BMC ripping off farmers - report

20 Nov 2018

Botswana Meat Commission (BMC)’s monopoly on beef exports may have fleeced farmers millions of Pula through price-fixing and other illegal activities, a confidential report by KPMG suggests.

The report by the audit firm which was commissioned by the Ministry of Agriculture also details how BMC’s business practices have done more harm to famers than good.  

“BMC is perceived to undertake price-fixing (or perhaps establishing a price ceiling) through its position as a monopoly, which private abattoirs use as a benchmark. It is generally considered that this negatively impacts prices paid to farmers as there is less competition available with whom farmers and producers can negotiate.”

According to the report “There is little transparency into BMC, with limited information available regarding the basis for pricing” adding that this “exaggerated by the entity failing to produce reports, financial information etc as required by the BMC Act.”

The report found that there appear to be inconsistencies in the application or at the very least in the understanding of cattle pricing.

“Although the price paid to farmers/feedlotters is based on the average price across all four quarters of a carcass, it is not clear whether the “fifth quarter” is taken into account. Disease penalties are high, being P10 per kg for cattle with measles at BMC compare with P0.50 thebe per kg at ‘local’ abattoirs,” it said. 

The report stated that there are significant costs incurred at the national level, by Government and farmers, to ensure the meeting of health and sanitation standards particularly in relation to exports to EU.

“Some existing private abattoirs note that they are compliant with EU import regulations but are otherwise prohibited from accessing that market,” the report said.

It said there are ongoing inefficiencies at BMC, including low throughput, which means the organisation is unable to turn a profit and pay dividends to farmers.

The report found that “Farmers have little negotiating power due to the existing monopoly by BMC and the smaller size of the famers. Famers have also indicated that local prices for certain cattle (e.g weaners) obtainable at BMC are significantly below the market prices in neighbouring countries including South Africa and Namibia.”

It also noted that “There is perception that cattle are underpriced in Ngamiland with BMC reaping extra profits in this region which helps to subsides processing costs and payments to farmers in other parts of the country.”

The report further revealed that the BMC was involved in illegal activities which are not provided for in the Commission’s Act.

“BMC appears to taken on a significant number of responsibilities access the sector outside of its processing role. This includes operating feedlots in competition with the private sector as well as some regulatory functions by virtue of its monopolistic position and functions stipulated in the BMC Act,” it said.

The KPGM officials also found that there is no accountability or transparency at BMC as the Commission furnished KPMG with incomplete information relating to throughput, output, price trends, finances (profit/losses and balance sheet over time) as well as incomplete information on government expenditure on the cattle sector and support services (DVS) BMC subsidies.

“The BMC provides limited transparency. Annual reports (publically available) dated back to 2008 only could be located.” Citing the organisation for Economic Co-operation and Development (OECD) , the report cautioned against a state-owned enterprise (SOE) having both a commercial mandate, as well as regulatory mandate (and strong influence over the regulator) as this may lead to regulatory capture. 

The report recommended that government should clearly and adequately define the rationale for the SOE (BMC) and ensure that its existence does not hamper or impede healthy competition.

“Where a state-owned enterprise (SOE), such as BMC has such a wide power to achieve the scope of its objectives, the Government should monitor and manage (at the very least) the fiscal risks arising from activities or operations of the public enterprise,” the report said.

In addition, the report said, where the mandate of the organisation poses an inherent conflict such as the one between the BMC’s commercial activities and its developmental activities, Government should monitor the execution of the mandate to ensure that it is in the best interest of all stakeholders and the public at large.

“It is incumbent on the Ministry of Agriculture (MoA) to monitor the BMC and ensure that the inherent conflict posed by the mandate is not executed in a way that is not in the best interest of the beef market and its stakeholders,” the report said.

Whereas the public enterprises such as the BMC have such wide discretionary power, the report found, “it is important for the Government holding the position as “shareholder” on behalf of the people of Botswana, to ensure that the BMC adheres to appropriate governance oversight over the public enterprise.”  

Section 9 of the BMC Act, determines that the Minister may provide the BMC with ‘direction’ pertaining to the ‘exercise and performance of its functions’ where public interest dictates.

“As far as we can tell, no such direction has been provided up to this point.  The BMC Act does not prescribe a level of efficient and economic use of resources and does not seem to execute its oversight responsibilities in a pro-active manner. The report stated that there is no legislated mechanism for BMC accountability to the MOA.” From a regulatory perspective, the report found that the BMC has wide discretionary powers to execute its mandate without any governance requirements to which it should adhere or objective oversight mechanism.

The regulatory landscape provides the Government (and to some extent, the BMC) with an extremely high level of control over entry into the supply and export of beef and cattle in Botswana with the potential for regulatory capture on the side of the BMC, the report said adding that the President holds wide discretionary powers to approve or deny permits/licenses and there are safeguards against arbitrary or capricious decisions.

According to the report, there is clear impediment in the form of BMC’s management of the industry (beef export and cattle rearing), evident in their operating losses.

It stated further that resistance to reform despite numerous previous proposals has stymied potential policy changes that will lead to the way to an improved functioning and improved of the industry.

“The failure of the shareholder, (government) to demand effective reforms and improved commercial performance while being willing to finance BMC losses unconditionally reinforces this resistance,” the report said. It recommended that private abattoirs should be allowed to export beef to non EU markets and general liberalization of the beef export market. It also recommended that a meat industry regulator should be set up. Following the report, The Government announced that BMC will be privatized.

Contacted for a comment, Botswana National Beef Producers Union (BNPU) Secretary General Abel Modimo said they welcome the recommendations of the report and the decision to privatize the Commission but expressed fear that Government this should not be done piecemeal.

“Before privatization, the government should have started with the restructuring of BMC first,” he said.