Zambia

In 1995, the Government of the Republic of Zambia (GRZ) decided to privatize the Zambia Consolidated Copper Mines (ZCCM), thus aiming to restructure the Zambia economy, develop the private sector and encourage investments in Zambia. As a result of the privatization, ZCCM was transformed into an investment holding company, ZCCM - Investments Holdings Plc (ZCCM-IH), with 10-20% minority shareholding in the newly privatized mining, treatment and power companies of the Copperbelt. Privatization was completed in March 2000.

In spite of the deterioration of the ZR system in recent years, quick revitalization of ZR is possible. As a first step, an expatriate management group, financed by SIDA, commenced work in March 1998 and has already taken some steps in this direction. Within two years, staff has been reduced from about 5,500 to a little less than 3,300. The morale of the remaining staff has shown a visible improvement. Locomotive and rolling stock availability has improved. As a result, the declining trend of traffic has been reversed. The freight traffic for the year 2000 is projected at 1.8 million tons but is likely to be around 1.65 million tons. A specially designed and speedily-executed package of about US$5.6 million under the proposed ZRRP would be targeted at further improvement of critical inputs, viz., track, locomotives, and rolling stock. Execution of three or four such specifically designed and targeted packages in the course of the next few years would make the system reliable enough for handling all the traffic on offer. However, for sustainability, radical restructuring of ZR and its privatization is urgently needed.

The main thrust of the Government's restructuring strategy is to seek private sector participation in the operation and management of the railways, mainly through private concessioning of infrastructure and selling/leasing of locomotives and rolling stock. To facilitate concessioning, the GRZ strategy is also to further reduce the number of employees in the railways to whatever number is required by the concessionaires (estimated at no more than 1,650). Establishing a regulatory framework and restructuring/winding up of the existing Zambia Railways would also be essential as a consequence of the concessioning of the railways.

The project would consist of six main components: Railway Concessioning; Staff Rationalization; Staff Redundancy; Unfunded Pension Scheme Contribution; Staff Retraining and Redeployment; Social Mitigation; Assets Rehabilitation and Environment Mitigation Works; Regulatory and Legal Framework; Winding Up/Restructuring ZR; MoCT Strengthening

Compared with the alternative of continuing with ZR as it is and relying solely on normal retirement and attrition, the concessioning of the railways and the accelerated downsizing will pay for itself through increased traffic, reduced labor costs year by year as well as other operating costs and its beneficial effect on the climate within the enterprise for change and innovation.

One important lesson from previous Bank involvements has been that a parastatal framework within which most railways currently operate in sub-Saharan Africa is inappropriate for an environment that is progressively becoming more competitive. Private sector participation in the operation and management of railways is considered essential for improving their performance and making them operate as financially self-sustaining entities. Second, the railways are unlikely to become financially viable unless surplus staff in the railways, generally 50- or more, is retired/retrenched. Third, investments in infrastructure, locomotives, rolling stock, and communication systems should better be left to the concessionaires in order to reduce the time and cost of execution. Fourth, it is better that the tasks of running the railways and restructuring it be separated and managed by separate entities. Under the project, Zambia Privatisation Agency (ZPA) will implement the concessioning part while ZR will continue to manage the railways. Finally, a change in the legislative framework affecting the railways is important for successful restructuring.

The Project development objective is to enable Zambia Railways (ZR), through restructuring and privatization, to substantially increase its operating efficiency, reduce its cost of operations, and configure its freight services and tariffs to meet customers' requirements and expectations, and consequently, to increase its share of the local, international, and transit freight traffic.

Inadequate infrastructure has been identified as a major bottleneck for private investment and diversified growth. The CAS states that, "reducing transport costs will help increase competitiveness and underpin growth in agriculture, tourism, manufacturing, and mining." The CAS states that IDA will support a project to facilitate private participation in the operation and management of ZR, to enable the railways to increase operating efficiency and, consequently, its share of the freight market. By creating the conditions necessary for the efficient and sustained operation of the railway system, the proposed project would enable the rail operators to increase their gross and net revenue. In particular, project funds will facilitate private concessioning of ZR and retrenchment of surplus railway staff.

Privatization. To address the issues described above, GRZ has decided to seek private sector participation in the operation and management of the railways. The agreed mode of private sector participation would be private concessioning of infrastructure and selling or leasing of locomotives and rolling stock. Private sector participation is aimed at dealing with problems normally associated with public ownership and management, viz., inefficiency, over investment, waste, excess employment, financial losses, and at providing capital to address issues of deferred maintenance.

Staff Rationalization. Staff rationalization is a key component of the GRZ strategy to improve efficiency and cost effectiveness of public enterprises in general and the railways in particular. On July 1, 1998, ZRL had a staff of 5,082 plus 800 "casual" workers. This has progressively been brought down to 3,293 by natural attrition as well as retrenchment. The optimal staffing level for ZRL, however, is much lower. According to the ZRL management, the optimal level is 1800, while according to the consultants the railways can be run efficiently by only 800 staff. The potential concessionaires would probably settle on a staffing level between 800 and 1800, thus requiring retrenchment of staff of between 1400 and 2400.

ZRL Restructuring/winding up. Eventually ZRLwill hand over the freight and passenger business to concessionaires. The future role of ZRL as an entity has still to be defined. ZRL may have need to continue operating as a downsized state owned company with the responsibility of spinning off the remaining commercial and non-commercial activities (i.e., not taken over by the concessionaires such as guest-houses, clinics, football teams and police), discharging all its liabilities, selling off the remaining assets, and finally winding itself up. ZRL may also have to be retained if: (i) no proposals are received for the passenger concession and ZRL is required to continue operating these services; and (ii) ZRL is required to serve as a holding company holding the infrastructure assets on behalf of the government.

The proposed project will assist GRZ and ZRL in the:
1. Finalization and operationalization of private concessions for ZR's freight and passenger operations, with the objective of reducing transport costs, improving the condition of infrastructure, contributing to the Government's revenues, reducing accidents and improving safety, and improving compliance with environmental standards;
2. Rationalization of staff through: (i) retrenchment of surplus staff; and (ii) counseling, retraining, and re-deployment of retrenched staff, with the objective of reducing costs of operation and facilitating the successful operationalization of the concession;

The concessioning proposal finalized by ZPA envisages three separate concessions as follows:
* a geographically separated but verfically integrated short-haul, inter-mine freight service concession comprising the Ndola-Chingola section plus branches;
* a geographically separated but vertically integrated long-haul freight service concession comprising the main line (Sakania-Livingstone); and
* an operating concession for a specified set of passenger services, being operated as public service obligations.

Staff Retrenchment. Based on the concessioning experience so far and confirmed by the estimates produced by ZRL as well as the consultants who undertook the Private Sector Participation Study, the concessionaires are likely to engage only between 800 to 1800 staff out of the current 3,300. To be on the safe side and to avoid a situation of shortfall of funds to finance retrenchment, the allocation of funds for this component is based on an estimated staff employment of 900 by the concessionaire and a corresponding staff retrenchment of about 2,400 staff.

The sequence of retrenchment, as developed in agreement with ZPA/ZRL/GRZ, is as follows: (a) 700 staff would be retrenched immediately after the Credit becomes effective, the criteria to be used for identifying the surplus staff having already been agreed with the unions; (b) the remaining staff would be retrenched after the concessionaires have selected the staff according to their requirement.

Pension Obligations. In the past ZRL has defaulted on transferring pension contributions from staff to the Pension Fund. Consequently the staff, who are entitled to pension benefits under the Zambia Railways Pension Rules (either a refund of contributions or a defetred pension on reaching the retirement age), cannot be paid their dues by the Pension Fund. The responsibility for this accumulated liability lies with ZRL. It is quite certain that the retrenchment efforts will get stalled unless ZRL meets this liability prior to commencement of the retrenchment process. ZRL has assured that the balance, about US$1.0 million equivalent, would be paid to the Pension Fund by December 31, 2001. This component would finance the severance payments of permanent staff to be retrenched, and would be implemented by ZRL.

As indicated earlier, between 1400 and 2400 staff could be retrenched during the next one year. ZRL plans to retrench 700 workers as soon as the Credit becomes effective and funds are available. While the retrenchment payments will help, the loss of employment could have a seriously adverse impact on workers unless the retrenchment process is carefully planned and implemented. Previous experience of retrenchment in ZRL has not been encouraging, as about 5% of the retrenched workers have found formal employment, another 20% have opened small enterprises, and another 5% have moved to the villages and presumably smallholder agriculture.

Every railway in the sub-Saharan African region is over-staffed (some to the extent of about 200 to 300 percent). Whether managed as it is or through private participation, the railways are unlikely to become financially viable unless surplus staff is retired/retrenched. Even though retrenchment of staff is a politically and socially sensitive issue and difficult to implement, the issue has to be addressed. To minimize the adverse social impact of the change, it is important that the staff rationalization scheme is designed in close consultation with the staff and their representatives, with in-built steps for staff counseling, retraining, and assistance in their re-deployment. The proposed Project staff rationalization component has been designed keeping the above considerations in mind and with full formal and informal consultations with the unions.

Eventually ZRL will hand over the freight and passenger business to concessionaires. The future role of ZRL as an entity has still to be defined. ZRL may have need to continue operating as a downsized state owned company with the responsibility of spinning-off the remaining commercial and non-commercial activities (i.e., those not taken over by the concessionaires such as guest-houses, clinics, and police), discharging all of its liabilities, selling off the remaining assets, and finally winding itself up. ZRL may also have to be retained if: (i) no proposals are received for the passenger concession and ZRL is required to continue operating these services; and (ii) ZRL is required to serve as a holding company holding the infrastructure assets on behalf of the government. The future structure of ZRL would depend upon the outcome of the concessioning process.

In all probability, with the condition that the freight bidders would need to ensure a bid for the passenger services as well, the concession for passenger services will be awarded. It is also very likely that the concessionaires would make their own arrangements for security either by engaging the necessary police or by subcontracting. The surplus police would be retrenched like all other staff. In such a case, the residual ZRL would be managed by a total staff of 54 until it is wound up.

Impact on Retrenched Workers and their Community. The two positive aspects of retrenchment, as far as the retrenched workers were concemed, were the opportunity to invest money in long desired items such as a house, and the opportunity to go into another field of endeavor, such as agriculture. The main complaints of already retrenched workers involved the size of and, even more so, the delays with which the severance payments were made. These delays led to financial hardship, as some retrenched workers had to take out high interest loans to "tide" them over until receipt of the payoff from ZR. A relatively small percentage, 18 percent, invested the money in ways to generate more income. Other than late payments, the respondents identified three seriously negative aspects of retrenchment as follows: (i) poverty and destitution due to the loss of a reliable source of income; (ii) loss of the social services (e.g., clinics, schools, recreation facilities) provided by ZR, and (iii) the stigma attached to sudden "unemployed" status, causing former workers to be looked down on by family as well as members of their communities.

Councils are chronically overstaffed. up to 60% of Council resources are absorbed by the approximately 18,000 staff they employ. Most Council employees are low skilled laborers. Local government service remains a low prestige career path, and unreliable payment of Council employees' wages has not improved its appeal Councils lack the resources needed to fund redundancy payments, although many have slowly started shedding employees (either through attrition, or by financing a few redundancies at a time when their cash position allows it)

Some progress has been made in meeting the objectives of the Public Service Reform Program which was launched in 1993. These include the retrenchment of almost 20 per cent of civil servants in 1998 and 1999; a wage freeze to bring public costs under control; the privatization of over 80 per cent of 280 state-owned enterprises; the implementation of a policy process that emphasizes coordination; substantial decentralization in the health and agriculture sectors; the preparation of restructuring plans for all ministries; the introduction of frameworks for improving legal and accounting capacity; and the preparation of a national capacity building program for good governance.

Right-sizing and Pay Reform. The objective of this component is to bring about the restructuring necessary rationalize the functions of government and to generate the financial resources needed to begin to create the pay incentives needed to motivate staff. Phase I will build upon progress made under the UNDP supported restructuring of ministries and the retrenchment carried out over the past year and assist Government in rationalizing the structure and size of the Public Service. It is expected that the establishment will be reduced from 136,000 in June 1997 to about 112,000 by the end of 1999 and about 110,000 by the end of 2000. The long term goal is to have a core civil service of 10-12,000. The main activities to be carried out under this component in Phase 1 would be: (i) separation of excess and redundant staff; (ii) creating a computer-based Complements and Gradings Register; (iii) putting in place payroll and establishment control systems; (iv) enhancing social safety net programs; (v) restructuring of the public service; (vi) enhancing capacity of the PSC to undertake selection and placement of appropriate personnel in the restructured Ministries; (vii) identifying and divesting non-core functions; and (viii) reform pay through monetization, negotiating performance contracts with PSs and increasing salaries, especially the salaries of key technical and professional staff. The Management Development Division in the Cabinet Office will lead this component.

Policy and Public Service Management. As direct service provision is decentralized, policy formulation and monitoring will become the business of government. The core civil service, which may contract to about 10-12,000 staff after 13 years, will be prepared for its new role under this component.

Government commitment. The program will be sustained because the Government is committed at the highest levels. GRZ has demonstrated its commitment to public sector reform by privatizing over 150 state-owned enterprises, one of the best records in Africa; by retrenching 22,000 public servants; and by introducing measures that make it almost impossible for retrenched civil servants to return to the civil service. During the recent Country Assistance Strategy (CAS) process, the Government itself identified "local capacity building" and "public service capacity building" as among its own development principles and priorities.

Important lessons were learned from the first six years experience of implementing PSRP. Some of these lessons highlight the need to improve the capacity of managers in the public service. The Issues Study carried out at the beginning of the preparation of the program demonstrated that even after many years managers still did not think strategically, especially about implementation. Although restructuring plans were developed, little has been done to implement them Other lessons point to the need to establish linkages, think about phasing and do " first things first." One reason for the lack of retrenchment was that the Government was not able to find any way to pay retrenched staff . Thus, it is necessary to link restructuring to retrenchment in order to release budgetary resources to pay for the retrenchment. Similarly, funding was never made available to decompress salaries, an essential precondition for motivating staff to perform more effectively. Over the years capacity deficiencies have become increasingly recognized as major impediments to growth. During the recent CAS process the Government identified weak public service capacity as one of the main reasons for weak economic performance and limited success in alleviating poverty. The past few years also demonstrated the importance of putting in place the means to link sectoral and government-wide institutional reform with realistic budgets. At the same time the Cabinet set out to substantially reduce the size of the public service, strategies were being prepared in some sectors that involved considerable staffing increases. Mechanisms did not seem to be in place to reconcile the proposed increase in the numbers of teachers, policy, prison workers and health workers with budgetary constraints.

The objective of Phase I is to design and begin to implement the critical system-wide reforms that will support improved service delivery in the sectors. These reforms include rationalizing staffing, particularly in the core civil service, reforming pay, introducing more effective management of payroll and establishment, replacing the cash budget with the Medium Term Financial Framework, and improving financial management systems. The first phase will also support progress being made under ongoing programs to restructure, decentralize, and improve accountability and transparency in the public service.

The following performance indicators adopted for Phase 1 of PSCAP are the program matrix monitoring indicators in the latest CAS: […]
* Reduction in numbers of public sector employees
* Decompression of public sector salary levels
* Introduction of new affordable pensions system

Government began a radical social and economic reform process in the early 1990s. Economic liberalization included removal of subsidies, the privatization ofparastatal companies, and redefinition of the role of the public service from that of controlling the overall economy to that of providing an enabling environment for increased participation of the private sector and individuals in the economic and social development of the country. The redefinition of the role of the public service was based, in part, on the realization that service delivery by the public service, in general, and the Civil Service, in particular, had deteriorated. As a result of a bloated Civil Service and weak internal controls, the Government budget was and still is unable to sustain competitive salaries and wages. Although personal emoluments consume about one third of the nation's domestic budget, Civil Servants' salaries have remained low. This has resulted in a de-motivated workforce leading to poor performance and delivery of services to the people of Zambia. As a trade unionist said during the current CAS process, "The country has accepted what the country has gone through [to promote liberalization] but the benefits have not diffused to the average citizen."

The provision of services has been highly centralized. Until retrenchment began, civil servants represented over 1 per cent of the population (the average for Africa is I per cent). With support from PSCAP, the current establishment of about 115,000 civil servants, most involved in the direct provision of services, will be reduced to a core of about 10,000 to 12,000 over 14 years, with service provision decentralized to executive agencies, the private sector and local government

Civil service wages are low and compressed. Wage levels are generally one-third the level in the private sector (which in many cases pays better non-wage benefits too). The ratio of a PS's salary to that of the lowest grade is 5:1, one of the highest degrees of compression in Africa (although,PSs and some other senior staff receive substantial non-monetary benefits). The principal objective of Phase 1 of PSCAP is to generate the funds needed to decompress salaries by continuing the retrenchment and reducing budgetary subventions to hived off service providers.

Recruitment is only loosely linked to merit; promotion is often by seniority; career progression is unplanned; pay is not related to performance and the staff appraisal system is cumbersome. PSCAP will support the establishment of a meritocratic civil service where what matters most is performance against agreed results.

In setting out to address these problems, the Government will build upon progress made in a number of areas in recent years:
· the retrenchment needed to implement restructuring plans has begun: by the end of 1999 the size of the civil service will have fallen from 137,000 to 112,000
· GRZ has agreed that the Civil Service Pensions Fund will be reformed to make it more sustainable

The need to have an affordable as well as effective public service. "Budget overruns, mounting arrears, and high levels of wasteful expenditures compound the already chronic liquidity problems of GRZ" (Source: the GRZ Technical Committee's December 1998, Development Plan for the Payroll Management and Establishment Control Project). Although progress was made in reducing overruns from 1994 to 1996 (from 18 to 14 per cent), the overrun rose to 29 per cent in 1997. Personnel Emoluments (PEs) present a particular problem. The objective is to have PEs at 25 per cent of the national budget or 4 per cent of GDP, the African average. However the PEs rose from, 22 per cent of total Government domestic revenue in 1994 to 43 per cent in 1997. Since then GRZ has reduced the size of the public service by about 30,000 staff, mainly through retrenching employees, voluntary separations, and hiving off. A further reduction of 7,000 staff was planned for 1999. One reason why it is important to reduce the size of the public service is that it will release the resources needed to increase salaries. Increased salary levels will in turn make it possible to recruit, retain and promote staff with scarce managerial and professional skills. Along with rightsizing, there is need to divest government services that can be better supplied by the private sector or by public agencies on the basis of performance contracts.

Right-sizing and Pay Reform: The principal objective of this component is to bring about the restructuring necessary to rationalize the functions of government and to generate the financial resources needed to begin to create the pay incentives required to motivate staff. Phase I will build upon progress made under the UNDP-supported restructuring of ministries and the retrenchment carried out over the past year and assist Govemment in rationalizing the structure and size of the Public Service. It is expected that the establishment will have been reduced from 136,000 in June 1997 to about 112,000 by the end of 1999. The main activities to be carried out under this component would be: (i) separation of excess and redundant staff; (ii); reform pay through monetization, iii) negotiating performance contracts for PSs and eventually all staff; (iv) putting in place payroll and establishment control systems; (v) enhancing social safety net programs for retrenched civil servants; (vi) restructuring of the public service to meet the economic growth and poverty alleviation needs of businesses and citizens; (vii) enhancing capacity of the PSC to undertake selection and placement of appropriate personnel in the restructured Ministries on the basis of need and merit; (viii) identifying and divesting non-core functions; and (ix) increasing salaries, especially the salaries of key technical and professional staff. The Management Development Division in the Cabinet Office will lead this component.

Phase 1 will improve the capacity of the public service to manage change, including carrying forward the planned restructuring and retrenchment and the associated improvements in incentives for civil servants and the managers of the private sector and local govemment agencies who will become responsible for service provision. The most important policy reforms that will be achieved during Phase I will be the monetization of civil service benefits, the introductions of performance contracts for PSs, significant improvements in the salaries of key technical and professional staff, and the establishment of an equitable and sustainable pensions fund.

[and much more]

Preliminary Document (July 2000)

By contrast to the lapses in macroeconomic management, Zambia has made substantial progress with structural reforms in many sectors over the decade of the 1990s. Whereas in 1990, the economy was dominated by state-owned enterprises, government administered price structures and protective mechanisms, Zambia today has a much more open economy where prices are largely market determined and the greater part of previously state-owned enterprises have been restructured and divested to the private sector including the all-important copper company. Some of the principal achievements of structural reform over the past ten years are presented in Box 1 and, more fully, in Appendix 1. Progress along the path of adjustment and structural reform has not always been steady and macroeconomic management has sometimes faltered but there can be no question that, on the threshold of the 21st century, Zambia is much better positioned to move forward on an accelerated growth path than at any time in the previous quarter century.

Main Economic and Structural Reforms Since 1991

• Public Service Reform Program launched in 1991 and renewed in 1997. Since renewal, 22,000 public employees have been retrenched and 14 ministries restructured;
• Completed sale or liquidation of about 80% of public entities offered for sale. Transfer of ZCCM assets completed in March, 2000;

  In order to improve the outlook for economic growth and social conditions, the government adopted, in 1999, a medium-term economic and structural reform program covering the period 1999-2001. The macroeconomic adjustment and reform program was supported by a new three-year PRGF arrangement, approved in March 1999. The program focused on strengthening macroeconomic policies, finalizing the privatization of ZCCM, accelerating the parastatal reform and privatization program for key public enterprises, and improving the financial sector. The main macroeconomic objectives of the program were to regain control over inflation mainly through continued fiscal adjustment and strengthening of the external position.

  Public sector reform. To stem declines in the cost-effectiveness of the public service, the government adopted a public sector reform program (PSRP) in 1993 aimed at, inter alia, reducing nonmilitary public employment, decompressing public sector salaries, and improving performance management systems. A limited hiring freeze, instituted in August 1997, followed by a program of retrenchment and contracting out of some services, resulted in the size of the nonmilitary public service dropping from 137,000 in 1997 to 112,000 by end-1999. Within this significant downsizing, efforts have been made to maintain adequate service delivery by protecting front line service providers (e.g., nurses, teachers, police) from retrenchment.

  Parastatal reform and privatization. The government's medium term strategy builds upon the program, begun in 1991,to privatize public enterprises which, at that time, accounted for some 80 percent of GDP and employed 140,000 workers. By 1998, some 80 percent of them had been divested. The sale of ZCCM in March, 2000 was a particularly important landmark because it substantially completed the privatization of Zambia's dominant copper mining industry. This development is expected to bring new management and investment into the mines and, more fundamentally, alter the relative roles and boundaries between the private and public sectors. The government now plans to extend its privatization program to include the privatization of key utilities. It aims to complete the divestiture of 50 commercial entities remaining in the original ZPA portfolio, and it will offer for sale a minority shareholding and management rights in the telecommunications company (ZAMTEL). The government will also add the electricity company (ZESCO) to ZPA's portfolio with a view to its early privatization. In the petroleum sector, the government is establishing a liberalized pricing and retail distribution system for petroleum products and will begin discussions with the Tanzanian authorities on options for private sector participation in operating the TAZAMA petroleum pipeline. With regard to financial institutions, the government intends to privatize the state-owned institutions in accordance with the provisions of the Privatization Act, including the Zambia National Commercial Bank and Zambia State Insurance Company, and complete the privatization of the Zambia National Building Society and the National Savings and Credit Bank by end 2000.

  While road transport is dominant in Zambia, other modes are important. Past efforts to improve Zambia Railways within the parastatal framework have not been successful and, therefore, railway operations are soon to be concessioned. After the liquidation of the national air carrier in the early 1990s, the Government has sought to foster a competitive, liberalized air transport system under which a number of domestic companies are licensed to provide domestic and international services. The main airports are operated on a commercial basis by the National Airports Corporation Ltd. While Government retains responsibility for operation of smaller facilities and for air traffic control and safety.

  The long-standing financial distress of ZESCO reflects in many ways the general financial weakness of other public sector and parastatal institutions many of which simply do not pay ZESCO for their power. The arrears of the former state owned copper company, ZCCM, was of particular importance in that respect because it consumed 50-60 percent of ZESCO's power output. The privatization of ZCCM in March 2000 has greatly improved prospects that ZESCO will be paid for this power in the future. Once the financial position of ZESCO begins to improve, it will be able to address more effectively the developmental needs of the sector especially with regard to the maintenance and extension of the transmission and distribution network. The privatization of ZESCO will be critical to the long-term efficiency of the sector. A study of the modalities of privatization will begin soon with financing from USAID.

  Possible Reforms and Indicators for Reaching a Floating Completion Point
  Privatization of the power company, ZESCO, and of the Zambian National Commercial Bank.

Key Structural Measures: Past Reforms and Future Milestones

Significant tax breaks for the new owners of the privatized copper mines were introduced in the 2000 Budget, including a reduction in the company tax rate to 25 percent, with a 20 year carry-forward period for losses; exemption from excise duties on electricity and from customs duties (up to a ceiling of US$15m a year) for 5 years.

Concession for railway operations to be awarded in early 2001 and monitoring arrangements to be put in place.

Policies and plans for: regulation of concessionaires; management of residual public sector role and resources; rationalization of any staff not taken on by the concessionaires - to be addressed by early 2001.

A study to identify modalities and options for the eventual privatization of ZESCO will be undertaken in 2000.

Privatization of ZESCO (2001-02).

Engage an experienced private operator to manage the water and sanitation assets of ZCCM (in nine mining towns) which have now been transferred to an independent holding company.

Over the seven year period 1992-1999 upwards of 250 formerly state-owned companies were either privatized, leased or, in a few cases, liquidated.

In March 2000, ZCCM, the state copper company, was privatized.

Fifty companies remaining in the portfolio of ZPA are to be privatized (2000-2002).

The financial viability of ZESCO, the power company, is to be reconstituted as a prerequisite for privatization and a study of possible modalities for privatization is to be undertaken (2000)

The distribution of petroleum products is to be fully privatized (2000).

Expansion of teacher training to replace untrained teachers by 2002.

[note: there are a couple charts of results over the past 10 years which could not be copied here]

Decision Point Document (HIPC: December 2000)

The government's program of privatization, financial sector reform, and further deregulation of the economy is supported by the IDA's adjustment lending and the program supported by the Fund's PRGF arrangement. Following the privatization of the ZCCM, the main focus of privatization has shifted to large utilities and state monopolies because the government recognizes that competitiveness can be improved only by reducing costs and improving these vital services. These goals can be achieved through a well-designed privatization that will increase efficiency and attract new investment in the sectors concerned. The cornerstone of the program is privatization of the key remaining state-owned enterprises, namely the electricity, telephone, and oil companies (ZESCO, ZAMTEL, and ZNOC respectively). For ZESCO, a study of the modalities of privatization and sector reform was undertaken with technical assistance from the U.S. Agency for International Development (USAID). The Zambia Privatization Agency (ZPA) will review the study and propose privatization options by end-December 2000 for cabinet decision. To improve efficiency in the petroleum sector, the Government has agreed to fully liberalize imports (so that all oil-marketing companies can import petroleum products directly) and retail prices of petroleum products, and to limit the role of ZNOC in managing and controlling strategic reserves of petroleum products (leaving all commercial operations to oil marketing companies). It will also offer for sale a majority controlling interest in the refinery, the oil pipeline and the terminal, as a package, to a strategic partner or group of partners. Moreover, the government will soon tender the granting of concessions for the railway system. In addition, a substantial share of the state-owned telecommunications company ZAMTEL (which no longer has a domestic monopoly) will also be offered for sale to a strategic partner. The IDA is supporting the program for privatization as part of its adjustment and other sector and project assistance.

In response to the continued weakness of the largest state-owned bank, the ZNCB, and the potential financial burden, the government plans to restructure the bank and privatize it. A study of the modalities for privatizing the ZNCB has been initiated and will also be reviewed by the ZPA and submitted by end-December 2000 to the cabinet for decision. The efficiency of the financial system will be enhanced by improved prudential regulation and supervision of the banking system. This improvement includes revoking licenses of insolvent banks, denying bailouts, limiting deposit protection, strengthening loan recovery efforts, and upgrading the training and incentives of bank supervisors.

In 1998, Zambia had a per capita GNP of US$380, and almost three-fourths of the population was living in poverty. Tables 2, 3, and 4 show a combination of declining or stagnating social indicators over the decade, although the incidence of extreme poverty has eased somewhat. Much of the deterioration has been concentrated in urban areas, owing to the decline in mining activity, public sector layoffs, and a depressed manufacturing sector. In the context of the PRSP under preparation, the government intends to foster urban micro enterprises and the informal sector, improve urban infrastructure and develop skills through training and vocational education. Rural poverty rates have fallen recently, but poverty remains very widespread because of geographic isolation, poor physical infrastructure, and low agricultural production and income. Further details on the nature and causes of poverty and government strategy to reduce poverty are provided in the I-PRSP and in the preliminary document.

Attention has also focused on the need to complete the program of divestiture in order to reduce the fiscal burden of public enterprises and extend the provision and quality of essential services. In that context the privatization of ZESCO, the national power company, is particularly important in order to improve efficiency, reduce tariffs, and facilitate future economic growth. Privatization of ZNCB is considered essential to address the weakness of the bank and to relieve the government of a financial burden. The issuance of bidding documents for the sale of a majority (controlling) interest for both institutions has been identified as a condition for reaching the floating completion point.

Key Reforms and Objectives for Reaching a Floating Completion Point
Restructuring and issuance of international bidding documents for the sale of a majority (controlling) interest in the power company, ZESCO.
Issuance of international bidding documents for the sale of a majority (controlling) interest in the Zambian National Commercial Bank.

Enhanced Structural Adjustment Facility Policy Framework Paper, 1999-2001

Progress has been made on a broad range of structural issues. The privatization of nonmining public enterprises has continued at a rapid pace, with 224 companies/units privatized by end-December 1998 out of a total portfolio of 282. Zambia's privatization efforts suffered a setback when an international consortium withdrew from the negotiations on the sale of the largest asset package of the ZCCM in May 1998, but the process of privatizing the ZCCM gained renewed momentum in December 1998. Financial sector reform has also advanced, as the Bank of Zambia (BoZ) has strengthened supervision of commercial banks and gazetted regulations on large loan exposure, insider lending, and provisioning. The central bank also made progress in strengthening the commercial banking system. By early-1998, one distressed bank was taken over by a larger bank, while four others were put under receivership. Also, on September 1, 1997, the government adopted a medium-term public service reform program aimed at reducing the size of the nonmilitary public service from 136,775 to 80,000 persons by end-1999. In the context of this program, about 7,600 public servants were separated in December 1997, and another 7,900 employees were retrenched in 1998.

Privatization of state enterprises is key to the government's efforts to raise efficiency, promote private sector development, and bolster economic growth. As part of the program, the government enacted a sound legal framework and established the Zambia Privatization Agency (ZPA). Significant progress has been made in implementing the privatization program, which started in 1993 with a list of about 138 companies to be privatized. This portfolio was increased to 282 entities in December 1998, of which 224 have been privatized. In the mining sector, six small copper and cobalt mines and ZCCM's Power Division were sold in 1997-98, while preliminary agreements were reached on the privatization of the remaining large assets-the Konkola, Nchanga, Nkana and Mufulira Divisions-as well as the Ndola Lime Company.

15. The government also intends to pursue a far-reaching privatization program in other sectors. It aims to complete the divestiture of the remaining 50 commercial entities in the ZPA's current portfolio, and offer for sale a minority shareholding and management rights in (ZAMTEL) by September 1999. In the power subsector, the government will add the electricity company (ZESCO) to ZPA's portfolio in 1999 with a view towards its eventual privatization. In the petroleum sector, the government plans to establish a liberalized pricing and retail distribution system for petroleum products. Based on the conclusions of a fuel options study and the review of the institutional framework for the petroleum sector, to be completed by December 1999, the government will adopt an action plan by 2000. On the TAZAMA pipeline, discussions will begin with the Tanzanian authorities to examine the options for private sector participation in its operations.

16. With regard to financial institutions, the government intends to privatize the state- owned institutions in accordance with the provisions of the Privatization Act, including the Zambia National Commercial Bank and Zambia State Insurance Company. Similarly, it intends to complete the privatization of the Zambia National Building Society and the National Savings and Credit Bank by 2000. In the transport sector, Zambia Railways has begun the implementation of a two-year management contract with a Swedish International Development Cooperation Agency (SIDA)-financed management team, while ZPA has initiated the examination of the railways' privatization options (see below). Concerning government departments, the government will decide on their divestiture in 1999.
17. The cost-effectiveness of the public service has declined significantly over the past ten years. Wage costs account for about 29 percent of domestic fiscal resources and crowd out expenditure on essential supplies and capital spending. As wage levels and pay differentials in the public sector have been compressed, it has become difficult to attract and retain skilled personnel. Moreover, even the available manpower is not used efficiently because of inappropriate management and organizational structures. Consequently, the public service has become generally unresponsive to the country's needs.

18. In September 1997, the government adopted a public sector reform program (PSRP) aimed at, inter alia, reducing nonmilitary public employment, decompressing public sector salaries, strengthening the systems for controlling the public payroll, and improving performance management systems. Since then, some progress has been made toward realizing these goals. A World Bank-supported action and implementation plan for the program was prepared and approved by the cabinet in April 1998. A full-time Director General was appointed in early 1998 to oversee the implementation of the program. To ensure enforcement of tighter establishment controls, a limited hiring freeze was instituted in August 1997. Staffing reviews have been initiated for the ministries that account for the bulk of civil service employment.

20. To ensure further progress on the PSRP, a revised action and implementation plan will be prepared with the support of the World Bank, and its implementation started during the first half of 1999. This plan will include time-bound actions in areas such as retrenchments, pay and pension policies, establishment and payroll controls, ministerial restructuring, performance monitoring, and the mitigation of the social impact of retrenchments. Of particular importance is the evaluation of various options for retrenching pensionable civil servants in an affordable manner. The possibility of altering the computation of pension benefits to retrenched civil servants and the feasibility of sending retrenchees, once identified, on forced leave so that they cannot benefit from future wage increases or changed pay scales will be examined in this context.

25. The key elements of the government's agricultural reform policy have been liberalization and decentralization. The agricultural sector has been largely liberalized, as input supply and crop marketing have been privatized, prices are set in free and open markets, and restrictions on domestic and international trade have been removed.

33. In the power sector, the government's main priorities are to attain financial viability for ZESCO, restructure it for privatization, facilitate private sector investment, and improve management of the Rural Electrification Fund, which, because of the tight budgetary situation in recent years, has received only a small part of the central government's revenues from the 10 percent levy on electricity tariffs. A 40 percent tariff increase for non-ZCCM customers, effective from January 1, 1998, and the finalization of a 15-year bulk sales agreement between ZESCO and the successor companies to ZCCM's power division will help strengthen the financial position of ZESCO.

Memorandum of Economic and Financial Policies (March 19, 1999)

1. The privatization of state enterprises is key to the government's efforts to raise efficiency and bolster economic growth. In January 1999, the government and a foreign mining company reached firm understandings on the sale of the main asset packages of the ZCCM, which is expected to take place by end-March 1999. As regards the nonmining sector, we plan to do the following:
o offer for sale a minority shareholding and management rights in the telecommunications company (ZAMTEL);

• concessioning of the railway system;
• privatize the Zambia National Commercial Bank (ZANACO);
• instruct the Zambia Privatization Agency (ZPA) to explore the options for divestiture of the electricity company (ZESCO), parastatals in the transport sector (the Njanji Commuter Company and ZAMPOST), and the National Savings and Credit Bank;
• ensure that the Zambian and Tanzanian privatization agencies will submit recommendations to their respective governments on options for private sector participation in the operations of the commonly owned TAZARA railway and TAZAMA pipeline.

The government adopted on September 1, 1997 a comprehensive public service reform program, with the twin objectives of reducing excess employment in the public sector and improving the delivery of public services by, inter alia, eventually offering a more competitive remuneration. Some 15,500 public workers were retrenched between December 1997 and end-1998 under this program. The original plan envisaged a reduction in the size of the public service to 80,000 employees by end-1999. However, an updated payroll analysis suggests that such a sharp reduction in the public service cannot be realized without reducing employment in education and health care. With the assistance of the World Bank, we are carrying out more detailed work to determine the optimal size of the civil service in the medium term. Nonetheless, for 1999, we are targeting a reduction in the number of civil servants to 112,500, which entails removing 7,000 civil servants from the payroll through retrenchment, natural attrition, and the hiving off of public institutions. Owing to delays in the retrenchment of pensionable civil servants in 1998, we envisage an extension of the timetable for the implementation of a revised program through 2001. A new civil service remuneration structure, which will address, inter alia, the significant compression in the pay scales, will be introduced after the substantial completion of the retrenchments, but with the understanding that the central government wage bill will not exceed 5 percent of GDP.

The program for 1999 envisages that a further reduction in the size of the public service will take place in the context of the restructuring of ministries, the hiving off of government units,7 and the government's long-term strategy to develop the sustainable capacity needed in the public sector to deliver high-quality services. With the assistance of the World Bank, we have drawn up a detailed implementation plan for the retrenchment of 7,000 public sector employees in 1999 to be achieved through (i) the hiving off of three government institutions with a total of 3,754 employees; (ii) the elimination of 500 positions in restructured ministries; (iii) 645 voluntary separations; (iv) natural attrition of 355 employees (on a net basis); and (v) the compulsory separation of 1,746 contractual daily employees. To ensure that the total cost of retrenchment of pensionable civil servants in 1999 will not exceed K 80 billion, we will adjust the benefits that separated civil servants presently can claim under the Public Service Pensions Act. An actuarial review of civil service pensions, which will specifically correct the anomalies in the various pension options under the present plan, will be submitted to the President by end-April 1999.

1. The government will continue to give high priority to the privatization of state-owned enterprises, including major utility companies, parastatals in the petroleum and transport sectors, and financial institutions. The following specific actions are envisaged in 1999:
o offering for sale minority shareholding and management rights in ZAMTEL before end-September 1999;
o requesting the ZPA before end-June to study options for the divestiture of ZESCO;
o offering for sale or closing the Zambia National Oil Company (ZNOC);
o before end-September 1999 putting out to tender the granting of concessions of the railway system;
o tendering management rights on the operations of the National Airports Corporation in Livingstone, Ndola, and Mfuwe;
o handing over ZAMPOST and the Njanji Commuter Company by end-June 1999 to the ZPA; and
o ensuring the preparation by ZPA of options for the privatization of the Zambia National Commercial Bank (ZANACO).
18. Privatization is fundamental to Zambia's adjustment program. In addition to measures proposed on ZNCB, we regard the elimination of government majority ownership and control of ZESCO and the oil sector as critical objectives. For ZESCO, a study of the modalities of privatization has already been initiated with technical assistance from USAID. This will be followed by a review by ZPA and submission by end-December 2000 of a proposal regarding the privatization options for Cabinet's consideration. The government will select the preferred option and refer the privatization back to ZPA for implementation. Regarding the oil sector, the government will implement a program of action in the context of the policies envisaged in the World Bank's Fiscal Sustainability Credit. This involves effectively privatizing the sector, with government retaining responsibility for maintaining storage facilities and a strategic petroleum reserve.

Zambia (June 30, 2000) Letter of Intent

(iv) issuance of instructions to ZNCB to place ZNOC on a non-accrual accounting basis retroactive to December 31, 1999, and to re-file the December 1999 and March 2000 prudential returns. Furthermore, in view of the insolvency of the Public Service Pension Fund, the government will commission a study to establish the modalities for moving to a "pay as you go" system consistent with the recommendations of the World Bank, and with reference to the recent actuarial study of the pension fund. It is intended that draft legislation will be submitted to Parliament by end-2000.

Letter of Intent (March 9, 2001)

As for public sector wages, the government will limit the wage bill to 5.7 percent of GDP in 2001 and will reduce the share of the wage bill in domestic noninterest expenditures over the medium term.