 COMPANY PROFILE |
| Introduction |
It is recognised that efforts to promote agricultural and industrial development and increase the standard of living of indigenous population through market intervention and establishment of public enterprises have not met with expectations. The Government of Malawi, taking into account the legacy of past inefficient interventions, has adopted a policy of liberalization of the economy and a move to market based incentives and allocation of resources. In accordance with this policy, the Government has decided to invest its interests in commercial public enterprises and encourage and promote the private sector. Ultimately, the Government will seek no role in the competitive market beyond that of neutral arbiter.
| Objectives of Privatisation |
The declared policy of the Government of Malawi is to diminish the size of the public enterprise sector through privatisation with a view to:
Foster increased efficiency in the economy;
Increase competition and reduce monopoly in the economy;
Promote participation by the Malawian public in enterprises; and
Raise revenue for the Government
By realising these objectives, the Government will create an economic environment conducive to private sector development and also free public resources for investment in infrastructure and social programmes.
| Institutional Arrangements |
A "Public Enterprises (Privatisation) Act" was passed by Parliament in March 1996 and it was assented to by His Excellency the State President on the 17th of April, 1996. The Act which sets out the objectives and guidelines for the privatisation programme also establishes the institutional set-up for the execution of the privatisation programme.
The Privatisation Commission shall be the sole authority in Malawi to implement the privatisation of the direct or indirect government ownership of any public enterprise. Its functions include, but are not limited to, the planning, management implementation, and control of the privatisation of public enterprises in Malawi. It will also be the duty of the Commission to report to the Cabinet the details of the sale of each public enterprise.
Membership of the Commission includes ex-officio representatives of Government, representatives nominated by each political party represented in the National Assembly, a representative nominated by the Malawi Congress of Trade Unions, and members representing professional and commercial business interests.
A Secretariat of the Privatisation Commission has been established comprising an Executive Director and subordinate employees. The Executive Director of the Privatisation Commission is responsible for the effective administration and implementation of the provisions of the privatisation programme.
| Scope of Privatisation |
Approximately one hundred and forty public enterprises exist to which should be added some thirty other assets managed by various ministries such as ranches, fish farms, and resthouses.
In excess of one hundred of these enterprises or assets have a commercial orientation and have or should have financial autonomy. These entities will all fall within the scope of the privatisation programme, and be included in a divestiture sequence plan prepared by the Privatisation Commission and submitted to the Cabinet for their approval. Some of these entities will need to undergo a ‘commercialisation’ process with a view to preparing them for privatisation and ensuring greater operating efficiency in the interim period leading up to their eventual privatisation. This will entail changing their status to that of limited liability companies and granting them greater autonomy in their day to day management.
Remaining public enterprises, which are not presently considered to have a commercial orientation will revert to the control of the appropriate ministry. In those cases where there is no apparent need for financial autonomy the enterprise will be absorbed directly into the relevant line ministry. A number of entities which are dormant will be liquidated and any surplus assets sold to private buyers.
| Principles of Privatisation |
The privatisation programme will be carried out in accordance with certain guiding principles. To the extent possible, subject only to limitations imposed by existing rights conferred by shareholders’ agreement, for example, pre-emption rights, etc., the following fundamental principles will apply:
Each transaction will be fully transparent to the public at large. In this regard the Privatisation Commission will publicise details of all completed activities of the privatisation programme.
All investors, irrespective of ethnic group or source of capital (foreign or local) are free to participate in the privatisation programme. In order to achieve the objective of increased participation by the Malawian public at large, shares in or assets of certain companies may be made available at a discount to citizens of Malawi. Where discounts are available, this fact and the quantum of the discount will be publicised in the invitation for competitive bids and a precondition of the discount being granted is that the shares or assets are subsequently retained for a period of not less than two years.
The privatisation process will be fair and efficient. An independent opinion of value will be obtained for each enterprise to be privatised. Full disclosure of the details of the enterprise will be available to the investing public and fair and equitable bidding procedures and criteria for ranking bids will be established and published.
Sales will be primarily on a cash basis. However, mechanisms will be developed to facilitate broader participation by Malawi citizens in the privatisation process.
It is the intention of Government to sell all of its interest in public enterprises and not to maintain a minority position or set any conditions concerning the future operations of a privatised enterprise. In certain exceptional circumstances, where the existing regulatory framework is considered inadequate, Government may with the agreement of parties to the sale of an enterprise, retain a shareholding conferring special rights to, in the national interest, intervene in the operations of the privatised enterprise.
To the greatest extent possible, privatisation transactions will be designed to reduce concentration of ownership and avoid creation or maintenance of consumer market monopolies. To this end, Government will not divest unregulated monopolies or grant privileges or guarantees to purchasers of privatised enterprises.
The Commission may elect to privatise public enterprises in various ways including, but not limited to, a public offering of shares, sales by competitive tender of the shares or assets and business of a public enterprise, management or employee buy-out or, where pre-emption rights exist, negotiated private sale of shares. The Commission may also create and offer for sale additional shares in a public enterprise in order to dilute the Government’s existing shareholding in that enterprise.
| A. REVIEW OF COMPLETED TRANSACTIONS |
 Finance Corporation of Malawi Limited (FINCOM) |
FINCOM is a private limited liability company incorporated in Malawi in 1976. Until 1991 FINCOM operated as the Malawi representative of an affiliated UK registered company, Malawi Finance Company (MFC), involved in procurement and financing for Malawi based importers.
FINCOM was licensed under the Banking Act as a deposit taking institution and appointed an authorised dealer in foreign exchange in 1991. This development necessitated that MFC’s relationship with FINCOM be re-examined, and resulted in FINCOM disposing of its interest in MFC.
FINCOM’s authorised share capital was 28 million ordinary shares of K1.00 each of which 23 million shares were issued to, and fully paid by, Admarc Investments Holding Company (AIHC). Until 1995 FINCOM’s core business was trade finance, relying largely on credit lines made available to it. More recently FINCOM has been working at diversifying its product portfolio, through other products such as working capital financing and consumer credit.
In line with the Government’s privatisation programme the Commission invited bids for the acquisition of up to 74 of AIHC’s shareholding in FINCOM. In order to strengthen FINCOM’s capital base, and increase the potential of future public offering of its shares, bidders were requested to undertake to subscribe at current market value for a minimum of 24 million additional shares beyond the existing issued capital.
Nedcor of South Africa, through its subsidiary SBM Nedcor, in association with BNP, were the successful bidders. FINCOM was handed over to the new owners on 1st July 1999. Nedcor agreed to a purchase price equal to the net asset value of the shares sold to be determined on the basis of effective date accounts, which are to be prepared within 45 days of hand over. Nedcor has agreed to provide FINCOM with management, technical and advisory services.
| VIPLY Limited |
VIPLY was incorporated in Malawi on 18th July 1984 as a private limited liability company. VIPLY was incorporated originally with an authorised share capital of K13, 000,000. As a result of subsequent restructuring and shareholding changes, the share capital of VIPLY as at 1993 was K82,000,000 held as follows:
VIPCOR 65.5%
ITMWI 32.3%
IFC 1.5%
Indebank 0.7%
100.0%
VIPLY’s main line of business is the production of plywood, blockboard and sawn timber from logging material sourced from the Viphya Forest.
Since commercial operations commenced in 1988, VIPLY was unable to achieve design output as a result of a number of factors including under-capitalisation at the outset, too high a proportion of debt funding and poor management of the complex.
In pursuance of the Government’s privatisation programme, the Commission appointed Economic Resources Limited to advise on the privatisation strategy for VIPLY. VIPLY was a capital-intensive company believed capable of profitable operations and yet had found itself in a financially untenable situation. As a result of this, the advisors recommended, and the Commission agreed, to a "Hiving-Down" of VIPLY whereby VIPLY sold to an entirely new company (Viply (1997) Limited) all of the assets attributable to its core business operations and also assigned the existing logging concession. This arrangement required the consent of all shareholders, and secured lenders. After a series of negotiations all shareholders consented. IFC, who were the major secured lender also consented after receiving assurances that sufficient income would flow to Viply 1997, and that such income will be utilised in settlement of their claims before being applied for any other purpose.
The Commission invited tenders for the acquisition of, in essence, VIPLY’s assets, rights and liabilities. Due to the complexity of the transaction, the Commission was willing to consider innovative approaches in the tender submissions.
The Raiply Group of Kenya, which has wood processing experience in Kenya and Uganda, was the successful bidder. Raiply proposed to purchase the assets of VIPLY free from any encumbrances, including IFC loans. The Raiply Group offered USD3.5 million for the assets transferred to a new company formed to take over the assets of VIPLY.
The new company is called Raiply (Malawi) Limited, and it took over the operations of VIPLY on 12th March 1999. A large portion of the proceeds of sale has been committed primarily towards the settlement of IFC claims.
Raiply (Malawi) Limited has also successfully negotiated with the Government a thirty-year renewable logging concession of some 20,000 hectares of the Chikangawa Forest.
| I & E MALAWI LIMITED(I&E) |
I& E Malawi Limited was formerly known as Import and Export Company (1984) Limited until its name changed in 1995. I&E has been a household name in Malawi for the past 30 years, initially through its wholesale arm known as Chipiku. The company boasts arguably the largest wholesale infrastructure spanning the entire length and breadth of the country.
In 1984 in an effort to grant the company a new trading perspective the Malawi Development Corporation (MDC), who until then owned the entire company, entered into a management contract with the John Holt Group Limited of Liverpool, UK. As a result of this arrangement the John Holt Group acquired 14% of the company thereby diluting MDC’s equity interest to 86%. The management contract with John Holt was renewed twice until it was allowed to expire in March 1998. At about the same time John Holt agreed to assign both its 14% equity in I&E and debt due to it from I&E, estimated at USD 4.29, to Lonrho Africa PLC. By a Heads of Agreement of November 1998 MDC and Lonrho Africa agreed to increase the authorised share capital of I&E from 8 million shares to 30 million shares. MDC forfeited its rights to acquire any of the new shares. Lonrho Africa was issued with 6.55 million new shares in consideration of conversion of a debt of USD 1.27 million. As a result of this Lonrho Africa’s shareholding was increased to 40%. According to the Heads of Agreement the balance of the debt (USD3.02) was to be rescheduled over ten years with interest at Barclays Bank rate plus 1%. However, in May 1999 MDC off-loaded a further 20% of its equity in I&E to Lonrho Africa in consideration of a further debt equity swap valued at USD 1.42 million. Consequently, MDC retains only 20% of the company. This balance has been earmarked for disposal to the general public in due course should the financial performance of the company permit.
| MPWEPWE BOATYARD |
Mpwepwe Boatyard Company Limited comprising a management buy out team was designated the successful bidder. After some protracted negotiations with all stakeholders, the divestiture process of the Yard was completed on 1 May, 1999 when the assets were handed over to the MBO team.
The Government has allowed the MBO team to continue the operations of the boatyard within the existing premises under a lease arrangement.
| SMALLHOLDER COFFEE AUTHORITY (SCA) |
The Commission approved the divestiture of SCA through the formation of co-operatives in the five growing areas namely: Misuku Hills, Phoka Hills, Vipya North, S. E. Mzimba and Nkhatabay Highlands with the ultimate objective of transferring the control and management of small holder coffee production, marketing and processing to producers. To ensure a smooth transition process in this regard, all the stakeholders agreed to set up a Trust to take over all the functions previously undertaken by SCA and perform those functions for an interim period of three years. It is expected that during this period the management of the Trust, in liaison with other relevant stakeholders, will provide civic education to the farmers on the various aspects of co-operatives prior to their formal setting up in the five coffee growing areas.
The transfer of management responsibilities from the former SCA to the Trust was completed on 1 June, 1999. The Trust took over 78 out of over 300 employees. The cost of terminal benefits was met from SCA own resources. This was due to the decision taken not to sell the surplus assets. Thus, the first phase of the SCA divestiture did not result in any financial benefits. Instead, it facilitated the empowerment of the coffee growers to manage their own affairs without direct interference from Government
| B. REVIEW OF ON-GOING TRANSACTIONS |
| Malawi Telecom |
The Communications Act 1998 ("the Act") came into force on 1 March 1999. The Act, among other things, makes provision for the regulation of the communications sector in Malawi which comprises telecommunications, posts and broadcasting as well as the radio frequency spectrum. Pursuant to the Government’s stated policy on telecommunications the Act also provides for the separation of the administration and provision of telecommunication services from postal services.
Before the Act came into force the provision of telecommunication services in Malawi was the exclusive privilege of the Malawi Posts and Telecommunications Corporation (MPTC). MPTC operates 115 exchanges with a total capacity of 70,000 lines. However, the provision of telecommunication services in Malawi has been characterised by poor quality, a very low penetration rate, and a high unmet demand. The Government does not want a continuation of this situation if Malawi is ever to be competitive in the global economy. As a result, the Government has embarked on a privatisation initiative of Malawi Telecom, being a company to be established by the Minister of Finance to take over the telecommunication operations of MPTC. Government will, initially, own Malawi Telecom 100%. It is envisaged that at least 30% of Malawi Telecom will be divested to a strategic partner to whom management control will be transferred. This is important to ensure that the Government makes the offer sufficiently attractive to interest the right type of investor.
The process of identifying financial and legal consultants to advise on a strategy and subsequently to implement the sale of equity in Malawi Telecom started in March 1999. It will be completed in the 3rd quarter of 1999. The World Bank under the Malawi Fiscal Restructuring and Deregulation Programme II is funding the study.
| Electricity Supply Corporation of Malawi Limited (ESCOM) |
The Government commenced the restructuring of the power sector in June 1988 with the passing of the Electricity Act, 1998. This Act, amongst other things, provided for the liberalisation of the sector, the incorporation of ESCOM as a limited liability company and the establishment of an independent regulator, the Electricity Council. The Government is now building on the reforms that commenced with that new Act.
In early 1999 the Government established a task force, of which the Commission is a member, charged with developing a Power Sector Policy Statement and with overseeing the reform of the sector. A draft Policy Statement was prepared by the task force and a consultative meeting was held in Blantyre at the end of June to discuss the draft with stakeholders. Based on the outcome of the consultative meeting a final draft Policy Statement was prepared for submission to the Government. The task force then commenced drafting the amendments to the Electricity Act, 1998 required to allow the implementation of the agreed policies.
The draft Power Sector Policy Statement envisions ESCOM becoming a holding company with its generation, transmission and distribution assets being placed into separate limited liability companies. A separate unit to administer rural electrification will be established and the independence of the Electricity Council will be enhanced. The private sector will be encouraged to invest in the sector.
The Policy Statement proposes that distribution should be the first part of ESCOM to be privatised. This will ensure that services are extended to new customers, losses are minimised and that revenues are collected to help support the development of the entire sector. As soon as the Policy Statement is approved by the Government, The Privatisation Commission will commence work on the privatisation of ESCOM Distribution. The first step will involve the appointment of an advisor. World Bank funding for advisor’s work is proposed. Privatisation of the distribution system is expected to take approximately 18 months to complete.
| Malawi Catering Services Limited |
The Privatisation Commission invited bids for the concession of Malawi Catering Services Limited in last quarter of 1998. The closing date for receipt of bids was 11 December, 1998. In all, a total of eight potential investors bought the Information Memorandum.
Regrettably no bids were received by the closing date. Accordingly, the Commission mandated the advisors to enter into direct negotiations with all persons who expressed some interest in the company. Amongst others the advisors contacted Air Chefs of South Africa, Catercraft of Zimbabwe and NAS of Kenya. A series of discussions were held with NAS, and at the moment the Commission awaits receipt of compliant technical and financial proposals from them.
| Malawi Railways(1994) Limited |
The receipt of bids closed on 4th September, 1998. Three bids were received from foreign firms as follows:
CFM of Mozambique;
GB Rail of Britain; and
Spoornet (Transnet) of South Africa
These were later evaluated in accordance with the criteria stipulated in the bidding documents. In addition, the Commission held informal discussions with bidders in order to seek clarifications on certain aspects of their bids. At the end of this evaluation process, a CFM/SDCN Consortium was formally designated the preferred bidder for the concession of Malawi Railways (1994) Limited. The Consortium consists of CFM, the Mozambican Railway Company, together with a group of international investors. Railroad Development Corporation (RDC) of USA is one of the international investors. RDC has railway operations in a number of developing countries and will be the operator of Malawi Railways. Negotiations with the consortium are currently under way and subject to their successful conclusion, and all going well the transaction should be concluded in 2000.
| Malawi Lake Services Limited( MLS) |
The Commission approved that MLS be divested using a flexible approach which would take the form of a long term concession for the whole of MLS or an outright purchase of one lot or lots of the individual assets of MLS.
Accordingly, the consultants, Messrs Hickling Transcom Limited of Canada have been instructed to prepare information memorandum.
In the meantime, the Commission is engaging a consultant to determine which passenger services on the Lake require a subsidy from the Government. Once this has been determined the relevant services will be put out to tender.
| Chillington Agrimal (Malawi) Limited(CAML) |
CAML was established in 1966. The Malawi Development Corporation (MDC) owns 44% of the company whilst the balance is held by Chillington Tool Company of the UK. The current authorised share capital of CAML is 1,100,000 ordinary shares of K2 each, of which 1,044,657 shares are issued and fully paid.
CAML enjoys a dominant position in the domestic forged hoe market. Its current production levels of 300,000 hoes per annum is not enough to meet the requirements of the domestic and export markets, estimated at more than 1,000,000 hoes per year. CAML is the only company in the country with electric furnace technology capable of melting and casting steel products, in addition to melting and casting bronze, iron and aluminium. CAML also makes hand tools like cutlass pangas, sickles, pruning knives and animal drawn ploughs.
In May 1999 the Commission invited competitive tenders for the acquisition of 100% of the company. Receipt of bids closed on 23 June 1999. The evaluation process of compliant bids received is in progress. A successful bidder will be announced in the month of August.
|
| Borehole Construction Fund |
The Borehole Construction Fund was established in 1969 as a treasury fund by the Borehole Fund Order pursuant to the provisions of the Finance and Audit Act. The Fund was created to provide capital for a revolving fund charged with the responsibility of developing and managing ground water resources. Prior to the creation of the Fund borehole construction was the responsibility of the department of Geological Survey.
About 54% of Malawi’s estimated population of 10.8 million has access to water supply facilities, though only 32% has access to potable water at any one time. All urban and some semi-urban areas are served by piped water. Gravity piped water supply, shallow wells and boreholes primarily serve rural areas. Shallow wells and boreholes are a dominant source of potable water in the rural areas. The Borehole Construction Fund has enjoyed near monopoly in groundwater abstraction.
Pursuant to the privatisation programme, the Commission incorporated a private limited liability company called the National Waters Supply (Malawi) Limited (NWS) to whom will be transferred all the assets and liabilities of the Fund. Sixty percent of the shares in NWS are on offer to a strategic partner. Government will for the time being retain the balance 40%.
| Smallholder Farmers Fertilizer Revolving Fund of Malawi (SFFRFM) |
The Commission approved the privatisation of SFFRFM. KPMG Peat Marwick were appointed as advisors to recommend to the Commission an optimal mode of divesting the Fund.
The Advisors considered several privatisation options. The management of the Commission considered them and recommended the dissolution of the Trust and the formation of a limited liability company to take over the assets and all liabilities of the Trust. Thereafter, a controlling stake in the company be offered to a strategic partner. The remaining shares to be owned by Government and to be offered to staff and the general public in due course. The continued Government presence, albeit in a minority position, would offer some comfort that fertiliser supplies to the three regional centres will be assured.
Furthermore, management recommended that the major assets such as warehouses continue to be owned by the Government either directly or through a public enterprise such as MDC but managed by a real estate agent and rented out to as many fertiliser companies as possible. The other assets such as a large chunk of the Fertilisers and Residential properties should be sold and the proceeds utilised to pay off the debts of the Fund.
All stakeholders could not agree on the privatisation mode recommended above. The matter was then referred to Government which then directed the formation of a limited liability company to take over the assets of the Fund and that 30 % of the company’s shares be divested to a strategic partner who would also assume management control of the company. The legal formalities of setting up the company are underway. At the same time, the advisors are currently preparing the draft information memorandum to be reviewed and finalised by stakeholders. It is expected that the invitation of bids for the 30 % of the company will be issued by July, 1999
| Smallholder Sugar Authority (SSA) |
The Commission approved the divestiture of SSA through the sale of shares to registered growers, management and staff. To implement this the stakeholders agreed, among other things, to a legal framework that entailed the setting up of two successor organisations. First it was agreed to set up a trust called Dwangwa Cane Growers Trust (DCGT) that has taken over all the assets, including title to land and buildings, and liabilities of SSA. The trust also holds the shares transferred to the new company in trust for underlying investors until disposal to them. Second, was the incorporation of a public liability company called the Dwangwa Cane Growers Company (DCGC) wholly owned, initially, by the trust. DCGC has taken over the commercial services currently provided by SSA to growers. In addition, the company undertakes several tasks, including the provision of farm management services to growers and the liaison between the Dwangwa Sugar Corporation (DSC) and the growers DCGC also receives and distributes cane proceeds to growers.
DCGC will make available al its shares (2,500,000) to registered growers and employees at an offer price of K1.30 per share. The Commission has approved a draft prospectus.
| Smallholder Tea Authority(STA) |
An action plan for the privatisation of STA was approved by the Commission, and is now under implementation. In broad terms the action plan provides for the merger of STA and the Malawi Tea Company, popularly known as MATECO, into one limited liability company. Simultaneously a trust will be established. The shares in the new company will be held by the trust for ultimate disposal to growers, management and staff after completion of necessary legal formalities. The trust will also own the land and buildings belonging to STA and MATECO. The new company will take over the operations and certain assets of both STA and MATECO. Assets deemed surplus to the operations of the new company would be disposed of.
In the meantime, the Commission, assisted by its advisers, is undertaking the formation of the trust as well as the incorporation of the merged company.
| Malawi Rural Finance Company |
The Malawi Rural Finance Corporation (MRFC) was established in 1993 with World Bank assistance as a private limited liability company owned 100% by the Government. The company was established to increase access to financial services for the country’s rural population and currently operates 199 offices throughout the country.
As part of the privatisation programme, a strategic partner is being sought for the MRFC who will inject capital into the company, provide additional expertise in rural and micro-financing and improve the company’s operational efficiency. Terms of reference for an advisor to assist with the work have been agreed with the World Bank and bids from suitably qualified consultants will be sought shortly. The advisor will be required to conduct a study on the impact that the MRFC has had on the development of the rural sector in Malawi as well as recommending on the options for the privatisation of the company. Following a decision by the Commission on the appropriate mode of privatisation, the advisor will be required to implement the chosen privatisation programme.
| Soche Tours and Travel Limited (STTL) |
STTL was incorporated on 1 April 1979. It is owned by Malawi Hotels and MDC in equal shares. STTL has an authorised share capital of K385,000 of K1.00 all whom are issued and fully paid.
STTL carries on the business of a retail travel agent and tour operator.
The Malawi Hotels group is in the process of a restructuring, part of which comprises the disposal of non-core businesses. Both shareholders have accordingly made an offer to the existing management to buy the company. In 1998 the auditing firm of Deloitte & Touche valued STTL as a going concern at K2.67 million. The purchase price agreed has been determined on this basis.
The Commission has confirmed that the MBO proposal is eligible under the EIB Privatisation Window facility.
| Plastic Products Limited |
Plastic Products Limited (PPL) was incorporated in 1967. It has an authorized share capital of K500,000 divided into 250,000 ordinary shares of K2.00 each. PPL is owned by Promat Limited and MDC who hold 51% and 49% respectively. PPL’s principal business is the manufacture and sale of plastic products.
In December 1998 Promat offered to sell to management the entire 51% of its interest in PPL at a purchase price of GBP 215,000. The MBO has so far paid a deposit of K1.5 million procured through a loan from MDC.
In order to raise the balance the MBO approached the Commission with a request to avail of the EIB Privatisation Fund administered by INDEBANK. However, the proposed disposal by Promat Limited did not qualify as privatisation, consequently it became necessary for MDC to consider disposing some of its interest in PPL. Accordingly, MDC agreed to dispose of 9% of its interest, at the price offered by Promat, so that the shareholding would now be 40% MDC and 60% the MBO. The Privatisation Commission has confirmed that the MBO proposal is eligible under the EIB Privatisation Window facility..
| Mchenga Coal Mines Limited |
The company was registered as a limited liability company on 24 July1992. It has an authorised share capital of K5,000,000 divided into 5,000,000 ordinary shares of K1.00 each. It is owned by- INDEBANK (47.5%); MDC (47.5%); and the Government (5%).
The operations of the company comprise coal mining and processing. Mining is underground, conventional board and pillar in discreet mining areas, currently numbering four. Run-of-mine (RoM) is hauled from the mining area to the crushing plant. Presently demand for all products is high. Production would have to double in order to meet local demand alone. Resource estimates based on available geological reports show that inferred reserves are estimated at 40 million tonnes.
All the shareholders of the company were desirous of disposing of their entire respective interests. Accordingly, in May 1999 Expressions of Interest were invited from interested strategic investors to acquire up to 100% of the company. Information memoranda were dispatched to pre-qualified bidders in July 1999.
| Collective Investment Vehicle |
The Privatisation Commission approved the establishment of a collective investment vehicle last financial year. The aim of the investment vehicle is to promote broad public participation in a diverse portfolio of profitable investments. The investment vehicle, which will be a collective scheme formed as a public limited liability company, will be called The National Investment Trust Limited. Shares in the investment vehicle will be marketed to the public and subsequently listed on the Stock Exchange. As well as holding shares in companies already listed on the Stock Exchange, the investment vehicle will hold shares in companies that are too small to list on the Exchange in their own right. Thus it will provide the Commission with a further option for privatising enterprises and will allow Malawians to participate in companies for which they would otherwise have no means of access.
The board of the Company has been appointed and, following a competitive tendering process, First Merchant Bank was select as the managers of the investment vehicle. The Commission’s advisors are now in the process of readying the shares that will be purchased by the investment vehicle, and in particular seeking a waiver of the presemption rights by other shareholders in the companies to be purchased. Once sufficient investments have been transferred to the new investment vehicle a prospectus will be prepared so that the shares in the company can be marketed to the public. It is proposed that, at least initially, shares will be made available only to Malawian citizens. Once the investment vehicle is listed on the Stock Exchange this restriction will have to be removed.
| Air Malawi Limited |
Air Malawi Limited is a limited liability company incorporated under the Companies Act. It is wholly owned by the Government and it in turn owns 100 percent of Air Cargo Limited, an air freight company, and 35 percent of Airport Caterers Limited, a company that provides catering services for airlines.Air Malawi came into being in 1964, initially as a wholly owned subsidiary of the then Central African Airways. Air Malawi’s performance and fleet have varied widely over the years. At its peak it owned nine aircraft. Currently it operates only three aircraft and its financial performance is poor, recording a loss of K169 million in 1998. In an effort to turn around the performance of the airline in 1997 the board appointed Speedwing, the consulting arm of British Airways, as advisors. The main recommendation of Speedwing was that Air Malawi should be commercialised and then privatised. Air Malawi embarked on the recommended commercialisation programme in 1997.
The Government has now decided to commence the privatisation process of Air Malawi. A task force, chaired by The Privatisation Commission, has been established to help oversee the whole privatisation process. Terms of reference for advisors to assist with the privatisation of the airline have been developed and funding from the World Bank to meet the cost of the advisor is being sought. It is anticipated that the privatisation of the airline is likely to take approximately 18 months.
| MPICO Holdings Limited |
The Malawi Property Investment Company Limited (MPICO Ltd.) was registered as a private company in 1972 to attract and utilise investment funds for the development of the new capital city. This objective was largely achieved by the early 1980s and as a consequence the company underwent a series of reorganisations. By the 1990s the MPICO group consisted of MPICO Holdings, MPICO Ltd., the main operating company, and four subsidiaries. Between them the group holds a total of 48 properties including many prime commercial properties in Blantyre and Lilongwe.
Through its direct and indirect holdings the Government owns 100 percent of MPICO Holdings Ltd. which in turn holds 50.2 percent of MPICO Ltd. Old Mutual and Lincoln Investments are the other shareholders of the operating company. MPICO Ltd., together with a range of other minority shareholders, are the shareholders of the four subsidiaries.
In late 1997 the Commission appointed advisors to recommend on the disposal of the Government’s shares in the MPICO group. Based on the advisor’s recommendations the Commission concluded that, following the sale of a portion of the Government’s shareholding to a strategic shareholder, most probably Old Mutual, MPICO Ltd. would be a suitable candidate for a public offering and listing on the Malawi Stock Exchange.
Preliminary discussions with the two other shareholders in MPICO Ltd. revealed that agreement would not easily be reached on the privatisation of the group. This was despite the Commission’s efforts to force the issue by formally notifying the other shareholders, in terms of the shareholders agreement, of its intention to dispose of its shares. The principal concerns identified by the other shareholders were the differing objectives of the various shareholders in the company, Old Mutual’s already large exposure to the property market in Malawi, and the fact that the Government is a significant creditor of the MPICO group.
Discussions between the shareholders have therefore turned more recently towards other options for the privatisation of the MPICO group. In particular, consideration is being given to a partial splitting up the group with each of the major shareholders taking direct ownership of selected properties. This option would allow each of the shareholders to meet their own objectives. In particular the Government would be able to obtain direct ownership of a number of the buildings it currently occupies thus avoiding the necessity to pay rent on them. The Government would also be able to pay off its rental arrears by transferring selected properties to the other shareholders. The remainder of the MPICO group would still be a substantial company that could possibly be listed on the Stock Exchange at a later date. Discussions continue with the shareholders.
| CHAIRMAN’S STATEMENT |
| The Programme this far |
The Commission initiated an evaluation study of the privatisation programme, which was conducted by an independent third party. The primary aim of the study was to determine whether the objectives of the privatisation programme were being achieved.
One of the major findings of the study is that the privatisation programme has been implemented in a difficult economic environment which was characterised by high rates of inflation and borrowing costs, thin financial markets, weak regulatory capacity, and lack of entrepreneurs and good managers. In spite of this, the programme has had demonstrable positive impacts on the economy.
At the enterprise level, the study concludes that following privatisation, a number of privatised firms now enjoy increased returns on sales, assets and equity. In addition, these enterprises have realised better internal efficiency, improved their capital structure, increased investments and marginally increased their work force.
This conclusion is probably not surprising since privatisation, if properly conceived and implemented, should foster efficiency and investments because it brings with it new owners who place greater emphasis on profit goals and carry out new investments that increase output. Evidence of greater efficiency has been observed bin some privatised enterprises such as Packaging Industries (Malawi) Limited (PIM), Dairibord Malawi Limited and SUCOMA where controlling interests were transferred to strategic partners. Smaller enterprises such as Mpwepwe Boatyard Company and, in the hospitality sector, Chintheche Inn and Kasungu Inn show similar results.
Reasonable increases in production have been recorded in the farming sector. Such positive developments have been observed at a number of the recently privatised dairy farms, such as Chiphazi and Capital Hill Dairy farm, which were almost dormant under Government ownership due to its inability to finance needed investments. These examples confirm that privatisation can be successful if an enterprise is transferred to private sector operators that have the necessary technical and managerial skills, as well as financial resources.
The outcomes of privatisation cannot be expected to be without costs. In the short-term, companies sometimes experience a decline in their production and employment levels as the new owners restructure the enterprise. An example of this is The Portland Cement Company (1974) Limited (PCC), which undertook a massive rehabilitation programme immediately after privatisation, investing a total of US$ 15.5 million. During the rehabilitation, production was at rock bottom levels. However the benefits from this investment drive have started to show already. Cement availability is now almost guaranteed and the company has been turned around. The Commission is optimistic that the investment will result in a more efficient PCC, which should bring to the economy more sustained economic gains in terms of the quality of its products.
As public enterprises are generally overstaffed, it is not unexpected that newly privatised firms are forced to rationalise employment levels following government divestiture in order to increase efficiency and profitability. Evidence from the report, however, shows that post-privatisation trends in relations to employment cannot be generalised either across or within sectors. Net expansion in employment was registered in the farming and finance sectors. Nevertheless, in spite of these mixed results, most workers as a class are reckoned to be better off after privatisation. In fact, most firms have indicated that in the post privatisation period, their workers are better off in terms of staff benefits, thanks especially to employee share ownership schemes.
Further, the report supports the position that in selected cases at any rate, privatisation has led to increased competition and monopoly restraints cannot be easily isolated from concurrent changes, such as changes in macroeconomic policy, improvement in the regulatory framework and the generalised liberalisation in the trade regime. A striking example, in this regard, is the breaking up of the former Malawi Dairy Industries (MDI) into seven separate units. This has resulted in increased competition in the dairy industry. In turn, the Commission expects that this should stimulate demand for inputs from smallholder producers with consequent positive effects on their incomes as privatisation-tied capacity of the independent firms expands. Additionally, an increased product range available to customers at competitive prices should be expected from the dairy industry. This, in turn is likely to have some social benefits in terms of increased dairy consumption by Malawians. At present, Malawians, on average, consume a small fraction of the Food and Agriculture Organisation’s recommended dairy consumption per person per year.
At the macro-level, there is evidence that the programme has contributed considerably, through listed companies on the Malawi Stock Exchange (MSE) as of June 1999, four came to the Exchange through the programme. These companies accounted for approximately 74 percent of the K7.5 billion total capitalisation of the Exchange. In terms of catalysing foreign investment inflows, the Commission is pleased to confirm that the privatisation programme has been instrumental in attracting foreign investors to Malawi. It is not-worthy that it has been easier to attract such investors into already existing enterprises that have proven track records, such as PIM and SUCOMA, as opposed to green-field projects. The contribution of the privatisation programme on the establishment of the MSE has also had other spin-off effects, such as meeting one of the objectives of the programme, namely, to promote the participation of the Malawi public enterprises.
The privatisation programme is not only expected to increase Government budget. The most notable transactions in the context of raising Government revenue included the full or partial sale of the Government’s stake in PIM, SUCOMA, Blantyre Dairy and New Capital Dairy. As of June 30th 1999, gross proceeds accruing to the Government from all the privatisation transaction amounted to over K1.0 billion. This figure could have been higher if the primary consideration of the Commission was to maximise short-term Government revenue, as opposed to pursuing other objectives that are intended to increase social welfare in the long run.
Indirectly, the programme has also generated income for the Government through increased tax collection and other charges from the privatised enterprises, as well as dividend payments by the privatised firms in which the Government budget by alleviating the unsustainable burden of economically inefficient public enterprises, in terms of a reduction in transfers and subsides to such enterprises. Such scarce public resources are now available for other uses, including allocation to the social sectors.
The implementation of the privatisation programme has not been without its problems. Lessons learnt in this regard will be used to improve the implementation of the programme. For instance, although the Government has been keen to promote Malawian participation in the programme, evidence is available that this has not been easy due to the limited financial resources of most Malawians. In this connection, there is the danger of asset concentration whereby only a few individuals or companies could monopolise the programme. I reported last year that to address this problem the Government, the Commission and Indebank had reached an agreement with the European Investment Bank over the funding of a ECU 1.43 million facility. This facility is being well patronised. Malawians who have participated in the privatisation of New Capital Dairy (part of the former MDI), Soche Tours and Katete Dairy Farm have borrowed from this fund to finance their purchases.
Other avenues for assisting Malawians, as I do reported last year, include the enlargement of the Special Fund that is managed by Indebank to enable Malawians to borrow money to purchase shares in public offerings. The National Bank floatation targeted for mid-2000 should offer the first opportunity to see Malawians benefit from the enlarged fund. In addition, last financial year, the Commission approved the establishment of a collective Investment Trust Limited, which will be a collective scheme formed as a public limited liability company.
It is important to note that while a programme for broad-based access to property by Malawians should be put in place, its effects should not be over-estimated. After all, privatisation requires strategic investors that are willing to turn the enterprises around, undertake the necessary investments and bring new technology and marketing skills into the country. Furthermore, selling a controlling interest to a foreign strategic investor does not preclude Malawians from investing in a company as well. In the case of PIM, SUCOMA and PCC, some shareholdings in each of these companies have been sold or will be sold to local interests.
| Prospects for 1999/2000 |
The Commission’s efforts in 1999/2000 will be geared towards sustaining the momentum that has been achieved and strengthening the improvements that can be made in the implementation of the privatisation programme. In this regard, the Commission will endeavour to incorporate in the programme the lessons that have been learnt over the past three years. While the Commission will continue its programme of privatising all the public enterprises that are still in Government hands, emphasis will be shifted to the privatisation of utilities and other natural monopolies, such as telecommunications and power. It is important to emphasise that costly and unreliable public utilities in Malawi in Malawi are blamed for the increased costs of business in the country and are given as one of the reasons why Malawi is considered to be less attractive to foreign investors in comparison with neighbouring countries. In this regard, revitalisation of these sectors will address one of the major obstacles to the development and promotion of the private sector in the country of Malawi in general.
|
