Zambia - Basic economic report (Vol. 3 of 5) : Annex 2 : the parastatal sector

Report No. 1586b-ZA Zambia-A EBasic Economic Report Annex 2: The Parastatal Sector TE C Y October 14, 1977 Country Programs Department Eastern Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Prior to February 1973 February 1973-to July 1976. US$ = K 0.7143 US$ = K 0.643 K I = US$1.40 K I = US$1.554 Since July 1976 SDR 1 = K 0.9218 K i = SDR 1.0848 US$1 = K 0.8000 (July-December 1976 average) K 1 = US$1.2499 (July-December 1976 average) US$ = K 0.7952 (January-July 1977 average) K I = US$1.2576 (January-July 1977 average) ABBREVIATIONS CSO - Central Statistical Office DBZ - Development Bank of Zambia Findeco - State Finance and Development Corporation GRZ - Government of the Republic caf Zambia INDECO - Industrial Development Corporation LBZ - Lever Brothers of Zambia, Ltd. Mindeco - Mining Development Corporation Namboard - National Agricultural Marketing Board NCCM - Nchanga Consolidated Copper Mines, Ltd. NIEC - National Import and Export Corporation NHC - National Hotesl Corporation NTC - National Transportation Corporation RDC - Rural Development Corporation RCM - Roan Consolidated Mines ROP - Refined Oil Products Ltd. Tazama - Tanzania - Zambia Pipelines UDI - Unilateral Declaration of Independence UNIP - United National Independence Party ZAMEFA - Metal Fabricators of Zambia ZESCO - Zambia Electricity Supply Corporation ZNEC - Zambia National Energy Corporation ZIMCO - Zambia Industrial and -Mining Corporation ZSC - Zambia Sugar Company WEIGHlS AND MEASURES tons = metric tons I metric ton a 0.948 long ton I metric, ton = 1.102 short ton 1 kilometer = 0.621 mile 1-hectare = 2.47 acres GWh = gigawatt hour equal to 1 million kilowatt MW = megawatt equal to 1 thousand kilowatts FISCAL YEARS Government of the Republic of Zambia - January 1 to December 31 INDECO - April 1 to March 31 1/ ZIMCO - April 1 to March 31 1/ Since the 1968/69 Fiscal Year. Prior to that time,. the fiscal and calendar years coincided.  FOR OFFICIAL USE ONLY Annex 2 THE PARASTATAL SECTOR Table of Contents Page No. SUi1MARY i - iii I. EVOLUTION OF ZAMBIA'S PARASTATAL SECTOR AND ISSUES ON ITS.STRUCTURE AND PERFORMANCE I A. Introduction 1 B. Evolution of the Parastatal Sector 3 C. Development Objectives and Financial Performance 9 D. Issues 12 II. ZIMCO: CURKR,NT STRUCTURE AND PAST PERFORMANCE 15 A. A Comparison of ZIMCO and Non-ZIMCO Structures 15 B. Current Structure of ZIMHCO 16 C. Past Pe-formance 18 III. INDECO: STRIJCTURE. DEVELOPMENT OBJECTIVES AND PAST PERFORMANCE 41 A. Current Structure 21 B. Indeco'" Role in Industrial Development 22 C. Zambianization under the Manpower Constraint 27 D. Past Performance 30 E. RelatiorLship to the Government Budget 34 IV. MEASURES TO I:NCREASE GOVERNMENT CONTROL OF PARASTATALS 38 A. Current Practice 38 B. Review c,f Recommendations for Increased Regulation 38 C. Policy Guidelines and Management Control 40 APPENDICES 1. Chronology of ZIMCO and Indeco Development 2. Parastatal Structure and Organization Charts 3. Zambia Tables 4. Some Effect3 of Government's Pricing Policies on Indeco State-Controlled Enterprises in Agro-Processing This document has a restricied distribution and may be used by recipients only in the performance of their official duties. Its co:ntents may not otherwise be disclosed without World Bank authorization.   SUMMARY 1. State-controlled enterprises dominate Zambia's economy. They play a key role in almost all major economic sectors, including Zambia's mining industry, manufacturing, wholesale and retail trade, energy, trans- port, finance, hotels and restaurants, and agricultural services and marketing. In 1975 the Zambia Industrial and Mining Corporation (ZIMCO), the giant state-owned parent holding company embracing some 73 state- controlled subsidiaries, reported a turnover of K 1.2 billion, total net assets of K 1.5 billion, total employment of over 100,000 persons or close to 25 percent of total national wage employment. Including an additional 14 major statutory bodies and corporations, it is estimated that well over half of Gross Domestic Product per year originates in the parastatal sector and that parastatals together employ at least a third of total nationa. wage employment. 2. At independence in 1964 Zambia inherited a number of public enterprises in agricult:ural marketing, electricity, rail and air transport, and development and rural sector financing. Their total assets in 1964 amounted to K 234 million, as compared to estimated parastatal total assets of K 2 billion in 1976. This Annex focuses on Indeco (the Industrial Development Corporation. of Zambia) which in 1964 was a small development finance company engaged primarily on long-term lending. In 1965 Indeco was selected to carry the main burden of Government's development program in the industrial and commercial sectors. Government at first pursued a general policy of Indeco participating in or establishing key industries and of otherwise providing incentives for prospective foreign and Zambian private enterprise. However, Government became convinced that most foreign-controlled and local expatriate companies, which still made up most of the private sector, were more preoccupied with fast and high returns and with transferring capital abroad than with local reinvestment, diversification of Zambia's economy and Zambianization of personnel. 3. In 1967 President Kaunda introduced an ideology for Zambia based on the principles of group ownership and participation, and opposed to Western-style private capitalism. The President translated his phi- losophy into political action with his speech, "Zambia Towards Economic Independence", delivered to the UNIP National Council at Mulungushi in April 1968. The "Mulungushi Reforms" were the first in a series of basic economic reforms that set the pace for the new policy of government take-over of majority shareholding in established larger scale private enterprises. Smaller enterprise would provide scope for the Zambian private sector. The Mat:ero Reforms of 1969 announced 51 percent take- over of the two giant ccipper mining groups, and after Matero the period of setting up the ZIMCO parastatal conglomerate began. ZIMCO has grown into the parent holding company for a total of eleven sub-group holding companies (as of April 1.975) that report to a total of five government ministries.  ANNEX 2 Page ii 4. The central theme underlying the economic reforms is that state ownership confers the rights of direct control necessary to pursue national objectives of Zambianization, employment generation, economic diversifica- tion, and rural development. State-controlled companies are expected to be profitable, and to use these profits for social benefit (many of the problems of public enterprise in Zambia in fact arise from a multiplicity of objectives that are not necessarily compatible with each other.) 5. In practice, Government greatly influences its enterprises through directives on key aspects of operations, including type and location of in- vestments and pricing, as well as top management appointments and factory staff decisions. At the same time, as the public sector grows larger, there is a great deal of concern expressed on how to bring parastatals under ef- fective government "control". 6. 'Financial performance of the ZIMCO group of companies reflects Zambia's economic crisis. Profitability of the larger ZIMCO group on a consolidated basis fell from 12.9 percent in 1973 to 7.6 percent in 1975. Indeco group profitability has fallen from 7.7 percent in 1970 to 1.5 percent in 1975 and further to net losses of 3.2 percent of net assets in 1976. 7. Indeco suffers from the dearth of experienced Zambian managers. As Zambianization progresses, the depth of this problem becomes more and more exposed. 8. However, there are also several economic factors causing the poor financial performance of Indeco companies. Zambia's manufacturing industries are, for the most part, based on imported inputs. Thus, factors that cause interruptions in the supply of imports and/or higher prices of imported inputs are directly felt by most Indeco companies. The Group has been most seriously effected by i) adverse economic conditions due to the fall in copper prices (foreign exchange shortages, tight liquidity, and decreased demand), ii) the country's long-standing transport problems, and iii) government pricing policies that tend to protect consumers from cost increases at the expense of producers. 9. Indeco was a net contributor to Government on current account from 1970 to 1974, with an annual net inflow to the Government budget averaging K 9 million. In 1975, two related factors caused a change to a budgetary outflow of K 8 million: the Government had to pay subsidies to Indeco to cover (partially) company losses due to controlled prices while, at the same time, lower company profitability resulted in reduced income tax revenues. 10. Estimates show that on the capital account from 1970 to 1975 there was a continual net outflow of Government funds to Iadeco, with the exception of 1972. From 1970 to 1974, of the K 23 million capital outflow from  ANNEX 2 Page iii Government, 56 percent: was investments in various Indeco projects; 26 percent was loans, normally at: 6.25 percent interest; and, only 18 percent was capital grants. However, in 1.975 the situation also changed in capital flows. On the expenditure side, Government made no new investments in Indeco projects. Instead, about half of the total capital was in loans and the other half in capital grants. The amount of capital grants for 1975 was almost as much as the total amount of grants for the previous five years. 11. Since Government does not receive any dividends from Indeco, the rate of return on its capital investments and loans is relatively low: 2.5 percent in 1970. This rate declined to 0.1 percent in 1975 due largely to reorganization whereby a large loan to Tazama Pipelines was transferred out of Indeco, but also due to outstanding interest arrears on Indeco's part. (Profits attributable to Indeco are all retained and reinvested in new projects. However, as shown in FY75 and 76 Indeco accounts, profitability has declined drastically and, in fact, retained earnings for the Group are being used to support loss-taking companies, some of which now have negative net assets.) 12. The most frequent criticisms of parastatals are that a) they do not follow policy guidelines and b) they are mismanaged. In order to bring parastatals into line wiith policy objectives, there has to be a clearly articulated policy with guidelines for its implementation. Government has not provided such guidelines: there is no Investment Code and national planning is weak. 1/ In short, the alleged lack of adherence by parastatals to policy guidelines is really a problem that Government must first solve at the ministerial level before it can hope to exercise greater control over parastatals. 13. To gain greater management control, appointment practices could improve internal company operations and external audit control could provide the check to identify mismanagement and inefficiency. This would aim at solving longer term problems of lack of experienced management manpower and reducing inefficiencies due to inexperience. Corruption could also be dealt with through an external audit mechanism. These solutions would not require any reorganization of parastatals. At the most, an additional government auditing unit would be needed. Improvement in parastatal performance and the success of actions taken to implement effective government control are predicated on the assumption that political interference in public enterprise operations would be replaced by responsible government guidance. 1/ An Industrial DeveLopment Act was passed by Parliament in August 1977. For a brief description, see Main Report, pp. 177-8.   ANNEX 2 Page 1 THE PARASTATAL SECTOR I. EVOLUTION OF ZAMBIA'S PARASTATAL SECTOR AND ISSUES ON ITS STRUCTURE AND PERFORMANCE A. Introduction Definition 1. The "parastatal sector" in Zambia is made, up of enterprises in which the State holds majority ownership, or a controlling interest, and which are organized outside the ministerial structure of Governmenc. 1/ Parastatals fall somewhere between private enterprises and government enterprises (for example, commercial tourism services) that normally are administered and financed as government departments. Parastatals, in contrast, are administered by a Board of Directo;;s, managed by non-civil service personnel, and are financially autonomous. Like private enterprises they may, for example, own and deal'in property, make contracts, retain and invest their surplus, borrow on the open market, and issue loans. 2. -Zambia's parastatals are either created by special legislation and are referred to as statutory boards or corporations, such as the National Agricultural Marketing Board (NAMBOARD), Zambia Airways, and the Development Bank of Zambia (DBZ) or they are state-controlled, limited companies incorpora- ted under the Companies Act, such as the Zambia Sugar Company, Chilanga Cement, and Shell and BP Zambia. These state-controlled companies are grouped under one of several wholly government-owned holding companies, and most of the latter in turn are wholly owned subsidiares of the Zambia Industrial and Mining Corporation, Ltd. (ZIMCO). The two large copper mining companies, Roan Consolidated Mines, Ltd. and Nchanga Consolidated Mines, Ltd., that make up 70 percent of ZIMCO's total assets, are exceptions in the ZIMCO group in that they do not come under a sub-group holding company but are direct subsidiaries of ZIMCO. 3. One of ZIMCO's sub-group holding companies is Indeco, Ltd. (formerly known as the Industrial Development Corporation of Zambia, Ltd.). Since independence, Indeco has been Government's principal instrument for the implementation of its industrial and commercial policies, and until recently 1/ "Parastatal" literally means "quasi-governmental". In this case, "'governmental" reEers to the ownership and "quasi" refers to the aspects that in principle place these enterprises financially outside the government budget and management-wise outside the government bureaucracy.  -2- ANNEX 2 Page 2 was by far the largest holding company within the ZIMCO group. Historically, the non-mining part of the vast ZIMCO complex was built up largely of spin- offs of Indeco's interests in transport, commercial trading, finance, and power and energy. There are now eleven ZIMCO holding companies, including the two mining operations mentioned above. As one of the largest and oldest members of the ZIMCO group, Indeco reflects in good part the direction state- controlled enterprises are taking with regard to management and their relation- ship to Government, and some effects of government policies on parastatals. This Annex is concerned-primarily with Indeco and represents an initial step towards understanding the parastatal sector in Zambia. Parastatals Dominate the Economy 4. The parastatal sector has grown to dominate the economy; statutory boards and corporations, and state-controlled enterprises play a key role in almost all major economic sectors, including Zambia's mining industry, manufacturing, wholesale and retail trade, energy, transport, finance, hotels and restaurants, and agricultural services and marketing. Agricultural production and construction are the two notable exceptions where private enterprise remains dominant. As the table below indicates, in 1975 the ZIMCO group alone, with some 73 state-controlled companies, reported a turnover of K 1.2 billion, total assets of K 1.5 billion, and total employment of 100,000 persons about 25 percent of total national wage employment% The Salaries Commission estimated that well over half of the Gross Domestic Product per year originates in the parastatal sector (that includes the ZIMCO group and 14 other major statutory bodies and corporations) and that parastatals together employ at least a third of total national wage employment. 1/ 1/ Zambia, Salaries Commission, Report of the Commission of Inquiry into the Salaries, Salary Structures and Conditions of Service ..., Volume One "the Public Services and the Parastatal Sector", 1975, p. 134. This estimate includes the ZIMCO Group and 14 major non-ZIMCO parastatals in finance, air and rail transport, power, post and telecommunications, housing, agricultural marketing and agricultural production. Considering that over 50 percent of GDP originates in mining, manufacturing, electricity, transport, and finance-sectors which are largely state-owned--and that 25 percent of national wage labor is accounted for by ZIMCO alone, the Commission's data provides a good approximation of the minimum level of parastatal participation in the economy. A full list of parastatals is given in Appendix 2, Charts I and 2.  -3- ANNEX 2 Page 3 Table 1: ZIMCO, Assets and Turnover. FY75 (in millions of Kwacha) Total Sector Assets Turnover Mining 1,187.0 848.8 Manufacturing 189.6 292.4 Fisheries 1.4 1.7 Energy 265.5 110.7 Trade 16.0 89.6 Finance 60.4 8.5 /a Road Transport 30.5 29.2 Hotels 5.1 2.6 Consolidated Total /b 1,467.7 1,247.6 Total Employment 100,000 /a Figure is for pre-tax profit. /b Differs from totals by sector due to consolidation of accounts. Source: See Appendix 3, Tables I and 2. B. Evolution of the Parastatal Sector Post-Independence 5. The expansion of the parastatal sector stems from a combination of growth of established parastatal enterprises, creation of new state- owned enterprises and, since 1968 under President Kaunda's policy of nation- ization, of government take-over of majority interest in established private enterprises. At indepeadence in 1964, Zambia inherited a number of parastatal enterprises engaged in activities that traditionally can be found in the public sector. These included the following major enterprises in agricultural marketing, electricity, rail and air transport, and finance: MARKETING UNITS TRANSPORT UNITS Dairy Produce Board Zambia Railways Cold Storage Board Zambia Airways Corporation Agricultural Rural Marketing Board Grain Marketing Board FINANCIAL UNITS Iadustrial Development Corp. (Indeco) Credit Organisation of Zambia  -4- ANNEX 2 Page 4 ELECTRICITY UNITS Central Electricity Corp. OTHERS Central African Power Corp. Tobacco Board of Zambia Northern Electricity Supply Corp. Zambia Housing Board Victoria Falls Electricity Board 6. Total receipts for these parastatals in 1964/65 was K 75 million, about 1 percent of which was government subsidy, and their total assets amounted to K 234 million, as shown in Table 2 on the next page. Total government investment, defined as share capital of the corporations, re- serves, and loans and capital contributions from Government, amounted to K 151 million, or 65 percent of total assets. In the first five years after independence total assets of the Group increased, by 27 percent while the Government's investment as a percentage of total assets rose to 70 percent. Total receipts increased by a third, with subsidies now accounting for 7 percent of the total. Table 2: Evaluation of the Parastatal Sector (millions of Kwacha) Maior Parastatals /a ZIMCO Group 1965 1969 1971 1975 Government Investment 151.2 /b 210.8 181.1 715.3 Total Assets 234.2 /b 296.4 713.2 1,467.7 Government Subsidies 1.0 7.0 -0- 15.3 Total Receipts 75.2 99.5 n.a. 1,247.6 /a This CSO study covered the public corporations listed in paragraph 1.05, and the RDC and Coal Board as additions to the original 14 companies in existence in 1964. The data in the CSO study are only for the headquarters' operations of the corporations and do not include any subsidiary companies. Therefore, while there is some overlap in the comparison with ZIMCO, 1971, the post-1968 growth in Indeco due to acquiring 51 percent majority participation in subsidiaries is not reflected in the 1969 CSO data. /b For 1964. Source: Central Statistical Office, Financial Statistics of Public Corporations 1967-69, Occober 1971, and ZIMCO, Annual Reports 1971 and 1975.  -5- ANNEX 2 Page 5 7. During this period only two new parastatals were created. The National Coal Board of Zambia was set up in 1967 (since then it has been moved into the ZIMCO group under Mindeco as Maamba Collieries). In 1968 the Rural Development Corporation of Zambia Ltd. (RDC) was incorporated under the companies act as "The Agricultural Corporation of Zambia" to spearhead rapid economic and social development in the rural areas, and to contribute towards removing the imbalance between the urban and rural areas. Shortly thereafter the Credit Organization of Zambia was merged with it and the name was changed. RDC was established with an authorized share capital of K 14 million and started out by taking over responsibility of several projects in tobacco, cattle ranching., and dairy farming that had been set up within the Ministry of Agriculture by the Organization for the Development of Agricultural Projects. RDC has the same legal status and organization as the holding companies in the ZIMCO group and, in fact, is the only non-ZIMCO holding company. 1/ 8. Indeco (then known as the Industrial Development Corporation of Zambia) already existEd before Independence, when it was a joint-venture development finance company whose primary function was to promote and finance industrial development. 2/ In 1965 the company reverted to full government ownership and President Kaunda appointed a dynamic, new Chairman and Managing Director to head Indeco, with the intention of building up the institution to carry the main burden of Government's development program in the industrial and commercial sectors. During this period Government pursued a policy of participating in, or establishing where necessary, basic industries of major significance to the economy and otherwise providing fiscal incentives, loan financing, and equity capital as an encouragement for prospective foreign and Zambian private enterprises. In November 1965, Southern Rhodesia announced its Unilateral Declaration of Independence (UDI), thus precipitating the crisis, calling for rerouting transport to move goods in and out of the country, and emphasizing to the Zambians more than ever the need to diversify their economy. Under the new management, and the urgency created by UDI, Indeco grew rapidly and in two years time changed from being primarily a financing institution to one emphasizing direct participation and management of subsidiaries. By 1967 the first major project, the Tazama oil pipeline, a joint venture with an Italian company, was underway. Many of Indeco's new projects, for example, in textiles and chemicals (from the First National Plan) and in road transport, did not come to fruition until 1970, so that Indeco plans for industrial growth and expansion prior to the nationalization of 1968 tend to be overshadowed. 1/ See Appendix 2, Chart 9 for list of subsidiaries. 2/ The main participants were the Northern Rhodesian Government, the Anglo American Corporation Group, the British South Africa Group, the Common- wealth Development Corporation, and the Rhodesian Selection Trust Group.  -6- ANNEX 2 Page 6 Leading Up to Mulungushi (1968) and After 9. By 1968, President Kaunda decided that the policy of depending on indirect incentives to attract private sector capital and to channel it in the direction of the goals of diversification and Zambianization was failing to produce satisfactory results. The economy was booming from 1964 to 1968; prices and profitability were high. Government was convinced that most for- eign-controlled and local expatriate companies, which still made up practi- cally the whole private-sector, were more preoccupied with fast and high returns and with transferring capital abroad than with local reinvestment or Zambianization of its management and production personnel. The evolu- tion of Government's thinking on the most effective approach to achieving true economic independence, through diversification of the economy and, at the same time, increasing Zambian participation, was first revealed in a pamphlet prepared by President Kaunda for the National Council of the United National Independence Party (UNIP) at Lusaka in April 1967. In this pamphlet, Humanism in Zambia, Dr. Kaunda first explained his philosophy of Humanism. It is an ideology for Zambia, based on the principles of group ownership, participation and benefit from a socialist economy, and is op- posed to Western-style private capitalism. 10. President Kaunda translated his philosophy into political action with his speech "Zambia Towards Economic Independence" delivered to the UNIP National Council at Mulungushi in April 1968. A series of measures were announced to give fuller support to Zambian businesses through enforcing greater credit availability from foreign-controlled commercial banks and more favorable licensing practices. In addition, the President requested certain enterprises "to invite the Government to join their enterprise" 1/ to the extent of 51 percent of their shareholdings. The primary reasons given for government participation were to bring down prices, and to rationalize and provide better services. i/ A total of 24 companies were finally "taken I/ The "invitation" method was used for legal reasons. Nationalization without consent would have required amending the constitution. 2/ The building industry was cited for price fixing and maintaining ex- orbitant prices of both locally produced materials (window and door frames, and crushed stone) and imported goods. A total of 12 firms dealing in construction materials were "invited". The brewery industry was likewise making excessive profits, and two companies were on the list of "take-overs". Two road transport companies were included to allow further rationalization of the country's road and rail transport systems, and to provide better services to rural areas, which the private com- panies failed to do. Five large retail and wholesale distribution com- panies were included to allow some measure of control on prices and to rationalize import supply lines and distribution. Finally, two timber companies were among the "take-overs", one company (Zambezi Sawmills) because it was a major employer in the Western Province and Government did not want it to be closed--as the owners had often threatened to do, and another mining-related timber company.  -7- ANNEX 2 Page 7 over" as a result of of the Mulungushi speech. Government participation was actually negotiated by Indeco, which was to hold and manage the assets on behalf of Government. In principle, companies were compensated at net book value of assets, although there was a certain amount of negotiation, espec- ially regarding the terms of payment. The arrangement in most cases was to pay the owners partly in cash and the remainder in installments according to formulae or a formula related to future profits. However, there were minimum and maximum levels of payments set, so that owners were guaranteed payment over an agreed upon period of time, irrespective of profit levels. Payments were made in Kwacha, and included an agreed-upon rate of interest on the balance of the amount of the unpaid shares, usually 6 percent. Permission to externalize all or part of the payments was in some cases written into the share purchase agreements and in other cases it had to be separately negotiated by the former owners with the Bank of Zambia. In practice, these latter arrangements did not give rise to any difficulty. 11. The Mulungushi reforms were the first in a series of basic economic reforms establishing the new policy of Government acquiring majority share- holding in established private enterprises in order to accelerate the pace of Zambianization, to insure reinvestment of surpluses in Zambia, and to minimize profiteering. In essence the reforms spelled out a policy whereby large scale enterprise would be the reserve of the State and small enterprise 1/ would be dpen to the Zambian private sector. The Matero Reforms of 1969 announced the 51 percent take-over oE the two giant copper mining companies and some addi- tional manufacturing companies. The third round of reforms in 1970 focused on the major financing institutions: Government announced its intentions to take 51 percent participation in the commercial banks, the State Insurance Company, and the building societies. Government however failed to reach agreement with Barclays, Standard and Grindlays foreign-controlled commercial banks regarding their take-over. I/ 12. After Matero the period of setting up the ZIMCO parastatal con- glomerate began. ./ IrL March 1970, ZIMCO was created. Indeco, which at the time had 39 major subsidiaries and holdings in 12 associate companies, in breweries, real estate, wholesale and retail distribution, road transport, building materials manufacture and distribution, and manufacturing industries, was brought in as a subsidiary holding company. As part of Government's 1/ "Small" was defined as a company making K 500,000 or less annual profit. For example, the reason for including Mwaiseni Stores, Ltd., a Zambian- owned retail distributing company, in the Mulungushi take-over group was that it had "reached the limit" (K 500,000 profit) as President Kaunda stated. 2/ As a result of this failure it was instead decided to expand the opera- tions of the National Commercial Bank. In 1974 full interest in the Com- mercial Bank of Zambia was acquired, and it was merged with the National Commercial Bank. 3/ See the Chronology of Indeco and ZIMCO Development, Appendix 1.  -8- ANNEX 2 Page 8 arrangement for 51 percent participation in the copper mining companies, the two major copper mines and several mining-related companies were arranged into two groups, Nchanga Consolidated Copper Mines Limited (NCCM) and Roan Consolidated Mines Limited (RCM). Both of them became subsidiaries of Mindeco, as sister holding company of Indeco under the ZIMCO umbrella (later on, in mid-1973, the two large mining groups were removed from the Mindeco holding company and placed directly under ZIMCO; Mindeco was left with other diversified and smaller mining interests). Over the next four years, six additional ZIMCO holding companies were created. Each one of them started with the spin-off of one, or several, subsidiary companies of Indeco engaged in a particular sector of activities. 1/ In 1971, three of these sector holding companies were created. The State Finance and Development Corporation Ltd. (Findeco) was created to manage the state's financial interests. It began with the hiving off from Indeco Ltd. of its more general development finance function, which was being handled by a subsidiary, the Industrial Finance Company (IFC). Findeco, however, grew quickly with take-over of all insurance business, administrative control of the Zambia Building Society (which itself combined the three separate building societies operating in Zambia), and the take-over and amalgamation of the Commercial Bank of Zambia with the National Commercial Bank. 2/ The road transport companies of Indeco were spun off to the National Transport Corporation (NTC) and Indeco hotel properties went to the newly created National Hotels Corporation (NHC), that now holds majority interest in all major hotels in the country. Finally, in 1974 three additional holding companies were added. The Zambia National Energy Corporation groups together former Indeco companies in oil refining, oil products, and their transport. 3/ Indeco's wholesale and retail distri- bution subsidiaries were spun off to the National Export and Import Corpora- tion. 4/ The smallest of the new holding companies is Zambia Fisheries and Fish Marketing Corporation, which started with one of Indeco's subsidiaries, Lake Fisheries of Zambia. 13. As mentioned, the trend in successive reorganizations of ZIMCO has been to decentralize ZIMCO activities according to economic sector. In turn, 1/ See Appendix 2, Chart 2, ZIMCO Organization Structure for a complete list of subsidiaries as of June 1976. 2/ See Appendix 2, Chart 7, FINDECO Organziation Chart as of June 1975. 3/ The largest new addition brought into the ZIMCO structure under this new holding company is the Zambia Electricity Supply Corporation (ZESCO) which includes the Kafue power complex in its assets. 4/ One of the main functions of NIEC will be to rationalize all importing and, in thi-s process, to get the best prices from suppliers. Another will be to get underway a major effort to promote exports of manufactures.  -9- ANNEX 2 Page 9 each of the ZIMCO holding companies reports to the government ministry responsible politically for its sector of economic activity. This involves a total of five ministries, and in principle spreads the work load of pro- viding a policy framework more evenly among ministries. Also, this should allow for more attention to be given to control over the holding companies' management and performance. The ministries involved are Mines and Industry; Power, Transport and Works; Land, Natural Resources and Tourism; Finance; and Commerce. 1/ 14. During the period new statutory corporations were also being created. Two of the inajor ones are the Development Bank of Zambia (1972) and the National CredLt and Savings Bank (1972) that replaces the Postal Office Savings Bank oi Zambia. Also, the Post and Telecommunications Corporation was created in 1974. 15. Thus the first five years of parastatal growth, as it turned out, was small compared to the spread of public ownership during the era of nationalization which began in 1968. In 1971 ZIMCO's total assets amounted to K 713 million, or well over twice as much as total assets of all the major parastatals in marketing, utilities, and transport in existence in 1969. In these early years government investment alone was only about 25 percent of ZIMCO's total assets; this proportion increased to 50 percent by 1975. The data in Table I give a rough idea of the magnitude of the increase of state- controlled interests in the economy, as well as the central role of the mining-dominated ZIMCO Group of companies (copper mines made up 75 percent of ZDICO's assets). At Independence, in 1964, stace-controlled assets amounted to K 234 million. Adding together the 1969 total assets of the major "tradi- tional" public corporations and statutory boards (K 296 millioti and the 1971 total assets of the ZIMCO Group (K 713 million), the resulting K 1,009 million is a very rough estimate of the amount of state-controlled assets at the beginning of the 1970s. In 1975 ZIMCO assets alone increased to K 1,468 million. Thus it would be fair to say that when adding in the statutory enterprises, total assets under government control would amount to something close to K 2 billion. Government's own investment (shareholders' funds, reserves and loans from GRZ) at the same time, in all likelihood, has increased from only K 151 million in 1965 to well over K 1 billion in 1975. C. Development Obiectives and Financial Performance Government Obiectives 16. The central theme underlying the economic reforms is that state ownership confers the rights of direct control necessary to implement gov- ernment policies and tc accelerate attainment of national goals. In this 1/ Prior to April 1977 reorganization of ministries. This reorganization appears to have little effect on the functional relationship between ministries and the various parastatals. Throughout the Annex the pre- 1977 reorganization of ministries is referred to.  - 10 - ANNEX 2 Page 10 light, the social and development objectives of parastatals are, by defini- tion, determined by Government and are identical to the stated national objectives which give high priority to Zambianization, employment generation, economic diversification, and rural development. Provision of broad guide- lines that should be followed by all state enterprises in the formulation and implementation of their projects is a government priority. In practice, Gov- ernment decides what specific investments and actions would further its ob- jectives, and issues directives to enterprises to implement these decisions. 17. Decisions affecting several projects within the ZIMCO group of companies illustrate Government's use of directives relating to various development objectives. National Hotels and National Transport, for example, both operate subsidiary companies that provide services to more remote areas of the country at uneconomic costs. The location of Livingstone Motors and Kapiri Glass Products, two subsidiaries of Indeco, was decided on the basis of providing better geographical distribution of employment opportunities. The Rucom division of Indeco is specifically responsible for rural industrializa- tion and carries out non-commercial programs. 18. In addition to issuing directives on the nature of investments, Government exercises control over producer, wholesale and retail prices. For many commodities Government exercises the right to review prices that are requested by parastatal companies. However, for several commodities classified as essential consumer goods, the prices are set by Government through a process based primarily on a policy to protect the consumers from the full impact of price increases. In these cases costs to the producer are not given adequate consideration, and many companies suffer substantial losses on an annual basis as a result of government pricing policies. Financial Criteria 19. The use of government directives in place of other investment and pricing criteria leads to the question of who is expected to bear the burden of the costs of uneconomic decisions. The whole set of issues surround- ing this question relate to the expectations for financial performance of enterprises and the role of government subsidies. A broad policy for com- mercial enterprises was set by President Kaunda in inaugurating the 1968 Malungushi Economic Reforms. He established the policy that state-controlled enterprises would not be treated differently (more favorably) than private enterprises and would be expected to make profits. As beneficiary majority shareholder of companies, the State would reap the profits and have the power to decide on how these savings would be reinvested. ZIMCO state-controlled companies: ... are expected to show a greater consideration for social benefit than would normally apply to privately-owned companies. They are nevertheless business organizations, and as such must operate in a business-like manner, become ever more efficient and profitable, and stand on their own in a ruthlessly competitive economy. 1/ I/ Zambia Industrial and Mining Corporation, Chairman's Statement for the period 31st March 1970 to 30th June 1971, Lusaka.  ANNEX 2 Page 11 20. There are, however, different categories of parastatals and two different sets of financial performance criteria that apply. On the one hand, there are statutory boards, such as Namboard and the Cold Storage Board, that are expected to break even in the long run. On the other, there are the ZIMCO state-controlled compcnies that are expected to be profit-making operations. Statutory corporations come under one or the other set of criteria seemingly depending on their area of responsibility. 21. President Kaunda in his address to the UNIP National Council in mid-1975 supported the 1968 policy and clarified what he sees as one of the differences between statutory boards and the ZIMCO group role. Statutory boards are set up as no profit/no loss operations in the long run. Thus, while a statutory board should be run as economically as possible: If a project is placed under a statutory board it should be oper- ated in such a manner and under a price structure so that in the long run it makes no profit and no loss, covering its expenses including depreciation on its wasting assets and interest on Gov- ernment's investment. Any short run gains should be credited to a reserve account, and any short run losses would be charged to that reserve account. The further capital which it may need for expansion should come either from its depreciation account or from fresh Government loans. It would not be expected to repay the principal in the foreseeable future. 1/ on the other hand, relating primarily to ZIMCO companies: Any other parastat:al company should be operated in such a manner and under such a price structure that it covers its expenses in- cluding depreciat:lon and interest on any debt owing to Government, plus a profit. Again, expenses should be kept to the minimum. The rate of profit: should be related to the riskiness and un- certainty of the business, and should allow a reasonable return to Government or i.ts appointed agency. The annual rate of profit might vary between say, 12 percent and 16 percent of the capital invested, depending on the riskiness of the business and on the expansion plans of the business. 2/ 22. Although there is an attempt by Government to group companies ac- cording to financial expectations, the distinction among statutory boards, statutory corporations, and ZIMCO state-controlled companies is never precise. For example, at the time of the UNIP meetings in 1975 a debate was going on 1/ UNIP. Summary Report of the Economic Situation in Zambia. Report No. I (A). Presented by His Excellency the President to the United Independence Party National Council on 30th June, 1975, p. 16. 2/ Ibid.  - 12 - ANNEX 2 Page 12 concerning the proper organizational location of the Rural Development Corpo- ration. It was argued by some that RDC subsidiaries, in principle, should be profitable and therefore should be merged into the ZIMCO group. Others argued that the RDC projects were mostly developmental, and to a large extent exper- imental in nature, and therefore should aot be expected to operate on a commercial basis. In the latter case, it is argued further that RDC would be appropriately placed under the Ministry of Rural Development. Subsidies 23. The government philosophy on subsidies for parastatals is: "In such [those] cases Government has asked a parastatal to do things instead of doing them itself. Such costs should be borne by government." As financial expectations are combined with parastatal responsibility to carry out social objectives, the Government tries to keep the two objectives separate by specifying subsidies to be paid. Subsidies are either (a) consumer based, or (b) project development expenditures. In the first case, Government reimburses companies for losses due to controlled prices of consumer goods. Namboard, for example, has an established equalization account to receive such reimbursement as the expenditures are incurred. In other cases, such as for Indeco food processing subsidiaries that cannot pass on increases in imported inputs due to government-controlled prices, the process of granting subsidies (reimbursements) is not regularized. In these instances,-each case must be presented to Government for reimbursement. Other subsidies may be granted to cover development costs of projects, and may come from the gov- ernment current budget, for example, to cover the costs of feasibility studies or project preparation, but these more often come from the capital budget to cover part of capital investment in the projects. This policy is followed in allocating government funds, through the Ministry of Mines and Industry, for new expansion projects under Indeco. 1/ D. Issues 24. As public ownership expanded, dissatisfaction with financial performance of parastatal enterprises has increased, along with the frus- tration over "control" of the sector. The Government in principle has tried to maintain some kind of discipline in parastatals through policies such as "no preferential treatment for state-controlled companies", general price surveillance, and threats to reduce subsidies. These measures are increasingly anachronistic, however, since many of the enterprises are monopolies, and, besides, they are not likely to be allowed to go out of business due to employment and other political considerations. There is a whole set of issues relating to efficiency of parastacals, the nature and 1/ See Appendix 3, Table 8 for Indeco receipt of subsidies from the re- current budget and from the capital budget.  - 13 - ANNEX 2 Page 13 cost of social and development objectives to be achieved through parastatals, and what appears to be the increasing burden of parastatals on the govern- ment budget. 25. In June 1975:, in his Summary Report of the Economic Situation in Zambia, President Kaundla very sharply criticized parastatal manufacturing companies for their inefficiency and, as a challenge, went so far as to praise those companies with larger minority shareholding and expatriate management for succeedi.ng in maintaining more efficient (profitable) opera- tions. However, 1975 was also the first year in which Government agreed to pay Indeco Ltd. substantial subsidies amounting to around K 12 million to help cover losses due to price controls affecting three subsidiaries in grain milling and edible oil processing industries. Moreove.r, the company receiv- ing the largest subsidy (National Milling) had a large minority shareholding (49 percent) and an expatriate management contract, and another (ROP Ltd., the result of a merger with Lever Brothers of Zambia), although fully na- tionalized, still retained an important expatriate contingent in management. 26. The 1975 price subsidies to Indeco, coupled with lower income tax revenues due to low profitability, meant that for the first time the net flow of funds on current account from Government to Indeco Ltd. was negative. Government outflow of funds on a net basis amounted to K 8 million in 1975, as compared to a net inflow from Indeco averaging K 9 million for each of the previous five years.. Part of this burden on the current budget may well be due to the suggested inefficiencies in the enterprises themselves, but a large part is also due. to provision of goods and services at below cost, as directed by Government. In addition, in relation to the capital budget, Government returns on its total loans and investments in Indeco have declined from 2.5 percent in 1970 to 0.1 percent in 1975, which would indicate that Indeco's choice of investments is costly to Government. Here again, many of Indeco's decisions are based on directives from Government. 27. Both the ZIMCO' and Indeco consolidated annual financial results, published since the 1975 presidential report on the economy, confirm evi- dence on individual enterprises that as a group state-controlled companies' financial positions have seriously deteriorated. The ZIMCO group after tax return on total assets declined by more than half, from 19 percent in FY74 to 8 percent in FY75. Within the ZIPICO group of parastatals, Indeco Ltd. profitability went from 8 percent in FY74 to 1.5 percent in FY75; and in FY76 Indeco Ltd. for the first time in its history reported net losses amounting to over 3 percent of total assets. (No subsidy is included in chis year.) 28. The major issues to be discussed in the main body of this Annex fall under the following headings:  - 14 - ANNEX 2 Page 14 (a) Pricing Policies. The most obvious pricing problem arises from Government maintaining price ceilings that allow very little margin for companies to recover their costs of processing; in some cases, the controlled price is lower than the c.i.f. cost of raw materials. (b) Development of Management Expertise. Zambianization of management has been greatly accelerated as a result of the basic economic reforms. While some experience in management had been building up since independence, it was not on a scale sufficiently large to deal with the present number of enterprises in practically every sector of activity. One of the biggest problems therefore has been to find Zambian middle and upper level management. (c) Government control Basic questions are being asked: How and where should Government get a firm hold on the large number of parastatal enterprises? What constitutes adequate "control" in the eyes of Government? This latter issue is perhaps one of the most important since there is a danger of "overkill" if Government were to seek control of management in its day-to-day operations. There are already problems of excessive politicizing of management appointments, outside influence over person- nel decisions at the plant level, and numerous directives on day-to- day operations. This kind of interference suggests that Government indeed has a great deal of control over parastatals but that the methods and motivations tend to contribute to enterprise inefficiency and corruption, rather than encouraging a socially more beneficial use of resources which is the objective of state ownership according to official policy in Zambia.  - 15 - ANNEX 2 Page 15 II. ZIMCO: CURRENT STRUCTURE AND PAST PERFOR AXNCE A. A Comparison of ZIMCO and Non-ZIMCO Structures 29. Zambia's parastatal sector may be divided into i) ZIMCO holding companies, and their subsidiaries, that have been established under the same Company law that applies to private business and ii) enterprises created by special statute. 1/ ZIMCO itself is a holding company whose total shares are held by the Minister of Finance. ZIMCO, its wholly owned sub-group holding companies, and their subsidiary operating companies are all limited liability companies, incorporated under provisions of the Companies Act (Cap. 686 of the Laws of Zambia). 2/ It is the sole or majority shareholding by the State that distiaguishes these enterprises from private companies. Government, as sole or majority shareholder, exercises control through its right to appoint Directors. The operations of a company are governed by the provisions of the Act, the company Memorandum and Articles of Association, and decisions of its Boards of Directors. There is a great deal of latitude in activities companies may engage in; and, if desired, the Articles and Memorandum may be changed by the Board, in compliance with the process pro- vided in the Act. The other, non-ZIMCO, parastatal enterprises in contrast are individually establ:Lshed by special act of Parliament that specifies the nature and function of the enterprise, the area of its responsibilities, and the particular Minister who appoints and provides policy guidance to the Board. To change the nature of activities of a statutory board or corpora- tion, the original statute must be amended by Parliament. Overall, ZIMCO enterprises, incorporated under the Companies Act, have a much wider range of possibilities in the kinds of economic activities they can choose to engage in. The enabling Act of a statutory corporation defines more narrowly what activities the organization may or may not engage in, and changes in the Act are a Parliamentary undertaking open to debate. 1/ In addition to the ZIMCO group of companies, the Rural Development Corporation (RDC) also belongs to the first group. However, since RDC is very small and is being considered for reorganization to put it on another footing, the discussion is simplified by referring to ZIMCO only. With respect to the second group, statutory supervisory boards, educational institutions, etc., that are technically para- statals (by definition of government ownership and location outside ministerial structure) but are not commercial enterprises, are not included in the discussion. 2/ The original Act was passed into law in 1921 and has up until now under- gone only minor revisions. It is under review for possible amendment or replacement legislation.  - 16 - ANNEX 2 Page 16 30. All parastatal enterprises have structures similar to those illustrated in Chart 1. Each ZIMCO holding company, and the individual statutory boards and corporations, has a Board of Directors in a policy advisory capacity and an operational management team whose Chief Operating Officer (General Manager of Managing Director) reports to the Board. ZIMCO operating companies (e.g., Kafue Textiles of Zambia) are wholly or majority owned subsidiaries of the holding companies. They have the same company structure as the parent holding company; management reports to the operating company Board, which is- chaired by a member of the management team of the parent company, in this case, an Indeco Operations Controller. 31. The Role of ZIMCO HoldinR Companies. Chart 1 however points up a major distinction between ZIMCO and non-ZIMCO parastatals vis-a-vis their relationship to the government ministerial structure. The holding companies and the statutory boards and corporations are at the same level as regards the organizational link to Government. Ministry policy guidance and control is established at this level. A Minister is Chairman of the Board, and in many cases his Permanent Secretary is Vice-Chairman (the practice of appointing the Minister as Chairman is not established by law, but has been the practice followed since 1971). Government thus has direct control over statutory enterprises (which are also operating companies), but exercises only indirect control over ZIMCO operating companies through the holding companies. One objective in creating the Z124CO complex was to minimize direct government interference in the conduct of business of profit- oriented enterprises. In practice, reportedly the ZIMCO holding companies were able to play a double-edged role. Holding companies were a source of frustration to those who sought greater control over allegedly widespread management iaefficiency and corruption; at the same time, they could act as a barrier to those who wished to encourage greater corruption by interfering with the operating companies directly. With the passage of time however it appears the holding companies are less able to play a protective role. This may be one result of lower levels of minority participation in govern- ment-controlled enterprises. B. Current Structure of ZIMCO 32. ZIMCO provides the umbrella for eleven major sub-group holding companies with activities in all economic sectors. The subsidiary holding companies in turn hold and manage approximately 75 state-controlled operating companies. 1/ As a holding company, ZIMCO's role is to exercise control 1/ The number of state-controlled enterprises appears to diminish, but this is due to consolidations not to any disinvestment.  ANNEX 2 - 17 - Page 17 Chart 1: PARASTATAL SECTOR ORGANIZATION THE ZIMCO (GROUP STATUTORY BOARDS AND CORPORATIONS ZIMCO "H O L D I N G C O M P A N I E S" Indeco I NAMBOARD Board of Directors Board of Directors Chr.: Min.,Mines & (------ Ministry < >------ Chr.: Min. Rural Industry Development Managing Director General Manager "O P E R A T I N G C O M P A N I E S" Kafue Textiles II Board of Directors Chr.: Indeco Oper- ations Controller Genera 1 Manager  - 18 - ANNEX 2 Page 18 over those sectors of the economy where it holds equity and to channel funds for investment into new enterprises necessary for the development of the economy. 1/ The organizational structure of the ZIMCO group is attached as Appendix 2, Chart 2. 33. Board of Directors. ZIMCO is an apex holding company. The Party, relevant government Ministries, and other parastatals are represented on its 23 member Board of Directors, I/ whose role it is to carry out the functions of ZIMCO. The Prime Minister is Chairman and his Vice-Chairman is the UNIP Central Committee member who chairs the Party's Economics and Finance Sub-Committee. Two other seats are reserved for the Administrative Secretary to the Party and one of the President's Special Economic Advisors. Members include the five government Ministers who chair the Boards of one or more of ZIMCO's eleven sector holding companies, all of the sector holding company Managing Directors, the Governor of the Bank of Zambia and the General Manager of Namboard. Thus top parastatal, government, and political leadership is represented. The Board is scheduled to meet quarterly, but in fact meets less frequently. 34. Management. Up to 1975 ZIMCO management consisted of a financial controller and a company secretary. Their main function was limited to coordination of information flow from the sub-group holding companies to the ZIMCO Board. In 1975, however, a ZIMCO Accounting Manpower Unit was created to assist its weaker holding companies, such as National Hotels and National Transport. C. Past Performance 35. The consolidated accounts for ZIMCO and its holding companies for 1973 to 1975 (Table 3) show that ZIMCO companies as a group had a 12.9 percent net return on total assets in 1973, a 19.2 percent return in 1974, and a dramatically lower return of 7.6 percent in 1975. Table 3: ZIMCO Consolidated Accounts. FY1973-75 (K million) 1973 1974 1975 Net Profit 128.3 217.2 111.1 Total Assets 994.1 1,130.0 1,467.7 Profitability (x) 12.9 19.2 7.6 Source: Appendix 3, Table 1. 1/ ZIMCO, Chairman's Statement, 1971. 2/ See Appendix 2, Chart 3, for complete list of Board members as of March 1974. From ZIMCO's creation in 1971 up to June 30, 1976, President Kaunda held the position of Chairman of the Board.  - 19 - ANNEX 2 Page 19 36. Consolidated accounts for the individual holding companies show that ZIMCO's overall rate of profitability is influenced mainly by the mining sector's performance, as shown in Table 4. With the creation of holding companies on a sectoral basis, the levels and fluctuations in performance shows up more clearly. In 1975 the downturn, while due largely to mining, was also contributed to by Indeco (manufacturing) and ZNEC (the energy group that is now the largest ZIMCO subsidiary after the mines). National Transport and National Hotels consistently suffered losses, although losses increased substantially .in 1975.  AkEX 2 -20- Page 20 Table 4: GROUP CONSOLIDATED ACCOUNTS, 1973-1975 (In millions of Kwacha) FY73 Mindeco/a Indeco Findeco NTC NHC Profit (loss) after tax 118.5 19.5 4.6 (0.3) (0.3) Total Assets 768.4 249.4 40.4 11.6 5.4 Profitability t 15.4 7.8 11.4 (2.6 (5.6) Share of Group Assets . 73.0 21.0 4.0 1.0 1.0 FY74 Mmndeco Indeco Findeco NTC NHC Profit (loss) after tax 186.8 15.4 7.2 (1.2) (0.4) Total Assets 837.9 223.2 51.0 26.5 5.4 Profitability % 22.3 6.6 14.0 (4.5) (7.4) Share of Group Assets * 72.0 22.0 4.0 2.0 0.4 FY7' Mindeco Memaco Indeco Fisheries ZNEC NIEC Findeco NiTC NHC Profit (loss) after tax fln.q 1.n 2.R (0.5) 5.R 1.2 5.7 (4.7) ((0.Q Total Assets 1,186.5 3.7/b 189.6 1.4 265.5 16.0 60.4 30.5 5.1 Profitability * 8.9 48.6 1.5 (35.7) 2.2 7.5 9.4 (15.4) (17.6) Share of Group Assets % 68.o ' 11.0 - 15.0 1.0 3.0 2.0 /a In ZIMCO Annual Reports the copper mining companies 3re listed under Mindeco although in mid-1974 they were removed from Mindeco and placed directly under ZIMCO. /b Turnover. 0' - negligible Source: Appendix 3, Table 2. EAN  - 21 - ANNEX 2 Page 21 III. INDECO: STRUCTURE, DEVELOPMENT OBJECTIVES AND PAST PERFORMANCE A. Current Structure 37. Indeco is the sub-group holding company now primarily responsible only for manufacturing industries but, as the precursor of all the non-min- ing sub-group holding companies, it has a longer standing and more highly developed organizational structure. 38. Board of Directors. Indeco is a wholly owned subsidiary of ZIMCO. Eight of its 13-member Board in 1975 were also members of the ZIMCO Board. The Minister of Mines and Industry is Chairman of Indeco's Board and his Permanent Secretary is also a member. In addition, the Permanent Secretary of the Ministry of Finance, and the Governor of the Bank of Zambia are members. The Board's Eunctions are to decide on policies governing its subsidiary companies, to exercise control over management of the large group of subsidiary companies, and to make decisions for new investments in the economic sectors in wh:Lch it is involved. In these matters, the Chairman of the Board functions as the liaison between Indeco and the Ministry of Mines and Industry, both of which have responsibilities in the industrial sector. The division of responsibilities of state-controlled enterprises and Govern- ment in the same econotmic spheres is perhaps best explained by President Kaunda, in his report in 1971 as Chairman of the ZIMCO Board. In reference to development of the country's mining industry and agriculture, The Government for its part will continue to provide the necessary infrastructure, but it is naturally to ZIMCO, anct other Government-owned business organizations, that it will look for the exploitation of these natural resources and for the use of the infrastructure to the most profitable ends. The Indeco Chairman also reports to ZIMCO, its parent holding company. There are no clearly established guidelines which state the kinds of decisions made by the Indeco Board that require final clearance by other authorities (e.g., the ZIMCO Board or the Ministry of Industry and Mines). The system functions rather as an interlocking directorate, with the Chairman of Indeco being also a member of the parent holding company Board and the Minister of that Ministry to which Indeco is linked. Generally, Indeco decisions are deliberated in several forums before being finalized. 39. Management. Indeco, in addition to being a holding company, pro- vides management services for its 33 subsidiary operating companies. Manage- ment is organized into six departments, consisting of Financial Controller, Personnel Services, Information and Publicity Services, Company Secretary, General Counsel, and Maaagement Services. The six department heads report  - 22 - ANNEX 2 Page 22 directly to the Managing Director. Overall Indeco's headquarters staff as of March 31, 1975 numbered 214, but with the reorganization of July 1975 may have increased to close to 250 people. Indeco's Organization Chart is presented in Appendix 2, Chart 5. 40. The subsidiary operating companies are organized into five divisions (Breweries, Chemicals, Industrial, Rucom, and Steelbuild/Real Estate) which replace what were, until July 1975, wholly owned divisional holding companies in the Indeco structure. 1/ The 1975 reorganization was a centralization move which eliminated the need for the Boards of Directors of the former divisional holding companies and also integrated the management of the former holding companies with that of Indeco headquarters. Some obvious advantages of the streamlining are that fees formerly paid to the holding companies' Board Mem- bers are eliminated and holding company staff can be reduced to cut down on operating company overheads. 2/ Moreover scarce management skills can be better employed. 41. Two related trends are occurring simultaneously in Indeco manage- ment: accelerated Zambianization (which is discussed more fully in the next section) and erosion of the autonomy of operating companies. As Zambianiza- tion of company management and technical positions has progressed and as the state's shareholding in companies has increased, Indeco's headquarters structurally has been strengthened and management decisions gradually more centralized. The resulting decrease in autonomy of operating company man- agement appears to be the result of two factors: i) lack of experienced Zambian managerial staff and ii) mistrust of management based on allegedly widespread corruption, malfeasance, and neglect. Centralization is Indeco's solution to the problems of providing managerial support to inexperienced staff and exercising control over management. Control over financial manage- ment of operating companies is also rapidly being centralized. Indeco has consolidated its role as sole negotiator for company financing, except for short term (primarily overdraft) facilities. In general, Indeco acts as a conglomerate in the matter of cross-subsidization, inter-firm short term financing, and to some extent in allocation among companies of investible surpluses. B. Indeco's Role in Industrial Development 42. Two primary development objectives of the Zambian Government since Independence have been to diversify the economy and to increase Zambian participation in its ownership, management, and benefits. As part of this goal, highest priority has consistently been given to industrial development I/ See Appendix 2, Chart 4. 2/ The staff for services, such as company secretary, accountants, and personnel, was transferred directly to Indeco headquarters. See Ap- pendix 2, Chart 6, for layers effected by the 1975 reorganization.  - 23 - ANNEX 2 Page 23 and Zambianization of ownership and management of the sector. There was very little to build on in the way of an existing non-mining related industrial sector. Domestic production supplied somewhat less than one-third of the local market for manufactured goods. 1/ Total manufacturing accounted for only 6 percent of GDP, and fully 75 percent of value added was concentrated in a few industries producing consumer and intermediate goods, low in value in relation to their bulk. 2/ To accelerate industrialization from this small base, Government followed a policy of direct participation on its own in key industries, where necessary, and of otherwise providing incentives to attract foreign and Zambian private enterprises. Fiscal policies included provision of incentives inder the Pioneer Industries (Relief from Income Tax) Act, tariff protection, capital allowances, and other tax relief. Direct assistance through loan and equity capital, provision of factory buildings and promotion of projects, feasibility studies, and investment advice were all functions of the Industrial Development Corporation, (Indeco). Under the economic reforms beginn:Lng in 1968, however, the overall strategy has changed to one of much greater r:eliance on direct state participation. Under both policy regimes Indeco has had a major role to play. The following 1966 policy statement falls short of the post-1968 reform policies in the role state participation would play, but it was clearly a forecast of what Govern- ment considered would be necessary to accelerate industrial diversification. It is the poli.cy of the Government to participate in certain basic industries which are of major significance to the economy. This participation will generally be in part- nership with private investors, but, in certain circumstances, the Government itself will undertake the establishment of industries considered to be in the national interest. Participation in all such cases will be undertaken by the Corporation on behalf of the Government.... In certain cases, (Indecol will carry out management functions in addition. In the case of existing industries in which the Government wishes to participate, appropriate arrangements will be made by agreement and again the Corporation will hold the shares on behalf of the Government. 3/ 1/ Excluding mining-related metal industries and non-modern indigenous manufacturing, which was not recorded in any census. 2/ They were maize milling and sugar refining in the food processing in- dustries (14 percent:); beer brewing, distilleries, and cigarette manu- facture (27 percent); some construction materials, such as cement and metal window frames (13 percent); and iron and steel castings, and other mining related metal fabrication (21 percent). 3/ Zambia, Ministry of Commerce and Industry, Outline of the Government's Industrial Policy. (First published 10th October, 1964. Revised and Re-issued 3rd January, 1966.) Lusaka, 1966. p. 6. Examples of principal industries in which the Government would participate were: iron and steel, fertilizers, fibre bags and sacks, cement, sugar, textiles, copper processing, leather tanning, and certain types of building materials.  - 24 - ANNEX 2 Page 24 43. In 1965 Indeco was primarily a finance company and was not heavily involved in joint ventures. It owned substantial shares in only two companies (Chilanga Cement - 40 percent and Zambia Clay Industries - 56 percent). On a consolidated basis, the ratio of Indeco shareholder funds to outside interests was 75:1. Under new management, and the urgency created by UDI, Indeco grew rapidly and, in two years time, changed from primarily financing to an em- phasis on direct capital participation and responsibility for management of its subsidiaries. By 1967 the first major project, the Tazama oil pipeline, a joint venture with an-Italian company, was underway, and accounted for K 21 million of the K 27 million of the level of fixed assets. However, even when excluding the new pipeline project in 1967, fixed assets were K 6.1 million as compared to only K 167,000 in 1965 (see Table 5 below). Total assets increased over seven times. Investments also doubled but later this was to be a relatively minor aspect of corporation activi- ties. Table 5: Indeco and Its Subsidiaries (In K'000s) As at December 31 As at March 31 1965 1967 1969 1970 1974 1976 Income Turnover - /a 1,863 76,236 123,753 332,394 308,035 Investment 299 657 1,981 1,179 269 1,058 Fixed Assets 167 27,349 91,861 106,166 239,802 214,559 Investment 3,713 7,693 10,427 11,948 5,332 1,753 Ratio of Indeco Share- holder Funds to Out- side Interests In Subsidiaries 75:1 15:1 1.7:1 2.9:1 1.9:1 2:1 Total Group Net Assets 4,987 35,560 108,094 119,867 249,405 201,089 /a About 85 percent of income was from investments and the remainder was fees, rents, etc. Source: Indeco Annual Reports. 44. Indeco's total group net assets tripled from almost K 36 million in 1967 to K 108 million in 1969. This was the combined result of Indeco's carrying through government policy of acquiring majority shareholding in selected existing enterprises and of new projects initiated by Indeco. Share- holders funds were then only 1.7 times that of outside interests. Indeco  - 25 - ANNEX 2 Page 25 continued its rapid expansion to a peak in 1974, when it had a turnover of K 332 million, fixed assets of K 240 million, and net assets of K 249 million. At this point the ratio of Indeco's interests to minority partners was almost 2:1. In 1974 some major companies were split off from the Indeco group to form new ZIMCO sub-groups. Thus in 1976 Indeco was diminished in size to K 215 million in fixed assets and net assets of K 201 million (reflecting the increasLngly heavy burden of liabilities suffered by Indeco in the last two years). The ratio of Indeco holdings to minority interests remained about the same,, -at 2:1. 45. Indeco's own projects and expansions are sometimes overshadowed by the large-scale nationalizations. Table 6 shows the significance of the take- overs in Indeco expansion. The take-over of majority ownership of private enterprises accounted for only one third of the increase in assets, which took place from end 1967 to k(arch 1969. The remaining two thirds were Indeco's own projects, many of which were the large, capital intensive projects from the First National Plan. In. the period following, 1971 to 1973, Indeco's total expansion slowed down considerably, and take-overs accounted for a relatively greater share of increase in total fixed assets. In many cases there was a substantial time lapse between the official announcement of intention to ac- quire majority shareholding in a company and the signing of the final agree- ment by Indeco. This is reflected in the spreading out of the bulk of the increase in assets due to take-overs over a five year period, 1969 to 1973. Including the assets transferred from Indeco to other Z