RESEARCH TOPIC
The Impact of Debt Cancellation to the Performance of Parastatals in Zimbabwe.
A Case of Zimbabwe National Water Authority 2013
CHAPTER I
1.0 Introduction
The chapter gives a general introduction and puts in picture issues that rekindled the interest of the researcher to study in the area concerned. The chapter puts in clear terms the statement of the problem, objectives of the study are outlined and the research questions thereof are identified and indicated as per the requirements. The significance of the study, assumptions and delimitations are discussed. Limitations which the researcher encountered in her field of study have been outlined. Lastly, the researcher gave recommendations and suggested solutions which might counter the impact of limitations so that results of the study will not be compromised.
1.1 Background to the study
Recently on 23 July 2013, the Rural and Urban development minister Ignatius Chombo at the instruction of the president, directed that all Urban and Rural local authorities should cancel debts owed by domestic consumers for the period of February 2009 to 30 June 2013 to a zero debt level. The directive was issued in terms of Section 133 of the Rural District Councils Act chapter 29:13 as read with Section 303 of the Urban Councils Act chapter 29:15 and stated that all local authorities write off debts in respect of rentals, unit tax, development levies, refuse charges and licence charges. Moses Matenga in the Newsday (2013) gives full detail.
According to a report in Voice of America/ Zimbabwe (2013), the minister said that the debt forgiveness amounting to about $2 billion would enable residents to start on a new slate, besides relieving users who are failing to pay off their debts; he also argued that local authorities were losing a lot of money by employing debt collectors to pursue the debts. It has been discovered that from 2009 ratepayers have not been able to meet their obligations in terms of payments of taxes, rentals, levies and related charges. This has resulted in enormous and crippling debt burden frustrating the majority of population. This has resulted in many facing bailiffs, court orders and threats to lose their homes. . In this period it has been noted that Zimbabwean residents had been affected by sanctions, this according to a report in the Herald (Debt cancellation legal, not mere politicking, 2013), moved the need to cancel debts to cushion people from the economic hardships they faced.
It is against this background that the minister has decided to cancel all debts in 92 local authorities from February 2009 to the end of June 2013.As per the directive; debts were to be cancelled in all local authorities or parastatals both in rural district councils and urban councils. This was meant to cushion individual ratepayers from the effects of economic challenges experienced during the period in question.
Parastatals are state owned organisations whose affairs are governed or controlled by the government. Their main thrust is to provide services to the nation and receive revenue by charging their customers for its services. These organisations are often partially or majorly funded by the government. Hence, parastatals survive either by government grants, loans and subsidies or by their own revenue creation sources. Sources of parastatal revenue besides government assistance include levies, rates and rents for refuse collection, sewerage, water and electricity, taxes on land owners and licenses.
However, the problem faced by the parastatals is debt collection from their debtors who are failing to pay off their obligations in their stipulated time period. This has recently proved to be detriment to the performance of parastatals. Reports about parastatals performance recently have showed that it’s declining continuously. In a report by Brian Matemba in the Zimbabwe Independent (2012), parastatals have been seen to perform dismally with the majority of state-controlled entities making losses which were worth of a thousand US dollars in 2011. This has been attributed to undercapitalisation, high overheads, lack of customer confidence, cash-flow problems, inability to attract investors and access lines of credit due to unattractive balance sheets. Most parastatals have recorded huge losses whilst some who may be considered to be better performing have only managed to make marginal profits. In 2013 the same issue has been raised where the ruling party was seeking measures against this dismal performance portrayed by parastatals (The Herald 2013, Zimbabwe: party to revamp parastatals). (The Herald 2012 Zimbabwe: Unpaid bills weigh down ZINWA) shows the Zimbabwe National Water Authority (ZINWA) recording a negative bank balance as a result of inadequate revenue due to bad debts. ZINWA is not the only financially starved parastatal, many other parastatals are faced with the same phenomenon.
Over the years ZINWA has been facing challenges of debt collection. The water Authority is owed a massive debt by stakeholders who range from government institutions, farmers, local authorities and industrialists among others. The debtors’ book has been consistently growing and weighing down the authorities’ ability to fulfil its mandate. Local authorities were owed vast amounts by defaulting rate payers, according to reports by Paidamoyo Muzulu (Zimbabwe Independent 2013), ZINWA was owed an approximate figure of $100 million by debtors.
Now it is of greater concern how the already stressed local authorities and parastatals can revive and provide services effectively without capital injection, since service provision in local authorities has always been sustained by payment of service charges by consumers. Payment of bills has always been the lifeblood of local authorities particularly in Zimbabwe where options for alternative sources of revenue are minimal owing to the depressed macro-economic environment.
The debt cancellation policy has raised many questions to its effectiveness to the entire nation. This means without focusing only on its effect to residents, attention should also be given to parastatals or local authorities who are also directly affected by this move. Hence, against this background the researcher has been motivated to carry out this research.
1.2 Statement of the problem
The life of ZINWA and City Councils as parastatals has always been centred upon support of their customers who benefit from services they offer as they pay for these services. However, after cancellation of bill obligations they are owed by the customers, it has become a great concern how parastatals are going to fulfil their mandate of providing quality services like before without capital injection. According to reports by Paidamoyo Muzulu, Zimbabwe Independent (2013) it has been estimated that an amount approximately $100 million was owed to ZINWA however after the directive they did not cancel the whole amount and cancelled $55 million. In Masvingo, the city council has lost approximately US $6.7 million and in Masvingo Rural District Council they have lost approximately US $4.8 million. Hence, after having lost such an amount of revenue it is the role of this research to find out how this has impacted on the performance of ZINWA and how it is coping with its daily operations.
1.3 Objectives of the study
a) To find out the immediate effects of debt cancellation on ZINWA
b) To find out the effect of debt cancellation on the performance of ZINWA
c) To review the alternative revenue sources available for ZINWA
d) To find out how ZINWA has adapted and is copying with the policy
e) To analyse the effect of the debt cancellation policy to different stakeholders of ZINWA – employees
1.4 Research Questions
a) What are the immediate effects of debt cancellation on ZINWA
b) What effect has debt cancellation have upon the performance of ZINWA?
c) What are the alternative revenue sources available for ZINWA?
d) How is ZINWA as a parastatal adapting and copying with the debt cancellation policy?
e) How does the debt cancellation policy affect the different stakeholders of ZINWA- employees
1.5 Significance of the study
1.5.1. Researcher
After carrying out the research project, the researcher acquired skills of carrying out similar tasks and also served as reference for future work in the related field. This research is also a fulfilment of the requirements of the Bachelor of Commerce Honours Degree in Accounting.
1.5.2 Parastatals
The research project has brought out people’s views about the debt cancellation policy. Also to such parastatals where the policy has had negative effects this piece of literature has given recommendations which might help them as a way forward.
1.5.3 Future researchers
Also other students who had interest in the same subject got a starting point to their research journey
1.5.4. Policy makers
The research project brought out peoples’ views about the debt cancellation policy. Effects of the policy have been discussed which helps the policy makers to revise the policy and make some resolutions where they see it fit. This will help them for future decisions with issues regarding policy making.
1.6 Assumptions
‘ The research had access to correct and unbiased information, this entails that the respondents interviewed were able to shed light and reveal their true views and perceptions. The private and confidential nature of data and information so acquired is guaranteed.
‘ The study managed to acquire average time and resources to carry out all necessary steps to completion, and also the researcher was emotionally and physically healthy throughout the research study.
‘ The researcher got favourable cooperation from the proposed respondents and the data so acquired was adequate to deduce findings and conclusions.
1.7 Delimitations (Scope) of the study
The research focused on Zinwa as the focus for parastatals, thus the response of parastatals to the debt cancellation policy was concentrated fully on Zinwa Masvingo in the Lundi catchment area and partially in other catchment areas of Zinwa. The study covers the period before debt cancellation that is before 23 July 2013 and after debt cancellation up to present.
1.8 LIMITATIONS OF THE STUDY
1.8.1 Time constraints
Time and pressure from other academic commitments affected the research to some extent, however, the researcher made use of after work times and weekends, she also worked under pressure and used the timetable as a guide till the submitting of the research.
1.8.2 Cost constraints
The researcher wished to review the effects of debt cancellation on almost all parastatal organisations in Masvingo province so as to get a clearer and wider picture of the effects of debt cancellation. This could have covered approximately $1000-00, however, because of financial constraints the researcher has resorted to focus on ZINWA only which will cost her $400-00. The project became expensive because of the usage of a power-tel dongle which costs $50/month, however the researcher got financial assistance from her parents.
1.9 SUMMARY
The chapter began with the background of the study and proceeded to give the description of the research problem. The main research questions and objectives have been laid out thereby laying a foundation and base of the study. Delimitations of the study have also been specified and with every research limitations are indispensable, thus they have been highlighted. Furthermore, some terms have been defined to further clarify the research idea. The next chapter therefore is going to review literature from different authors to help the researcher to explain some aspects of importance involved in the research.
CHAPTER II
LITERATURE REVIEW
2.0 Introduction
The purpose of this chapter is to establish a theoretical framework which best presents a clear sense and context of the research questions and objectives on the impact of the debt cancellation policy on the performance of parastatals. The research focused on parastatals, debt cancellation, debt relief, debt forgiveness, organisational performance (particularly parastatals), debt, debtors and these terms will be defined in this chapter.
2.1 Theoretical literature review
2.1.1 Parastatals
Parastatal organisations can be defined as organisations or agencies owned or controlled wholly or partly by the government Cullen, Gilmour and Holmes (2005).They are treated by national laws and regulations to be under the guidance of the government. Parastatals are clearly separated from regular government administration and are given sufficient autonomy to pursue their objectives in a flexible manner. Parastatal bodies are set up by Specific Acts of Parliament and managed by Boards of Directors appointed by government. They are established outside the Central Government and are involved in commercial, economic, service oriented or social activities requiring a large degree of autonomy and freedom from bureaucratic interference Parastatal bodies (2013: 1). Parastatal organisations are taken to include government business enterprises, state corporations and other organisations including boards, agencies and institutions which are established as semi-autonomous entities with their own governing bodies ECSAFA (2004).
2.1.2 Mandate for parastatals
The mandate of local authorities or parastatals in Zimbabwe is well stipulated in the Rural District Council Act chapter 29:13 and Urban Councils Act chapter 29:15 which is to provide utility services to the general residents of the cities, rural areas, towns, or the community. Both the rural and town councils as local authorities are obliged to provide road networks, water supplies, construction and maintenance of sewage works, roads and dams, electricity, residential stands, business stands, burial services, library facility, schools, recreational facilities and provide a clean environment in towns and cities so this includes issues of refuse collection and repair of burst pipes and other community services. (Urban Councils Act chapter 29:15) On the other hand the residents also referred to as ratepayers have an obligation to make payments for the services rendered which means all have a role to play.
2.1.3 ZINWAs’ mandate
ZINWA derives its mandate and functions from the Zimbabwe National Water Authority Act of 1998 (ZINWA Act), (Chapter 20:25). The Act also provides for:
‘ The appointment and functions of the Board of the Authority;
‘ The raising of charges for the provision of water and other services by the Authority;
‘ The funds of the Authority;
‘ The imposition and collection of the water levy;
‘ The repealing of the Regional Water Authority Act [Cap.20:16]
ZINWA also has a delegated authority to administer the Water Act [Chapter 20:24]. The
Water Act provides for among other things:
‘ The development and utilisation of the water resources of Zimbabwe;
‘ The establishment, powers and procedures of Catchment Councils and Sub-Catchment Councils.
‘ The grant of permits for the use of water;
‘ The protection of the environment and the prevention and control of water pollution.
In addition there is a Water Levy Fund which was established in terms of section 39 of the ZINWA Act (Chapter 20:25). Its administration is governed by the constitution and guided by Accounting Procedures Manuals the Authority also adheres to the provisions of other Acts like the Planning and Development Act (Chapter 28:02). This Act enables Parastatals and Government Departments to charge fees for services and facilities provided by institutions under their control. The Public Health is another Act, which ZINWA adheres to. It provides standards for drinking water quality. Report of the Comptroller and Auditor General (2006: 1)
2.1.4 Revenue sources for parastatals (local authorities)
According to the Zimbabwe Institute of local government: policy review (2005) the sources of revenue for Local Authorities to finance operations include:
‘ Grants from the Central Government for the general administration costs, including paying for recurrent expenditure like salaries and wages
‘ Loans received under the Public Sector Investment Programme for Infrastructural Development.
‘ Levies, rates and rents paid to council for services rendered by Government such as refuse collection, sewerage and water
‘ Interest earned on money invested by council in any investment instrument as provided in the Act
‘ Revenue received from any activity engaged in by council. A council may engage in any commercial, industrial, agricultural or any other activity for the purpose of raising revenue for the council
‘ Taxes on land owners, mining locations, licenced dealers and permit holders.
2.1.5 Revenue sources for Zimbabwe National Water Authority (ZINWA)
Revenues or funds for ZINWA are well stipulated in the Zimbabwe National Water Act (Chapter 20: 25).Section 27 funds of the Authority shall consist of:
a) moneys payable to the Authority from moneys appropriated for the purpose by Act of Parliament, or funds from subsidiaries in terms of Section 29 and from funds in terms of Section 43
b) Any donations and grants made to the Authority by any person or Authority or by any government of any country
c) Moneys obtained by the Authority in form of loans or by way of other financial assistance as approved by the Minister of Finance
d) Charges for services rendered by the Authority or other means or assets as may accrue to the Authority whether in the course of its operations or otherwise.
Section 30 Water and other charges:
a) The Authority may with the approval of the Minister and subject to the Water Act (Chapter 20:24), fix charges
b) The sale of raw or treated water from water works operated or controlled by the Authority and
c) The disposal of waste water and
d) The drilling of boreholes and
e) The provision of consultancy services
ZINWAs’ core mandate is to provide water and water related services. As it provides water to its consumers, it bills its consumers according to the amount of water they consume, and because ZINWA holds a monopoly position, it has the most customers in the water provision industry. The customers range from general residents to commercial farmers, industrialists and other big local authorities. It provides raw water and clear water in small towns and rural areas, bulk raw water is provided to local authorities whilst treated water is directed to consumers on behalf of local authorities who lack the capacity to do so http://www.zinwa.co.zw/.
As part of ZINWAs’ commercialisation drive, the Authority has a subsidiary called Kumakomo Beverages where there is production of bottled water in compliance with regulations in existence, that is, Ministry of Health, International standards through the Association of Zimbabwe. ZINWA does bottling water for other entities (contract bottling) and bottling any other beverages. This was formulated in the year 2004. http://www.zinwa.co.zw/about-us/zinwa-subsidiaries/.
Another subsidiary for ZINWA is Livewater Boreholes Private Limited. The subsidiary specialises in the drilling, equipping and installation of boreholes at a commercial scale, http://www.zinwa.co.zw/about-us/zinwa-subsidiaries/. Since water is a necessity and a scarce commodity especially in most remote areas, borehole drilling has been the solution in these areas. Therefore, ZINWA gets the opportunity to make surveys for locations, potential volumes and yields of water, conduct drilling services and also construct boreholes in these areas, http://www.zinwa.co.zw/departments/groundwater-and-drilling-services/. In the same vein, it also provides engineering advice and consultancy services under the design and construction department http://www.zinwa.co.zw/departments/design-construction/. ZINWA has also increased its capacity by building large dams, for example the Tokwe Mukosi dam and Wenimbi dam which is underway http://www.zinwa.co.zw/.
2.2 Performance
Performance is an increasingly important concern for businesses in Zimbabwe; parastatals are not exempt from this necessity of performance. Performance has been defined by Hellriegel, Jackson and Slocum (1999) as the level of an individuals’ work achievement after having exerted efforts. However, according to Hofer (1983), performance is a contextual concept associated with the phenomenon being studied. For instance, if studying the performance of a profit making organisation, the financial perspective of performance is no exception. Hence, in the context of organisational financial performance, performance is the measure of the change of the financial state of an organisation or the financial outcomes. Therefore, since the perception of these outcomes is contextual, the measures used to represent performance are selected based upon the circumstances of the organisation(s) being observed. Carton (2004:2)
2.2.1 Organisational performance
The concept of organisational performance is based upon the idea that an organisation is the voluntary association of productive assets, including human, physical, capital resources for the purpose of achieving a shared purpose Alchian and Demsetz (1972), Barney (2001), Jensen and Meckling (1976), Simon (1976). Those providing assets will only commit them to the organisation so long as they are satisfied with the value they receive in exchange, relative to alternate use of the assets Carton (2004: 3). As a consequence the essence of performance is the creation of value. So long as the value created by the use of the contributed assets is equal to or greater than the value expected by those contributing the assets, the assets will continue to be made available in the organisation and the organisation will continue to exist. Carton (2004: 3). Therefore, value creation, is the essential overall performance criteria for any organisation. How that value is created is an essential element in any organisation Carton (2004:3). As expected of parastatals, ZINWA also strives to retain that value in its vision of becoming a world class stock exchange listed provider of water-based lifestyles.
2.2.2 Performance measurement
Kaplan (2010:3) acknowledges the ideas of a prominent British scientist, Lord Kelvin more than a century earlier, he had a certain belief that drives the importance of measurement, he said; ‘I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it, but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind. If you cannot measure it, you cannot improve it.’
To assess performance there’s need for measurement, after measurement we can then be able to make conclusions on the success or failure of an organisation. The purpose of measuring performance is not only to know how an organisation is performing but also to enable it to perform better. Performance measurement systems were developed as a means of monitoring and maintaining organisational control Nani et al (1990), which is the process of ensuring that an organisation pursues strategies that lead to the achievement of overall goals and objectives. Edson (1988) and Talley (1991) stressed the need for performance measurement systems to focus attention on continuous improvement. A condition of stagnancy is not healthy for every organisation; hence the need to ensure improvement of performance
The ultimate aim of implementing a performance measurement system is to improve the performance of an organisation so that it may better serve its customers, employees, owners and other stakeholders Johnson (1981). ZINWA holds a greater part of consumers as its products and services are vital and is a necessity in everyone’s life WHO (2006); hence the performance of ZINWA has to stay satisfactory to the needs of the consumers of its products. From the year 2000 when ZINWA started operatations.to present, ZINWA has been serving domestic residents, agricultural farmers and industrialists among others; hence as the demand of water and water services is increasing, performance has to catch up. According to Chenje et al (1998) water is becoming increasingly scarce largely due to the growing demands for domestic, agriculture and industrial water needs. Performance measurement system enables an enterprise to plan, measure and control its performance according to a pre-defined strategy Okwo and Marie (2012). Gekonge (2005) interprets performance measurement as a process of assessing progress towards achieving pre-determined goals and objectives. According to Gekonge (2005), this involves information on efficiency with which resources are transformed into goods and services (outcomes) and delivered to customers, in the case of ZINWA we look at how well the organisation delivers its water and water services to customers and the extent to which the water users are satisfied and how well the organisation tries to meet the requirements and regulations of the World Health Organisation in the provision of water.
The World Health Organisation (WHO), World Bank, International Development and US Agency have set a 20-40 litres per person per day target excluding water for cooking, cleaning or bathing which raises it to the total range of between 27 and 200 litres per capita per day Gleick (1996). Also according to Gleick (1996), clean water required to maintain adequate human health is between 2 and 80 litres per person per day the low end of this range is an absolute minimum and reflects survival only. Hence, ZINWA must be able to supply water according to the regulations of WHO. WHO has also set some guidelines to ensure quality provision of water to the public.
In World Health Organisation (GDWQ) (2006), there are set guidelines for drinking-water quality (GDWQ) which bring in 3 important categories that will assist in coming up with safe water for public health which is meant to be adopted by all countries. There is the Water Safety Plans (WSPs) whose primary objective is to ensure the minimization of contamination of source waters, the reduction or removal of contamination through treatment processes and the prevention of contamination during storage, distribution and handling of drinking water WHO (2006:48) In order to achieve this, there should be system assessment to determine whether the drinking-water supply chain (up to the point of consumption) as a whole can deliver water of a quality that meets health-based targets, and also to have effective operational monitoring of management WHO (2006:49). Lastly, there should be a quality assurance and quality control department where appropriate quality assurance and analytical quality control procedures should be implemented for all activities linked to the production of drinking-water quality data WHO (2006:75). Another category is the Health-based targets, which takes into account status and trends and the contribution of drinking-water to the transmission of infectious disease and to overall exposure to hazardous chemicals both in individual settings and within overall health management WHO (2006:37). Lastly there’s Surveillance, which is the continuous public health assessment and review of the safety and acceptability of drinking water supplies. Surveillance contributes to the protection of public health by promoting and improvement of the quality, quantity, accessibility, coverage, affordability and continuity of water supplies and is complementary to the quality control function of the drinking-water supplies WHO (2006:84). Surveillance is done by auditing or direct assessment WHO (2006: 86, 87). These are the set guidelines which must be followed by water providers like ZINWA according to regulations and standards of WHO.
The BSC (Balanced scorecard) is the most widely applied performance management system today. Financial and non-financial performance measures are merged through the BSC that ultimately links all aspects of performance Kaplan and Norton (1992). In measuring performance it is essential to integrate both the financial and non-financial performance Atkinson and Kaplan (2003), Hoque and James (2000), Malina and Selto (2001), Simons (2000). The BSC is a performance measurement conceptualisation that translates an organisation’s strategy into clear objectives, measures, targets and initiatives organised in the four perspectives: financial, customer, business processes and human resources or innovation and learning as stated by Kassahun (2010). According to Chaudron (2003), the BSC is a way of measuring organisational, business unit or departmental success, balancing long-term and short-term actions, balancing the following different measures of success; financial, customer, internal operations, human resource systems and development (learning and growth) Bourne (2002).
Financial perspective
The financial performance measures define the long-term objectives of the business unit Kaplan and Norton (1992).Financial measures indicate whether the organisations’ strategy implementation and execution are contributing to bottom-line improvement. The financial perspective emphasizes cost efficiency, that is, the ability to deliver maximum value to the customer at minimum cost and sustained stakeholder value Gekonge (2005). The financial perspective for public sector models differs with the private sector. In private sectors the key objective relates to financial profitability, whereas in the public sector their success is determined by them being effective and efficient in meeting the requirements of their key stakeholders who are the government and the general public Mackie (2008). ZINWA being under the public sector as a local authority should strive to satisfy its customers and the government of Zimbabwe.
Customer perspective: how do customers see us?
The most typical mission of companies today is to strive to be the best placed company in delivering value to customers. This perspective captures the ability of the organisation to provide quality goods and services, the effectiveness of their delivery, and overall customer service and satisfaction. This will result from price, quality, availability, selection, functionality, service, partnerships and brand value propositions, which will lead to increased customer acquisition and retention Gekonge (2005). Satisfied customers buy a product again, talk favourably about the product, and pay less attention to other competing brands and advertising Kotler and Armstrong (2004). Recent management philosophy has shown an increasing realisation of the importance of customer focus and customer satisfaction in any business Chabrow (2002), Holloway (2002), Needleman (2003). In general the customer perspective is the primary focus for a public service. Public bodies are also more likely to have a duty of care perspective than private sector organisations Mackie (2008). It’s more important for ZINWA to value their customers because ZINWA holds a monopoly position in the provision of water and water services, ZINWA Act Chapter 20:25, hence retaining that position is still their priority. ZINWAs’ competitors include city councils which have the same mandate of providing water and water services to the Zimbabwean residents Zimbabwe: Water Act Chapter 20:24 (1998). In May 2005, ZINWA was directed by the government to take over the bulk water supply responsibilities for Harare Metropolitan province and the entire water distribution and sanitation system including billing and revenue collection Herald (2007). Following the takeover of the water and sanitation utility of the city of Harare, In 2006 the Cabinet of Zimbabwe issued a directive that ZINWA should take over the entirety of water and sewerage services in all cities and towns in the country Parliament of Zimbabwe (2007) and today ZINWA still holds that responsibility to provide water in the city. This means having been given this huge responsibility which was once in the hands of the city councils, ZINWA has to provide much value and satisfaction to the customers more than what the councils could have done.
Internal processes perspective: what must we excel at?
According to Kaplan and Norton (1992), the internal measures for the BSC should stem from the business processes that have the greatest impact on customer satisfaction. Gekonge (2005) also joins in the same notion. To meet the organisational objectives and customers’ expectations, organisations must identify the key business processes at which they must excel Gekonge (2005). These key business processes are monitored to ensure that outcomes will always be satisfactory. The internal business process perspective covers the internal business results that lead to financial success and satisfied customers Kaplan and Norton (1992). It will be important to find out if ZINWA was able to maintain a good relationship with its customers after debt cancellation in responding to customers effectively.
Innovation, learning and growth perspective
The people perspective covers the competence of staff and the capacity of organisational members to develop individually and collectively to enhance organisational effectiveness Mackie (2008). The ability of employees includes their skills, talents, knowledge and training; this will merge with a positive organisational alignment and quality and updated information system to achieve the desired objectives. Processes will only succeed if employees are adequately skilled and motivated. Employees will lead to production and delivery of quality products and services; and eventually successful financial performance Gekonge (2005). Coetzee (2005) has found out that no organisation in todays’ competitive world can perform at peak levels unless each employee is committed to the organisations’ objectives and works as an effective team member, Coetzee added on that, employees would want to be associated with an organisation which offers good income and the opportunity for development and secure employment. After an employee is satisfied with the way things run in an organisation then he becomes engaged. Employee engagement has been defined as emotional and intellectual commitment to the organisation Baumruk (2004), Richman (2006), and Shaw (2005) or the amount of discretionary effort exhibited by employees in their job Frank et al (2004). Truss et al (2006) also defined employee engagement as simply ‘passion for work.’ It is therefore essential for ZINWA to sustain their employees and ensure to keep them within as long as possible until at a level where they are fully committed and engaged. It will be important to investigate into how ZINWA has been performing to achieve the above mentioned objectives in terms of employee welfare.
2.3 Government debt cancellation policy/ directive
The policy of debt cancellation was adopted from the Urban Councils Act, where the Minister has the power to cancel debts in certain circumstances. In Chapter 29:15 of the Urban Councils Act in section 303 of the writing off of bad debts, it’s stated that:
A council may write off amount excluding rates, owing to the council by any person if:
a) The council considers that such amounts are irrecoverable or
b) In the opinion of the council the difficulties, disadvantages or costs of collection thereof outweigh the value thereof.
2.4 Debts
The word debt was derived from the Latin verb debere which might be translated as ‘to have to’ or ‘to be obliged to’ suggesting that these repayments are an obligation on the part of the debtor Mochrie (2003). This could also be termed a financial obligation which is an obligation to pay money to another party. Debts can be external or domestic; a domestic debt is defined as a debt owed to an individual, company, institution or government in the same country, The state of debt: putting an end to 30 years of crisis (2012). Although they are cases in which debt is tolerated, it is not always good; a quotation by Thomas Fuller once stated that debt is the worst poverty.
2.4.1 Debt sustainability
According to the Results of International debt relief (2003:205), a debt is said to be sustainable if the debtor is able to fully meet his current and future debt service obligations without recourse to debt forgiveness, debt rescheduling or accumulation of arrears and without unduly compromising its growth. However most of the Zimbabwean residents failed to meet their obligations due to some reasons, according to the Minister of Rural and Urban Development, Minister Chombo in the Herald: Debt cancellation legal, not mere politicking (2013), residents have failed to meet their debt payments because of economic hardships they faced as a result of the illegal sanctions. Hence, their debts were unsustainable until at a point where even the creditors could not anticipate payment, that is, a concept of debt overhang.
2.4.2 Debt overhang with reference to below diagram
Figure 1 Debt overhang: the debt laffer curve
Debt overhang occurs when creditors anticipate that the debt will not be repaid in full Krugman (1988: 15, 16). This means that expected debt payments will be lower than the value of the debt, that is, the anticipated value is lower than the nominal present value of payments equals the nominal value of the debt, between O and A, if the debt further increases the expected payments will be less than the nominal value. If the debt grows even further, the expected value of repayments may even decline, between A and B. The debtors find themselves in the downward section of the Debt Laffer Curve to the right of B. In such a situation, debt forgiveness is in the interest of both the debtor and the creditor. After forgiveness the debtor will be able to pay remaining debt service on debts that are still outstanding. Considering the approximate amount of $100 million of debt owed to parastatals like ZINWA, this could be the necessity. According to a report by Sibanda M (Daily news 2013) residents have been struggling to settle their outstanding bills and on the books of accounts of the city, these debts remained there for a long time, therefore are already bad debts, with very little chances of recovering them from debtors, and amongst these are found consumers of ZINWA. Hence this phenomenon describes the issue of debt overhang.
2.4.3 Debt cancellation
Debt cancellation has been alternatively described as debt forgiveness. Onyekachi (2006:10) describes this term as a specific and highly concessional form of debt relief, with cancellation the level of the official debt is reduced in net present value terms, with total debt cancellation, all eligible debts are reduced to zero as in the case of the 2013 debt cancellation in Zimbabwe.
2.4.4 Debt forgiveness
The IMF (2006:245) describes debt forgiveness as the voluntary cancellation of all or part of a debt obligation within a contractual arrangement between a debtor and a creditor, the debt forgiven may include all or part of the principal outstanding, inclusive of any accrued interest arrears, in the case of Minister Chombos’ directive it was a forgiveness to zero debt level. Carrasco et al (2007) referred debt forgiveness to debt relief and describes it as the act of excusing heavily indebted customers from all or part of their unsustainable debts.
2.4.5 Debt relief
Results of International debt relief article (2003) describes debt relief as the reduction of the debt stock or of debt service payments, the first always implies debt forgiveness, the latter may involve forgiveness, but not necessarily, the debt service can also be reduced by spreading the same repayment obligations over a longer period, which leaves the stock of debt unchanged, but reduces the size of the debt service payments.
2.4.6 Importance of debt cancellation or forgiveness
Debt cancellation comes into picture when debtors fail to pay their obligations; hence, cancellation comes as a solution for a helpless debtor, because of this, debt cancellation comes as an important policy Carrasco (2007). Cancellation can be either partial or full, in the Zimbabwean case it was a total debt cancellation IMF and World Bank staffs (2001). This type of cancellation has been done to African countries by the European countries before. Reasons for cancellation of debt have been described to be mainly to alleviate poverty in poverty stricken societies Bakare (2010).
Many factors have led to poverty in developing countries which are economic, political, poor economic management, weak governance among others. In about half of the poorest countries, unsustainably high external debt has become a key constraint on development IMF and World Bank staffs (2001). For decades, debt has been the major obstacle to development in Africa with many countries forced to spend more on servicing their debts than on investing in the health and education of the people Carrasco (2007).
The significance of debt cancellation or forgiveness should be to help the country’s goal of reducing poverty, accelerating the pace of growth and development and provide some boost for the on-going reforms and millennium goals Bakare (2010). The quality of life of residents ought to become better after debt cancellation because the debt burden has been lifted hence income would be used to improve ones’ well-being Bakare (2010). In Zimbabwe even domestic debt has been pressing too hard on the residents until the policy was implemented. As one of the reasons why people have accumulated large amounts of debt, it’s because of the negative effects posed by sanctions which were given soon after the land reform policy from 2002 up to present the country has been facing economic problems. This has motivated the Minister to cancel debts owed by residents since they have financial problems for over a decade, Herald (debt cancellation legal, not mere politicking 2013).
2.4.7 Arguments for debt cancellation
According to Mochrie (2003), debt cancellation has been a controversial issue from theologians to economists, as to its necessity. Economics seek to resolve the problem by assessing the extent to which the policies multilateral financial institutions provide the sorts of incentives that foster growth and poverty reduction. Theologians tend to object to this instrumentalist approach, arguing that other objectives such as justice or dignity are of greater importance and are not necessarily congruent with increased wealth Mochrie (2003). The language of economic analysis makes an implicit claim for its priority, arguing that we may dispose of ethical or social considerations of arguing for the sufficiency of measures of wealth Mochrie (2003:14). In supporting morals Carrasco et al (2007) says that demanding payment of debts ignores the needs of the people in developing nations by compromising the country’s ability to provide basic necessities. In repaying their debts, developing nations channel money away from projects aimed at reducing poverty and improving healthcare, education, life expectancy and other social conditions, this inevitably contributes to and perpetuates the impoverished conditions under which these nations suffer.
In a report in the Bulawayo Agenda: Debt cancellation Boon or Bane for local Governance in Zimbabwe (2013), there is a semblance of merit in debt cancellation in Zimbabwe. There is no debt that the economy is under performing with unemployment at over 80% meaning that there is limited capacity on the part of residents to pay for service provision. Debt cancellation was thus in this regard popular among residents. Some of the cancelled debts were 4 years old further suggesting that the probability by local authorities of recovering the money was minimal.
2.4.8 Arguments against debt cancellation
For developing countries being in debt is natural, and it seems the problem of debt is still an on-going phenomenon IMF and World Bank staffs (2001). From past experiences, reducing the debt burden was recognised and regarded as a necessary solution to break the vicious circles of poverty in the African countries. However, it was recognised that debt relief, forgiveness or cancellation was not sufficient to achieve a lasting solution to a debt problem Bruijn and Rehbein (2011).
Problems of debt forgiveness may promote an inherent moral hazard problem. This means that the policy may promote irresponsibility with the hope that the government will bail out debts in future crises Krugman (1989 cited by Rao 2005). This may create a trend of not paying debts; in applying to the case of Zimbabwe, the residents may not pay out their obligations with the hope that the government will cancel debts in the future. On the other hand, those people who met their obligations faithfully will also be demotivated into doing the same in the future. According to a report in the Bulawayo Agenda: Debt cancellation Boon or Bane for local Governance in Zimbabwe (2013) an ideal approach is to cancel a proportion of the debt and let households settle the rest as a means of ensuring that households are alive to the reality that service provision comes at a cost.
It may also occur that debt forgiveness may not be able to produce the desired results. From past evidence of debt forgiveness, the Heavily Indebted Poor Countries (HIPC) Initiative has also been launched to assist poor countries, but its success was questioned. The World Bank and International Monetary Fund (IMF) have launched the HIPC initiative to address the debt burdens of the worlds’ poorest countries. However, 20 years after there were still reasons to be sceptical about its efficacy. From 1989 to 2003, developing countries have received $100 billion in debt relief Chauvin and Kraay (2005 cited by Rao 2007). However several studies have failed to link between debt relief and an important external position, increased development spending, or improved development outcomes. In Chauvin and Kraays’ (2005) study of debt forgiveness for 62 developing countries from 1989 until 2003, they failed to find any evidence of a positive impact on public spending, Gross Domestic Product (GDP) growth, policy quality improvement, investment rates. They found no evidence that debt forgiveness in practice addressed any of the theoretical arguments for debt forgiveness.
Other critics contend that debt forgiveness is insufficient to remedy the economic problems that poor countries face without effective political and economic reforms, debt relief/ forgiveness cannot provide long-term economic stability. For this reason, many are sceptical of debt-relief advocates who tout debt forgiveness as the magical solution to poverty in developing nations Carrasco et al (2007).
In a report in Bulawayo Agenda: Debt cancellation Boon or Bane for local Governance in Zimbabwe (2013) about Zimbabwe’s debt cancellation, total debt cancellation defies basic economic principles. Service provision comes at a cost, a cost that consumers of a service have to inevitably pay for. The local governance sector is still riling from a decade of economic stagnation which was among other challenges characterised by burst sewer pipes, ill equipped clinics, uncollected refuse, unlit streets, pot-hole littered roads with the climax being the 2008-9 cholera outbreak, which according to UNICEF claimed 4 000 lives. Despite the introduction of the multiple-currency system in 2009, service provision has still not fully recovered. While local authorities are not profit oriented, service provision has to be at full cost recovery for sustainable and quality service provision.
2.5 Effects of debt cancellation
At country level
As debt cancellation is not a new policy in Africa, we need to see the effect or the results of debt cancellation in African countries. Though the same type of debt cancellation which occurred in Zimbabwe might not be the one which occurred in other countries, we want to see the effect of debt cancellation to African countries which have received debt cancellation from organisations like the IMF, Paris Clubs and the World Bank. These organisations have launched the Heavily Indebted Poor Country (HIPC) – initiative to reduce the debt of some heavily indebted poor countries, Bruijn and Rehbein (2011).
One popular efficiency argument for the provision of debt relief is the so called debt overhang Bakare (2010). Hence, as far as debt overhang is concerned, debt relief or cancellation has managed to solve the problem of debt overhang. Research by Bruijn and Rehbein (2011) on countries like Mozambique and Ghana has proven that attempts of debt relief have reduced the debt burden and dropped debt service payments. There has been a measurable extent of economic growth; funds have been made available for higher poverty spending, there’s been a growth of national income poverty reducing expenditures. There have been remarkable successes in the areas of education and health Bruijn and Rehbein (2011). However, in other countries like Nigeria, the debt forgiveness granted though reducing the debt burden did not positively influence the growth indicator Bakare (2010).
However, as far as the question of sustainability is concerned, these countries still required external financing in order to stay sustainable. It has been discovered that debt relief itself could not guarantee sustainable economic development. It doesn’t prevent a country from getting into a debt problem again Bruijn and Rehbein (2011:15).
In Zimbabwe the effects of domestic debt cancellation have been said to be negative. In a report in Newsday: scrapping off Zesa bills disastrous, Zimbabwe is currently saddled with a $10.7 billion external debt. Accelerating the domestic debt which is reaching unsustainable levels will not only further hurt the economy, but also instil a culture of misgovernance which will affect generations to come.
At organisational level
Organisations, councils, local authorities and some businesses have also been affected by debt cancellation. According to a report in the Bulawayo Agenda: Debt cancellation Boon or Bane for local Governance in Zimbabwe (2013) payment of bills is the lifeblood of local authorities, particularly in Zimbabwe where options for alternative sources of revenue are minimal owing to the depressed macro-economic environment. Because of a lack of consensus between central Government and local authorities over the cancellation of debts, there is again a valid possibility that some local authorities may clandestinely increase service charges, particularly for water. Such unethical practice will serve to disenfranchise the already economically constrained consumers, leading to non-payment of bills.
More worrying, however, is the fact that there is no light at the end of the tunnel with regards to the dire financial straits besetting the local authorities as some councils say they do not have the capacity to turnaround their situations which have become somewhat of a vicious cycle, a report in The Financial Gazette (2013). In a report by Paidamoyo Muzulu in Zimbabwe Independent (2013) ZINWA points that the debt write-off had a severe knock on their cash flow. The ZINWA finance director Honest Murindagomo said they were facing serious financial problems after the debt write off. Due to financial crisis local authorities are failing to pay off salaries to workers. In a report in the Financial Gazette (2013) the situation is worse in Chitungwiza a dormitory town 30 km south of Harare. The local authority which cancelled debts worth US$40 million after the government directive has failed to pay its workers for the past ten months from June 2013 and there is no indication the situation is going to improve. The City of Harare which was owed over US$400 million by ratepayers before the debt cancellation decree is now failing to pay its workers and struggling to raise US$3 million required to pay water purification chemicals every month, in a report in the Financial Gazette (2013).
As a result of the diminishing revenue base Harare mayor Bernard Manyenyeni said the city council is now bankrupt and failing to meet its financial obligations. The reduction in revenue collection as a result of debt cancellation means the longer it will take to mobilise the required resources and the longer the residents of Bulawayo will have to contend with a water supply deficit, a report in the Bulawayo Agenda: Debt cancellation Boon or Bane for local Governance in Zimbabwe (2013). Also due to increased cuts in water and electricity businesses are being affected in their operations. In a report about Gwanda by Mthulisi Mathuthu in SW Radio Africa, due to cuts in water provision and water rationing regime businesses are being crippled.
Hence, in many local authorities debt cancellation has had negative effects.
At Individual level
The debt cancellation policy which was implemented in Zimbabwe on 23 July 2013 as a directive from the government and had its effects on individuals. Firstly, the directive was meant to benefit individuals or domestic users who failed to pay up their rates at stipulated periods. According to a report in the Herald (Debt cancellation legal, not mere politicking (2013), the debt cancellation was meant to relieve users who were struggling to pay due to negative effects of sanctions imposed on Zimbabwe. Hence, customers benefited much and the policy left them smiling Newsday: scrapping off ZESA bills (2013). A wide range of consumers benefited out of this policy. In a report by Paidamoyo Muzulu in Zimbabwe Independent (2013) according to ZINWA farmers were the major beneficiaries of the cancellations since they owed a bulk of debts to ZINWA particularly those involved in irrigation farming. In another report by Victoria Mtomba in Newsday (2013) the relief according to ZESA cancellations would benefit all domestic customers with a relief of $160 per household however; customers on prepaid meters would have their amortised outstanding debts adjusted.
While customers did benefit out of the relief, the policy also imposed negative effects to some citizens in Zimbabwe. According to a report in the Bulawayo Agenda: Debt cancellation Boon or Bane for local Governance in Zimbabwe (2013), the immediate effects of the debt cancellation were delays by cities, like Bulawayo and Harare to pay their August 2013 staff salaries soon after the policy implemented in July 2013. Also in the report, to the council workers this happened at a time when primary and secondary schools were reopening for the third term and some parents were thus not able to pay tuition fees. Some students were turned away from schools including those writing examinations at the end of the year. Delayed salaries also affected staff morale and quality of service provision is ultimately compromised.
Further in the report Bulawayo Agenda: Debt cancellation Boon or Bane for local governance in Zimbabwe (2013), debt cancellation also presents equity challenges and puts the concept of ‘good citizenship’ to a test. Residents who were fully paid up naturally felt disenfranchised by the cancellation. Residents no longer have the incentive to pay off their debts. In another report by Wonai Masvingise in Newsday: Zanu PF directive backfires (2013), residents had accumulated debts apparently on the assumption that government would announce another debt relief soon. Despite the fact that ratepayers had been given a zero debt level cancellation, ratepayers had now gone from zero debt in July 2013 to an astonishing $200 million as of September 30 2013.
Debt cancellation is believed to cripple service delivery and this would affect individual residents’ rights to service delivery and their health in general, in a report by Lesley Moyo in Radio Dialogue ‘giving you a voice’: Debt cancellation will cripple service delivery: residents associations (2013), it was said that service delivery is going to be heavily affected, already council is failing to collect refuse on a weekly basis. It is clear that this is caused by financial constraints. Roads are full of potholes and councils do not have the funds to attend to all these problems. In another report by Mthulisi Mathuthu in SW Radio Africa: Government debt cancellation affects Bulawayo refuse collection (2013), the Bulawayo council gave a warning of an impending interruption in the refuse removal service in the low-density and parts of the high density suburbs until further notice. Furthermore, a report by Faith Zaba in Zimbabwe Independent: Zanu PFs’ populist policies disastrous (2013), councils, ZESA and ZINWA heavily rely on rates and other charges and the debt cancellation will negatively impact on water and electricity supplies as well as sewerage reticulation.
Crippling of service delivery is also believed to have negative effects to the health of residents. In a report in the Herald: ZINWA owed US$98million (2012) ZINWA was facing the withdrawal by UNICEF from providing water treatment chemicals. The withdrawal of the support spells danger to residents of growth points and rural service centres who rely on ZINWA water. The Zimbabwe Development Democracy Trust (ZDDT) was on the ground to help the council to limit chances of disease outbreaks due to failure to collect refuse and receive adequate water, a report by Mthulisi Mathuthu in SW Radio Africa. There are water cuts or disconnections all over the country. In a report in New Zimbabwe: Masvingo to sue over $5million debt, the council is now concentrating on water disconnections on defaulting residents. In Gwanda, a report by Mthulisi Mathuthu in SW Radio Africa: Gwanda forced to introduce water rationing over $4 million debt, ZINWA is vowing that it will continue to turn off the taps until a part of the debt is settled. This has forced councils to introduce town wide water rationing. In a report in the Financial Gazette (2013) the Zimbabwe National Water Authority disconnected water supplies to the Gwanda council over an unpaid US$5 million debt, forcing residents to fetch untreated water from Mutshabezi River which is not a healthy source of water. In Chitungwiza the residents group was worried that a health crisis was looming where over 10 000 homes are not connected to the sewerage or water reticulation system. In such circumstances residents have resorted to digging shallow wells and the construction of pit latrines for use as toilets. This imposed negative effects on individual residents.
2.6 Summary
The above literature has been describing the concept of debt cancellation, looking at its effects and impact in the past societies. It is now the role of the next chapter of research methodology which is going to measure the impact of debt cancellation on the performance of parastatals in Zimbabwe particularly to ZINWA.
...(download the rest of the essay above)