Public sector financial engineering in constrained economy — unburdening the fiscus

Financial engineering instruments Derivative — a financial security with a value that is reliant upon or derived from an underlying asset or group of assets. A contract between two or more parties based upon the assets. Examples include ‘Options’, which are financial derivatives sold by an option writer and bought by an option buyer.

The contract offers the buyer the right nut not obligation to buy or sell the underlying asset at an agreed upon price during a certain period of time or a specified date.

There are ‘Futures’, which are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset such as a physical commodity or financial instrument at a pre-determined future date and price. ‘Swaps’ are a contract between two parties agreeing to trade loan terms.

Opportunities for financial engineering Current difficult business environments in Zimbabwe call for financial innovation, which allows companies not only to survive but to grow and expand using underutilised assets that they may have such as real estate and other infrastructure. The public sector can collaborate with institutions such as insurance companies, pension funds, financial institutions, venture capitalists, et al to create new financial products and transactions that create mutually beneficial outcomes like sale and lease back of buildings using derivatives such as options

Bond market The bond market is a good platform for the public sector to raise capital because it is cheaper. Local municipalities/government can issue out bonds. The Zimbabwean money market in general is illiquid, not tight and lacks immediacy and depth, it is failing to fully attract foreign investment and this makes it slow. The central bank not being able to be the lender of last resort due to lack of a local currency has negatively affected the performance of the financial markets in general. This has led to the banking sector being the main market participant — range of securities is narrow because mainly it is bankers acceptance’s and Treasury Bills.

Current public sector performance State owned enterprises and parastatals drive i nve s tment and job creation in key sectors, they provide vital public services and impl e m e nt public policies. Most of them are operating at a loss and require public subsidies to remain solvent.

The money is borrowed from domestic and foreign markets, which increases national public debt. Some have significant tax arrears, net drain on public finances, weak accountability and monitoring (Problematic transparency and financial reporting), poor corporate governance, poor oversight/insufficient oversight of the entities, inadequate, expensive and poor service delivery, salary services ratio not ideal and misplaced priorities on budget allocations.

Corporate governance of public sector Corporate governance — system of rules, practices and processes by which a firm is directed and controlled. Poor and weak corporate governance has been playing a major role in the underperformance of the public sector.

The appointment process of some of the boards of the organisations did not adhere to basic corporate governance requirements. Some board members having been appointed based on their relationship with the appointers and not based on their skills and competencies hence resulting in weak boards.

This also covers managerial interference by ministries, lack of board charters and code of ethics for some and poor corporate governance affects their contribution to GDP and employment creation.