RWANDA’S PARTY-STATALS:

Are they contributing or impeding development?

Nilgün Gökgür

nilgun.gokgur@gmail.com

Scholar-In-Residence

Institute of Development Policy and Management (IOB), University of Antwerp, Belgium

April 27, 2012 - ANTWERP

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OUTLINE

• DEFINITION OF PARTY-STATALS

• RWANDA’S ACHIEVEMENTS IN PERSPECTIVE

• PARTY-STATALS IN ENTERPRISE LANDSCAPE

• THREE BIG INVESTMENT HOLDINGS AND SUBSIDIARIES

– CRYSTAL VENTURES LIMITED – CVL (Former Tri-Star)

– HORIZON GROUP LIMITED – HORIZON GROUP

– RWANDA INVESTMENT GROUP SA - RIG

• CROSS-OWNERSHIP WITH SOEs AND MILITARY ENTERPRISES

• DEVELOPMENT IMPACT OF PARTY-STATALS – PARTY-STATAL EFFICIENCY

– DISTRIBUTION OF BENEFITS AMONG STAKEHOLDERS • RWANDAN GOVERNMENT AND DEVELOPMENT PARTNERS

• OWNERS AND OPERATORS

• DOMESTIC AND INTERNATIONAL COMPETITORS

• UNEMPLOYED AND UNDEREMPLOYED RWANDANS

• ORDINARY RWANDAN AS CONSUMERS

• CONCLUSIONS AND RECOMMENDATIONS

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WHAT ARE RWANDAN PARTY-STATALS?

Party-statals are not state-owned enterprises (SOEs)

Party-statals are owned either fully or partially by the ruling party (RPF) together with directly or indirectly by the Government of Rwanda (MINECOFIN), directly and indirectly by the military (MINADEF), and RPF-connected business elite

There is NO political distance between Rwandan state and the party-state statals; “elite capture” in play

No publicly available data exist on their legal status, exact shareholding structure, assets, accumulation of economic rent or profits, allocation of operating surplus to investment and social obligations; and their borrowings from the financial sector and payback rate

No donor requested a study on impact assessment on stakeholders—government, donors, owners and operators, competitors, labor and ordinary Rwandans as consumers

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PARTY-STATALS

Ruling Party (RPF), State, Military and Business Elite Connectivity

GOVERNMENT

of RWANDA

MINIDEF

MINECOFIN- 30

SOEs

RPF-linked

Business Elite

Horizon Group Ltd

2006

2 fully-owned;

6 partially-owned

(CVL, SOEs, RDB,

and one UK firm as

equity partners)

Crystal Ventures

Limited (CVL -

Former Tri-Star since

1994)

8 fully-owned;

2 partially owned

(GoR, SOEs, and

Horizon Group as

equity partners)

Rwanda Investment

Group SA (RIG)

2006

3 majority-owned

with GoR as an

equity partner;

3 partially owned

with SOEs as equity

partners

RULING PARTY -RPF

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RWANDA’S GROWTH AND DEVELOPMENT IN PERSPECTIVE

ECONOMIC GROWTH (8% on average over the last decade)

REDUCTION IN POVERTY and INEQUALITY

Poverty declined from 56.7% in 2005/06 to 44.5% in 2010/11

Gini Coefficient decreased from 0.52 in 2005/06 to 0.49 in 2010/11

GOVERNANCE INDICATORS

Economic Governance (government effectiveness and regularity

quality)

Institutional Governance (rule of law and control of corruption)

Political Governance (voice and democratic accountability,

political stability and absence of violence)

PRODUCTIVE EMPLOYMENT CREATION RECORD ALARMING

Decline in on-farm employment from 89% of the working

population in 2001/2 to 72% in 2010/11

Without commensurate increase in employment /job creation

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ECONOMIC INDICATORS EXPLAINING GROWTH

Source: Compiled from IMF, World Economic Outlook Database, September 2011

2006 2007 2008 2009 2010 2011

GDP Growth

9.2 5.5 11.2 6.0 7.6 8.8

Share of Public Investments in GDP

6.9 7.8 10.4 10.0 11.1 10.7

Share of Domestic Private Investments (including SOEs) in GDP

12.8 12.4 13.1 11.3 11.7 12.0

Share of Foreign Direct Investments in GDP

1.2 2.2 2.2 2.3 0.8 1.5

Share of Government Revenue in GDP

12.1 12.3 14.9 12.8 13.2 14.1

Share of Official Grants in GDP

8.0 9.7 9.5 10.0 11.7 12.9

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SECTORAL SHARE OF GDP

Sectors 2006 2007 2008 2009 2010 2011

AGRICULTURE 38 36 32 34 32 32

INDUSTRY 14 14 15 14 15 16

Mining 1 1 1 1 1 1

Manufacturing 7 6 6 6 7 7

Electricity&Water 0 0 0 0 0 0

Construction 6 6 8 7 7 8

SERVICES 42 45 46 45 47 46

Adjustments 6 6 6 6 6 6

TOTAL 100 100 100 100 100 100

Source: Compiled from NISR, GDP – NATIONAL ACCOUNTS 2011

RWANDA’S ENTERPRISE LANDSCAPE

Employment in enterprise sector constitutes only 16% of non-agricultural workforce of

1,406,000 according to EICV3, Main Indicators Report, NISR, 2010/11; remaining 84% work

predominantly in Household Enterprises (HEs), a sub-set of micro enterprises with one worker

and un-paid household help, and 2% in public works.

Source: Compiled from Establishment Survey 2011

Type of Businesses Number of

Businesses

% Persons

Employed

%

Enterprise sector (including party-statals)

116,839 95 224,659 80

Cooperatives 1,877 1 25,264 9

Non-Profit Organizations 4,238 3 16,968 6

Public/Mixed Sector/Health and Education

572 1 15,105 5

TOTAL 123,526 100 281,946 100

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EMPLOYMENT BY ECONOMIC SECTOR IN 2011

Source: Compiled from NISR, Enterprise Survey 2011

Share of Employment

Share Of Businesses

AGRICULTURAL SECTOR 8 0.5

INDUSTRIAL SECTOR 13 4.1

-Mining 0.1 0.0

-Manufacturing 9.4 3.7

-Construction 2.0 0.0

-Electricity/Water 0.1 0.3

SERVICES SECTOR 79 95.4

-Retail trade/repair of motor vehicles and cycles/transportation, storage

34.1 52.5

-Accommodation/food service activity 21.2 26.7

-Other services 23.7 15.8

TOTAL IN PERCENTAGES 100 100

TOTAL EMPLOYMENT AND BUSINESSES 281,946 123,526

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DISTRIBUTION OF EMPLOYMENT BY SIZE-CATEGORY IN 2011

Source: Compiled from NISR, Establishment Survey 2011

Kigali City

Southern Province

Western Province

Northern Province

Eastern Province

TOTAL

LARGE (+100 Workers)

Businesses 51 16 22 12 5 106

Employment 12,600 4,900 17,800 8,800 900 45,100

MEDIUM (30 – 100 Workers)

Businesses 204 123 74 71 41 513

Employment 10,100 5,800 3,400 3,400 1,900 24,600

SMALL (4 – 30 Workers)

Businesses 3,147 1,508 1,518 1,242 1,133 8,548

Employment 25,400 12,800 11,500 9,700 8,200 67,000

MICRO (1 – 3 Workers)

Businesses 25,767 22,253 24,147 20,750 21,412 114,329

Employment 34,300 27,400 29,400 27,000 26,400 144,600

FACTORS EXPLAINING TINY SIZE OF ENTERPRISE SECTOR

• Unsuccessful/failed privatization program • Not proper sequencing of reforms for competition and regulation

• No proper competitive tendering process

• No Competition Law-Policy or Competition Commission

• Only in November 2011 Competition and Consumer Protection Law passed the Parliament / Ineffective Competition Unit at MINICOM

• Expansion of Party-statals over last 18 years

• Now owners and operators of several privatized entities

• Increasing cross-ownerships with the SOEs and the military enterprise and among themselves

• Inevitable and unavoidable “elite capture”

• Economic weight (share in GDP, investments and employment) and share in financial sector NOT yet measured but high and increasing….

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THREE INVESTMENT HOLDINGS and SUBSIDIARIES IN VARIOUS

ECONOMIC SECTORS, 1994-2012

CRYSTAL VENTURES

LIMITED

FULLY-OWNED

Real Contractors 2005

NPD/CONTRACO 1996

MUTARARA Enterprises 1995

INYANGE Industries 1997

BOURBON COFFEE SHOPS

2007

GRAPHIC PRINTING

SOLUTIONS 2009

INTERSEC SECURITY 1994

MEDIA GROUP SYSTEMS ?

PARTIALLY-OWNED

MTN RwandaCell 1997

Building Material Investments

(BMI) Limited—East African

Granite and Ruliba Clays 2009

HORIZON GROUP LIMITED

FULLY-OWNED

Horizon Construction 2006

Horizon Logistics 2006

PARTIALLY-OWNED

Horizon Sopyra 2009

Gaculiro Property Developers

(GPD) 2008

Building Materials Industries

(BMI) 2009

Commercial Complex in Kigali

2010

Green Horizon 2010

Africa Agropharm 2011

RWANDA INVESTMENT

GROUP (RIG) SA

MAJORITY-OWNED

CIMERWA 2006

RWANDA Energy Company

2008

Peat Energy Company 2009

Multisectoral Investment

Group (MIG) 2008

MINORITY-OWNED

Ultimate Concepts 2010

Kigali Convention Center 2011

(in the process of getting its

financing together despite

having reached IMF’s ceiling

of US$ 250 for non-

concessionary loans)

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PARTY-STATAL CROSS-OWNERSHIP WITH

STATE-OWNED AND MILITARY ENTERPRISES

Year Established

Direct and Indirect Equity Participation in Party-Statals

Caisse Sociale du Rwanda (CSR)

1962 CVL, Building Materials Industries (BMI), Real Contractors (Kacyiru Apartments); Horizon Group, Gaculiro Property Developers (GPD), Building Materials Industries Ltd.(including East Africa Granite Industries and Ruliba Clays Ltd.); RIG, CIMERWA, Kigali Convention Center

Primeholdings 2003 RIG directly, Ultimate Concepts, Kigali Convention Center directly, and indirectly in all other subsidiaries

Military Medical Insurance Scheme (MMI)

2005 Horizon Group directly and indirectly in all its subsidiary companies

ZIGAMA-Credit and Savings Society (CSS/Micro Finance Institution)

1999 Horizon Group, Horizon Construction, Horizon Sopyrwa, Horizon Logistics, Gaculiro Property Developers (GPD), Green Horizon, Commercial Complex in Kigali City, Building Materials Ltd., Africa Agropharm

Source: Compiled from data on party-statal websites and SOEs from MINECOFIN

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IMPACT ON PARTY-STATALS ON EFFICIENCY

• FAVORABLE ACCESS TO STATE RESOURCES THROUGH GOVERNMENT CONTRACTS

• PRIVILEGED POSITION IN PROCUREMENT

• NO INCENTIVE MECHANISM TO DETECT INEFFICIENCY AND RENT-WITHDRAWAL SIMILAR TO ASIAN COUNTRIES

• CASE STUDY: MERGING HOUSING BANK OF RWANDA (HBR) WITH RWANDA DEVELOPMENT BANK (April 2011) AFTER POOR PERFORMANCE OVER THE YEARS

• GUARANTEES OF FIXED ASSETS AND FIXED RENTS

• PARTY-STATALS OPERATE WITH CONFIDENCE IN FIXED RENTS AS WELL AS FIXED GUARANTEES IN THE ABSENCE OF ANY PROPER RENT-MANAGEMENT SYSTEM

• CASE STUDY: CIMERWA; GoR HAD TO INCREASE ITS EQUITY IN CIMERWA TO BORROW AND GUARANTEE LOANS FROM KENYA COMMERCIAL BANK AND AFRICAN DEVELOPMENT BANK FOR THE NEW PLANT; CIMERWA DID NOT INVEST AND INCREASE PRODUCTION, RWANDA HAD TO IMPORT AT HIGH PRICES. (October 2100)

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IMPACT OF PARTY-STATALS ON STAKEHOLDERS

• RWANDAN GOVERNMENT AND DEVELOPMENT PARTNERS (NEGATIVE)

• INCREASE AND DECREASE IN NET FISCAL FLOWS FROM INEFFICIENTLY OR EFFICIENTLY OPERATING ENTERPRISES

• OWNERS AND OPERATORS OF ENTERPRISES (POSITIVE)

• INCREASE IN PROFITS AND DIVIDENDS FROM EFFICIENT OPERATIONS

• CROSS-SUBSIDIZATION POSSIBLY LEADING TO NEGATIVE GAINS

• DOMESTIC AND INTERNATIONAL COMPETITORS (NEGATIVE)

• DOMESTIC BUSINESSES WITHOUT CLOSE TIES TO RPF EXCLUDED

• HIGH MARKET CONCENTRATION OF PARTY-STATALS

• LARGE DEMAND ON DOMESTIC BANK BORROWING

• PREFERENTIAL TREATMENT IN GOVERNMENT PROCUREMENT, IN TAXATION, IN USE OF SUB-CONTRACTORS RPF-LINKED SMEs

• INTERNATIONAL BUSINESSES WITHOUT CLOSE TIES TO GOR EXCLUDED

• UNEMPLOYED AND UNDER-EMPLOYED RWANDANDS (NEGATIVE)

• ORDINARY RWANDANS AS CONSUMERS (NEGATIVE)

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CONCLUSIONS AND RECOMMENDATIONS

TRANSPARENCY-LED REFORMS

ENHANCING TRANSPARENCY AND DISCLOSURE

MEASURING AND MONITORING STATE AND PARTY-STATAL RELATIONS IN TWO SEPARATE CATEGORIES: TWO CONSTRUCTION COMPANIES: CVL’s NPD/CONTRACO (civil

works) and HORIZON CONSTRUCTION (building roads): PERHAPS NATION-BUILDERS BUT AT WHAT COST?

REST OF CONTRUCTION PARTY-STATALS, CONSUMER GOODS PRODUCERS, AND OTHER PARTY-STATALS

FORMULATING PRODUCTIVITY-AND-JOB-RICH GROWTH

SEPARATING SOEs AND MILITARY ENTEPRISE FROM PARTY-STATALS

INCREASING COMPETITION AMONG CONSUMER GOODS PRODUCING PARTY-STATALS AND THE ENTERPRISE SECTOR

DEVELOPING EXIT STRATEGY FOR PARTY-STATALS

ASSETS COULD BE TRANSFERRED TO PUBLIC SECTOR

ASSETS COULD BE TRANSFERRED TO A TRUST FUND