do not always transform into delivery.

K2.6 trillion is expected to come from Pay As You Earn, K2.5 trillion from VAT, K1.4 trillion from Import Duties, and K1.6 trillion from Excise Duties. Foreign Grants of K2.7 trillion are expected to cover Direct Budget Support, Sector Budget Support, and Project Support.

The 2009 budget is marginally bigger than that of 2008 but there is currently a global economic recession, our mines are laying off workers, and the disposable income for foreign tourists is declining thus negatively impacting on our tourism expectations for the year. The weaker Kwacha will reduce the expected imports which will in turn reduce the revenues anticipated for Import Duties and VAT.

The projections for 2009 are optimistic and are not backed up by complete facilitation cycle initiatives within the budget provisions.

For example, manufacturing will not really be supported until the Government facilitates manufacturing through lowering or removal of taxes on imported machinery and raw materials, and safe guarding the market for domestic manufactures by introducing tariff increases on manufactured imports. There is need to nurture domestic industry to a level where the industry will compete favorably with imports. Deliberate funding and financing for exports will have to be in place for cotton and cotton seeds to be locally processed.

Piecemeal support to tourism by allocating resources to either Livingstone which is over subscribed, or Kasaba Bay which substantially only needs access through an airport or airstrip, will not help matters much. Investors in tourism want to be able to ensure that tourists will be able to access their lodges, hotels and resorts first. Issues of electricity and roads come as a second step after assessing what the tourists are looking for. Upgrading roads that have no tourism impact will not help the economy much.

Air access to Samfya, Siavonga, Kafue National Park and Kasaba Bay are the basic requirements. The private sector will then determine the next steps for development.

The levels of PAYE and Corporate Taxes may be over estimated as many businesses go through what promises to be a few years of business slump.

Several of the assumptions and expectation in the 2009 budget seem to ignore what is happening in the global economy. Railway systems have not delivered on their concession agreement and yet they are ready to make more pledges of USD30 million. How feasible is this?

There is need for more prudent expenditure within the Government machinery this year if we are to finance and balance our 2009 budget. More than K6 trillion is allocated to General Public Services, Defence, and Public Order and Safety. This figure can be down sized to reflect our developing country status leaving more resources for Economic Affairs, Health, Education and Social Protection.

The 2009 budget appears to be a good wish list. It will take a very determined administration to ensure that the other K9 trillion goes towards truly transforming the economy in a meaningful way such that businesses thrive during the year and the focused sectors of Agriculture, Tourism and Manufacturing deliver as predicted. Anything less than this will mean we have a Dream Budget that will fall short of expectations and not live up to the 2009 budget theme.

Published 3 February 2009