ECONOMIC GOVERNANCE WATCH 9/2021
[17th August 2021]
The Auditor-General’s Report on State Enterprises
and Parastatals for 2019
On the 16th June in the National Assembly, the Minister of Finance and Economic Development presented the Auditor-General’s report on the financial statements of 30 State enterprises and parastatals for the year 2019. The report can be accessed on the Veritas website [link].
In this and subsequent bulletins we shall outline some of the governance issues the Auditor-General raised in her report, but before doing so we should note two preliminary points.
Scope of the Auditor-General’s audits
At the beginning of the report the Auditor-General cautions that the principal objective of her audits is to enable her to express an opinion on the truth and fairness of the entities’ financial statements as a whole. Hence, she says, she may not have examined all aspects of the entities’ activities and procedures. She further cautions that an audit opinion is based on the concept of reasonable assurance. It is not a guarantee that the financial statements are free of misstatements.
The Auditor-General conducts her audits according to international auditing standards, and public entities are also bound to comply with international standards when preparing their financial statements. This is mandated by section 37 of the Public Finance Management Act. One of these standards – International Accounting Standard (IAS) 21 – specifies how to account for transactions in foreign currencies: amounts in a foreign currency (such as the US dollar) must be converted into the accounting currency (in this country, the Zimbabwean or RTGS dollar) according to the spot conversion rate (i.e. current market exchange rate) applicable at the time of the transactions.
Government action however made it impossible for public entities to comply with this. In February 2019 the President issued SI 33/2019 which directed that for accounting and other purposes all assets and liabilities had to be valued in RTGS dollars at a conversion rate of 1:1 with the US dollar. Hence public entities had to convert all the US dollar amounts in their financial statements into RTGS equivalents at an arbitrary rate which did not reflect the rates applicable at the time of the transactions giving rise to the amounts concerned. This was particularly problematic for entities such as the Zimbabwe Consolidated Diamond Company (ZCDC) which conduct a substantial part their business in foreign currencies.
As a result of their non-compliance with IAS 21 the Auditor-General could not certify that the financial statements of 25 out of the 30 entities covered in her report were in accordance with international standards.
This consequence of SI 33/2019 was probably unforeseen but it illustrates how foolish it is to try to regulate the country’s economy by decree without regard to market forces.
Late Preparation of Financial Statements
Although the report was for the financial year ended on the 31st December 2019, just over half (55 per cent) of the financial statements covered in the report were for earlier years – which means the entities concerned were behindhand in preparing their financial statements. Particularly bad examples of this are:
- Air Zimbabwe (Pvt) Ltd (2015-2017 accounts audited)
- National Museums & Monuments (2017 accounts audited)
- Zimbabwe Broadcasting Corporation (2017 accounts audited)
- Zimbabwe Post (2016 accounts audited)
- Zimbabwe Youth Council (2016 & 2017 accounts audited)
General Governance Issues
Out of 69 issues the Auditor-General reported on, 53 related to the area of governance, principally:
- the payment of fees and allowances to board members without ministerial approval (this applied to NSSA, Zimparks, Tobacco Industry Marketing Board, MMCZ, NOIC, ZETDC, NRZ and ZCDC – the acronyms are explained below)
- board members failing to declare their personal or financial interests (this applied to Zimparks and ZETDC)
- vacancies on boards and unequal representation of genders and regions on boards, also failure to fill senior managerial posts (this applied to the Mining Promotion Corp (MPC), Petrotrade, ZINARA, Zimra, Zimsec, ZCDC, SMEDCO and Zimbabwe Women’s Microfinance Bank)
- ineffective internal control systems (this was almost universal).
Findings on Individual Entities
The National Social Security Authority (NSSA)
NSSA failed to monitor performance on its housing offtake agreements, i.e. agreements under which NSSA paid developers to build housing units which would be transferred to NSSA. In Harare a developer had been paid to construct 1 000 houses but had done nothing; in Chinhoyi a developer had been paid nearly Z$8 million to build and transfer 809 houses but had built only 202. NSSA had taken no steps to recover contractual penalties or damages from the defaulting developers.
Zimbabwe National Roads Administration (ZINARA)
Parliament’s Public Accounts Committee [PAC] analysed the Auditor-General’s special report on ZINARA and a forensic audit report on the organisation, and we analysed these devastating reports in our Economic Governance Watch 2/2021 of the 2nd May 2021 [link]. It is hard to imagine that there could be any more faults to find with ZINARA, but the Auditor-General found a few:
- ZINARA was technically insolvent in the years 2017 (when its liabilities exceeded its assets by US$37 914 239) and 2018 (when its liabilities exceeded its assets by US$52 798 724).
- ZINARA used 10 per cent of the Road Fund to pay staff wages and salaries, in breach of section 15(d) of the Roads Act which says that no more than 2,5 per cent of the Fund may be used for that purpose.
- ZINARA’s Board operated with two vacancies throughout 2018 and did not meet the requirements for gender equality prescribed in the Public Entities Corporate Governance Act.
Zimbabwe Parks and Wild Life Management Authority
The Authority had outstanding debts amounting to nearly Z$8,4 million, some of which dated back to 2010. Some operators running facilities leased from the Authority were operating on expired leases, some without a lease.
Grain Marketing Board (GMB)
The GMB contracted with “a local company” to import 10 000 tonnes of maize and made an advance payment of US$3,9 million. The company delivered maize worth only US$1,482 million and agreed to import the balance in soya beans, but delivered only US$1418 million worth of beans, leaving US$1 million worth of deliveries outstanding.
The Auditor-General did not name the company involved in these transactions, presumably because – as she told the PAC later – she feared lawsuits if she did. In a later bulletin we shall comment on whether this fear is justified.
The Auditor-General noted that the Commission incurred deficits in the 2017 and 2018 financial years, and its net liability position in both years was about $5,5 million. This she said cast doubt on the Commission’s ability to continue as a going concern. Because of its financial straits the Commission was unable to provide its employees with medical aid cover, and failed to pay their pension contributions to the Pensions Office.
Zimbabwe Electoral Commission (ZEC)
ZEC failed to recover $105 000 paid for computers it had returned as unsatisfactory. To the Auditor-General’s recommendation that the matter be followed up, ZEC responded:
“The issue is before legal recourse hence we may still need to stand guided so that any positive outcome will put the matter to rest.”
This cryptic response is hardly an example of the transparency which ZEC is enjoined to show by section 7 of the Electoral Act!
National Aids Council
The Council failed to pay suppliers $7 054 631 for antiretroviral drugs because it was unable to get foreign currency from the Reserve Bank. [Comment: One would have thought that the purchase of ARVs would be an absolute priority for the Government and the Reserve Bank]
Mining Promotion Corporation
Since 2016 the Corporation operated without a substantive CEO and without a human resources and administration manager, an internal auditor and a chief accountant. The Corporation’s rather lame explanation was that it was going through its formative stage.
National Railways of Zimbabwe (NRZ)
The Auditor-General doubted the ability of NRZ to continue as a going concern, in view of the following:
- its liabilities exceeded its assets by nearly Z$875 million
- it had been incurring substantial losses for 10 years; the loss in 2019 was nearly Z$1 080 million
- it was unable to repay its loans, which by the end of 2019 amounted to nearly Z$294 million – though the precise amount could not be verified because of lack of documentation
- it even lacked the funds to insure its locomotives.
National Oil Infrastructure Company of Zimbabwe (NOIC)
The company had to rely on ZESA to supply power to pump fuel along the Beira pipeline, so fuel could not be pumped to Msasa during power cuts.
Petrotrade (Pvt) Ltd
This company had no board from 2015 until June this year. As a result it was unable to carry on any activities legally, and could not even recover company vehicles from dismissed managers.
Zimbabwe Consolidated Diamond Co (ZCDC)
The Auditor-General did not give this company a clean bill of health:
- She was unable to ascertain whether amounts allegedly owed to the company by creditors could be recovered; the amounts totalled over $24 million in 2018 and over $304 million in 2019. She was also unable to verify whether the company’s investments in subsidiaries of over $20 million in 2018 and over $178 million in 2019 were fairly valued. Her failure to obtain certainty in these matters, she said, cast doubt on the company’s ability to continue operating as a going concern.
- The company’s board did not have independent directors, since all the directors had interests in other organisations (such as the Zimbabwe Mining Development Corporation and the Minerals Marketing Corporation) intimately related to the company.
- Members of staff holding acting positions were paid more than they would have received had they been appointed substantively to those positions.
- The company complied with a government directive to sell diamonds to local customers in Zimbabwe currency at the official rate of 1:1. This led to loss of revenue.
- The company seemed unable to keep proper track of its stock, i.e. diamonds. It did not check that its physical stock matched the stock its books indicated it ought to hold. Particular examples:
- In 2018 nearly 41 700 carats of diamonds were excluded from the stock count, and it was assumed they had been sold to customers. An additional 13 223 carats were excluded from the count in error.
- In 2019 297 660 carats of diamonds were not counted and were excluded from the closing inventories.
- Tender rules requiring customers to pay for their diamonds within three days were ignored.
- The company paid more than US$352 000 for equipment and fuel that was never delivered.
ZESA (ZESA Holdings and the Zimbabwe Electricity Transmission and Distribution Co - ZETDC)
The audit showed up serious management problems with both entities and cast doubt on their ability to continue as going concerns. ZETDC recorded operating losses of nearly Z$3,5 billion in 2018 and Z$925 million in 2019.
The following issues were highlighted:
- ZESA Holdings received loans from the Ministry of Finance without any agreement as to their amount, repayment or other terms. According to the Auditor-General the total amount outstanding as at the end of 2019 was Z$1 179 454, though how she could arrive at that figure is not clear. It is incredible that the Ministry and ZESA entered into such vague transactions.
- Due to “cash flow challenges”, ZETDC failed to remit rural electrification levy payments amounting to over Z$224 million to the Rural Electrification Authority.
- ZETDC received advance payments amounting to nearly Z$4,138 million from customers for electricity connections, but failed to connect them.
- ZETDC allowed electricity consumers to run up debts amounting to Z$2,2 billion at the end of 2019.
- Having paid a supplier US$1 293 654 for cables in 2015, ZETDC had not received delivery of them five years later, nor a refund.
In 2018, 1 688 theatre operations were cancelled mainly due to non-availability of equipment to carry them out. Generally, the hospital had inadequate equipment and resources and lacked beds to accommodate patients in its intensive care unit and higher dependence unit.
This, it should be noted, was before the COVID-19 pandemic struck.
The Auditor-General summed up her findings as follows:
“The audit revealed that most of the weaknesses emanated from governance issues. It is therefore imperative that State Enterprises and Parastatals embrace provisions of the new Public Entities Corporate Governance Act and incorporate these into their existing structures and processes.”
Perhaps that might work, but State enterprises and parastatals have been mismanaged for decades and their problems seem too deep-seated to be cured simply by a piece of legislation. Perhaps Parliament’s Public Accounts Committee should initiate a wide-ranging debate in the National Assembly to come up with real and long-lasting solutions to their problems.