Sunday, February 28, 2021

Parastatals’ capital structure needs acute attention

The delivery and benefit of public services validates the existence of state owned enterprises (SOE), often referred to as parastatals. In fact, it is evident that such entities have a necessary and meriting role to play in the economy. Needless to say, what is important but sadly quite often ignored is ensuring that such entities have an optimal capital structure. SOEs get involved in commercial and in certain instances non-commercial activities on behalf of government, the reason being to create value for the broader public. Government avails funds needed to meet such public obligations.

The first question to ask is where such funds can be obtained and at what cost. In answering where the funds come from, it then follows to identify how such funds can be obtained and the conditions that should be in place to access such funds. It emerges that SOEs have, broadly speaking, two options to seek funding, being government national budget and the commercial market place.     

Every year government allocates varying and specific amount of funds to SOEs. The allocation appears to be done based on the commitment to address the most pressing and challenging needs of the economy. But what cannot be demonstrated confidently is that the funds at the disposal of SOEs deliver public services at maximum value parallel to minimized cost. Examples can be offered; Botswana Meat Commission (BMC) as one of the SOEs which due to the deficiency of funds from the national budget have actively sought additional funding from the commercial market place, in particular local commercial banks. In certain instances, government can on top of the budgetary allocation inject capital into SOEs, termed as bail outs, which BMC has also received. According to figures cited by BMC Chief Executive Officer, Dr. Akolang Tombale at a media briefing earlier this year, BMC received a bail out of about P590 million. BMC fell into a crippling financial state after it was delisted in 2011 from supplying the European Union with its beef, due to incessant Foot and Mouth outbreaks in Botswana. It was re-listed 18 months later, but the financial damage was already inflicted by the forced hiatus. In an effort to bring its operations to profitability, BMC also borrowed from different local commercial banks, of which the total amount of loans is estimated at P769 million. This included P50 million from BancABC to resuscitate the Maun abattoir and P125 million from FNBB to upgrade the Francistown abattoir. Tallying the loans obtained, BMC pays close to P45 million in interest a year.             

Regarding the flexibility that SOEs have in terms of accessing financing from the market, Sunday Standard engaged Afena Capital’s investment analyst Kwabena Antwi, to shed light on the degree to which the market can be tapped for financing. “In order to access financing from the market, SOEs would need to provide detail to the market of what the funds will be applied to, the return that the SOEs expect from the application of funds and proof that they have the ability to honour periodic payments as and when they fall due,” he said. He however highlighted that some SOEs will most likely fail to persuade the market that they possess the financial strength to make future repayments which as a result will require them to provide security in the form of physical assets or letters of guarantee from government so as to reduce the risk of default. BMC accessed financing of P300 million from Stanchart after government provided the bank with guarantee. “A guarantee from government would significantly reduce the risk of default because the SOE financing would then be backed by the full faith of the government of Botswana which has the highest credit rating on the African continent. As a result of the reduced risk of default the cost of the financing would then be significantly reduced,” said Antwi.

A report on financing state owned enterprises details the experiences of European Union member states in relation to the subject. While it is acknowledged that the experiences may demonstrate large differences from those of Botswana, the report highlights certain practices that could be related to Botswana. It cites that public policy and temporary budgetary concerns become predominant factors in decisions relating to SOEs capital structure. This statement is particularly relevant to the case of BMC which, despite its run down financial state, government continues to inject significant amount of capital into its operations and even with its constrained budgetary condition, BMC remains a priority.

The report also makes an interesting observation, “requiring an SOE to deliver public services at below market costs while maintaining commercial returns imposes an undue burden that is not consistent with competitive neutrality.” This statement is relevant to Water Utilities Corporation and Botswana Power Corporation which as highlighted by the Minister of Minerals, Water and Energy Resources Kitso Mokaila continue to charge their services at prices that are starkly unreflective of market costs. It further reveals that Botswana’s practice of a government bailout is not consistent with that of the European Union member states. “According to the Treaty on the functioning of EU, member states are prohibited from providing any aid […] in any form from whatsoever that distorts or threatens competition by favouring certain undertakings or production of certain goods […]” it states however that state support is received in compensation for the discharge of public service obligations, which depends on certain conditions.

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