Technical File with Grain Malunga: the role of state-owned enterprises in developing economies

TECHNICAL FILE

By Grain Wyson Phillip Malunga FIMMM Minerals, Geology, Environment & Corporate Affairs Consultant

The Role of State Owned Enterprises in Developing Economies

Abstract

While it is universally accepted that State Owned Enterprises (SOE) face challenges of poor governance, they can also reduce dependency on manufactured imports through import-substitution and offer speedy industrialisation through public private partnership. SOEs can manage state equity well if personnel is recruited on merit and they operate in an autonomous environment.

INTRODUCTION

Countries whose economies are underdeveloped face infrastructure development challenges and often rely on primary industries such as agriculture and natural resource extraction. These countries are faced with illiteracy, poverty, diseases and unemployment.

In order to get out of this situation they come up with public policy that promote private sector development and social development. Private sector development is triggered by availability of good infrastructure such as energy, transportation systems, water supply, communication, education and healthy. This public policy entails establishment of state owned enterprises (SOE) or state corporations (SC) that promote the development of private sector and mixed economies that trigger economic development.

In Malawi this saw the birth of Electricity Supply Commission (ESCOM), Agriculture Development and Marketing Corporation (ADMARC), Water Boards, Malawi Telecommunication Limited and Mining Investment and Development Corporation (MIDCOR).

In this paper we dwell on the role MIDCOR played and would have continued to promote the development of the minerals sector.

MINING INVESTMENT AND DEVELOPMENT COROPRATION

Prior to 1994 the mineral sector contributed less than 1% of Malawi’s GDP. With the aggressive campaigns both local and external, between 1995 and 1998, the sector’s contribution rose to nearly 3% of the GDP. The activities of MIDCOR established in 1985, and the Ministry of Energy and Mining led to increase in foreign investment in the mineral sector and equally showed the confidence foreign investors had in developing Malawi’s minerals sector. The following table proves this point:

201807 Malawi Mining & Trade Review Technical File

When mining investment was increasing, in terms of exploration, both the Ministry of Energy and Mining and MIDCOR were abolished. This was a result of Structural Adjustment Programmes (SAPs) that forced African governments to adjust their economic policies in order to benefit from debt relief and conditional financing in terms of loans. This disturbed African Development Bank’s assistance through development of Mulanje Bauxite and Bwanje Valley limestone deposits.

The European Union sponsored a Southern Africa Development Community (SADC) Mining Investment Forum in in December 1994. The purpose of this forum was to enable the European Mining Companies to look at mining investment opportunities in each of the member states of the SADC. A similar forum was hosted mid-2000. This had an effect also on increase in investment interest in countries of the SADC. The abolition of the two institutions in 1997 sent wrong signals to private sector on the seriousness of the Government in developing the minerals sector. FDI in the mining sector rose in 1998 due to investment in uranium mining and processing, a commitment that was already met during MIDCOR days.

The security of high-risk investment was at stake in a situation where there was no full time ministry responsible for mineral development affairs. Economic policy reversals were rampant. MIDCOR was mandated to look at import substitution and investment into strategic minerals such as coal, iron and limestone (for lime and cement) for Malawi’s energy and infrastructure development. Investment promotion in major mining investment events were undertaken.

Government’s direct participation in the mining sector such as uranium mining and ruby mining has not been effective due to poor governance representation and monitoring of mine revenue. The situation has raised interest in the re-instatement of a state mining company to develop the available mineral resources and become a vessel for mineral development. No organization wanted to develop Mchenga Coal Mines, but after MIDCOR, with the assistance of Department of Mines and Geological Survey, many companies presented their bids when government decided to divest. This showed public sector participation in strategic investment is vital for economic development of emerging economies.

The mineral sector will continue to attract development cooperation if government continues to put mining as a priority just like agriculture.

CHALLENGES IN MANAGING PUBLIC INSTITUTIONS

It is widely claimed that SOEs face immense challenges in terms of accountability and presence of multiple authorities offering oversight roles, lack of new technology, weak internal controls marring the corporate governance practices, mindset issues and lack of motivation to work in private sector environment. SOEs also suffer from unnecessary heavy expenditure on social and political overheads leading to unnecessary over capitalisation.

Recruitment of personnel is not based on sound merit and planned labour projections. Productivity is low on account of poor materials management or ineffective inventory control. Absence of proper price policy forces SOEs to effect price subsidies that meet socioeconomic objectives of their shareholder (government).

OPPORTUNITIES FOR ECONOMIC DEVELOPMENT

A SOE in the mining sector should be viewed as a holding company that will promote the minerals sector, oil and gas, participating in state equity and provide leadership for    divesture in order to promote local participation in the mining sector.

The Company will be managed by professional managers recruited on merit and with autonomy to offer maximum return to the shareholder (government). This arrangement will help promotion of development of strategic minerals necessary for import substitution, youth employment creation, trigger the development of economic linkages and bring about technological advancement.

The company could also help the formalisation and marketing of mineral products from small scale mining.

CONCLUSION

The development of the minerals sector requires the establishment of a SOE to manage state equity, develop low value minerals with strategic importance and foster a cooperative relationship between government and private sector for the provision of infrastructure services effectively. This will bring technical and managerial expertise and injection of huge capital, which the government may not possess.

The SOE can also act as a development bank for the minerals sector to assist with formalisation of the artisanal small scale mines and marketing their mineral products.

***

This piece was initially published in Malawi’s Mining & Trade Review Issue Number 63 (July 2018).

The full edition is available for download here. This monthly publication is edited by Marcel Chimwala.

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