INDECO (IDC): Past Problems and Opportunities Analysed by Kampamba Shula

INDECO

Intro

Recent media: Zambia Daily Mail

Recently his Excellency President Sata announced that the state through the Industrial Development Corporation (IDC) will, through IDC, maximise the value of government assets by establishing a sovereign wealth fund.

·         The fund would focus on stimulating investment in strategic non-mining industries, among others, thereby expanding the country’s investment portfolio and creating jobs.

·         IDC will boost the contribution of state-owned enterprises (SOEs) to national development by placing them under one umbrella holding entity to deepen their reform, enhance efficiency and maximise returns.

·         Government’s strategy to enhance domestic capital formation, wealth creation and preservation by focusing on exploiting the country’s advantages in natural resources and actively developing industries and enterprises to create jobs for the people.

To better Understand INDECO we must review its history, why it eventually failed to work and how it should operate differently to succeed this time.

History

Following the achievement of independence in 1964, the Zambian government sought to rely on the existing private sector as the basis of its development policy. The perceived failure of these measures prompted a reassessment of the policy and in 1968 the emphasis shifted towards state enterprise (Craig, March 1999.)

Initial Development Strategy

The independent Government outlined ambitious development objectives in the First National Development Plan (FNDP) in 1966 (Zambia, 1966). Objectives included

·         The diversification of the economy so that it was not reliant solely upon mining; the increased domestic production of goods to meet local demand;

·         The increasing of employment and real output per head; the minimizing of the inherited inequalities between the rural and urban sectors;

·         The raising of the level of education and social welfare and the development of the economic and social infrastructure.

The role of state activism in the economy was conceived as being that of a catalyst, inducing and quickening private sector activity. As the Plan stated:

A vigorous investment policy by the Government is a prerequisite for dynamic private enterprise, especially when a large percentage of the investment is devoted to establishing the economic infrastructure which promotes the expansion of productive private investment.

INDECO

Zambia had inherited a diverse collection of around fifty state owned companies and statutory boards, some directly from the territorial government and some created from the splinters of divided federal institutions. They included utility industries such as railways and electricity, agricultural finance and marketing boards and an Industrial Development Corporation (INDECO). 25

Although previously used as an abbreviation, the name of the corporation was formally changed to Indeco Limited from 1st April 1970.

INDECO was created by the colonial territorial government to act as a development agency, promoting private industry through finance and research. The Independent Government declared it to be its "principal instrument for the administration of industrial policy" and extended its role to include the promotion of specifically Zambian entrepreneurship and taking direct equity investment in projects.

It was not, however, envisaged that the state sector would displace the dominant position of private enterprise in the industrial sector. As the Government stated in 1966;

There is no question of the Zambian Government nationalizing industries that are already in existence, the policy being for state ownership of certain new basic industries and for state participation jointly with private enterprise in certain others. The remainder of the industrial field is open to private investors and the Government has created a tempting investment climate to encourage the inflow of capital for private investment.

This was in line with the advice of the Seers Report (1964, p.80) that defined a role for Government as "an entrepreneur, either partially or completely, in industries where the private sector is not prepared to establish plants or is doing so to an insufficient extent," arguing that in such circumstances state participation could create greater confidence in the economy and encourage further private investment.

Expansion through INDECO 1964 to 1968

Although the Government undertook investment during this period through a number of institutions, INDECO was the primary vehicle through which this was undertaken.

While it continued to promote private enterprises after independence, INDECO increasingly became dominated by direct equity investments in state enterprises. Between 1964 and 1967 INDECO expanded rapidly, its net assets rising from K2 million in FY 1964 to over K16 million in FY 1967. INDECO's portfolio changed markedly between FY 1964 and FY 1967, with equity investment, particularly in subsidiary companies, replacing loans as the principal form of investment activity undertaken.

INDECO's stated criteria for establishing state enterprises targeted industries which constituted domestic monopolies and were basic to the economy, or those in which the opportunity for utilizing local resources required a greater investment than private enterprise would contemplate.

By early 1968, INDECO had interests in 22 companies, of which 7 were fully operational, and the remainders were in the process of initial development. 37 They ranged from minority stakes in foreign transitional subsidiaries to wholly owned INDECO subsidiaries. The largest INDECO investments were in four associated companies (Chilanga Cement, Kafue Textiles, Zambia Sugar and Zambia-Tanzania Road Services), four INDECO subsidiaries (Zambia Clay Industries, TAZAMA Pipelines, Zambia Hotel Properties and Nitrogen Chemicals of Zambia) and two wholly owned INDECO subsidiaries (Zambia National Wholesaling Corporation and Zambia Steel and Building Supplies).

Although INDECO was establishing a major presence in Zambia's economy, its role in ownership was seen as transitory. The Seers Report had suggested that ownership could be transferred to private interests at subsidiary level through the sale of equity in enterprises to private interests or through the sale of shares in the corporation itself.

Problems of Development and Evolution of Policy

The economic strategy of the Government changed in direction in 1968. At the centre of this new approach was the expansion of both the size and the scope of the State Enterprise sector, and a restructuring of the state’s relationship to private enterprise. The extension of state control over a wider group of enterprises was combined with an extension of the objectives to be pursued through the sector. The key to the expansion of the state sector was a series of take-overs between 1968 and 1970, aimed at the major expatriate and foreign owned enterprises that covered much of the economy.

The announcements of the takeovers were delivered in three speeches by President Kaunda at Mulungushi in 1968, at Matero Hall in 1969 and again at Mulungushi in 1970. 42 In 1968 President Kaunda announced that INDECO would be taking over a number of private enterprises involved in the supply and manufacture of building materials, brewing, transportation, and retailing. 43 These takeovers made INDECO the third largest company in Zambia behind the mining companies Anglo-American and RST. It was to these latter companies that attention turned in 1969, when President Kaunda announced the takeover of 51 percent of their mining interests. 45 Finally in 1970 President Kaunda turned his attention to the financial sector and announced plans to take over a number of financial institutions along with a further tranche of other enterprises. 46 This represented the end of the period of major takeovers and while further acquisition occurred, they were incremental.

Evolution of Government Policy

The evolution of government policy was prompted by political pressures on the government combined with the limitations of existing economic policies to achieve the objectives of development policy. In this context, the expansion of the state enterprise sector through acquisition of a number of major private enterprises appeared to offer a more direct course through which the development objectives of the Government could be realized.

The case that the takeovers reflected the ideological predisposition of the Government has been made by (Libby & Woakes, 1980). They argue that the rationale behind the takeovers in Zambia was an ideological commitment to the control of the economy, stating that; the populist and socialist ideology of Zambia's ruling party, the United National Independence Party (UNIP) made the nationalization of the private sector inevitable.

 

Economic Factors

The development programme outlined in the FNDP placed substantial new demands on the Zambian economy, which without a corresponding increase in the supply of goods and services would prove inflationary.

INDECO: Problems

As earlier indicated INDECO was able to initiate a number of major projects, utilizing both state and private capital. Its continuing expansion was, however, problematic.

·         In focusing on industries that required a large investment and had a longer payback period, INDECO's ability to generate funds for reinvestment was limited in the short and medium term.

·         Further to this, the task of establishing new enterprises proved to be difficult, even when undertaken with a private sector partner, and involved heavy start-up costs. INDECO had not always been able to find a suitable partner to undertake joint ventures and in cases where it decided to act on its own, such as in trading, INDECO experienced problems in recruiting competent management (Martin, 1972).

Despite these problems, the development of new industries under INDECO was considered to be a success, prompting the Government to establish an agricultural development corporation, to parallel the role of INDECO in the agricultural sector (INDECO, 1967).

Expansion through Acquisition 1968 to 1973

The formula announced for takeovers at Mulungushi in 1968 was for INDECO to negotiate the acquisition of 51 per cent shares of each company, at a price based upon their book value. Although, the terms negotiated differed between companies, repayments were usually made at the commercial rate of interest, were guaranteed by INDECO rather than the individual enterprise, and the management services of the minority shareholder were generally retained this formula was also the basis for the negotiations of the mining takeovers. The acquisition of control of the mining companies was to be negotiated by INDECO on the basis of book value, and to be paid out of future dividends.

Regrouped into a new state holding company Zambia Industrial and Mining Company (ZIMCO), state enterprise net assets totaled K695 million in FY 1971, compared to the K35 million of assets held by INDECO before the takeovers began in FY 1968. 110 As the ZIMCO Annual Report noted "based on the 1973 results ZIMCO ranked 123rd in size amongst the 300 largest corporations outside the United States of America and was far and away the largest in independent Africa.

In the new structure INDECO became a sub-holding company of ZIMCO alongside MINDECO, which held the groups mining assets, FINDECO, which held the group financial assets, and the National Transport Corporation and National Hotel Corporation, which were demerged from INDEC0.The centrality of the mining assets to the of ZIMCO group, was a reflection of the importance of the copper mines to the Zambian economy, and implied that at least three quarters of ZIMCO assets were acquired by takeovers, rather than through the establishment of new businesses.

In the case of INDECO, however, there was a mix of assets acquired through takeovers and through the establishment of new enterprises. An analysis by the World Bank (1977b) estimated the contributions of takeovers to INDECO on the basis of the net book value of consolidated fixed assets ascribed in the INDECO accounts to takeovers. These figures in FY 1970 show that 1NDECO's consolidated net book value of fixed assets stood at K106 million, of which K23 million (22 percent) were acquired by takeover. The final year in which INDECO accounts recorded material additions through takeovers was FY 1973. The INDECO Report of that year showed Net Book Value of Group fixed assets at K224 million, to which should be added the K13 million of value demerged in FY 1972, to show a total of K237 million, of fixed assets accumulated through INDECO. The aggregated net book value of fixed assets acquired through takeovers to FY 1973 was K88 million, 37 percent of the total.

While such an analysis fails to account for the value of the assets held in associated companies, which are treated separately on consolidation as investments, it does suggest that takeovers accounted for a minority of the assets value established through INDECO and that the main source of the group’s expansion continued to be through the undertaking of new projects.

Ownership Patterns and Policy

The takeovers of the period 1968 to 1970 established a mixed economy in Zambia, the main outlines of which were to endure over the following two decades. Although UNIP (1974) asserted the "right [of the Zambian State] to participate in any new venture involving private investors" and committed the Government to continue to "explore further areas where the state could effectively participate," it was also accepted that there were limits to the extent to which the expansion of state ownership would be feasible or beneficial.

Many of the enterprises within the ZIMCO Group were themselves partnerships between state and private capital. These enterprises were often among the largest in the state sector. Between FY 1979 and FY 1983, 71.5 percent of the turnover of INDECO's subsidiaries was from enterprises with a minority shareholder, while only 28.5 percent was from wholly owned enterprises. This would suggest that the stated aim of the Zambian Government to secure ownership of the largest enterprises within the economy was achieved, while still allowing substantial space within which private enterprise could develop. 129 Indeed as Baylies (1982) observed, in sectors where state enterprise competed with private enterprise, the success of the former was by no means assured, and some private enterprises operated successfully in these sectors.

State ownership of the major enterprises operating in the Zambian economy offered the Government the prospect of a greater control over the national economy and a more direct means of implementing its development strategy. However, it has been argued that while the Government gained formal ownership of these enterprises, it did not secure effective control, which continued to reside with their management. Seidman (1979) and Makgetla (1994) argue that the legal ownership of state enterprises in Zambia was not translated into effective control. Makgetla (1994) places particular emphasis on the framework of commercial law established under British rule, which granted enterprises an autonomy that allowed them to pursue their own strategies independent of the Governments development plans.

Financial Balance of the Takeovers

As a result of the takeovers, the Zambian state acquired, on the one hand, assets yielding a new source of revenue, and on the other, additional liabilities in the form of the compensation payments. For this to generate new resources for the Government and the local economy, the new sources of revenue acquired by the takeovers had to be sufficient to meet the additional liabilities. While this applied to all the takeover agreements, the discussion presented here is limited to the case of the copper industry, which has been the focus of discussion on the issue in Zambia.

The impact of the nationalization was also complicated by the concurrent changes to the basis on which the industry was taxed before the takeover of the copper industry; taxation had been levied upon three different bases, the price of copper, and the level of production and the profits of the mining companies. In response to the complaints of the mining companies and advice from the International Monetary Fund, the Government's revised structure of taxation was based exclusively upon profits, while as a shareholder it acquired a dividend income which was also profit dependent. As a result of the takeover and the changes to the taxation of the mining companies, all Government revenue from the industry became dependent solely on the profitability of the companies.

Nationalization and Integration

It has been argued that nationalization of subsidiaries of transnational corporations potentially undermines the commercial viability of the acquired subsidiary unit. The argument draws upon explanations of the behavior of transnational corporation which explain their integration of diverse activities on the basis of the commercial advantage achieved. 156 The acquisition of subsidiary units can, therefore, cause the disintegration of the corporate structure and dissipate the advantages of integration. This has the potential to damage the commercial viability of the enterprises involved. While this analysis is applicable to the acquisition of any subsidiary company, the discussion will again focus on the case of the copper industry.

The extent of vertical integration in the copper industry has been limited. Copper mining companies have tended to undertake smelting and refining, but have not been heavily involved in fabrication. The Zambian copper industry reflected this pattern of integration with most of its output being refined domestically, this would support Radetzlci's (1985, p.131) view that "nationalisation in Zambia did not cause any important rupture of vertical integration chains." The Zambian Government was aware of the potential benefits of vertical integration and the reluctance of the mining companies to extend the degree of integration in the local copper industry was a source of friction between them both before and after the takeovers.

It is argued by Shafer (1983) that the mining state enterprises were more constrained in horizontal diversification than were the transnationals which had pursued strategies of spreading their investments between varieties of products. The copper interests of Anglo American Group, for example, were only a small element of its overall portfolio of investments which also included trading, financial, brewing and engineering operations as well as other mining interests. 164 The diversification by transnationals has, however, been on an international scale. While it provided the transnational with protection against adverse circumstances in any particular country, it equally denied the individual host countries of the benefits of that diversification. In the case of Zambia, a complaint against the behavior of the mining companies was that they had failed to reinvest their earnings in the diversification of local economy. This was itself the aim of Zambian Government mining policy which was intended to fund the diversification of the Zambian economy, to reduce its dependence on copper. While the acquisition of an enterprise that is part of an integrated corporate structure has the potential to undermine its commercial viability, it has been argued that in the case of the Zambian copper industry this did not occur. The discussion has also emphasized that the extent to which enterprises were integrated within corporate structures frequently did not provide the benefits of diversification to the Zambian economy, which the constructing of the state enterprise sector after 1968 sought to remedy.

This Chapter has provided an analysis of the construction of the Zambian state enterprise sector. It has argued that under the initial policy framework established following independence, the Government envisaged that the economy would continue to be dominated by private enterprise. The role of state enterprise was limited to strategic sectors and industries in which the existing private sector was unwilling to invest. In addition, the takeover of existing private enterprises was explicitly ruled out. From 1968 government policy changed and through a series of takeovers of existing private enterprises, state enterprise emerged as the main instrument of development policy. The central factor prompting a change in the Governments implementation of its development objectives has been identified as its growing concern over the effectiveness of the initial policy. framework. The existing foreign and expatriate elements within the private sector appeared reluctant to respond to the incentives that the government had established, while the emergence of indigenously based private and co-operative sector remained slow. In contrast, the Government regarded the performance of state enterprise as successful. Through INDECO it had established a number of new industries within Zambia and secured the participation within them of a number of transnational investors. The extension of state enterprise also responded to political pressures upon the government. UNIP's ability to maintain its popular base of support was under threat from factional competition. In this context, the extension of the state enterprise sector was perceived by the political leadership to offer both the opportunity to increase the rate of economic growth and to control the distribution of its benefits. By the beginning of the 1970s, the Government had acquired control of most of the major enterprises in Zambia, including the copper mining sector. Nevertheless, Zambia remained a mixed economy with the private sector continuing to play a significant role in the economy. In addition, minority private shareholdings remained in many state enterprises and were attracted to a number of new state investments. While the state enterprise sector that was established offered the government an instrument through which it could implement it policies, it also reflected many of the problems of the wider economy including the dependence on the copper industry. In particular, the financial agreements for the acquisition of the mines increased the vulnerability of the government to a prolonged downturn in the price of copper.

Downfall

From the beginning of the 1970s, most of the major state enterprises were placed within ZIMC0.The capacity of ZIMCO to fulfil these diverse objectives was founded on the complementary characteristics of the businesses with were included within it. The mining sector provided a potential source of profits, while INDECO had experience of establishing new industrial enterprises. In addition to this, ZIMCO also had extensive wholesaling and retailing networks and was an important manufacturer of essential consumer goods.

Over the period of the economic reforms INDECO had undergone great changes, expanding its value from K36 million in FY 1967 to K223 million in FY 1973, and its turnover from K2 million to, K286 million over the same period. INDECO appeared to be a profitable and diversified industrial group, with its operating companies organized into seven divisions covering brewing, chemicals, real estate, trading, transport, rural development, and building material supplies. 154 It had, however, become overstretched and efforts were made to refocus the group towards industrial and manufacturing activities. Its hoteling interests and the bulk of its transport division were transferred out of the group in FY 1972, followed in FY 1975 by the demerger of the entire trading division, the oil and petroleum interests of the chemical division and its fishery interests.

As the ZIMCO holding company for industry, INDECO was responsible for import substitution and economic diversification through the development of new projects and it aimed to manage its operating subsidies and associated companies on a commercial profit making basis in order to provide funds for this. Its presence across a range of industries also provided the government with opportunities to pursue non-commercial objectives. For example, it was a major supplier of goods and services to the domestic market and had leverage over the level of prices across the economy. The non-commercial objectives did not always sit easily alongside the generation of profits for reinvestment. As INDECO (Annual Report, 1971, p.3) complained;

There is a widespread belief in certain quarters that if Indeco makes a profit, it is exploiting people. The same proponents of this theory happily turn around and accuse the organization of inefficiency if a member company makes a loss. Indeco will continue to operate its companies on a normal commercial profit-making basis and it must be remembered that every Ngwee earned is available or ploughed back for the further development of Zambia'.

Diversification through INDECO

While enterprises were transferred out of INDECO, the group had expanded through the acquisition of equity in existing enterprises, the undertaking of new direct investment and the organic growth of its businesses. In addition to the takeovers announced by President Kaunda between 1968 and 1970, INDECO also acquired interests in a number of other private enterprises. INDECO entered the oil and petroleum sector in FY 1970 with the acquisition of a 51% stake in Shell/BP Zambia and a 50% stake in Agip Zambia, and in FY 1973 acquired a majority stake in Zambia Oxygen. In addition, INDECO also extended its equity participation in enterprises in which it already held an existing interest. At Zambia Sugar in FY 1971 and at Chilanga Cement and Kafironda in FY 1973, shareholdings at associated companies were increased to make these subsidiaries of INDEC0.

Once nationalized, INDECO sought to rationalize enterprises and integrate them with related enterprises within the group. In FY 1975, INDECO reported that mergers had been effected in bakeries, milling, aggregates and building supplies. These reorganizations often went beyond changes to the management structures to address operational issues. When the former competitors Refined Oil Products merged with Lever Brothers to form ROP (1975), for example, production was reorganized with the manufacture of edible fats and oils at one plant and detergent production at another. INDECO's direct investments into new developments during the 1970's can be divided between those which were pursued through the incorporation of new companies and those which were made within existing subsidiaries. In establishing new enterprises, INDECO followed their pre-reform pattern of focusing on investments that substituted for imports, had linkages to existing sectors and sought major private enterprise as a partner.

INDECO entered a joint venture with ANIC of Italy in FY 1970 to establish the Indeni Petroleum Refinery. This project was completed in FY 1973 and had linkages to existing state investments in the oil sector such as TAZAMA pipeline. Metal Fabricators of Zambia (ZAMEFA) was also established to produce copper wire in a joint venture between INDECO and a consortium including Phelps Dodge and Continental Ore Corporation, both of the United States. ZAMEFA was an example of the forward linkages which the Government had encouraged the copper producing companies to pursue. Enterprises were established to supply motor vehicles. 160 Livingstone Motor Assembly was setup with Fiat and Intersomer to assemble cars, and Motors Parts Distributors was formed with investment from Grindleys Bank to distribute spares for these models. INDECO also established Kapiri Glass in partnership with Coutinho Curo of West Germany to produce bottles; Luangwa Industries with Atlas Cycle Industries of India to produce bicycles and Mansa Batteries to produce dry-cell batteries with Oy Ariam of Finland. General Pharmaceuticals was also established, wholly under INDECO ownership, to produce intravenous fluids.

INDECO also invested in its existing companies. In FY 1975, for example, INDECO reported work on expanding Nitrogen Chemicals plant, the expansion of three milling plants and the rehabilitation of another, the installing of oil seed refining and processing facilities at ROP (1975), the expansion of Supa Baking's bread producing plant, the installation of new equipment at Kabwe Industrial Fabrics, and the completion of two brickworks by Zambia Clay Industries. In response to the difficulties which emerged in the second half of the 1970s, INDECO reevaluated a number of its investments. Plans for a vehicle assembly plant at Kassama were abandoned in 1979, and the brickworks at Nega Nega and Kalulushi were closed in 1978 and 1980 respectively.161 Although INDECO remained the primary instrument in the state sector for the diversification of theZambian economy, from 1980, its emphasis moved towards consolidation and the rehabilitation of its existing investments. As its 1980 Annual Report (1980, p.11) noted;

The financial burden on Indeco from these capital projects has become too heavy to permit immediate further large expansion. Consequently, it is desirable that most of the Group's attention and investment should now go towards consolidation, solving current prevailing problems, and modernizing and expanding existing capacities to maintain and improve production efficiency as well as to meet growth in demand.

During the 1980s, INDECO was unable to continue the rate of expansion that it had achieved in the previous decade. The establishment of new enterprises was limited, with United Milling, Choma Milling and Zambia Ceramics, set up in the first half of the decade and Zambia Coffee and Zambia Maltings, established in the second half. All of these new enterprises were wholly owned by INDECO, and, with the exception of ceramics manufacture, all involved the processing of domestically produced agricultural produce.

Despite the new industrial developments that it had undertaken, critics have argued that the implementation of an import substitution strategy through INDECO failed to break the established imbalances in the economy. Seidman (1979) argues that INDECO catered for the existing demands for luxury consumer goods, whose production was characteristically capital intensive and import dependent, rather than reorienting production towards indigenous needs. Bhagavan (1978) extended a similar analysis arguing that the State enterprise sector was overly capital intensive and had failed to break with the private enterprise patterns of concentrating on the production of luxury and export goods in line-of rail provinces.

The strategy of INDECO was to be involved in established sectors in order to raise the funds for diversification into new industries and locations. The primary issue this raises, therefore, is not the pattern of what INDECO produced, but of how it invested. Bhagavan makes no distinction between new projects established by the state sector, and existing enterprises taken over by the state sector, whose location and structural decisions were pre-determined in the private sector. Reviewing the 36 projects undertaken by INDECO during the period of the Second National Development Plan (1972-6), Simwinga (1977) reported that 17 were initiated by Government instruction and in 8 of those projects the Government instructed INDECO as to their location The degree of discretion over the choice of location which was left to INDECO, was in fact even more limited than this suggests, since a number of the projects examined involved extensions to existing plants for which the location was fixed.

This section has concentrated its attention on the industrial projects that were established by INDECO. Such an approach, however, fails to identify projects which could have been beneficially established, but which INDECO failed to introduce. In this context, the case of the steel sector may be discussed. Alongside the establishment of fertiliser production, the Seers Report had identified steel production as a particular sector in which the Government could contribute to establishing domestic production.

Although a plan had originally been agreed in 1964 for the construction of a mill to process local scrap metal and imported billets, this was superseded by plans to establish an integrated iron and steel industry which could utilize local supplies of iron ore and coal. The First National Development Plan (1966-70) identified this as a project of "national importance," allocating to it 44.82 percent of the projected capital expenditure on commerce and industry under the plan.

INDECO, which was responsible for the project appraisals, reported in 1967 that the evaluation of iron ore deposits had been disappointing and that revised estimates of the capital and operating costs of the plan were higher than had been initially thought. 172 The commercial viability of the plan has also been questioned by Fortman (1971, p.216-7), who calculated that the domestic market for steel in Zambia provided less than half the level of demand for steel which would be required for the plant to produce at an efficient scale, while also requiring a larger supply of coal than Zambia could provide internally.

New proposals were drawn up which aimed to establish an iron and steel works in North Western Province by Technical Industrial Kulumbila Associate Ltd. (TIKA), a company in which the Government held 20 percent of the equity, and UNIP's own company, Zambia National Holdings, held 80 percent of the equity. Work on the project was to have commenced in 1975, but it was not until late 1979 that it was announced that the project had failed to be established, despite costs of K15 million having been incurred by the Government.

The responsibility for establishing steel production returned to INDECO in the 1980s and the Zambia Steel and Build Supplies subsidiary of INDECO produced plans for the establishment of a steel re-rolling mill to process steel billets imported from Zimbabwe. While the plant itself could provide for up to three quarters of local demand, it could also provide a downstream connection for any subsequent established iron and steel works. The project was included in the Fourth National Development Plan (1989-93), but was never implemented.

Although the establishment of an iron and steel industry had been emphasized by the Government and by independent advisors as an important part of the construction of a diversified industrial structure, INDECO and other state agencies failed to establish it. This failure is open to number interpretations. If steel production did offer material benefits to the economy and could have been established as a viable industry, INDECO would appear to have failed in providing a vehicle for such diversification. However, INDECO undertook a number of studies to determine the feasibility of various proposals, which may indicate that despite the potential benefits of steel production, no project was considered viable. Certainly, the viability of an integrated iron and steel project was open to question, and INDECO was not involved in the unsuccessful TIKA venture. When a re-rolling mill was proposed by INDECO in the 1980's, it reflected a less ambitious proposal, and in its sourcing of imported billets from Zimbabwe, was one which would not have been acceptable before 1980. That this scheme was not implemented may reflect the limited scope of INDECO for establishing new enterprises in the 1980's.

Problems and Rehabilitation

While the Zambian economy faced severe problems from the mid-1970's, as early as FY 1972 INDECO drew attention to the rising costs of inputs and difficulties of obtaining imports and warned of its liquidity problems, stating that "some new projects will have to be shelved as a result of lack of funds." In FY 1976 it further warned that "The viability of Indeco in the last three years has been a matter of serious concern... Indeco is far too strategic in our economy to be allowed to go under."

Two problems frequently identified in INDECO Annual Reports were

·         Government restrictions on pricing

·         Shortages of foreign exchange to purchase inputs.

Many of INDECO's products were subject to formal price controls, although even where this was not the case, price rises required ministerial and cabinet approval. The process through which prices were adjusted was also slow and cumbersome. As UNDP/ILO (1978, p.58) noted "the Prices of INDECO companies are first submitted to INDECO for approval. The prices of parastatal goods and services then go to their various ministries for detailed assessment, which is circulated to other ministries concerned, who are asked to comment. Three or four weeks later these comments are added to the assessment, and the matter goes to the Cabinet for decision," the result of this process being that "by the time new prices are set, they have often been overtaken by further cost increases."

In addition, many INDECO subsidiaries with accounting losses made large contributions directly to Government revenue through sales and excise tax payments. For the enterprises concerned, however, such arrangements meant "creating an ongoing loss situation for many subsidiaries, with consequent loss of reserves, non-replacement of plant and machinery and further loss of efficiency." In 1976 the Corporation stated that;

Indeco must work towards becoming self-financing. This will not be achieved unless the Government reconsiders its present price policy... Indeco companies can no longer continue operating under this situation without risking collapse.

Although producing goods previously imported, many enterprises were still dependent on imports of raw materials and intermediate inputs. The downturn in the copper markets reduced Zambia's supply of foreign exchange and, alongside the problems of transportation, restricted the availability of imports. This situation was made worse by the low levels of foreign exchange that were generated by INDECO itself. While INDECO was allocated foreign exchange to the value of K115 million against its requirement of K246 million in 1981 and 1982, it had by comparison only generated K0.6 million itself. 186 Enterprises found themselves short of materials or unable to obtain spare parts for machinery, and had to operate below capacity. In 1979 and 1980, rates of capacity utilisation were below 50 percent at Livingstone Motor Assembly, Mansa Batteries, ROP, Zambezi Sawmills, Choma Milling, INDECO Milling (stock feeds), National Breweries and RUCOM Industries.

Many of the factors that determined the performance of INDECO subsidiaries affect wholly owned companies and joint ventures alike. The unpredictable allocations of foreign exchange and approval of price rises affected the performances recorded by enterprise year to year. 197 Commenting on INDECO's performance, the National Commission for Development Planning noted that "It is characteristic that the main profit makers were companies whose prices were not Government controlled, whilst the biggest losses were incurred by those subsidiaries which produce essential commodities and/or which had not been allowed to charge economic prices in spite of all official pronouncements to the contrary.

The under-allocation of foreign exchange to one enterprise could also give rise to secondary effects at others. Kabwe Industrial Fabrics' shortage of materials in 1983, for example, caused a shortage of packaging for Nitrogen Chemicals of Zambia, and consequently a shortage of fertilisers for the agricultural sector.

The only persistent loss maker not wholly owned by INDECO was Livingstone Motor Assembly in which the Italian companies, Fiat and Intersomer held 30 percent of the equity. Although it made early progress in localising the supply of paint, tyres and batteries, it remained dependent on foreign suppliers for the kits from which cars were assembled. The downturn in the enterprise's performance began in FY 1975 following the decline in foreign exchange availability and persistent losses were recorded after FY 1976.

Mismanagement and poor corporate governance could also contribute to poor performances. A report on Crushed Stone Sales by the Auditor General in 1982 revealed a poor record of protecting the assets of the company. The sale of plant in Kitwe had not received the approval of Directors or been put out for tender. The audit revealed monies owed by former employees, sales receipts which had not always been banked or otherwise accounted for, and provisions for bad debt which included amounts due from ZIMCO and INDECO. The Company had recorded losses in each year since FY 1976, which at a cumulative value of K4 million' far exceeded the share capital of K1.6 million Current liabilities had exceeded current assets since FY 1977, and the Auditor General doubted the ability of the enterprise to meet its obligations for debt repayment.

In the context of the structural adjustment policies of the mid-1980s, INDECO undertook a number of initiatives aimed at strengthening the Group's commercial performance. As part of a World Bank Industrial Rehabilitation Project, an Economic Evaluation Unit was established within INDECO in December 1985 to review its existing and proposed investments, in order to ensure their viability. In conjunction with this, outside consultants undertook reviews of a number of subsidiaries and made recommendations for their rehabilitation. The Group also published financial objectives for the three years, FY 1986 to FY 1989, which were to achieve a growth in earnings per share of 10 percent per annum; obtain a return on capital employed of 20 percent; contain total borrowings at under twice shareholders’ funds and at less than 60 percent of total assets and maintain a ratio of current assets to current liabilities of over 1.25:1.

Private enterprise also began to play a greater role in the management of state enterprises, and management contracts were agreed for a number of enterprises including Nitrogen Chemicals, Livingstone Motor Assembly, Zambia Breweries, Luangwa Industries and Zambia Poultry Products. Policy toward increased equity participation by private enterprise was, however, less certain. While Heineken was refused a request for equity participation in Zambia Breweries, an agreement was negotiated for Heinz to acquire 49 percent of the equity and management control of a plant of ROP, which was incorporated independently as Premium 0il.

As outlined above, INDECO group performance began to recover between FY 1983 and FY 1986, and strengthened in the period to FY 1989. The UNDP (1986, p.106) noted the decontrol of prices as a factor in INDECO's improved performance, alongside capital restructuring and tighter management controls, and INDECO (Annual Report, 1982, p.5) welcomed "the concept of economic prices [which] is fast becoming a reality," stating in 1984 that decontrol had allowed enterprises to operate on a viable basis and to generate funds for reinvestment. 210 Despite this, profit margins over the direct costs of bought-in materials fell between FY 1982 and FY 1986. 211 This casts doubt on the extent to which the INDECO group took advantage of the decontrol to raise prices, as does the Group's record of improved rates of profit in FY 1988 and FY 1989, when price controls had been reintroduced. 212 However, structural adjustment policies also brought new problems to INDECO. Devaluations raised the costs of imported inputs, while the foreign exchange auctions reduced the supply of foreign exchange to INDECO by 40 percent, and companies such as Zambia Steel and Building Supplies, which had been persistently profitable, faced liquidity problems.

One factor in the recovery in Group profitability at the end of the 1980s was the decrease in enterprises which recorded losses. 214 In FY 1988 only three subsidiaries recorded losses and in FY 1989 only one did. Changes in the composition of INDECO after FY 1985 also contributed to the recovery. Technical and design faults in an extension to the plant of Nitrogen Chemicals Zambia resulted in the plant operating at under 50 percent of capacity and recording losses in FY 1983, FY 1984 and FY 1985. These were material to the performance of the INDECO Group as a whole. 215 After FY 1985, Nitrogen Chemicals was demerged from INDECO and placed under the direct control of ZIMCO. Livingstone Motor Assembly also ceased to be a subsidiary of the Group in FY 1988, with the entry of the UNIP owned Zambia National Holdings as a new shareholder and the enterprise changed to the status of an associate company of INDECO.

Conclusion

The primary objective of the strategy pursued through state enterprise was to create a diversified industrial sector. This required that state enterprises maintained their commercial viability and generated sufficient profits for reinvestment and the pursuit of the other objectives specified by the Government. This Chapter has argued, however, that from the mid-1970s, the sector failed to generate the level of resources required to achieve this. Increasingly, the continued viability of the existing enterprises within the sector became a cause for concern, and the resources for further investment became minimal.

The primary determinant of the period as a whole was the effect on Zambia of the declines in the price of copper from the beginning of the 1970s. Although the strategy of the government was to encourage the development of a diversified economic structure, this had not been achieved when the copper revenues began to decline. In addition, the fall in copper revenues also removed from the state enterprise sector its primary source of funds to undertake this diversification. The Zambian government initially sought to insulate the domestic economy from the full extent of the decline, a strategy which proved unsustainable as it became clear that the trend in copper prices was no longer cyclical. From the end of the 1970s, the conduct of Zambian economic policy became increasingly reliant on the conclusion of agreements with the World Bank and the IMF, aimed at adjusting the Zambian economy through economic liberalization. The Zambian government, however, remained unconvinced that these policies could generate economic recovery, and sought alternative means of adjustment. None of these resulted in the restoration to the Zambian economy of the level of growth which had been experienced in the late 1960s.

The main source of profits within the state enterprise sector was the state mining companies. Alongside the problems faced by the Zambian economy as a whole, the copper mining industry also encountered geological problems which lowered output and productivity. Although the companies recorded considerable success in reducing the costs of copper production in response to the decline in the international price, they were constrained, by both technical and policy factors, in the methods through which this could be achieved. After further falls in the copper price at the end of the 1970s, a number of more far-reaching measures were undertaken. These included the creation of ZCCM and the formulation of a Production and Investment Plan with the World Bank and external consultants. Although these initiatives halted further decline in the viability of the mining industry, it remained in need of substantial new investment, and was not in a position to provide funding to other sectors. Within the state enterprise sector the primary responsibility for industrial diversification was placed with INDECO. In the 1970s INDECO continued to expand through establishing new industrial projects and enterprises. However, increasingly this effort was undermined by problems of liquidity and in the 1980s the Group increasingly turned its attention to the rehabilitation of its existing enterprises. It has been demonstrated that the performance of the enterprises within INDECO was subject to a wide variety of factors. While cases have been cited in which the policy objectives of government, such as price controls, placed significant costs of certain subsidiaries, in other cases factors such as poor management undermined their performance. In the mid-1980s INDECO and the Zambian Government undertook a number of initiatives to rehabilitate a number of the subsidiaries and to strengthen the overseeing of the holding company. While the performance of the Group as a whole improved during the late 1980s, it did not provide the basis for a renewed expansion.

BANK of Zambia(BoZ) Governor Michael Gondwe says the Government’s plan to introduce the Industrial Development Corporation (IDC) will succeed in triggering job creation and generally drive economic growth forward, once the concept is implemented properly.

Speaking when he appeared before the Parliamentary Committee on Economic Affairs, Energy and Labour in Lusaka yesterday, Dr Gondwe said the IDC would help forge the economic agenda for the benefit of Zambians.

Dr Gondwe was appearing before the Committee which is chaired by UPND Siavonga Member of Parliament, Kennedy Hamudulu, to discuss the status of employment statistics in Zambia.

Dr Gondwe who was responding to UPND Mazabuka Central MP, Garry Nkombo, who wanted to know whether the IDC would work to better the economy, said the IDC was another vehicle which Government could opt to implement as a tool to foster growth as well as create employment.

“In my view the IDC is an effort to look at how best to grow the economy and not entirely depend on the private sector and certainly when properly implemented, it (IDC) will help the economy and divert the country towards inclusive growth, which the private sector cannot do,” he said.

Dr Gondwe also said that the target set by Government to create 200, 000 jobs was highly attainable especially with the improved investment climate in the country.

References

Craig, J. R. (March 1999.). State Enterprise and Privatisation in Zambia 1968 - 1998. Leeds: Department of Politics The University of Leeds.

INDECO. ( 1967). Annual Report (p.27).

Libby & Woakes. (1980). Humanism.

Martin. (1972). The case of the nitrogen fertiliser factory (p.67).

Zambia, G. o. (1966). Discussions and evaluations of the plan presented by Jolly (1971b), Fry (1980) and Bell (1981, p.5-18). Government of the Republic of Zambia .