Thursday, August 18, 2022

State presence in competitive sectors drains the economy – Report

To turn around its economy, Botswana needs to reduce the presence and influence of State-Owned Enterprises (SOEs) in sectors that are commercial, advises the World Bank in its latest Country Private Sector Diagnostic (CPSD) report published recently.

The World Bank researchers note that there is need to create markets with competitive neutrality hence the need to put in place policies that tackle underlying and cross-cutting constraints, especially those that foster competition in sectors dominated by SOEs.

The report further stated that there is need to harness private sector participation to foster transitions to sustainability, efficiency, and affordability of key enabling sectors such as energy and water.

“This will create markets for entrepreneurs and SMEs to address, private firms to grow, and foreign investors to participate in. These actions would be buttressed with policies to facilitate trade in environmental goods and services and reduce gaps in infrastructure, skills, and access to finance that hinder employment and productivity growth in firms”, reads part of the report.

For a long time, state-owned enterprises (SOEs), have been identified as a drag on government finances, blamed for poor performance and reliance on state subvention.

But now the World Bank says the dominant role that the government of Botswana still plays in large parts of the economy, particularly through its footprint as a shareholder in companies in the corporate sector, is a critical constraint that inhibits the entry and success of private sector participants.

As of 2019, the Botswana government had ownership participation of 10 percent or more in at least 92 companies across 16 sectors, which the World Bank is relatively high with respect to the economy’s size.

Official figures also shows that seven out of every 10 companies with state participation identified in Botswana operate in competitive sectors. The bank also noted that the legal framework governing SOEs is fragmented, with multiple laws containing conflicting and outdated requirements, adversely affecting SOE viability, compliance, and accountability. In 2021, a report by the Botswana Accountancy and Oversight Authority (BAOA) stated that compliance with best practices in corporate governance in Botswana is poor across the board, covering not only SOEs but also entities regulated by the Botswana Stock Exchange (BSE), Non-Bank Financial Institutions Regulatory Authority (NBFIRA), and other significant entities.

What needs to be done?

The bank says the Botswana should commit to and prioritize addressing issues in the competitive environment. As a start point, Botswana has been called on to ensure that the competition framework is updated to emphasize the subsidiarity role of the state, so its presence is assessed through an economic rationale and spell out more strongly the competitive neutrality principles to ensure that SOEs are subject to the same discipline and enforced in similar terms as their private peers.

“Once appropriate governance and regulatory mechanisms are in place they should be followed by firm-level SOE reforms and improvements,” says the bank.

The World Bank report follows an announcement by government early this year that a comprehensive rationalisation strategy covering all the SOEs has been developed and implementation of the Strategy will address issues such as duplication of activities and overlapping mandates.

The government first came up with a privatisation policy in 2000 to cut down on its number of SOEs which were weighing heavily on the government, often piling on debts and relying on the government to bail them out.

However, the government did not only fail to implement its privatisation policy, but it also increased the number of SOEs to 60 over the years. With clear signs that the increased number of SOEs, and many of them are straining government’s revenues through subventions, another round of privatisation and rationalisation is in the offing.

“The number of these SOEs has grown over the years and this has had a cumulative impact on the running costs of Government as well as on the efficiency and effectiveness of the Public Sector as a whole”, admitted President Masisi in April 2022.

 At the time, Masisi further announced that several existing SOEs will be restructured – an exercise he said will be characterized by mergers intended to remove duplication and overlaps of mandates and operations as well as the bringing in of strategic private sector partners to help revitalise and develop selected SOEs. The much anticipated rationalisation exercise will see amongst other things the incorporation of Selebi Phikwe Economic Diversification Unit (SPEDU) into the Botswana Investment and Trade Centre (BITC), followed by combining all of the investment promotion activities of BITC, the Special Economic Zones Authority and the Botswana Tourism Organisation into one entity.

On the Financial Development Agencies side, a strategic private sector partner will be brought in to help revitalise and develop the National Development Bank (NDB) to focus on its core mandate of being an agricultural bank, including taking on agricultural sector financing operations currently handled by the Citizen Entrepreneurship Development Agency (CEDA). CEDA itself is expected to be merged with the Local Enterprise Authority (LEA) to provide broad-based support to Micro, Small and Medium Enterprises (SMMEs).

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