Thursday, July 9, 2020

LEA technically insolvent

Though its name hardly is hardly mentioned alongside troublesome state-owned enterprises (SOES) that are bleeding government money, the Local Enterprise Authority (LEA), is another SOE that’s tinkering on the edges of collapse, saddled by huge expenditure against tightening government subventions.

The entrepreneurship and enterprise development agency, established in 2008 by the government, is incurring significant annual expenditure in discharging its mandate. Last year, LEA received P183.8 million from government, and ended up burning through the cash, and in the wake, a P75 million shortfall, higher than the P2.8 million in 2018.

The agency’s expenses topped P285 million, mainly comprising of training, mentoring, research and development project expenses and operating lease rentals, the agency said in its 2019 annual report. A large chuck of the expenses, amounting to P211 million or 74 percent of total expenses, was due to staff costs, made worse by retrenchment which cost P114 million.

The company’s accumulated deficits and its huge liabilities has resulted in LEA being technically insolvent, with its ability to continue as a going concern diminished. The agency’s external auditors, KPMG Botswana, has also cast doubts on LEA to exist without government’s help.

LEA’s total liabilities exceeded its total assets by P77.2 million while the current liabilities exceeded current assets by P88.6 million, leading KPMG to express an auditor’s opinion that events along with other matters as set forth in the financial statements, indicate that a material uncertainty exists that may cast significant doubt on the Authority’s ability to continue as a going concern.

LEA was saved from total collapse for the 2019/2020 financial year, after government pledged P173.3 million. The government has also issued a letter of support indicating it would provide financial support to LEA in order for it to continue as a going concern. Being dependent on government rescue puts LEA in a precarious position because should the government cuts back om funding, LEA will have to seriously downsize or close.

“However, in the event that the Authority does not receive the financial support of the Government, a material uncertainty exists which may cast significant doubt about the Authority’s ability to continue as a going concern and, therefore that it may be unable to realise its assets and discharge its liabilities in the normal course of business,” advised KPMG.

Already, the government has indicated that it will be tightening its purse as it cuts back on wasteful expenditure. The second priority, after promotion of export-led growth, will be ensuring more efficient government spending and financing, said Dr Thapelo Matsheka, minister of Finance and Economic Development, when delivering the budget speech earlier this month.

One of Matsheka’s main immediate challenge is to return the country to sustainable fiscal pathway. The government has been raking in massive deficits as it undertakes the National Development Plan (NDP) 11, which began in 2017 and finishes in 2023. The budget deficit for 2017/2018 was P1.9 billion, then widened to P8.8 billion in 2018/2019. As the 2019/2020 financial year comes to an end in two months, the finance minister has projected a budget deficit of P7.9 billion.

“The budget outturn for the first three years of NDP 11 recorded budget deficits. Therefore, it is imperative that, while the 2020/2021 Budget Proposals were prepared in line with the economic transformation agenda, government is conscious of its commitment to fiscal discipline and maintenance of long-term fiscal sustainability,” Matsheka said.

On the face of severe budget deficits, Matsheka’s latest budget for 2020/2021 cuts back slightly on expenditure, with the deficit expected to narrow down to P5.22 billion. The slowed deficit is on the back of reduced spending by government, limiting spending to P67.62 billion in 2020/2021 compared to the current year’s expenditure of P68.64 million. The budget deficit will also be softened by expected higher revenue and grants, estimated at P62.39 billion, roughly three percent higher than in 2019/2020 financial year.

Besides reducing expenditure, Matsheka has reiterated government’s plans to rationalise and streamline, and even privatise some SOEs. He disclosed that will head a subcommittee of cabinet which will undertake a comprehensive review of the mandates, governance, and performance of the over 60 SOEs, with a view to proposing specific recommendations to government on the relevance of some of these organisations and their financial sustainability.

“Government spends substantial resources on parastatal organisations in the form of subventions or grants. For instance, an amount of P4.9 billion is proposed as subventions to various state-owned enterprises for the Financial Year 2020/2021. It is, therefore, important that these resources be used efficiently to contribute to the transformation agenda,” Matsheka said.

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Sunday Standard July 5 – 11

Digital copy of Sunday Standard issue of July 5 - 11, 2020.