Saturday, May 30, 2020

Is the BMC really making money?

Dr Tombale has overseen what appears to be a remarkable transformation at the BMC. The Commission has gone from a major loss making parastatal over the last five years to an organization that is reported, if its accounts are to be believed, a surplus of some P28 million in 2013. Given that over a period of five years before that the commission had lost a total of P 727 million, had been locked out of the EU market and had been attacked for corruption and mismanagement, Dr Tomable’s tenure there has seen the most remarkable financial turnaround. This is the result of three factors. The first┬á and most important is the re-entry of Botswana beef to the relatively lucrative EU market in 2013 after two years of being blocked out of the market because of the failure to comply with EU traceability standards. The second factor and probably just as large has been the increase in beef prices. South Africa, long held to be a low value frozen beef market, in 2103 was taking huge volumes of our chilled beef at prices not far below those of the once lucrative UK market. The benefits of trading our beef with Europe are declining and Dr Tomable is rightly trying to steer the BMC to new as well as traditional regional markets.

The third reason for the turnaround is the price paid to farmers. Despite a P1,007┬á million revenue in 2013, the second highest in the commission’s history, it was only able to make P28 million surplus. In fact if one takes away the P71 million that the BMC received for the first time in 2013 from the government of Botswana to repay it for the losses at the Francistown abattoir, then the BMC still made a loss in 2013. The Francistown subsidy is emblematic of the BMC’s problems. Nevertheless, the losses at the BMC are much lower than the previous year 2012 when BMC made losses of a whopping P318 million.

From 2009 -2012 when the huge losses were being made the corporation was paying the farmers an ‘export parity price’ for their cattle. In other words they were getting precisely what they would receive if they had sold to South Africa. In 2012 farmers were paid roughly P617 million out of a revenue of P747 million or 83% of revenues. This is roughly what an efficient abattoir should pay to farmers. In 2013 the BMC made P1,007 million in revenue but its livestock costs were roughly the same as 2012 at P 608 million or 60% of revenues. In 2012 the BMC abandoned export parity pricing, and so the turnaround can be largely explained by the fact that famers and livestock owners are getting a smaller share of an expanded total revenue. If farmers were paid the same share of revenue in 2013 as they did in 2012 and with everything else held constant, the losses would be approximately P200 million. So it is now the farmer rather than taxpayer that is paying the price for BMC’s inefficiency.

Dr Tombale has said that an ‘export parity price system’ remains in place. Yet despite writing to him on several occasions he and his assistant Mr Goteti have simply refused to reply when I asked how this new export parity price was determined. Framers in the industry insist that while the price is adjusted from time to time there is no automatic linkage to export prices as existed prior to 2012.

Dr Tombale has tried to do many of the right things with the Commission. He has attempted to diversify the export base away from our almost complete and unhealthy dependence on the unpredictable EU market. This is necessary not only because of security and the increasing riskiness and lack of stability of EU food standards but also to find markets for the beef from Ngamiland which is stuck in Ngamiland because of FMD, there have been increased exports to Zimbabwe as well as attempts at developing regional markets in Mozambique and Angola. As long as Ngamiland cattle suffer from endemic FMD then its beef will sell at a discount on the export market and will not be able to enter the EU. The EU remains, for the moment, the most lucrative market and the one on which the financial health of the BMC still relies.

Inefficiency at the BMC which has been there for many years was always paid for in either of two ways. Mostly the inefficiency of the BMC was┬á paid for the by the farmer who simply got less revenues as the BMC became more inefficient or, post- 2006 by the taxpayer. In 2006 the government decided to introduce what is called ‘export parity pricing’ for cattle. The farmer was for the first time since the old Johannesburg parity price of the colonial era paid the same as they would receive for selling their cattle for slaughter in South Africa. But between 2006 and July 2012 when BMC was paying a strict export parity,┬á prices paid to farmers trebled. For once the Botswana farmer was getting his fair share of the BMC revenue but the inefficiency of the BMC meant that the losses that this created meant the taxpayer had to pay.┬á

Dr Tombale has also gotten rid of many of the inefficient marketing practices of the past that plagued the BMC and he has tried to lower labour costs with some limited success. But the most important change under Dr Tombale, and one for which he should be congratulated has been the diversification away from the country’s dangerous and almost complete dependence on the EU market. According to Statistics Botswana in 2013 sales to the region, mostly South Africa climbed to almost 70% of exports. Dr Tombale has increased exports of frozen beef to new markets albeit in small quantities to DRC, Zambia, Tanzania and even our neighbour Namibia. All this is to be applauded.

But where Dr Tombale has gone that is less than laudable is in some of his expansion plans for BMC. He is planning to introduce BMC butcher shops as well as develop BMC feedlots. Given the highly seasonal nature of Botswana’s cattle industry, for almost a century anyone who has owned the Lobatse abattoir has tried to level off the peaks and troughs of cattle supply so as to assure regularity and therefore make a profit. Ultimately raising cattle is an agricultural activity and depends on the weather, diseases and rainfall but an abattoir is an industrial activity that needs regularity of supply of cattle to be profitable. The most recent attempts┬á to regularize cattle supply has been through feed lots though Dr Tomable has been very disappointed with the results he has gotten from the private sector and wants to set up his own. This is a truly bad idea. The BMC has not slaughtered cattle efficiently for years and now it wants to feed and raise them. Given the BMC’s limited administrative capacity this will ultimately result in more losses and it will displace the private sector which is perfectly capable of running feed lots. The only reasonable advice to Dr Tombale is to not give up on the private sector ÔÇô keep working at improving their efficiency. Killing off Botswana’s private operators is not the answer to the BMC’s problems. Indeed the very role of BMC is the exact opposite, it is to strengthen Batswana farmers and feedlotters.
But Dr Tombale also wants to establish BMC butcher shops. This he says is to help market beef at the top end of the market ( tourists and other wealthy people) and not to compete with the small butcher shops. Even though this may be the intention, top end butcher shops are a questionable financial proposition because of the size of the top end of the beef market and when the BMC luxury butcher shops starts losing money, as I am confident they will,  they will almost certainly have to penetrate the whole of the beef market.  This is very dangerous for Batswana farmers  as the only other place they can sell their cattle is to local butcher shops. If BMC enters the butcher shop business at the bottom end it has the potential to make matters much worse for farmers and decrease competition in the cattle and beef industry. The BMC is already the beef price setter in Botswana. The BMC commissioners, the government and the Competition Authority should stop BMC from penetrating anything other than the top end of the beef market for tourists and the rich, which is their current game plan. If BMC is allowed to market beef to the bottom end it would unduly restrict competition and stop the local private sector from developing.

But Dr Tomable wants both of these activities in the BMC because at the very core of his management problems as the CEO of BMC is that it is a very inefficient BMC operations. He is almost certainly not allowed and does not appear to believe that hard decisions need to be taken at BMC to tackle that inefficiency in the way a private business would. Dr Tombale is a first class public official with a brilliant record of service to the country and therefore he knows the limits of where he can and can’t go. Instead of shutting Francistown and laying off workers the government in 2013 earmarked P71 million in further subsidies to the BMC for Francistown. The solution to BMCs problem does not lie in capturing all the value added in the beef value chain by going from raising cattle on feedlots to selling them in butcher shops. It lies in dealing with the issues of inefficient abattoirs and a massively overstaffed commission. But to do this would result in more blood on the floor than one finds in the abattoir and so now, as it was prior to 2006, it will be the farmer rather than taxpayer who will pay and there will be an appearance of a surplus!

These are the views of Professor Roman Grynberg and not any institution with which he is affiliated. The author served as advisor to the Parliamentary Committee on the BMC and the Beef Industry and spent six arduous months studying why it was failing. This article was first written in December 2014 and was sent to BMC for comment. 

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Sunday Standard May 24 – 30

Digital copy of Sunday Standard issue of May 24 - 30, 2020.