Saturday, April 4, 2020

A rejoinder to BOB Report on Performance of Policy Framework

In the Bank of Botswana Annual Report 2006, the Bank of Botswana, while discussing the “Performance of the Policy Framework”, under the subheading “Financial Assistance Is Not a Panacea”, notes that one of the most prominent characteristics of policies that support economic diversification in Botswana is the emphasis on provision of subsidized loans and grants by Government, as well as financial policies that require minimal collateral or equity contribution by the project owners.

The BoB argues that subsidised loans have a tendency to inhibit proper project costing and appraisal by prospective entrepreneurs and lenders, and indiscipline in financial management. Where promoters are only encouraged, but not required to make equity contributions, as at CEDA, there is moral hazard, possibly to the detriment of longer term private sector development, and may act as a disincentive for entrepreneurs to strive for the success of their businesses as there is no financial risk to them that is linked to failure of the business.
The BoB also argues that provision of loans on generous terms may also result in crowding out of private financial sector in the credit market. The BoB, therefore, argues that the proportion of jobs ‘created’ by CEDA could also have been financed by private financial institutions, while the presence of CEDA type institutions might obviate the need for private sector innovation to meet the apparent demand for start-up capital, especially among citizen entrepreneurs. The BoB concludes that going forward, private sector initiatives and long term sustainability of businesses are more likely to be helped by a reduced role of government assistance in determining viability of business plans. Government does not necessarily have to fill the gap for equity or collateral requirement, by assuming the role of a lender. Citizens need to be encouraged to provide equity for their business investments, while pooled financial and labour resources may also be a better strategy as opposed to heavy reliance on Government assistance.

While I believe that CEDA and others do appreciate and acknowledge that financial support is not a panacea to the development needs of the country, I am however, of the view that there is need for Government intervention in the market in the case of Botswana, where as the BoB rightly points out, commercial banks are unwilling to provide funding for potentially risky business start-ups and expansions. Commercial banks in Botswana have over the years been derided by local companies for their lack of interest to finance SMMEs and where they are willing to do so they have charged highly prohibitive interest rates. Commercial banks have now started programmes which targets SMMEs as they have realised that this sector promises growth potential for them as opposed to earlier years where BOBCs were their cash cows.

The BOBCs have provided, for along period, a risk free investment vehicle for commercial banks which, one may argue, had acted as a disincentive for commercial banks to fund risky start-up businesses. Even though commercial banks are setting up to assist SMMEs they are not looking at financing start-ups but rather expansions which have been in operation for three years and over. It is my belief that this function will complement the CEDA function where CEDA funded projects will graduate to seek assistance from commercial banks to finance their further growth.

The BoB maintains that schemes such as CEDA may act as a disincentive for entrepreneurs to strive for the success of their businesses as there is no financial risk to them that is linked to failure of the business. I must confess that I do not understand this line of argument, because while CEDA does not require security to provide funding as opposed to commercial banks, CEDA does secure assets financed and also require beneficiaries to sign personal guarantees which bind them should they fail to repay which CEDA could leverage to effect payment and as such there is financial risk to the promoters in the event of defaulting. As someone who was involved in the National study on CEDA project a few years ago, I strongly believe that, the failure of CEDA financed projects, though partly attributable to management deficiencies (just like anywhere else including in Banks), they are also partly due to lack of support and the absence of an overarching empowerment policy. The failure to develop an Empowerment policy which could drive schemes such as CEDA cannot be blamed on CEDA management.

The lack of support for SMME has led to outcry from the business community of the unwillingness of Government Institutions to award tenders to local business which has resulted in a number of directives and programmes to encourage these institutions to further support SMMEs. Directives though helpful do not have meaningful impact if parastatals and other Government institutions ignore them. This therefore calls for an overarching empowerment policy which will address the concerns of SMMEs and the general citizenry.

Government intervention around SMME development and support is not unique to Botswana. SMME support programmes are in place in both developing and developed countries, such as USA through the Small Business Administration, Malaysia, Thailand, South Africa through SEDA and Khula to name a few.

It is a fact that one of the reasons why the World Trade Organization Doha Agenda has stalled is mainly to do with Subsidies that the European Union, through the Common Agricultural Policy (which Botswana Beef has benefited immensely from) and the USA through the Agriculture Bill of 2001. South Africa will never be competitive in the Motor industry without subsidies. The Scandinavian countries run the most advanced welfare system in the world, partly through transfers to small businesses; and these are developed economies. To suggest, therefore, that there is something wrong with providing subsidies and making transfers to certain sectors of the economy, is not correct. What is wrong is coming up with schemes such as CEDA without developing empowerment, competition policies etc to ensure the success of such schemes. What is wrong is not CEDA or SLOCA or ALDEP, but the failure to understand that the success of such schemes will depend to a large extent on procurement policies, addressing infrastructural problems in the agricultural sector etc.

There is absolutely nothing wrong with the government’s reservation policy as some people would want us to believe; however such a policy will never succeed without a competition Law that ensures that wholesalers, for instance, operate as such, not as dimausu. To attribute the failure of entrepreneurial development in Botswana to such a policy is very simplistic; and the argument that such a policy discourages foreign investment is unfounded. What sort of foreign Investment do we need in the running of salons, bottle stores and dimausu? Yes Government cannot continue to dish out money without substantive results. But results will only come, if we (all stakeholders) appreciate the linkages and the need for collaboration between different agencies for the success of Government schemes. To argue for the termination of some of these schemes, without establishing the structural problems that lead to failures of some of the projects under such schemes, is simply to sweep the dirt under the carpet.

Thus while Botswana cannot afford to provide financial assistance just because other countries provide them, for purposes of empowerment in Botswana there is need for Government to provide financial support for meaningful participation of Batswana in the economy. The CEDA scheme is one such programme which gives Batswana an opportunity to consider entrepreneurship as an option to employment and a conduit to meaningfully participate in the economy, instead of seeking employment from Government. The BoB should be looking at encouraging all stakeholders to support citizen empowerment initiatives to the betterment of all Batswana. This could be achieved through meaningful collaboration between institutions which support SMME development and other ancillary institution to drive empowerment.

Real opportunities for Batswana to be empowered around finance sector should be explored alongside other empowerment activities. These opportunities I believe could be spearheaded by all financial institutions; and the BoB should play a leading role in driving the empowerment message as the nation’s bank and show the country that it is concerned with economic development which also embraces meaningful empowerment of its citizens.

It is a fact that the BOBCs with commercial banks give them a risk-free environment without any meaningful citizen empowerment. Pension Fund managers have therefore relied on the BOBCs for investment to the detriment of the development of the economy as these funds could be productively utilized to finance business ventures and diversify the economy. The BOBCs have therefore restricted the growth of the financial sector as it acts as disincentive for financial institutions and financial market player to find innovative and high growth potential products to invest in.

Barriers to entry in the commercial banking environment should be reviewed as it has restricted the participation of citizens in commercial bank ownership, Batswana cannot be forever understudies to expatriates without graduation to leadership and ownership of commercial banks.