- Government plans to increase stake in Cottco Holdings from 37% to 51%
- Cottco has faced various challenges since its privatisation
- Concerns exist about government management of entities
Harare- Cottco Holdings Limited has announced in its trading update for the year ending August 31, 2023, that the government is edging closer to obtaining an additional controlling stake in the company. Presently, the government possesses a 37% ownership, making it the largest shareholder, and intends to raise its stake to 51%. This strategic move aims to tackle the economic and financial difficulties that Cottco has encountered since its privatisation period, particularly starting in 2009.
Given the current struggles of entities where the government already holds a significant share, there is a crucial question as to whether a government takeover of 51% will bring any substantial improvement or value.
Cottco was established in 1994 as a successor organisation to the government-controlled monopoly known as the Cotton Marketing Board (CMB). The CMB had the responsibility of overseeing and regulating the cotton industry in Zimbabwe. In October 1997, Cottco underwent a process of privatisation with the objective of introducing market-oriented principles, improving efficiency, and attracting investment to foster the growth of the cotton industry. As a result of privatisation, Cottco transformed into a publicly traded company and was listed on the Zimbabwe Stock Exchange (ZSE) on December 1, 1997.
Commencing in 2000, Cottco achieved profitability, and by 2008, prior to the hyperinflation period, the Group acquired several companies. These encompassed full ownership (100% stake) of Cotpro, Motmate Designs, Toray Knitting Mills, Cottco International, a 50.52% stake in Seed Co Limited, and a 75% stake in Scottco. However, in 2008, Cottco faced significant challenges due to hyperinflation and the ensuing economic downturn. Consequently, in 2009, the Group underwent a restructuring process and came under the ownership of AICO Africa Limited. In 2013, as part of another restructuring, Seed Co and Olivine were separated from Cottco and established as independent entities, no longer under the ownership of AICO. Subsequently, in 2014, the entire management body responsible for overseeing the Group's well-being resigned, leading to a management crisis.
Since the unbundling, the Group faced challenges from legacy debts to management crisis. It was left with a debt of US$14 million which accrued mostly since the restructuring period in 2009.This situation has left the company in a difficult position, leading to instances of side marketing. Compounding the issue, the government's payments to Cottco were made in Zimbabwe dollars against a ballooning PMR, rapidly depreciating against the US dollar. As a result, the company struggled to meet its debt obligations for inputs and operational costs, which were denominated in US dollars. This financial strain led to Cottco being unable to pay its farmers, resulting in an outstanding debt of approximately US$56 million.
In November 2014, Cottco took the step of voluntarily suspending the trading of its shares on the Zimbabwe Stock Exchange (ZSE). This decision was made in conjunction with Cottco's application for provisional judicial management, which was submitted on November 5th, 2014. The company's application for provisional judicial management was driven by its inability to settle debts amounting to approximately US$56 million. This failure to settle debts was primarily a result of Cottco's struggle to recover the costs associated with inputs supplied to contracted cotton farmers due to management crisis and economic decay.
The government then with 16% stake through NSSA, took steps to intervene and address the situation. Currently, the government has a 37% stake in Cottco. In 2015, the government introduced the Presidential Inputs Scheme (PIS) with the aim of resolving the challenges faced by Cottco. As a result, the company withdrew its application for provisional judicial management.
In 2016, the government facilitated the restructuring of Cottco's debt through the Zimbabwe Asset Management Company (ZAMCO). This move was intended to alleviate the financial burden on Cottco and improve its overall viability. The Presidential Input Programme was introduced to provide small-scale growers with free inputs, and arrangements were made to finance the supply of inputs to growers under the condition that they sold their produce to Cottco, allowing the company to recover the cost of inputs. This program has achieved some success, as seed cotton production has shown signs of recovery, reaching approximately 140 thousand tonnes in 2021. However, the government has faced challenges in recovering its investment in the input supply and financial support program, leading to the withdrawal of these measures.
Despite a complete restructuring of the Board of Cottco and the company's suspension from the stock market, corruption within its administration continued to persist, with government having the big stake.
The government implemented a cotton subsidy scheme to further support the viability of Cottco. In 2020, an amount of ZWL$1.5 billion was committed to this subsidy, followed by an additional commitment of ZWL$2.5 billion in 2021.
In 2022, the government made a commitment of ZWL22 per kilogram, which, considering the exchange rate volatility, was significantly lower than the equivalent of US$0.50 cents. The subsidy allocated in 2021 amounted to ZWL2.53 billion, but only ZWL500 million was actually paid. This was not only a small amount in Zimbabwe dollars but also significantly lower when converted to US dollars due to the Zimbabwe dollar's 85% depreciation against the US dollar during that period.
The Zimbabwe dollar experienced a rapid decline starting from April 2021, with a minimal 0.03% gain in November on the formal market. However, on the informal market, the exchange rate surged to over ZWL300 against the US dollar, with a premium of over 100%. Given this volatile situation, side marketing became an appealing option for farmers as they received better payment rates in both US dollars and Zimbabwe dollars. Consequently, the government was the primary cause of Cottco's problems.
By 2021, Cottco had accumulated a substantial debt of ZWL800 million owed to farmers. However, when converted using the parallel market rate, these figures were insignificant as the Zimbabwe dollar depreciated on a daily basis. Therefore, it can be concluded that the contracted farmers, owed that debt in Zim dollars using formal market rate which was far behind the actual rate were the most disadvantaged participants in this rigged system.
In the most recent trading update for 2023, Cottco disclosed that the Ministry of Finance and Economic Development, which aims to hold a 51% stake in the company, appointed Grant Thornton to conduct a Financial Due Diligence on Cottco. This due diligence process was completed in August 2023. The purpose of such a financial assessment is to thoroughly examine and evaluate the financial condition, performance, and potential risks of the company.
There have been concerns and doubts about the government's ability to effectively manage companies in which it holds a controlling stake. While some entities like Kuvimba have shown relative success, there have been ongoing management problems within other government-controlled companies.
The issues faced by National Railways of Zimbabwe, Zimbabwe Broadcasting Corporation, Air Zimbabwe, Grain Marketing Board, Cold Storage Company, and Zimbabwe Iron and Steel Company (now Zimsteel) are evidence of the challenges in effectively managing these entities. These problems range from financial difficulties, outdated infrastructure, mismanagement, governance issues, and a lack of strategic planning. The failures in addressing these issues, particularly in recapitalizing and refurbishing old machinery, highlight the government's struggle in finding sustainable solutions to revive and transform these companies. This raises doubts about the government's ability to effectively manage and turnaround Cottco’s fortunes.
NRZ has faced significant financial challenges since the government took over its operations. The company has been reporting losses, and its outdated trains, some of which date back to the colonial era, have posed operational and efficiency issues. Prior to the reintroduction of the Zimbabwe dollar, NRZ had already accumulated a substantial debt of over US$300 million by 2017. This debt burden continued to increase, reaching $575 million in 2020. The decline in freight volumes, attributed to factors such as deteriorating infrastructure, inadequate maintenance, and a lack of investment, has had a direct impact on the company's revenue generation.
The financial strain faced by NRZ was evident when the company appealed to the government in August of this year to assume its legacy debt amounting to US$23 million. This situation highlights the challenges faced by government-run companies, including their struggles to manage debt and address financial and operational issues effectively. In the case of Cottco, which is currently experiencing difficulties, the government's significant shareholding raises concerns about its ability to address the company's challenges and ensure its success.
The same goes for the national airline. Air Zimbabwe has encountered significant financial challenges and operational difficulties. The airline's fleet has been reduced from 7 to just one functional plane, reflecting its struggle to maintain and expand its aircraft inventory. The company has faced mounting debts, with reports in 2018 indicating that its debts exceeded US$300 million. The airline has experienced difficulties in maintaining its fleet, leading to frequent flight disruptions, cancellations, and a decline in the quality of services provided.
In 2021, the financial situation of Air Zimbabwe remained dire, with reports indicating a deficit of US$349 million in local debt and US$30 million in foreign dues. These substantial financial burdens have further constrained the airline's ability to address its operational shortcomings, invest in necessary upgrades, and improve its financial standing. Due to unpaid fees and safety concerns, the government-owned airline has faced multiple suspensions from the International Air Transport Association (IATA).
Similarly, the Grain Marketing Board (GMB) has been plagued by poor management practices, resulting in the failure to support farmers adequately. This has led to a situation where Zimbabwe, which used to be a regional exporter of basic grains like maize, now finds itself importing these essential commodities, even from within the Southern African Development Community (SADC).
Another example is the Zimbabwe Broadcasting Corporation (ZBC), in which the government holds a controlling stake. Despite advancements in digital broadcasting technology, ZBC has been slow to transition to digital broadcasting. As a result, the television network continues to broadcast outdated and unengaging content, lacking the innovation and variety expected in today's media landscape. Moreover, ZBC remains heavily controlled by the state, limiting the diversity of information and perspectives available to viewers.
These instances highlight the challenges faced by government-controlled entities in Zimbabwe. Poor management, outdated practices, and limited adaptability to changing technologies contribute to inefficiencies and hinder the ability of these organizations to provide quality services to the public.
The decision regarding the future of Cottco should be based on an objective evaluation of its performance, management practices, and the potential benefits and drawbacks of privatisation. It is essential to ensure that any changes made are transparent, fair, and in line with good governance principles, rather than being influenced by personal or political interests.
Even with the government acquiring a 51% controlling stake, we do not anticipate immediate substantial changes in the situation.
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