Recent developments within the parastatal sector have led to numerous questions and commentaries about the governance and overall performance of public enterprises in Botswana. It has to be noted that most of our public enterprises, especially those with commercial mandates were established decades ago, when the world was not as advanced as it is today in issues of corporate governance.
Our quest therefore, should be to continue to improve in order to keep up with the times.
It is of no doubt that Government’s has made substantial investment in the establishment and recapitalisation of the public enterprises over time. As at end of March 2010, Government equity in commercial public enterprises totalled over P16bn. It is therefore, of paramount importance to ensure that their performance in terms of adequately delivering on their mandates as well as giving adequate return on investment should be above par. Looking at the performance of our parastatals over time however, it is not unjust for people to question the robustness and effectiveness of their corporate governance practices. This is even more pertinent considering the public enterprises’ potential to contribute to economic development and employment creation. According to the Central Statistics Office, the parastatal sector contributed up to 4.4 % of the total formal sector employment as at December 2010.
From interacting with different people tasked with leadership of public enterprises, an issue of governance that always comes up when discussing unsatisfactory performance is the role of Government as the shareholder. A major shortcoming which affects public enterprise performance is that the role of Government has never been clarified in a coherent and consistent policy that can be used as a reference point for all stakeholders dealing with issues affecting public enterprises. In defining the role of the state in the affairs of public enterprises, the Organisation for Economic Co-operation and Development (OECD), which is recognised world-wide as an authority on governance issues, proposed that “the state should act as an informed and active owner and establish a clear and consistent ownership policy, ensuring that the governance of state-owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness”. The purpose of this paper therefore, is to discuss why the Government of Botswana should also take interest in considering increasing its role in the governance of public enterprises through formulation of a Public Enterprise Ownership Policy.
Due to the lack of a consistent ownership policy to guide the establishment and governance of public enterprises, some of the entities, especially those in the utilities sectors, are uncertain about the role that they are expected to play in the economy besides providing a particular service. In most countries, presumably Botswana included, Public enterprises are usually established to play a developmental role on behalf of the Government. Normally however, different stakeholders, including the public or customers would hold varying views and expectations about the performance of the public enterprises. Government being the owner therefore, has a duty to spell out expectations from its portfolio of public enterprises through an Ownership Policy. An Ownership Policy would serve to confirm or articulate Government’s high-level and long term objectives and assign all stakeholders roles to play in achieving these objectives. The Policy covers many issues, one of which, being classification of public enterprises in terms of importance so that those of a strategic nature are identified, and strategies for their role in the economy are properly formulated.
The role of an Ownership Policy is even more imperative in the case of Botswana, where Government has adopted a largely decentralised public enterprise ownership model. Under the ownership structure, public enterprises are under the responsibility of different sector ministries, and day-to-day control is devolved to Boards of Directors and Executive Management. An ownership Policy will assist in ensuring that public enterprises will work towards achievement of the common developmental goals set by Government, without giving too much consideration of the fact that they are controlled by different ministries. The overall objectives of government ownership are also important for setting out performance targets for Ministries and public enterprises.
With Government’s objectives clearly articulated in an Ownership Policy, monitoring of the performance of public enterprises would also improve. Corporate Governance experts have long established that without proper performance measurement, it is impossible to provide appropriate incentives, properly delegate authority, or consider alternative policy actions such as privatisation. All these factors continue to affect performance of Public enterprises in Botswana.
The Policy can be used to facilitate implementation of more enhanced monitoring and evaluation of performance through adoption of performance contracting between the Public Enterprises and Government. The broader performance outcomes set in the policy are cascaded down and contracted between the shareholder and the public enterprise. The Policy can also assist by providing guidance on actions that should be taken where public enterprises perpetually fail to deliver on their mandate. This is currently not clear in the context of Botswana, and many Public Enterprises have managed to get away with underperformance.
Even though there was never a clear policy on state ownership preceding it, Government adopted a Privatisation Policy back in year 2000. Had the Ownership Policy been in place before Government decided to pursue privatisation, it would have made identification of public enterprises that should be considered for privatisation much easier. The process would entail assessing the portfolio of public enterprises and identifying those that no longer meet the overall Government’s ownership or investment objectives.
As a substitute for providing strategic direction through an Ownership Policy, Government has instead adopted a practice of appointing civil servants to serve in the Board of public enterprises, as “shareholder representatives”. Although so far there are no proper systems of evaluating Board performance amongst public enterprises, evidence of effectiveness of this practice points to the contrary. Ministries tend to set their own policy direction based on National Development Plans, but the process of cascading the objectives to public enterprises and enforcing implementation is not robust enough. In assigning public enterprises mandates, the absence of common broad objectives has also caused Ministries to over-emphasize circumstances that are peculiar to their own operations, such as capacity or budgetary constraints, without giving proper consideration to the fact that they are part of a broader Government. The result has been that Ministries and Public Enterprises are not able to adequately collaborate and co-operate in order to maximize efficiencies for both the shareholder and the customers.
As an example, although it is commendable that Government has finally commenced implementation of the water sector reforms, it is evident that the reforms are not able address all the issues that have for a long time engulfed the water sector, due to budgetary constraints and limitations placed by the Water Utilities Act. There is a strong demand for WUC to supply water to other services like agriculture and mining, but currently there is no clear policy on this issue even though it is evident that the water sector can contribute to the growth of these other very important sectors of our economy.
Another sector that is highly affected by ineffective collaboration is that of housing. As a result, the cost to housing in Botswana is one of the highest in the region, while a significant proportion of the population can-not afford the services. An Ownership Policy would assist in establishing mechanisms for public enterprises to operate within a framework which is centred on pursuing common outcomes.
Yet another issue that needs to be clarified through an Ownership policy is universal provision of services by public enterprises. Some Public Enterprises in Botswana, though set up with commercial mandates, are indirectly tasked with providing certain social obligations which impact on their commercial functions. In order for public enterprises to properly account for their performance, it is imperative that Government should have clear systems for financing the non-commercial services or to clearly articulate its expectations about the effects of providing social services on the overall performance of public enterprises.
Still related to the issue of performance, Government needs to provide guidance to commercial Public enterprises regarding factors such as the expected rate of return, dividends and reporting. Publication of information and reporting of performance forms the basis for the formal exercise of Government’s oversight role as the owner. Government should therefore, at all times have relevant, updated and correct information about its public enterprises and their operations. This is a precondition for assessing their financial developments.
Reporting that forms the basis for following up and controlling results is mainly in the form of annual reports. As the owner therefore, Government should insist on public enterprises preparing reports which can be used for continual assessments of developments. In Botswana however, majority of the public enterprises struggle to publish their annual reports within a period of six months from the end of their financial years as stipulated in most constitutive documents. One cannot help but wonder how they would cope if they were governed by even more onerous regulations such as those of listed companies, which require publication of financials within a period of three months from financial year end.
It is also important to set standards for the content of the annual reports if they are to convey useful information for the shareholder and other stakeholders. Because of lack of clarity of objectives and performance indicators, some annual reports are over concentrated with information about social activities that in no way assist the shareholder to form an opinion about performance.
In conclusion, it is evident that the time has come for Government to start establishing measures and reforms that will promote effective shareholder involvement in the governance of public enterprises. This will ensure optimal utilisation of resources and performance. A Public Enterprise ownership policy is one tool that Government can use to clearly articulate its ownership objectives and performance outcomes for public enterprises. Government therefore, has the opportunity to make use of the on-going Public Finance Management reforms to make provisions that will enhance commitment to enshrining principles of accountability and transparency within the public enterprise sector. However, a very important point to note is that for these reforms to be effective, Government will need to build capacity in areas such as setting of performance outcomes and targets as well as monitoring and evaluation.
Otlametse Rakwadi is Manager Performance Monitoring at PEEPA. The views expressed in the article, however do not necessarily represent those of his employers. For any views on the article, please contact: [email protected]
