Turnaround actions: No 4

Another immediate action would be to institute commitment and cash controls, to strengthen financial control in general and to start overhauling the government accounting system.

Each ministry comprises departments, which have provincial and local offices and operations. The budgeted and actual expenditure of each is classified under standard headings, called votes.

In theory, each local office summarises all its expenditure needs for the coming financial year, from capital and wages down to mops and buckets, and these are aggregated through their provincial and national departmental head offices up to consolidated ministry level.

The total ministry expenditure request is submitted to the treasury and this amount is allocated in the annual national budget. The head of each office or operation is notified of how much he can spend under each vote. Using a system known as "commitment control", he keeps a record of the value of each requisition issued, against the budget allocated for each vote, and periodically he works out the value of the budget remaining.

If he identifies a need to exceed a budget allocation, he asks head office for permission to do so, and if there is room to juggle the budget for the ministry as a whole, the request is approved. If not, the ministry has to apply for parliamentary approval for supplementary expenditure. If any ministry exceeds its budget without approval, its accounting officer can be penalised by means of a surcharge against his salary.

Requisitions issued are approved by the ministries and submitted to the CPO (Central Payments Office), which pays them. Any budget allocations unused at the end of the financial year die at midnight on the last day. Any requisitions issued in one financial year but paid in the next are treated as having been spent against the next year's budget.

That's the theory.

The practice is that annual budget allocations in the national budget fall far short of what each ministry has requested from treasury. Therefore the civil servant at the bottom of the chain who actually issues the requisitions has little, if any, idea of what he is supposed to be allowed to spend, so he can't keep control of what budget he has left.

Also, the CPO delays making payments, often for months, because cash is tight. So even if the chap at the bottom of the chain did know his budget, merely knocking off the value of the requisitions he has issued (the "commitments" he has made) wouldn't give him a meaningful answer, because if the CPO hasn't paid them, then they haven't come off his budget.

In this mess, civil servants responsible for running government operations end up issuing requisitions for what they need, without heed to any budget. Often, their main concern is whether the supplier will accept the requisition, which is influenced by how far in arrears his payments from CPO are. In fact, many suppliers won't accept government requisitions, so the government ends up buying at prices that are not the best.

The system described above was developed in Victorian times and applied throughout the former British Empire. Many other governments have reformed the system, notably the New Zealand government, which produces reliable government accounts quickly. In the early 1980s, under Mrs Thatcher, Britain partly reformed its government accounting system by offering competitive salaries to finance professionals in the private sector.

In my view, no meaningful economic reforms could be implemented in Zimbabwe until the budgeting, expenditure and commitment control system, described above, has been reformed.

Turnaround actions: No 5

Immediate and radical tax reform would be very high on the agenda. There is a proliferation of taxes in Zimbabwe, most of which are counter productive and expensive to collect. Tax legislation has been unnecessarily complicated by successive amendments over many years, with the result that there are myriad tax breaks that cost the government significant amounts of revenue, some of which few people can remember the original purpose.

Witness the low effective rate of income tax actually paid by many companies that publicly report their financial results.

Also, by treating import duty primarily as a source of revenue and, more recently, as a means to reduce demand for foreign currency, the government has lost sight of the purpose of import duty. It is supposed to be a mechanism to collect taxes on imported goods and services, on the grounds that it would have collected such revenue if they had been supplied from local sources.

Furthermore, the sales tax system is full of loopholes.

The main objectives of tax reform would be to spread the burden through widening the tax net, to radically simplify the existing system, to reduce collection and administration costs, to speed up collection, to remove disincentives to saving and to encourage investment.

The overall aim is to increase revenue, through a bigger economy paying lower rates.

Essentially, my suggested approach is to:

• shift the emphasis from direct to indirect taxes
• scrap most of the minor direct taxes (e.g., stamp duty, capital gains tax, death duty)
• considerably simplify but widen income tax and reduce the rate
• to replace sales tax with VAT and increase the rate
• simplify import duty and reduce the rate
• replace most of the exemptions and incentives that remain with cash grants

Direct vs. indirect taxes

• Direct taxes such as income tax are a problem for taxpayers, governments and the economy.
• Direct taxes offer taxpayers no choices. Whether the income received is saved or spent, the tax is payable. This, combined with their relative complexity, enhances taxpayers' motivation to (legally) avoid and (illegally) evade direct taxes.
• For governments, direct tax is relatively difficult to police (given the complexity of the tax laws) and expensive to collect, because each individual taxpayer has to be individually assessed. In a country like Zimbabwe, the direct tax burden is narrowly spread, because most participants in the large informal economy fall outside the direct tax net. Also, there is a delay in collecting some direct taxes, because they are only levied periodically.
• From the point of view of the economy, direct taxes reduce savings (because the amounts saved are after-tax sums) and this in turn affects capital formation to fund investment.
• Indirect taxes, such as sales tax and VAT, are far preferable for all concerned.
• For individuals, indirect taxes offer choice. Tax is incurred only when the income received is spent, but not if it is saved. The taxes are hidden in the prices of goods and services consumed, thus reducing the motivation or the ability to avoid or evade them.
• For governments, indirect taxes are much simpler and cheaper to police and collect, because they are uncomplicated and based on the gross value of transactions of businesses, which are more visible and easier to audit. Also, indirect taxes are collected far more quickly than indirect taxes.

Indirect taxes: sales tax versus VAT

Sales tax is a percentage of the selling price, paid by the end user only. It is charged by the seller and paid across to the fiscus. Generally, businesses in the supply chain are exempt from paying sales tax, because they are not the end users.

VAT is also a percentage of the selling price, charged by the seller and paid across to the fiscus. The first difference is that VAT is charged and paid every time there is a sale, by every business in the supply chain. The second difference is that sellers can deduct from their VAT payments to the fiscus all the VAT they have been charged by their suppliers.

So under VAT, the tax is collected as the goods and services move through the supply chain, each time value has been added (hence the name "value added" tax). It is important to note that the full cost of VAT is actually borne by the end user, because every time a business pays across VAT to the fiscus, it is only paying amounts that it has collected from its customers on behalf of the fiscus.

Exemption from paying sales tax, whether legitimate or not, is easy to arrange. However, virtually no one can be exempted from paying VAT. With sales tax, there is no cost to a business not registering (except if detected in an inspection) but with VAT the cost of not registering is that a business cannot reclaim the VAT it has had to pay its suppliers. Therefore, VAT closes evasion loopholes and induces businesses to register.

From the government's point of view, VAT offers numerous advantages over sales tax:

• The number of businesses outside the tax net is considerably reduced.
• The simpler application and improved audit trail makes it easier to detect evasion.
• The cost of VAT illegally pocketed by unregistered businesses is limited to the tax on the value added by that supplier, not the tax on the full sale value.

Income tax reform

Income tax in Zimbabwe is source-based, i.e., only income actually (or deemed to be) from sources in Zimbabwe is subject to income tax. Many other countries have residency-based income tax systems, which subject their taxpayers' world-wide income to tax. I suggest that Zimbabwe moves to a residency-based income tax system and reviews double tax treaties to ensure equity.

Income tax in Zimbabwe also subjects only revenue (and not capital) to tax. Assuming the scrapping of capital gains tax, I suggest widening the scope of tax to all gains and losses, with inflation indexation for specified capital assets (to relieve the effects of inflation) and exemptions in respect of primary residential residences.

To calculate the taxable income of a business, many adjustments are made to the accounting profits. These adjustments have their historical origins in accounting profits being subject to significant manipulation, before the advent of accounting standards.

Nowadays, accounting standards are far more reliable, and their proper application produces much more consistent profit reporting. Some countries have moved to tighten their companies legislation to specify that the financial statements of a company can only be in compliance with that legislation (which compliance auditors have to report on) if they have complied with international accounting standards (another audit report requirement).

I suggest making a company's taxable income its reported profit for accounting purposes, providing that international accounting standards have been complied with. Where choices exist in these accounting standards, and there is a significant difference between them, income tax legislation could deem choices which benefit the fiscus. An exemption would be available for smaller companies not requiring an audit, with a system for regular tax inspections for such companies.

I suggest that the first $100,000 of an individual's total annual earnings be exempt from income tax. Also, that the rate of income tax for individuals, trusts and companies be a flat rate of 10% - 15%. However, virtually all earnings would be included in taxable income and the penalty for non-disclosure would be 100%.

Dividends would be exempted from tax (because they are paid out of profits that have already been taxed). Withholding taxes on interest, royalties, etc. earned by non-residents would also be the same rate as income tax.

Investment and similar incentives under income tax would be scrapped and replaced by a system of cash grants, payable against special purpose audit certificates (as in South Africa). This would enable government to target more precisely those activities that it wanted to encourage, better monitor the costs of giving incentives, evaluate the success of the schemes and give it the flexibility to change its targets from time to time. For the recipients, the benefits would be easier to identify at all stages.

One possible example to consider would be a US$1 million cash grant for every new company that listed on the Zimbabwe Stock Exchange within a specified period.

Sales tax

I suggest replacing sales tax with VAT, increasing the rate (to 20% - 25%) and reducing exemptions and zero-ratings to the absolute minimum, mainly interest, rentals, wages and salaries, capital proceeds and goods exported.

Outputs from farming and mining, as well as tourism sales to non-residents, all of which are currently exempt from sales tax, would be made subject to VAT, however a system would be introduced whereby such companies could claim the cost of past capital investments against VAT output tax collected, over a period.

To simplify collection and reduce evasion, "essential" goods such as foodstuffs and children's clothing would all be made subject to VAT, however consumers would be shielded from the impact of this measure:

• for a transitional period, the government would ask manufacturers and importers of the essential goods to absorb a portion of the VAT and it would provide them with cash subsidies (funded out of the additional VAT collected) if their profitability was significantly affected
• a monthly family allowance, payable in cash to every family in Zimbabwe, would be introduced. This is detailed below.

As part of the turnaround plan, which would anyway call for pain to be shared by everyone, the government would encourage business to shield consumers from the impact of the increase in the VAT rate, by absorbing it in their margins, and by even reducing prices, wherever possible. The rationale for this request would be threefold.

• Firstly because, with a stable and favourable macro economy having been restored, risks would be considerably reduced and businesses would no longer need to "assume the worst" when setting their margins and prices.
• Secondly because they would gain significantly from the tax reform process, which would reduce corporate income tax rates, allow them to reclaim VAT paid on repairs and capital expenditure and eliminate double taxation incurred on certain overheads under the sales tax system.
• And thirdly because the introduction of the family tax credit would result in sharply higher consumer spending, thus improving sales volumes (and, in the case of manufacturers, unit costs).

As a backstop, "persuasive" pricing measures, to work by exception only, would be adopted in the short term. Newspapers would be encouraged to publish comparative price tables for popular goods, comparing prices charged over time by various retailers, and members of the public would be invited to report profiteering to hotlines established (probably by retailers' trade associations) for the purpose.

Those who blatantly or persistently profiteered would be publicly named and shamed and, in extreme cases, fined. As a veiled threat, the tax authorities could let it be known that such offenders would be high on the list for comprehensive income tax and VAT inspections.

Turnaround actions: No 6

The introduction of a "family allowance" was suggested above, primarily to compensate for the cost of VAT imposed upon "essential" goods, such as basic foodstuffs and children's clothing. This would be a standard amount of so much per adult, plus so much per child, per month, reviewed regularly.

If this sounds expensive, consider that its cost will be funded from VAT on essential foodstuffs, which in turn will be financed mainly by business, because the supply chain will be asked to absorb most of the price increase, on account of lower taxes and risks in the new business-friendly environment.

The government will have to finance some of the price increase, through limited transitional subsidies to deserving importers and manufacturers, but if most of the family allowance is spent on goods and services in the formal economy then, from its tax take on that expenditure, the government is likely to gain overall.

Obviously, an intensive registration exercise would be required for the introduction of the family allowance, but with the incentive of cash for registering, people wouldn't need much persuasion to do so.

I suggest the use of smart card technology and satellite data links, proven in other countries. Also, that that the administration of the whole system be outsourced, possibly making use of the post office and Agribank branch network.

Such an outsourcing contract would be particularly attractive to organisations wanting to reach the traditionally under- banked. If so, the advantage to the government would be that the establishment of nationwide rural "banking" would provide the foundation for mortgage funding for improvements to agricultural land, when title is eventually given to every communal farmer.

Aside from relieving the imposition of VAT, the introduction of a family credit would immediately bring many more people into the mainstream economy, by putting cash in their hands on a regular basis. It would also relieve the burden on those in town who remit money to relatives in rural areas and increase sales and general business activity throughout the private sector.

There would be additional administrative benefits to such a system. It could provide an interface to the national registration system for recording voters, births and deaths, and also provide the foundation for the subsequent establishment of a social safety net.

It would facilitate the giving of title deeds to agricultural land and (as detailed below) the privatisation exercise.

It could also serve to promote democracy, by making a failure to vote punishable by a token fine (as in Australia), which would be deducted from the following month's family allowance.

In terms of the outsourcing agreement for the administration of the family credit, the administrators of the system would be required to apply a portion of their profits to funding the expansion of the branch network into remote areas, which would provide the cornerstone for development of more infrastructure and business centres and better rural bus services.

The smart card would double as an ID card, thus enabling the police to improve crime prevention and detection, through the use of hand held scanners, and the immigration services to work more efficiently.

To allay public concern over "big brother" issues, data protection legislation would probably be necessary.

Turnaround actions: No 7

Duty on all goods and services imported would be fixed at a flat rate of 10% - 15%, again with a 100% penalty for non-compliance. There would be no exemptions, except in terms of international treaties and conventions. Welfare organisations would be able to apply for cash refunds upon the production of audit certificates.

Under the reformed system, customs officers would concentrate on statistics, random physical inspections and intercepting drugs- and crime-related movements across borders. This would speed up international movements of traffic and goods.

Turnaround actions: No 8

Each time an area of government was reformed, the turnaround team would focus on reorganising the civil servants responsible for administering that area, trimming staff numbers and re-deploying those to be retained, designing and implementing new systems and training and monitoring the staff who would operate them in the future.

The human resources aspect of this activity would include basic training on the big picture and the new approach, job evaluation, grading and revised remuneration scales. If we want our civil servants to be effective and run our country properly, and also to shun corruption, we need to ensure they have proper job satisfaction, adequate financial rewards and good job prospects.
Additionally, the turnaround team would need to ensure that the other resources required for the staff to do their jobs properly, such as computers and adequate backups, were available.

Turnaround actions: No 9

With reforms in all the above-mentioned areas underway, the turnaround team would need to turn its attention to all the other areas of government not yet touched, in order to cut back, as far as possible, government intrusions into business decisions, to streamline decision making and to institutionalise accountability and transparency.

Wide consultations in the public and private sectors would be used to formulate strategic plans for the operations of each ministry and government agency.

Turnaround actions: No 10

A good international image for Zimbabwe is vital for the continuing success of the country. In addition to its formal ambassadors, a country's politicians, foreign investors, tourism products, visiting tourists, exports, sporting teams, arts and culture are all very valuable informal ambassadors for a country.

A good image doesn't just happen, it needs to be worked at by paid professionals, integrated in all government strategies and considered in all government decisions.

As a first step, a competent international public relations consultancy would be retained to conduct a SWOT analysis on the country and thereafter put in place both an international communication strategy and a plan for all its formal and informal ambassadors to closely co-ordinate their efforts.

The communications strategy would probably start with an omnibus survey of attitudes among key international publics and it would specify the actions to be taken continuously to portray Zimbabwe in the best light internationally.

Such actions would likely include design of a national logo to help correctly "position" the country, a national brochure, management of all foreign visits by politicians, a continuous programme of foreign media visits, professional responses to crises and bad publicity, continuous information releases to the media, arrangement of features and supplements in foreign media and management of the public image of Zimbabwe's foreign missions.

The co-ordination efforts would involve all the different government ministries and private sector bodies that have any ability to influence international perceptions of Zimbabwe. They would be required (or, in the case of the private sector, encouraged) to formally incorporate, and give much higher priority to, management of the national image within their organisations, in pursuance of the national communications strategy.

To enable the national image to be managed at the highest level, the creation of the senior cabinet post of "super-minister", with ultimate responsibility for the national image, should be considered. The ministers responsible for information, tourism, exports and investment promotion would report to this "super-minister".

He or she would ensure consideration of the national image in every cabinet decision, supported by an office that worked closely with both the contracted international PR company and all the ministries and private sector bodies with the ability to influence the national image.

Turnaround actions: No 11

In particular, the turnaround team would need to reform local government, both the administration and the financing thereof. A feature of public finance in Zimbabwe is that most money in the country gravitates to the capital but very little finds its way back again.

Systems should be put in place to ensure that the origin of all government revenue is traceable, and that after essential central costs have been funded, a desirable proportion flows back whence it originated, after taking account of what is spent by central government in each area.

Local authorities in Zimbabwe urgently need more funding in order to invest in public infrastructure. Increased industrialisation would be impossible without this. Obviously, they must have strong administrative structures in order to ensure the increased funding they receive is safeguarded and well spent. It may be that a central effort is needed initially to identify the essential investment requirements of all areas, award the tenders nationally and control the expenditure, in conjunction with each local authority.

Turnaround actions: No 12

Privatisation of state-owned enterprises and state agencies would come next.

I suggest first turning all such organisations into private companies under the ownership of, say, six corporate groups, each comprising a number of large and small unrelated businesses and each under one set of "group" management.

The management would be given the resources to establish reporting and financial control systems and the mandate to clean up these companies, as far as they were able to in the short term, in order to improve their saleability.

Then I suggest issuing shares, for free, in each of the corporate groups to every adult registered for the family credit (detailed above). The shares would represent, say, 70% of the capital of the groups, with government retaining the balance as a "golden share".

Then inviting bids from different (and diverse) private sector consortia for each of these groups, who would agree between themselves on how they wanted to split up the different businesses in the groups they were bidding for. Within the groups there would probably be businesses that would have to be closed, if so the consortia would have to bear the cost of doing so and this would be taken into account in their offers.

The bidding consortia would negotiate with the government, advised by the management of each group as well as by international and local professional firms, on the offers to be made for each, which would have to detail how government debt and loan guarantees would be treated and what capital would be invested after acquisition.

The bids from the competing consortia in respect of each of the groups would be put to the public shareholders, who would be required to vote on which bid to accept, probably when collecting their family credit during the course of a specified month. All bids would have to be in cash.

The shares in public hands would not have a cash value pre-privatisation, to prevent bidding consortia buying them in order to build influence in the voting on the bids. The cash value of each of the public shares would be payable either to the shareholders (at their option) or into trust, to enable the mechanism described in the section below to operate.

The government would decide on a case-by-case basis whether to maintain its "golden share" (probably only in strategic industries) or use it in order to settle government debt owed by privatised enterprises and loan guarantees.

There are a number of important reasons for suggesting that privatisation be done in this way:

• It will attract the best quality and the widest range of bids internationally, which will help to ensure maximum inward investment (in foreign currency), transfer of technology and modern management practices, as well as adequate capital to optimise the performance of the privatised enterprises in the future.
• Combining unrelated businesses and agencies will make it vital for bidders to have local knowledge and this will incentivise international bidders to include local companies in their consortia.
• It will avoid the situation where international bidders can "pick the eyes" out of the state enterprises (i.e., take the best and leave the worst, which would thereafter be unsaleable).
• It will pass responsibility for sorting out distressed and under performing state enterprises to the private sector, who will be far more efficient at doing so than the government.
• It will effect privatisation of all state enterprises quickly, on terms most advantageous to government, the fiscus and the country as a whole. This will ensure that state enterprises are turned from being a drain on the fiscus to a provider of revenue without unnecessary delay.
• By including government agencies, such as the registrar of companies, in the process it will bring forward what is often treated as a separate and subsequent element of privatisation.
  Very importantly, the process will put back into the hands of all the people of Zimbabwe some of their taxes that past governments have invested, often wastefully, in these state enterprises.
• At the same time, through the proceeds from selling their shares, it will draw more of the population into the mainstream economy, which will provide a significant stimulus for the private sector and, in turn, government revenue.
• One additional benefit will be the ability to further trim government expenditure quickly, because departments that have responsibility for overseeing state enterprises can be trimmed or scrapped.

Turnaround actions: No 13

There is a further mechanism I suggest in connection with privatisation. This is to encourage people to hold onto their proceeds from privatisation, rather than accepting cash for them, on the basis that they will be able to trade them for either rural land or urban housing later on.
The section on privatisation, above, suggested that the cash paid by winning bidders could be paid into trust, at the option of each shareholder. If they elected to do so, they would receive an entitlement certificate, which would not be tradable and only redeemable in the event of the holder's death. These investments would accrue interest.

When title deeds are given as part of agricultural land use reform in the (hopefully not too distant) future, a portion of the land available for resettlement would be partially developed and allocated for sale to individuals, to be paid for by applying the privatisation proceeds held in trust.
There would have to be a simple mechanism whereby people entitled to free land anyway, because they were the existing users of such land, could give up that land in return for a bigger piece of partially developed land if they applied their privatisation proceeds. This would relieve pressure on land in use and reduce the disputes that are bound to arise when title deeds are given for rural land.

Alternatively, members of the public could use their privatisation proceeds to buy a house in an urban area, possibly as a sizeable down payment with the balance funded by mortgage. In that case, the reform and funding of local authorities would need to incorporate accelerated programmes for the servicing of land and building societies would need to be encouraged to finance the construction of new housing on such land.

As members of the public redeemed their privatisation proceeds for land or housing, the underlying investments released would be transferred to government-administered funds applied to the development of rural land for resettlement, servicing of land for urban housing and investment in related infrastructure.

Index | Part 1 | Part 2 | Part 3 | Part 4