Tanzania’s privitisation windfall
Our Correspondent
Published: 25-AUG-06

Since 1992 when Tanzania’s privatisation policy was officially introduced as an integral part of the Economic Reform Programme, more than 350 former state-owned entities were either partially privatised in joint ventures with foreign and local investors or wholly sold off.

To facilitate the implementation of the policy, the government created the Presidential Parastatal Sector Reform Commission in 1993.

Today the commission, coordinated by Dr E Kavishe, can claim a total 920 divestiture transactions made up of the divestiture of 319 units and disposal of 601 non-core units to foreigners, Tanzanians or joint ventures of local and foreign investors through share sales, asset sales, leases or liquidations.

And it’s not just well-heeled foreigners who are capitalising on the sales bonanza, says Kavishe. In all, the total number of parastatals have been reduced from 400 in 1992 to 35 today comprising some 390 investors so far — 100 of them Tanzanian-owned companies and the remaining 300 divided between foreigners and joint ventures between government and local investors.

The success of the privatisation programme is in the results. Says Kavishe, “Firstly, operational efficiencies of 78 parastatals that in 1990 could not run have improved and are contributing value to the economy. Secondly, other companies which were working but producing far below capacity have improved their performance. Tanzanian Breweries, for example, was making minute profits prior to privatization. Post-privatisation, the company paid dividends worth 30 billion shillings. Telecommunications connections too increased considerably from around 125 000 in the past, unlocking a hidden demand that was not supplied.”

The impact is in the difference between closing sluggish companies down at huge cost to the economy, and selling them to the private sector at bargain prices. “ It would have cost about $7mn to close company down companies,” says Kavishe. “So the government was willing to give the companies away at bargain prices just to be assured that they work.”

And the strategy is paying off. “You can see the results in the economy – considerable value is being unlocked. For example, the Kilombero Sugar Company Limited was operating far below its capacity in terms of time efficiencies and production volume. With privatisation production rates jumped from 29 000 tons to 120 000 tons. It’s spectacular. And if you go to the Tanzania Revenue Authority you will find that the 10 biggest tax payers are companies that have been accredited through the privatisation process.”

There’s also social value that’s being created by way of employment both inside and outside these companies, says Kavishe.

In many instances, privatisation resulted in major rationalisation exercises aimed at pruning excess labour and enhancing operating efficiencies. Some jobs were lost as a result, others were redeployed. But the retrenchments that have occurred must be seen in the overall context of the exercise, says Kavishe.

“Privatisation creates jobs in long run. You have to bear in mind that we had companies that were failing and privatisation reopened them and created employment where there would have been none. In other cases you had companies that were overstaffed with resultant retrenchments and redeployments. And then there’s employment created downstream outside the companies themselves. For example, the Breweries in its three companies employs a total 700 people directly. But outside the companies they employ about 320 000 people in downstream activities like distribution and retail outlets.” Although the number of employment opportunities created by privatisation is, in Kavishe’s words, “a moving target”, the quality of jobs has certainly improved. “When the Breweries was privatised, the minimum wage was 5000 shillings. It is now twice that,” he says.

Yet there’s reasonable grounds to assume that skills remain a problem, so much so that foreigners have dominated the upper echelons of the occupational structure.

This in turn has led to perceptions that the government is rethinking its employment equity policy to reflect greater local empowerment.

“It’s a tricky balancing act,” says Kavishe, “but one that recognises the need for foreign expertise and local employment.”

“The problem is that not al foreigners have had the requisite skills set and this has been to the detriment of local employment. When you bring in unemployed people from outside and pay them less, you are pitting them against less qualified people in the country. So government is saying bring in people from outside but ensure that their skills are viable. Unemployment is a timebomb and the problem is if they abuse it, the timebomb ticks faster.”

“Our position is that industry should make a genuine effort to employ local skills. If not then go out. The need to show government that they made a genuine effort to employ locals and empower them.”

But it’s not just at the level of employment that the economy has taken off. In the face of criticism that the privatisation process has rewarded foreigners, Kavishe retorts that more than 10 000 ordinary Tanzanians have acquired shares in privatised companies through Initial Public Offerings on the stock exchange.”

For its part the government has either ceded some of its shares to ordinary people or facilitated the acquisition of shares through the promotion of unit trusts.

“Estimates are that more than 500 000 people have subscribed who would otherwise not be in a position to afford the purchase of shares. So the unit trust is a massive potential vehicle to buy shares.”

The challenge of course lies in essential utilities like state power utility, Tanzania Electric Supply Company Limited, which are considered core functions of the state.

Kavishe concedes it’s a big problem — outages have been on the rise as more and more corporatised parastatals come on stream, and demand increases.

The problem, he explains, is twofold: First, the country’s traditional reliance on hydro power was a miscalculation that proved costly when the country was hit by drought last year, suggesting the need for a more diverse supply pool.

“Everyone believed that hydro was forever. But dams are not forever and have a limited lifespan which immediately pushes up the cost of hydro power.”

The second related problem was the search for alternative energy sources and the unbundling of generation, transmission and distribution.

“The challenge was to identify the alternatives, prepare the modalities and get our house in order before taking it to market. You can’t just go to the private sector and say you need electricity. You have to present and attractive and sustainable investment option. So we are now working on strengthening transmission and also the generation of power outside of hydropower. The national development corporation has been doing feasibilities on coal and will later make a suggestion on how government can invite investors.”

Going forward Kavishe is satisfied that the process is adequate to the country’s growth challenge which, he says, requires a 10 percent average annual growth rate over the next six years.

“Companies need to grow as successful undertakings. And that means more private investment in greenfields investments and private participation in areas we used to think was government’s prerogative.” Of course, the challenge is a little more complex than creating a conducive environment. A lot depends on investor perceptions of the country and region. Says Kavishe, “We should not assume that if we do everything right investors will be banging on our door. Other countries are privatising too, compounded by the challenge of changing perceptions that Africa is one country. If there’s conflict in one country it doesn’t mean all countries are unstable. We need to show that the country’s ripe for investment.”

This article was first published in Business in Africa Magazine (East Africa), July 2006. To subscribe click here

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