INTOSAI Working Group on the Audit of Privatisation
THE STATE AS A MINORITY SHAREHOLDER IN PRIVATISED BUSINESSES: COUNTRY PAPER FROM THE OFFICE OF THE AUDITOR GENERAL, ZAMBIA
PAPER FOR THE SIXTH MEETING
WARSAW, 5 and 6 OCTOBER 1999
Introduction
Privatisation is commonly defined as any process aimed at shifting functions and responsibilities, in whole or in part, from the government to the private sector. The main reasons for such privatisations include:
In order to promote such private participation and investment governments will normally provide incentives in form of tariff protection, waiver of duty of capital investments, tax holidays and so on.
Privatisation can take various forms; including:
(i) Contracting
This entails a competition among private bidders to perform government activities. With contracting, the government remains the financier and has management and policy control over the type and quality of services to be provided.
(ii) Sale of assets/shares
In this form of privatisation, the government transfers ownership of assets, commercial type enterprise, or responsibilities to the private sector. Generally, the government would have no role in the financial support, management, or oversight of a sold asset.
(iii) Managed competition
Under this form, the contracting process permits an agency (e.g. Roads department) of the government to prepare a work proposal and submit a bid to compete with private bidders (e.g. road construction companies). The government may then award the contract to the bidding agency or to a private bidder.
Determining degree of control or influence of minority shareholders
Control is the ability of an undertaking to direct the financial and operating policies of another undertaking with a view to gaining economic benefits from its activities. It is generally understood that the degree of control or influence to be exercised by any shareholder will depend on the following factors:
(1) Size of shareholding based on relative number of shares
(2) Voting rights (which are exercised) relative to the number of shares held
(3) Control or influence (which is exercised) over the appointment of the board and the board chairperson
These factors determine the power to govern the financial and operating policies of another and the ability of the controlling entity to benefit from its interest in the other entity. The resulting extent of influence may be classified as either: Remote, Significant/participating or Dominant.
(a) Remote:- Holding of below 20%
A holding of less than 20% does not confer much influence on the holder.
(b) Significant/participating:- Holding of 20% and up to 50%
An interest held by an undertaking in the shares of another undertaking which it holds on a long-term basis for the purpose of securing a contribution to its activities by the exercise of control or influence arising from or related to that interest.
A holding of 20% or more of the shares of an undertaking shall be presumed to be a participating interest unless the contrary is shown.
(c) Dominant influence: - Holding of more than 50%
Influence that can be exercised to achieve the operating and financial policies desired by the holder of the influence, notwithstanding the rights of any other party.
This means that the holder has a right to give directions with respect to the operating and financial policies of another undertaking with which its directors are obliged to comply, whether or not they are for the benefit of that undertaking.
The actual exercise of dominant influence is the exercise of an influence that achieves the result that operating and financial policies of the undertaking influenced are set in accordance with the wishes of the holder of the influence and for the holder's benefit whether or not those wishes are explicit. The actual exercise of dominant influence is identified by its effect in practice rather than by way in which it is exercised.
Indications of Dominant Influence: -
| (a) | It holds a majority of the voting rights in the undertaking | ||||
| (b) | It is a member of the undertaking and has the right to appoint or remove directors holding a majority of the voting rights at meeting of the board on all, or substantially all matters | ||||
| (c) | It has the right to exercise a dominant influence over the
undertaking:
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| (d) | It is a member of the undertaking and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking | ||||
| (e) | It has a participating interest in the undertaking and:
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The main benefit of being able to exercise control over another entity lies in the distribution of assets, particularly through dividends.
Post Privatisation/State as a minority a shareholder
Background
At independence, the Zambian Government inherited an economy that was run on private sector principles. In 1968, the Government decided to get involved in the ownership and management of business enterprises directly. It embarked on the program of nationalisation of private enterprises leading to the creation of the mammoth Zambia Industrial and Mining Corporation (ZIMCO), which was wholly owned by the government. ZIMCO controlled 80% of the economy and had sub-holding companies in nearly all sectors of the economy.
Due to the new economic world order caused by the collapse of communism, the Government initiated the policy of liberalisation and thereafter embarked on the privatisation program in 1991. This policy led to the establishment of the Zambia Privatisation Agency (ZPA) and the Zambia Privatisation Trust Fund under an Act of Parliament passed in 1992. The state established ZPA to privatise selected companies. The privatisation has taken the form of sale of assets/shares, in whole or in part, in selected state owned enterprises (SOEs). A SOE is an enterprise in which the state has a majority or controlling interest. In public companies, the government is the sole shareholder whereas in statutory corporations the state has a majority or controlling interest.
In 1991, at the commencement of the privatisation program, the parastatal sector comprised over 150 state-owned enterprises (SOEs) covering various sectors of the economy including; mining, utilities, manufacturing, energy, financial, tourism and trading.
Following privatisation, the state has now become a minority shareholder in those enterprises where transfer/sale of assets/shares has only been in part. Minority interest is interest in an undertaking that is attributable to the shares held by or on behalf of persons other than the majority shareholder.
As a minority shareholder, the Government's shareholding in privatised companies as at 31 March 1999 ranged from 10% to 48.5%. The actual shareholdings in selected companies is given below:
| No. | Company Name | % of Govt. Holding | Major Shareholder Holding |
| 1 | BP Zambia | 25.00% | BP Africa - 75.00% |
| 2 | Kafironda Limited | 23.30% | ICI Explosives (Africa) LTD - 76.5% |
| 3 | Metal Fabricators of Zambia LTD | 18.00% | Phelps Dodge - 82% |
| 4 | National Breweries (1995) plc | 30.00% | Hendricks Syndicate - 70% |
| 5 | Northern Breweries plc | 20.00% | Zambian Breweries plc - 80% |
| 6 | Zambia Sugar plc | 23.00% | Tate & Lyle - 40% |
| 7 | ZCCM - Luanshya division (Roan Antelope Mining Corporation of Zambia plc) | 15.00% | Binani Industries - 85% |
| 8 | ZCCM - Chambeshi Copper Mine (Non - Ferrous Corp. Africa Mining plc) | 15.00% | China Non - Ferrous Industries Corporation - 85% |
| 9 | ZCCM - Power division (Copperbelt Energy Corporation plc) | 15.00% | Metorex Consortium - 85% |
In privatised companies, the government retained minority shares have been transferred to the Zambia Privatisation Trust Fund (ZPTF).
The purpose of the ZPTF is to facilitate the floatation of retained shares to the public. The floatation is done when it is assessed that the affected company is sufficiently attractive and the public is able to absorb the floatation. Further, the ZPTF has a deferred payment scheme to encourage wider public participation in the investment of these shares.
Companies such as BP, Zambia Sugar and National Breweries are presently considered attractive enough for a public floatation, but the managers of ZPTF have assessed that the public does not have the ability to absorb a floatation in these companies at the moment.
Other companies such as, Kafironda and Metal Fabricators of Zambia, are not yet profitable enough to be considered for a public floatation.
Main areas of influence
(i) As a state
On the basis of such minority shareholdings, the government's influence in these companies is either remote or significant as defined above. The state and its agencies, like many other Governments, has the power to regulate the behaviour of many entities by use of its sovereign or legislative powers. For example, the Environmental Council of Zambia may have the power to close down the operations of entities that are not complying with environmental regulations.
However, this power does not constitute control because the pollution control authority only has regulatory (policy) control and not ownership control.
Additionally, the state exercises a certain amount of purchase control as it determines which entities to do business with. As the recipient of taxes, donor funds and loans, the state is a very liquid entity indeed. Due to poor performance of the economy, most entities in Zambia are facing liquidity problems.
(ii) As a minority shareholder
Generally, the state secures a contribution to the activities of privatised companies by the exercise of control or influence in the following ways:
(i) Board Representation
Certain Articles of Association in these companies provide for the appointment of a board member from the minority shareholder, the state. In other cases, the majority shareholders may request the minority shareholder to nominate a member to represent them on the board. Further, depending on the type of business, it may be in the interest of the company to have state representation, especially where the impact of the interaction with the state is significant.
ZPTF has appointed trustees drawn from various professional organisations such as the Zambia Association of Chambers of Commerce and Industry (ZACCI), Zambia Institute of Chartered Accountants, Law Association of Zambia and the Bankers Association of Zambia to the boards of the privatised companies. This is in addition to the state representative, being the permanent secretary at the ministry of finance.
As a minority shareholder, the appointed trustees have unrestricted powers to participate at board proceedings.
(ii) Monitoring
The state continues to play a monitoring role in all privatised companies to ensure that conditions of sale agreements are adhered to. These include achievement and maintenance of certain agreed levels of profitability, investment, employment and so on.
ZPTF is committed to ensuring that retained shares are floated to the public at the earliest opportunity.
(iii) Dividends
Through board representation and monitoring, the state is able to influence the formulation and application of dividend policies.
Other benefits
In addition to dividends and participation in the formulation of operating policies of companies in which the state is a minority shareholder, other benefits include:
(i) Increased investment leads to employment to the citizens of the country
(ii) Economic growth leading to increased revenues in form of taxation
(iii) The state is able to concentrate on the business of providing an enabling environment for trade, commerce and industry to flourish.
Audit issues
From the above there are several issues of interest to consider when auditing companies under which the government has a minority shareholding. These include:
(i) does the state get the required level of dividends?
(ii) Are the companies meeting their tax obligations?
(iii) Are these companies making any meaningful contributions to the economic growth of the country, such as creation of employment through increased investment?
(iv) Compliance to conditions in the sale agreements?
Conclusion
One of the functions of the ZPA is to undertake post privatisation monitoring to ensure that sale agreement conditions relating to certain matters such as profitability, investment and employment are complied with.
The monitoring results so far indicate that privatised companies are performing much better as privately owned companies than state owned/controlled companies. Results show that better profitability and investment levels will be achieved steered by more efficient and effective management. It is also apparent that certain companies would have become insolvent anyway, if they had not been privatised.
But the state may wish to retain some minimum shareholding in certain strategic industries such as mining (ZCCM) and power supply (ZESCO) for political and social reasons. For example, a private investor may not be willing to invest in rural areas where it will not get the required return on investment. The mining sector is another example of a strategic industry in Zambia where the state intends to retain a shareholding in order to continue to participate in the formulation of operating policies.
However, as a minority shareholder, the state loses its ability to protect the public from adverse effects of market forces such as unfavourable price increases, especially in monopolistic conditions.