Last week, Finance Minister Felix Mutati announced in Parliament some form of nationalization of Inter-market Bank. Government has converted the NAPSA K50million owed by the closed Inter-market Bank into equity. The Finance Minister was just shy of mentioning the word ‘nationalization’ because President Lungu has stated several times in public that he is not a fan of nationalization.
We have no problem with this sort of conversion of debt into equity. In the financial world, debt-to-equity swaps are common transactions that enable a borrower to transform loans into shares of stock, or equity. Most commonly, a financial institution, such as an insurer or bank, holds the new shares after the original debt is transformed to equity shares. Since Inter-market Bank failed to repay its debt to NAPSA, then government as sole shareholder of NAPSA has power to convert its NAPSA-debt into equity. Both public as well as private companies are eligible for such a conversion.
However, we have a problem with the Finance Minister for being very economical with the details surrounding the newly established Zambia Industrial Commercial Bank. Was this bank created through an Act of Parliament considering that it is a parastatal? Or was it incorporated by NAPSA or Industrial Development Corporation (IDC)?
If it is an IDC Bank, when did IDC incorporate it? And when was the Board of the Bank constituted? When were management and staff recruited? Where is it located? Is it the Board of the Bank that made the decision to convert the debt into equity?
The announcement of the Zambia Industrial Commercial Bank scheme of arrangement has raised more questions and issues we have with IDC in its current form. Actually, the brief statement by Minister of Finance in Parliament following an intervention by honorable Garry Nkombo last week has exacerbated our fears.
When Government announced in early 2014 the incorporation of IDC, the nation was informed that IDC would be a domestic development finance institution wholly owned by the Zambian government. We were informed further that its mandate is to play a catalytic role in deepening and supporting Zambia’s industrialization capacity. IDC is also expected to serve as an investment holding company for state-owned enterprises and new investments to ultimately generate earnings for the proposed Zambia Sovereign Wealth Fund.
According to an announcement by Government in 2015, all shares in parastatal companies, which were formerly held by Ministry of Finance, were transferred to IDC. We were informed that President Lungu is the Board Chair of IDC. We are however not sure whether the relevant laws have since been amended by parliament to effect this change of Board Chairmanship since most, if not all parastatal companies like NAPSA, were created by Acts of Parliament. Whatever the case, this decision is bad corporate governance and likely to bring the presidency into ridicule in the long-run. We will unpack this point below.
Furthermore, the accountability of IDC is not clear: is it accountable to State House or a particular ministry? Additionally, it is also not clear the role of the CEO for IDC is, considering that projects being financed through PPP are announced by the President and his ministers. We are not even sure when he or she was recruited or appointed. Moreover, it is not clear when management and staff were recruited where IDC offices are located.
However, we know for a fact that IDC is now in business. We also know that IDC and the international Finance Corporation (IFC) did go into negotiations of a formal advisory mandate under which IFC was to be appointed as lead transaction advisor to IDC for the development of the projects. We are not sure whether this mandate is now in place, and if so, the role of IFC advisability so far on projects which are now running. We can only assume that the power to convert the NAPSA-debt into equity is an initiative of IDC following advice from IFC.
While IDC concept on paper appears good, our point of departure, as the Green Party, is on the structure adopted by President Lungu to run IDC. We foresee a situation where the structure is likely to bring the Presidency into contempt and ridicule or even accused of State Capture corruption in the long-run.
First, we are aware from the Auditor General’s Office Report on Parastatal Bodies for the financial year ended December 31, 2012 that there are serious financial irregularities in these bodies totaling to billions of Kwacha. Overall, there is a tone of poor performance owing to internal control lapses in these bodies. The Auditor General noted that most parastatal bodies lack a strategic direction, have inadequate checks and balances and disregard the legislation that established them. Further, the Auditor General also highlighted issues of poor management of contracts, poor financial performance, poor infrastructure management; poor management of funds; lack of strategic plans; failure to produce financial statements; and failure to constitute boards of directors.
With this litany of governance issues, we shudder to see the President to be the overall Board Chairman for such institutions. For example, will it be appropriate, or even achievable, for the Auditor General to summon the President to explain the lack a strategic direction; inadequate checks and balances; disregard of the legislation; poor management of contracts; poor financial performance etc. in IDC companies? Or indeed, will Parliament be in position to summon the President to explain on these issues?
It is very clear in our mind that at one point soon, this Zambia Industrial Commercial Bank scheme of arrangement for NAPSA debt-equity conversion will raise dust of State capture corruption. The Presidency should therefore keep arms-length dealings on the scheme of arrangement.
Remember: forewarned is forearmed.
Green Party President