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SOEs Loss Making Under Microscope

Malawi’s State-Owned Enterprises (SOEs) continue to face deteriorating liquidity positions as per Malawi Government 2023 Annual Economic Report released on Thursday, March 2, 2023, alongside the budget statement
which shows that SOEs continue to register losses.

The Malawi Government 2022 annual economic report indicates that out of the 17 public enterprises assessed last
year, 11 parastatals posted profits while six registered losses. The 2023 report, however, projects that five out of 25
SOEs are expected to post losses by the end of the current financial year, which ends on March 31, 2023.

Among the companies that are projected to post losses this year are Blantyre Water Board (BWB), Northern Region
Water Board (NRWB), Southern Region Water Board (SRWB), the National Food Reserve Agency (NFRA), and Lilongwe Handling Company (LHC), largely due to unpaid bills by the public sector.

Last year, the SOEs that posted losses included Central Region Water Board (CRWB), Airport Development Limited
(ADL), Malawi Posts Corporation (MPC), National Food Reserve Agency (NFRA), Agricultural Development and Marketing Corporation (Admarc), and the Malawi Institute of Management (MIM) now the Malawi School of Government, largely on account of an increase in debtors for the parastatals with liquidity positions below one.

The report says, on aggregate, trade debtors have continued to erode SOEs working capital, thereby worsening the
liquidity position, a situation prevalent among public utility companies and other trading parastatals.

It is expected that BWB will post a loss of MK21.1 billion, NRWB will post a loss of MK5.8 billion, and SRWB will post a loss of MK216 million. NFRA is to post a loss of MK662.3 million, while LHC will register a loss of MK171.4 million by March 31 this year.

According to the Economic Outlook report, as of September 2022, debtors owed BWB MK9.1 billion in unpaid bills,
of which MK4.3 billion was held by public institutions and MK4.8 billion was held by private institutions.

When the parliamentary committee on Natural Resources and Climate Change inspected the progress of SRWB Khudzi Bay water project in Mangochi district on Saturday, March 4, 2023, it was revealed that ministries, departments, and agencies (MDAs), including Malawi Defense Force (MDF), Malawi Police Service (MPS), hospitals, and Zomba State Lodge, hold unpaid bills amounting to MK8.1 billion with the utility body.

SRWB Chief Executive Officer (CEO) Duncan Chimbamba is quoted as saying that as one way of mitigating the losses that his institution is registering due to unpaid water bills by MDAs, his institution started installing prepaid meters to all MDAs.

“The sad development of not paying water bills has greatly impacted the cash flow of the institution. As a way of reducing the unpaid bills, we started installing prepaid meters, and currently we have finished installing prepaid meters at MDF and some district hospitals,” Chimbamba said.

The Minister of Finance and Economic Affairs, Sosten Gwengwe, admitted the worsening conditions of the SOEs in
his budget statement for the 2023–2024 financial year.

“It is evident that commercial state-owned enterprises have been registering losses, borrowing heavily from commercial banks, or persistently requesting government bailouts to finance their operations. Some contingent liabilities for SOEs have eventually turned into actual debt. Those that continue to make losses may have to be restructured or indeed closed altogether,” Gwengwe said.

It seems the problem is not solved because the same minister, in his budget presentation last year, lamented the
same problems, and articulated reforms for SOEs, and it is apparent that the reforms have not yielded the desired
results except that he hinted, in this year’s budget statement, that 90 percent of SOEs now hold accounts with the Reserve Bank of Malawi (RBM).

Last year the Finance Minister said in order to strengthen financial oversight over state-owned enterprises, several
reforms are being implemented, which include the formulation of guidelines for issuance of parastatal guarantees and issuance of letters of consent to enable borrowing by parastatals.

“To enhance monitoring of revenues collected by SOEs, all commercial SOEs will, from the 2022-2023 financial year, open holding accounts with the Reserve Bank of Malawi,” said Gwengwe.

In June 2019, the then Minister of Finance, Economic and Strategic Planning and Development, Joseph Mwanamvekha, challenged parastatals to reach target agreements with government. Hemade this observation after observing that the previous year; most parastatal organizations did not remit dividends to government because they made losses.

With advice from the Bretton Woods institutions of the World Bank and International Monetary Fund (IMF), in the
1990s, Malawi disposed of several state companies that were struggling through  privatization as one way of conditionality of the Structural Adjustment Programs (SAP) of these Bretton Woods institutions imposed on Malawi. Privatization is also among the ten pillars of the Washington Consensus as a way of resuscitating economic growth in developing nations.

A structural adjustment program is a plan implemented by the World Bank and the International Monetary Fund
(IMF) in a developing nation to try to get their economies to be more productive. However, some critics, like Jason Oringer and Carol Welch, have a different look at the SAPs.

“SAPs are based on a short-term, profitmaximization model that perpetuates poverty, inequality, and environmental degradation. Social safety nets and good governance reforms do not compensate for the serious flaws that SAPs introduce by deregulating laws and diminishing the state’s capacity to protect the welfare of its citizens,” said the Bretton Woods.

Leslie Mkandawire, an economist who worked with the Reserve Bank of Malawi for many years but now runs his Mlomboji and Partners Consulting firm, observes that Government must institute a balance between a state’s
ownership mandate (appointing boards and providing oversight) and improving SOE competitiveness simultaneously.

He added that government must also explicitly delineate realistic, time-bound, and quantifiable outcomes to better
guide and evaluate SOE performance if they are to make business sense.

The classification of SOEs can be placed in four not mutually exclusive categories: the ones created to achieve public policy objectives; the ones involved in providing public services (e.g., water, electricity, petroleum, etc.); those established as exclusive providers of goods or services needed by the state (for example, military suppliers); and; those responsible for producing income for the state and competing with the private sector on equal terms.

State-owned enterprises are often required to implement multiple and sometimes conflicting objectives, i.e.,
to achieve loss-making public policy goals (e.g., universal service obligations, uniform tariffs irrespective of the costs of provision) while operating commercially.

The triple role of the government as the regulator, enforcer of those regulations, and owner of SOE assets can sometimes undermine the SOEs’ competitiveness and efficiency because of corruption, mismanagement, and technical incompetence of their staff. Most SOEs, are not just expected to be financially profitable, they are also  tasked with providing crucial public goods, (For instance, the provision of clean water, electricity, and sanitation services in remote towns and villages, might not be as financially profitable as they would be in big towns, but they are equally essential for both sets of populations,” said Mkandawire.

Renowned associate professor of economics at Malawi University of Business and Applied Sciences (Mubas),
Betchani Tchereni, observes that the problem is with the mandate given to the parastatal organizations that affects their performance on expected deliverables. Tchereni has also observed that another challenge is with the governance aspect, where board members and/ or Chief Executive Officers appointed to run state owned enterprises are mostly ruling party affiliates, thereby eroding their autonomy in running the enterprises.

“Board members are people without expertise, you can even wonder if the board members appointed have the
acumen to turn tables. There are people in the corporate world who may have retired but have the requisite expertise; these are the people to be on the boards of parastatals,” he said.

Tchereni concurred with Chimbamba in saying that the only way water boards can be in a real business sense to avert losses is by installing prepaid meters to all public institutions.

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