The long road to parastatal reforms

Despite the numerous voices that have spoken and are still speaking, there’s no debate about where the economy should be headed. Government policy, priorities and strategies echo the advice and recommendations of entities such as the World Bank, IMF and locally, the Bank of Botswana and the Botswana Institute of Development Policy Analysis.

The post-diamond future for the country, the sustainable solution to breaking out of the middle-income trap, lies essentially in private-sector led growth anchored by a suite of structural reforms in the economy.

Everything else, from the new drivers or sources of growth, to the catalysts required such as digitisation, mindset change and other conditions necessary, are all in support of the private-sector led growth ambition that all ‘voices’ agree is the sustainable path forward for the country.

All commentators agree that diamond mining has played its part and provided the basis for the next phase of growth of the economy. Government, which of necessity has dominated the economy over these decades, will similarly need to reduce its presence and cede some ground to private sector enterprise.

The debates are around the pace of this change. This is not unique to Botswana but every country that has attempted to move from its primary economic moorings to a more sustainable, value added model, has faced friction over the pace of reforms. Too fast and underprivileged citizens are left behind on the shoreline, embittered and frustrated. Too slow and windows of opportunity slam shut, occasional economic weaknesses become structural and the same citizenry sinks collectively.

Debates around public sector reforms are particularly abrasive, as they could potentially affect hundreds of thousands of jobs and livelihoods. And yet, these particular reforms are amongst the most urgent as they directly impact upon the establishment of a private-sector led economy.

Last April, President Mokgweetsi Masisi announced a whole-government shake-up, rearranging ministries and mandates and laying out plans for parastatals reforms. The pace of the changes within the parastatals has been slow, with critics saying expecting some of the tougher reforms to be implemented in the run-up to a general election, is unrealistic.

At the last count, the country had 64 parastatals spread across the different ministries, with the majority of these loss-making and having been in such a state over many years, draining the ever-tightening budget of billions of Pula annually.

Parastatals are key to service delivery and are divided into commercial and non-commercial, meaning those expected to run on a profitable or ‘going concern’ basis and those that by the nature of their activities exclusively rely on support from government for sustenance.

Thus, the majority of parastatals such as the Botswana Geoscience Institute and the Botswana Examination Council are not focused on profits but on public service. However, the balance such as Air Botswana, the Botswana Power Corporation and others, are expected to provide government with a return on its annual investment.

By law, these commercial parastatals are expected to operate as ‘going-concerns’, generating enough revenue to cover their operations and ordinarily should not require additional capital from government.

However, each year, government, allocates the majority of the P15 billion or so it spends under ‘grants and subventions’, on parastatals, but gets little in return whether by way of returns or a reduced need for financial support.

In recent years, many of the 17 commercial parastatals have sunk even deeper into the red, becoming totally reliant on government support, while some of those which previously supported themselves have also drifted into losses.

The World Bank this week noted the pressure on the budget is not the worst challenge posed by parastatals. In a 73-page assessment known as a Systematic Country Diagnostic, the World Bank government’s stance on parastatals as part of the “many current policies which are not aligned with the country’s urgent need to enhance private sector growth and competitiveness”.

“The state participates in markets in which other countries tend to promote competition,” the World Bank said. “The Country Private Sector Diagnostic demonstrates that competition in sectors such as energy, beef, and transport is dampened by the large public sector footprint and the preferential treatment of some state-owned enterprises.”

Achieving private-sector led growth in an environment where loss-making parastatals are perennially propped up by taxpayer funds, stamps out private enterprise. The World Bank notes that the growth of private sector enterprise suffers from the unfair playing advantage parastatals enjoy.

“Subsidies to state-owned enterprises in water, electricity, and air transport create barriers for private sector firms attempting to enter these sectors, entrench inefficiencies, and hinder the reliable supply of these services,” the report reads.

Other analysts have pointed out that this is where correctly pacing reforms is critically important. As government cedes ground to the private sector, it will still need to cover the poorest of society, while ensuring that those who can pay their way, do so. Ceding ground abruptly would put key services such as health, education, electricity, water and others, in the hands of a profit-motivated private sector at a time when the economy may not be expansive enough for most citizens to afford the true cost of these services.

But the World Bank has noted an even more worrying trait in the reform debate.

“The high reliance on — and remarkable success of — the diamond industry has entrenched a lack of urgency in the implementation of new policies,” the Diagnostic Report reads. “Moreover, there is no political consensus about the future growth path, and policy makers are divided about whether to embrace protectionist or liberalisation policies. “Policies that could help drive private sector growth and productivity (including efforts to enhance the competitiveness of backbone services) have stalled, as have reform plans for several state-owned entities.”

Government’s policymakers have heard such criticisms before. Responding to written enquiries from Mmegi last year on the pace of structural reforms, Finance Ministry gave assurances that no one in government was taking things easy.

“With growth projected to average four to 4.2% through the NDP12 period, this is low and as such is not sufficient to create job opportunities and attain high income status by 2036,” technocrats told Mmegi. “In this respect, government recognises the need to fast track efficient delivery of public service reforms, digital transformation and other structural reforms. “This will provide a conducive business environment for the private sector to thrive, ultimately resulting into an improved non-mining sector performance. “Combined with a robust mining sector performance, this should help the country reach its growth target of at least five percent, intended to drive the country to high income status.”

In defending government’s commitment to public sector reforms, policymakers will also point to a new, but curious development around parastatals. The Public Enterprises Evaluation and Privatisation Agency (PEEPA), government’s agency tasked with both parastatal performance and privatisation, is advocating for the creation of another parastatal which will act as an oversight authority to curb the inefficiency of already existing state-owned entities.

In a document called “the draft ownership policy for parastatals” launched recently and submitted to Cabinet, PEEPA says the proposed oversight authority would set the yardstick for the performance of state-owned entities, creating a framework for their operations and setting performance targets for them.

However, public finance experts have been thrown aback at this suggestion, startled by the suggestion that adding another parastatal to an already overcrowded and poorly performing group of entities would work.

Public finance expert, Sennye Obuseng told Mmegi that adding another parastatal is far from being the solution and “PEEPA must hang its head in shame” for failing grossly at delivering its mandate.

“The problem we have is that when government has a problem, she resorts to setting up institutions and that’s why most of the parastatals lack a business case and they will continue to drain government coffers,” he said.

Obuseng says most parastatal poor performance is linked to the lack of a business case for their establishment. According to the economist, most local parastatals were formed as government was reacting to economic and social pressures and without a business case, they will continue to drain government finances.

The mushrooming of parastatals dates back to the decades of institution-building and deepening of the economy, where government sought to extend services and support to citizens – and not necessarily on a return-basis. Former president Festus Mogae presided over a decade of the highest growth in parastatal numbers. Between his entry into the Finance Ministry in 1989 and the end of his term as President in 2008, at least 12 new parastatals had been added to government’s books between the ministries of finance and trade alone.

However, Mogae also stressed the need to streamline their activities.

“A preliminary review of parastatals was carried out recently,” he said in the State of the Nation Address of 2006. “The review established, that many entities have overlapping, similar, related, or duplicative mandates thereby creating unnecessary inefficiencies in the delivery of public services and utilisation of resources.”

Besides announcing the ministerial and parastatal shakeup, current president, Mokgweetsi Masisi, has also pledged to freeze the creation of new parastatals, although a few more have been established in recent years. Observers have said while some may unavoidably have to be created, such as the upcoming Meat Industry Regulatory Authority, they can be balanced off through faster reforms that will merge any overlapping existing ones.

The World Bank says as a priority, government needs to improve governance of parastatals, introduce measures to enhance accountability for performance and liquidate non-performing organisations.

Observers however say whatever actions are required to be taken, as well as the pace and nature of reforms, will have to wait until the general elections next year.