2011 - 2014 Baseline data for Zimbabwe’s Portfolio of STATE ENTERPRISES & PARASTATALS Prepared By: Office of the President and Cabinet Ministry of Finance and Economic Development State Enterprises Restructuring Agency (SERA) Contents 2 Table of Contents 13 Profit (Loss) 4 Acronyms 13 Total Assets 5 About this Report 14 Total Liabilities 5 Summary 14 Contingent Liabilities 6 Introduction 15 Transfers from the State 7 Overview of Zimbabwe’s SEP Portfolio in 2014 16 PART TWO 9 PART ONE 16 Commercial SEPs by sector performance 9 Financial performance of SEPs 19 Non-Commercial SEPs sector performance 9 SEPs portfolio performance 21 PART THREE 10 Gross income 21 SEPs Portfolio Risk Analysis 10 Total expenditures 23 Conclusion 11 Wages 24 ANNEX 1 11 Board costs 24 List of Non-Commercial SEPs by Sector 12 Corporate taxes paid 26 List of Commercial SEPs by Sector 12 Dividends paid 2 Figures Figure 1 Commercial SEP Sectors by Asset 7 Figure 2 Non-Commercial SEP Sector by Assets 8 Figure 3 Commercial SEPs US$(000) 10 Figure 4 Non-Commercial SEPs US$(000) 10 Figure 5 Commercial SEPs US$(000) 10 Figure 6 Non-Commercial SEPs US$(000) 10 Figure 7 Commercial SEPs US$(000) 11 Figure 8 Non-Commercial SEPs US$(000) 11 Figure 9 Commercial SEPs US$(000) 11 Figure 10 Figure 10: Non-Commercial SEPs US$(000) 11 Figure 11 Commercial SEPs US$(000) Corporate Taxes Paid 12 Figure 12 Non-Commercial SEPs US$(000) Prior Accumulated Corporate Taxes 12 Figure 13 Dividends Paid to the State US$(000) 12 Figure 14 Commercial SEPs US$(000) Profit (Loss) 13 Figure 15 Non-Commercial SEPs US$(000) Surplus (Loss) 13 Figure 16 Commercial SEPs US$(000) 13 Figure 17 FNon-Commercial SEPs US$(000) 13 Figure 18 Commercial SEPs US$(000) 14 Figure 19 Non-Commercial SEPs US$(000) 14 Figure 20 Explicit Contingent Liabilities US$(000) Commercial SEPs 14 Figure 21 Commercial SEPs US$(000) 15 Figure 22 Non-Commercial SEPs US$(000) 15 Tables Table 1 Commercial SEP Sector Performance 16 Table 2 Non-Commercial SEP Sector Performance 19 3 Acronyms AfDB African Development Bank CMED Central Mechanical Equipment Department GDP Gross domestic product MoFED Ministry of Finance and Economic Development SEP State Enterprises and Parastatals SERA State Enterprises Restructuring Agency OPC Office of the President and Cabinet PSIP Public Sector Investment Program VRF Visible Relative Fiscal (risk) ZETDC Zimbabwe Electricity Transmission and Distribution Company ZIM-ASSET Zimbabwe Agenda for Sustainable Socio-Economic Transformation ZIMRA Zimbabwe Revenue Authority ZIMREF Zimbabwe Reconstruction Fund ZINARA Zimbabwe National Roads Administration 4 About this report This report provides financial data about State Enterprises and Parastatals (SEPs) for the 2011– 2014 period as a means of informing future discussions of Zimbabwe’s SEP portfolio. It is the first known stocktaking of a portfolio view of the financial performance of SEPs. The report is divided into three parts. Part one presents a consolidated view of the 84 SEPs represented in the baseline data. The second part presents a sectoral view of both the commercial and non- commercial SEPs, and the third part presents a risk analysis. Conclusions draw out a few of the main relevant provisions of the Constitution and Laws of Zimbabwe. Summary Zimbabwe’s SEPs were established to spearhead were both illiquid and insolvent, and a further development by investing in industries where 19 were illiquid. SEPs’ overall (loss/deficit) was the private sector is reluctant to invest; to reduced by a surplus recorded by non-commercial address conflicts of interest through regulatory SEPs of about $25 million. agencies; to fulfil service delivery, social and research roles in various sectors, particularly in Only two SEPs reported paying dividends in 2014, those areas dominated by natural monopolies. totalling $1.7 million; in that year, commercial SEPs play a key role in advancing the economic SEPs received over $85 million in fiscal transfers. development of Zimbabwe. Government’s Government also transferred $318 million to non- economic blueprint, the Zimbabwe Agenda for commercial SEPs whose main source of income is Sustainable Socio-Economic Transformation (ZIM- usually the National Budget. ASSET), acknowledges the pivotal role played by SEPs in socio-economic development. While fiscal risk can be derive from many contingencies, one important source of risk is During data collection exercise, 84 SEPs reported a SEP’s present financial situation: its lack of their results for 2011-2014, out of the total of 97. profitability as well as, liquidity and solvency Those 84 SEPs recorded an overall loss/deficit of challenges. A review of this aspect of the US$260 million in 2014 (the last year for which commercial SEP portfolio confirms that it audited reports are widely available) and gross continues to pose significant fiscal risk to the income of $4.2 billion using gross assets of $14.1 Treasury. The paper concludes with a brief survey billion. The 38 commercial SEPs in the sample of a few key provisions of the Constitution and accounted for $285 million loss (only 12 returned Laws of Zimbabwe which bear on the weaknesses a profit) on gross income of $3.25 billion and gross identified in the body of the report. assets of $12.7 billion. In 2014, 6 commercial SEPs 5 Introduction Zimbabwe has a decentralized ownership The Baseline Data Collection began in February structure, whereby the line ministries act as the 2016, following the launch workshop on January owners of SEPs on behalf of the Government, the 20, 2016. Information was requested from 97 shareholder. In such an ownership structure, the SEPs; 84 SEPs made data submissions, for a Government delegates its shareholder function, response rate of 87 percent. Of the SEPs which including performance monitoring, to the line submitted their data, 38 were commercial entities ministries which monitor SEPs under their and 46 were non-commercial entities. SEPs were respective portfolios. given definitions and formulas for calculations of the data to be provided. The financial data This fragmentation of ownership as well as lack of received was verified using audited financial role clarity has led to isolated monitoring of SEPs, statements and management accounts provided which in turn made it more difficult to ascertain by the entities. the SEPs’ overall portfolio performance. However, when SEPs face financial challenges, they call upon This SEP database will enable the Government the Government or the Treasury for bailouts. This to develop appropriate policy interventions, makes it imperative for the Government to assess thereby improving the efficiency and the overall performance of its entire SEP portfolio. effectiveness in the utilization of government The overall performance monitoring of the SEP assets and financial resources. portfolio allows the Treasury to manage fiscal risks posed by these state entities. In its endeavour to monitor the performance of It is imperative for the SEP portfolio, the Government undertook a baseline data collection exercise. This exercise the Government to was carried out by the Ministry of Finance and Economic Development (MoFED), through the assess the overall State Enterprises Restructuring Agency (SERA), with the assistance of a World Bank-administered performance of trust fund, the Zimbabwe Reconstruction Fund (ZIMREF). The Baseline Data Collection was its entire SEP undertaken to build a complete and credible database of key information about the SEPs. The portfolio. baseline data serves as a point of reference against which future data collections will be conducted and compared. As such, it will enable an analysis of SEP performance. 6 Overview of Zimbabwe’s SEP Portfolio in 2014 The commercial SEPs are subdivided into 11 entire asset base of the 38 commercial SEPs. sectors as depicted in figure 1, including: energy, The environment and water sector was the mining, transport, industry and commerce, second largest with US$2.2 billion in assets, or environment and water, financial services, 17 percent of the asset base. This was followed by agriculture, postal and telecommunications, the financial services sector with US$1.4 billion media and communication, culture, and health. in assets, or 12 percent; and then the transport The energy sector is the largest sector with sector with US$1.2 billion in assets or 10 percent. US$5.6 billion in assets, or 44 percent of the Figure 1: Commercial SEP Sectors by Asset Transport 10% Postal & Telecommunication 8% Agriculture Mining 3% 3% Media & Communication 1% Energy Culture 44% 0% Industry & Commerce 2% Health Environment and Water 0% 17% Financial Services 12% Source: Baseline database 2014 Non-commercial SEPs also play a pivotal role post and telecommunications with 5 percent, in various sectors of the Zimbabwean economy agriculture and entertainment — each with 4 (see figure 2). Among the non-commercial SEPs, percent, research, social and development sector education is the largest sector with 40 percent of with 5 percent, health with 3 percent, and energy the asset base, followed by transportation¹ with and culture — with 1 percent. 22 percent, financial services² with 15 percent, ¹ The transportation sector includes the Zimbabwe National Roads Administration (ZINARA). ² The financial services sector includes the Zimbabwe Revenue Authority (ZIMRA). 7 Figure 2: Non-Commercial SEP Sector by Assets Entertainment Energy 0% 1% Transport Post & Telecommunications 22% 5% Research, Social & Development Education 5% 40% Agriculture 4% Media & Communications Culture 0% 1% Financial Services Health 15% 3% Environment 4% Source: Baseline database 2014 In fulfilling their commercial, developmental borrowed from both international and local sources. and social mandates, SEPs create employment Their inability to repay the debt poses significant opportunities for the people of Zimbabwe. As of fiscal risks to the Government, which is often the December 2014, 84 SEPs employed 59,391 people. guarantor for the debt. In addition to the debt This represented 1 percent of the employed/active guarantees, the Government provided state transfers population in Zimbabwe.³ Thirty-eight commercial to SEPs. These transfers outweighed receipts in the SEPs employed 40,716 people, and non-commercial form of dividends and taxes to the State. SEPs employed 18,675 people. Transport accounted for the largest number of employees as it registered The SEP financial data revealed that 6 entities 25 percent of employed people in commercial SEPs. reported market shares below 10 percent, and 10 The second highest employer was the energy sector entities reported market shares below 50 percent. followed by the mining sector which employed 20 It had been observed that 17 commercial SEPs and 14 percent, respectively. The education sector, reported capacity utilization below 50 percent, which comprises universities, employed 46 percent which includes 3 that operated below 20 percent of people employed by non-commercial SEPs, capacity utilization. The economic environment followed by the environment sector with 18 percent, coupled with reduced capacity utilization led some and the financial services sector with 15 percent. SEPs to the retrenchment of employees. Assessing employment data from 2011 to 2014, there was an SEP financial performance deteriorated significantly 8 percent reduction in the number of employees over the period 2011-2014. In 2014 the commercial in commercial SEPs. The agriculture, transport and SEPs reported a US$285 million loss, whereas the industry, and commerce sectors were the sectors non-commercial sector reported a marginal surplus with the highest levels of employment reductions. of US$25 million. As a result of their poor financial performance, SEPs struggled to repay their debt — ³ Based on the active population or labor force of 15+ years of age employed (6,265,869), according to ZIMSTATS 2014 Labour Force Survey. 8 Part One Financial performance of SEPs SEPs portfolio performance portfolio is unable to meet its current obligations. Although SEPs operate in critical sectors — in The inability of the SEPs to generate profitable some cases, constituting monopolies — their returns is a fiscal risk to the Government. In 2014, performance, particularly that of the commercial of those SEPs which submitted their data, explicit SEPs, was unimpressive. Only 12 of 38 commercial contingent liabilities⁵ amounted to US$ 1.9 billion, SEPs reported a profit in 2014; all others reported representing 13 percent of gross domestic product a loss. The extent of the losses reported by the (GDP). The financial burden created by the SEPs commercial SEPs resulted in a return on assets on the Government is significant. It concerns declining from -0.2 percent in 2011 to -2.2 not only explicit contingent liabilities, but also percent in 2014. These results indicate that transfers from the Government to SEPs. However, although the assets held within the commercial the Government receives extremely low dividends SEPs portfolio are significant (US$ 12.7 billion), and corporate taxes in return. The Government’s the SEPs inefficiently used their assets to generate transfers to commercial SEPs in 2014 amounted profits. It was also noted that three SEPs operated to US$ 85 million, whereas dividends received at capacity utilization of below 20 percent. totalled US$1.7million, and corporate taxes US$ 15.6 million. Transfers from the State occurred The debt to asset ratio for the commercial SEPs in the form of Public Sector Investment Program portfolio was 51 percent in 2014, indicating that (PSIP) funding, equity injections, as well as grants just over half of the assets in the portfolio would be to a very few commercial SEPs. required to meet financial obligations. With these assets not generating sufficient profits, SEPs are Non-commercial SEPs do not pay dividends, given struggling to repay their debts. Working capital for that their mandates are social and developmental 2014 was (US$ 1.9 billion), indicating that the SEP in nature. Their social mandates require state ⁴ Explicit contingent liabilities refers to SEP borrowing that is guaranteed by the Government. 9 transfers in the form of grants. However, the composed of fiscal transfers exceeding operational grants received by these SEPs have decreased expenditure, and other revenues exceeding costs overtime, forcing some non-commercial SEPs to (or, for revenue-generating non-commercial SEPs identify additional means of revenue generation. which fund other public sector activities, retention See figures 3 and 4. In 2014 non-commercial of funds pending transfer to end-users). SEPs recorded a total surplus of $25 million, Gross Income Figure 3: Commercial SEPs US$(000) Figure 4: Non-Commercial SEPs US$(000) 920,312 947,346 3,404,490 3,251,512 3,226,658 840,071 2,827,122 634,756 2011 2012 2013 2014 2011 2012 2013 2014 Source: Baseline database 2014 Source: Baseline database 2014 Gross Income for the SEP portfolio in 2014 totalled percent in 2014 when compared to 2013, and US$ 4.2 billion, with commercial SEPs reporting gross income for the non-commercial portfolio US$ 3.2 billion and non-commercial SEPs reporting increased by 3 percent in 2014 when compared US$ 947.3 million (figures 3 and 4). Gross Income to 2013. for the commercial SEPs portfolio declined by 4 Total Expenditures Figure 5: Commercial SEPs US$(000) Figure 6: Non-Commercial SEPs US$(000) 874,420 907,906 814,369 3,420,639 3,571,574 3,544,665 623,357 2,816,969 2011 2012 2013 2014 2011 2012 2013 2014 Source: Baseline database 2014 Source: Baseline database 2014 Total expenditures for the SEP portfolio amounted 2013. Non-Commercial SEPs reported expenditure to US$ 4.5 billion (figures 5 and 6). Commercial of US$ 907.9 million, an increase of 4 percent SEPs reported expenditures of US$ 3.5 billion in when compared to 2013. 2014, a 1 percent decrease when compared to 10 Wages - Staff Remuneration Figure 7: Commercial SEPs US$(000) Figure 8: Non-Commercial SEPs US$(000) 717,897 750,399 678,550 580,148 389,656 353,215 309,549 240,897 2011 2012 2013 2014 2011 2012 2013 2014 Source: Baseline database 2014 Source: Baseline database 2014 Staff remuneration for both the commercial and 2013, and for non-commercial SEPs, the increase non-commercial SEPs totalled US$ 1.1 billion was 10 percent. Staff remuneration for the in 2014 (figures 7 and 8). Both SEP portfolios commercial SEPs portfolio was 21 percent of total saw increases in wages; for commercial SEPs, expenditures, and 43 percent of total expenditure the increase was 5percent in 2014 compared to for the non-commercial SEPs. Board Costs Figure 9: Commercial SEPs US$(000) Figure 10: Non-Commercial SEPs US$(000) 5,635 3,088 4,329 4,382 2,522 2,135 2,928 1,652 2011 2012 2013 2014 2011 2012 2013 2014 Source: Baseline database 2014 Source: Baseline database 2014 11 Board costs for commercial SEPs decreased by 22 10). A significant portion of the increase in non- percent in 2014 when compared to 2013, board commercial SEP board costs resulted from tax costs for non-commercial SEPs increased by 22 penalties paid by one SEP in 2014. percent when compared to 2013 (figures 9 and Corporate Taxes Paid Figure 11: Commercial SEPs US$(000) Figure 12: Non-Commercial SEPs US$(000) Corporate Taxes Paid Prior Accumulated Corporate Taxes 21,915 20,073 20,144 15,640 42,064 37,870 32,822 28,788 2011 2012 2013 2014 2011 2012 2013 2014 Source: Baseline database 2014 Source: Baseline database 2014 Corporate taxes paid by commercial SEPs do not pay corporate taxes. Although commercial decreased by 22 percent in 2014 compared SEPs have made corporate tax payments, they to 2013 (figures 12 and 13). This decrease was have accumulated significant tax liabilities. Prior primarily driven by decreases in corporate taxes accumulated corporate tax liabilities were US$ paid by the mining sector. Non-commercial SEPs 42.1 million in 2014. Dividends Paid Figure 13: Dividends Paid to the State US$(000) 73,412 44,637 23,045 1,746 2011 2012 2013 2014 Source: Baseline database 2014 Dividends paid in 2014 showed a 96 percent to pay dividends to the Government whenever decrease when compared to 2013 (figure 14). they make a profit”. The rate of the dividend This decrease was due to a significant reduction payable should be at least 50 percent of after-tax in dividends paid by the mining sector. The profits. However, in 2014 only two SEPs reported Dividend Circular Number 7 of 1995 states that dividend payments. Non-commercial SEPs did not “all parastatals and state enterprises are required report any dividend payments. 12 Profit (Loss) Figure 14: Commercial SEPs US$(000) Figure 15: Non-Commercial SEPs US$(000) Profit (Loss) Surplus (Loss) 2011 2012 2013 2014 37,925 (20,633) 24,749 20,058 (150,908) (171,587) 4,340 (285,242) 2011 2012 2013 2014 Source: Baseline database 2014 Source: Baseline database 2014 Losses generated by SEPs in 2014 totalled US$ 260.5 million (figures 15 and 16). Losses increased as the Losses increased as mining sector’s profitability declined significantly. Losses were also attributable to increased losses in the mining sector’s the agriculture sector. Commercial SEPs accounted for US$ 285 million of the losses, whereas non- profitability commercial SEPs reported a surplus of US$ 25 million. Only 12 commercial SEPs reported a profit declined in 2014. Most universities reported a deficit in 2014. The surpluses were mainly generated by the significantly research, social and development sectors. Total Assets Figure 16: Commercial SEPs US$(000) Figure 17: Non-Commercial SEPs US$(000) 12,695,658 1,322,723 1,406,038 10,953,312 1,147,726 8,690,089 9,266,605 875,841 2011 2012 2013 2014 2011 2012 2013 2014 Source: Baseline database 2014 Source: Baseline database 2014 In 2014, the 84 respondent SEPs had an asset commercial SEPs had an asset base of US$ 1.4 base of US$ 14.1 billion (figures 17 and 18). Of billion. Total shareholder value (total net assets) these 84 SEPs, 38 commercial SEPs had an asset was amounted to US$ 7 billion in 2014. base of US$ 12.7 billion, and 46 of the non- 13 Total Liabilities Figure 18: Commercial SEPs US$(000) Figure 19: Non-Commercial SEPs US$(000) 6,482,215 614,553 5,584,720 554,971 4,842,472 443,142 4,150,985 236,123 2011 2012 2013 2014 2011 2012 2013 2014 Source: Baseline database 2014 Source: Baseline database 2014 Total liabilities for the overall SEP portfolio to US$ 6.5 billion, representing 51 percent of their amounted to US$ 7.1 billion (figures 19 and total assets. Total liabilities for non-commercial 20). This represents a total liabilities level of 50 SEP amounted to US$ 614.5 million, representing percent of the total assets owned by the SEPs. In 44 percent of the portfolio’s total assets. 2014, total commercial SEP liabilities amounted Contingent Liabilities Figure 20: Explicit Contingent Liabilities US$(000) Commercial SEPs 1,864,513 1,651,787 1,505,704 1,293,872 2011 2012 2013 2014 Source: Baseline database 2014 In 2014, of the US$ 6.5 billion total liabilities in Explicit guarantees increased by 13 percent in commercial SEPs, US$ 1.9 billion have explicit 2014 as compared to 2013 (figure 21). External guarantees from the Government (refer to sector creditors are the primary source for explicit analysis). Contingent liabilities in the form of contingent liabilities. explicit guarantees constitute fiscal risk to the Government. In the event that SEPs are unable to repay their debt, creditors may expect the Explicit guarantees Government to repay the amounts. As a result of increased by 13 weak financial performance, SEPs have not been adequately servicing their debt. The resulting percent in 2014 legacy debt is a fiscal risk to the Government. 14 Transfers from the State Figure 21: Commercial SEPs US$(000) Figure 22: Non-Commercial SEPs US$(000) 156,441 322,633 317,584 131,748 128,245 218,669 84,626 151,817 2011 2012 2013 2014 2011 2012 2013 2014 Source: Baseline database 2014 Source: Baseline database 2014 In 2014, the Government transfers to the 84 SEPs The decline in transfers had been partly caused represented $402 million in 2014 (figures 22 and by challenges faced by the Treasury in raising 23). Of this amount, US$ 85 million went to the funds to recapitalize the SEPs. Government grant commercial SEP portfolio, and another US$ 318 to Zimbabwe Revenue Authority is not included million was allocated to the non-commercial SEP in 2011 and 2012 figures due to unavailability portfolio. In 2014, the Government transfers to of the information. SEPs were at their lowest level for the commercial. 15 Part Two Commercial SEP Sector Performance Table 1: Commercial SEP Sector Performance Transfers from the state Number of employees Profit (Loss)(US$000) Corporate taxes paid liabilities (US$000) Explicit contingent Return on assets Dividends paid Current ratio Commercial Debt ratio Liabilities (US$000) (US$000) (US$000) (US$000) (US$000) Assets SEPs Agriculture (67,330) 354,044 115,084 - 16,476 - 142,663 3,410 1.1 33% -19.0% Energy (108,105) 5,568,122 2,779,423 - - 9,572 740,273 7,960 0.5 50% -19% Environment and (18,598) 2,201,028 227,246 - 62,049 - 24,361 3,519 0.8 10% -0.8% water Financial Services 90,208 1,486,297 462,439 500 4,000 1,349 7,795 1,973 1.9 31% 6.1% Health 6,228 26,517 3,237 - - - - 145 7.0 12% 23.5% Industry and (38,931) 215,427 170,048 - - - 27,825 2,951 0.4 79% -18.1% Commerce Culture (6) 60 49 - 57 - - 5 1.1 81% -10.0% Media and (16,904) 119,453 109,317 - 927 - 1,769 1,395 0.8 92% -14.2% Communication Mining (44,933) 392,465 414,244 1,246 - 2,942 - 5,499 0.4 106% -11.4% Postal and (8,236) 1,086,560 1,142,011 - - 1,778 505,017 3,807 0.4 110% -0.8% Telecommunication Transport (78,631) 1,295,685 1,059,117 - 1,116 - 414,810 10,052 0.3 8% -6.1% Total (285,242) 12,695,668 6,482,215 1,746 84,626 15,640 1,864,513 40,716 51% -2.2% Source: Baseline database 2014 16 Profit (Loss) Dividends Paid For commercial SEPs, the energy sector accounted The mining and financial services sectors are for the greatest losses with 38 percent, followed the only two sectors that paid dividends to the by the transport sector with 28 percent, and the shareholder. The dividend paid by the mining agricultural sector with 25 percent. However, sector was paid to the Ministry of Mines and the financial service and health sectors reported Mining Development, which assumes the role of profits, thereby mitigating the overall losses. shareholder on behalf of the Government. Transfers from the State Corporate Taxes Paid Transfers from the State were allocated to a variety The energy, financial services, mining, and postal of sectors, including agriculture, environment and telecommunications sectors all paid corporate and water, financial services, culture, media taxes. The energy sector was the largest corporate and communication, and transportation. The tax payer in 2014. environment and water sector received the highest transfers, representing 73 percent of total transfers. This transfers came through PSIP funding. 17 Liquidity A comparison of the 2011 to 2014 shows that SEP liquidity has decreased in most sectors. As of 2014, the transport sector was the least liquid sector, with a current ratio of 0.33 compared to 0.48 in 2011. The postal and telecommunications sector had a ratio of 0.43 in 2014, which remained flat a ratio of 0.42 in 2011. The mining sector’s ratio was 0.4 in 2014, compared with 0.76 in 2011. The ratio for the industry and commerce sector was 0.4 in 2014, compared with 1.13 in 2011. The energy sector ratio was 0.53 in 2014, an increase compared to 0.49 in 2011. The media and communication sector had a ratio of 0.81 in 2014, compared to 0.39 in 2011. This increase was mainly due to increased accounts receivable at Transmedia. Finally, the environment and water sector had a ratio of 0.81 in 2014, compared to 1.01 in 2011. Contingent Liabilities The Government is exposed to a high level of explicit fiscal risks resulting from guaranteeing the debt of the commercial SEPs. The energy sector accounts for 40 percent of the explicit contingent liabilities, followed by the postal and telecommunications sector with 27 percent, and the transport sector with 22 percent. These sectors do not have the resources required to meet their current obligations. In this context, the agriculture, financial services, culture, and health sectors are the only sectors with a current ratio greater than 1, meaning that they have the necessary resources to meet their current obligations. However, the current ratios for these sectors also decreased in 2014, when compared to 2011. 18 Non-Commercial SEPs Sector Performance Table 2: Non-Commercial SEP Sector Performance Transfers from the state Number of employees Return on assets Surplus (Deficit) SEPs Sectors Current ratio Debt ratio Liabilities (US$000) (US$000) (US$000) (US$000) Assets Education (10,493) 560,323 213,430 168,438 8,563 0.9 38% -1.9% Media and (233) 1,249 728 225 N/AV 1.6 58% -18.7% Communications Financial Services 4,352) 206,371 40,308 119,316 2,376 1.6 20% -2.1% Environment (7,135) 60,909 21,050 7,560 3,297 1.5 35% -11.7% Health (2,129) 45,592 7,757 6,858 1,077 2.4 17% -4.7% Culture (362) 15,041 452 1,569 123 0.7 3% -2.4% Agriculture 8,084 60,680 8,125 81 1,162 2.4 13% 13.3% Research, Social and (3,291) 63,572 36,925 12,951 1,092 0.4 58% -5.2% Development Postal and 3,710 62,547 8,578 585 102 6.6 14% 5.9% Telecommunications Energy 2,325 13,999 4,370 - 36 2.6 31% 16.6% Entertainment 128 1,326 155 - 4 5.8 12% 9.7% Transport 38,498 314,429 272,674 - 483 0.7 87% 12.2% Total 24,749 1,406,038 614,553 317,584 18,675 44% 1.8% Source: Baseline database 2014 Surplus (Deficit) of Profit (Loss) Non-Commercial SEPs by Sector The non-commercial SEPs recorded a surplus of US$25 Due to the “surplus” reported by ZINARA in 2014, the million in 2014 (see table 2). The biggest contributor transport sector was the main driver of the surplus to this surplus was the transport sector, represented by reported by non-commercial SEPs. The “surplus” Zimbabwe National Roads Administration (ZINARA). actually represents fees collected, but awaiting The agriculture sector also registered a surplus. The distribution to the Road Authorities, as well as servicing contributors to the surplus in the agricultural sector of the African Development Bank (AfDB) loan. The included the Tobacco Industry & Marketing Board, amount should therefore be transferred to creditors or the Agricultural Marketing Authority, and the Tobacco to the fund account awaiting disbursement. As such, Research Board. as reported, it is not an operating surplus. 19 Transfers from the State Liquidity The education sector received the largest amount Some non-commercial SEP sectors were illiquid. of Government grants in 2014, accounting As of 2014, the education sector had a current for 53 percent of the total transfer to non- ratio of 0.9, compared to 1.6 in 2011. Culture has commercial SEPs. The education sector is mainly a ratio of 0.7 in 2014, compared to 2.1 in 2011. comprised of universities. The financial services Research and social development had a ratio of sector received the second highest amount of 0.4 in 2014, compared to 1.2 in 2011. Finally, the Government grants, accounting for 38 percent of transport sector’s ratio was 0.7 in 2014, compared the total transfers, followed by the research, social to 1.1 in 2011. These sectors are all vital to the and development with 4 percent, environment advancement of Zimbabwe’s economy. However, and health with 2 percent. they do not have the resources required to meet their current obligations. Debt The research and social development sector’s debt ratio of 58 percent is due to the National Indigenization and Economic Empowerment Board which is insolvent, and does not have the assets required to meet its total debt. The transport sector debt ratio of 87 percent is cause for concern, and should be monitored closely to avoid insolvency. 20 Part Three SEPs Portfolio Risk Analysis Significant SEP losses and debts are financially Government) may have contractual obligations costly to governments. SEPs may require the cost of which can be difficult to estimate (for unforeseen bail-outs — resulting in significant example, a guarantee of a given level of demand in fiscal risks. There are various contributing factors, a Joint Venture — the factor underlying Portugal’s including: uncompensated quasi-fiscal activities;⁵ fiscal crisis). lack of role clarity in the management and monitoring of SEPs; excessive borrowings by SEPs The baseline data provides only a view of SEP which may carry explicit and implicit government borrowing and financial performance; other areas, guarantees; and weak SEP reporting and oversight. as noted, are not captured in the database. Against this background, a proper fiscal risk assessment is The measure of fiscal risks with regard to SEPs is not included in this report. Conducting a thorough broad. As noted, there is the expectation that the fiscal risk assessment for Zimbabwe’s SEPs would Government, as the shareholder, will stand behind require extensive research and analysis. Analysis a SEP that is losing money, becomes illiquid, or of the available data indicates that based on their even insolvent. In addition, there are other risks profitability, liquidity and solvency, some SEPs that may strike even currently solvent, liquid and pose immediate fiscal risks to the Government. profitable SEPs. For example, like any company, Close monitoring could entail a more detailed a currency mismatch between income and cost fiscal risk assessment. streams may expose a SEP to exchange rate risk. Also, heavy borrowings at variable interest rates The analysis of the financial performance and may imply an interest rate risk. Further, asset position of SEPs resulted in the categorization of valuations may involve credit risks in which the SEPs by the immediate fiscal risk they pose on the debtors’ viability is unclear. Finally, a SEP (or a Treasury, relative to their size. Of course, size also ⁵ Activities performed by SEPs on behalf of the Government, but for which SEPs are inadequately compensated. 21 matters. For instance, a small SEP which is illiquid, Nevertheless, SEPs can be categorized as follows: insolvent, and/or loss-making, but has expenditures (i) Very High, Visible Relative Fiscal (VRF) Risk SEPs of under US$1 million and debts of a similar level, is in as they are both illiquid and insolvent; (ii) High VRF absolute terms a lower fiscal risk than a solvent, liquid Risk SEPs as they are illiquid; and (iii) Lower VRF Risk and loss-making SEP whose losses exceed US$10 SEPs due to their losses, and others. The analysis is million, total liabilities exceed US$100 million, and divided into two sectors, namely a commercial SEP net current assets are only just in the positive range. assessment and a non-commercial SEP assessment. Commercial SEPs Commercial SEPs with Very High Visible Relative SEPs with Lower VRF risk Fiscal (VRF) Risk The Baseline Data showed that 4 SEPs had lower The baseline database revealed that there were VRF risk, as indicated by their financial status. The 6 insolvent and illiquid commercial SEPs in financial statements of these SEPs showed they were 2014. Among insolvent SEPs, one entity was in a both liquid and solvent, but still incurred losses. The peculiar situation as it made a profit in 2013 and failure by these SEPs to contain losses may result 2014. However, due to its significant debt burden, in the deterioration of their financial status, which it remains both illiquid and insolvent. All of these may, in turn, lead to an increasing illiquidity gap SEPs are considered to have very high VRF risk as and insolvency. In each case, the loss in 2014 was they are both illiquid and insolvent —and may roughly equivalent to the net current assets. This require a Government bailout. means that another similar year of operations would drive them into illiquidity — and move them into the Commercial SEPs with High Visible Relative High VRF Risk category. Fiscal Risk Other SEPs High VRF Risk refers to SEPs that are illiquid. There were 19 SEPs which posed a high VRF risk There are 9 SEPs which made a profit, and were both to the Treasury. These SEPs were mostly illiquid, liquid and solvent. Their financial status indicates which can further worsen their insolvency if their that it may take relatively longer for such SEPs to performance does not improve. However, 3 of the be in a position of needing to seek a Government 19 SEPs made a profit in 2014, which offers the bailout. These SEPs are in the energy, mining, possibility of improving their financial status. transportation and finance services sectors. Non-commercial SEPs Fiscal Risk Status SEPs with Very High VRF Risk commercial SEPs with very high VRF. These SEPs may call upon the Government for a bailout at Very High VRF Risk refers to SEPs that are both any time, given that they are already insolvent illiquid and insolvent. In 2014 there were 11 non- and illiquid. These 11 SEPs are in the education, 22 research and development, culture, health and financial performance needs to be monitored more postal and telecommunications sectors. Ten of closely in an effort to avoid illiquidity/insolvency. these SEPs also reported a deficit. These 8 SEPs operate in the financial services, health, agriculture and culture sectors. SEPs with High VRF Risk Other SEPs In 2014 there were 13 non-commercial SEPs with high VRF risks. High VRF Risk refers to SEPs that There were 14 SEPs with low risk, as deduced are illiquid. The 13 SEPs are in the research, social from their financial status. These SEPs were and development, financial services, education, solvent, liquid, and reported a surplus. These agriculture, environment and transport sectors. SEPs may take a longer time, relative to their While all 13 SEPs were illiquid there were 3 that counterparts, before they call upon Government were profitable. to rescue them. SEPs with Lower VRF Risk In 2014 due to their reported deficit 8 non- commercial SEPs had lower VRF risk. Their overall Conclusion Zimbabwe’s SEPs were established to spearhead Zimbabwe. The Government’s economic blue development by investing in industries where print, ZIM-ASSET, acknowledges this pivotal role the private sector is reluctant to invest; to played by the SEPs for the advancement of the address conflicts of interest through regulatory country’s socio-economic development. The agencies; to fulfil service delivery, social and financial data reveal that measures should be research roles in various sectors. SEPs play a key put in place to improve the performance of SEPs. role in advancing the economic development of The Government has already identified a number of constitutional and legal areas that call for specific action, including: i) Section 195 of the Zimbabwe Constitution, as well as governing legislation, requires that enterprises conduct their operations to maintain commercial viability. ii) Section 300 of the Zimbabwe Constitution gives guidance for limits of state borrowing, public debt and state guarantees; the Treasury is considering how best to limit guarantees to the SEP sector. iii) The Public Financial Management Act imposes obligations, including deadlines for audit report submissions. However, these are currently poorly observed, although penalties for non-compliance are currently non-constant. 23 Annex 1 List of Non-Commercial SEPs included in the Baseline Database by Sector Agriculture Agricultural Marketing Authority Pig Industry Board of Zimbabwe Tobacco Industry & Marketing Board Tobacco Research Board Culture National Arts Council National Gallery of Zimbabwe Education Bindura University Chinhoyi University of Technology Great Zimbabwe University Harare Institute of Technology Lupane State University Midlands State University National University of Science and Technology University of Zimbabwe Zimbabwe Council of Higher Education Zimbabwe Institute of Public Administration and Management Zimbabwe Manpower Development Fund Zimbabwe Open University Energy Zimbabwe Energy Regulatory Authority Entertainment Lotteries and Gaming Board 24 Environment Environmental Management Authority Forestry Commission National Biotech Authority Zimbabwe Parks and Wildlife Management Authority Financial Services Deposit Protection Corporation Insurance and Pension Commission Securities and Exchange Commission Zimbabwe Investment Authority Zimbabwe Revenue Authority Health Medical Control Authority National Aids Council Radiation Protection Authority Zimbabwe National Family Planning Council Media and Communications Broadcasting Authority of Zimbabwe Transport Zimbabwe National Road Administration Research, Social & Development Competition and Tariff Commission Consumer Council of Zimbabwe National Economic Consultative Forum National Incomes and Pricing Commission National Indigenization and Economic Empowerment Board Research Council of Zimbabwe Scientific and Industrial Research and Development Council State Procurement Board Zimbabwe National Statistic Agency Portal and Telecommunication Postal and Telecommunications Regulatory Authority Zimbabwe Academic and Research Network 25 List of Commercial SEPs included in the Baseline Database by Sector Agriculture Agricultural and Rural Development Authority Cold Storage Commission Grain Marketing Board Culture National Handicraft Centre Energy National Oil Infrastructure Company of Zimbabwe Petrotrade ZESA Enterprises ZESA Holdings (Company not the Group) Zimbabwe Electricity and Transmission Company Zimbabwe Power Company Financial Services Agricultural Bank of Zimbabwe Infrastructure Development Bank of Zimbabwe National Social Security Authority People’s Own Savings Bank Small Medium and Enterprise Development Corporation Health National Pharmaceutical Company Industry and Commerce Industrial Development Corporation Zimbabwe Group Media and Communication New Ziana Printflow Transmedia Corporation Zimbabwe Broadcasting Corporation Zimpapers 26 Mining Hwange Colliery Company Minerals Marketing Corporation of Zimbabwe Zimbabwe Mining Development Corporation Postal and Telecommunication NetOne Powertel TelOne Zimbabwe Posts Transport Air Zimbabwe Civil Aviator Authority Zimbabwe CMED National Handling Service National Railways of Zimbabwe Road Management Services Zimbabwe United Passenger Company Environment and Water Allied Timbers Zimbabwe National Water Authority Portal and Telecommunication Postal and Telecommunications Regulatory Authority Zimbabwe Academic and Research Network 27