RAID | Rights and Accountability in Development...questions on accountability. Secondly, that the affect of privatisation on the four-fifths of the Zambian population who live below

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This collection of Fact Sheets has been designed and written to inform people in Zambia and elsewhere aboutprivatisation in that country. With the requirements of community-based activists in mind, they present information onall aspects of privatisation: from why privatisation has been undertaken; through who is in charge of the programme andhow it has been carried out; to its immediate and longer term impact. The aim is to provide a framework, so that peoplecan better situate their own experience and relate it to the wider picture of what is happening. Two issues are of primaryimportance:

� Firstly, that people should be given the full facts on privatisation by both those in charge of the process andby the new owners in the private sector. The Fact Sheets, by outlining what information should be available inthe public domain and highlighting both secrecy and apparent malpractice, will assist people in asking their ownquestions on accountability.

� Secondly, that the affect of privatisation on the four-fifths of the Zambian population who live below thepoverty line is given the attention that is warrants. Privatisation has had an adverse impact on the enjoyment ofbasic social and economic rights in Zambia because, in the race to deregulate the economy and sell-off the stateowned sector, little or no attention has been given to who shoulders responsibility for social provision.

��Rights & Accountability in Development

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�� - What is privatisation?

�� - Who is in charge of privatisation?

�� - Will privatisation help make Zambia wealthy? - Money & Investment

�� - Will privatisation make Zambians wealthy? - The new owners

�� - Job creation or job losses?

�� - Has privatisation been conducted in the best interests of employees?

�� - What assistance is there for retrenchees?

�� - Have people’s social needs been forgotten? - The economy & poverty

�� - Have people’s social needs been forgotten? - Poverty in Zambia today

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What is the purpose of these factsheets?

This set of Fact Sheets look at privatisation, the processby which the Government of Zambia is selling off stateowned industries and enterprises to new private sectorowners - often overseas companies or wealthy Zambians.They ask questions about privatisation and give answersabout what it means for millions of Zambians.

This Introduction will:

� Introduce six Zambian citizens so that the real impactof privatisation can be considered through theirexperiences.

� Tell you what information can be found in the otherFact Sheets.

Six Zambians

Above all else, privatisation is not a distant process ofconcern only to politicians and businessmen in Lusaka orthe Copperbelt. It has a real impact on people's livesthroughout Zambia and will affect individuals and familiesdifferently depending upon their personal circumstances.There will be winners and losers. That is why it isnecessary to introduce six Zambians, all from differentwalks of life, when considering the rapid pace ofprivatisation in Zambia today. In the Fact Sheets whichfollow, the impact of privatisation will be looked at fromthe point of view of these Zambians and their families.

The citizens described overleaf do not, strictly speaking,exist. However, they are not entirely made up either.There are many people in Zambia today whose livesmirror the stories of these characters. Indeed, thesituations described are drawn together from listening andtalking to real people.

What information is in the other FactSheets?

What is privatisation?� Privatisation defined� A positive view� A negative view

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Have people's social needsbeen forgotten? - The economy& poverty� The promise of economic

growth and the alleviation ofpoverty

� The social impact ofeconomic adjustment

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What assistance is there forretrenchees?� Assistance for the

unemployed� The informal sector

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Has privatisation beenconducted in the best interestsof employees?� Employment conditions and

a fair wage

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Job creation or job losses?� How many have lost their

jobs already?� Future employment or

further unemployment?

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Will privatisation makeZambians wealthy? - The newowners� Who are the new owners?� Who will get richer?� Will ordinary Zambians

benefit?� The myth of popular share ownership

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Will privatisation help makeZambia wealthy? - Money &Investment� Where money from the

sell-off has gone� Prospects for new

investment� Revenue for the Government

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Who is in charge ofprivatisation?� Zambian Privatisation

Agency� The role of the Government

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Have people's social needsbeen forgotten? - Poverty inZambia today� The extent and severity of

poverty� Poverty and access to

health, education & basicservices

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Have people's social needsbeen forgotten? - Policies tocombat poverty � The adequacy of

Government action� The responsibilities of the

international donors

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Have people's social needsbeen forgotten? - Privatisation& social services� Determining responsibility

for services under the newowners

� The housing crisis &resettlement

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Your right to information - 10urgent questions� What you have a right to

know� Questions which need

answers

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What is privatisation?

Privatisation refers to the sale or transfer of control ofenterprises which were formerly owned and run by theState to companies in the private sector. Under the SecondRepublic of Kenneth Kaunda, Zambia became one themost heavily nationalised economies in Africa. Hencesome 152 state-owned enterprises are in the process ofbeing privatised and sold off as 331 separate companies orunits.

Although enterprises are often transferred in their entiretyfrom national ownership to the private sector - as is mostlythe case in Zambia - privatisation can take differentforms. For example, a government can sell the controllinginterest to a private sector company, but still keep asignificant shareholding itself. The Zambian Governmenthas kept an interest in some of the larger enterprises whichit intends to sell to Zambians at a later date. A state ownedenterprise can also be run on a management contract orleased to a private sector company which takes the profitsfrom the operation but never owns it outright. The formerGovernment run tourist lodges and camps have beenprivatised in this way.

Why is there a need to privatise and sellZambia's state owned enterprises?

There is a widely held view among economists, especiallythose in the World Bank and IMF, that nationalisedindustries cannot compete in today's global market andthat the only way to achieve development is to harness thedynamism of the private sector. Development through theprivate sector in a free economy is seen as the way ahead.The MMD Government in Zambia agrees with thisthinking.

The prevailing view is that State owned enterprisesoperate in an economy which is regulated by governmentand hence they are shielded from the real world ofcompetition in the market place. If a private businessmakes a loss, and if this loss is sustained over a number ofyears, then the business will close. A private businesswhich breaks even or which only makes a small profit mayalso be in danger of closing down as it will not be able togenerate the capital to invest in new machinery or recruitthe new talent it needs to stay ahead of its competitors.

State owned enterprises do not face the same commercialpressures. A government can artificially protect the marketfor their goods by either fixing prices or by excludingforeign goods from the market by imposing tariffs or taxes

on imports. A government may subsidise state ownedenterprises from its revenue to ensure that companies keeprunning and that employees keep their jobs. A governmentcan borrow money against the more profitable companiesit owns either to support poorly performing companies orelse to pay for its own increased expenditure.

The problem is that all these practices are unsustainable.Businesses become run-down because money whichshould have been used to invest in the firm has alreadybeen spent. The State owned sector ceases to make a profitand instead incurs losses.

The only way the government can bail an industry out is toabsorb these losses. This inevitably means borrowingmoney from overseas and increasing the government'sburden of debt. Once these debts have been serviced andthe interest paid, the government is left with far lessmoney available for public expenditure. If it refuses to paythe money back, then banks and donors will beincreasingly wary about lending any more money.

How do you break this cycle and reversethe decline in State owned industries?

It is widely believed that two steps are needed to breakthis cycle.

The first step is to `liberalise the economy'. This meansremoving most of the measures which previous ZambianGovernments had put in place to artificially protect stateindustries. Liberalisation is the process by which foreignfirms and the private sector are allowed to compete on thesame terms with domestic companies and state ownedenterprises.

For example, since 1991, the MMD Government has:

� eliminated subsidies and price controls, removedcontrols on the quantity of imports allowed into thecountry and reduced customs duties and tariffs;

� brought in legislation to protect privately-ownedassets from expropriation. This was necessary toreassure investors in Zambia that the businesses inwhich they are investing will not be taken over by theGovernment in the future as has happened in the pastunder the nationalisation programme.

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� Set up a Securities and Exchange Commission and theLusaka Stock Exchange so that shares in thoseprivatised companies which ‘go public’ can be readilybought and sold.

� Allowed the market to freely determine interest ratesand exchange rates.

� Abolished foreign exchange regulations. This meansthat companies are now free to bring in foreign moneyfor investment but also to take out foreign exchangemade by their Zambian operations and send it to theircorporate offices or shareholders in other countries.

� Allowed foreign shareholders to keep all profitswithout further deductions after tax.

� Reduced individual and corporate taxes, as well asintroducing high capital allowances.

It is argued that this first step of liberalisation is needed inorder to attract foreign investment into Zambia and also toensure that businesses in Zambia are competitive. It is onlyon this basis that they will be able to both supply goodsand services at reasonable prices to Zambians and also becompetitive in export markets where increased sales willbring foreign exchange into the Zambian economy.

The second step is to privatise the state owned enterprisesthemselves so that both Zambian and foreign investors andcompanies can buy them and run them at a profit. This isexpected to happen after they have injected the necessarycash and expertise to make each company competitiveagain in the free market which has been created byliberalisation.

Many argue that the high price to be paid for liberalisingthe economy and for unconstrained privatisation isincreased uncertainty for many and impoverishment forothers. This view will be looked at in a moment. First, letus consider what privatisation can do to benefit Zambia.

A positive view of privatisation

Privatisation is based on the belief that commercialenterprises are better run by business people in privatesector companies than by government.

The sale of those state owned enterprises which are viablewill attract new investors to Zambia. The sale itself willgenerate revenue for the Government but, moreimportantly, it will also bring new money into the countryfor badly needed investment in equipment, machinery,modern management and in re-skilling the work force.

In order that certain industries regain their competitiveness,there may be some initial rationalisation of the labourforce. Uncompetitive industries may go into liquidation.However, the revenue generated from the sale of goingconcerns ought to help to cushion redundancies andprovide resources for retraining and a social safety net toget retrenchees through short term difficulties.

The real boost to the economy is brought about as soon asthe new investment begins to increase productivity andgenerate profits, a significant proportion of which willcome from export sales in markets in which the newcompanies have considerable knowledge and expertise.Local suppliers of goods and services will benefit from

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supply contracts. The government will gain money forpublic expenditure directly through moderate corporatetaxes and indirectly through income tax as employmentexpands.

Increased employment opportunities will create a demandfor labour which will ensure that employees are paid amarket wage in the formal sector. Many employees andcouncil tenants will have bought their houses atadvantageous prices and will have the security of an assetwhich will increase in value in a vibrant economy. Homeownership will provide the local council with an incomethrough domestic rates, to top up their grant from centralgovernment, enabling them to invest in improved localservices and amenities. Furthermore, as workers spendtheir pay packets in the local economy, traders andproducers in the informal sector will also benefit.

A negative view

There is another bleaker side to liberalisation andprivatisation, one with which many ordinary Zambians willidentify. This is because there are costs as well as benefits.

Liberalisation will lead to redundancies. Inefficientcompanies will close as the economy opens up tocompetition. Many loss making State owned enterpriseswill be liquidated and closed prior to privatisation.

Privatisation itself will lead to further job losses as the newowners will want to increase efficiency and productivity byreducing overmanning in the labour force. Retrenchmentswill swell the informal sector, which already accounts foreighty per cent of economic activity within Zambia, andincrease the incidence of poverty.

At the same time, economic reform has meant a squeeze ongovernment expenditure. Hence user fees are alreadycharged for access to health care and education. This hashappened precisely at a time when those in need can leastafford to meet these costs. Social provision which wasprovided by the former parastatals is now uncertain as thenew owners may wish to shed these responsibilities. Theburden of providing these services will therefore shift tocentral government, private firms or local councils. Towncouncils have already seen the amount of money they getfrom central Government significantly reduced. They havebeen compelled to sell their council housing stock. Thishas drastically reduced their rental income. The overallresult is that town councils will find it very difficult tomake sure people - and especially the poor - get safe waterand sanitation. Private water companies are not ready to

take on provision and are, in any case, geared towardsconsumers with an ability to pay. Similarly, centralgovernment, with depleted resources for publicexpenditure, cannot meet the need for decent hospitals,clinics and schools.

Many individuals have bought or are buying houses, inmany cases using money from their terminal benefits to doso. On the loss of their jobs they are then left with little orno money for their immediate needs. For the first time theyare faced with rates and maintenance costs for their homeswhich they never had to pay in the past when the houseswere council or company owned.

Some will be left with little choice but to either sell or renttheir homes, moving themselves and their families to livein squatter settlements with all their attendant insecurities.Was not privatisation meant to attract foreign investment,increase employment and generate Government revenue toprovide for better social services available to all?

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Which of these views of privatisation ismore accurate?

The only way to decide who stands to gain more and whostands to lose more under liberalisation and privatisation inZambia is to look at:

� How the process is being managed in Zambia. This isexamined in Fact Sheet 2:

Who is in charge of privatisation inZambia?

� The benefits and costs in moredetail. This is done in Fact Sheets 3 to 5.

Job creation or job losses?

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Will privatisation makeZambians wealthy? - The newowners

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Will privatisation help makeZambia wealthy? - Money &Investment

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Have people's social needsbeen forgotten? - The economy& poverty

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What assistance is there forretrenchees?

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Has privatisation beenconducted in the best interestsof employees?

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Have people's social needsbeen forgotten? - Poverty inZambia today

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Have people's social needsbeen forgotten? - Policies tocombat poverty

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Have people's social needsbeen forgotten? - Privatisation& social services

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Who is responsible for privatisation inZambia?

On paper, in the written laws of Zambia, it is a body calledthe Zambia Privatisation Agency (ZPA) which isresponsible for privatisation. It was established bylegislation known as the Privatisation Act (1992). Itspurpose it to plan, manage, implement, and control theprivatisation of State owned enterprises by selling them tothose with the expertise and capital to run them on acommercial basis.

Is the ZPA open and free fromGovernment interference?

This question can only be answered by examining the facts.

On the one hand, positive claims are made for the ZPA:

� Although the ZPA is a government agency, itmaintains that it is both transparent and as independentor as free from political manipulation as possible.

� Decisions on privatisation are taken by the Membersof the ZPA, in effect a board of directors. Of thetwelve designated positions, only three are reservedfor government. These are the Permanent Secretary ofthe Ministry of Finance; the Permanent Secretary ofthe Ministry of Commerce, Trade and Industry; andthe Attorney General.

� The remaining nine positions fall to representatives ofcivil society and the private sector. This includesprovision for the business community, the unions andthe churches.

� At the head of the Members of the ZPA board is aChairman and Vice-Chairman, both of whom areelected by the other members. The two governmentPermanent Secretaries are ineligible for these twopositions.

On the other hand, there are opportunities for politicalinfluence built into the Privatisation Act:

� Although the Privatisation Act determines whichorganisations are Members of the ZPA, eachindividual representative is appointed by the President,having first received the approval of a SelectCommittee of the National Assembly.

� Some of the positions on the ZPA board are empty. Asof 31 December 1997, the Law Association of Zambia,the Bankers Association of Zambia, and the Churchesof Zambia were not represented. This situation wascriticised by the Parliamentary Committee on PublicInvestments tasked with preparing a special report onprivatisation which it put before the House inDecember 1997.

If the ZPA board is so important, whyare these positions vacant?

Each organisation will have its own reasons as to why ithas not sent a representative. However, it is true to say thatthe Members of the ZPA board do not have as muchcontrol over privatisation as might first be imagined.

Who has the final say over privatisationand who runs the ZPA on a day to daybasis?

Under the Privatisation Act, it is the Cabinet which:

� decides and issues policy guidelines on how theprivatisation programme is to be implemented;

� and which approves the divestiture sequence plan.This is the list of which State owned enterprises are tobe privatised and the order in which they are to besold.

It is then left to the ZPA to advise on the mode of sale ineach case, although again it is the Cabinet which has finalapproval over the mode chosen.

It is specified in the Privatisation Act that the Members ofthe ZPA need only meet once every two months. It istherefore the ZPA management which takes decisions onthe day to day running of the privatisation programme andmakes recommendations to the Members. ZPAmanagement comprises the Chief Executives Office,headed by Mr. Valentine Chitalu, and senior staff in thetechnical directorate. The latter is responsible for theoperational side of ZPA, to include responsibility for allprofessional functions. Support services are supplied by anadministrative directorate.

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How is the sale of each State ownedenterprise carried out?

The most common way in which large State ownedenterprises are sold is through the private sale of sharesthrough negotiated or competitive bids. This means thatprivate sector companies or even individuals can makebids based on how much they believe a business is worth.

When a company is to be sold in this way by tender, eachbidder must first pre-qualify by demonstrating that theyhave the necessary financial resources, managementcapacity, and business experience to buy and run theenterprise in question. A ZPA investigating team may alsoexamine the company profile of prospective bidders,seeking information from industrysources, accountants, even foreignembassies. The idea is to preventZambia's industry from fallingunder the control of investors with adubious background or a poor trackrecord.

A Confidential Information Memorandum (CIM) on theenterprise in question is prepared by one of ZPA's teamsof business analysts as part of a `tender package'. Thisgives prospective buyers all the information they need inorder to assess the worth of an enterprise through what arecalled due diligence studies. These involve a carefulexamination of the company information which is suppliedand site visits if these are arranged in advance throughZPA.

Each bidder has four to twelve weeks to carry out thisassessment and then make a bid. Bids are placed in sealedenvelopes and deposited in padlocked metal tender boxesat the ZPA offices. All bids are then opened in public.

What are the other ways in which aState owned enterprise can be sold?

Other ways of selling a business can be recommended bythe ZPA for Cabinet approval. These include:

� the public offering of shares;� the offer of additional shares in a State owned

enterprise to an existing shareholder to reduce theGovernment's holding;

� the sale of the assets and business of a State ownedenterprise, which will thereby cease to exist in its ownright;

� management or employee buyouts;

� lease and management contracts whereby a privatesector company runs a State owned enterprise for aspecified period.

How can the ZPA make sure a goodprice is secured for Zambia's nationalcompanies?

Many buyers will offer a low price while the ZPA isrequired to ensure each enterprise is sold for its marketvalue. To assist in achieving this, each enterprise must bevalued by independent assessors.

For State owned enterprises which are going concerns, thisvalue is based upon what they arelikely to earn in the future. This isthe theory. In practice, the ZPAconcedes that, ultimately, themarket value of an enterprise isdetermined by the price someone

is willing to pay for it and the price which the seller iswilling to accept. By this definition, the `market value'realised may be significantly below the independentvaluation. Furthermore, as only the bids and eventual saleprice are published, the public is none the wiser as to thereal value put on the enterprise by the independentassessors.

For businesses which are not going concerns, the valuationis based upon how much all of its assets - such asbuildings, land, machinery, vehicles and furniture - areworth. Again, the valuation is carried out by independentassessors but, once more, details of the valuation areseldom published so it is difficult to gauge whether theeventual money paid for the assets is a fair one.

Who is responsible for selecting the bestbids?

Once the bids have been opened in public, an evaluationteam within ZPA assesses each of them in turn. Theevaluation team is made up of two or three ZPA staff anda consultant.

In evaluating each bid, consideration is given not only tothe price offered, but also to the commitment of potentialbuyers to develop the enterprise and to their ability to doso as shown by their track record.

The team then meets with the ZPA management beforepresenting its Bid Evaluation Report andrecommendations to the Members of the ZPA board. TheMembers approve a short list of bidders and invites thoseselected to further negotiations.

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Who is responsible for negotiating eachsale?

For each sale, ZPA management is assisted by anindependent negotiating team whose appointment isapproved by the Members of the ZPA board. This alwayscomprises an independent chairman, a lawyer, at least twotechnical consultants from ZPA staff, and specialistconsultants/advisers, as required.

The negotiating team liaises and bargains with eachselected bidder and eventually hammers out a deal withthe selected buyer. Overall, the team is responsible forsecuring the best possible deal and for ensuring thatagreement is reached on all issues of concern to theGovernment of Zambia. These include making sure thatthe new owners honour existing conditions of work andpledge to make agreed investments in the business.

Is the use of independent negotiatingteams ensured in each and every sale?

The use of independent negotiating teams is a good way toavoid political interference in the sales and, by and large,negotiating teams have been appointed in accordance withthe Privatisation Act.

The ZCCM privatisation - by far the most important ofZambia's parastatals - is one notable exception.Negotiations over the sale were being led by theinternational merchant bank, N.M. Rothschild until, at theend of March 1997, Mr. Francis Kaunda was appointed bythe President, rather than by the ZPA board, to head theZCCM Privatisation Negotiating Team. This directly

contravened the Privatisation Act which was drawn up toensure the process remains free from undue politicalinfluence.

Who finally approves the sale after thenegotiating team has reachedagreement with a prospective buyer?

Once each individual agreement has been finalised by thenegotiating team, it does not come back to the Members ofthe ZPA board for approval, although both the board andthe Attorney General may review the agreement reached.

Rather, the Privatisation Act specifies that the Minister ofFinance shall sign the final Sales Agreement to transfershares to the selected bidder.

However, the process specified in the Privatisation Act isnot followed in each and every case. The sale of ZCCM isagain a case in point. In effect, a special Cabinetsubcommittee (also known as the Committee of Ministers)decides whether each sale should go ahead in line with theterms which are being agreed by the negotiating team.This subcommittee is chaired by the Minister of Finance.Its other members are the Minister of Mines and MineralDevelopment, the Minister of Commerce, Trade andIndustry, and the Minister of Energy by virtue of the saleof ZCCM's Power Division. The subcommittee keeps inclose contact with the negotiating team throughout toensure the sale is going ahead in accordance with itswishes.

Are there other ways in which theZCCM sale has not been handled inaccordance with the Privatisation Act?

ZCCM management and the Government itself, not theZPA, are handling negotiations over the sale of ZCCM.For example, the chiefexecutives of the fourmajor partners in theKafue Consortium -atthe time bidding forthe Nkana/Nchangamines - visitedLusaka. They metwith PresidentChiluba, FrancisKaunda, LukeMwananshiku, andEdward Shamutete on 15 August 1997 to press for aspeedy resolution of negotiations.

A question was asked in Parliament by Lusaka CentralIndependent MP Mr. Dipak Patel as to why theGovernment is heading the ZCCM negotiations, and notthe ZPA, as stipulated in the Act. The Deputy Minister ofMines and Mineral Development, Mr. Lembalemba, failedto answer the question or address the issues it raised.

First Quantum, a company which was unsuccessful in itsbid for the Luanshya/Baluba mine has sued the ZPA,ZCCM, the Binani Group as the new owner, and thegovernment as a fourth defendant. It alleges that its bidwas superior and that the decision to award the contract tothe Binani Group was not considered by the ZPAMembers or the sale handled by the ZPA. The companywanted a declaration to the effect that no other bodyexcept the ZPA is entitled to offer for sale any Stateowned enterprise under the Privatisation Act. Theimplication is that the decision to sell to Binani was takenby the Government and ZCCM.

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[ZCCM sale smells corruption charges Sesheke AZ MP,The Post, 3 December 1997]

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of Commerce spokesman, Times of Zambia,5 January 1998]

The chief executive of ZPA, Valentine Chitalu, is aDirector of ZCCM. Mr. Willa Mung'omba, a member ofthe ZCCM Privatisation Negotiating Team, is also aDirector of ZCCM. The Privatisation Act purposefullyspecifies that the ZPA, and therefore not the companyboard and directors of a parastatal, is to handle all sales.In the case of ZCCM, this distinctionis blurred. Similarly, Francis Kaunda,the chairman of the ZCCMnegotiating team who was appointedover the heads of the ZPA Members,is a former chairman and chiefexecutive of ZCCM. It may makesense for someone with a thoroughknowledge of ZCCM to head up theteam, but the manner of Mr. Kaunda'sappointment sent a clear message thatthe ZPA was no longer in charge of the process.

Is privatisation transparent so thatthose in privileged positions do notbenefit unfairly from the sales?

� Any member of the ZPA, or consultant to the ZPA,and their immediate families and professional partnersare required to disclose any conflict of interest.

� However, this disclosure is not made publicly but tothe Director of the ZPA who has total discretion indeciding what action (if any) is appropriate in eachcase.

� Those responsible for the implementation of thePrivatisation Programme may not participate in theprogramme except through public share offerings.

� Political leaders and public officers are required topublicly disclose their intention to bid for shares in aState owned enterprise, except in the case of publicflotation.

� Any potential investor must disclose his bid in a Stateowned enterprise, or his direct or indirect interestwhether this is in the form of a share holding or heldthrough a nominee.

� Finally, a parliamentary select committee onparastatals monitors the operations of ZPA.

What is the public entitled to knowunder the Privatisation Act about thesales?

Under the Act, the ZPA must publish certain informationby notice in the Gazette. This information is reproducedevery six months, at the end of June and at the end ofDecember, in a progress report which the ZPA must alsosubmit to the Minister of Finance. This report is presentedto the National Assembly and then published for sale tothe public. Published information must include:

� The names of State owned enterprises to beprivatised.

� the names of registered consultants, valuers, lawyers,public accountants and merchant banks dealing withthe privatisation process.

� However, you will not know bylooking at the listings in eitherthe Gazette nor in the ZPA'sprogress reports who is in eachindependent negotiating team orthe extent to which any one firmor individual is being used.

Each progress report must also list:

� The names of bidders and howmuch they are bidding.

� The successful bidders and the reason they have beenselected.

� The price of shares and any other special conditionsof sale of shares.

� Any other matters thought to be appropriate.

� However, details of how much the enterprise wasvalued at originally are not published as a matter ofcourse. This makes it impossible for the generalpublic to judge whether the enterprise in question wassold at a fair price.

� Furthermore, there is often a delay in revealing thedetails of certain deals. For example, SalesAgreements for Luanshya and Baluba mines to theBinani Group were signed on 30 June 1997; for thesale of Power Division to the Copperbelt EnergyConsortium on 6 October 1997; for the sale ofChibulua mine to the Metorex consortium on 31 July1997. However, by the end of the year no full detailsof the value of the bids received or the reason for theaward of the sale to any of the companies concernedhad been made public.

The ZPA must also submit an annual report and accountsto the Minister of Finance who presents these to theNational Assembly. This report is published for sale to thepublic.

What neither the ZPA's annual report and accounts nor thesix monthly progress reports omit to tell you is of equalimportance.

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[Times of Zambia, 3 December 1997]

� They no longer indicate how much money from thesales has been deposited in the privatisation revenueaccount - the place where all the proceeds should endup.

� Neither do they tellyou how muchmoney has gone outof the privatisationrevenue account, letalone where it hasgone to. This meansthat it is impossibleto calculate thebalance in theaccount.

The ZPA acknowledges that the privatisation revenueaccount is controlled by the Ministry of Finance and hencethe ZPA itself cannot reveal details about the amount ofmoney it contains.

All employees of the ZPA, consultants and members ofthe ZPA board must take an oath of secrecy. There arestiff penalties under the Act for the unauthoriseddisclosure of information, including heavy fines and evenimprisonment for up to five years.

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The impact of privatisation

The next two Fact Sheets 3a & 3b will look further at howthe sell-off has been handled, at what has happened to thesale proceeds, and will consider whether privatisation hassucceeded in attracting investment of the type which willallow Zambia and its people to prosper.

Taken together, the remaining Fact Sheets consider whatprivatisation means for people in three important areas oftheir lives - wealth, employment and social provision.

Has privatisation beenconducted in the best interestsof employees?

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Will privatisation makeZambians wealthy? - The newowners

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Will privatisation help makeZambia wealthy? - Money &Investment

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Have people's social needsbeen forgotten? - The economy& poverty

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Have people's social needsbeen forgotten? - Poverty inZambia today

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Have people's social needsbeen forgotten? - Policies tocombat poverty

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Have people's social needsbeen forgotten? - Privatisation& social services

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Investment in the Zambian economy

There are definitely economic benefits to be gained fromprivatisation:

� New investment - Foreign companies have the moneyto invest in the former state-run enterprises which havebeen starved of cash. This applies in particular tolarger enterprises and is typified by the mines. Forexample, ZCCM did not have the money to developnew prospects at the Kansanshi mine whereas the newbuyers, Cyprus Amax of the USA, are set to spendlarge sums on exploration. The Madhvani Group ofUganda, the new owners of Northern Breweries plc,have committed to invest at least $ 8 million in thecompany to bring it up to international standards. TheCommonwealth Development Corporation havepledged to invest $15 million on the development ofMunkumpu/Nchanga Farms over the next three to fouryears.

� According to Zambia Investment Centre (ZIC)Executive Director, Bwalya Ng'andu, directinvestment in Zambia had reached only $72 million byDecember 1997. Investment pledges made in 1997did, however, increase to $231 million and ZICestimates that over $500 million of investment will bechannelled into the mining sector over the next twoyears. This calculation was made before the recentcollapse of negotiations with the Kafue Consortium tobuy Nkana and Nchanga mines.

� But the Government is not in a strong negotiatingposition when it comes to the sale of Zambia's staterun industries. This is because many of these are not ingood commercial shape, even though they have thepotential to be profitable again in the future. Beforethis can happen, they need new investment and, inmost cases, better management. The Governmentalready has large debts with overseas banks,multilateral donors and other countries and so is not ina position to secure new loans for investment in theparastatals. The MMD Government therefore agreeswith those backing reform - the World Bank, the IMFand bilateral donors - that it must privatise. The criticsof privatisation argue that national assets are beingsold when they are not going to fetch much on theopen market in comparison to their true value giventhe right investment.

� A return to profits - The bottom-line of business is tomake money. Most of the new owners who are seriousabout business will have done their sums and will aimto make a profit from the companies they have boughtas soon as possible. This should be good for theeconomy at the national and local levels, generatingemployment and development.

� But rapid expansion of the economy and increasedincome for the government of Zambia are by no meansguaranteed. Some of the businesses will fail and, outof the others which succeed, significant profits mayend up going overseas.

This Fact Sheet 3a will consider how much money is beingrealised now from the privatisation of Zambia's Stateowned enterprises, who is responsible for managing therevenue generated, and where the money is actually going.A central concern will be the extent to which the Zambianpublic is kept informed about what is happening to thisincome which, after all, comes from the sale of theirnational assets. It will also consider the argument thatsignificant government revenue - for example, throughtaxes and duties - is likely to be generated in the future as aresult of privatisation.

This Fact Sheet should be read in conjunction with FactSheet 3b which will go on to consider another importantaspect of wealth creation, the question of who now ownsmost of Zambia's industry and businesses.

How much cash will the sales bring in?

The sale of former state enterprises might be expected togenerate money for the Government of Zambia, althoughthis will not be anywhere near as much as might beassumed.

The reason the sale will not generate much money for thebenefit of the Zambian people is because many of theenterprises are currently running at a loss and will continueto do so until the new owners invest in them. For example,over the period 1985-1989, parastatals cost theGovernment $455 million in hidden subsidies againstdividends paid to the Government of just $22 million.ZCCM has recently been running at a loss of $25 million

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every month. Hence privatisation is less to do with raisingmoney than with saving money and attracting newinvestment.

A proportion of the money generated from the sale ofsound companies has been used to pay off the debts andliabilities of other state-run enterprises. Some of thismoney will therefore go, for example, to suppliers whohave not been paid for goods or services. Other amountswill be used to pay off debts to both domestic andoverseas banks. At a conservative estimate, perhaps K5billion has gone to State owned enterprises, includingshops in the trade sector, in an attempt to maintain theirviability. Examples of companies supported by the ZPAare given in the box overleaf.

However, rather than ZPA covering the costs of companyliabilities out of the money made from privatisation, oftenthe price paid for an enterprise is adjusted in order to takeinto consideration existing debts. This means that theamount of money actually received - the cashconsideration - is often much less than the value of thesale as a whole. Consider the examples ofMunkumpu/Nchanga Farms, National Milling Company,and Cleanwell Dry Cleaners in the box overleaf.

Even if the market dictates that the prices realised are low,it might still be expected that the sheer size of the sale -involving some very large parastatal companies, as well ashundreds of small and medium sized enterprises - wouldgenerate a significant amount of capital for theGovernment of Zambia which could then be used toincrease public expenditure, for example, on retraining orsocial provision. As will become clear, this has nothappened for a number of reasons.

Who looks after the money made fromthe sell-off?

Under the Privatisation Act, proceeds from the sale are tobe deposited in the privatisation revenue account (PRA) atthe Bank of Zambia which is controlled by the Ministerfor Finance.

How much money is in the Privatisationrevenue Account?

This is a good question, as figures for the amount ofmoney in the privatisation revenue account are not madepublic. Initially, the progress reports did list how muchmoney from each sale went into the PRA, but this practiceceased altogether after Progress Report No. 7 whichcovered privatisations in the six months to the end of1995, before the bulk of the sales went through. Evenwhen deposits into the PRA were listed, no figures werepublished by the ZPA or the Ministry of Finance detailingout goings from the account or how the money generated

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was being spent. The balance of money in the PRA is notofficially stated and is therefore the subject of speculation. There is a certain amount of information which can bepieced together:

� By adding up the cash realised from each and everysale, the total amount of money generated up until theend of June 1997 is in the region of K143 billion.

� Some of this amount is on deferred payment terms,but, by the same date, at the very least K100 billionshould have gone into the privatisation revenueaccount.

� Unofficial estimates put the actual amount which hasgone into the account at less than half this figure.

� At the end of 1997, the balance in the account wasbelieved to be approximately K30 billion.

Can this money be spent in any way theGovernment sees fit?

The Privatisation Act is very clear in spelling out how theproceeds from the sale of state assets may be used by theGovernment. With the prior approval of the Minister forFinance, the money generated may be used for:

� funding the cost of privatisation and the PrivatisationTrust Fund;

� initial funding of mutual funds;� expanding existing productive capacities;� financing credit creation by the Government for

Zambian investors;� rehabilitating existing plants; supporting new capital

investments;� funding the restructuring of State owned enterprises to

be privatised;� supporting redundancy payment schemes in

consultation with the Ministry responsible for labour;� supporting alternative income generating projects;� or funding of any social project that will be in the

public interest.

Is the money being spent in the waysspecified under the Act?

Assuming the figures on revenue and the current balance inthe PRA are broadly correct, then anywhere between K70billion and K110 billion of the money generated from theprivatisation programme so far has already been spent ormoved to other accounts.It is by no means clear that this money is being put to thoseuses specified under the Act. A vital issue for the peopleof Zambia is what has this revenue, the inheritance of thepeople of Zambia, been spent on? Urgent questions need tobe asked about where this money has gone and how thefunds which remain will be used to benefit the people ofZambia.

Despite the lack of official information, it is apparent thatthe income generated has been spent disproportionately ona narrow range of uses as specified under the PrivatisationAct.

A great deal of the money from the sales has gone intopaying for the running of the Zambian PrivatisationAgency. At least K20 billion since the beginning of 1995until the end of 1997 has been used to fund the ZPA itself.A report in the press maintains that the then FinanceMinister, Ronald Penza, confirmed in a meeting withbusinessmen in Livingstone that most of the moneygenerated from the sales had been ploughed back intoZPA.

Other areas which should, according to the Act, bereceiving funds are being badly neglected, although no-onecan say for certain towhat extent. The factthat no officialfigures are availablefrom the Ministry ofFinance or the ZPAon how the money inthe PrivatisationRevenue Account isbeing spent isunacceptable. TheZambian people have a right to know how this money -which, after all, represents the proceeds from the sale ofnationally owned assets - is being spent. However, it ispossible to look at the other side of the equation and toconsider the Government's poor record of achievement incertain areas earmarked for funding under the Act.

� Support for redundancy payment schemes - TheZPA has allocated perhaps K3.5 billion directly fromthe privatisation revenue account to propping up Stateowned enterprises. Only a small proportion of this sumhas been used to ensure that terminal benefits can bepaid. At the same time, as companies are privatised,workers in some State owned enterprises have almostno option but to accept payment in kind against theirterminal benefits.

� Other workers, caught in a situation when either anexisting or newly privatised business goes intoliquidation, are last in line to receive the benefits dueto them after banks, creditors and suppliers have beenpaid out of what little money remains. They areentitled only to a small, statutory minimum. Thenumber of recently privatised companies currentlyfacing closure or undergoing liquidation, less than halfa dozen in all, is comparatively small. However, thisis of no comfort to the employees of ZambiaEngineering and Contracting Company, GeneralPharmaceuticals Limited, Kapiri Glass Products, EagleTravel, and National Drum and Can Company. Nor isit a comfort to those workers in State ownedcompanies which have closed in the run up toprivatisation. They may receive little or nothing in the

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'��8��9��[The Post, 15 February 1998]

way of compensation. Why is it not possible toallocate a fair and equitable amount of money to assistpeople who find themselves in this position as a directresult of privatisation?

� Support for income generating projects or socialprojects - To reduce the impact of retrenchmentscaused by privatisation, the Government set up aNational Social Safety Net in 1993. This program isrun under the Ministry of Labour and Social Securityand is tasked with producing a policy frameworkwithin which redundancies can be managed on anequitable basis as this relates to compensation, trainingand retraining programmes, entrepreneurshippromotion, and support for resettlement schemes forretrenchees.

� To date, the National Social Safety Net Co-ordinatingCommittee has received funding worth $500,000 fromthe World Bank and the United Nations DevelopmentProgramme. Its first four years - and virtually thisentire budget - were taken up by capacity building andinternal staff training. This means that almost nomoney at all was spent where it matters, on new socialprojects.

� So far, only 234 retrenchees have received retraining.This is a drop in the ocean when set against projectedredundancies running into the 100,000s as a result ofprivatisation, economic restructuring and the publicsector reform program. The Government funds onlythe operational costs of the Safety Net to the tune ofK200 m. Hence there is a desperate need to fundactual social rehabilitation and retraining. ThePrivatisation Act specifically allows for proceeds fromthe PRA to be spent on social projects and incomegeneration projects: why is this not happening?

Has all the money from each and everysale gone into the Privatisation RevenueAccount?

Before ZPA stopped publishing any details about the PRA,it was apparent that deposits into the account were notalways for the full amount realised in the sale and noexplanation was given as to where this money went. Atother times, although very large sums of cash weregenerated from the sale of valuable medium-sizedoperations or from the sell-off of the largest companies ofall, no money was listed as going into the PRA. Nor was itrevealed where this money went. The list of unaccountedfor revenue includes:

� Zambia Sugar Company - $14.8 million� Munkumpu/Nchanga Farms - $7.2 million� Mpongwe Development - $507,000� All ZCCM sales so far - Chibuluma, Kansanshi,

Luanshya/Baluba - a cash consideration to date of$105.5 million.

The list is unquestionably much longer and is almostcertain to include other significant sales such as MetalFabricators of Zambia, Zambia Horticultural Products, BPZambia and Zamlube, Zambia Oxygen, and many others.This diversion of funds was revealed by the Committee onPublic Investment in December 1997. In the case of ZCCMsales, the proceeds went into a ZCCM account, apparentlyto be put towards meeting the company's obligations. Whyhave the proceeds of these sales not been deposited in thePrivatisation Revenue Account, as required by law?

A further serious omission in public accounting concernsthe public flotation of the Government of Zambia'sremaining shares in a company. These sales can generatesignificant sums of money but the amount realised is notrecorded in the ZPA's published records nor is it clearwhether the money generated is deposited in the PRA orwhether it goes elsewhere. There is simply no way oftelling from information published under the PrivatisationAct.

Wealth in the longer term?

It is argued by political leaders and the privatisation gurusthat although the sale of national assets has not itselfdirectly generated huge sums of money for Zambia, this isless important than the investment and revenue whichZambia will gain as these enterprises return to profit. Thecash component of the sales is not, in reality,inconsiderable: the conservative estimate of K143 billionto mid-1997, which excludes the sell-off of the bulk ofZCCM, represents almost 4% of gross domestic product.However, putting aside this issue of money already in thebank, how much ordinary Zambians will benefit fromlonger term investment and increased Government revenuedepends upon:

� how much of the profits generated stay within Zambiaor whether the bulk of the money made is exportedabroad.

� It is only when money is collected from the newcompanies by central and local government as taxesand rates that Zambia stands to gain from increasedfunds for public expenditure.

If significant revenue is to be generated from newinvestment, then the copper industry should be a primecandidate for the generation of wealth. Copper mining isZambia's biggest industry, accounting for 75% of thecountry's export earnings and almost 10% of grossdomestic product. Despite steadily falling production tohalf former levels, Zambia was still the tenth largestproducer of copper in 1996 and ZCCM the fourth largestsingle copper mining operation in the world. ZCCM haslacked the capital to invest in upgrading the mines andlittle new exploration has been carried out for 25 years.The industry is ripe for much needed new investment.

How much money will the Government get from the newprivate sector mining companies? The first mine to be soldwas the Kansanshi Mine to Cyprus Amax, a company fromthe USA. When asked this question about Kansanshi, theofficial response was:�

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��[ZPA, The ZCCM Kansanshi Mine Sale:

Questions & Answers]

� It is true that money will come from royalty paymentson copper sales.

� But in the budget for 1998 the Government reducedthe Mineral Royalty Tax rate from 3% to 2%.

� The claim about duty is misleading. No duty needs tobe paid when machinery or equipment for use in theagriculture and mining sectors is imported intoZambia. The duty used to be 20%. This concessionencourages investment in new equipment, but resultsin a loss of revenue for the Government.

� Furthermore, the Import Declaration Fee, which was5% by value of all imported goods, will be abolishedwith effect from 1st July, 1998. An overall revenueloss of K20 billion is expected from this measure,although only a proportion of this loss will beattributable to the mining sector. On the other hand,the abolition of this fee will encourage investment innew equipment bought from overseas.

� It is true that company profits are taxed at 35%. As thenew investors begin to make a profit from theprivatised industries, then this will generate revenue.

� However, it could be some years before the newcompanies begin to see a profit from their investment.Companies can write-off all capital expenditureagainst tax. The 1998 Budget allows them not only tooffset 100% of losses against profits, but also allowsthem to carry forward losses for up to ten years.

� For example, if a new company starts to make a profitin its fourth year of operation, it does not necessarilypay the Government any tax. This is because it candeduct its losses over the first three years from theprofit it has just made. When the mines are sold,development agreements are signed which guaranteethat the Government will not increase or adverselychange the tax, royalty or duty rates paid by themining company. This means it could be some yearsbefore a mining company will have to pay significanttax on its profits.

� It was estimated in December 1997 that theGovernment could gain K100 billion in mining-relatedrevenue over three years, providing investment levelsreach $1 to $1.4 billion. The actual revenue will nowbe much smaller for two reasons.

� Firstly, the level of investment now appears to bethreatened. In April 1998, one of the biggest potentialinvestors, the Kafue Consortium, has pulled out ofnegotiations for the Nkana/Nchanga package. Inaddition to the purchase price, they would have boughtinvestment pledges worth $760 million. Falconbridge,a large Canadian mining company, has likewiseannounced that it has pulled out of a deal with AngloAmerican to develop the Konkola Deep mine. AngloAmerican must therefore find a new partner or find theresources to develop the reserves itself.

� Secondly, the tax and other concessions announced inthe 1998 budget will result in a revenue loss of K18billion for the Government of Zambia. This is the lossfor just one year. The total cost to the Government willincrease year upon year while the concessions remainin place. It will only be reversed when the companiesnot only begin to make a profit, but begin to make aprofit which is eligible for tax.

Incentives to foreign companies which upgrade theefficiency of former State owned enterprises, promoteexports and global links, or which bring in capitalinvestment or new technology, are an integral part ofZambian legislation. They are written in to the InvestmentAct, reaffirmed in the Privatisation Act itself, andguaranteed for years to come in development agreements.

Who will really gain from any wealthcreation?

In order to assess whether the majority of Zambians standto gain directly from the creation of wealth which is meantto go hand in hand with privatisation., the focus must shiftto how the spoils of privatisation are distributed, bothwithin Zambia and overseas.

Who are the new owners? Are they a new class of Zambianentrepreneurs or are they large foreign companies who willtake profits out of the country?

Do ordinary Zambians have a chance to share in anysuccess through employees or existing managers buyingand running their own businesses? And what of popularshare ownership - is this meaningful for the vast majorityof Zambians? All these questions will be addressed in thenext Fact Sheet.

Will privatisation make Zambianswealthy? - The new owners

��

Luanshya and Baluba��

The future is bright if Ramco Zambia can deliver on its promises

The Luanshya and Baluba mining and metallurgical complex was handed over to the new owners, the Binani Group of India, on 15 October 1997. Itnow operates under the name Ramco Zambia Plc. Consulting engineer, Satyendra Bhatnagar, predicts that annual production of finished copper atthe mines will reach 100,000 tonnes by 2003-4 compared with the 48,000 tonnes which is currently produced. $69 million will be spent over thenext five years on existing operations. It will be used to refurbish and improve mining, milling operations, the smelter at Luanshya and theconcentrator at Baluba. The smelter is 67 years old, the concentrator was built in 1973. ZCCM lacked the funds to buy spare parts to keep eitherrunning efficiently.

$20 million has already been committed to replace and refurbish machinery at Luanshya and Baluba. New machines and techniques should result inan increase in output to 65,000 tonnes per annum within three years. On top of the $69 million earmarked for existing operations, a further $103.5has been set aside over the next five years for new copper mining projects at Luanshya and repair of the smelter.

Extensive audits and feasibility studies are being undertaken by a British based mining consultant Kilborn SNC Lavalin. Their preliminary studieshave indicated that there are reserves of 44 million tonnes at Muliashi (North). If a full feasibility study turns out to be favourable, a new open pitmine will be opened at the site. Investment in a solvent extraction plant and associated sulphuric acid plant, producing 25,000 tonnes of finishedcopper, will enable the company to process the additional mined output. Kilborn SNC Lavalin will complete their studies on the prospects for thesedevelopments by November 1998. If all goes well, the projects should be completed by 2000. Technical audits of mining and milling operations bythe same consultants will consider the extension of existing mining at Luanshya and Baluba by developing new reserves at Lufubu North and South,as well as tapping the existing Mashiba deposit.

The future for Luanshya and Baluba appears very bright. However, there are two further considerations which need to be taken into account:

� Firstly, how much of the promised investment is assured?

? Out of the $69 million capital earmarked for investment in existing operations over the next five years, only $20 million has been committed. Ofthis amount, much less has actually been spent.

? The additional $103.5 million earmarked for new copper mining projects at Luanshya and repair of the smelter is promissory. There are nolegally binding investment guarantees. Plans to develop Muliashi, Lufubu North and South, and Mashiba are all in their early stages. In all cases,what are known as bankable feasibility studies remain to be completed. It is only on the basis of these - and then only if the results arefavourable - that finance to proceed will be forthcoming from the banks.

? Even refurbishment of the Luanshya smelter and the sulphuric acid plant will not take place for some time. By April 1998, Ramco was on theverge of awarding a contract to a company to carry out the first step of a feasibility study. This must be successfully completed before the leveland time-frame for the refurbishment can be fully determined.

? At the national level, Ramco Zambia has calculated that it currently contributes $1.17 million each year in licence fees, royalties and taxes andthat this will rise to $4.93 million if and when all projects reach fruition. It is unclear whether these calculations take into consideration thesignificant tax concession to the mining industry announced by the Government in its 1998 budget. If they do not, then revenues will besignificantly reduced.

� Secondly, what impact will the development of Luanshya and Baluba have upon employment levels and job security?

� It is estimated that the opening of Muliashi and other projects by Ramco Zambia will add ten years to the existing life span of Luanshya, givinga total of 18 or so years of feasible mining in the area. Prior to privatisation, the mine had been geared to close in five years time. Assuming thatdevelopment proceeds as planned, the 6,194 miners have the promise of a secure future. Currently, the management of Ramco Zambia hasassured the existing work force that there are no plans to lay off any staff.

� At the local level, investment projects already underway will improve the prospects of the construction industry in Ndola, Luanshya and Kitwe.

? However, the medium to long term job security of the current work force will be dependent on the Muliashi project going ahead as planned.Similarly, local suppliers and construction firms will only benefit from local multiplier effects if the capital which has been pledged can bedelivered on the back of positive feasibility studies.

Wealth and development for the peopleof Zambia

There are four possible ways in which Zambians can, intheory, prosper from privatisation.

� Firstly, although the revenue generated through centralgovernment taxation might be at a relatively low levelfor a number of years until tax concessions haveworked their way through, any extra funds willeventually benefit ordinary Zambians if the money isspent on things of importance to them in their dailylives: health care, water and sanitation, education, orensuring terminal benefits are paid.

� Secondly, if significant new employment is generatedas companies invest, and if employees are paid a fairwage, then money will begin to circulate in theeconomy as those in formal employment spend theirmoney on goods and services in towns andcommunities. Expanded formal sector employmentwill also increase the revenue the Government receivesfrom income tax. Is it realistic to assume that new jobswill be created in significant numbers? Will growth belimited to no more than a few places, for exampletowns near to new mines? Will wage levels rise whilethere is a pool of labour in the informal sector?

� Thirdly, if a significant number of the best firms aresold to Zambians, then some believe there is anincreased chance that a greater proportion of themoney which is generated in profits will remain withinZambia. While it would be naive to assume that this

wealth would automatically filter down to the poor orless well off, it is assumed that a new core of Zambianentrepreneurs would at least be more likely to committo investing in the country and its people on a longterm basis. Privatisation has also created the chancefor employees and managers to buy and run thebusinesses in which they work.

� Finally, much has been made of the opportunity forordinary Zambians to share in the generation of wealththrough the buying of shares in those privatised firmswhich are to be publicly floated on the Lusaka stockexchange. How well does this claim of broad publicparticipation stand up to closer scrutiny?

These last two issues - of Zambians buying companies andpopular share ownership - will be examined in this FactSheet. The issues of social service provision andemployment will be looked at in Fact Sheets 4a - 4c andFact Sheet 5 respectively.

Do Zambians or large foreign firms nowown most of Zambia's industry andbusinesses?

Consider how the ZPA answers two questions about whogains from privatisation. �

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The answers given by ZPA serve only to raise morequestions. If a total of 215 state owned enterprises havebeen privatised, 40 of which have been sold to foreignersand 100 to Zambians, what has been the fate of theremaining 65 enterprises? The numbers given by the ZPA,which are based on figures for January 1998, differ fromthose given by Enoch Kavindele, Minister of Commerce.He stated in Parliament on 2 February 1998 that 128companies had been sold to Zambians and 70 toforeigners.

Either way, it would at least seem that the majority ofenterprises have been sold to Zambians. This is true butmisleading if it is then assumed that the bulk of theZambia's newly privatised industries and businesses byvalue are now owned by Zambians. This is because thecompanies sold to foreigners tend to be the largestcompanies or those medium sized operations with thepotential to make good profits. Using figures published byZPA for the total sale values of State owned enterprisessold up to the end of June 1997, those sold to foreignersare worth eight times as much as those sold to Zambians.Once the continuing sale of ZCCM is complete, this willmassively alter the balance still further towards foreignownership.

Turning to the Trading Sector, of the fifteen shops whichwere not sold to Zambians, the ZPA states that 14 havebeen sold to Shoprite/Pep Stores and one to CDC. Incomparison to the 175 shops sold to Zambians, thisnumber appears to be relatively insignificant. Again,nothing could be further from the truth. The majority ofshops sold to foreign interests were sold as going concernsand are by far the most profitable stores. Two packages,totalling nine shops, bought by Pep stores in major townsand cities, including Lusaka, Ndola, and Kitwe, fetched$2,026,000 in comparison to the small amount made fromthe sale of assets from all the rest. Shoprite/Pep Storesincreasingly dominates the Zambian market and its shareis growing, driving local traders out of business with itsvigourous low-price approach to trading.

One might also begin to wonder which Zambians havebought businesses and who the shops in the trading sectornow belong to? It is a truism to say that the businesses willhave been sold to the well-off: they are the only Zambiansable to secure the necessary finance. A significant numberof politicians and those close to political power havefigured prominently. The ZPA can be praised forpublishing lists which show who the new owners are. Thelists only serve to reinforce the popular perception thatprivatisation is a gravy train for the wealthy and a politicalelite.

Does it matter whether the new ownersare Zambian or not?

The answer to this question must not be based on blindprejudice. Any new, committed owner who has a genuineinterest in expanding a business by investing in Zambiashould be welcomed, whether this is a foreign-ownedmultinational or a Zambian company. The importantquestion is the type of investment and management whichnew ownership brings. If the interest is in long-term,sustainable profits, a fitting proportion of which arereinvested in the company; if working conditions areimproved; if wages are fair; if employees and localcommunities are consulted as part of a company's plans,then the nationality of the owners is irrelevant.

The ZPA, in its questions and answers, emphaticallydenies that foreign firms will take money out of Zambia.However, at the same time it is conceded that foreignersmay èxternalise profits'. What is critical for Zambia'seconomic future is the level at which profits are taken outof the country in comparison to the amount of capitalwhich is reinvested.

The bottom line of any business - whether domesticallyowned or a subsidiary of a multinational - is to make surethat its shareholders get a return for their investment. Thisapplies to the private sector in all countries, so you mightthink that Zambia is no worse off. Most individuals andinstitutions who own shares in business are in thedeveloped world. Therefore profits, wherever they aregenerated, ultimately flow back to these parts of the world.

In line with many other countries, Zambia removedrestrictions on how much hard currency could be broughtin and out of the country by abolishing the ExchangeControl Act in 1994. On the one hand, this means that aninvestor can now repatriate all amounts of capitalintroduced into Zambia, and can send out of Zambia alldividends, interest earned, and after tax profits withoutrestriction. All earnings by expatriates can also beexternalised without difficulty. On the other hand, thisremoval of restrictions is precisely what is attractive tooverseas companies inthe first place.Investment can flow inat the same time asprofits flow out.

However, there arereasons why countrieslike Zambia are at adisadvantage when it comes to the free movement offoreign exchange. In common with many countries in thedeveloping world, Zambia is already short of hardcurrency which it needed to:

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[Isoka East independent, Robert Sichinga, ThePost, 3 December 1997].

� Pay off Zambia's foreign debts. Private banks and themultilateral banks will not accept payment in Kwacha.

� Build up reserves to be used by the Government inthe event of unforeseen crises such as drought, adrastic fall in copper prices, or interruptions inforeign exchange coming in from internationaldonors.

� Pay for the equipment and machinery which businessrequires from overseas, to meet expatriate wages, and to pay off loans to foreign banks.

At the moment, most of the foreign exchange in Zambiacomes from ZCCM which then sells it on to the Bank ofZambia and the commercial banks. The decline inZCCM's revenue from copper and cobalt has alreadyresulted in shortages of foreign exchange. When ZCCM isprivatised, the new owners will not be required to supplyforeign exchange. Hence the warning of Mr. Sichinga andothers that the Bank of Zambia, the Government andbusiness will be starved of foreign exchange. This longerterm shortage will be offset only at the outset by the initialround of foreign exchange brought into Zambia forimmediate investment.

Do ordinary Zambians have a stake inthe newly privatised firms?

When Zambia's business enterprises were all State owned,the theory was that all Zambians would benefit fromsecure employment and the profits would be used wiselyby the Government. This did not happen. However, underprivatisation there are two main ways in which Zambianscan share in the promised new prosperity by taking a stakein the new companies directly. The first way is throughemployees and managers actually getting together to buythe firms in which they work when these come up for sale.The second way is through popular share ownershipschemes.

Much has been made of these schemes by political leadersand the ZPA but, as will become apparent, most people inZambia are simply too poor to take part. People are toopreoccupied with making ends meet on a day to day basisto even give such schemes consideration.

How do employees or existing managersbuy a company?

The Privatisation Act makes it clear that one way in whichthe ZPA can privatise State owned enterprises is by sellingthem to existing employees or managers who decide topool their resources and make a bid. These are known asEmployee Buy Outs (EBOs) or Management Buy Outs(MBOs). When the company is offered for public sale bythe ZPA, MBO or EBO teams make their bid alongsideother interested buyers. However, in 1994, theGovernment earmarked a number of companies whereemployees and management were given the firstopportunity to bid for their company. Only if their bid wasconsidered inadequate or if negotiations failed was thesale opened up to other interested buyers.

Although, MBOs and EBOs represent an opportunity forZambians to gain a stake in their company when it isprivatised, in reality there are barriers to be overcome.People need the necessary expertise to draw up and agreeupon a business plan and the funds to make a competitivebid. It is not surprising, therefore, that most buyouts havebeen launched by management. Indeed, only four buy outshave been initiated with any direct employee involvement.

There are incentives for both employee and managementbuy outs. As with all successful bids by individualZambians, and unlike foreign buyers, all MBOs andEBOs may defer payment for a company, allowing themthe time to raise the finance they need. Although tensionscan sometimes build between employees and managerswhen the latter launch a bid without informing theiremployees, in every case there is a requirement that a 25%share in the company must be put in trust for allemployees when a MBO or EBO is successful. This meansif the company does well, all employees will share in thesuccess.

There are certain other circumstances in which Zambianscan benefit directly from privatisation. These include theformation of co-operatives. For example, this happened inthe case of the Dairy Produce Boards in Kabwe andNdola, when local dairy farmers joined together to buy thebusinesses which they had previously been supplying. Inthe case of the National Tobacco Company, the businesswas sold to the tobacco growers themselves through theTobacco Association of Zambia in partnership with aGerman firm, Contraf-Nicotex. There are a handful ofsimilar examples, but all are the exception rather than thenorm.

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[ZPA, How far have Zambians participated in the privatisationprogramme?, January 1998]

How many businesses have beensuccessfully bought in MBOs/EBOs?

In reality, the number of successful buy outs by managershas been small. Of the 59 management buy out teams whohave initiated bids, 18 have been successful. This shouldbe set against a total of 188 privatisations by June 1997.NIEC Overseas has been the only successful buyoutinvolving employees, excluding the farming co-operativesalready mentioned. Furthermore, with the exception ofMIL Construction Ltd., all the other companies bought bymanagement or employees have been officially classifiedas small companies by the ZPA or else are individualhotels or mills. The approximate value of the firms boughtin this way by June of last year is K4.5 billion out of atotal sale value in the region of K143 billion from allprivatisations.

What about popular share ownership -how does this work?

Apart from management and employee buy outs, the othermain way for Zambians to participate directly inprivatisation is through popular share ownership schemes.

Buying shares in a company means that you come to owna small part of that company. You literally buy a part orshare in the business. When you buy shares in a company,you will get a certificate confirming how many shares youown. For example, if a thousand shares are for sale in acompany and you buy one hundred of them, then you willown a tenth of the company.

While a State owned enterprise is in the hands of theGovernment, it owns most, if not all, of the shares in thatcompany. Sometimes, in the case of a `parastatal' thegovernment will either not have owned all of the companyfrom the outset or else will already have sold part of itsholding. However, in both circumstances it will still be themajority shareholder.

Public flotation is the process by which people are giventhe chance to buy into a former state owned company forthe first time. In principle, anyone - members of thepublic, management, employees, foreign investors - canparticipate in this. When remaining Government sharesare to be sold, adverts are placed in newspapers and onTV which tell people about the share offer and advisepeople on how to go about purchasing shares.

What is the Privatisation Trust Fund?

The Privatisation Trust Fund was set up to hold shareswhich the Government owns in some of the newlyprivatised companies. It is managed by the Ministry ofFinance and five trustees. Remaining Government sharesin the newly privatised companies will then be released in

a controlled way from the Privatisation Trust Fund to besold on the Lusaka Stock Exchange. Zambian citizens who purchase a small amount of shareswill be able to do so at a discount. All Zambians - thepublic, employees and management - will also be able topay for these shares in instalments. The proceeds from thesale of shares should be transferred to the PrivatisationRevenue Account, although there is reason to believe thatthis has not always happened in flotations to date.

What are Government owned `goldenshares'?

The Privatisation Act allows the Minister of Finance, onthe advice of the National Assembly, to retain a `goldenshare' in key privatised companies. This gives theGovernment the right to nominate a director on the boardof the new company. The idea is to ensure that theGovernment retains some influence in the decision makingprocess in important industries. However, unlike regularshares, the golden share does not allow the Government toreceive dividends or other financial benefits. To date,`golden shares' have been retained in the sell-off of ZCCMpackages and in Maamba Collieries.

Are some shares in all of the newlyprivatised companies going to bepublicly floated?

The ZPA has decided that out of more than one hundredand fifty companies which are being privatised, only aboutthirty or so are suitable for public floatation. Thesecompanies are generally those which are large, have beenwell managed and have a strong likelihood of makinggood profits in the near future. This makes thesecompanies a good investment and the risk involved inbuying shares is relatively small. Examples of companieswhich have seen some of their shares publicly floated are:

Chilanga Cement [37%]National Breweries [30%]Zambia Breweries [10%]Rothmans [18%]Zambia Sugar [30%]

The flotation of other companies is envisaged, including:

ZamtelZambia State Insurance Corp.Zambia OxygenKafirondaMetal Fabricators of ZambiaNanga FarmsFormer ZCCM minesAGIPMpongwe DevelopmentBP

What is to be gained from owningshares in a company?

If you own shares in a company and it makes a profit, thenyou are entitled as a shareholder to receive some of thisprofit. This is known as a dividend and the amount you

will receive will depend upon the number of shares youown. Furthermore, when a company is doing well andmaking a good profit, the amount of money it is worthrises. This means that the shares you own in a companyalso increase in value.

If a company makes a loss instead of a profit, then nodividend will be paid. You do not have to pay thecompany any more money to make up for this loss andyou keep your shares.

It seems too good to be true that a shareholder can makemoney from owning shares in a company when it is doingwell yet he or she does not have to bail the company outwhen it is doing badly. There is, of course, a catch. Whena company does not perform well, the amount of money itis worth falls. This means that the value of your shares inthat company also falls. For example, if you bought onehundred shares in a company and they cost you K2000each, then the company does not perform well, the valueof each share will fall. If the value of each share droppedby K1000, then you would have lost K10,000 on yourinitial investment.

Do ordinary Zambians stand to benefitfrom share ownership?

This is a key question. The answer is an emphatic no in acountry riven by poverty.

The facts speak for themselves and expose the two facednature of some of the political rhetoric. �

�

Mr. Penza's optimistic assertions can be totally discredited by the mostelementary arithmetic. The population of Zambia is 9.3 million. Thenumber of people who have bought shares is 6,000. Work out thenumber of people who now own shares as a percentage of thepopulation and it is apparent that less than 0.7% of the population ownshares.

These percentages translate to 6.5 million and 5.1 million Zambiansrespectively. What chance have these people got to buy shares and participatein the generation of wealth in Zambia?

What relevance do public floatations have for these people when theirmain concern is simply surviving from day to day on what little theyhave?

Mr. Speaker, Sir, it is encouraging to note that by nowthere are approximately 6,000 Zambians who have investedin our stock market. This goes to show how well the publicis responding to Government's liberalisation andinvestment policies, and with how much foresight theGovernment had moved to establish the Lusaka StockExchange.

[Ronald Penza, Minister for Finance, Budget Speech 1998]

70 percent of all Zambians are living in povertywith 55 percent of the population lacking sufficientincome to meet basic nutritional needs.

[Extract from Penza's Budget Speech 1998]

Rural poverty remains more prevalent and is more severethan urban poverty. Most social indicators mirror theincidence of poverty. Infant mortality, illiteracy andmalnutrition remain extremely high and limit the poor'scapacity to improve their own situation. The prevalence ofAIDS has exacerbated the situation.

[Extract from Penza's Budget Speech 1998]

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[George Zulu, spokesman for UNIP vice-president Chief InyamboYeta, Times of Zambia, 3 December 1997]

But surely privatisation will raiseeveryone's standard of living?

Although the distribution of the direct wealth in terms ofshare ownership will not benefit poor Zambians and willinstead further concentrate wealth in the hands of the rich,gauging the effect of privatisation on the livelihoods andstandard of living of a wider set of Zambians dependsupon three factors:

� Firstly, will the newly privatised firms be taking onnew employees? This issue is of the greatestimportance to many Zambians.


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� Secondly, the protection of workers' interests duringand after privatisation is vital, as is support for thoseretrenched. These matters will be the subject of FactSheets 4b and 4c.

Has privatisation beenconducted in the best interestsof employees? ��

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Have people's social needsbeen forgotten? ��

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Job losses, job creation or saving someexisting jobs?

On the face of it, privatisation will either create jobsthrough investment or else will result in further job lossesas inefficient businesses and overmanned former Stateowned enterprises either close or undergo cuts in theirwork force. There is a third way to view privatisation.Some would argue that, given the state of Zambianindustry, privatisation should not be viewed in terms ofhow many jobs will be lost, nor how many jobs will becreated, but rather in terms of how many jobs will besaved.

This Fact Sheet 4a will examine the scale of job lossesand the prospects for job creation. It will also look at theprivatisation of several important former State ownedenterprises and the impact upon employment in the areasin which they are located. The next Fact Sheet 4b is stillconcerned with employment. It will look at what peopleare being told about employment plans, at howredundancies are being handled, and the likely effect ofprivatisation on employment conditions. A final FactSheet 4c on employment will then assess what socialsupport is available to the unemployed and those whohave recently lost their jobs. It will also consider workprospects in the informal sector, given that this is wheremany of those who are retrenched must earn their living inthe future.

What has been the immediate effect ofliberalisation and privatisation onemployment?

In the short term at least, liberalisation and privatisationhave been the cause of significant job losses. The harsheconomic logic of opening the economy up to a privatesector which must be competitive if it is to make profits,has seen many former uncompetitive state ownedenterprises go into liquidation or has seen the shedding ofexcess labour to make them more efficient and attractiveto new buyers. The State has, in effect, already undertakenmuch of the difficult task of retrenching a sizeableproportion of the work force in the run up to privatisationproper. However, it is unlikely redundancies will end withprivatisation as many of the new owners will want to cuttheir work force in order to increase productivity.

What is the extent of job losses?

As a result of the UNIP initiated Fourth NationalDevelopment Plan, formal sector employment stood at arecord high in 1992. Government policy on employmentchanged dramatically under the MMD. It maintained thathigh levels of employment, especially in parastatals andthe civil service, were being effectively supported andsubsidised by money which the Government did not have. In the past, the solution had been to borrow the necessarycash, but the resulting debts could not be repaid. As aresult, no new loans were on offer. Hence the MMD hasembarked on the restructuring of the economy, backed bythe World Bank, which requires it to balance the books. Inorder to do this, it has sought to stem the drain on itsresources by selling off the parastatals and it has put inplace the Public Sector Reform Programme in order to cutgovernment expenditure on administration, primarily byreducing overmanning in the civil service. The outcomeof these policies is inevitable and large-scale job losses.

From the high of 545,900 formal sector employees in1992, preliminary figures from the Ministry of Financeand Economic Development put the number at 472,300 in1997. This means that 73,600 jobs have been lost withinfive years as a direct result of liberalisation, privatisationand reform of the public sector.

Of these job losses, many have been in the parastatalsector. From September 1993 to June 1995, employmentin State owned enterprises fell by 40,900 as a result ofliquidations and preparations for privatisation. Althoughsome of this fall can be accounted for by increases inprivate sector employment as companies are privatisedand change ownership, there is still a significant shortfall.Over the same period of September 1993 to June 1995,private sector employment went up by 11,400. This meansthat 29,500 jobs were lost in this transition period. Theonly conclusion that can be drawn from this is that most ofthese people must now look for employment in theinformal sector if they are to survive. Latest figures for1996 and 1997 show that there were a further 6,184redundancies across both State and privately ownedindustry. There is no indication that redundancies are at anend.

Local and central government employees have alsosuffered directly as a result of the MMD Governmentimplementing its Public Sector Reform Programme on thestrong recommendation of the World Bank. The intention

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is that no fewer than 57,000 people or a staggering 40% ofthe public sector work force will lose their jobs by 1999.The plan was to lay off 7000 employees by December lastyear, to be followed by a further 8000 redundancies byApril 1998. However, as the Government has a limit of K20 billion under the 1998 budget allocation to coverretrenchment packages for some 3410 civil servants, it hashad to scale down its plans while it awaits the approvaland release of the shortfall of K96 billion from donors andthe World Bank.

How many former State ownedenterprises have closed?

The ZPA lists eleven companies as having beingliquidated from 1994 - 1997 under the privatisationprogramme. It is unclear whether this figure includes theclosure of significant operations such as the United BusCompany of Zambia and Zambia Airways which wereliquidated before they could be privatised under thedivestiture sequence plan. In those companies closedbefore their successful privatisation could be concluded,5,801 jobs have been lost.

In addition, as of December 1997, 28 companies are listedby the ZPA as either under liquidation or in the process ofbeing wound up after the sale of their assets. Of course,those in the latter group include enterprises such as theNational Dairy Board, National Home Stores Limited, theNational Hotels Development Corporation, ConsumerBuying Corporation of Zambia, Zambia AgriculturalDevelopment Limited, Zambia Cold Storage Corporation,Zambia Steel & Building Supplies, and others which werebroken up into asset units before being privatised. Largeand medium scale liquidations currently underway includethe Memaco group of companies, Mpelembe Properties,and Premium Oil Industries. A further six enterprises arein receivership.

To date, according to the ZPA, four businesses whichhave been sold have subsequently gone into receivership

or liquidation. These areGeneral ParmaceuticalsLimited, Kapiri GlassProducts, Eagle Travel,and National Drum andCan Company. ZambiaEngineering andContracting Company

must also be added to this list. There is newspaperspeculation that a vast array of others are dead everywhereelse except on paper. This is hard to refute when the ZPAadmits that almost nothing has been done to track theperformance of companies after privatisation.

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What are the prospects for job creationas a result of privatisation?

Against this scale of past, current and future job losses inthe formal sector, the balance will only be addressed iftwo conditions are fulfilled. Firstly, if new jobs are createdin the private sector, especially in those former Stateowned enterprises which are newly privatised on thepromise of investment. The economically activepopulation grew from 2.7 million to 3.5 million from 1986to 1993, equivalent to a rate of 4.1% each year. If this is acontinuing trend, then not only will those jobs lost to dateneed to be replaced, but new jobs over and above previouslevels will need to be created.

Secondly, and failing a rapid expansion of jobs in theformal private sector, prospects will only improve ifsecure, well-paid and longterm employmentopportunities can becarved out by thosejoining the ranks of theinformal sector. Theprospects of thishappening are consideredin the next Fact Sheet 4b.

Many statements are madeabout the economic boomand the expansion in the number of jobs whichprivatisation is meant to bring about. However, incontrast, very little concrete information is released about

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exactly how many jobs will be created and where thesewill be. Nor is much said about future job losses which arealready planned by the new owners of certaincompanies.�

General figures have been released by the ZambianInvestment Centre which attempt to forecast how manyjobs will be created as a result of investment pledges indifferent sectors of the economy.

5,453756271,703,743281,200,000192,920,000

Unskilled

Skilled199719961995

Employment tobe generated as

a result ofpledges in 1997

Investment pledges $US

There are, however, a number of problems with thesefigures:

� There can be no certainty that companies will actuallyinvest the amount of money they have promised. Thisis because the ZIC figures show investment pledges,which companies can go back on, and not legallybinding or actual commitments. Of course, it isperfectly legitimate for business and commercialinterests to alter their investment plans as they see fit.For example, investment pledges from 1994 to 1996amounted to some $610 million but the actualinvestment made in Zambia over the same period was$117 million. This assumes that all the moneypromised in one year will be delivered very soonafterwards, at least within two years. This is seldomthe case.

� Investment pledges may be spread out over manyyears. Some capital may arrive almost immediately,while the bulk may be invested in two years time withthe balance being delivered over five or even tenyears. This needs to be taken into consideration wheninterpreting the prospects for new jobs given by ZIC.In reality, it may be one, five, or even ten years beforethe jobs which match the pledges are delivered.

� Even assuming that investment pledges do result inhard cash which is invested in Zambian businesses, byand large within the next five years, then the totalnumber of jobs created is still small in comparison to

the number of jobs which have been lost. Forexample, the total of 6,209 jobs which are predictedto result from investment pledges in 1997, willgenerate, on average, 1,242 jobs a year over the nextfive years. Assuming the number of jobs created isproportional to the amount of investment, theninvestment pledges in 1995 and 1996 should alsocreate, on average, an additional 880 and 1,285 jobsper year respectively. Hence employment to totalapproximately 3,400 jobs per year will be generatedby these levels of investment. This degree of jobcreation is simply inadequate if it is to balance thenumber of jobs losses. let alone the numbers ofyoung people entering the job market. Over the lastfive years, on average, 14,720 jobs have been lost ineach year. Of course, the level of job losses may fallin the near future and the number of new jobs createdthrough investment may rise more rapidly. It is by nomeans certain that this will happen.

Is it not true that, without privatisation,the situation could be even worse?

This is a key question at the heart of the purpose ofprivatisation.

� Privatisation is resulting in job losses, but given thestate of Zambian industry, most commentators wouldargue that these losses are unavoidable and that thenew private sector owners are taking the hard,commercial decisions which should have been takenunder parastatal management but which were avoidedfor political reasons.

� Privatisation is not creating jobs. Many would arguethat, again, this is inevitable, at least in theforeseeable future, as former State owned enterpriseshave been overstaffed. In order to offer goods andservices at competitive price while making a profit,

�The negative aspects of redundancies are evident but should not obscure the positive opportunities afforded of moving thework force into new and growing areas of employment and wealth creation.�

[ZPA, Progress Report 2]

�The privatisation programme is assisting to revitalise economic activity in Zambia.�

�With economic activity expected to pick up strongly in 1998, job opportunities are expected to be generated on a large scale.�[Government of Zambia, Economic Report 1997]

�With the anticipated injection of fresh capital, new management and entrepreneurial skill and up-to-date technologies theGovernment expects major increases in the production efficiencies of the mines, the opening up of employment opportunitiesand a rejuvenation of the general business and economic atmosphere on the Copperbelt.�

[Penza, Budget Speech 1998].

there is a need to increase output while reducingproduction costs. Shedding excess labour is the firststep to achieving this. Under the MMD Government,State owned enterprises have themselves been layingworkers off in an effort to avoid closure and this trendis simply gathering pace under private sectorownership.

� Privatisation is not, therefore, about avoidingredundancies; it is not about job creation; rather,privatisation is all about stemming huge losses andsaving the remaining number of jobs which wouldotherwise have been lost if more parastatals hadsimply closed.

This conclusion is a bleak one as it has little to do withdevelopment. However, accepting that privatisation andunemployment are a reality in Zambia today does notmean accepting the way in which their adverseconsequences have been handled The next Fact Sheet 4bwill turn from the question of overall job losses and jobcreation to consider whether people are being told thewhole truth about employment prospects; the manner inwhich redundancies have been managed; and theimplications of privatisation for working conditions

Has privatisation been carried out inthe best interests of employees?

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A final Fact Sheet 4c on employment will look at socialsupport for retrenchees and employment in the informalsector.

What help awaits retrenchees in theirnew life?

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If job losses are seen as inevitable, doesthis mean abandoning the unemployedto their fate?

Those who advocate privatisation see themselves as realists.If Zambian industry and business is, first and foremost, tobe saved - let alone recover or expand - then privatisation isthe only solution.

In any situation where no other choices are on offer, there isthe inherent danger that the end will justify the means, comewhat may. The argument of those advocating free marketeconomics is well rehearsed. Zambian industry and theZambian economy were already in a poor state prior toliberalisation and privatisation. It is therefore amisconception to believe that these two processes havecaused Zambia's economic problems. The belatedapplication of free market principles in Zambia may stopthe rot but cannot save Zambians from the hardships whichhave already been set in train by prior mismanagement ofthe economy.

This argument can be used to absolve the architects ofliberalisation and privatisation from responsibility for theinevitable suffering. They did not cause the crisis. Themedicine they offer is bitter, yet it is the only medicineavailable. Ordinary Zambians must suffer the build-up ofconsequences without the expectation of assistance.

This thinking must be rejected. It is precisely when peopleare at their most vulnerable that both the ZambianGovernment, international donors, and private sector buyershave a responsibility to ensure that they are not exploitedand that minimum standards are upheld. This requires:

� Honesty - coming clean about the continuing hardshipsthat Zambians will face after privatisation is verydifferent to holding up Zambia as a modelprivatisation.

� Information - people have a right to know what plansfor employment or further redundancies are in store.

� Monitoring - a close eye needs to be kept on newlyprivatised firms to make sure that the new ownerscomply with their promises to uphold employmentconditions, invest in the business, and take on anysocial responsibilities to which they have agreed.

� Compensation - those who do lose their jobs must betreated fairly in accordance with their conditions ofservice so that they receive fair warning of redundancyand so that their retrenchment benefits are paidpromptly and in full.

� Social support - the Government and internationaldonors, the advocates of privatisation in Zambia, havea responsibility to ensure that those who suffer from theconsequences of the programme have at least minimalsupport for themselves and their families. Withoutretraining, land or credit facilities to enable them tostart up a new business, it will be very difficult forpeople to succeed. Support is not the same as handouts.

Each of these principles will be borne in mind whenanswering the questions posed in the following Fact Sheets.This Fact Sheet 4b deals with the issues of information,monitoring and compensation. The next Fact Sheet 4c willexamine what social support is available to retrenchees aswell as considering the pros and cons of employment in theinformal sector.

Are more accurate figures available foreach of the newly privatised companieswhich show likely job gains and losses?

Of the greatest importance to Zambians are the concreteplans which employers in the areas in which theythemselves live and work have for contraction or possiblyeven expansion. Employees and local people want to knowwhether the newly privatised companies will be taking morepeople on or, as is more likely, laying people off.

For those directly employed in a firm, this information isessential if they are to assess how secure their jobs are. Forthose who work in the informal sector, perhaps as streetvendors or minibus drivers, knowing about employmentlevels in formal sector factories and businesses will helpthem determine whether trade is likely to improve or getworse. For some, there may even be the possibility ofgetting work in a local company which is set to expand.

What information is therefore available to them? Theanswer is very little. This is not because plans for expansionor contraction of the labour force do not exist, but ratherbecause these plans are not made available to the public.

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Do the ZPA and the new owners haveinformation about employmentprospects which they are reluctant toreveal?

The ZPA admits that it is lacking when it comes to hardinformation about the probable impact of privatisation. Italso tends to conceal what it already knows. Many newowners or prospective buyers claim that they too cannotpredict the effect of privatisation, for example, on theemployment levels of a company. Despite this, they arefrequently quoted in the press denying rumours ofredundancies.

Evasive replies or outright denials by companiesconcerning the negative impact on employment of theirplans for a newly privatised business hide the fact that thenew owners will already have a good idea of who will losetheir jobs. On the other hand, companies which intend toexpand will also have predicted whether they will need torecruit new employees as a result of new investment.

� The ZPA has publicly acknowledged that, duringnegotiations, buyers will normally give details ofwhich employees they will keep and which staff theywill let go in accordance with their plans to make abusiness profitable.

� Indeed, the criteria used when selecting a buyerinclude the extent to which a proposal offers jobprotection or the retrenchment of employees. Thepreliminary business plan which is required from allbidders is also assessed in terms of its potential for jobcreation.

� Under the Privatisation Act, everyone, whetheremployees of a company or members of the generalpublic, are entitled to know details of all bids and, inthe case of sales by public tender, the reason why thewinning bid was preferred over all others. Given thatfuture plans for the size and nature of the work forceare supposedly taken into consideration whenassessing and ranking a bid, there are strong groundsfor arguing that this information should be reproducedby the ZPA in its progress reports on the sales to date.At present, it does not do so.

� When a business is sold, no guarantees aboutemployment levels are specified in the salesagreements. The bottom line is that the new ownershave the authority to set the optimal size andcomposition of their labour force.

There are, indeed, no guarantees. Projections about thenumber of people employed in a business may change forthe better or for the worse, but is not the Zambian publicentitled to know what redundancies and new employmentopportunities are already on the cards? This information isavailable. At least people could then draw some informedconclusions for themselves about the likely impact ofprivatisation on their own employment prospects.

How have retrenchments been handled?

Given that many people have been laid off already andgiven that further widespread redundancies are likely tofollow, it is vital to examine what measures have been putin place to ensure that retrenchees are treated fairly andreceive the terminal benefits which they are entitled to.Their future depends upon this.

The Redundancy Act (1989) recognises that an employeeis made redundant - and is therefore entitled to terminalbenefits - when a business either closes or the work whichan employee is contracted to carry out either ceasesaltogether or is reduced to the point when there is notenough work to go around.

A worker is not automatically recognised as being maderedundant when a business is sold and his or her contract istransferred to or taken on by the buyer of the business. Thishas important implications for employees in firms whichare privatised and sold off. It means that they are notentitled to their terminal benefits when an enterprise is soldbecause workers contracts are transferred to the newowners. Workers cannot therefore claim their terminalbenefits from a Stateowned enterpriseearmarked for closure thenexpect to be re-employedby the new owner of thebusiness on a newcontract.

It is the responsibility ofthe ZPA, and in particularits Social ImpactDepartment, to ensure thatworkers in State ownedenterprises are fullyinformed about how the sale of their company will affectthem. ZPA itself concedes that employees were unpreparedfor changes to their contracts after the first privatisationsand that many parastatal sector employees viewed theintended private sector owners `with suspicion andmistrust'.

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How are retrenchment packagesdecided?

In its National Policy on Retrenchments, the Governmentsets out three basic principles by which workers retrenchedas a result of restructuring in the civil service andprivatisation of a State owned enterprise are to be awardedtheir retrenchment packages:

� If valid collective agreements governing the award ofcompensation exist between the employer andemployee representatives, then this will determinewhat each worker will receive.

If a company is being liquidated, then workers will bepaid their terminal benefits in accordance with thebankruptcy law. This means...

If neither of these two circumstances apply, then theGovernment, through its Special RetrenchmentDivision, will pay a minimum package as contained inthe Minimum Wages and Conditions of EmploymentAct. This is two weeks salary for each completed yearof service.

It is clear from the above guidelines that responsibility forredundancies prior to privatisation rests with the parastatalsthemselves, while the new owners areresponsible for payments afterprivatisation. In the case of State ownedenterprises prior to privatisation, the ZPAacknowledges that, although the cost ofterminal benefits and redundancy paymentshave usually been calculated for eachcompany, these have not often beenmatched by existing funds. This is whyState owned enterprises are often sold at asubstantial discount because new buyers agree to take onthe liability for paying retrenchment packages to anyemployees who are later made redundant. If people are tobe laid off while a company is being restructured inpreparation for privatisation or if workers lose their jobswhile protracted sale negotiations are under way, thenfinding the resources to pay employees their entitlements isoften very difficult. However, the Privatisation Act does

allow proceeds from the sales to be used to supportredundancy payment schemes, although release of fundsmust be approved by the Ministry of Finance and theactual distribution of these schemes is handled through theMinistry of Labour. Few claims have been met in this way.

Under the Government's National Policy onRetrenchments, employees are entitled to six weeks noticeif they are to lose their job. Each employer must registerdetails of those to be retrenched with the local labour officeand copy this information to the Government's SpecialRetrenchment Division. On registration, full informationon the compensation package to be paid to retrencheesshould be provided. Payment of compensation is to bemade before the last day of duty of each employee,otherwise the employer is responsible for paying salariesand other benefits until the redundancy package is paid.These stipulations apply to both the public and privatesectors. Again, they are seldom adhered to.

Why have people not been adequatelycompensated for the loss of their jobs?

The Government admits that there are two criticalproblems when it comes to the payment of retrenchmentpackages which employees are entitled to.�

The list of companies whose employees have received lateor reduced payments, or no payment at all and who are still

fighting their claims, is a long one. Itincludes employees of ZambiaEngineering and ContractingCompany, General PharmaceuticalsLimited, Kapiri Glass Products, EagleTravel, the National Drum and CanCompany, the United Bus Company ofZambia, the Memaco Group, ZambiaAirways and many others besides.

Furthermore, there is a lottery in which some receivecompensation while others, equally deserving, lose out.This has frequently happened when employees are giventhe opportunity to purchase houses as sitting tenants atseemingly attractive prices in return for the cash whichwould have been paid to them from their terminal benefits.

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[National Policy on Retrenchments, Government of Zambia, July 1995]

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The ZPA confirms that the `payment of terminal benefitscan be immediate, deferred, cash or kind or anycombination developed by the parties involved.' In otherwords, these arrangements are often put in place because aState employer, or ultimately the Government, does nothave the money to meet the cost of retrenchment packages.

What will be the effect of privatisationon conditions of service?

A number of issues create a great deal of uncertainty in theminds of employees in former State owned enterprises asthe new owners take over. These relate to the payment oftheir terminal benefits, to their status after privatisation, tothe possible loss of fringe benefits and to the overall natureof the relationship between employees and the new owners.

The ZPA's policy during negotiations over the sale of anenterprise is to ensure that retained workers will enjoy thesame or better employment conditions under the newowners. It is responsible for ensuring that certainconditions with regard to the rights and protection ofemployees are built into initial pledges (known asmemorandums of understanding) and the final saleagreements themselves. The ZPA makes it clear that

èmployees are employees of the SOE not of thebusinesses' owners or shareholders and, consequently,existing contractual arrangements, like conditions ofservice and collective agreements, are legally binding andare transferred unchanged unless renegotiated by theparties. These contracts of employment cover terminalbenefits like redundancy payments, pensions, long servicegratuities etc.' [ZPA, Progress Report 2].

There are, however, three potential problems with thesearrangements:

� Firstly, it is believed that the strong negotiatingposition of some new investors has resulted in development agreements which relax Governmentregulations for an agreed period. It is understoodthese include indemnities against prosecution for pastdamage to worker's health in hazardous industries,including mining. The danger arises that new andcontinuing damage to a worker's health will beclassed as past damage with a consequent loss incompensation. Thebelief is thatcertaindevelopmentagreements willallow newinvestors awindow of timebefore they have tocomply withexisting pollutionrequirements andenvironmentallegislation.

� Secondly, existing collective agreements are oftensuperseded by new agreements. Many of the newbuyers will have a strong hand in negotiations over thefuture of such agreements and contracts when the realthreat of redundancies hangs over the work force.

� Finally, over and above the role played by unions, it isunclear whether the ZPA or a new Government bodywill be set up to monitor newly privatised businessesand ensure that stipulations in the sale agreementscontinue to be adhered to.

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[Unnamed investor, quoted in the Daily Mail, 28January 1998]

Can employees rely on the ZPA to makesure that the new owners meet theirpromises?

The issue of monitoring is vital in an economy whenunemployment is high. Employers are in a strong positionwhen it comes to setting working conditions and paylevels for the simple reason that there is a readilyavailable pool of labour in the informal sector shouldexisting employees fail to tow the line.

The ZPA is charged under the Privatisation Act withmonitoring the progress of the privatisation process inZambia. It must be noted that this provision does notmention monitoring what happens after privatisation.Indeed, the whole emphasis in the Act is upon the rapidsell-off of state owned enterprises, not on examining theimpact of their privatisation. However, under section 49(h), there is limited provision for the development ofmonitoring guidelines to be implemented once a sale isfinalised. The ZPA itself lays out what it is required todo.�

A number of unresolved issues follow from the answerswhich the ZPA gives.

� It is not altogether clear who is responsible forensuring that the new buyers meet their obligationstowards employees. On the one hand, the ZPA states

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[emphasis added].[ZPA, Transparency in the privatisation programme]

that it has the responsibility for ensuring that aninvestor lives up to all the commitments andagreements it has made. On the other hand, it claimsthat once a company has been privatised, it no longerhas a responsibility to protect workers' rights. Thissituation is contradictory and is in urgent need ofclarification. Otherwise, what is to stop unprincipledemployers exploiting the work force and going backon their promises?

� In an early interview about the ZPA, its chiefexecutive Valentine Chitalu, said Ì aim to workmyself out of a job in a few years.' That was in 1995.Recent estimates judge the remaining portfolio ofcompanies will take the ZPA eighteen months toprivatise. What long term role in monitoring theimpact of privatisation can the ZPA possibly have,given that it was envisaged as a short-lived operationat the outset? Given this responsibility to monitor thesales, and given the ZPA's inevitable winding-up, twopressing questions arise:

� What has the ZPA actually done to ensure privatisedcompanies are monitored?

� In answer to this question, a recent article in the Timesof Zambia has described this omission to monitor the

effects of the sell-off as `the greatest weakness in theprivatisation process thus far' and ZPA technicaldirector Sturat Cruickshank has been quoted asadmitting the ZPA is ònly depending on hearsay'.

� A performance study of companies sold, to includestudy of their staff levels and working conditions, isbeing planned for this year, backed by World Bankfunding. It is of the utmost importance that the resultsof this study are made public and the Government ofZambia should promise now that this will be the case.

� Has the Government actually made plans for apermanent, independent, post-privatisation mechanismto monitor whether the privatisation has in fact beengood for Zambians?

� In answer to this second question, not only are thecurrent levels of monitoring by the ZPA totallyinadequate, at present plans for a permanentmonitoring have not been developed. In the absence ofsuch a mechanism, it will be impossible to judge thesuccess or failure of privatisation. Furthermore, it will

be very difficult to monitor and alert the relevantauthorities of failures of the new owners to live up totheir commitments. Once the ZPA ceases to exist, nosingle organisation in Zambia will have an overall,direct responsibility for monitoring the agreementsreached with the new owners. In the absence of suchscrutiny, how will malpractice come to light and whatwill prevent unscrupulous employers from quietlygoing back on agreements? A heavy burden will beplaced on a disunited trade union movement.

� If there is to be any wider protection of employeesafter privatisation, the ZPA accepts that it is essentialfor workers to be educated, among other things, aboutthe terms of the privatisation sales agreements.

� But this is, in reality, impossible as these agreementsare classed as `commercially sensitive' by thecompanies involved and are not released in the publicdomain. Nor is the Ministry of Finance, whoseMinister signs the agreements as the representative ofthe Government of Zambia, willing to disclose thesales agreements, including their associateddevelopment agreements.

Is there enough concern over the plightof retrenchees?

The failure to monitor the impact of privatisation by theGovernment and the failure of international donors to insiston this flies in the face of their claims that Zambia is amodel of development through privatisation.

Privatisation in Zambia has little to do with meaningfuldevelopment for the vast majority of Zambians. Evidenceof the failure to meet the needs of retrenchees for adequatesocial protection and retraining will be examined in thenext Fact Sheet.

What help awaits retrenchees in theirnew life?

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��'��[Times of Zambia, 3 December 1997].

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��'��[World Bank, The Progress of Privatization in Africa]

What has been done to assist thosemade redundant?

The measures put in place to cushion the vulnerable fromthe full force of economic restructuring in Zambia can bedivided, firstly, into general welfare and developmentprogrammes; and, secondly, into those measures aimed atcombating the particular problems caused by privatisationand widespread retrenchments. This Fact Sheet 4b willexamine the latter, while initiatives to promote widersocial development will be examined in Fact Sheet 5.

A number of agencies and Government ministries haveresponsibilities for tackling the social problems caused byredundancies. Overall, it is the task of the Ministry ofLabour and Social Security to give à new vision torelations between employers and employees as well asbuilding future social security for workers who are out offormal employment'

It was therefore within the Ministry ofLabour and Social Security that aNational Social Safety Net was set upin 1993, although it is managed by aCo-ordinating Committee whichallows all the relevant bodies to worktogether. The Co-ordinatingCommittee was given the task of producing a policyframework - known as the National Retrenchment Policy -within which redundancies could be managed on anequitable basis as this relates to counselling, retraining,entrepreneurship promotion, redeployment and support forresettlement schemes for retrenchees. Details of theschemes, run by the relevant Ministry or agency, butco-ordinated under the National Social Safety Net, are asfollows: �

�

How effective is the National SocialSafety Net?

There would appear to be an array of initiatives to assistthe unemployed. This impression is misleading because, inreality, the impact of each scheme has been limited for anumber of reasons.

� The National Social Safety Net Co-ordinatingCommittee has itself been heavily criticised for itscomplete lack of urgency, for spending most of itsfunds on its own facilities and staff, and for an almosttotal absence of concrete results. Despite being set upback in 1993, it took four years before it evenproduced a policy framework in 1997. Funding fromthe United Nations Development Programme agreedin 1995 was spent on capacity building, staff andoperational costs. This source of funding is expected

to end in 1998. The World Banktoo committed $292,000 in1996, bringing the total level ofcommitted funds to $0.5 million.This money too was spentlargely on staff training andequipment.

� Given this background, it is notsurprising - although,

nonetheless shocking - to discover that only 234retrenchees have received retraining. Given that theGovernment funds only the operational costs of theSafety Net to the tune of K200 million, that currentdonor commitments are at an end, and the legacy ofmismanagement and inaction, it is difficult to see howthe National Social Safety Net can have any impacton solving the social problems caused byretrenchment.

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Assesses projects and provides funds forselected small business initiatives.

Ministry of Commerce, Trade and IndustrySmall Business Development Programme

Seeks to equip graduates with businessskills for the future.

Public Service Management DivisionFuture Search

Informs employees, managers and the publicabout the likely social impact ofprivatisation.

Zambian Privatisation Agency, SocialImpact Department

Social Impact

Basic assistance with food, shelter,healthcare and education for the poorest.

Ministry of Community Development andSocial Services

Public Welfare Assistance Programme

Provides plots in resettlement schemes forsmall scale agriculture.

Department of Resettlement in the Office ofthe Vice President

Land Resettlement ProgrammePurposeRun byScheme

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[Profit Magazine, March 1994]

What is the role of the ZPA in helpingretrenchees?

� Despite its claims, the ZPA has, in reality, only alimited role to play in addressingthe impact of privatisation. Itconcerns itself almost exclusivelywith the run-up to privatisation ofa State owned enterprise anddoes not offer guidance toretrenchees or employees after afirm has been sold.

� The Privatisation Act allows proceeds from the salesto be used to support alternative income generatingprojects or social projects in the public interest.

� It is the Ministry of Finance which controls therevenue, not the ZPA. There is no evidence that anyrevenue has been spent on such schemes.

� The ZPA's Social Impact Department is charged withensuring that existing State sector employees areadequately informed about how the privatisationprocess affects them. The main way in which this is tobe achieved is through seminars and workshops toeducate the public, unions, employees, managers, andparastatal holding companies about the social aspectsof privatisation.

� However, very little information about the work of theSocial Impact Department is published by ZPA. Thelast time was in Progress Report 3, covering a rundown of the Department's activities over the periodJuly to December 1993. By that time, seminars hadbeen held with personnel in the first and secondwaves of companies to be privatised, but it is unclearwhether participation extended to all employees or tomanagement alone. The Social Impact Departmenthad also undertaken an employment and laboursurvey of State owned enterprises. This was used innegotiations to establish the position of potentialbuyers on existing employment issues and was alsoused as input to the National Social Safety Net. Thesesporadic information initiatives do not constitutemeasures of direct and immediate benefit to thosefacing retrenchment.

How have resettlement schemes helpedretrenchees?

� Resettlement to rural areas to begin farming is oneoption for retrenchees. The Office of the VicePresident is responsible for all resettlement, althoughthe National Social Safety Net limits its concern tothe resettlement of retrenchees. Overall, the numberof demarcated plots for resettlement has risen underthe overall resettlement programme from 1,434 in1991 to 5,457 in 1996. There are currently fifty-tworesettlement schemes and the total number of peopleresettled is up from 8,604 in 1991 to about 32,742 in

1996. However, the official monitoring ofresettlement is inadequate. Indeed, accurate figuresare not available either on the number of retrencheeswho have been resettled nor on the numbers who may

have drifted back to the townsand cities.

� The Government providesdegazzetted land and meets thecost of demarcation. Theaverage size of plot is 60 acres.It puts in basic services,

typically wells, bore holes and access roads.

� However, the Government no longer supplies hoes,axes, seeds, fertilisers, or funds for clearing onehectare of land in the first year. It has also stoppedoffering mealie meal and relish which people used tofeed themselves during the first year.

� The problems that urban retrenchees face whenmoved to a rural resettlement scheme include:

� Lack of agricultural experience.

� Lack of resources. Not only has Governmentassistance ceased, but often retrenchment packageseither have not been paid at all or have been paid late,and then often not in full.

� There is not enough land to go around and there is awaiting list for resettlement.

� The Government has not been able to meet itsresponsibility to provide infrastructure and services toall sites.

� Credit facilities are almost non-existent. The NationalSocial Safety Net has carried out a study on setting uprevolving funds of credit, but it is only now in theprocess of drawing up a plan in order to seek donorsupport.

�&��

��[ZPA, Progress Report 2]

�&� �� '� �� '��

[Office of the Vice President, Ministry statement]

�&�� '� ��'� �� '�� '�� F�G� � �� [Extract from a socio-economic impact assessment for the Institute of

Natural Resources, University of Natal]

� Overall, liberalisation of the agricultural sector hasmade it difficult for small producers to compete, tofind buyers for their produce, or even to transport it tomarket.

What welfare support is aimed at thosewho are made redundant? � The Public Welfare Assistance Scheme, run by the

Ministry of Community Development and SocialServices, covers the whole population of vulnerablepersons and concentrates resources on orphans, thedisabled, the elderly and the unsupported. In 1997,three quarters of programme expenditure was spenton food, shelter, medical fees and to meet educationalneeds.

� While many retrenchees will be impoverished, manyof them will not be destitute and will not thereforequalify for assistance.

� Expenditure is not high. Compare its scale against theK18 billion tax concessions in the 1998 budget whichwill benefit mining conglomerates. Furthermore,expenditure on the scheme fell by a massive forty percent in 1997 over the amount spent in the previousyear.

3.8%K683 m

As % mining taxconcessions

Funding

� The Peri-Urban Self Help programme offerstemporary employment to participants, many of themwomen. In 1997, almost four-fifths of the funding was

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� During 1997, informal sector skills trainingprogrammes in agriculture, carpentry, and homeeconomics were offered at a number of Provincial andDistrict Community Development Centres which wererehabilitated for the purpose. This initiative is notaimed exclusively at retrenchees but rather atuneducated informal sector workers in general. Again,its scale is very limited.

0.7%K131 m


Funding

� Three other general initiatives, all run under theMinistry of Community Development and SocialServices, may offer assistance to a small number ofretrenchees, again without being specifically gearedtowards their needs. They are the Micro BankersTrust, aimed at empowering the poor through creditdelivery, savings mobilisation, and training; theNational Fund for the Disabled which provides loansfor income generation but which was suspended in1997 because loans were not being repaid; andWomen Development Programmes to encourageincome generating activities such as tailoring, poultryrearing, small scale trading and hammer milling.

1.9%K338Women Devl.Programme

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What support is there for those whowould like to start up their ownbusiness?

Training in entrepreneurial skills and backing to helpsmall business start up is vital but, by and large, theinitiatives presently underway are marginal.

� The Ministry of Science, Technology and VocationalTraining in 1997 opened eight new trade traininginstitutions teaching mixed farming, leather-work,home management, weaving and other basic skills.This brings the total of such institutions to twenty-onewith an enrolment 6,473 trainees. In addition, avocational training centre for carpentry, bricklaying

and basic motor mechanics was opened in Lusaka anda second such centre is under preparation in Kitwe.

� Overall, however, the Government concedes in its1997 Economic Report that `the resources going tothese activities were inadequate and, in some cases,severely constrained the execution of these activities'.Legislation has recently been passed to create aNational Training Authority and Management Boards,to be funded in part by a training levy, but theinitiative is still in its early stages and full financinghas not been agreed.

� The Future Search programme has delivered businesstraining, but only to a small number of graduates whothen cannot secure funds to launch their businessplans. The Small Enterprise Development Board,from January to June 1997, financed just five projectsto a total value of K26 million and Board officersvisited 150 projects to assess performance and offerbusiness counselling. During 1997, the Board trained205 entrepreneurs in business skills.

0.1%K26 m


Funding

� Taken together, these limited initiatives are nomeasure of subsequent business success and must, inany case, be set against massive formal sectorredundancies over the past five years.

� The Government has recently established ZambiaEnterprise Financing Limited, backed by the WorldBank, in an attempt to tackle the lack of access tolong-term foreign financing for exports in the privatesector. Funds from bilateral and multilateral financialinstitutions will be made available through thedomestic banking system to Zambian enterprises.Similarly, another arm of the World Bank, theInternational Finance Corporation, has agreed toprovide initial funds for Finance Bank ZambiaLimited to be made available to businesses in theprivate sector.

� However, both initiatives will be all but irrelevant formost small scale entrepreneurs, especially those in theinformal sector, as money will only be lent on acommercial basis to those who can demonstrate their

�&��/��'�� (�� -�� D��6��,��4�D6,5�� (��'� �� '� �� 2��'��[Extract from a socio-economic impact assessment for the Institute

of Natural Resources, University of Natal]

ability to pay the money back. The initiative may,however, help medium and large Zambian firmsexpand and take on new employees.

What role has the informal sector toplay in Zambia's development?

Given the scale of public and private formal sectorredundancies envisaged in the short and medium term, theeconomic future of many Zambians will be increasinglydependent on employment in the informal sector. TheMMD Government has recognised the role to be playedby the informal sector in containing unemployment andhas set up a Vendors Desk at State House in recognition ofits importance.

The broad definition of the informal sector includessubsistence farmers as well as those either self-employed

or working for wagesin unlicensed andunregisteredbusinesses.

In this Fact Sheet,the focus will beupon the informalsector in urban areas.

A closer examination of employment conditions andopportunities in the informal sector is essential in order tojudge whether it offers a viable means through which themajority of Zambians can survive and hopefully realiseimprovements in their standards of living.

What is the size of the informal sector?

Informal sector employment was estimated at 2.3 millionin 1993, comprising 1,800,000 people working inagriculture and 500,000 more earning their living innon-agricultural activities, mainly small-scale trading. In1993, the economically active population stood at 3.5million. Hence, at that time, the share of informal sectoremployment was two-thirds of this total.

Since 1993, the size of the informal sector has increasedeven further. The latest figures for 1997 show that thenumber in formal sector employment was 472,300. Evenon the conservative assumption that the economicallyactive population has remained static since 1993, then inthe region of 3 million or a massive 80% of Zambians nowearn their living or supplement their income by working inthe informal sector. A recent survey of informal trading inKitwe in the Copperbelt estimated that the rate of entryinto informal sector trading increased by 400% between1991 and 1995.

Who works in the informal sector?

Few of those earning a living in the informal sector do soout of choice. In a survey of traders, of those who gave areason for starting up a small business, less then two inevery ten said that they had done so because they actuallypreferred to work in the informal sector.

Broadly speaking, four categories of people make up theinformal sector.

� Firstly, there are those with traditional skills - forexample, those making reed baskets and mats, orproducing charcoal - who meet a need which cannotbe met by the formal sector.

� Secondly, there are those who used to be employed inthe formal sector. In the Lusaka survey, this groupmade up one quarter of the total. The majority ofthese people had lost their jobs due to retrenchmentsbought about by privatisation, liquidations or the pooreconomic performance of businesses.

� A third group, one out of every ten, had formal sectorjobs but were looking to the informal sector tosupplement their income.

� It is most revealing, however, that by far the largestgroup is to be found in the final category, those whohave never had formal sector employment. This wasthe situation of 65% of those surveyed in Lusaka.

Most informal traderscome from shantysettlements and live inhigh density housing.However, a quartercome from mediumdensity areas. Thisshows the increasingimpact ofretrenchments on theurban middle classesand former semi-professionals. In 1986, only one in ten ofthose in the informal urban sector had secondaryeducation. By 1996, this had risen to four people in everyten.

The majority of informal traders are women and adisproportionate number of female divorcees and widowsappear in the surveys. Hence a sizeable proportion offemale headed households make a living in this way.

�"��'�� '� �� '� �� 7��

��[Daily Mail, January 1998]

�� '7��'� �� '� ��'� �� '�� / ��

[Observation on Chipulukusu shanty, Ndola,World Bank, Poverty Assessment, 1994]

What do the majority of people workingin the urban informal sector do?

In a survey of informal sector businesses in Lusaka in1995, three quarters of them were involved in trading, andabout a fifth in small-scale manufacturing or services. Ofthose working in the trade sector, nine out of ten were inthe retail trade - street vendors, market stall holders, thoseselling small items and newspapers to car drivers at thetraffic lights.

How do informal sector businesses getthe money they need to start up andthen keep going?

� The vast majority of people, almost nine out of ten,starting out in the informal sector, got their initialmoney to start the business up either from their ownsavings or from friends and relatives.

� Less than one percent got loans from banks orfinancial institutions, showing the total lack ofsupport from either Government or private funds.

� Six out of ten businesses were started with capital of

less than K25,000, and eight out of ten on less thanK75,000.

� The situation was no better in businesses which wereup and running. A quarter had virtually nothing totheir name, and almost half had assets worth belowK25,000.

How fierce is competition?

A significant majority of informalsector businesses in Lusaka, overseven out of every ten, are less thanfour years old. Almost half are lessthan one year old, indicating either therecent nature of the switch to theinformal sector or the short life spanof most businesses in a notoriouslyinsecure and unstable operatingenvironment.

While competition is fierce, sellinggoods at a time when people havelittle money is very difficult.

How do earnings between the formaland informal sectors compare?

It is necessary to distinguish between a minority ofentrepreneurs who make a good living in the informalsector and who are increasingly taking on employees andthe vast majority who either work for low wages or barelymake a living selling food, a few clothes, or small trinkets.

� For those paid a wage, the average formal sectormonthly pay packet in 1995 was K94,503. Thiscompares with a wage of K63,786 in the informalsector in Lusaka. Entrepreneurs in the informal sectorare increasingly taking on employees. For example,half of those working in the trade sector were paidemployees.

� For non-wage earners - those who own their ownbusinesses and are self-employed - average net profitsin the informal sector are higher than the averageformal sector wage by some K45,000 per month. Yetthis average hides the true distribution of these profitswhich favour a minority of entrepreneurs doing wellcompared with the majority who are doing badly. Infact, almost two thirds of informal sector businessesin Lusaka were recording a profit of less thanK75,000 per month, only a little over three quarters ofthe formal sector wage. Furthermore, the poorestthird, mainly traders, were making less than K25,000a month. It must also be noted that profits do notnecessarily equate to earnings as money must bereinvested in a business to keep it viable.

The argument has been made that many work in theinformal sector in order to top up their overall income.While it must be acknowledged that the boundary betweenformal and informal sector work is a fluid one, nine out often operators in the Lusaka survey rely on the informalsector as their sole source of income.

Do people earn enough to live on?

When comparing wage levels between the informal andformal sectors, it is easy to lose sightof the overall fact that the majorityof Zambians are poor and gettingpoorer still.

� The World Bank estimated thatabout 60 percent Zambianswere living in poverty in 1974as compared with 68 percent in1991.

� Figures for 1993 suggest that85% of Zambians were livingon less than one US dollar aday.

�-�� '� �� '� ��'��'� ��

[Urban Poverty on the Copperbelt, Desk Study prepared for theRoyal Netherlands Embassy]

�� '�� '� �� (� �� +�� (�� '�� +�� &�'� �� '�� '�� [Study Fund, Informal Sector Business Activities

in Lusaka Urban District under the StructuralAdjustment Programme, 1997]

The apparent increase in formal sector monthly earningsfrom K15,480 in 1992to K97,005 in 1995masks that, in reality,this is equivalent to anincrease of just K915when the falling valueof the Kwacha is takeninto consideration.

+ Add to this the five fold increase in the cost of livingin real terms;

+ add to this the fact that most Zambians work in theinformal sector where wages are lower;

+ and add to this job insecurity.

When these factors are set against estimates from theCatholic Commission for Justice and Peace, which hasworked out the cost of basic monthly requirements for afamily of six in Lusaka, then it is not surprising that levelsof urban poverty are on the increase:

Is there any evidence of a fall in wagesin firms which have already beenprivatised?

Little hard information is available on this questionbecause of the failure of the ZPA to monitor the impact ofprivatisation. However, the early indication is that the freemarket, rather than driving wage levels up, will result inlower wages for employees.

With a massive pool of informal sector labour, and withoverall formal sector employment continuing to fall at atime when the economically active population continues togrow, this is no great surprise. Shoprite, for example, hasrecently been the subject of complaints from workers to

the Human Rights Commission which is investigatingclaims of `slave wages' paid to the company's employees.

Who is to blame for this situation ofincreasing poverty in both the formaland informal sectors?

The MMD Government's period in office has seen anincrease of wealth in the hands of elite groups andprivatisation is likely to see the repatriation of profits bymultinationals.

Governments and financial institutions in the developedNorth have continued to cripple the Zambian economy bydemanding the repayment of debts owed to them, althoughcertain debt relief measures are being introduced.

To the list of those with responsibilities to make sure thatpeople who are adversely affected are supported in thedifficult times ahead must be added the World Bank andthe IMF. The argument is a simple one. They have pushedfor rapid privatisation in Zambia. This has happened sofast that the Government, Zambian institutions and theZambian people have had little time to readjust. Theconsequence of this is that not enough support is in placein the form of retraining, compensation, or an adequatesocial safety net to prevent those made redundant orindirectly affected from being impoverished as a directresult of liberalisation and privatisation.

When the mandate of the World Bank is to alleviatepoverty, yet the immediate result of the programme ofliberalisation and privatisation in Zambia has been tocause poverty, it is not good enough to argue that suchreform is unavoidable without first having paid equalattention to cushioning its impact on the Zambian people.

This whole question of the adverse social impact ofeconomic restructuring and privatisation - including whohas a responsibility to protect the basic rights of themajority of Zambians - will be the subject of the next fourFact Sheets.

Have people's social needs beenforgotten?

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Has economic reform delivered pro-poorgrowth?

When the economic reform programme was embarkedupon back in 1991, the message given out by the MMDGovernment and its international backers - principally theIMF and World Bank - was that free market policies wouldundo the damage caused by the misguided policies ofUNIP and once again make Zambia competitive in worldmarkets. The reforms would deliver growth, employmentand a higher standard of living for all. The economicrecovery programme was therefore linked directly todevelopment for all Zambians, including the majority ofpoor citizens.

However, behind the positive public presentation ofeconomic reform was the realisation that economicstabilisation, necessary to get the national finances intoshape, and liberalisation and privatisation, necessary toensure an efficient business base in Zambia, were strongmedicine to halt the decline. The expectation was thatreform would bring with it hardship but that this would beshort lived as growth followed hard on its heels. Thereform programme was swift and far-reaching on thegrounds that the shorter and sharper the shock, the quickerZambia would be set on the road to recovery. The reality isthat sustained growth has not been delivered, manyZambians have been impoverished, and the reformprogramme has therefore gone beyond austerity to take ona harsh aspect.

Hardliners in the MMD Government and among itsinternational backers insist the situation would have beenworse still without economic reform: more businessclosures and greater unemployment. They argue that therehas been no other option. But this bleak conclusion is a farcry from the promise of development which, after all, iswhat the whole process of structural adjustment,liberalisation and privatisation is meant to be all about.

It is equally unrealistic to suppose that there is anyalternative to free market reform. The more measuredapproach is to accept the reform process but to plan for itsadverse impact on the poor, a view belatedly adopted bythe World Bank: ��

In order to assess the impact of economic reform onpoverty in Zambia, it is necessary to:

� examine whether economic reform is beginning totackle poverty through growth or whether certainreform policies are actually causing poverty;

� consider, in some detail, what it is to be poor inZambia today and establish the extent and severity ofpoverty as the reforms have taken hold;

� look at what the World Bank, international donors andthe MMD Government have done to redress thisproblem of poverty.

The major issues addressed in this Fact Sheet 5a arewhether economic growth is being delivered, whether thisgrowth benefits the poor, or whether there is, in fact,evidence that certain aspects of economic reform andstructural adjustment are actually causing poverty.

Fact Sheet 5b will go on to summarise the extent ofpoverty in Zambia today. It will aim to paint a picture ofhow the poor in Zambia fare in terms of education, health,housing and the supply of basic services. The picture whichemerges is, by and large, one of increasing poverty andworsening social support.

Given this situation, Fact Sheet 5c asks what it is that theGovernment, World Bank and donors are doing to combatpoverty? Have they succeeded in balancing the strongmedicine of economic reform with support for the poorthrough improved social services and, for those who arefacing particular hardship, the provision of social safetynets to see them through to better times?

Finally, the impact of the privatisation programme itselfupon social provision will be examined further in FactSheet 5d because of the important role which theparastatals have played in the upkeep of the social fabric ofmany towns. A particular concern will be whether socialresponsibilities have been agreed between central

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[World Bank, Zambia: Poverty Assessment, 1994]

government, local authorities and the new private sectorowners.

What was the immediate background toeconomic reform in Zambia?

The Zambian economy was, of course, in serious trouble inthe 1980s. After the slump in copper prices in 1975, theUNIP Government borrowed heavily in the expectation thatexport earnings from copper would rise to their formerlevels. This failed to happen. Borrowing cushioned theimpact of the slump in the short term by subsidisingdomestic prices, supporting the value of the Kwacha andmaintaining levels of public expenditure.

However, as the revenue from exports failed to increase, inan attempt to promote economic recovery, the UNIPGovernment signed up to a series of reform programmesbacked by the World Bank and IMF in the 1980s. Thehardship which followed weakened the Government’spolitical will to see these programmes through to theirconclusion. The World Bank and IMF suspended theirlending because of the refusal of the UNIP government tomeet repayments on the money it had borrowed. Externaldebts built up to unprecedented levels. In 1989, the UNIPGovernment agreed to a more extensive reform programmebut, less than two years later, it again defaulted on loanrepayments.

Pressure grew for democratic elections and the Movementfor Multiparty Democracy (MMD) was elected inNovember 1991 on the platform of committed free marketreform. With assistance from the international community,it cleared the arrears which had built up with the WorldBank and negotiated a course of action - known as a RightsAccumulation Programme - to clear Zambia’s existing debtswith the IMF. The next step was to agree a new way forward with the World Bank and IMF. Hence theGovernment produced a Policy Framework Paper outlininghow it intended to turn the economy around. The WorldBank and IMF strongly influenced what polices the MMDGovernment proposed in this plan. It was only on this basisthat they agreed to provide new money and resources tohelp finance economic recovery in Zambia.

How is economic reform meant to work?

The MMD Government embarked on what has beendescribed as ‘one of the most ambitious economic reformprograms on the African continent.’ It can be split into twophases. In a first phase, from 1991 to 1995, the MMDGovernment, with the backing and approval of the WorldBank and IMF, implemented two major types ofprogrammes concerned with structural adjustment andmacroeconomic stabilisation. In a second phase, from 1995to the present, while the fundamental reforms which arealready under way have continued, there is a new emphasison supporting key economic sectors earmarked for growth,

investing in infrastructure, and explicitly addressing theproblem of poverty.

� The structural adjustment programme, whichcommenced in the first phase of economic reform, is aset of policies aimed at changing the basis upon whichthe economy in Zambia works. The generation ofwealth has, the early years of independence, beendependent on the performance of State ownedenterprises, in particular the copper mines, and uponthe output from domestic agriculture which has beenproduced and consumed within Zambia. However, thepoor performance of the parastatals, especially inoverseas markets, means that the economy has not beenperforming well. The result has been increasingpoverty and lack of employment. Structural adjustmentis designed to remedy this decline by seeking to:

� expand agricultural production;� liberalise trade and industry;� privatise the loss making parastatal sector;� reform the public sector.

While the first three elements of structural adjustmentare directly concerned with changing the economy,reform of the public sector is designed to change theway in which day to day government is carried out. InZambia, public sector reform seeks to:

� restructure central and provincial Government;� improve human resources management;� decentralise and strengthen local government.

� The stabilisation programme, again embarked on inthe first phase of reform, is a set of policies designed tobring the Government’s finances under control. InZambia, stabilisation seeks to:

� reduce inflation;� balance the Government’s accounts, to include the

control of public expenditure;� rationalise and consolidate the financial sector.

In practice, both the stabilisation programme and thestructural adjustment programme are inter-linked. Forexample, public sector reform, by seeking to make thedelivery of Government services more efficient, helpscontrol public expenditure. Similarly, decentralising powerto local government also links in with one of the objectivesof privatisation which is to increase the role of commercialcompanies in the running of health facilities and evenschools.

In order to tackle the problems which occurred after thefirst phase of economic reform, and in order to push for thegrowth which has eluded the economy, the MMDgovernment and its international backers have started asecond phase of reform.

� On the one hand, it was agreed that there should bepolicy continuity. Structural adjustment andmacroeconomic stabilisation should be deepened ratherthan moderated. The belief is that the fundamentals arein place but need adding to through new policies. Thisshift in emphasis has three objectives:

� The first objective is to actively promote certainsectors of the economy - agriculture, tourism, lightmanufacturing - in order to increase the supply ofproduce and goods to diversify away from adependence on the copper industry. However,copper will remain of the utmost importance toZambia. Hence, in the mining sector, by far themost important goal is to achieve the completeprivatisation of ZCCM to prevent both a drain onGovernment resources necessary to keep theparastatal afloat and also to attract investment toincrease copper production and help restore thebasis for copper revenue.

� The second objective is to provide infrastructure -transport, energy and a managed naturalenvironment - to help industry grow.

� The third objective is to deepen public sectorreform to contain wages but increase serviceprovision. At the same time, improvements arebeing sought in the way in which Zambia isgoverned in order to increase democracy, raiseaccountability and further transparency.

� On the other hand, and because of the hardship causedby economic reform itself, there is now recognition thatdirect measures need to be taken to explicitly tackle theissue of poverty. This promise to deliver social supportalongside economic reform will be looked at in detailin Fact Sheet 5c.

How successful have the structuraladjustment and stabilisationprogrammes been in promoting growth?

While this second phase of economicreform is ongoing and sets prioritiesuntil the end of 1998, it is meaningful tobring the picture of growth in Zambia upto date. The box overleaf summarises anumber of key economic indicators.

� There has not been the expected growth in Zambia’sgross domestic product.

� Imports are outstripping exports and copper revenuescontinue to fall.

� There are signs that non-traditional exports are on theincrease, but it is too early to tell if the economy ismoving away from its dependence on copper.

� The economy is massively reliant on foreign support.

� Zambia will continue to have huge debts with overseasbanks and the World Bank and IMF themselves. Thereis a certain irony in that current credits and loans fromZambia’s bilateral backers are used to pay the servicingon Zambia’s existing debts with the World Bank andthe IMF. Furthermore, continued funding is conditionalon the Government meeting repayments and interest onthese earlier debts.

� Inflation has been significantly reduced.

��The Government’s domestic budget balances, but thishas been achieved by massive cuts in public spending,including social spending, and by informal borrowing.

Despite the decidedly mixed performance of the Zambianeconomy, many commentators, at least up until the middleof 1997, believed that the conditions for growth were inplace. Yet development is much more to do with equitablegrowth - that is, an improvement in living standards for all -than it is to do with overall economic growth per se. Inorder, therefore, to consider the consequence of changes inthe Zambian economy for the majority of poor Zambians, itis necessary to look much more closely at the majorelements of economic reform and their impact on people’slivelihoods.

What has been the overall impact ofagricultural reform?

A priority of the structural adjustment programme is tocapitalise on Zambia’s agricultural potential. The countryhas both a large rural population of farmers and is rich inuntapped agricultural resources. Out of nine millionhectares suited to agriculture (although this figure includesforested land as well as cleared land), it has been calculatedthat only 16% of this land is under cultivation. By adoptinga strategy to place agriculture as ‘an engine for growth’ atthe centre of the Zambian economy, the plan is to createwealth from domestic and overseas sales. It is throughagricultural exports that foreign exchange will be broughtinto the Zambian economy. The policy aims are to improve

production by smallholders andemerging commercial farmers,promote farm exports, diversify thecrop base, open up a market in land,improve food security and supportthe food processing industry withinZambia. The first step was to shift

production away from maize.

Prior to reform, maize had become the predominant cashcrop grown in Zambia. This was because farmers were

�6�� '��

World Bank, Zambia: Country AssistanceStrategy, 1996]

In four out of the last six years, Zambia has been importing more goods byvalue from overseas than it is exporting. The trade balance was at its worst in 1992because of the need to import food supplies after the drought.

In their own right, the value of goods sold overseas has not increased, despitethe fact that the drive to push up exports remains a key aim of economic reform.The main reason for this is Zambia’s continued and extensive reliance on copperexports. Both production by ZCCM and the price of copper has declined.

Overall export revenue would have fallen if it were not for the fact that the saleof non-traditional exports - textiles, processed foods, flowers, engineering products -has increased three fold over the period. This is encouraging and is a positive, if asyet modest, result of the policy to restructure the economy.

1990

1991

1992

1993

1994

1995

1996

1997

800

1000

1200

1400

$ m

illio

ns

ExportsImports

Imports and exports

1992

1993

1994

1995

1996

1997

0

20

40

60

80

100

Non-traditionalCopper/cobalt

Type of exports

While the domestic budget has been brought into balance, Zambia’s external account is heavily in deficit.This means more foreign exchange is going out of the economy in paying for imports and debt servicing thanis coming back in through export sales and foreign assistance. As a consequence, there is a shortage of foreignexchange for Zambian business and a lack of funds with which either private companies or the Governmentcan repay debt to foreign banks and institutions.

If it had not been for balance of payment support from donors, this deficit would be higher still. However,this assistance has itself fallen significantly in recent years because donors have withheld funds over issues ofpoor governance and because they are insisting on measurable progress towards the completion of theprivatisation of ZCCM.

1992

1993

1994

1995

1996

1997

-300-100100300500

Current account deficit [incl. BOP support]BOP Support

Balance of payments[support & current account deficit]

The amount which Zambia owes in debt to foreign banks and multilateral financial institutions such as the World Bank and IMF is enormous. Intotal, it owes almost twice the amount the whole Zambian economy currently generates in any one year. However, because money must be paid back indollars or other foreign exchange, it is more relevant to look at how much Zambia owes in relation to how much it exports.

By this measure, the net value of Zambia's total overseas debt in 1995 wasover four times the amount it earned through all exports in the same year. Theamount which the Government had to find to meet repayments and interest onthese debts has, until recently, been the equivalent of almost one third of its entireexport earnings each and every year.

This level of debt is unsustainable. It places severe constraints on the amountof ready cash the Government has at present and the ‘debt overhang’ will beimpossible to pay back in the future. Debt rescheduling - extending the amount oftime over which repayments can be made - has helped Zambia reduce itsrepayments in the short term. However, it is the Heavily Indebted Poor Countriesinitiative which may, potentially, help the country to reduce its debt burden. Yetthere are conditions attached and Zambia does not yet know whether it will qualifyfor debt reduction or not. For further details, please see Fact Sheet 5c.

1992

1993

1994

1995

1996

1997

012345678

$ bi

llion

s

15

20

25

30

35

% o

f exp

orts

Debt service/exports

External debtTotal amount owed

by 1997:

$7,143,000,000

Equivalent to

$770owed for every

Zambian.

Since 1991, the MMD Government has significantly reduced its domestic budget deficit until, inthe last year, it actually collected in more money than it spent.

The graph (right) shows how this has been achieved. The top line reveals how the amount ofGovernment revenue over the period has remained broadly the same when measured as a share of GDP.The bottom line shows expenditure. This has fallen sharply when measured against GDP and it isthrough these savings that the Government has been able to balance the books. However, there is both apositive and a negative side to this:

� Some of the cuts in expenditure represent real savings and improved efficiency.

� Yet drastic cuts in Government spending has also reduced the amount of money available for socialspending to help the poor.

1990

1991

1992

1993

1994

1995

1996

1997

-40

-20

0

20

40

% G

DP

BalanceRevenue (incl. grants]/GDP

Expenditure/GDP

Source: IMF (except 1997 GoZ)

Domestic budget

Significant progress has been made in lowering the rate of inflation which peaked at almost 200% in1992/1993 but which has since fallen dramatically. At the end of 1997 inflation was just under 19% but hassince risen to between 25-30%.

Low inflation is obviously good for Zambians when it comes to buying food and other goods as the costof living is kept down. Overall, however, inflation has taken its toll on the standard of living of the poor:

� The value of any savings which people might have had - for example, from redundancy payments - washard hit by high inflation in 1992 /1993.

� Even with reduced inflation at a level of around 30%, increases in the cost of living are still outstrippingincreases in people’s income.

� Inflation continues to weaken the whole business sector.1990

1991

1992

1993

1994

1995

1996

1997

0

50

100

150

200

250

%

Inflation

Gross domestic product (GDP) measures the overall performance of an economy. Over the last eightyears in Zambia, there have been three years of growth and five years of stagnation or decline. This meansthat, on average, the Zambian economy has been growing by just 0.2% each year since 1990.

However, when you take into account that the population of Zambia is also rising by about 3% eachyear, then this rate of economic growth will not even enable the majority of Zambians to maintain, let aloneimprove, their standard of living.

Of course, it is argued that it takes time for the results of economic reform and structural adjustment tobe reflected in the GDP figures. Growth for the next few years is expected to be around 5%, although in thecurrent climate of economic uncertainty, this projection appears over-optimistic.

1990

1991

1992

1993

1994

1995

1996

1997

-10

-5

0

5

10

%

Source: IMF (except 1997 GoZ)

GDP growth

given subsidies and guaranteed a pan-territorial purchaseprice for their grain through Government marketingboards. Clearly, farmers benefited from thesearrangements. At the same time, Government control overmilling and the setting of an affordable price for mealiemeal allowed urban consumers to buy sufficient supplies.Indeed, the whole purpose of the marketing system was tokeep the urban workforce in the parastatal and publicsectors - mining, manufacturing and administration -supplied with cheap food. To an extent, it thereforeappeared that everyone gained from this fixed market formaize, both producers and consumers alike. However, thearguments behind the need for reform were based on anumber of intractable problems with this system:

� Fixed and guaranteed prices removed the necessity todiversify into other crops or to innovate and increaseproductivity as even inefficient producers or producersin areas too distant for economic transportation couldstill break even. Little pressure was exerted on farmersto repay Government loans to buy seeds and fertiliser.Without the necessity to find repayments, nor a freemarket offering attractive prices for alternative crops,the growth in agricultural output averaged just above2% per year throughout the 1970s and 1980s. Thus isfailed to even keep pace with the growth in Zambia’spopulation.

� Rural farmers, reliant on the Government maizemarket, did not improve their standard of living,although neither did levels of rural poverty increasesignificantly. The IMF and World Bank werepersuaded by the argument that it was a relativelywell-off core of urban consumers who gained most bynot paying market prices for their food.

� The whole subsidy system was no longer perceived tobe affordable. While proceeds from copper sales hadbeen used to support the maize marketing system, fallsin copper output and the price of copper meant thatmaize subsidies were increasingly met by Governmentborrowing. Furthermore, subsidies did not meet withthe approval of the donors whose policies were drivenby free market ideology.

The MMD Government, with full IMF and World Bankbacking, therefore implemented a policy to removesubsidies and abolish fixed pricing. When combined withthe removal of trade controls, this had the effect of openingthe agricultural market up to competition. The reformswere designed to allow efficient farmers to receive goodmarket prices for their produce; to reward those who actedon demand for other crops and moved away from growingonly maize; and to encourage exports of lucrative cashcrops. Urban consumers, likewise, would benefit fromincreased choice and lower prices brought about byincreased competition.

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�� "�� " "�� "�� !� �� $�� "� �� "�� "�� "� � �� !�� H$��!��" "�� "��!�730��&((,��&3,0� �� &(()�� "� �� 6++� �� "�� "�� .�� $�� !� �� "� �� /"�� "�� +0� �� J�� $�� *�� " �� "�� *�� *! � �� "�� ?� �� "�� " "�� " �� .�� " "� �"�� .�� :�� >"�� &((+ � �� $��" "�� "�� " "�� "��

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1991 1992 1993 1994 1995 1996 19970

5

10

15

20

25

Agricultural output as % GDP[constant prices]

1985

-90

[av

1990

/91

1991

/92

1992

/93

1993

/94

1994

/95

500550600650700750800

Thou

sand

sH

ecta

res

Area planted to maize

What has been the impact ofagricultural reform on the poor?

There is no doubt that agricultural reform polices haveactually caused increased hardship for Zambia’s poor. TheWorld Bank, as backers of the MMD Government’spolicies, assumed that subsidies benefited those who werebetter off when, in fact, fixing the price of maize helpedboth poor producers and poor consumers. The poor, bothin the cities and the countryside, immediately suffered fromthe reform of the maize market:

� It hit the urban poor who could nolonger afford to buy mealie meal asthe price increased once Governmentcontrols were abolished. The WorldBank and Government of Zambiainitially failed to take into accountthat the ‘elite’ of employees in theurban formal sector was beingreplaced by an urban poor ofretrenchees and informal sectoremployees.

� It hit the rural poor for two reasons.

� Firstly, the poorest farmers in isolated areas used tobenefit from an effective transport subsidy and wereable to sell their maize at a profit to the Governmentmarketing boards. With the abolition of this marketingsystem, private marketeers either failed to serve theseoutlying areas or else offered only a low price for thecrop due to the real cost of transporting it to market.

� Secondly, the removal of subsidies on fertiliser inorder to create a level playing field for imports meantthat the cost of farm inputsincreased. At the same time, theend of favourable Governmentloans to buy seed coincided with asharp decline in access tocommercial credit as interest ratessoared in the 1990s. Hencefarmers, already suffering fromthe impact of successive droughts, were unable topurchase seed, fertiliser and other inputs necessary toplant out new crops.

The response of the MMD Government to these difficultieswas, initially, to announce floor prices for maize andappoint ‘primary buying agents’. In the World Bank’sview, this delayed the move to a fully fledged free marketin maize until 1994/5 and set back the emergence ofprivate traders and diversification. In 1997, theGovernment continued to play a role in the marketing ofinputs such as fertiliser through its Agricultural CreditManagement Programme, although it admits that problemsin its delivery to farmers has suppressed the output ofmaize.

For its part, the World Bank concedes that the reformshave created hardship for the poor in the short term but

argues that producers will become more efficient andrealise good profits from increased productivity or bydiversifying away from maize into other lucrative crops.There is evidence that this is increasingly the case forfarmers supplying the newly privatised cotton industry.Large-scale commercial operations in sugar, horticulture,soya beans, coffee and tobacco have been revitalised undernew ownership following privatisation. While largetransnationals have been behind much if this resurgence,there can be benefits for small farmers when they aresourced as outgrowers.

However, it is difficult to see howpoor farmers away from the line ofrail will be able to make the leapto growing high value export cropswithout massive improvements inthe road and transport system orwithout better access to markets.Among the majority of smallfarmers, the end of the Statemilling monopoly has seen anincreased use of local

hammer-mills for processing maize and there has been adecline in the amount of maize which actually goes tomarket. There is some evidence of diversification, althoughthe move away from maize has increased food insecurity.For example, by December 1997, Zambia had an overallfood deficit of maize, rice, and wheat when measuredagainst food requirements. Hence the importation of thesestaples was inevitable.

What has been the overall impact oftrade and industrial reform?

Structural adjustment in the areasof trade and industry has been,and remains, a central element ofthe reform programme. TheWorld Bank argues thatmanufacturing industry inZambia has traditionally beencapital intensive. This means it

concentrated on making goods using machinery and plantbought from abroad rather than by making fully use ofavailable labour in Zambia. This situation arose because:

� import tariffs on such machinery were low;

� the Government provided subsidies and allowances forinvestment in manufacturing plant and machinery;

� the interest rate for borrowing money to finance thisexpenditure was kept artificially low;

� and because the value of the Kwacha was keptartificially high by the former Government whichcontrolled the exchange rate, guaranteeing a setnumber of dollars for each Kwacha. In reality, theKwacha was worth less than the official exchange rateand Government support for the currency was a hiddensubsidy when it came to buying machinery from

�&�� 2�� 6��>JJ>��2��-�� 2�� 2��

[World Bank, Zambia: Poverty Assessment,1994]

�&�� '��

[World Bank, Zambia: Prospects for SustainableGrowth, 1996]

abroad. While each Kwacha purchased more than itshould, the cost to the Zambian Government was high.

The employment capacity of the industrial sector inZambia has, the World Bank argues, always been marginalbecause of this reliance on imported machinery and the aimof reform is to move to a labour intensive system.Furthermore, by supporting city-based, loss-making parastatals in this way, a relatively privileged class ofworkers with high formal sector wages has been created atthe expense of the rest of the population.

As part of its industrial reform and market liberalisationprogramme, the MMD Government therefore removedsubsidies, abolished fixed exchange rates, and allowedinterest rates to be determined by commercial banks. Inaddition, with strong IMF and World Bank insistence, itembarked on its far reaching privatisation programme.

What has been the impact of trade andindustrial reforms on the poor?

Again, the thinking of the World Bank seems confusedwhen viewed in relation to the impact of tradeliberalisation and industrial reform on development and thepoor. It is one thing for the World Bank to argue that theZambian Government could simply no longer afford tosupport the inefficient industrial sector, but quite another toassume that the reforms would allow for a redistribution ofwealth and create labour intensive industry associated withhigh levels of employment.

The reality is not a high waged urban aristocracy employedin the formal sector with access to good quality services.This characterisation may have reflected the situation in theearly 1980s, but stagnation and decline meant that, even by1989, real earnings in manufacturing were only a third ofthe level of 1983. Liberalisation and privatisation in the1990s, coupled with periods of very high inflation broughtabout by market reforms, have resulted in widespreadunemployment and a further severe decline in real wages.The World Bank admits that incomes no longer cover basic

needs and that the reform of industry and trade has resultedin increased urban poverty. Indeed, the overriding cause ofurban poverty is lack of employment.

It is an inescapable fact that reform to encourage freemarket competition and a more open trade regime hasdriven some companies out of business or seen them shedlabour. This drive toefficiency may beinevitable if Zambianindustry is to becomeviable, but the equallyinevitable impact ofredundancies in creatingurban poverty cannot beunderplayed.

By far the biggest factordetermining whether people living in towns or cities arepoor is whether or not they have access to regularemployment. Fact Sheets 4a - 4c examine the current waveof formal sector redundancies, the insecurity of theinformal sector, and the lack of assistance for theunemployed. This analysis will not be repeated here. It issufficient to note that:

� Economic reform, liberalisation and privatisation haveprecipitated a massive increase in redundancies andtherefore an increase in urban poverty.

� The reforms have not, as yet, generated significantnew growth or translated this growth into jobs.

� For the majority, informal sector employment, farfrom being a road out of poverty, is at best a means ofsurviving the hardship.

&��

��"�� "�� $�� "�� 2?B�� A��&(('� �� &((, � �� "��"�� "�.�� "�� 2?B� �� "��80� �� "�"�

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1994 1995 1996 19970

5

10

15

20

%

Extractive [incl. copper]Manufacturing

Main industrial output[% GDP at constant prices]

1994 1995 1996 1997-30

-20

-10

0

10

%

Extractive [incl. copper]Manufacturing

Growth rate over previous year[constant prices]

�� '� 4��(�� / �� 5� �� '� �� 1��7� �� '�� '��[World Bank, Zambia: Poverty Assessment, 1994]

Yet, despite its ownevidence to thecontrary, the WorldBank maintains thatrising unemploymentand the fall in livingstandards of urbanresidents is from acontinuing position ofrelative privilege. Bythis criterion,development has littleto do withimprovement inpeople's well-beingand livelihoods butinstead appears tolower everyone down

to the same level of impoverishment. It is not ordinaryurban workers who are privileged, only a small section ofthe ruling and industrial elites.

The advocates of trade liberalisation and adjustment in theindustrial sector claim that reform has:

� benefited consumers by lowering prices for goodsmade by efficient firms within Zambia or importedfrom abroad now that import quotas, tariffs and dutieshave largely been abolished;

� yet, for much of the 1990s, Zambia has beencharacterised by high inflation and significant rises inthe consumer price index;

� set the stage for industrial growth;

� yet the reformers admit they do not know when thistakeoff will happen;

� prepared the ground for labour intensive growth;

� yet policy makers admit that employment continues tocontract.

� Furthermore, this claim for labour intensive growth ispuzzling when the whole basis of privatisation is toencourage foreign, capital intensive investment.

? The MMD Government and its backers champion theinformal sector and call for increased deregulation ofsmall business;

� yet the World Bank concludes on the basis of its ownPoverty Assessment that informal sector employmentis insecure, amounts to little more than petty tradingfor the majority, and is most often a means to survivalrather than self-improvement.

� The reformers finally resort to a negative argument,that the reform policies are at least better than the oldsystem in which an inefficient, protected andsubsidised industrial sector did not contribute topoverty reduction.

What has been the overall impact ofpolicies designed to balance the books?

Turning from structural adjustment to the stabilisationprogramme - that part of overall economic reform which isdesigned to bring the Government’s finances under control- the World Bank and IMF has supported policies by whichthe MMD Government has sought to balance the books.These include:

� the careful control of public spending;

� the introduction of cash budgeting to ensure theGovernment does not release funds it does not have;

� placing limits on the amount of money theGovernment borrows for public expenditure, known asthe public sector borrowing requirement;

� maintaining the amount of revenue the Governmentreceives through taxation.

When the MMD came to power, it inherited a domesticbudget which was in the red, certainly because of highpublic expenditure, but especially because of thechannelling of financial support to many loss makingparastatals. The latter expenditure was not planned orbudgeted for. It was therefore necessary for theGovernment to borrow large amounts of money fromdomestic banks to pay for the resulting budget deficit.Indeed, the Bank of Zambia could hardly keep pace withGovernment demand for cash and, eventually, the amount needed was actually greater than the amount of money theBank could afford to lend.

This budget deficit was the main underlying cause ofinflation in Zambia. Put simply, while the Governmentcontinued to borrow to meet its high expenditure, moremoney was going out into the economy than theGovernment was taking back out in revenue. This resultedin ‘monetary expansion’ - too many Kwacha in theeconomy. With so much money in circulation, the realvalue of the Kwacha fell and more notes were needed topay for goods and services. Put another way, prices wentup rapidly and what cost you K100 one month could costK200 the next. A situation of high inflation prevailed.

The MMD Government took action to cut its budget deficitby first of all drastically reducing its public expenditureand hence the overall amount of money it was introducinginto the economy. For example, its recurrent expenditureon the day to day running of Government departments andservices was slashed by a third from 1991 to 1992. Suchmeasures may, under normal circumstances, have gone along way towards cutting the deficit, reducing moneysupply and hence lowering inflation. Indeed, theGovernment’s tight fiscal control reduced inflation from apeak of 400% to 50% in the first half of 1992.

However, at the same time as the Government was tryingto stabilise the economy by balancing its books, it was alsopressing ahead with structural adjustment to change

�3�� '�� '��'��

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[World Bank, Zambia: Poverty Assessment,

Zambia into a free market. In October 1992 theGovernment allowed the Kwacha to float on the freemarket for foreign exchange and went on to open upfinancial markets in Zambia. This liberalisation itselfcaused inflation because there was a sudden fall in the realvalue of the Kwacha against other currencies. This one-offdepreciation as the Kwacha found its true level meant that,for a while, people did not want Kwacha as its realpurchasing power - for example, against the US dollar -was much less than it had been before. If people weregoing to be paid in Kwacha, they wanted more of them tocompensate for the fact that the currency was now worthless. Again, this caused prices and salaries to rise andfuelled inflation to a massive - if short-lived - peak of500%.

These circumstances threatened ‘hyper-inflation’. This iscaused when the expectation of inflation prompts suppliersto demand more and more for the goods they are sellingand people to demand ever higher salary increases to meetthe expected increase in cost. The MMD Governmentintroduced a package of stabilisation measures in 1993 inan attempt to prevent this situation from developing.

What further stabilisation measureswere introduced to tackle inflation?

Overall, the stabilisation measures which were introducedwere designed to reduce domestic money supply, that is,the amount of cash in circulation. The result of having lessmoney in the system is to maintain the value of the Kwachaand thereby reduce inflation.

� Cash budgeting was implemented. This strictaccounting measure means that a Government willonly release funds - for example, to cover the day today running of Government services and ministries orto meet civil service wages - when there is money inthe coffers to cover the amount to be disbursed. InZambia, cash budgeting had the effect of wiping outthe expectation that more and more money would beforthcoming from the Government. Of course, it alsoresulted in further severe cuts in public expenditureand in the failure to pay for goods and services whichthe Government had bought on credit.

� Treasury bonds were issued. Such bonds are sold toinvestors by a Government which then pays outinterest on the money which it has borrowed fromthem. This direct borrowing helped the MMDGovernment reduce the budget deficit. Cash belongingto the general public and private investors whichwould otherwise have circulated in the economy wastied up in the bonds.

� Action was also taken to raise the reserve ratio. Thismeans the Government increased the amount of moneyit held in savings relative to the amount it spent.Again, the result was less money in circulation.

� Finally, both the strict control of expenditure by Government owned parastatals and the release of

official currency prevented foreign exchange shortageswith the result that the real value of the Kwachaincreased.

All of these measures combined, resulted in a fall ininflation from 200% in the first half of 1993 to 20% by theyear end. However, the period of chronic inflation hadcaused further problems. The real value of theGovernment’s revenue had itself been hit hard. Forexample, the revenue it collected in, mainly from taxes,collapsed by over a quarter in real terms between 1992 and1993. The fact that less money was coming in itselfcontributed to the budget deficit. The Governmentresponded by further drastic cuts in expenditure -excluding drought relief, it again fell by almost a third in1992/93 - and by setting up the Zambian RevenueAuthority in 1994 to improve the efficiency of taxcollection and reduce corruption thereby increasing theamount of money it drew back in taxes. The backers of freemarket policies praised the MMD Government for movingaway from a tax system based on international trade to onebased on VAT. In the meantime, the Government remainedheavily dependent on grants from the World Bank anddonor governments to keep its budget deficit in check,although the level of support progressively decreased.

How successful has economicstabilisation proved?

Even with these stabilisation measures in place, it has takenthe Government a while to balance its domestic accounts.In the first three years of reform, the public sector wagebill received a disproportionate amount of Governmentfunds at the same time as strict cash budgeting wasintroduced. As a result, capital investment in infrastructure,buildings, and equipment fell sharply and money was notavailable to meet the day to day running of Governmentdepartments and services. Donor disquiet over politicaldevelopments in Zambia caused interruptions in the flow ofaid money, causing the MMD Government to purchaseforeign exchange to meet its obligation to service itsexternal debt. At the same time, it had to find additionalmoney to pay high levels of interest on the debts it hadbuilt up with domestic banks. In 1994 and 1995, there wasoverspending on defence as a result of powerful pressurefrom the Ministry of Defence. The Government’s financeswere also upset by its unwise and unsuccessful attempt tobail one of the largest commercial banks in Zambia,Meridien BIAO Ltd.

In retrospect, many commentators believe the decision toallow the Kwacha to float on the foreign exchange marketsshould have been delayed until economic stabilisation andtight fiscal control had brought inflation down. As it was,the devaluation in the Kwacha fuelled further inflation.Likewise, the decision to eliminate controls on Zambiancommercial banks should, perhaps, have been delayed. Forthe first time, they were allowed to set their own interest rates on loans rather than keeping them artificially low.This meant that interest rates soared alongside inflation and

were to increase further still with the release of treasurybonds designed to attract investors. � On the positive side, high interest rates helped to

stabilise the position of the Kwacha on the foreignexchange markets.

� Indeed, after the initial depreciation, the Kwacha heldand, to some degree, increased its value to the extentthat it made Zambian goods too expensive in exportmarkets and hence put a brake on economic growth.

� High interest rates also helped fight hyper-inflation bytying up money in savings, although this wascounteracted to an extent by the fact that the interestpaid on savings was itself inflationary.

� The most negative aspect of the high interest rate,however, was that it made it prohibitively expensivefor businesses to borrow money to invest.

Until very recently, there is evidence that the MMDGovernment has been broadly successful in controlling itsdomestic finances. It has not spent too much beyond itsmeans and has stayed within a predetermined cash budgetsince 1994. Increased efficiencies in the way in whichmoney is disbursed - for example, by making paymentsdirect to District Health Boards and Provincial Educationofficers - has been a positive development. Acceleration ofthe Public Sector Reform Programme has reduced the sizeof the civil service, capped pay increases and cut wagebills. Indeed, by 1997, the domestic budget deficit hadbeen turned into a slight surplus, albeit with support in theform of grant aid. However, the first half of 1998 may haveseen a reversal of this progress.

What impact has balancing the bookshad on the poor?

There has been a high price to pay for achieving a balanceddomestic account and, ironically, it is the majority of lesswell off Zambians who have felt the worst affects of harshbudgetary measures. Closing the budget gap has beenaccomplished mainly by a severe cut in Governmentexpenditure rather than by raising revenue. Between 1991and 1993, public expenditure halved as a share of GDP.Since then, up to and including 1997, it has fallen byanother third.

� The social sectors have suffered disproportionately inthe drive to slash public expenditure. These cuts have,of course, hit the poorest members of Zambian society.

� While the amount the Governmentearmarks for the social sector - forexample, in spending on educationand health - is often protected ineach budget, when it comes to theactual money received, these areaslose out. Cash budgeting has madethis problem worse as more

powerful ministries muscle in on the reducedallocation of available ‘hard cash’.

� There has been an almost complete failure to allocatefunds for social safety nets to help the most vulnerableand prevent people from joining the ranks of thepoorest.

� Large savings have also been made by the withdrawalof direct subsidies, for example to maize farmers, andindirect subsidies on mealie meal to urban consumers.Again, the impact of this on poor farmers in remoteareas and upon poor urban residents is welldocumented.

� The pressure from Zambia’s international backers hasseen a deepening of the Public Sector ReformProgramme in recent years. This has cut the publicsector wage bill, but the human cost has beenwidespread redundancies. The retrenchmentprogramme has only just begun and 57,000 publicservants are expected to lose their jobs by 1999. Sofar, the World Bank and international donors have metthe costs of retrenchment and have pledged $80million to fund the next round of redundancies,although there are conditions attached to the release ofthese funds. However, as people move out of formalsector employment there is a significant risk that theywill find themselves joining the ranks of Zambia’spoor.

� The introduction of VAT has adverse consequencesfor the less well off as, unlike income tax orcorporation tax, it is equally applicable to the poor aswell as the rich. Although the Zambian RevenueAuthority only began to collect domestic VAT in1995, by 1997 it accounted for 17% of theGovernment’s total tax revenue. Whereas in 1991taxes on international trade contributed 33% ofrevenue, by 1997 this had been reduced to 28%. In the1998 budget, tax concessions to mining companiesworth K18 billion in their first year, the scrapping ofthe import declaration fee, an increase in the personalallowance, and a tax amnesty called for by thebusiness community were all announced. All of thesemeasures are of little or no direct benefit to the poor.

� On the positive side, lowering inflation is of obviousrelevance to the poor as it stabilises the price of foodand other essential goods and services. Clearly poorpeople are less able to protect themselves againstrising costs than the better off who are likely to havesavings. The measures taken did bring inflation undercontrol and this averted the catastrophe of a spiral of

escalating prices. However, theannual rate of inflation between1991 and 1996 never fell below35% and it was only last yearthat the rate fell to 19%. Evenat this level, the cost of living isoutstripping any increase inhousehold income for the poor.

“Government has not been able to keepits promises to protect spending in socialsectors and to increase their share of totalspending.”


� The high interest rate and the resulting lack of credithas not only affected bigger businesses, it has also hadan impact on private traders. Especially hard hit havebeen those agents which the Government hoped wouldmove in to market maize because they had no moneywith which to purchase produce from farmers.Likewise, poor farmers could not afford the creditnecessary to buy expensive inputs for planting out nextyear's crop. Some commercial farms were even pushedto the edge of bankruptcy. For example, by late 1993real interest rates were excessive at over 200%, kepthigh by the returns paid on treasury bonds which, for aperiod, hit almost 600%. The current bank lending rateis in the region of 30%.

Are Zambia’s external accounts inbalance?

Although the amount the Government spends and collectsdomestically within Zambia has been brought broadly intoline, albeit at a high social cost, the overall amount ofmoney going out of the country to pay for imports and debtis increasingly in danger of outstripping the amount ofmoney brought into the country by exports.

In 1997, the overall deficit was $139 million. In order tocover this shortfall, donor governments and the WorldBank transferred $120 million back to the Government ofZambia. This overall ‘balance of payments’ problem isexpected to get worse for two reasons.

� Firstly, at a time when copper still accounts forfour-fifths of export earnings and brings theGovernment much of its foreign exchange revenue,output of the metal is likely to remain flat for years tocome and copper prices are predicted to stagnate.

� Secondly, Zambia is required to meet interest andrepayments on the debt it owes to overseas banks. In1997, external debt servicing cost the Government$216 million. With massive external debts totallingover $7 billion, this debt servicing requires a large partof the foreign exchange the Government has put aside.Indeed, the Government is dependent on donorassistance to repay its debts and, increasingly, it willnot be able to find enough money to do so.

By the end of 1997, eight members of the Paris Club ofmajor international donors had either written-off orrescheduled the repayment of debt owed to them byZambia under terms previously agreed in Naples.However, it has been calculated that, even makingmoderately optimistic assumptions about economic growth,and even after debt rescheduling, external financing in theregion of $1 billion will be needed from 2001-2004, fallingto $600 million by 2010.

It is therefore of great importance that Zambia qualifies forthe Highly Indebted Poor Counties (HPIC) initiativelaunched in 1996 by the World Bank and IMF. HIPC isaimed at those countries, like Zambia, who are currently

receiving concessional assistance from the World Bank butwho are faced with an unsustainable debt situation evenafter the full application of current debt relief mechanisms.Surpluses generated by the World Bank and IMF will beused to write-off existing debt but, in order to be acceptedonto the scheme, a country must show a commitment toeconomic reform programmes as well as to structural andsocial reform, including improving basic health care andeducation. Zambia must meet a number of benchmarks setby the World Bank and IMF, to include meeting itsexisting debt repayments, if it is to qualify for HPIC.

As it is, the ‘gap’ in the Government’s finances caused byZambia’s burden of debt makes the country very dependenton donor assistance, places limits on Governmentexpenditure, and creates uncertainty in the minds ofpotential investors, many of whom are not convinced thatthe MMD Government will be able to avoid defaulting onits loans.

How have recent events in Zambiathreatened any prospect of economicrecovery?

The economic stabilisation programme, in the light of thedrastic cuts in public expenditure and because of a failureto protect social spending in hard times, has been criticisedfor its adverse impact onthe poor. Yet, towardsthe end of 1997, thefinancial mainstays ofthe Zambia economyappeared to be in place.Growth, even if it wasnot orientated towardsthe poor, was on thehorizon. By mid-1998,less than seven months later, many are pointing to astartling reversal in Zambia’s economic position.Commentators have identified two principle factors whichhave precipitated the crisis.

� The first of these surrounds the issue of governance:an absence of due democratic process within Zambiaand the failure to uphold civil and political rights.

� The second factor is the failure of the MMDGovernment to complete the privatisation of ZCCM.Donor support has always been implicitly linked to thesale of the mines while ZCCM’s losses have draggedthe economy down.

“The statistics show a trend in which theeconomic gains experienced throughout1997 are now in reverse gear, and theyreveal a plea for something drastic to bedone to avoid virtual collapse of theeconomy.”[Comment on Barclays' Bank Quarterly Report,

Times of Zambia, 25 May 1998]

Both pledges and the actual delivery of donor funds havefallen sharply throughout the period since the MMDGovernment came to power because of concerns overhuman rights and political freedoms within Zambia. Afteran initial honeymoon period, the major donors, at theirConsultative Group meeting in December 1995, expressedtheir disquiet over clauses in the redrafted Constitution. In1996, the national elections were criticised for

irregularities in monitoring andvoter registration. During1997, police roundups ofalleged agitators, includingUNIP officials, werecondemned as politicalpersecution. Then, in October1997, the abortive coupattempt prompted the MMDGovernment to impose a stateof emergency. In November

1997, Kenneth Kaunda, Zambia’s former president, wasarrested. The manner of Kaunda’s arrest; his initialdetention without charge; the subsequent trial on the basisof flimsy evidence; the torture of the perpetrators of thecoup; and wider concern over the MMD’s involvement inattempts to use the police to intimidate and smear itspolitical opponents, all of these matters prompted thedonor community to stop assistance to the ZambianGovernment. The Consultative Group meeting of donorsscheduled for December 1997 was postponed and onlytook place in May 1998 after the state of emergency waslifted.

While the MMD Government was successful in securingdonor assistance of $530 million at the May 1998Consultative Group meeting, it is important to note that theearmarked funds constitute pledges and final payment isconditional on the Zambian Government meeting a numberof stipulations. The money will only be disbursed ifZambia abides by its commitments in respect of goodgovernance. These include reform of the police force, swiftaction to redress torture, and wide participation in localelections. Zambia must also continue to meet economicbenchmarks set by the IMF. Continued support is explicitlylinked to progress towards the complete privatisation ofZCCM as the donor community isopposed to the use of externalassistance to prop up the loss makingconglomerate.

The consequences of both theGovernment's poor record ongovernance and the failure toconclude the sell-off of ZCCM havebeen painfully apparent:

� The donor aid freeze and the suspension of balance ofpayments support caused an almost complete lack offoreign exchange. By May 1998, the Government hadbeen forced to release $80 million of its reserve in afutile attempt to make up for the shortage of foreignexchange in the economy. Lack of foreign exchangemeant that each dollar was worth almost 20% more atthe end of the first quarter of 1998 than it had been atthe beginning of the year. As a result, there is anupward trend in inflation, although interest rates haveremained low for Zambia. Given that current pledgesfinally agreed in May 1998 are conditional on goodgovernance and progress towards the completion ofthe privatisation of ZCCM, support is by no meansguaranteed and the crisis is not over.

� Events over the last year, in particular the collapse ofnegotiations to sell the core Nkana/Nchanga mines,have made the privatisation of ZCCM a distantprospect. ZCCM is in danger of defaulting on its debtswith domestic and foreign banks and emergencysupport from the World Bank to keep the companyafloat can only stave off collapse. A memo fromZCCM’s director of human resources confirmed that,beginning on 1 May 1998, a number of miners wouldbe recessed on indefinite paid leave until either aminority accepted compulsory redeployment or untilmoney could be found to finance retrenchmentpackages for the majority. As a result of the 1998Consultative Group meeting, the World Bank hasagreed to provide $40 million towards the cost ofredundancies within ZCCM on condition thatprivatisation advances. There is little immediateprospect of this happening.

� Payments are not being made tosuppliers who are incurring theirown debts with other creditors andthe banks themselves. Theirworkers are not being paid.Bankruptcy must be a realprospect for many firms.

1992

1993

1994

1995

1996

1997

500

700

900

1100

1300

1500

$ m

illio

ns

External financing[including debt relief]

�&��'�� &�� (�� '� �� [Visiting IMF delegation leader Dinah Guti, quoted in the Times

of Zambia, 4 July 1998]

��9��7��'�� '� �� '� ��

[Investec, Africa Today, June 1998]

� When compared with the same period in the previousyear, manufacturing sector output has fallen by 15%,non-traditional exports have remained static, theexport of agricultural commodities has dropped byalmost a quarter, and overseas sales of both freshflowers and horticultural products have declined by10% and 19% respectively. One positive statistic is thesignificant growth of non-copper mining exports suchas silver, gold and cobalt slag.

� In the absence of this flow of foreign exchange, andbearing in mind the markedly reduced foreign earningsfrom exports, the Government is running out of moneywith which to pay its external debts. In the first quarterof 1998, half of the money it was obliged to take outof its foreign reserves went to meet debt servicing.The successful implementation of the 1998 budget isheavily dependent for over one third of its revenue ondonor funding and it must be noted that the assistanceagreed at the Consultative Group meeting in May 1998is $100 million less than was sought by the MMDGovernment to balance its accounts.

� Should it miss the benchmarks set by the IMF inrespect of how the economy is managed, the countrymay not receive the next tranche of balance ofpayments support. A medium term threat is theexclusion of Zambia from the Highly Indebted PoorCountries initiative which will deprive the country ofsignificant debt relief.

Is there an end in sight to the hardshipcreated by economic reform?

The first phase of economic reform promised recovery, thedevelopment rationale being that poverty in Zambia wouldbe reduced on the back of economic growth. The expectedeconomic turnaround did not happen. The second phase ofeconomic reform recognised that direct action would haveto be taken to stimulate certain sectors of the economy butit also recognised, somewhat belatedly, the need for socialsupport as it became apparent that the link betweeneconomic reform and the reduction of poverty was far fromassured.

On the contrary, economic reform, instead of tacklingpoverty through growth, has actually had a negative impacton the lives of many poor people in Zambia. The latestswift reversal in Zambia’s economic and political fortunesis seen by many to threaten the destruction of the veryconditions for growth which were the result of so muchausterity. Even so, it is by no means apparent that the stagewas ever set for pro-poor growth in the first place.

In 1994, midway through the reform programme, theWorld Bank published its own Poverty Assessment onZambia. This was designed to map out the extent ofpoverty in Zambia, examine its causes, and makerecommendations on what should be done. Fact Sheet 5cwill go on to consider the degree to which the MMDGovernment and its international backers have sought tocorrect the problems identified in the Poverty Assessmentin the second phase of reform.

Have people's social needsbeen forgotten? - Policies tocombat poverty ��

��

However, the next Fact Sheet 5b aims to show just howsevere and widespread poverty in Zambia has become overthe reform period. When talking in terms of equitablegrowth, reducing this level of poverty is the only validbenchmark against which the economic reform programmein Zambia is to be judged.

Have people's social needsbeen forgotten? - Poverty inZambia today ��

��

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The key question

As seven years have elapsed since the MMD Governmentintroduced its World Bank and IMF backed economicreform programme in Zambia, it is high time to ask the keyquestion: �

Q. What is the extent and severity of poverty inZambia today?

Each and every Zambian or commentator who is minded toask this question is fully entitled to do so. This is becausethe World Bank justifies its very existence on the basis ofits mandate which is to alleviate poverty. �

The World Bank stands or falls in relation to its record ofsuccess or failure in bringing this about. The MMDGovernment came to power on the basis of promises itmade to the electorate. It too must be judged by its recordin office.

This Fact Sheet 5b will seek to outline:

� what it is to be poor in Zambia today;

� the extent and severity of this poverty;

� and how far levels of health care, education and basicservices have deteriorated over recent years.

This picture is necessary in order to determine in the nextFact Sheet 5c whether the World Bank and MMDGovernment have taken action, as promised, to combatpoverty and improve social support in the face of thecriticisms of the economic reform programme which havebeen made. It is also necessary in order to judge whether ornot the social situation in Zambia is beginning to improveas a result of this action.

Is widespread poverty new to Zambia?

Widespread and severe poverty is not new in Zambia,although the number of people who feel its affects is on theincrease. From a position of relative prosperity in the late1960s and through the 1970s, when the country was one ofthe most prosperous in sub-Saharan Africa, over the 1980sto the present day, Zambia now ranks as one of the poorercountries in Africa. Hence it would be inaccurate to saythat structural adjustment, liberalisation and privatisation,as recommended by the World Bank and IMF andimplemented under the MMD Government, are responsiblefor poverty in Zambia. In reality, poverty and socialprovision were already deteriorating. However, whatcannot be denied is that certain free market economicreform policies have directly resulted in deterioratingstandards of living, declining services and increasedhardship.

How is poverty defined?

The World Bank defines poverty in two ways. In the firstapproach, people themselves are asked how they wouldcharacterise being poor. Poverty means not having enoughmoney to buy food or clothes. It means not being able tovisit a health centre or hospital or being able to buymedicine. It means keeping your children out of school todo odd jobs and help with household income or becauseyou cannot afford school fees and the cost of uniforms.Poverty means having nothing in reserve, almost no assetsand no savings to get you and yout family through thosetimes when things get even harder.

The second way is to calculate how much it costs toprovide a person with food for a month based on therequirements of an average adult. In late 1991, the WorldBank worked this out to be K962, although it would costmuch more than this at today's prices. If someone can findthis amount and can then afford to spend at least 30 percent more on other goods and services - bringing theirhousehold expenditure per adult to K1380 - then they arenot considered to be poor. If, on the other hand, householdexpenditure per adult is less than this ‘poverty line’ ofK1380, then a person can afford the cost of food but hasnot enough to spend on other essential items. Someone inthis position is considered to be poor. If expenditure cannoteven meet the cost of this basic ‘food basket’, then aperson does not even have enough to eat and ischaracterised as ‘core poor’.

�� -��$��$!�.��!

�� '��&

��

�� '� �� /�� -�� ,��(�� B�� (� �'� ��

�� [Lewis Preston, former President of the World Bank, quoted in Implementing

the World Bank's Strategy to Reduce Poverty: Progress and Challenges, 1993]

By this measure of poverty,a total of 68% of Zambiansfell below the poverty line in1991. Furthermore,four-fifths of those living inpoverty were very poorindeed and could bedescribed as ‘core poor’.

In recent years, evidencesuggests that more and moreZambians are becoming poor.

In 1993, an increased total of 86% of the population fellbelow the national poverty line. By international standards,roughly the same percentage of the population was livingon less than the equivalent of $1 each day. However, theGovernment of Zambia’s own statistics for 1996 maintainthat the percentage of Zambians living below the povertyline remains at about 69%.

Are people poorer in rural areas than inthe cities?

Poverty in rural Zambia is more widespread than in urbanZambia. The 1991 figures show that a massive 88 per centof people living below the poverty line in the countrysidecompared to 46 per cent in the towns and cities.

The needs of both the rural and urban poor are equallyimportant, but it is because many people in Zambia live ina small number of cities that large scale urban poverty isnow a major problem in Zambia. Figures for 1995 suggestthat 4.1 million Zambians, or 45% of the total population,live in urban areas. Although urban growth rates have

slowed in the 1990s,there is little evidencethat people are leavingthe cities. Instead, theurban poor are stayingon in the informalsector.

The number of poorpeople is growing at a faster rate in the cities than in thecountryside. In the 1970's only four out of every onehundred people living in urban centres were poor. In the1990s, every other person living in a Zambian city is livingin poverty. The Government of Zambia’s 1996 LivingConditions Monitoring Survey also confirms that, althoughpoverty in rural areas remains deeper and more severe, thegap is closing as urban residents become poorer.

The Copperbelt, characterised by its towns and cities whichhave grown up around mining, has been particularly hardhit in recent times as copper production has fallen andemployment in ZCCM and associated industries hasdeclined. Nearly one fifth of Zambia’s total populationlives in the Copperbelt and the vast majority of thesepeople - more than eight people in every ten - live in urbanareas. Almost half the entire ‘core poor’ urban populationof Zambia live in the Copperbelt. Furthermore, of the very

poorest urban dwellers - those whose expenditure is lessthan a quarter of what is needed to meet their need for foodand known as the ultra poor - eighty per cent areconcentrated in the Copperbelt.

What characterises urban poverty?

Poor people in cities are a diverse group as the personalcircumstances of each and everyone varies a great deal.However, although people themselves are different, theyoften share a number of characteristics because of thepoverty which they are experiencing:

� The most important expenditure for poor urbanhouseholds is food which accounts for over two-thirdsof the monthly budget. A further fifth of householdexpenditure goes on housing.

� This means that the remaining budget for otheressentials is very small indeed. It is thereforenecessary for people to set priorities. Top of the list isbudgeting for cooking fuel, followed by meetingessential transport costs, then covering the cost ofwater and sanitation, and finally paying out forschooling.

� In hard times, people reduce the amount they eat ateach meal or perhaps eat only one meal a day. It maybe considerednecessary to pullchildren out of schoolto cut down onschool fees anduniform costs.Children can be set towork to raise theincome of a poorhousehold.

� In the early 1990s, about half of the poorest people incities owned their house and about half rentedaccommodation. In fact, home ownership is higheramongst the urban poor than it is amongst urbandwellers who are better off. This is because the poormainly live in squatter compounds where they havebuilt their own homes. However, because thesedwellings are often classed as illegal by the authorities,people always live under the threat of eviction and thelocal council is not required to provide them withbasic services. The housing situation is changingrapidly in many cities as a result of the MMDGovernment's sale of council houses to sitting tenantsand the right of employees to buy their houses as Stateowned enterprises are privatised. The impact of this isdiscussed further in Fact Sheet 5d.

68%

32%

86%

14%

1991 1993PoorNon-poor

The poverty line in Zambia

�= �7�� '� �� (��


�&�� '�� +�� 2�� '��'��2�� '��'��[World Bank, Zambia: Poverty Assessment,1994]

� Urban poverty is often linked bypeople themselves to petty crime,violence and prostitution.

� Urban poverty is characterised byinadequate access to a number ofbasic goods and services -housing, education, health care,transport, water supply andsanitation - which are necessary tomeet people's social needs.

What coping strategies dopeople adopt to helpthemselves?

It would, however, be a mistake to think that the majorityof those who are poor simply accept their fate. Most people are resourceful and enterprising. They adopt awhole host of strategies to help themselves cope with theirsituation:

� Informal sector trading, selling everything fromvegetables to clothes, from dried fish to salt, frompapers to haircuts and shoeshines, is the most commonway for people to get by.

� Of course, people cultivate small garden plots andgrow what they can to help feed the household orprovide produce which can be traded. A study by thedevelopment agency CARE showed that, amongst thepoor residents of George Compound, Ndola, abouthalf of them cultivated gardens and small plots. Foodis not only grown for home consumption; selling cropssuch as sweet potatoes was one of the most profitableactivities. The biggest problem the residents face,however, is that because they have no legal tenure,their gardens are viewed as illegal by the City Council.Gardens on public land may be destroyed, yet land isreallocated to commercial farmers for political gain.

� It is very difficult to get loans orcredit, but neighbours and kin dosupport each other with food andfuel when someone isparticularly hard up. Gettingcash credit is fraught withdifficulties but it can beorganised. The informal kakoba system requires a loan to paidback at extortionate rates by thefirst day of the next month butrotating chilimba credit, oftenorganised among groups ofwomen, is a better alternativewhen it is available.

Indeed, those who are dependent on others or those welland truly ground down by inadequate food and lack ofresources are perceived as the poorest by those whocontinue to struggle and think up new ways to make endsmeet.

Is it realistic to expect that people canescape poverty on their own?

In answering this question, it is appropriate to introducethree quotes from the World Bank: �

�

�+� �� '�� '� �� (��

�&�� '��'��(��'�� (� �� (�� '��2�� N��'��+B6�� +� �� '� �� '��


8B��!��>JJ*��'�� '��('�� '��9[Urban Poverty on the Copperbelt, Desk Study prepared for the

Royal Netherlands Embassy]

Often people engaged in some form of petty tradingwhether selling cigarettes outside their homes or selling afew tomatoes and buns. However, this range of activitiesseemed to be geared more towards survival than being anindication of any kind of dynamic thrust in the per-urbaneconomy.

[Zambia: Poverty Assessment]

Human resource development must be a key element of anypoverty reduction strategy. Greater access to quality socialservices is important for the productivity of the poor’smost important asset: their labour....Lessons from othercountries confirm that the poor will not be able to benefitfrom the improved macroeconomic policy framework ifthey are illiterate, malnourished, or in poor health.

[Zambia: Poverty Assessment]

The ability of poor Zambians to help themselves isconstrained by grossly inadequate services in health,education, transport and in the provision of water andsanitation.

[Zambia: Country Assistance Strategy]

These statements tell us that:

� whatever poor people do on their own, how everresourceful they are, the majority may survive, but willnot escape from poverty;

� it is essential social services and education, designedto meet the needs of the poor, which will make thedifference;

� and that it is precisely this level of quality socialsupport which has been missing in Zambia in recentyears.

The remainder of this Fact Sheet will attempt to summarisethe state of this essential social provision.

Exactly what has been done to deliver improvements inthese areas will be the subject of the next Fact Sheet 5c.

Have people's social needsbeen forgotten? - Policies tocombat poverty ��

��

It will examine whether the World Bank, internationaldonors and the MMD Government have lived up to theirpromise to deliver this investment in ‘human capital’ -education, health care, and training. In its absence, it willbe impossible for the majority of Zambians to escape frompoverty, no matter how extensive the economic reforms.

=��

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� �� "�!� �� J�� !� �� "�� "�� "�� "�� "�� !� ��

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It has often been assumed, given the "urban bias" in Zambia'sdevelopment, that urban populations have been better served by healthand education services. Declining revenues and increasing populationpressures during the 1980s mean that if this was once the case it iscertainly not the current situation....the urban poor are eitherunder-served or, in illegal settlements, not served at all.


-��O��

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� 5�� .��"� �� *"��.�+-0��"� ��(80�"�� "��

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. B�� 5�� "�� &-��"�� 7--��&((&��.��"�� 7---��

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45.6%

48.9%

4.8% 0.7%

Pit latrineFlush toiletNone/bushOther

Urban sanitation [1996]

46.7%

33.9%

15.6%3.8%

Private tapPublic tapWell/boreholeOther

Urban water sources [1996]

In Chipulukusu, people attributed theoutbreaks of diseases such as cholera anddysentery to the dirty water from thewells, which they understood wereinfused with the dirt from the latrinesclose by. [World Bank, Zambia: Poverty Assessment,comment on Chipulukusu compound, one of

The department is not getting any returns onits water services extended to squattercompounds. This goes also with low costhousing areas.

[Report of the Acting Director of Water andSewerage Services, Kitwe, 1994]

1��

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�� $��"��!��" ��"��!�� "��

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# ��"�� !� �� .��"��$��.��?� 2��@�� "�� !�� "�� >"� �!�� !� �� >"�� B�� !�� " � �� "��"�� !�$��"��!� �� "�� P�"�� /��!��" � ��!�� " ��.�� >"��"��"��B�� "�� ;

B�� "��!�� 5��"��"�� .��"�� "�� .�� !�� :��

152

191 197

1977-81 1987-91 19960

50

100

150

200

250

Under five mortalityNo. of children dying between birth and the age

of five per 1000 live births

79

107 109

1977-81 1987-91 19960

20

40

60

80

100

120

Infant mortalityNo. of deaths of infants under the age of one

per 1000 live births

The overall level of chronic malnutrition (stunting or lowheight-for-age) in Zambia is higher than the average forSub-Saharan Africa and 15 times as high as levels indeveloped market economies.


The AIDS epidemic will have serious repercussions onpoverty in Zambia, as elsewhere. HIV/AIDS threatens toeliminate some of the most productive members of society,clog the health care system, and saddle individual familieswith increased responsibilities caring for the ill and forlarger numbers of dependants.

World Bank, Zambia: Poverty Assessment, 1994]

User fees in the formal health care system appeared to be puttingthe mainstream health facilities out of reach of the poor. Highmedical fees alone in many cases were simply unaffordable andaccounted for the claim of a sharp decline in the number of visitsto clinics and hospitals....In Chipulukusu, people expressed anguishat the fees they were expected to pay, especially when coupled withthe mediocre treatment they received.


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[T]he poor face the necessity to balance the cost ofeducation and its perceived long-term benefitsagainst the immediate needs for labour and incomegenerating capacity to produce food and otheressentials for life.

World Bank, Zambia: Poverty Assessment, 1994]

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In real terms, urban transport costs have risen out ofall proportion to incomes. For those using transport,costs consume an average of 17 percent of non-foodexpenditure. In Chawama, 71 percent of the verypoor cannot afford to use transport services at all.[World Bank, Zambia: Poverty Assessment, 1994]

Documents

RAID | Rights and Accountability in Development...questions on accountability. Secondly, that the affect of privatisation on the four-fifths of the Zambian population who live below