I BOTSWANA CONFEDERATION OF COMMERCE INDUSTRY …pdf.usaid.gov/pdf_docs/pnabz158.pdf · BOTSWANA CONFEDERATION OF COMMERCE INDUSTRY AND MANPOWER Privatisation in Botswana ... I Joint

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BOTSWANA CONFEDERATION OF COMMERCE INDUSTRY AND MANPOWER

Privatisation in Botswana - August 1996

Final Report

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I I PRIVATISATION IN BOTSWANA

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Executive Summary 1

I Introduction 5

I Terms of Reference 5

Enterprises in Sample 6

1- Acknowledgements 8

Report Contents 8

I Selection of Divestiture Targets 10

I Background IO

I Changing Relations between Government and Parastatals 10

Restructuring Parastatals 14

I Restructuring commercially oriented Government Departments 15

Changing the Role of Local Councils 17

I Removing Obstacles to Sale Transactions 18

Policy concerns 19

I Legal constraints 19

Formal agreements 19

I Monopolies 19

Performance issues 20 -

I Selecting Sale Method 20

Public issues 20

I Trade sales 23

Asset sales 23

I Employee buy outs 24

Joint ventures 25

I Contracting out 26

I I

I I Privatisation Options and their Consequences 28

Background 28

I Government 29

I Company Management 30

Employees 32

I Customers 32

Investors 32

I Special Interest Groups 34

I Promoting the Privatisation Programme 35

Publicity Techniques 35

I . Financial Incentives 37

I Scheduling the Privatisation Programme 40

Background 40

I Capacity Constraints 40

Areas ofFocus 40

I Privatisation Plan 41

I The Cost and Revenue Implications for Government 43

I Evaluating Financial Impacts 43

Botswana Meat Commission 44

I Botswana Telecommunications Corporation 45

Botswana Housing Corporation 45

I Botswana Savings Bank 46

Conclusion 46

I Organisational and Legislative Implications 47

I Background 49

Organisation of the Programme 49

I Privatisation Legislation 52

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Appendices

Appendix A: Gaborone City Council

Appendix B: Central Transport Organisation

Appendix C: Department of Architecture and Building Services

Appendix D: Botswana Savings Bank

Appendix E: Botswana Railways

Appendix F: Department of Supply

Appendix G: Department of Printing and Publishing Services

Appendix H: Botswana Housing Corporation

Appendix I: Botswana Telecommunications Corporation

Appendix J: Botswana Meat Commission

-Appendix K: Botswana Power Corporation

Appendix L: Air Botswana

Appendix M: MFDP Accounting Unit

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Executive Summary

I We were invited by BOCCIM to carry out a study on privatisation in Botswana. The study involved a review of a sample of state owned enterprises, including parastatals, Government departments and councils. _9ur analysis showed that there is substantial potential for privatisation in Botswana, which could have a considerable impact on the way the country is serviced. The scope for privatisation covers not only the possible sale of several parastatals but also a number of executive functions of Government and activities of local councils which could be transferred to -the private sector. In the process, the role of Government could be transformed from one of owning and doing to one of expediting and regulating.

2 The transition from microeconomic management based on Government intervention through parastatals to an approach which places greater reliance on market forces involves substantial policy decisions. Activities such as the provision of middle and upper income housing, the marketing of maize and sorghum, the running of airlines, the export of beef, the running of printing services, rural savings mobilisation and lending, the management of transport fleets and provision of telecommunications services can certainly be left to the private sector. This is the position in many other countries. But the Government of Botswana has intervened directly and extensively in these areas, as was necessary in the early years after independence. It may now b~ prepared to change its approach but only after evaluating the effects can it confirm that it is prepared to move to a market oriented approach.

3 As a starting point for implementation of the programme, we suggest that there should be a transition to a more commercial approach to running the public sector as a whole. This

- would involve:-

(a) Establishing an arms length relationship between Government and parastatals, which would preserve and enhance Government's role in agreeing parastatals' plans and monitoring their performance but give parastatals greater freedom in taking pricing, operational and investment decisions.

(b)

(c)

Turning a number of Government departments into parastatals and putting their relations with Government onto a commercial basis. They would join other parastatals in adopting accruals based financial and management accounting systems. They would sell their services to Government and Government could procure from elsewhere if it wished.

Introducing accruals accounting into councils.

These arrangements would provide both a better framework for those entities which stay in the public sector and a sound basis for privatisation of those which are being sold.

4 In parallel with the move to a more commercial approach to running the public sector, work can begin on privatisation transactions. Sales could be made through a variety of methods including:-


(a)

(b)

(c)

(d)

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Public issues. We identified the Botswana Meat Commission, the Botswana Telecommunications Corporation and Air Botswana as potential candidates to be sold by this method.

Trade and asset sales. The Botswana Savings Bank or the housing stock of the Botswana Housing Corporation (BHC) could be sold by this route.

Employee buy outs. These could be alternatives to asset or trade sales for entities such as the fuel points and workshops of the Central Transport Organisation, the depots of the Department of Architecture and Building Services and the maintenance activities of the BHC.

Contracting out. A number of enterprises are already contracting out services as diverse as vehicle repairs, refuse collection, building maintenance, printing jobs, security, construction, uniform manufacturing and catering. There is substantial scope for expanding contracting out in both established and new areas.

5 All these approaches have some novel aspects for Botswana which will require careful management. Public issues should be planned so as to attract the maximum public interest and create a generation of citizen shareholders through special incentives such as financial discounts and trust funds. They provide a major opportunity for developing the Botswana Stock Market. Employee buy outs can create new locally owned businesses and Government should create financial and managerial mechanisms to ensure that they are supported. Effective contracting out requires in~reased skills in tendering procedures and contract writing, some of which are available through the sharing of existing experience. It is therefore important to plan the programme well so as to gain the full potentfal benefits.

6 This requires an appropriate institutional framework for managing the programme. We suggest that, within the Cabinet, overall responsibility for the privatisation programme should rest with the Minister of Finance and Development Planning (WDP). The Minister would be supported by a privatisation committee, chaired by his Permanent Secretary. The committee should have eight to ten members, drawn from both the private and public sectors. Responsibility for the implementation of individual transactions would rest with the sponsoring ministry for the parastatal or department affected, through a reference group.

7 - It is vital to keep sponsoring ministries closely involved in managing the transactions. It is only through their active commitment to the programme that all the potential opportunities for privatisation in Government can be identified and realised. Furthermore, sale transactions for complex parastatals have to be handled on a case by case basis as they are bound to raise unique legal, regulatory and policy issues which only the sponsoring ministry is competent to address fully.

8 However, recognising that ministries will not have all the technical skills to manage transactions, both the programme as a whole and the individual transactions would be supported from a small unit in MFDP. The unit would act as a secretariat to the privatisation committee and support the committee in developing overall plans and policies for implementing privatisation. It would also provide technical support to ministries through membership of the reference groups. It would therefore be able to advise ministries on the

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overall direction of the programme and to report back to the privatisation committee on the progress being made by each ministry and on each transaction. The unit should be structured along the lines of the Shashe Project Management Unit or the North South Carrier Implementation Unit.

9 The unit would report to a senior civil servant in the :MFDP, possibly the Permanent Secretary or alternatively one of his immediate subordinates, who would haye responsibility for the unit, along with other responsibilities. Within the unit there would be at least one experienced privatisation specialist, designated as the Chief Technical Adviser, who would co-ordinate- the technical advice to decision makers in the privatisation committee and the reference groups. The ideal candidate for this post would be a citizen who could combine privatisation skills with deep knowledge of the economic and political situation in Botswana. This ideal is not likely to be achieved in practice as privatisation skills are not widely available in Botswana. The Chief Technical Adviser is therefore likely to be an expatriate.

10 The unit would have about three other staff members initially but staffing might need to be higher or lower depending on the rate of progress of the programme and the needs for central support to ministries. So far as possible, support for transactions would be contracted out to the private sector.

11 An early-task for the privatisation committee and the unit will be the preparation of a privatisation White Paper and a privatisation plan. The White Paper would appear first and set out Government policies on privatisation. The plan would follow and demonstrate how the policies were being translated into privatisation transactions. The plan would be updated periodically. Some opportunities for quick successes should be identified in these documents, in order to demonstrate that the programme can obtain results. This is likely to involve trade or asset sales as these are the quickest sale techniques to implement. But there should also be proposals for taking forward more complex privatisations, especially in areas where there are major potential benefits from the sale. The initial plan should also include at least one public issue as the method of sale most likely to attra-ct public attention to the programme. There should be a balance between different ministries and sale methods so as to make progress with the programme in a variety of areas.

12 It is for Government to reach the final decisions on the priorities for the programme. However, the results of our survey suggested that possible priorities include selling some more of BHC's houses as a quick asset sale, planning a public offer for the Botswana Meat Commission or the Botswana Telecommunications Corporation, introducing charging arrangements and commercial accounting for the Central Transport Organisation and the Department of Printing and Publishing Services, seeking a strategic partner for Air Botswana and contracting out some maintenance work from DABS.

13 The privatisation committee will have to devise and attract publicity for the programme. The options include seminars and workshops, publicity on television and radio and in the print media and speeches by politicians and other leading opinion formers.

14 The complete privatisation of any parastatal will require special legislation. It will not be enough simply to repeal the Act which set up the parastatal. In some cases, the parastatal will need to be transformed into a company under the Companies Act. In others arrangements for liquidation may be required. Regulatory powers which are in the hands of parastatals will


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have to be transferred to Government. However, such legislative needs are rarely an obstacle to beginning the privatisation process.

15 The privatisation programme will have significant revenue and expenditure implications for Government. Parastatals which currently require loan finance and, in some cases, subsidies will become taxpayers. There wilLbe sale proceeds for Government. The overall effects depend on the scope and approach used in the programme but could amount to hundreds of millions of pula annually.

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I Introduction

Terms of Reference

16 W fP were invited by the Botswana Confederation of Commerce, Industry and Manpower (BOCCIM) to carry out a study into privatisation in Botswana. The study required us to undertake a strategic analysis of the options for and possible approaches to privatisation. The terms ofreference for this part of the work were as follows:-

(a)

(b)

(c)

- (d)

(e)

(t)

what factors and criteria should be used in the selection of divestiture targets and how should they be promoted?

what are the consequences of each option for the various stakeholders?

what assistance, if any, should be given to citizens to participate in- this exercise?

should the programme proceed incrementally?

what are the cost and revenue implications for the Government?

what legislation/regulations should be put in place to support the divestiture process? What existing legislation should be amended or nullified?

17 In carrying out the study we also focused on a sample of parastatals, Government departments and other organisations, selected by the reference group. The terms of reference for this component of our work covered the following areas and tasks:-

(a) Organisational survey:-

(i) what are the mission and objectives of the individual State Owned Enterprise (SOE) or unit? Are they still relevant to the current socio-economic situation?

(ii) how is the SOE or unit organised and staffed?

(iii) who benefits from the services rendered?

(iv) how does the SOE or unit operate, in terms of procedures?

(v) what is the size of the service and the workload expectations?

(vi) what is the state of equipment and facilities?

(vii) are there plans for expanding the SOE or unit?


(b)

(c)

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Policy Review:-

(i) are there reasons for keeping some or all of the activity as a government function?

(ii) would essential public services be disrupted by a modification m ownership and/or management?

(iii) could a private sector group deliver the service in an efficient, cost - effective manner?

(iv) are commercial entities available to assume operations?

(v) is competition from the private sector probable?

(vi) in view of the foregoing, are there areas potentially suitable for privatisation?

Business Evaluation:-

(i) is the organisation operating efficiently, m terms of financial and operational performance measures?

(ii) to what extent has management been "localised"?

(iii) is there citizen business interest in the services?

(iv) do citizens have the capacity to perform the SOE or unit's functions or will expatriate technical expertise be required?

(v) will there be an expansion of opportunity for citizen business?

(vi) what is the likely impact on employment?

(vii) is there a possibility of re-deploying and/or re-training the displaced workers?

Enterprises in Sample

18 The entities covered by the survey were as follows:-

(a) Gaborone City Council.

(b) Central Transport Organisation.

(c) Botswana Agricultural Marketing Board.

(d) Department of Architecture and Building Services.


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(e) Botswana Savings Bank.

(f) Botswana Railways.

(g) Department of Supply.

(h) Department of Printing and Publishing Services.

(i) Botswana Housing Corporation.

Botswana Telecommunications Corporation.

(k) Botswana Meat Commission.

(1) Botswana Power Corporation.

(m) Air Botswana.

(n) I'vfFDP Accounting Unit.

19 Each of these organisations is the subject of an enterprise profile, and these profiles are each presented as a separate appendix to this report. We have drawn extensively on material from the profiles in devising our strategic recommendations, as well as the results of the privatisation workshop which we conducted as part of the study, comments from our reference group and other discussions and written material, including evidence of the experience of other countries, especially in Africa. The analysis ranges more widely than the terms of reference in certain areas, for example in discussing possible organisational options for managing the programme in Government and issues of publicity for the programme2 which were identified as important during the assignment.

20 We stress that our sample did not include many important parastatals, departments and councils where there may be potential for privatisation. The entities which we did not review, but which may have functions suitable for privatisation, include:-

(a) Bank of Botswana.

(b) Botswana Development Corporation.

(c) Department of Wild Life and National Parks.

(d) Department of Electrical and Mechanical Services.

(e) Central Statistics Office.

(f) Department of Roads.

(g) Auditor General's Office.


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(h) Government Computer Bureau.

(i) Botswana Livestock Development Corporation.

G) Botswana National Sports Council.

(k) Botswana Technology Centre.

(1) Botswana Vaccine Institute.

(m) National Development Bank.

(n) Botswana Building Society.

(o) Water Utilities Corporation.

(p) University of Botswana.

( q) Botswana Postal Services.

(r) - Councils outside Gaborone.

( s) Local Government Audit.

(t) Department of Civil Aviation.

there will certainly be opportunities for privatisation in other entities as well as these.

Acknowledgements

21 In carrying out this work, we were enormously assisted by the support we received from BOCCIM itself and the members of the study reference group and by our interviews with many managers, in particular those in our sample of enterprises. We take this opportunity to thank all those who assisted us for their invaluable support, without which this study would not have been possible.

Report Contents

22 The remaining sections of our report, after this introduction, set out our conclusions as follows:-

(a) Section II: Selection of Divestiture Targets.

(b) Section III: Privatisation Options and their Consequences.

(c) Section IV: Promoting the Privatisation Programme.

( d) Section V: Scheduling the Privatisation Programme.


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(e) Section VI: The Costs and Revenue Implications for Government.

(f) Section VII: Organisational and Legislative Implications.

23 The supporting appendices contain profiles for the various entities which were included in the sample and follow this main text.


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II Selection of Divestiture Targets

Background

24 Privatisation has been adopted as a tenet of Government policy in many developed and developing countries over the past fifteen years. Even in Africa, probably the continent where the policy has had the least impact su far, Governments are increasingly accepting the need for the private sector to take over many of the roles previously discharged by Government and parastatal organisations.

25 However, people differ in their understanding of what is meant by privatisation. To some, it is simply a matter of selling off a few poorly performing parastatals. To others it is a far more wide ranging policy which has potential implications for virtually every aspect of the running of Government. If the policy is pursued to its logical conclusion, most of the executive functions of Government can be privatised. In this study we h-ave adopted a wide ranging definition of privatisation. We have looked at the work of Government departments as well as parastatals. We have considered many areas where market forces rather than Government decisions could be the basis for future policy. Naturally, this requires acceptance of change by Government before the new policy can be implemented. But it is clear from our work that the potential for privatisation in Botswana is considerable, once the principles are accepted.

26 We therefore suggest that the selection of divestiture targets should take as its starting point the premise that many of the activities of Government are amenable to privatisation. The steps needed to achieve privatisation should then be considered. The key components of this process are:-

(a) Changing relations between Government and parastatals.

-(b) Restructuring parastatals where necessary.

(c) Restructuring commercially oriented Government departments.

(d) Changing the role of local councils.

(e) Removing any obstacles to each sale transaction.

(f) Selecting an appropriate method of sale.

27 These steps are not sequential. A number of them can take place in parallel. Nor do all of them apply to every enterprise.

Changing Relations between Government and Parastatals

28 All the parastatals which we reviewed were subject to routine Government involvement in a number of their activities. Decisions on pricing, on operations and investment and on financing were all subject to Government interventions.


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29 Examples of interventions in pricing decisions were widespread. The rents set by the Botswana Housing Corporation (BHC) have to be approved by Government. The rebalancing of Botswana Telecommunications Corporation (BTC) tariffs is under Government consideration. The Botswana Agricultural Marketing Board (BAMB) sets price which are subject to Government approval. Changes in the fares and tariffs charged by Botswana Railways are approved by Government.

30 Interventions in operations and investment are equally frequent. Air Botswana has been pressured to maintain uneconomic flights. The Botswana Power Coi:poration (BPC) and BTC are expected to extend their services to rural areas, even though it is uneconomic to do so. Extensions to the rail network and the new headquarters building of the Botswana Savings Bank (BSB) reflect Government decisions. The Botswana Meat Commission (BMC) has to seek ministerial approval for investments over a certain size.

31 These pricing, operational and investment decisions have financial implications for the parastatals. Financial support flows from Government to parastatals in a variety of ways. For example, BAMB receives Government funding:-

(a) As subsidies for the operation of certain unviable depots.

(b) Through payments for the management of the strategic grain reserve.

( c) Through grants to cover capital expenditure.

( d) Through loans to sustain BAMB in operation in view of its continuing financial losses. In view of the Board's financial position, the loans cannot be repaid in practice and as such the loans are better described as subventions.

32 Other parastatals receive other forms of support. BSB has had a capital injection and is also receiving grants for the construction of its headquarters. Rural electrification is subsidised through BPC. Air Botswana recently had a capital restructuring which involved a debt write off There are also financial flows from parastatals to Government. Some, but not all, parastatals pay interest on their debts to Government. BTC pays dividends on its equity. Botswana Railways was affected by the Government sponsored restructuring of its main customer and had to write off debts from that customer.-

33 Of course Government, as owner, is bound to intervene in the activities of parastatals. But the way in which it intervenes has a major impact on the morale, commitment and performance of the managers in the parastatals and on the results achieved. Moreover, a transfer of ownership into the private sector will create a situation in which Government is no longer capable of direct interventions of this sort. It will have to find other ways of making effective its policy decisions.

34 We consider that, from the viewpoint of both improving performance and creating an environment which will facilitate privatisation, the framework in which parastatals operate needs to change. The precise arrangements will differ from parastatal to parastatal. However, the general features which we recommend are as follows:-

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(a) Agreement of corporate plans.

(b) Setting of performance objectives.

(c) Monitoring of performance.

( d) FinaJ?cial payments to meet agreed investment and subsidy needs.

3 5 The corporate plans would be agreed annually between parastatals and Government. _ The coverage would include proposed investment and operational developments, pricing proposals and financial projections which demonstrate the impact of these plans on the parastatal's finances. Responsibility for agreement of the corporate plan would rest with the sponsoring ministry of each parastatal. However, the Ministry of Finance would also be involved in agreeing formats for financial information and levels of financial support.

-36 The corporate plans would also include performance objectives. The focus would be on a limited number of indicators which gave an overall picture of performance. Some of the indicators would be financial and some would be operational.

3 7 Parastatals would submit periodic reports to their sponsoring ministry. These reports would detail results against the objectives agreed in the plan. There would be periodic review meetings to discuss results and the Board of each parastatal would be expected to monitor results at its meetings and initiate corrective action where necessary.

3 8 The corporate plan would also lay down the nature and level of the financial flows between the parastatal and Government. These flows might take the form of equity injections, loans or subsidies from the parastatal to Government and flows of dividends or loan repayments in the opposite direction. The nature of the payments would be appropriate to the position and performance of the enterprise. Thus loss making enterprises which Government wished to sustain would receive subsidies and not, as happens at present, "loans" which they cannot repay or even pay interest on.

39 Within the framework provided by agreement of the corporate plan and monitoring arrangements, the parastatal's managers would have the freedom to manag~ the enterprise without further Government interventions. Thus changes in prices would be announced by the parastatal and, provided that they were in accordance with the agreed plan, no further Government approval would be needed. Operational and investment decisions would be taken by the parastatal's managers. A relationship of this sort would provide a far firmer basis for privatisation of parastatals than the existing structure. It would also create a better framework for the running of those parastatals which are remaining in public ownership.

40 Government would now have three options for those policy areas which it currently pursues through its parastatals:-

(a) To identify policy areas which it was now prepared to leave to market forces, thereby ending Government interventions. The parastatals concerned could then be sold.


(b)

(c)

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To identify policies which it wished to continue to pursue, but where it would be possible to agree arrangements with the private sector which would enable it to realise its goals. The parastatals concerned could also be sold, but special contractual or other protection might be required to meet Government objectives.

To retain certain parastatals and continue to pursue its objectives through them in the new framework.

41 It is for Government to decide on the areas of policy which it considers vital, but-from our analysis we have identified a number of areas where we consider change possible:-

(a) The marketing of sorghum and maize could be left to market forces, thereby enabling the privatisation of most of BA.MB 's activities.

(b)

(c)

(d)

(e)

The provision and subsidisation of middle and upper income housing could be left to the private sector, allowing BHC to be privatised.

The export of meat could be left to the private sector, enabling the privatisation of BMC.

Rural savings and credit markets could be left to market forces and BSB could be privatised.

Air transport could be left to market forces and _Air Botswana privatised.

42 Examples of areas where the Government could privatise but continue to -pursue its policy i11terests through other mechanisms include:-

(a) The telecommunications sector could be liberalised and BTC could be privatised. However, Government could protect its policies of extending network coverage to rural areas through licence conditions and limit price rises through regulatory restrictions on tariffs.

(b) BMC could be privatised but the Government could maintain regulatory control over cattle and meat exports and slaughterhouse licensing through the Ministry of Agriculture. -

43 For activities such as electricity distribution and the operation of the railways, which are natural monopolies and less suitable for full privatisation, Government could continue to pursue policy objectives such as rural electrification through the planning arrangements discussed above.

44 In addition, if Government decides that it is not prepared to leave some of the policy areas discussed above to market forces, then we consider that these planning arrangements will provide a far better framework for policy interventions. For example, BSB receives subsidies through both subsidised access to the Post Office network and free capital from Government. The objective is to support the rural savings and credit market although in


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practice the main area of expenditure is the corporate headquarters in Gaborone. The planning framework discussed above would provide a far better basis for evaluating both the costs and the benefits of these methods of intervention.

Restructuring Parastatals

45 If Government accepts that a number of parastatals have roles which can now be left to the private sector then this has major implications for their structure. The existing structures and roles reflect Government policies and priorities and would never hwe come into existence in the private sector. BHC has three separate businesses (property development, property management and housing finance) which have no logical business connection. A debt to equity conversion of P250 million of BHC's debts to Government has now been agreed because the Corporation is not viable with its present capital structure. The equity will not in practice be remunerated although it might be recovered through privatisation. The debt to equity conversion is therefory in effect a debt write off designed to sustain the viability of the business. BA.NIB procures several crops, supplies inputs, runs depots and silos all over country, packs pulses, makes feedmix and maintains the strategic grain reserve. There is no business logic behind the range of its activities and facilities, and the enterprise as a whole is not viable.

46 If, with privatisation, Government is willing to leave these areas of activity to market forces then there is no possibility of keeping these parastatals in being in their present form. Government will have to undertake major restructuring before privatisation in order to break up these businesses and create enterprises which are marketable and have the potential to achieve reasonable selling prices and remain viable in the private sector. For exam_ple, a possible structure and privatisation approach for BHC would be as follows:-

(a) Selling BHC owned property to tenants or, where necessary, other potential buyers. Because of the history of subsidisation of such property, it is inevitable that selling prices will have to include an element of subsidy compared to replacement cost.

(b)

(c)

(d)

(e)

Selling the development activities ofBHC to its staff through an employee buy out (EBO).

Selling BHC's maintenance actlv1t1es, probably also through one or more EBOs, with contracts between BHC and the new firms to continue to maintain BHC's properties in the short term.

Selling the housing finance activities, by selling both the assets and liabilities to a bank or other financial institution.

Selling remaining let properties to the market, possibly using variable rate loan stock companies.


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Restructuring commercially oriented Government Departments

47 During our analysis we reviewed a number of parastatals and Government departments. One of the most noteworthy comparisons between the two was in the quantity and availability of financial data. Parastatals had up to date accounts and other financial information, produced on commercial lines. By contrast, the Government departments all run on Government principles of cash accounting and had minimal financial data available. They do not produce financial accounts, balance sheets or profit and loss accounts. Nor do they have any financial management information. This has a number of implications in each of the four departments which we studied, ie the Central Transport Organisation (CTO), the Department of Printing and Publishing Services (DPPS), the Department of Supply and the Department of Architecture and Building Services (DABS).

48 In the case of CTO, vehicle services are provided to all Government ministries and departments and are paid for out of CTO's budget. This has the implication that the service is free to users at the point of use. The effect is that CTO is always under pressure to provide increasing amounts of transport to users as the users have no incentive to economise. Nor do they have any incentive to consider alternatives such as rail and air transport, which may be cheaper, because the cost of using these alternatives will be borne out of the budgets of their own ministry or department.

49 The lack of a management accounting system means that CTO is unable to compare the costs of carrying out various servicing and repair jobs in house with the charges levied by local garages. Nor can it compare the effectiveness of its different workshops or evaluate their overall performance. Thus although CTO contracts a number of tasks there is no confidence that it contracts out the jobs which it is cost effective to have undertaken externally. Furthermore, the requirement to fill vehicles at a CTO fuel point often means that vehicles do many miles of unnecessary running to reach a fuel point rather than using a local garage.

50 At the DPPS, the situation is similar in that services are free to ministries and departments at the point of use. As a result, ministries have no basis for deciding which printing jobs to undertake in house, using modem desk top publishing software and equipment and which to send to DPPS. When jobs are sent to DPPS, ministries have no incentive to eco_nomise on the quantity or quality of service which they demand as the cost is borne by DPPS. Nor is there any incentive to deliver material to DPPS in the most cost effective way. Finally, DPPS has no basis for comparing its internal costs with the charges made by external printing companies.

51 The Department of Supply does charge ministries for items which they procure from the Department. However, the charges are set at cost plus a mark up. They are not determined on commercial criteria. Nor are the stores run commercially. On occasions, ministries have changed designs and made obsolete items in the stores which have been procured for their sole needs. The costs have been borne by the Department. The Department is unable to make the trade off, which any commercial stores operator must make, of the storage costs, obsolescence risks and working capital costs of holding stocks against the risks of running out of stock if re-order levels are set at too low a figure. The services which the Department undertakes, such as the repair of photocopiers, cannot be costed against the provision of the same service by the private sector, either for individual repairs or on a maintenance contract.

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Computerisation is still m progress, many years after computers became standard m commercial stores.

52 The Department of Architecture and Building Services (DABS) also provides a free service to ministries. As a result, the costs of property development are understated. This distorts any comparison between the costs of owning property rather than renting or leasing it. DABS also lacks the systems to compare the provision of in house services against the cost of using external consultants and contractors.

53 All these departments therefore suffer from a range of similar problems iIT performing efficiently. We consider that the same long term solutions are likely to be applicable to all of them and possibly to other departments that we have not examined and which perform a broadly commercial role, such as the Department of Electrical and Mechanical Services and the Department of Wildlife and National Parks. The key elements of this proposed long term structure are:-

(a)

(b)

(c)

(d)

Ministries or other users should pay for services rendered at rates determined by the department.

The departments should operate as commercial ent1t1es, with appropriate commercially oriented management and financial systems.

Users should have the option to procure services from departments or from other suppliers in accordance with their own commercial judgement.

Departments will have the choice of contracting out services or performing them in house, depending on the cost effectiveness of each approach.

54 We have considered alternative means of achieving these outcomes. The best approach will differ from department to department. However, we consider that the conversion of commercial departments into parastatals should be an invariable feature of these changes, for the following reasons:-

(a)

(b)

The financial restnct1ons on the behaviour of Government rrurustries and departments, arising from both established legislation and the constitution, will make it difficult, if not impossible, to introduce commercial accrual accounting systems, with profit and loss accounts and balance sheets, to the departments in the short to medium term. This is not a problem if the departments become parastatals.

We have noted the inability of these departments to introduce commercial management accounting systems within a Government framework. The DPPS has been trying for several years to introduce a costing and charging system without success. Similar considerations apply to the CTO. The pressures arising from conversion to parastatals will force a more rapid pace of change.

55 Other arrangements should differ from department to department. For example, the recommendation that ministries should have the ability to seek services from departments or

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other sources as they see fit is much easier to implement for a simple service such as printing than it is for the procurement of new buildings. Thus the change is likely to come much more quickly at the DPPS than at DABS. It will be easier for users with large vehicle fleets, such as the police, to take on greater management responsibility for their vehicles than for ministries which operate only a few vehicles.

56 In all of the departments which we examined there is considerable scope for contracting out of services. We discuss the general principles associated with contracting out below. In the case of DPPS, DABS and CTO the scope for contracting out covers virtually the whole of the departmenfs activities. DPPS could act as a procurement agent from the private sector. DABS could contract out more of its design work and its maintenance depots could be sold and the work contracted out. The CTO's workshops and fuel points could be sold into the private sector and the CTO become solely a procurement organisation.

57 In all cases, some service procurement role is bound to remain in the public sector. In the case of the CTO, decisions about the size and role of the Government's vehicle fleet have to remain within Government. There are tax advantages within SACU if vehicle ownership stays ii:i Government hands as well. In the case of DABS, there will have to be some remaining Government responsibility for taking decisions on which buildings to develop, lease or rent. These roles must stay within Government and cannot pass into the parastatal or private sector. However, the role of the remaining personnel will be radically different from that currently undertaken within these departments. With greater external procurement from the private sector, the civil servants involved will need far greater skills in contract negotiation and letting rather than running large service organisations internally.

58 The decisions on contracting out will be much easier to take once there are commercial accounting systems in pf ace. It will then be possible to compare the costs of in house provision with charges from the private sector. However, decisions need not be deferred until such systems are in place. It is straightforward to carry out ad hoc costing exercises to evaluate the relative costs in the private and public sectors, as has already happened for borehole drilling. Such costing exercises should be carried out in all departments as a means of identifying priority areas for privatisation.

59 These changes to the role of commercial departments and the way they operate should have an enormous impact on the efficiency of Government. They should make the control of public spending more effective and enable increased value for money for each pula of expenditure.

Changing the Role of Local Councils

60 As part of this assignment we examined the services provided by one council only, Gaborone City Council (GCC). However, we understand that the circumstances of other councils are broadly similar. Introducing privatisation to local councils raises a fundamental democratic issue in that the councils are elected and some of them may not wish to adopt privatisation as a policy. Government has three main options in these circumstances:-

(a) It can accept that local council services are off limits for its privatisation policy and allow different councils to pursue the policies which they prefer.


(b)

(c)

18

It can exert financial leverage over the councils. Since Government covers most recurrent expenditure and virtually all development expenditure this should be feasible.

It can pass legislation to impose its will and require councils to give up certain activities or to contract out certain services.

61 If councils, either voluntarily or as a result of coercion, adopt privatisation as a policy then then~. are a number of areas suitable for privatisation. Some services are currently provided in ways which are partly social and partly commercial, a position analogous to that of many parastatals. One example is abattoir services, where charges are made but are restricted by Government to a non commercial level. The subsidy is justified as a means of discouraging slaughtering at home or in other unsuitable places. Government could decide that this area could be left to the disciplines of market and if necessary planning controls and the abattoirs could then be sold to the private sector to be run commercially. Similar considerations apply to services such as the provision of market stalls and community centres.

62 Gaborone City Council has a number of houses, which are occupied by its staff It would.be possible to sell off this housing, to tenants or to other buyers and adopt a policy of officials finding their own housing in future. This possibility applies to any publicly owned housing and needs to be considered on a co-ordinated basis before any decision is taken. Moreover, such a decision would have to be taken alongside other decisions about how to remunerate staff affected by the change.

63 Finally, there are a number of services provided by councils which are suitable for contracting out. They incfude refuse collection, maintenance and engineering services. We discuss contracting out further below.

64 In evaluating the possibility of contracting out engineering services or privat1smg services such as abattoirs, community centres and markets, we found the financial information compiled by GCC less useful than it might be. The situation is better than with Government departments in that councils prepare accounts using the principles of double entry bookkeeping. However comprehensive accounts are not prepared for trading activities, although the basic data to prepare such accounts is available. Nor are there any management accounts which would enable a comparison between the costs of undertaking engineering services against the cost of using consultants and contractors.

65 We consider that the accounting standards and management information of councils should be upgraded. The objective should be to compile the financial and management information needed to carry out a commercial evaluation of the activities which are amenable to privatisation.

Removing Obstacles to Sale Transactions

66 We turn now from consideration of the issues which must be confronted in Government and the parastatals in progressing a programme of privatisation to a more detailed examination of the approach to be adopted to privatisation transactions. The design of an approach to privatisation of a particular public sector activity involves two interconnected

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components. First, the obstacles which stand in the way of privatisation must be identified and a plan developed to remove them. Second the method of sale must be selected and tailored to the requirements of the transaction. Sale methods are considered further below.

67 The obstacles to privatisation can take a variety of forms. The most important ones which we have identified in this study are:-

(a) Policy concerns.

(b) Legal constraints.

(c) Formal agreements.

(d) Monopolies.

(e) Performance issues.

Policy. concerns

68 We have discussed above the various areas where Government will have to take policy decisions before a privatisation can take place. Essentially this involves deciding that market forces can take the place of Government intervention in decision taking. The transaction can only begin once the policy decisions have been taken.

Legal constraints

69 All parastatals are set up under legislation which gives them a legal existence in the public sector. The finances of Government departments are governed by the constitution and by legislation on vote accounting. These legal requirements cannot be amended without new legislation. While small scale initiatives such as contracting out of some services or the sale of peripheral assets would not require legislation, the complete privatisation of a parastatal or the conversion of a department into a parastatal would require new legislation.

Formal agreements

70 In some cases there are formal agreements in place between parastatals and third parties which are based on the position of the parastatal in the public sector. For example, BMC enjoys access to the EU market for Botswana's meat under the Lome agreement. This access depends on the benefits of the sales flowing to the people of Botswana and Government would have to take great care to ensure that the access was not prejudiced by the privatisation. Many parastatals, including BMC, have loans from aid donors which have been lent to Government and then on-lent to them. These agreements may have to be re-negotiated as part of the privatisation process.

Monopolies

71 A number of parastatals enjoy monopolies. In some cases, these monopolies are natural, for example railways and power. Others have been created, for example on meat


20

exports. Others fall between the two, for example telecommunications. In no case could the relevant parastatal be considered for privatisation without reform. For the BPC or Botswana Railways, continued public ownership is probably the best way forward, at least in the early stages of a privatisation programme. BMC and BTC are more suitable for privatisation but this would require a combination of liberalisation and regulation and the new regime must be in place before privatisation.

Performance issues

72 There are concerns over the performance of some parastatals. Air Botswana, which is in many ways among the most suitable candidates for privatisation, has a history of financial losses. Until there is evidence of improved results the airline will be difficult to sell at a satisfactory price. The sale programme for some parastatals must therefore begin with a performance improvement programme. In the case of Air Botswana, this will probably take the form of finding a strategic partner.

Selecting Sale Method

73 There are six main methods which we expect Botswana to use in any privatisation programme as follows:-

(a) Public issues.

(b) Trade sales.

(c) Asset sales.

(d) Employee buy outs.

(e) Joint ventures.

(f) Contracting out.

We discuss the approach to be adopted in each case below.

Public Issues

74 Public issues are most suitable for large companies with significant capital needs and a satisfactory profit record. In the course of our review we identified two parastatals which met these criteria and are therefore clearly suitable for public issues, BTC and BMC. We also consider that Air Botswana is most suitable for privatisation through this route, although it will need further restructuring and possibly a strategic investor as a partner before this can be accomplished. We discuss below the possible role of strategic investors and their potential impact on public issues in the context of joint ventures.

75 One of the great advantages of public issues is that they give the opportunity for achieving widespread ownership of the company in the hands of the general public, both by

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direct investment and through pension schemes. However, they are time consummg and demanding in terms of their documentation requirements.

76 Typical stages in a public issue are:-

~ (a) Valuation of the company.

(b) Restructuring the balance sheet.

(c) Deciding whether to sell the company in its entirety or a partial stake only.

(d) Preparation of a prospectus.

( e) Determination of the approach to marketing the public issue.

(f) Deciding the price and timing of the issue.

77 . Valuation of companies which are being considered for privatisation should generally be undertaken on the basis of their discounted cash flows. This is a lengthy and technically demanding task for complex companies such as BTC or BMC. For example, in the case of BTC the valuation must take into account such variables as the prospects for market growth, which are in tum linked to the growth of the national economy; the regulatory environment, particularly with regard to the degree of competition in the most profitable markets and licence provisions in such areas as service provision and network expansion obligations; and the choice of a discount rate, which should reflect the rate of return investors are likely to require on their investments, and will depend on business risk, regulatory risk and country risk. In the case of BMC, the valuation must look separately at the various different entities which make up the Commission which includes companies in South Africa, the UK, the Netherlands, Germany, Greece and the Cayman Islands as well as Botswana.

78 The restructuring of a company's balance sheet should aim to create a balance between debt and equity which is appropriate for the private sector. This may involve writing off some Government debt or injecting additional debt. Any change in the level of debt will of course be offset by an equal change in the likely proceeds of the sale of equity through privatisation. In taking its decision, Government will need to take into account the capacity of the Botswana Stock Market to absorb a new issue. If the level of debt is too low, the value of the company may be too great for the market to handle readily.

79 There are a number of factors which will influence the decision on whether to sell the company in its entirety or a partial stake only. They include:-

(a) The capacity of the Botswana Stock Market and its ability to absorb the issue in a single sale.

(b) The possibility of obtaining a better price for subsequent tranches of shares after the initial public offer has been completed and the shares have traded on the market for some time.


22

( c) The desire of Government to retain a residual influence over the company through a continuing equity stake. Government might continue to appoint one or more directors to the company. It might wish, by retaining a 26% stake, to be able to prevent any changes to the company's Memorandum and Articles of Association, which requires a majority of more than 75% of shareholders under Botswana company law.

( d) Any requirements for special protection for a company. This might be implemented through the creation of a "golden share", which will enable the Government to exercise certain powers under well defined circumstances. In other countries, such golden shares have, for example, been used to limit the level of foreign ownership of companies or the level of shareholding of any individual shareholder. The company is thereby protected against takeover.

80 In deciding whether it wishes to avail itself of the protection offered by retaining some stake in the company, the Government will have to recognise a trade off Investors may be put off by the perception that Government will interfere in the running of the company, to the detriment of the interests of shareholders. This will damage the price obtainable for the shares. It may be necessary for Government to accept limits on voting rights, Board participation or on the conditions for further share sales in order to attract investors. Voting rights might be limited to 15% of the equity regardless of the size of the stake. Government might agree to appoint no more than one or two directors. There might be a delay of two years before any further sale of Government shares.

81 Any restrictions on the participation of foreign investors in public offers, beyond those impos~d by exchange control regulations, would be certain to damage the price obtainable for shares. In view of the lack of liquidity in the market, it would also make any large offer significantly harder to market. We discuss the role of foreign and local investors in greater detail in the next section.

82 The prospectus for any public offer will have to be prepared in accordance with the rules of the Botswana Stock Market. These rules are acceptable to the international investment community. This document is the main written statement on which the marketing of the offer is based. It therefore has to be comprehensive and well produced. Specialist advisers will be required at this stage in such fields as stockbrokers and reporting accountants.

83 The issue will have to be marketed. There are a variety of potential buyers of the shares, including a number of foreign institutions and funds, local pension funds and private shareholders. Each group will require targeted publicity on the proposed issue. This may take the form of publicity in the media and selective presentations about the issue to groups of potential buyers. We discuss in a subsequent section of this report the possible ways of giving incentives to local citizens to invest in public issues.

84 Finally, a decision has to be taken on the price and timing of the issue. These details have to included in the prospectus and they are invariably the last items to be decided. The price has to be attractive enough to attract buyers, while ensuring that Government obtains a fair price for its investment. The issues will have to be timed to avoid other public issues, either under the privatisation programme or from private companies.


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85 Countries such as Zambia and Kenya are using their privatisation programmes as a major instrument for the development of local stock exchanges. Botswana has the opportunity to use its privatisation programme in the same way. We discuss the possible impact of the programme on investors, and hence on the stock market, in the next section of this report.

Trade sales

86 Trade sales are suitable for self contained business units, either complete enterprises or parts of enterprises, with short term profit records or uncertain prospects. The sale involves not just the business assets but also the financial assets and liabilities, the employees and the network of relationships with customers and suppliers. It would be a suitable approach if, for example, Air Botswana or Botswana Railways wished to dispose of their maintenance activities or for the sale of a portfolio of rented property by BHC. It could also be used for businesses which are suitable for employee buy outs if employees do not wish to bid or in order to provide competition for a bid from employees.

87 Trade sales follow the same general course as a public issues. They usually include a valuat~on and if necessary a balance sheet restructuring. However, it is most unlikely that Government would wish to retain a stake in a trade sale. The prospectus on the company does not have to follow a particular format although in practice potential buyers are likely to want much of the same information as investors on the Stock Market. Rather than setting a fixed price for the stock, the prospectus is sent to selected potential buyers as a means of soliciting from them offers and outline business plans for the future of the company. It should always be an objective to obtain more than one offer so as to ensure competition.

88 During the bidding process, Government officials will have to be available to answer questions about the company and the management and facilities of the company may have to open to inspection. It is generally best to be open with potential bid~ers as this is likely to increase their willingness to bid.

89 In order to obtain the best terms for the sale of the company, it is usually sensible to leave bidders with considerable flexibility over the terms on which they may bid. Some may offer cash. Others may offer deferred payment terms. There may be radical differences in their business plans. Their willingness to take over the work force may differ. It is vital that the prospectus is clear on any absolute requirements of Government from the sale process. ·

90 Once offers are received, Government has the difficult task of evaluating against one another what may be substantially different offers from the various bidders. This involves a combination of judicious assessment of the feasibility of the various plans and financial evaluation of the offers on a common basis, using discounted cash flows. There are generally negotiations with the preferred bidder to improve on poor or unacceptable aspects of the offer. Once these negotiations are complete, the successful bidder will wish to complete a due diligence exercise. This can lead to further negotiations. When these are complete, contracts are finalised and the sale takes place.

Asset sales

91 Asset sales are considerably simpler than trade sales in that the Government is simply offering to sell a particular asset and not an entire business. This method of sale is particularly


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suitable for the sale of assets where the activity currently undertaken using those assets is clearly not commercially viable and Government is withdrawing its financial support. The depots owned by the Botswana Agricultural Marketing Board could fall into this category.

92 Government may wish to obtain a valuation for the asset before offering it for sale but this is sometimes pointless. If the activity currently being undertaken with the asset is not viable then its commercial value is uncertain. The best way of valuing it is to find out what another potential user is prepared to pay for it. This can most easily be accomplished by offering it for sale.

93 The sale process may involve the preparation of an offer for sale document, detailing the asset and its condition. Alternatively, arrangements may be made to sell the asset by auction. The most appropriate approach is dependent on both the nature of the asset being sold and the likely sale proceeds. It is not worthwhile to go through an exhaustive tendering process for an asset which clearly has little value in view of its replacement cost and condition. Equally an asset which has captured the interest of a number of potential buyers will probably be sold for the best price through a tender process. Once again, potential bidders need to be offere~ access to the asset when considering their bids.

Employee buy outs

94 There seems to be considerable scope for employee buy outs (EBOs) in any privatisation programme in Botswana. This sale technique is suitable for any business with limited capital needs and a knowledgeable, committed management. Examples of possible businesses and assets which might be sold by this route include depots and peripheral assets owned by BAMB, fuel points and garages operated by CTO, the maintenance activities of the BHC and the maintenance depots of the DABS.

95 The essence of the process is for a group of employees, usually led by one or more senior managers, to form a company, subscribe for shares, and use the company as a vehicle to make an offer for the business which is being sold. The employees rarely have the capital required to purchase the business outright. Consequently, they must persuade other financiers to provide debt and equity funding. In order to do this, they will have to put forward a viable business plan for the future of the company. The viability of the business plan is greatly enhanced if there is a draft contract in place with the vendor, for the continuing provision of services after the EBO takes place. Thus a DABS depot would have a contract for maintenance of a group of named Government buildings. This would give potential lenders considerable assurance about the repayment of their loans from operational cash flow. The EBO team must negotiate the terms of purchase for the company with Government. This may take place as a sole negotiation or in competition with other offers for the business, for example from trade buyers.

96 There is very little precedent for such EBOs in Botswana. Managers in the public sector do not generally have an appreciation of the procedures and processes involved. The financial sector has little experience of providing funding. Neither the Government nor other institutions have tried to sell assets on such terms until now. They have not therefore considered the issues involved. Some managers have a perception that it is inappropriate for Government to sell national assets to a group of employees.


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97 Government will have to be proactive in promoting EBOs and we recommend that the Botswana Development Corporation (BDC) should be given this responsibility. The role needs to be undertaken by a commercial organisation so that funding is provided only to commercially viable projects. In discharging this role, BDC should undertake the following tasks:-

(a)

(b)

(c)

(d)

- (e)

(f)

(g)

(h)

To promote the concept of EBOs as a method of implementing the privatisation programme.

To provide training to managers who may be interested in implementing EBO transactions.

To evaluate EBO opportumties, including the business plans developed by managers, the quality of managers and the financing needs.

To provide debt and equity funding in support of EBO opportunities.

To introduce additional management support in cases where this is needed to make EBOs viable.

To introduce additional financial support for transactions where necessary, for example in funding property assets.

To monitor performance after the transaction, collect debt repayments and dividends and take any remedial action which may be required if the loans are not performing.

To sell equity in due course.

98 Government will need to make funding available to BDC in order to enable it to carry out this role. It should consider making such funds available on concessionary terms so that BDC is able to take above average risks in investing in EBOs. This could be part of Government's support to local participation in the programme.

Joint ventures

99 Joint ventures are not a method of privatisation in their own right but can provide a supporting mechanism for other sale techniques in cases where international expertise is needed to support the management of the business. Possible examples are in running telecommunications and the national airline. In putting forward the possibility of a joint ventures for these parastatals, we are in no sense criticising the current management. Rather it is a recognition of world wide trends in civil aviation and telecommunications. Both industries are increasingly dominated by global companies and alliances of companies. Any Botswana based operator in these industries is bound to need strong international links if it is to prosper in the next millennium.

100 Joint ventures are commonly carried out in parallel with public issues. The size and price of the strategic investor's stake have to be planned into the overall sale process. There


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can be considerable synergy between the sale of a stake to a strategic investor and the public issue. The strategic investor will be more willing to become involved if there is a clear plan for Government to divest from the parastatal and withdraw from any involvement with its management. The public issue will in turn be easier because the strategic investor is seen to have purchased a stake at a particular price and this provides justification for the pnce, typically somewhat lower, to be paid by less sophisticated investors in the public issue.

Contracting out

101 There are many services currently undertaken in house by parastatals and Government departments which could potentially be contracted out. Some contracting out has already taken place in many parastatals and departments. For example:-

(a) BPC has contracted much of its security and construction activities.

(b) Botswana Railways has contracted out catering.

- (c) The CTO contracts out specialist vehicle repair and maintenance jobs.

( d) The Government Printer contracts out high quality printing jobs.

(e)

(f)

(g)

(h)

DABS contracts out most of its design work and some of its maintenance requirements.

GCC has contracted out refuse collection in part of Gaborone.

BHC contracts out specialist repair and maintenance jobs.

-The Department of Supply contracts out the cutting, making and trimming of uniforms.

102 There are many more opportunities for contracting out throughout Government and the parastatal sector which have not yet been exploited. For organisations such as the CTO, DABS and the BHC, virtually all of their work could be carried out by the private sector on contract. There is therefore substantial opportunity to expand the use of contracting out if Government wishes to do so.

103 Any decision to contract out a service should be based on an assessment of the costs and quality of the service likely to be provided by contracting out compared with in house provision. In the first instance, Government faces a fundamental policy decision on the extent to which it is willing to require parastatals, departments and councils to evaluate contracting out as a policy. In our opinion it is not appropriate to lay any general requirements on parastatals. They may be encouraged to consider contracting out some of their functions, for example through publicity, but the decisions should rest with the parastatals as part of their operational decision making. There might be exceptions to this general rule where contracting out was an integral part of an overall privatisation plan, for example if Government wished to sell off BHC but felt that maintenance activities had first to be contracted out before the transaction could be completed.

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104 For Government departments and councils, Government is in a position to demand some assessment of contracting out. Departments and councils could be required to seek private sector quotes for particular activities and would be bound to accept a private sector quote if it were cheaper for the same standard of work. In order to carry out this assessment properly, management accounting and costing systems are needed in Government departments and councils. We set out above recommendations on this topic.

105 Contracting out can take a variety of different forms. At the simplest level, the CTO may take a vehicle to a local garage for a single repair job. In oth~r cases there are long term contracts. The contract for the collection of refuse in Gaborone is for three years and an even longer contract would be needed if the Council were not itself supplying the vehicles at a nominal charge. There is no simple rule to guide decisions on the length of contract to offer. The decision must be taken on a case by case basis. However, in general terms longer and more comprehensive contracts are likely to attract keener prices from suppliers and to encourage investment where necessary in order to meet needs most effectively. Thus the Government Printer is likely to obtain much better deals from the private sector by offering long term contracts for volumes of business than by contracting out odd jobs.

106 In some cases, contracting out may take the form of considering a totally different supply option. For instance, at present the Department of Supply buys photocopiers and services them using in house staff It would be possible to consider renting or leasing with a maintenance contract from the supplier as an alternative.

107 In carrying forward the initiative to increase contracting out, we consider that there are two particularly important roles to be played by Government as follows:-

(a) To encourage the sharing of experience across the public and private sectors.

(b)

Thus initiafr":'_es which are already in progress at DABS to contract out some maintenance work could have an application at BHC. Experience of contracting out vehicle repairs by the CTO could help parastatals and councils which themselves run small vehicle workshops. The experience ofDebswana in contracting out services at its mines could be exploited when departments, councils and parastatals wish to contract out similar services. Gaborone City Council's experience in contracting out refuse collection and the running of its beer hall could be shared with other councils. Private sector advice could be sought when drawing up procurement specifications, to ensure that they provided a viable basis for bidding. In all these areas, Government can take a proactive role.

To work to improve tendering procedures. Contracting out of services always carries with it the risk of corruption and it is vital that procedures are both open and seen to be open. Refining the tendering procedures in the light of experience ought also to lead to increased value for money from Government spending. Value for money auditing techniques should also be introduced to assess whether progress is being made.


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III Privatisation Options and their Consequences

Background

108 Different privatisation options have different implications for different stakeholders. We consider the following categories of stakeholders:-

(a) Government.

(b) Company management.

(c) Employees.

(d) Customers.

(e) Investors.

- (f) Special interest groups.

109 Some of them are particularly affected by the form that the privatisation takes and we draw attention to this where relevant.

Government

110 A privatisation programme leads, over time, to a significant change in the role of Government. The best way of expressing this is in the transition from a situation where Government owns and runs a range of activities to one where it regulates and expedites those same activities. We described in the previous section a number of proposals for change in the relationship between parastatals and this will be one of the impacts of the programme.

111 A number of the parastatals which we consider suitable for privatisation enjoy monopolies or dominant market positions at present. In some cases, for example telecommunications and meat, the monopoly has statutory force and the parastatal enjoys regulatory powers. It is clearly inappropriate to privatise a statutory monopoly and we recommend removing such regulatory powers into another entity before privatisation takes place.

112 The Ministry of Agriculture already has adequate powers to regulate the meat industry, under separate legislation, and hence the regulatory powers enjoyed by the BMC could simply be removed. This would still leave BMC with a dominant position in the industry and Government would need to consider additional protection for farmers until it was clear that there was a competitive private sector market.

113 In the case of telecommunications, a new regulatory structure is already being put in place, through a bill which has been presented to Parliament recently. The objective at this stage is to permit competition from private operators to BTC while the .latter stays in public ownership. However, it would be straightforward to develop the new structure so as to move BTC into the private sector with a licence from the regulator in the same way as other private


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service providers. This regulatory structure is likely to be required in the medium to long term, recognising the difficulty of introducing full competition and the continuing public interest in the coverage of the telecommunications service network. Similar regulatory arrangements would be required if other natural monopolies moved into the private sector, such as the Botswana Power Corporation or Botswana Railways, although such privatisations would be difficult and we do not recommend them at an early stage in a privatisation programme.

114 However, there is a broader issue at stake here. Botswana does not have any fair trading legislation at present. The Control of Goods, Prices and Other Charges Act could be used to control prices in the event of flagrant exploitation of consumers. But it is not-a fair trading law. In a small market such as Botswana, there is a risk that companies may achieve a dominant market position which enables them to behave unfairly towards their customers or suppliers. An increasing reliance by Government on the private sector must increase the risk that, in some fields, companies will attain a dominant position.

115 Botswana already has one important protection against anti competitive behaviour by being an open economy, subject to import competition. However, in due course consideration should. be given to introducing fair trading legislation which might, for example, permit the investigation of mergers which appeared against the public interest or apparent anti competitive behaviour. The Government of Kenya has recently created a Monopolies Commission to investigate mergers as a safeguard on consumer interests.

116 We explained in the previous section the possible impact of increased contracting out. It is vital to have proper procedures in place for contracting out of services to ensure that contracts are let fairly and not designed to favour certain firms. Government will have to ensure that proper tendering and audit (including value for-money audit) procedures are in place.

117 The effect of a privatisation programme should be, over time, to increase the value for money obtained by public spending. It should also lead to reductions in the size of the civil service as tasks are moved into the private sector and the sponsorship role in relation to parastatals disappears. However, the process will be gradual.

118 The final area where there will be a change in the role of Government is in its capacity as a provider of investment capital. In the long term, this role should shift to private investors and the Botswana Stock Market. However, this transition will take some years to achieve. Government is such a major supplier of capital at the moment that it will not be able to withdraw from this role in the short term. Thus parastatals which are privatised will have to be sold with a stock of Government debt. There is a precedent for this with First National Bank, which holds some Government debt.

Company Management

119 The managers of parastatals typically react with initial caution to a privatisation programme. They will understand from the outset that privatisation may mean substantial change for them. Until they have a clear idea of what is likely to happen to their company and to them personally, some caution is understandable. It is therefore important to inform


30

company managers at the earliest possible stage about the Government's plans, both in general terms and as they affect particular enterprises.

120 As managers' understanding grows, their reactions are likely to change. Some, especially those who work in viable enterprises which have good prospects of success in the private sector, will come to welcome the change. Privatisation offers the opportunity to escape from Government control. They may be able to obtain shares or share options on preferential terms as part of the sale process. Privatisation may offer the scope for improving salaries and other terms and conditions. They may even be able to purchase the company through an employee buy out (EBO).

121 Other managers will feel less enthusiastic. They may be working in a parastatal that has little future without Government patronage. Others may be too set in their ways to adapt to the change or too close to retirement to be interested. There is a risk of obstruction to the privatisation from sl1ch managers, which Government must act to circumvent. There are a number of ways of achieving this which include:-

. (a)

(b)

(c)

(d)

Employees

Education on EB Os, so that managers can evaluate the possibility of becoming involved in purchasing the enterprise or part of it

Attractive terms for early retirement or redundancy for managers who do not wish to continue in post.

Term contracts with bonuses to keep managers in place in parastatals which may contract or close as part of the programme.

Job switches to more responsible positions for good quality managers who are committed to th_e success of the programme.

122 Employees often have the same initial reactions to privatisation as managers. There are some supporters of privatisation, but many staff feel concern over the risk of job losses. These fears are well justified in cases where Government is withdrawing from socially oriented activities which are not commercially viable as a result of the privatisation programme. Even in the case of parastatals which are engaged in fundamentally sound businesses, there is some risk of short term job losses as commercial pressures become more significant factors in decision making. There have already been job losses at several parastatals including Botswana Railways, Air Botswana and the NDB. There is likely to be scope for reductions in numbers in other parastatals as well.

123 We stress that these possible short term job losses do not indicate that there will be an overall loss of employment. There is no possibility of calculating in advance the medium term employment effects of a privatisation programme. Job losses if, for example, a service formerly provided in Government is contracted out have to be balanced against the employment gains in the private sector and the private sector may carry out the tasks involved in a different way which make the impact difficult to measure. Similar considerations apply to such areas as the introduction of competition (for example to telecommunications). Further


31

complications arise because the private sector may introduce new services which were simply not available before and would not have been introduced in the public sector. Finally, the changed focus of public expenditure will create job opportunities elsewhere in the economy. It is impossible to measure the impact if, for example, savings from reducing subsidies to parastatals are devoted to higher spending on social services or low cost housing.

124 However, there must be a considerable risk of direct job losses from parastatals and departments if privatisation takes place. For this reason, we consider that the Government must consult unions .and employee representatives at an early stage, both about the privatisation programme and in relation to individual transactions. While it may not be possible to resolve all doubts or overcome all opposition, we consider that there are three things which Government should offer to workers as part of the overall programme as follows:-

(a) Due consideration for the interests of employees in the handling of the privatisation transaction.

(b) A fair redundancy scheme.

(c) Training to develop skills for staff made redundant.

125 The consideration of the interests of staff in any particular transaction will depend on the nature of the transaction. In some cases it may take the form of support for an EBO, with Government providing capital. In the case of trade sales or asset sales to private companies there may be encouragement to the purchaser to take on former employees. For public offers there may be incentives for staff to subscribe for shares on preferential terms. It is not possible to give a complete set of guidelines but in many transactions there will be opportunities to favour staff in some way. There should be explicit mechanisms in place for consulting staff when planning privatisation transactions. We propose in Section VII of this report that reference groups should be established in ministries to manage each privatisation transaction. One of the roles of these groups will be to consult and inform employees.

126 A fair redundancy scheme is indispensable. The legal requirements for retrenchment are set out in the Employment Act (as promulgated on 14 December 1984) and the Employment Amendment Act (effective 9 October 1992). This Act sets out the following minimum requirements:-

(a)

(b)

(c)

notice of the intention to retrench should be given to the Commissioner of Labour and to every employee to be or likely to be directly affected by the reduction;

all employees should be provided with at least one month's written notice of retrenchment, which increases to six weeks notice after ten years of service;

severance benefits should be paid to employees with more than five years continuous service (of one day basic pay for each of the first 60 completed months and two days for each additional month). Years served before December 1984 are excluded;


(d)

(e)

(f)

32

where an employee is covered by a company pension, provident fund or gratuity scheme, no severance benefits need to be paid;

accumulated leave should be paid; and

where practical, the principle of first-in-last-out should apply m selecting employees for retrenchment.

127 These terms are far from generous and in practice most parastatals which have made staff redundant in recent years, such as Air Botswana, Botswana Railways and the NDB, haveoffered considerably more generous terms. In our opinion, Government should formulate standard guidelines for parastatals to follow in making staff redundant before privatisation. In the event that parastatals are sold by public issues or trade sales then the companies should be bound by the redundancy guidelines for a period of say two years after the sale.

-

128 The terms need not be identical for each parastatal. Final decisions about the details have to be taken in the light of factors such as the state of the enterprise's pension scheme, the appropriateness of first in first out as an approach in view of the calibre of the work force, the privatisation approach being adopted and other factors. However, the guidelines should lay down a general approach.

129 Parastatals have generally tried to train staff to realise their full potential and for alternative positions in cases where their existing jobs are disappearing. This is commendable and we expect it to continue. As part of the privatisation programme, consideration should be given to offering more general training, particularly to unskilled workers, in entrepreneurship skills. Such training would be designed to help staff who were leaving parastatals to identify and exploit opportunities for self employment in the private sector.

Customers

130 Customers should benefit unequivocally from privatisation because services will become more customer focused rather than serving the interests of Government. A service which becomes more customer focused almost invariably improves in quality. However, there are likely to be protests from customers for services which are not viable and therefore likely to disappear as a result of privatisation. We discuss this further in the context of special interest groups.

Investors

131 The privatisation programme will create new equity investment and lending opportunities. The opportunities to invest in equities will focus on the Botswana Stock Market. At present there are twelve companies listed on the market. Many of them are subsidiaries of transnational and South African corporations such as Barclays Bank, Standard Chartered Bank, First National Bank, Pep and Engen. The total capitalisation of the market is P 1.2 billion, but about 60% of this total is not traded, often because it is held by foreign parents. During 1995, trading was equivalent to about 8% of market capitalisation. This is low by international standards but rising rapidly. The corresponding figure for 1990 was about 1 %. However, liquidity in the Botswana market remains tight.


33

132 Foreign investors holding more than 5% of the equity in a local company are classified as direct investors and any international capital transactions require Bank of Botswana approval. Foreign funds are also taking an interest in the Botswana market. An investor with a stake of less than 5% in a company's equity is classified as a portfolio investor and is not subject to exchange control restrictions. The shares which are not held by direct investors are defined as the free float. Foreign portfolio investors may not own more than 49% of a company's free float between them.

133 The other major investors on the stock market are the local life and pension funds. These funds have about P600 million invested. About half of it is invested outside Botswana and the balance is divided between equity and property investments in Botswana. The total investment of the funds in the stock market is just over P200 million. There are also a few private investors. However, there is little trading by private investors and their investment in new issues is small. When BDC divested some of its assets on the stock market, it tried to promote local private interest in the share sale but only attracted about P6 million from this source.

134 . The shareholders funds in major parastatals which may be suitable for privatisation amount to Pl47 million in the BMC and P226 million in Botswana Telecommunications Corporation. These figures may be regarded as first indications of the value of these companies. The potential scale of their public issues is such that they could be the largest ever share offers in Botswana. The largest single sale to date was the P30 million issue by Pep. A larger issue could probably be handled now, reflecting greater international interest in the Botswana market.

~

135 Public issues on the scale of BMC and BTC would therefore have a major impact on the investment climate in Botswana. If they are handled well they offer the opportunity to create a virtuous circle for the local market in which the increased availability of stocks from the privatisation programme creates greater investor interest, greater liquidity, keener prices and hence attracts further public issues. However, in order to achieve this the offers will have to be targeted at all the categories of investor, ie local private investors, local pension and life funds and international investors.

136 The programme requires a step change in the level of interest from local private investors. We discuss in the next section a number of incentives to encourage such investment such as special financial incentives and the creation of citizen trust funds. For the local funds, lengthy notice of the issues will be required in order to ensure that they have time to build up funds. For foreign funds, these transactions will offer a further opportunity to become involved in the Botswana market.

13 7 Equity is not the only possible source of finance for the privatisation programme. Loan funding is also feasible. However, long term loans are not widely available in Botswana. Banks generally prefer to make short term loans. The only debt traded on the stock market is Bank of Botswana certificates. In the past, the long term funding of parastatals has taken the form of loans from the Public Debt Service Fund (PDSF). As part of its privatisation programme it would be reasonable for Government to seek repayment of these loans, which the borrowers could refinance in the private sector. However, in practice it would be difficult for parastatals to find alternative sources oflong term finance in the private sector immediately.

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13 8 We therefore suggest that parastatals should generally be sold into the private sector with their indebtedness to Government maintained. Government may wish to ensure that its lending is all put on a commercial footing as part of the restructuring of companies' finances. But it should not aim to withdraw. The level of debt funding should be determined on the basis of an appropriate debt to equity ratio for each company. There is already precedent for this approach in the case of First National Bank, which has retained some PDSF funding following the purchase of FSC from the public sector owners.

139 Government loans may also be necessary to assure other parts of the programme. For example, we have recommended that Government funding might be availabte for EBOs. We also consider that the privatisation of BHC's housing finance operations could only be accomplished if the acquirers were able to take over some PDSF debt as well as the loans to purchasers so as to accommodate the loan portfolio on their balance sheet. Asset sales throughout the programme may sometimes have to be made on deferred payment terms. The Government should accept this as part of the requirements of implementing a privatisation programme and a necessary short term measure while local capital markets develop and deepen.

Special interest groups

140 Any privatisation programme is liable to run into obstruction from special interest groups, who are particular beneficiaries of the tasks which parastatals currently undertake and of the way in which they are managed. They may include groups of staff who are engaged on tasks which are clearly of no commercial value or beneficiaries of a service which is provided on a social basis. They fall into the other categories described above but, because there is likely to be co-ordinated opposition to the privatisation programme from such groups, it is vital to consider them explicitly.

141 In some cases, opposition can be neutralised by other measures of support which offset the losses arising from privatisation. For example, privatisation of BAMB could be accompanied by announcement of other support measures for grain farmers. This may make the privatisation more palatable. But this will not always be possible or necessarily effective.

142 Government must accept that, in some cases, these interest groups will attempt to discredit the privatisation programme as a whole and in particular the aspects that affect them. It is vital for Government and major opinion formers to tackle the adverse publicity which these groups generate head on, for example by drawing attention to the public expenditure implications of the current policy and to the fact that opposition is motivated by personal interest and not by considerations of principle. In any transaction there is there possibility that such interest groups will try to prevent the sale taking place and the identification and, if possible, winning over of such groups is a vital part of planning the sale.

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35

IV Promoting the Privatisation Programme

143 In this section of our report, we consider various steps which might be taken to promote citizen interest in and support for the privatisation programme. These steps can be divided into two categories:-

(a) Publicity techniques to generate interest m and a positive attitude to the programme.

(b) Financial incentives designed to encourage citizen participation in particular sales.

Publicity Techniques

144 Publicity techniques need to cover everybody in Botswana from important opinion formers such as politicians, senior civil servants and the senior managers in parastatals to the general public in both urban and rural areas and professional specialists such as bankers, lawyers and accountants who will be heavily affected by the transactions. No single approach can address the varied needs of all these groups. Furthermore the number of people who need to absorb relevant publicity and the wide ranging scope of privatisation as a policy means that many publicity activities will have to be repeated and reinforced as the programme proceeds. Finally, the nature of the coverage needs to evolve as the programme progresses, from general education about the programme as a whole in the early stages to more focused publicity related to particular transactions as enterprises begin to move into the private sector.

145 We have identified the following possible means of publicising the programme:-

(a) Workshops on the plans for privatisation in Botswana.

(b) Educational courses on particular aspects of privatisation.

(c) Speeches by politicians and other opinion formers.

(d) Television and radio.

(e) Newspaper and magazine articles.

(f) Activities organised by professional institutions.

(g) Special activities for rural areas.

146 As part of this study BOCCIM organised a workshop on privatisation which was attended by a number of parastatal managers, senior civil servants and representatives of the private sector. This workshop introduced participants to privatisation concepts and the likely implications of a privatisation programme in Botswana. We understand that the participants found it valuable. However, inevitably only a small percentage of those who might have benefited were able to attend. We therefore suggest that similar workshops should be held so that further opinion formers may benefit from an initial understanding of privatisation and how


36

it might affect Botswana. The Botswana National Productivity Centre, because of its standing with Government, could be asked to organise such events. The material used at this workshop could be repeated, suitably updated to take account of subsequent events. Further similar workshops could be held as the programme progresses.

147 BOCCIM has already taken a lead in organising privatisation trnining. A number of local managers have attended courses in the United States, funded by USAID. A further course has recently been held in Gaborone. Such courses provide training in the skills required for privatisation, based on international case studies. This has the benefit of first class training materials but has the drawback that the material is generaily not specific to the local situation. Participants have to translate what they have learnt into practical applications for the local market. As the privatisation programme progresses further needs may be identified for specialist training, for example in employee buy outs in which the local experience is minimal.

148 Privatisation is a potential source of material for speeches by politicians and other opinion formers. Such speeches serve two purposes. First, they demonstrate that there is political support for the programme. Second, they are a means of promoting the programme to the general public through reporting of the speeches in the media.

149 Television and radio are widely enjoyed in Botswana's main towns. Some 45% of Botswana's population live in urban areas. These media can be encouraged to broadcast speeches and to cover events connected with the privatisation programme. It may also be possible to have special programmes prepared on the subject by local journalists.

150 Similar considerations _apply to the print media. There is a wealth of written material available internationally about privatisation and the local press could be encouraged to publish such material, suitably adapted for the local market. -Local firms of accountants, consultants or banks may well be able to supply such articles to the press.

151 Privatisation often has particular implications for professional groups such as -accountants, bankers and lawyers. The relevant professional associations should be encouraged to make privatisation a focus of their meetings and training activities.

152 Rural areas are often the most difficult to reach with any publicity programme. Local politicians can have some impact, but the media and public debate stimulated by them are less likely to penetrate to rural areas than to other parts of the country. There are imaginative approaches to such areas being developed elsewhere in the world. For example, a play on privatisation, which is acted out in local languages, is currently highly popular in Uganda where it has been produced widely.

153 In devising publicity, there are three particular aspects which we consider of importance:-

(a) Government must ensure that it adopts an open approach to information, is accessible to the media and actively promotes seminars and workshops on privatisation. The Government will inevitably be the main potential source of information on privatisation, particularly in the early stages.


37

(b) Botswana is fortunate in that its privatisation programme can be informed by the many similar programmes which have been put into effect elsewhere in the world and especially in Africa. It should therefore aim to draw on material available from other Governments and their privatisation agencies.

( c) Positive publicity will help to generate political support for the programme. But it will also translate into other, financial benefits. Sales can proceed more rapidly and if people believe in the programme they are more likely to buy shares and hence better prices can be obtained.

Financial Incentives

154 The publicity proposals set out above will go some way to encourage local support for and involvement in the privatisation programme. However, in order to be fully effective, the programme also needs to incorporate financial incentives to encourage the involvement of citizens. The arrangements will differ depending on the approach adopted to the sale. We described in section II six possible approaches to privatisation, namely public issues, trade sales, asset sales, employee buy outs, joint ventures and contracting out.

155 Public issues offer particular opportunities to give incentives to small local buyers of shares. The following options should be considered:-

(a) Ensuring a low minimum subscription amount for share purchases in initial public offers so that the public are able to become shareholders with relatively small amounts of money.

(b)

(c)

(d)

(e)

(f)

(g)

Staging payments so that buyers do not pay the full purchase price at once but in two or three instalments over a period of a year or so.

Offering a share bonus issue to shareholders who hold on to shares for a specified period, for example an extra 10% if the shares are held by the purchaser for three years. This will encourage purchasers to take a long term view of share ownership.

Giving a discount to small scale local buyers compared to the price at which institutions and foreign buyers obtain shares.

Ensuring that there are special incentives and terms to buy shares for employees of the company which is being sold. For example they may be enabled to buy shares through salary deductions or given a further discount on the price payable by other citizens.

Ensuring, in the event of over subscription for shares, that small local buyers and employees receive priority over foreign and institutional buyers. This can be achieved by creating different classes of subscribers for shares.

Creating a trust fund to hold a number of shares from the initial public offer on behalf of citizens. The shares could be sold to citizens subsequently at prices


(h)

38

determined by the current trading price on the stock market. This would enable citizens to buy shares at a later date, as and when they had funds available, without having to go to the stock market. Procedures for sale would have to be devised but might, for example, involve applying through the Post Office.

Selling the shares in tranches so that, for example, 51 % of the shares might be sold through the initial public offer and the remainder three or four years later. Citizens will then have several opportunities to purchase shares in public offers.

156 A number of privatisation programmes in Eastern Europe have used voucher schemes to distribute shares to citizens. The details of these schemes vary but the essential principle is that vouchers are distributed to all citizens who are then entitled to exchange them for shares in companies which are being privatised. The circumstances in Eastern Europe which made such distributions necessary are very different from those in Botswana. They included virtually total public ownership of agricultural, industrial and commercial assets, the absence of stock markets and unreliable financial data on companies.

157 . The only way of progressing a privatisation programme rapidly in such conditions was to adopt voucher schemes both to move companies into the private sector and to create capital markets. Botswana does not suffer from these problems. Furthermore, any voucher scheme would be far more difficult to implement in Botswana than in Eastern Europe. The fairness of these schemes depends on very high levels of literacy and participation in the cash economy. Neither of these conditions applies in Botswana. The risks that illiterate people or people engaged in subsistence agriculture would be duped out of vouchers or unable to use them effectively are very high. We do not therefore consider that voucher schemes should be considered for Botswana.

15 8 Trade sales and asset sales are essentially similar to one another in that they both involve selling businesses or parts of businesses to a person or an entity which is already in the private sector. As a measure of assistance, citizens and citizen owned business could be given preference of, say, 5% in evaluating prices offered by them compared to prices offered by foreigners. There is a risk that such preferences might put foreign bidders off participating in privatisation sales, but this should not happen provided that the extent of any preference is kept small and made public in advance of any offer for sale. At present it is Government policy that no preference should be shown as between local and foreign bidders.

159 Access to credit may also sometimes be a problem for local business. Government can assist here by showing a willingness to accept staged payments for assets and companies sold through the privatisation programme. This will enable citizen owned businesses to purchase assets which they could not otherwise afford. We stress however that such offers should only be accepted if they are made by competent management who have a viable business plan and will be able to make required payments from their operational cash flow. Deferred payment terms have to be evaluated far more carefully than cash offers because of the associated credit risk.

160 Employee buy outs (EBOs) could also be facilitated by financial support from Government. One of the major obstacles to EBOs is the availability of finance for the deals. Government could facilitate such sales by accepting deferred purchase terms when assets and businesses are sold to employees and being willing to remain as a minority shareholder in those


39

businesses if necessary. However the same considerations of credit and risk evaluation apply as when considering deferred payment terms from other bidders.

161 Joint ventures are likely to combine a foreign investor with some form of local sale method such as a public offer or trade sale. The same considerations apply as for these types of saleo

162 Contracting out can be undertaken in a way which offers a financial advantage to local business in the same way as for asset and trade sales. A 5% preference could be permitted on bids from citizens and citizen owned businesses. In addition, those letting contracts should ensure that the workload of any proposed contract is within the capacity of locally owned businesses.

163 We noted one interesting example of contracting out in Gaborone City Council which may have wider application and encourage grass roots interest in the privatisation programme. Refuse collection has been contracted out to a local company, Daisy Loo. In one area,- Village Development Committees (VDCs) are acting as sub contractors to Daisy Loo by collecting rubbish from houses and delivering to central skip bins, from which it is collected by Daisy Loo. This policy has enabled the VDCs to earn some income. It is a policy which could be used more widely, both for refuse collection and for other services such as maintenance of storm drains and children's playgrounds. Approaches which created employment opportunities at grass roots level in this way may help to popularise privatisation as a policy and could be encouraged by Government.

164 Because of the circumstances of particular sales, these incentives may not always be feasible or desirable. It is therefore not possible for Government to give a blanket commitment that it will give financial incentives for local purchasers. However, a general policy commitment to at least some of the proposals set out above could be valuable in attracting public support to the privatisation programme and thereby ensuring its success.


40

v Scheduling the Privatisation Programme

Background

165 In order to be effective, the privatisation programme must proceed incrementally. Because the potential scope of the programme is so vast, its implementation will inevitably be prolonged. The programme of privatisation in the UK has been in progress for almost twenty years and, while the main publicly owned assets have now been sold, the approach continues to exercise a significant influence over decision taking. Although the programme for Botswana need not be so long drawn out, it will inevitably take many years to complete the sale programme.

166 In the course of this assignment, we have looked at only a sample of enterprises which might be covered by the programme. More detailed review of all the entities which might be affected by the programme would be needed in order to devise a complete phased implementation plan. The two main factors which should influence the plan are:-

· (a) Recognising all the capacity constraints which confront the programme.

(b) Identifying the areas which should receive primary focus.

Capacity Constraints

167 Capacity constraints can take a variety of forms. At present there is no central capacity in Government to carry out privatisation. We develop proposals in a subsequent section of this report to set up a privatisation unit in the Ministry of Finance and Development Planning to help to ease this constraint. However, the unit will be able to progress only a limited number of transactions at any one time.

168 There are similar human resources constraints in other organisations which may be affected by the programme. Sponsoring ministries will not be able to progress privatisation in all their parastatals and departments at once. There are a variety of steps required to achieve privatisation in many organisations and they ha1..ve to be ordered and prioritised.

J

169 There are also market constraints. P~~es will have to be phased in order to allow for the limited absorptive capacity of the stock market. The BDC, which we have proposed should promote EBOs, will only be able to handle a few transactions at once. This in turn implies that the programme should aim to promote a range of privatisation candidates which will use different sale options.

Areas of Focus

170 An across the board approach which attempts to achieve everything at once is therefore most unlikely to be successful. Rather the programme has to be focused. In the first instance we consider that the main focus should be on:-.

(a) Achieving early visible success.


(b)

(c)

41

Identifying and taking forward those areas where the programme is likely to yield the greatest benefits.

Resolving overall policy issues which will affect the programme.

( d) Identifying areas which should be left outside the scope of the initial programme.

171 A few early successes at selling parastatals are vital to give initial credibility to the privatisation programme. Public offers and employee buy outs cannot provide these early sales since these privatisation methods are time consuming. The simplest way of making a sale is through a trade sale or asset sale. Government therefore needs to agree on some assets which are suitable for sale by this method and put them on the market.

172 However, it would be wrong to focus only on assets which can be sold quickly. Otherwise the programme will quickly come to a standstill again and may lose credibility as a result. It is vital at the same time to be bringing forward some longer term possibilities. These shoul~ be in the areas which are likely to offer the most significant long term benefits. Thus, although it will take some time to bring to fruition, there should be an effort to develop at least one public issue.

173 There are a number of policy issues which merit early consideration as part of a privatisation programme. Some of them are the ministry level decisions about those areas of activity which can now be left to market forces. But they also include a number of global policy issues which affect a number of ministries and parastatals. Examples are the policy of the public sector on providing housing for staff, the promotion of employee buy outs and the extent to which Government is willing to impose its privatisation policy on local councils.

174 Finally, the privatisation programme should rule out of consideration in the first instance those entities for which there is minimal prospect of achieving short term success. These include natural monopolies and areas where there will be low benefits from privatisation in the short term because of a lack of buyer interest.

Privatisation Plan

175 Once the Government has taken its policy decisions and undertaken a more thorough review of the potential for privatisation in all its parastatals, councils and departments, it should prepare and publish a privatisation White Paper. The White Paper should aim to present policy proposals on privatisation and the steps which Government is taking in pursuit of these policies. It should identify where possible the entities which will be affected by the programme, the timing of change and the priorities for action. It should state which parastatals are subject to immediate action and where action is being deferred. Where decisions on particular transactions have been taken, details should be included. The publication of this plan will help to generate publicity for the programme and create a climate of greater certainty for all those who may be affected by it.

176 However, the White Paper cannot and should not include complete proposals on the transactions which will make up the programme and the way in which they will be

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implemented. The transactions arrangements will be developed in detail in the light of the overall policy and therefore there must be some delay before the relevant decisions can be made public. We therefore recommend that the White Paper should be followed by a privatisation plan and timetable which has a greater focus on transactions. The plan might be published six months after the White Paper. It should be regularly updated and revised versions can be published every year or so both to report on progress against the previous plan and to indicate the future direction of the programme.

177 Any proposals on privatisation planning which we put forward can only be tentative. Our coverage of entities which might be covered by the programme was only partial, the priorities may well be different by the time Government is prepared to commit itself to a privatisation programme and the policy decisions are in any event for Government to take. However, on the evidence from the entities which we covered and at the time when we prepared this report, we consider that the priorities should include:-

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

Deferring until the medium to long term any substantive actions at the BPC, Botswana Railways and the l\.1FDP's Accounting Unit, where there is minimal scope for privatisation in the short term. While there are measures of privatisation which can be taken in these organisations, they offer less potential than the other entities covered by this study

Explicitly deferring action on BTC and the Department of Supply. Action on BTC should be deferred until the new regulatory legislation has been passed and a regulator appointed so that the regulator is involved in the privatisation planning. However, once this has happened, BTC's privatisation could be a very high priority. Action on the Department of Supply should be deferred until its new computer system is in place, but there should be pressure to complete installation of this system quickly.

Ensuring that there are at least some quick asset sales. An accelerated sales programme for BHC housing could meet this need.

Announcing at least one planned public issue. BMC appears to be the best candidate at present. However, by the time the relevant policy decisions on privatisation have been taken by Government, BTC might appear an equal or better candidate since the telecommunications regulator should be in post within a few months.

Moving forward on the introduction of commercial financial systems and charging arrangements for the CTO and the DPPS.

Carrying out some contracting out of maintenance at DABS ~n a pilot basis to evaluate procedures and assess cost effectiveness.

A rapid search for a strategic partner for Air Botswana.

Policy announcements on clearly non viable parastatals such as BAMB and the BSB and the extent of continuing needs for public intervention in their activity areas.

/


43

VI The Cost and Revenue Implications for Government

Evaluating Financial Impacts

178 In order to carry out a full evaluation of the cost and revenue implications of a privatisation programme it is necessary to carry out a number of stages as follows:-

(a) Determine the cost and revenue implications of current arrangement~.

(b) Evaluate the impact of proposed policy changes.

(c) Estimate the likely revenue from the privatisation transaction.

(d) Evaluate the impact of privatisation on performance.

( e) Assess the likely tax impact of the new arrangements.

None of these tasks is at all straightforward in practice.

179 The cost and revenue impacts of current arrangements are complex. Funds flow between Government and the parastatals in a number of ways. There are equity payments, loans, capital grants and subsidies. In some cases the description of the payment is not a good guide to its nature. For instance, BAMB receives loans which it has no prospect of repaying to cover the costs of its operations. These loans would be better described as subventions. Equity capital is often not expected to be rewarded and hence is better described as a capital grant, for example as in the case ofBHC.

180 The evaluation of the impact of policy change depends on the chosen nature of the change. For example, Government might decide to dispose of BSB but encourage rural savings in other ways. The financial impact of the new policy would have to be taken into account.

181 The amount of revenue from a privatisation transaction also depends on policy decisions. The BMC has no owner. The proceeds for Government will depend on how the equity is allocated between Government, cattle farmers and other possible beneficiaries. Government may decide to give big discounts on public offers to citizen share buyers, thus depressing revenue. The value of the BTC will be heavily influenced by the regulatory regime which Government puts in place.

182 Revenue also depends on the value of the company or asset sold. The accounts of the enterprises only enable us to assess book values and market values could be higher or lower. There will also be transactions costs incurred in making the sale, for example to pay for the services of advisers or underwriters, which will affect the net revenue.

183 Privatisation could have a significant impact on performance. The introduction of charging by the CTO, the commercialisation of the Government stores, the contracting out of maintenance by DABS or any other change could improve performance. The outcome is likely

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to be a reduction in public spending but the scale of the reduction is impossible to evaluate without detailed study.

184 The likely tax impact of privatisation is also uncertain. When parastatals move into the private sector they ought to become taxpayers, but the level of tax will depend on their performance and opening positions agreed when they are privatised.

185 Finally, there are secondary cost and revenue implications arising from the economic impact of privatisation. These are bound to be contentious and virtually impossible to measure but may nevertheless be significant.

186 In view of these uncertainties, we have not tried to evaluate the overall financial impact of a privatisation programme. We have however reviewed the accounts of four parastatals to assess m general terms how their privatisation might impact on Government finances as follows:-

(a) Botswana Meat Commission.

(b) Botswana Telecommunications Corporation.

(c) Botswana Housing Corporation.

( d) Botswana Savings Bank.

Botswana Meat Commission.

187 The Botswana Meat Commission is in sound financial condition. It receives no subsidies from Government and has not borrowed money from Government in recent years. It is repaying a numb_er of loans. We assume these loan repayments will continue with privatisation. The value of BMC's capital reserves and revenue reserves, which would equate to shareholders' funds if the company was in the private sector, was P147 million at 30 September 1995. Some of these funds would probably be allocated to farmers in the event of privatisation. There is certainly a strong case for allocating the revenue reserves to farmers. The capital reserves of BMC, which Government might take over through legislation, amount to P 115 million. However, Government might decide to allocate these reserves elsewhere.

188 The value of BMC might be higher or lower than P147 million, depending on its expected future profitability. This in tum depends on its pricing policy towards farmers. In the year to 30 September it had an operating surplus of P40.8 million. From this surplus it paid tax of P9.2 million, made various transfers to reserves and distributed a bonus of P18.4 million to farmers. It is uncertain whether a privatised BMC would continue to pay bonuses to farmers in this way. If it was instead used as a profit to reward shareholders, which would include farmers, then a higher value than P147 million would be indicated.

189 BMC is subject to a tax regime which is unique to the Commission. In 1994/95 this raised P9.2 million. Special tax arrangements of this sort would make BMC more difficult to privatise. It would be preferable to tax the new company in the same way as other companies.


45

However, Government may still wish to impose specific taxes on cattle producers or meat exporters.

Botswana Telecommunications Corporation

190 The Botswana Telecommunications Corporation is a profitable parastatal but it has significant borrowing needs. In 1994/95 it borrowed P62.6 million and repaid P26.3 million. The corresponding figures for 1993/94 were P76.7 million and P9.6 million. About three quarters of these loans are sourced from the PDSF and the balance from commercial banks. The loans are all being repaid on schedule. Privatisation could lead to some restructuring of these debts. However, all the lending is commercial and hence there should not be any change of substance with privatisation.

191 The shareholders funds in BTC were P225.7 million at 31March1995. A dividend of P2.3 million was paid to Government as the equity investor, out of a trading profit of Pl8.5 million. If BTC is privatised then the flow of dividends will cease.

192 · Opening BTC's operations up to competition may have a substantial impact on its finances. The existing tariffs embody cross subsidies which will be difficult to sustain in the face of competition. Rural telephone services are subsidised and BTC will undoubtedly press for subsidies from Government or favourable terms in its operating licence in other areas if it is to sustain its current rate of investment in these services. If Government decides to pay subsidies then this will impact on public expenditure. The value of the company will also depend on the decisions reached on these issues because of their crucial effect on future profitability and cash flow. This value could be significantly different from the current level of shareholders funds.

193 Once the BTC moves into the private sector it is likely to remain profitable and hence it will become a taxpayer. This will lead to a flow of tax receipts to Government.

Botswana Housing Corporation

194 The Botswana Housing Corporation made an operating loss of P 13. 3 million in the 1994/95 financial year. A similar loss is likely in 1995/96. This loss, along with other financing needs, necessitated borrowing from Government. In 1994/95 BHC borrowed P6 l .4 million while repaying P12.8 million to Government, a net borrowing figure of P 48.6 million. Net borrowings the previous year were even higher at Pl53.6 million.

195 BHC's finances are changing for two reasons under present policies. First, the cost of its borrowings is rising to commercial levels as rates of interest on PDSF funds increase. Second, its building programme is winding down and it is now aiming to sell more houses rather than letting them. This has two implications. First, BHC faced continuing financial losses with its existing financial structure. This has been recognised and over the next two years P250 million of debt is being transformed into equity. Dividends will not be paid on this equity capital under existing policies. Thus the conversion from debt to equity is in effect a capital grant. Second, BHC's borrowing needs should fall as new construction is reduced.

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196 BHC has developed proposals for commercialisation of its operations but it will require Government approval to implement them. The commercialisation of BHC will itself improve financial performance. It will be a necessary part of any privatisation of BHC's activities. The main feature of BHC's privatisation would be the disposal of its housing. It had housing properties valued at P950.0 million in its books at 31 March 1995, accounting for over 95% of its employment of funds. The main factor which will determine whether Government can recover its loans and equity in a privatisation is whether this property can be disposed of for at a price which exceeds its book value. BHC believes that the current value of its property portfolio exceeds this book value, but much would depend on the time scale over _ which the property was sold. Any attempt at a rapid sale would inevitably force down property prices and make profitable sales more difficult.

197 The creation of companies to take on repairs and maintenance work from BHC ought to increase tax revenue in due course. However, the impact would be minimal in comparison with the impact of sale of the property portfolio.

Botswana Savings Bank

198 Botswana Savings Bank is profitable, but not because it is running an intrinsically profitable business. It has received Government equity and capital contributions on which it is not expected to pay a dividend. It also has an effective subsidy from the Post Office, which handles most of its transactions at a low cost. The Government has recently provided PS million in equity to set up the bank and Pl3.2 million as a capital contribution to build a headquarters in Gaborone. The final capital structure has not yet been agreed. It is unlikely that Government will earn any return on this investment, which is designed to mobilise rural savings for social reasons.

199 BSB could not be sold to the private sector as _a going concern. If Government is prepared to leave rural savings and lending to market forces then it could close down BSB and privatise it by selling off its assets and liabilities. The headquarters building could be sold as a property development. The loan portfolio and savers accounts could be sold to a financial institution, but the buyer would change the terms of the accounts considerably to make them financially viable. Through a sale, Government would probably recover most of its investment.

Conclusion

200 The different circumstances which face these four parastatals illustrate the difficulty of drawing conclusions about the likely overall financial impact of a privatisation programme. However, it is clear that change has the potential to reduce Government expenditure and increase tax revenue. It is also clear that the sums involved are large, with potential financial flows measured in hundreds of millions of pula annually.

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VII Organisational and Legislative Implications

Background

201 We have considered in previous sections the feasibility of a privatisation programme for Botswana, the sort of enterprises which might be sold and the possible approaches to -

selling them. However, it is clear that Botswana does not currently have the capacity in Government to implement such a programme. In this section of our report we consider the possible institutional changes whicn might be adopted to support the programme and the associated legislative changes which may be needed.

Organisation of the Programme

202 Any privatisation programme has to be sponsored from a central ministry. The clear candidate to perform this role in Botswana, as in most other countries, is the Ministry of Finance and Development Planning. No other ministry has the same breadth of role or involvement with the economic and financial issues which will determine the progress and success of the programme.

203 The programme will have to have sponsorship at the highest political level and we suggest that this sponsorship should come from the Minister responsible for Finance and Development Planning. He should be supported in this role by a privatisation committee, chaired by his Permanent Secretary. The committee should have eight to ten members and advise on policy formulation and the implementation of the programme. The final policy decisions will be taken by the cabinet.

204 The members of the privatisation committee should offer a wide range of experience, - in both the private and public sectors. One of the factors which, in our opinion, augurs

particularly well for the programme in Botswana is the way in which the private sector, through BOCCIM, has been closely involved in the formulation of this initial strategy. The private sector will be particularly well placed to advise on the feasibility of particular sale approaches. This will help Botswana to avoid some of the impracticable approaches to sales which have been put forward purely from within the public sector in other countries' programmes.

205 The public sector membership of the committee might come from the Office of the President, the Attorney General's Chambers and the Ministry of Commerce and Industry, the Ministry of Labour and Home Affairs, the Ministry of Works, Transport and Communications and the Bank of Botswana as well as the MFDP. There should also be some parastatal representation and we suggest that this should come from the BDC as the only parastatal with privatisation experience. Private sector representation might include a representative of BOCCIM, a representative from Debswana as an organisation with extensive experience of contracting out, a representative of the local financial community and a representative of the Botswana Stock Market. Members of the committee might on occasions have to absent themselves from committee meetings if matters in which they have a direct interest were under discussion.


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206 The implementation of the privatisation programme can be handled in a number of ways. It could be highly centralised in the :MFDP, with the Ministry taking over full responsibility for parastatals which are to be sold and managing the sale programme. It could be highly decentralised, with decision taking resting with individual sponsoring ministries and the :MFDP taking only a limited co-ordinating role. Each approach has advantages and disadvantages.

207 A centralised approach enables privatisation skills, some of which will have to be imported, to be focused in a single organisation. Those staff can then be single minded in pushing the programme forward and fighting vested interests in parastatals and elsewhere in Government. The balancing of the programme can be handled within the agency. But there is a risk with such a centralised organisation structure of creating a bureaucracy that has no incentive for completing the privatisation programme within a reasonable time scale. Those employed on the task may be inclined to make slow progress in view of uncertain employment prospects once the programme is complete.

208 The decentralised approach takes as its starting point the recognition that the potential for pri.vatisation extends across virtually all the executive functions of Government. It is only by having ministries throughout Government focusing on the identification of opportunities for privatisation that the full potential can be realised. The programme should therefore focus on case by case approaches to individual parastatals and departments, driven from within ministries. The main risk of a decentralised approach is that lack of relevant skills, or even deliberate obstruction, could cause delays in implementation. There is also the possibility of collusion between staff in the ministry and the parastatal to carry out the privatisation in ways which favour particular individuals.

209 In principle we consider that the decentralised approach is preferable because it is the only way of ensuring that privatisation as a policy has the opportunity to influence all areas of Government activity. But, in order to avoid the risks associated with this approach, there should be a supportive central group of staff, based in or associated with the :MFDP. We envisage that, once a decision to proceed with the privatisation of a particular parastatal had been taken, the ministry responsible will set up a reference group. This reference group will include members from the :MFDP as well as the sponsoring ministry. Senior staff from the parastatal will also be members of the group. But on occasions Government staff may have to meet alone because parastatal managers have conflicts of interest on the matters being discussed or because the Government's interests and those of the parastatal may diverge. The :MFDP will then be able, through its membership of these groups, to monitor the overall progress of the programme. In particular it will be able to identify ministries or transactions where the progress is too slow or the approach is unsatisfactory and draw this to the attention of the privatisation committee.

210 The role of :MFDP in managing the privatisation programme could be carried out by a unit based within the ministry or by a separate agency which was reporting to it. Different countries have taken different approaches to this issue. Separate statutory agencies have been created in Zambia and Tanzania. The programme in Kenya has been managed from within the civil service. The agency in Uganda was separate from the Ministry of Finance but has now been moved back into the ministry.


49

211 The creation of a special agency would require new legislation. Since there is no need to wait for such legislation before starting on the programme, we consider that the responsibility will inevitably rest initially with a unit in the l'vIFDP. This might be turned into a separate agency at a later stage. However, our view is that a separate agency is unlikely to be needed.

212 There are four principal arguments for preferring an agency approach rather than keeping the operation in house:-

(a)

(b)

(c)

A separate agency is a very good- way of handling lots of small sales of non strategic parastatals which require a similar sale approach and minimal continuing input from Government.

A separate agency can have remuneration policies which are different from those of Government. This is a major issue in Tanzania and Zambia where civil service salaries are very low and different remuneration policies are required to attract staff.

The life of a privatisation agency can be time limited by legislation and staff can be put on contracts. This encourages them to make progress with the programme.

( d) Staff are dedicated to the task of privatisation and cannot be moved on to other tasks.

213 These arguments are not particularly strong in Botswana. There are few small parastatals in Botswana. The role of the public sector is far more limited than in Tanzania and Zambia, which have separate privatisation agencies. An agency provides a less satisfactory way of handling the privatisation of strategic parastatals or of parts of Government departments, where the Government is bound to retain a keen interest in the privatisation process and cannot leave the task to an external agency. While salaries in the civil service in Botswana are not high they are not such a significant obstacle to staff recruitment. In practice the time limit on the life of the agency lacks credibility and staff expect to have contracts renewed. The need to ensure that staff are dedicated to privatisation can be dealt with in other ways, for example by committing any staff who work in a privatisation unit to a two or three year term of duty in that post.

214 We stress that these are not final conclusions. The position can be reviewed again once a unit is working in l'vIFDP and has some practical experience.

215 The size of the privatisation unit has to be related to the workload it is expected to perform. This in turn depends on political decisions on the number of entities which will be covered by the programme and the speed at which it should be implemented and on the balance to be struck between the use of internal advisers and the recruitment of specialists to advise on particular transactions.

216 All African privatisation programmes have taken time to build_ up momentum. We therefore suggest that the unit should be small in the first instance, with up to four members, divided equally between local and expatriate staff. Within this group, the critical post will be


50

the position of Chief Technical Adviser on the programme. The Chief Technical Adviser will provide technical leadership for the privatisation unit. The necessary qualifications for this position are extensive experience of privatisation policy and its implementation. Ideally, the adviser would also be a Botswana citizen with in depth knowledge of the economic and political situation in the country. However, we doubt in practice whether there are any candidates available with the relevant experience so the adviser is likely to be an expatriate. In considering the acceptability of this, Government should bear in mind that the roles of the adviser and the unit are purely advisory, with the executive decision taking in the hands of the privatisation committee and the reference group responsible for each transaction.

217 The unit should report, through the Chief Technical Adviser, to a senior civil servant in the Ministry of Finance and Development Planning. This civil servant would serve on the privatisation committee and have the privatisation programme as part of his formal responsibilities. The role could be performed by the Permanent Secretary or one of his immediate subordinates. We would expect the civil servant to combine privatisation responsibilities with other duties.

218 All the posts in the unit should be regarded as temporary or contract positions rather than permanent civil service appointments. They relate to the management of a programme which has a limited time frame and within which priorities, and hence staffing needs, may change as the programme progresses. The project management arrangements under the North South Carrier Implementation Unit or the Shashe Project Management Unit should be regarded as successful models. Local recruitment may be undertaken externally or on secondment from within the MFDP or other ministries. Staff seconded to the unit would devote themselves exclusively to the work of the unit and would not have any residual role in or responsibilities to the supplying ministries.

219 The privatisation unit should operate with the following terms of reference:-

(a)

(b)

To provide technical support to the privatisation committee in reaching its decisions about Botswana's privatisation programme, both by developing proposals on privatisation policy and transactions and by monitoring the results of the committee's decisions ..

To act as a secretariat to the committee.

(c) To assist in drafting the White Paper on privatisation.

(d)

(e)

(f)

To prepare a privatisation plan, for approval by the committee and subsequent publication.

To work with line ministries to set up reference groups for the privatisation of particular enterprises and provide technical support to those groups.

To draw up plans for the privatisation of particular enterprises and to conduct transactions, in consultation with reference groups.


(g)

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To identify requirements for additional technical support on particular transactions and to develop proposals for procuring that support.

220 The additional technical support for particular transactions could take the form of further recruitment of advisers, either to the unit or into departments, or of using professional advisers such as bankers, accountants and management consultants on a contract basis. All the privatisation agencies in the region are using external advisers as consultants for specialist tasks and this is a sensible approach for Botswana to adopt. Through this approach, leading

- edge international skills can be brought to bear on specialist tasks such as selling telecommunications utilities. There would be little need for or prospect of Botswana recruiting such skills on a full time basis.

221 There is a growing trend in Africa for the privatisation of the privatisation process. Under this approach a particular bank or consulting firm is appointed to manage the entire transaction process for a particular parastatal. While Government approvals may have to be sought at particular points in the process, as far as possible the management of the transaction is left to the appointed firm. This has the advantage of speeding up the sale process, especially if part- of the remuneration for the project is based on completion of the sale. It also enables Government to avoid the problems of recruiting a range of specialists directly. This approach is now being adopted in Ghana and Uganda. We consider that it is applicable in Botswana as well.

222 In seeking a candidate for the position of Chief Technical Adviser or other foreign advisory support for the privatisation programme, the Government may wish to consider approaching aid donors. Aid donors have played a substantial role in all the African privatisation programmes by financing advisers on both specific enterprise and sector sales and on the programme as a whole. This reflects both the frequent need to obtain skills which are not available within country and the enthusiasm of donors for the concept of privatisation and hence their willingness to expend aid funds on promoting it. Many bilateral and multilateral agencies have provided funding in this area. In our experience, the most active have been the World Bank, USAID and Britain's Overseas Development Administration.

223 The proposed organisation structure for the programme is illustrated in figure 7. 1 overleaf


Figure 7.1: Organisation Structure for Privatisation Programme

Cabinet

Ministers

Privatisation Committee:

Designs Policy

Privatisation Unit:

Technical Support

Privatisation Legislation

Reference Groups:

Manage Transactions

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224 In many countries, the privatisation programme has been supported by special legislation, both to set up an agency to conduct the programme and to regulate the way in which the programme should be run. For example, the legislation which set up the Zambia Privatisation Agency also introduced the following powers and requirements:-

(a)

(b)

(c)

Creating powers for Government to retain "golden shares".

Laying duties of record keeping on parastatals which are scheduled for privatisation.

Defining the methods of privatisation which may be adopted.

( d) Laying down procedures for enterprise valuation.


(e)

(t)

(g)

(h)

(i)

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Defining the eligible buyers of enterprise and buyers who are excluded from the programme

Creating special arrangements for purchases of shares by citizens.

Defining sale negotiation procedures.

Establishing publicity procedures for companies which are being sold.

Permitting Government departments to be converted into state owned enterprises.

225 We consider such legislation less necessary in Botswana. Most of the duties laid on the Zambia Privatisation Agency by this legislation could be handled by internal administrative decisions of Government, taken through its privatisation committee. Furthermore, there are comparatively few parastatals in Botswana and most of them are set up by their own Acts rather than being established under the Companies Act. Consequently, each privatisation will in any·event require its own Act before it can be completed, for example to turn the parastatal into a company under the Companies Act which Government can sell and to repeal the provisions which govern its activities. We stress that, while legislation is required to complete many of these transactions, there are often many practical steps to privatisation which can be taken under the existing law

226 There are a number of factors that need to be taken into account when drafting future legislation in order to promote a culture which encourages private sector provision wherever possible. These are:-

(a)

(b)

(c)

(d)

Keeping regulatory powers separate from the supply activities of parastatals. For example, BTC has until now had regulatory powers to enable it to maintain its monopoly. A new bill has recently been published which will remove this power and transfer it to a separate regulator. BMC has regulatory powers over the meat industry. As a matter of principle, such powers should be kept by Government and not handed over to parastatals.

Using legislation to promote private sector participation in all areas of the economy. For example, at present BPC has a statutory monopoly. However, the law could be liberalised so that BPC was required to purchase any electricity offered to it in Botswana subject to technical and pricing conditions being met.

Creating parastatals as companies subject to the Companies Act, in the same way as BDC, rather than as public. corporations.

Avoiding imposing non commercial obligations on parastatals through law. For example, BAMB is obliged to act as buyer of last resort. It is better to have Government impose such obligations under a planning relationship with the parastatal rather than requiring it to act uncommercially by law.


(e)

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Having powers built into legislation to wind parastatals up by order in the Gazette.

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Appendices

Appendix A: Gaborone City Council

Appendix B: Central Transport Organisation

Appendix C: Department of Architecture and Building Services

Appendix D: Botswana Savings Bank

Appendix E: Botswana Railways

Appendix F: Department of Supply

Appendix G: Department of Printing and Publishing Services

Appendix H: Botswana Housing Corporation

Appendix I: Botswana Telecommunications Corporation

Appendix J: Botswana Meat Commission

Appendix K: Botswana Power Corporation

Appendix L: Air Botswana

Appendix M: MFDP Accounting Unit

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Al

Appendix A

Enterprise Profile: Gaborone City Council

1 This appendix addresses the various questions about Gaborone City Council (GCC) raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.

Organisational survey

2

what are the mission and objectives of the individual SOE or unit? Are they still relevant to the current socio-economic situation?

To provide a range oflocal services to the inhabitants of Gaborone.

how is the SOE or unit organised and staffed?

3 There are some 2,300 staff, of whom 1,600 are industrial class. The main departments are the treasury, engineering, health, education and housing.

who benefits from the services rendered?

4 The people who live in Gaborone.

how does the SOE or unit operate, in terms of procedures?

5 GCC receives revenue from Government grants and to a lesser extent from internal sources such as rates and income for services rendered. GCC expends its revenue on services for the populace of Gaborone.

what is the size of the service and the workload expectations?

6 GCC provides a wide range of services and it is not feasible to define the size of the service.

what is the state of equipment and facilities?

7 Generally suitable for the activities which are being undertaken.

are there plans for expanding the SOE or unit?

8 The Council itself would like to expand the scope and scale of its activities, but since the majority of funding comes from Government these plans could not be realised without Government financial support. "'


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Policy Review

are there reasons for keeping some or all of the activity as a government function?

9 For most of the Council's activities, there are sound reasons for keeping the activity in public hands. GCC provides schools (it runs 23 primary schools) and clinics and supports the Self Help Housing Agency for example. These are all areas where Government policy would expect the Council to continue to act as a service provider. However, there are other activities which could readily be put in the hands of the private sector or contracted out, for example the running of abattoirs or refuse collection.

10

would essential public services be disrupted by a modification in ownership and/or management?

In suitable areas, there should be no disruption with proper planning.

could a private sector group deliver the service in an efficient, cost effective manner?

11 For those services which are suitable for privatisation, there are private sector service providers who could undertake the service cost effectively.

are commercial entities available to assume operations?

12 In those areas which are suitable for privatisation there are commercial entities available to assume operations.

is competition from the private sector probable?

13 It already exists for many of the suitable services.

in view of the foregoing, are there areas potentially suitable for privatisation?

14 Yes. They may include refuse collection, abattoirs, community centres, market stalls, engineering services, maintenance of parks, playgrounds and public spaces, vehicle maintenance and staff housing.

Business Evaluation

is the organisation operating efficiently, in terms of financial and operational performance measures?

15 The Council's finances are in a sound condition as a result of Government grants. The wide range of operational activities makes meaningful evaluation of overall operational performance impossible. However, the experience from contracting out refuse collection suggests that in this area at least there is scope for improvement.

to what extent has management been "localised"?


A3

16 There are about 30 expatriates out of a total staff of 2,300, most of them m professional and technical positions.

is there citizen business interest in the services?

17 There could be citizen interest in some of the activities which are suitable for privatisation.

do citizens have the capacity to perform the SOE or unit's functions or will expatriate technical expertise be required?

18 Citizens could perform some of the functions but, as at present with the City Council, some of the technical and professional positions might demand expatriate inputs.

will there be an expansion of opportunity for citizen business?

19 There could be if the privatisation covers appropriate areas.

what is the likely impact on employment?

20 Any contracting out might lead to job losses in the Council but this should be offset to som eextent by employment growth in the private sector.

is there a possibility of re-deploying and/or re-training the displaced workers?

21 Because of growth, the Council has managed to redeploy staff affected by previous contracting out. There may be similar opportunities in future.

Conclusions

22 Gaborone City Council is different from the other enterprises covered by this study in the wide range of services it performs. Many of them are clearly not suitable for privatisation, eg health and education. But several of them are. We have identified opportunities in the following areas:-

(a) Refuse collection.

(b) Abattoirs.

(c) Markets.

( d) Community centres.

(e) Staff housing.

(t) Various services provided by the Engineering DepartmenL


A4

23 Refuse collection in Gaborone South has already been contracted out to a citizen owned company called Daisy Loo. They have a three year contract which covers an area of about 35% of the geographical area of Gaborone and 50% of its population. Daisy Loo are using vehicles which were let to them by the Council for a nominal sum. An evaluation undertaken by USAID at the time of the contracting out suggested that this approach was more cost effective than in house provision. Standards have improved since Daisy Loo took over the operation. The contract was won after a competitive tender in which four companies participated. Apart from Daisy Loo, the other three bidders were all based in South Africa.

24 In one area, Village Development Committees (VDCs) are acting as sub contractors to Daisy Loo by collecting rubbish from houses and delivering it to central skip bins, from which it is collected by Daisy Loo. This policy has enabled the VDCs to earn some income. It is a policy which could be used more widely, both for refuse collection and for other services such as maintenance of storm drains and children's playgrounds. Approaches which created employment opportunities at grass roots level in this way may help to popularise privatisation as a policy.

25 · Refuse collection could be contracted out more widely. The procedures have already been established. However, the policy of the present councillors is against privatisation. This raises an important policy issue for central Government, namely to what extent is it prepared to impose a privatisation policy on local councils which do not support privatisation themselves. Government has the financial levers to exert control if it wishes to, because it provides so much of the councils' income and capital needs, but there would have to be a political judgement first on whether financial sanctions were appropriate if some councils opposed the privatisation policy.

26 In the United Kingdom, when central government was faced with similar issues with a number of local authorities, legislation was passed. which required competitive tendering of refuse collection and other council services. At some stage, the Government of Botswana might have to consider a similar initiative.

27 One approach which might be considered in any future privatisations of refuse collection services would be to give the existing work force the opportunity to bid for the contract. This could be done on a competitive basis. Alternatively, the work force could be awarded the contract for a limited period (say three years) with a commitment for a competitive tendering process at the end of the three years.

28 In the long term, a longer period of tender than three years would be sensible. This would make it viable for bidders to buy their own vehicles rather than relying on the Council to fund them.

29 Abattoirs, markets and community centres all raise similar issues when considered for privatisation. These are all services which the Council provides and makes some charges for. However, they are not provided on a commercial basis and in each case the council recognises a social dimension in service provision. The abattoirs are provided at cheap prices which are set by Government, in order to encourage slaughtering of animals at the abattoir rather than at home or in another inappropriate location. In 1995/96, the income from the abattoir was P289,483 and the expenditure was P772,484, a deficit of almost P500,000 which takes no account of the capital costs of the abattoir. The markets are designed to provide economic

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opportunities for small scale retailers at minimal cost. The community centres are available for low fees to local people.

30 In all cases, it would be possible to move over to a market driven approach, set charges at commercial levels and privatise operations, provided that it is accepted that the social goals which motivate the present approach are no longer appropriate for subsidisation from public funds. Privatisation would therefore require prior policy decisions by Government and /or the council which would enable the provision of these services to be left to market forces in future.

31 Staff housing is provided for a number of GCC personnel. It would be possible to sell off this housing, to tenants or to other buyers, and adopt a policy of officials finding their own housing in future. However, housing is one of the employee benefits offered by the GCC. Consequently, any decision to privatise would need to be accompanied by modifications to remuneration in other areas and the changes would have to be assessed for cost effectiveness against the cost of providing housing.

32 - The Engineering Department provides a number of services and has some 700 staff. The services include the management of development projects, sewerage and sewage disposal and maintenance of storm drains. Some of these services are carried out by direct labour. Others are carried out by consultants, contractors and other suppliers. It would be possible to privatise this area of activity further by increased contracting out. In some cases, assets could be privatised as well, for example the vehicle workshop could be sold, either to a trade buyer or through an employee buy out. The VDCs could be considered as potential suppliers for some of these services, for example maintaining storm drains and playgrounds.

33 In evaluating the possibility of contracting out engineering and maintenance services or privatising services such as abattoirs, community centres and markets, we found the financial information compiled by the Council less useful than it might be. The situation is better than with Government departments in that the Council is preparing its accounts using the principles of double entry bookkeeping. However comprehensive accounts are not prepared for trading activities, although the basic data to prepare such accounts is available. Nor are there any management accounts which would enable a comparison between the costs of undertaking engineering services in house and the costs of using consultants and contractors.

34 We consider that the accounting standards and information of the Council should be upgraded. The objective should be to compile the financial and management information needed to carry out a commercial evaluation of the activities which are amenable to privatisation.


Bl

Appendix B

Enterprise Profile: Central Transport Organisation

1 This appendix addresses the various questions about Central Transport Organisation (CTO) raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 The role of the CTO is to administer, maintain and repair the Government fleet, operate a fleet of vehicles which Government Departments can call upon, provide petrol oil and lubricants and meet fleet safety standards. In an environment where privatisation is a Government policy, most of these tasks could be left to the private sector.


3 CTO has a head office in Gaborone and twelve main outlying service stations at Lobatse, Sebele (two), Maun, Mahalapye, Selebi-Phikwe, Gantsi, Kasane, Francistown (two), Tsabong and Serowe. Vehicles are based, serviced and repaired at each of these sites. CTO employs 1860 people.


4 Government Departments, which obtain transport services which are free at the point of use from CTO.


5 Vehicles are procured in accordance with agreed plans for changes in the fleet. CTO is then responsible for vehicle allocation, fuel supply, maintenance and repairs and meeting the costs of these activities in accordance with the requirements imposed by Departments.


6 In 1993/94, CTO operated approximately 7,600 vehicles. They travelled an average of just over 19,000 km and visited the workshops an average of six times. Each vehicle spent an average of 44 days in the workshop.


7 The workshop in Gaborone is in reasonable condition but not up to the standards of the best local garages. In more remote areas, we understand that the CTO is often among the best equipped facilities in the area.


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8 The Government fleet has been expanding steadily from year to year. This is illustrated in the following table:-

Average annual Vehicle type 1985 1994 growth rate (%)

Trailers 811 879 0.9

Plant 513 585 1.5

Vehicles 3,672 6,566 7.9

Total 4,996 8,030 5.4

10 Continued expansion of the fleet, and hence the role of CTO, will depend on Government policy decisions. In our view there are incentives built into the current structure of the- CTO and its relationship with Government which encourage expansion of the fleet beyond its economic size. If these incentives were removed by putting CTO on an arms length trading relationship with Government Departments then expansion might well cease. However, this will require a purposive policy decision by Government and extensive improvements to the CTO's systems. In the absence of such decisions, expansion is likely to continue.

Policy Review


11 Government will always need to organise its transport needs and this will involve some staff But the bulk of the maintenance, repair and other activities which the CTO undertakes need not be a Government function.


12 With appropriate advance planning, there would be no disruption.


13 A number of private sector groups service vehicles and sell fuel in Botswana and could provide a similar service for Government.


14 Yes there are.



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15 It already exists.


16 Most of the CTO's activities could be privatised although certain planning and procurement decisions would inevitably remain with Government.

Business Evaluation


17 Financial performance is virtually impossible to measure as the CTO does not produce commercial accounts. The operational performance can be inferred from the fact that the CTO employs some 1,860 people to look after about 7,500 vehicles, trailers and plant, ie one person for every four units. This is not commercial best practice, even allowing for the additional burden of activity that stems from being in the public sector. Moreover, vehicles spend -a long average time in workshops, both in aggregate and on each repair visit and the reported fuel consumption on some vehicles is high. The reputation of CTO is poor, with regular complaints from users about the timeliness and standard of repairs. The conclusion must be that there is significant scope for efficiency improvement.


18 Over 95% of the staff are local but there are a number of expatriates still m management and technical positions.


19 Some interest was shown by citizen management at the CTO in an employee buy out (EBO) of some CTO activities. This is a sector in which there are established citizen businesses.

do citizens have the capacity to perform the SOE or unit's junctions or will expatriate technical expertise be required?

20 There are some expatriates working with the CTO in technical posts but the employees are predominantly citizens.


21 Potentially, yes. The fuel points could be turned into petrol stations. The workshops into garages. Both could offer services to the private and public sectors in a growing market.



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22 There must be a strong possibility of reductions in CTO employment numbers in the interests of greater efficiency. However, the vehicle population is growing rapidly in Botswana and it is unlikely that a sound mechanic would have difficulty in finding new employment.


23 Staff with a skill learned at CTO should be able to find employment in the private sector as there is a shortage of private sector capacity. Unskilled staff might have more difficulty in finding employment and there are no redeployment opportunities in the public sector.

Conclusions

24 There are two ways in which the CTO could be privatised. First, the vehicles, or the tasks which they are required to perform, could be moved into the private sector. Thus civil servants could be encouraged to use their own vehicles and receive reimbursement from Government rather than using a CTO vehicle. The recent decision to move responsibility for borehole drilling into the private sector is an example of this sort of policy in operation.

25 The current structure and financing of CTO militates against such a development. CTO does not charge departments for their use of CTO vehicles but picks up the costs from its own budget. As a result, departments will always demand more transport from CTO and prefer use of CTO transport to other options such as flying or travelling by train because the CTO option appears costless. This argues strongly for the introduction of a commercial accounting system into the CTO and recharging arrangements with ministries and departments for use of vehicles. A change of this sort should not only improve the finances of the CTO but also of Air Botswana and Botswana Railways because their services will be used where it is more cost effective to do so. The change should also ensure more cost effective use of the time of civil servants.

26 The introduction of charging arrangements for departments should also be accompanied by a review of ownership arrangements. At present, all vehicles are owned by CTO. This makes sense when Government has a small vehicle fleet. However, with rapid expansion in recent years, several departments ( eg the police) now have large, dedicated vehicle fleets. It would be sensible to transfer ownership to those departments. They could then become responsible for their own fleet management, like any large fleet user. They could make their own servicing plans and use CTO or private garages for repair and maintenance in accordance with their view of relative standards and costs. This would necessitate some increase in vehicle inspection skills in user departments but is no more than any large fleet user has to undertake. In some cases they would decide, confronted with the full costs of ownership, that it was better to use private resources or other transport arrangements rather than owning vehicles directly.

27 A commercial accounting system would also make a useful contribution to privatisation of the CT O's fuel points and workshops because it would enable their true costs and efficiency to be evaluated. We discuss this aspect further below. Th~ best way to achieve commercial accounting might well be to turn the bulk of the CTO into a parastatal so that it was required to use commercial systems and at the same time no longer required to undertake


BS

Government accounting. However, some activities would have to remain part of Government. They include procurement decisions, ownership of the vehicles and fleet management decisions for pool vehicles, which are used by a number of departments, and possibly for smaller departments which cannot manage their fleets in house. It is particularly important for ownership to remain with Government as there is a tax exemption on Government vehicles under the Southern African Customs Union (SACU) which would not be available under any other ownership arrangement.

28 The second approach to privatising the activities of the CTO would be to contract out certain activities rather than carrying them out in house. Fuel points could be replaced by the use of public petrol stations. Workshops could be sold as garages either on the open market or to the management and employees through an EBO. Maintenance and repair work for particular types of job or vehicle could be contracted out to the private sector. This already happens to some extent at the moment. The CTO has a budget of P 15. 5 million for sub-contractors.

29 The arrangements for disposing of workshops would be more likely to succeed if the CTO gave the workshops a contract for vehicle repairs upon privatisation, for a specified period and types of repairs. Such arrangements are in any case far more likely to give good value for money for repairs than ad hoc use of individual garages. It would also help to commercialise the CTO's systems by introducing job costing and accruals accounting before privatisation if the aim is to sell as a going concern or through an EBO.

30 There should be some interest in the opportunities offered by privatisation of the CTO by the local garage trade. CTO is responsible for less than 10% of the total national vehicle fleet and there are many private garages offering service and repair facilities. They could be interested as potential buyers of workshops and fuel points or as potential competitors for CTO business,

31 The installation of a commercial accounting system should be part of the privatisation programme. However, it need not delay market testing of some services, which can be based on ad hoc costing exercises.


Cl

Appendix C

Enterprise Profile: Department of Architecture and Building Services

I This appendix addresses the various questions about the Department of Architecture and Building Services (DABS) raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.


2


The role of DABS is to procure and maintain buildings for central Government.


3 There are four divisions, responsible for architecture, engineering, quantity surveying and direct works


4 Government ministries, which have buildings designed and construction supervised on their behalf


5 Ministries come to DABS with demands for new buildings. DABS is not involved in establishing need. DABS may undertake the design work itself, but is more likely to contract out to consultants. DABS invites and adjudicates tenders and supervises construction. Consultants are often used and generally if consultants are used at the design stage they are retained for subsequent stages. The consultants work as an extension of DABS. Direct works division then carries out maintenance work on buildings. Some of this is also contracted out, but there is a considerable direct labour force working in eight main depots and fifteen sub depots and a number of isolated maintenance units for individual buildings.


6 At present, DABS has 82 projects at the pre contract stage, valued at P530.3 million, of which 65 (value P51 l.8 million) are with consultants and 17 (value Pl8.5 million) are being handled in house. There are 66 projects at the post contract stage, valued at P399 million, of which 41 (value P358.4 million) are with consultants and 25 (value P41.2 million) are being handled in house. There are also a number of inactive projects, on which DABS is not working at present because there are external issues to be resolved first ( eg site availability).


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7 DABS has the equipment and facilities necessary to carry out its work.


8 DABS has plans for contracting out much of its maintenance work, which will lead to a reduction in staffing if it goes ahead. DABS is keen to recruit at senior level to fill professional vacancies but this is difficult to achieve in practice because of national shortages of skills in architecture, engineering and quantity-surveying.

Policy Review


9 Some of DABS's procurement role will have to stay in the public sector but the majority of its operational role could be contracted out to the private sector quite readily.


10 No. DABS already makes extensive use of external consultants and contractors and this use could be expanded.


11 Private sector groups already provide similar services competitively.


12 Yes, there are a number of firms providing similar services in Botswana in the areas of design and contracting, although not in the overall supervisory role which DABS discharges.




14 Yes. More of the work of DABS could be put out to tender. In principle, virtually the entire role of DABS could be privatised by having all Government buildings designed, developed and maintained by the private sector and then rented or leased by Government. Even within the present structure, where Government owns most of its own buildings, there is potential for using the private sector to a greater extent.


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Business Evaluation


15 There are no indicators of financial or operational performance. DABS has been criticised both from within Government and by contractors for failing to meet objectives. This clearly does not reflect well on the performance of DABS but must be viewed in the context of the difficulties of recruiting and retaining- qualified staff and the problems such as_ site availability which are outside the control of DABS.


16 There are some 65 expatriates in senior technical and professional positions.


17 - The architecture, engineering and quantity surveying professions in Botswana are dominated by expatriates, although there are some qualified Batswana. The maintenance activities of the direct works division are more likely to attract citizen business interest.


18 Some expatriate technical expertise in areas such as architecture, engineering and quantity surveying is likely to be required in Botswana for the foreseeable future.


19 Further contracting out of maintenance work might create extra work for citizen business.


20 The specialist staff in DABS should be able to find alternative employment very easily. Any increased contracting out of direct works maintenance might lead to unskilled job losses, which would be offset to some extent by employment gains in the private sector.


21 No re-training is needed for the skilled staff There would be difficulty in finding alternative employment opportunities for unskilled staff

Conclusions

22 In principle DABS could be almost completely privatised if Government gave up its role as a property developer and rented buildings from the private sector instead. There are frequent complaints that the public sector is a disruptive developer by contributing to the


C4

booms and busts in the local construction industry and acting as competitor to the private sector in offering accommodation for rent. This approach would deal with such complaints and virtually do away with the need for DABS at the same time. In cases where a new building was needed, for example because no suitable accommodation was available in the area, a private developer could be brought in to manage the entire process, with Government leasing or renting the building on completion. With suitable contractual arrangements, this could be accomplished for specialist buildings as much as for standardised office buildings. The role of DABS would then be limited to managing this contract process.

23 However, there are-difficulties with this approach in view of the lack of sources of long term capital other than Government. While these problems could be overcome, we expect that Government will continue to act as a property developer in the short term. Within this framework, there are still a number of ways of commercialising and privatising DABS. DABS activities can be divided between the procurement of buildings, which is the role of the architecture, quantity surveying and engineering divisions and the maintenance work undertaken by the direct works division. The number of staff in each division is as follows:-

Division

Administrative staff

Architecture

Quantity surveying

Engineering

Direct works

Total

Number of staff on establishment

22

49

30

26

2,591

2,718

25 This shows the overwhelming importance of direct works and maintenance compared to other DABS activities. Moreover, most of the work on design and construction supervision is already largely contracted out to the private sector. In value terms, the private sector is doing 96% of the projects which are at the pre contract stage and 89.5% of the work which is at post contract stage. The scope for further contracting out is therefore quite limited in this area.

26 However, there are huge opportunities to contract out the maintenance activities. At present, DABS has let a maintenance contract for the Princess Marina Hospital and is considering contracting out the maintenance of some 400 houses in Gaborone. This could be extended to all of the maintenance activities. The 23 depots and sub depots could be sold, either to the management and staff through employee buy outs, or by trade sales to contractors. In the short term, the depots would be sold along with a contract to maintain the Government buildings for which they are currently responsible. However, there would be a time limit and, in due course, individual buildings or groups of buildings could be put out to competitive maintenance tender. This is the most important area of potential privatisation in DABS.


cs

27 In order to support this privatisation, DABS need to install commercial accounting systems so that it undertake proper costing exercises for its activities. This is desirable for a number of reasons apart from supporting privatisation of the depots. DABS provides services which are free at the point of use to Government ministries (although ministries do pay for the consultants which DABS hires). This will tend to bias the decision between buying and renting property in favour of buying. The effect is certainly limited but in principle DABS should recharge ministries for its services.

28 The lack o-f a commercial accounting system also means that DABS cannot compare its in house costs with the charges of consultants who carry our projects on its behalf

29 In principle DABS could itself decide to install a commercial accounting system. There are several computer packages on the market for management and statutory accounting in organisations of its type. However, there are problems with this approach in that requirements of Government still have to be met. Moreover, in practice progress would be very slow. The best way of achieving change would therefore be to transfer most of the functions of DABS to a parastatal organisation.

30 A programme of change of this sort would take no more than two years and need not involve significant increases in staff numbers. In the short term, it would be possible for DABS to contract out more work based on the results of ad hoc costing exercises and the use of tendering procedures for direct works to establish private sector costs.


DI

Appendix D

Enterprise Profile: Botswana Savings Bank

I This appendix addresses the various questions about Botswana Savings Bank (BSB) raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 BSB aims to provide banking and financial services to all people of Botswana. Urban markets are already served and BSB is placing particular focus on developing savings mechanisms for rural people. The long term aim is to provide similar access to credit for rural people.


3 BSB's headquarters are in Gaborone. It has 68 staff, most of whom are based at headquarters. There is an agency arrangement between BSB and the Post Office, under which the Post Office provides agency services to enable savers to access their accounts. Funds are invested in Bank of Botswana certificates or in other local financial institutions or are lent to public servants for the purchase of houses and vehicles.


4 Savers who are able to operate subsidised accounts at the bank. and public servants who are able to borrow from it.


5 For savers, BSB operates three types of account. Ordinary and special savings accounts are opened at Post Offices or at BSB headquarters. Save as you earn accounts also involve the employer since they make use of stop orders. Lending is undertaken from headquarters. The only lending clients at present are public officers.


6 At the end of March 1995, BSB had P41.3 million in depositor accounts. Loans to public servants amounted to P25 .4 million pula.


7 The headquarters are brand new and most equipment has been purchased in the recent past as a result of the restructuring of the bank.


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are there plans/or expanding the SOE or unit?

8 There is an expectation that the bank will expand in two ways. First through increased mobilisation of rural savings. Second through the development of new products, for both savers and borrowers. The main focus of current effort is on expanding the range of lending products.

Policy Review


9 Like any similar institution, BSB mobilises savings and provides loans. There are many other banks providing similar services in Botswana and, from this perspective, there is no argument for retaining any of BSB's activities in the public sector. However, BSB's services to savers are aimed at a middle income rural clientele, which is not served effectively by other financial institutions. BSB has outlets nationwide through the 105 post offices in the country. This can be used as an argument for retaining BSB in the public sector. It is unlikely that any private sector operator would be interested in providing a similar service because it is not economic.


10 A new owner with a commercial orientation would almost certainly introduce greater restrictions on the behaviour of account holders, which would be a source of inconvenience to them. However, it is difficult to argue that such constraints would be a significant disruption to essential public services.


11 Private banks can and do provide savings and loan facilities efficiently and cost effectively. It is unlikely that any bank could provide the same services as BSB on a cost effective basis as those services are intrinsically loss making.


12 No commercial entity would take over BSB in its present form unless there was a mandate for significant changes in the way the bank operates.


13 There is already a competitive market for financial services in Botswana.


14 The decision to create BSB and operate it as a parastatal was essentially a political one. There is no commercial case for the bank's existence. Thus while pdvatisation is possible it is bound to lead to major changes in the scope ofBSB's services.

I I I I -1 I I I I I I I I I I I I I I

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Business Evaluation


15 The bank is profitable and hence its financial results appear satisfactory. However, there are two factors which make the financial performance questionable. First the bank has received significant financial injections from Government. These have been in the form of equity capital, on which the bank is not paying a dividend, and through capital contributions for the construction of the new headquarters building. As a result of having this free capital, the bank has operated profitably and has been able to accumulate reserves. Second, the payments to the Post Office for its agency services seem low and BSB management admits that the charges by the Post Office are below commercial levels. In 1994/95, costs rose far faster than the deposit base and this is a warning sign of financial problems to come. The static level of deposits also suggests that BSB is having difficulty in meeting its objective of increasing rural savings mobilisation.

16 _ The financial management of the bank's lending activities, always the most risky area in any bank, seems sound in that it has focused on very low risk activities such as Bank of Botswana certificates, lending in the financial sector and well secured loans to public servants.


17 The management is fully localised but enjoys technical assistance from DSGV, the German Savings Banks Association.

18

19


It is most unlikely that BSB could be sold as it stands, to citizens or anybody else.


Citizens are already performing the functions of BSB, albeit with some technical assistance.


20 It is likely that any privatisation of BSB would lead to a contraction in its activities. Hence the opportunities for citizen business may well be small.


21 There are only 68 staff at BSB and any impact on employment from restructuring or privatisation is likely to be negligible.


I I I I ~I


D4

22 A number of BSB staff have qualifications or are studying for them and could expect to find other employment opportunities. However, it is difficult to see scope for redeployment in the public sector.

Conclusions

23 BSB provides three savings accounts. The ordinary savings account is the most widely used and had deposits of P26.9 million at 31 March 1995 out of total deposits of P41.3 million. The minimum deposit on this account is P20 and there are no restrictions on withdrawals. Nor are there any charges. BSB management admits that many workers use these accounts in effect as current accounts, with salaries being paid in at the month end and often withdrawn very quickly thereafter in cash. There is no possibility of running a viable business on the basis of these accounts. However, BSB regards them as a component of its social role in mobilising rural savings.

24 Government has been supportive of BSB1s development and has injected substantial capital. It does not appear to expect a return in the form of dividends. The bank would not be financially viable in the absence of this support. Hence there is no scope for privatising BSB as a gomg concern.

25 Any plan to privatise BSB must be preceded by a statement of Government policy on its approach to rural savings mobilisation and rural credit. If Government is willing to leave these areas to market forces, then privatisation is relatively straightforward. The bank1s headquarters could be sold as an office development. The loan portfolio could be offered for sale to financial institutions. There would be a contract in place with the Post Office on the terms on which it would continue to provide counter services for former BSB customers. Any purchaser would inevitably increase significantly the charges and minimum balances required to operate an account to bring them up to commercial levels. A significant portion of the customer base would be lost as a result. However, the remaining business could be viable. Any buyer would be likely to abandon BSB1s plans to expand its rural credit activities.

26 If, by contrast, Government"is unwilling to leave this area to market forces then it must decide which areas of rural savings and credit it wishes to subsidise and how. Government could put in place explicit subsidy measures which compensated for the cost of operating unviable accounts, for example an annual payment for every ordinary account with an average balance below a certain level. This more direct approach has much to commend whether B SB is privatised or not since Government would then be relating its subsidy to the objectives which it sought to achieve through BSB, rather than, as at present, subsidising BSB1s capital through a new building in Gaborone.

27 If the subsidy arrangements were put on a long term contractual basis then it would be possible to offer BSB for privatisation. It could be sold to another financial institution. Alternatively it could be considered for a public offer. However, the company would be a risky investment and would not be suitable for an early place in a privatisation programme.


El

Appendix E

Enterprise Profile: Botswana Railways

1 This appendix addresses the various questions about Botswana Railways raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.


2


To provide freight and passenger rail services on the line of rail through Botswana.


3 There are some 1,200 staff, a significant reduction from the 1,900 staff at the end of the 1994/95 financial year. They are organised into five departments, with the headquarters at Mahalapye.


4 Rail passengers and users who have freight carried on the railway.


5 Freight traffic is predominantly wagon load. BR offers services to customers either at published tariffs or, for larger customers, at agreed contract rates. The tariffs are designed to cover costs and there are detailed contracts for customers who are using dedicated facilities such as the Sua branch line. Passengers purchase tickets at stations. Services are run in accordance with timetables and available train pathways.


6 In 1994/95, BR carried 450,000 tons oflocal freight, 653,000 tons of imports, 375,000 tons of exports, 281,000 tons of transit traffic and 525,000 passengers. There is capacity to carry more traffic. Freight traffic has fallen quite sharply in the last two years as a result of the reduction in transit traffic.


7 The line of rail in Botswana joins the much bigger railway networks of South Africa and Zimbabwe. There are three branch lines, serving specific customers. The total length of track is 888 km. BR has 40 locomotives, 1,027 wagons, and 47 coaches as well as various sidings, stations and maintenance facilities.


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8 The future development of the railway depends on the level of traffic. This has fallen in the recent past as a result of the diversion of traffic from ports in South Africa, in particular Durban, to ports in Mozambique.

Policy Review


9 Yes. Botswana Railways is a natural monopoly and a loss maker. It would be difficult to regulate its activities in the private sector and it is anyway doubtful whether there would be interested buyers.


10 · There must be considerable doubts over how much of the rail network and its activities a private operator would wish to sustain in operation without subsidy. Whether such services are essential or not is a matter of judgement. In order to avoid disruption, a complex contractual arrangement would be required between the new, private operator/owner and Government. This would be difficult to agree in practice.


11 It is unlikely that any private sector group could be found which is interested.


12 There is no private sector group currently operating in Botswana which has the capability to run Botswana Railways. There are examples of privately owned and operated railways which run efficiently elsewhere in the world, but it is doubtful whether any of these operators would be interested in a small market such as Botswana.


13 There is competition from the private sector through other transport modes, principally road transport. It is inconceivable that any private sector group would set up a competing railway.


14 The potential for privatisation is minimal. Some peripheral services might be contracted out. There is some potential for property development, which could involve the private sector. But the potential for privatisation of the core business is minimal.


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Business Evaluation


15 From a financial point of view, results are not satisfactory. There has been an operating loss in each of the past two years and this has been compounded by a major debt write off of P24 million on Soda Ash Botswana, BR's largest customer, which has been liquidated. The losses have been covered by injections of Government equity.

16 Operational performance has improved considerably in the past two years with the reduction in staff numbers, without any corresponding contraction in activity levels. There is some scope for further improvements in performance but the major opportunities have been taken already.


17 · There is an expatriate general manager and two other managers are expatriates. But overall, the number of expatriate personnel is in single figures and most of the staffing is local.

18


There is some interest in providing the peripheral services.


19 The peripheral services which have the greatest potential for privatisation (ie vehicle maintenance, catering and security) have little need for expatriate expertise. If BR tried to contract out its maintenance engineering services then this might require expatriate inputs.


20 Contracting out vehicle repairs, security and catering would create limited additional opportunities for citizen businesses.


21 Botswana Railways has recently gone through a major downsizing programme. There are unlikely to be further significant staffing reductions. Any privatisation would have a negligible impact on employment.


22 This is not likely to be an issue.

I I I I 1~


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Conclusions

23 There is little potential for full scale privatisation at BR. Internationally, railways have proved difficult entities to privatise, because they generally make losses and are natural

monopolies. In the case of Botswana, the situation is further complicated by the basic role of the railway, which is as a link between the rail networks of South Africa and Zimbabwe. The

level of transit traffic using the route is crucial to its operational and financial viability but beyond the influence of BR management. As a result of the decline in transit traffic since 1992/93, BR has moved from financial surplus to deficit. No private sector operator would find these uncontrollable risks attractive.

24 The potential for privatisation is at the margin of BR's act1v1ties and here the opportunities are numerous. BR is already trying to privatise such activities as security,

catering and vehicle maintenance. In addition it believes there may be potential for the promotion of tourism as a joint initiative between BR and the private sector.

25 There are three other important areas where we consider that there is potential for

greater private sector involvement as follows:-

(a) In managing property development.

(b) In carrying out maintenance of rolling stock.

(c) In managing the financial risks of providing specialist services.

26 BR has difficulty in carrying out any property development at present because of its status as a commercial enterprise of Government rather than a public corporation. As a result, BR cannot own land. BR has already proposed that it should become a public corporation in

order to get over this problem and we support this proposal. Property development initiatives are, in our experience, most effectively carried out involving private sector expertise and we would expect BR to bring in such expertise on any major development.

27 Maintenance of rolling stock is another area which has potential for privatisation, through sale of the existing maintenance facilities to private operators. A foreign firm would

almost certainly need to be involved in such a sale in order to provide the necessary technical skills. BR already uses the maintenance facilities of the National Railways of Zimbabwe and Spoornet for some of its more complex maintenance and there would therefore be some

competition for the maintenance workshops if they were sold off The sale would probably need to be accompanied by contracts between BR and the workshops to provide a short term assured workload for the workshops in order to attract interest in the sales.

28 Finally, there is the issue of the financial risk associated with providing special services.

In the recent past, BR has suffered losses as a result of losses of business from major clients. One example is the financial failure of Soda Ash Botswana, which went into provisional liquidation. The company also failed to meet guarantees on the volumes of product transported on the railway, which amounted to 305,000 tonnes in 1994 against a guarantee of

658,000 tonnes. The financial costs of these failings have been met by BR rather than by the

investors in the soda ash project. While this is in some ways a question of internal


ES

bookkeeping for the public sector, since there was public money in the soda ash project, there is an important question of principle involved. BR should negotiate commercial contracts in situations of this sort so that it is not left taking risks which it cannot manage. It would have been better if Soda Ash Botswana had bought the specialist wagons its services needed rather than BR making an investment which it could not remunerate unless the company performed well.

29 Similar considerations apply to the transport of coal to the Selebi-Phikwe power station, which has been closed. The closure of the station left BR with a number of redundant specialist wagons. It is bearing the cost of these wagons. Once again, an alternative contract structure could have transferred this risk to BPC, which took the decision to close the power station early.

30 BR should be alert to opportumt1es to avoid taking risks which it cannot manage effectively because key decisions are in the hands of third parties. The construction of branch lines and the provision of specialist wagons are both risky projects for which the return depends on the behaviour of a single customer or a very small number of customers. In such circumstances BR should seek long term enforceable contracts which transfer risk to the user of the specialist facilities.


Fl

Appendix F

Enterprise Profile: Department of Supply

1 This appendix addresses the various questions about the Department of Supply (DoS) in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 To purchase a range of items which are widely used in Government departments and supply them to departments in accordance with their needs. Government will always have to undertake this role for itself. However, there are always issues over firstly the balance between the roles of user ministries and departments and the central procurement agency (ie DoS) and secondly between the work undertaken in house and the use made of the private sector. The first issue is outside the scope of our present assignment. The second can only be resolved rationally if there is a financial and management accounting system which enables comparisons between costs incurred by the DoS and the prices charged by the private sector. Such a system does not exist at the present.


3 There is a head office in Gaborone and the main depot is at Gaborone West, away from the headquarters. There are also depots at Francistown, Maun, Kasane, Gantsi and Tsabong. According to the establishment register for 1995/96, the staffing of the depots and the various departments is as follows:-


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Department Number of staff

Central administration 22

Central purchasing 12

Inspection and internal audit 16

Uniforms unit 9

Office equipment repairs 16

Carpentry 7

Gaborone depots 277

Tsabong depot 58

Gantsi depot 59

Francistown depot 105

Kasane depot 54

Maun depot 60

Seconded to ministries 384

Total 1,079

5 In addition there are over 1000 industrial class employees based in ministries who are responsible for supplies but are on ministerial payrolls.

6 The staff at depots outside Gaborone include personnel responsible for office equipment repairs and carpentry. There are about the same number of staff providing theses and based outside Gaborone as there are based in Gaborone.


7 Government ministries and departments, which have their supply needs met by DoS.


8 The existing contractual and financial arrangements between the DoS and its suppliers and customers are such that DoS does procurement from the private sector. Items are generally bought for stock rather than in response to a specific order from a department and DoS aims to buy in bulk in order to obtain bulk discounts. DoS uses tendering procedures to place orders, some of which run for up to two years.

9 Ministries and departments are obliged to buy from a set list of items available from the DoS. If they wish to procure items which are outside this list then they require DoS's approval to do so. When a department wants to obtain items from DoS it must indicate the availability of funds to do so. DoS then meets the order and charges the customer through an internal transfer voucher. The charge is based on cost plus a mark up of 10%. However, the mark up


F3

is not based on cost recovery principles. DoS 1s part of the Ministry of Finance and Development Planning and is not self accounting.


10 We were not able to obtain a figure for the value total issues, which would indicate the level of activity in the DoS. We were informed that the total stock value is about P50 million.


11 The stores are in generally good condition and the stock is neat and tidy and well looked after.


12 The size of the unit is likely to expand or contract in response to changes in the size of Government.

Policy Review

are there reasons for keeping some or all of the activiry as a government function?

13 Some of the activities will inevitably remain in public hands as they involve Government purchasing. However, some of Department's activities could readily be undertaken by arms' length contractors rather than in house. Whether they should or not is a question of cost and operational effectiveness.


14 Not so long as the privatisation was reasonably well planned. Any disruption would be internal to Government and it is difficult to see how there would be any effect on essential public services in view of the tasks the Department undertakes.


15 In some cases (eg equipment maintenance) clearly yes. In other cases, there may be greater difficulties.


16 Generally there is already private sector activity in the areas which the Department covers in its work and they could assume control.


17 In those areas that are amenable to privatisation there is scope for 'competition.


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18 Yes. A number of activities could be contracted out. They include the repair of office equipment, carpentry, some stockholding with better inventory management and the manufacture of uniforms, which is part private (the cut, make and trim operation) and part public (the procurement of material and other inputs).

Business Evaluation

is the organisation operating efficiently, in terms of financial and operational peiformance measures?

19 In the absence of a commercial accounting system, any assessment in this area has to be highly subjective. The stores themselves were well looked after and the stock was kept in excellent condition. However, there are clearly areas where there have been efficiency failings. The volume of uniform stocks seems very high in the light of examination of stock turnover levels. There were a number of very slow moving stock items such as wheelbarrows, which were stored outside and going rusty, and cookers which were acquired for VIP housing and not used. There have in the past been examples where uniforms were procured but not then taken by the relevant ministry because of design changes. The fact that the stores are only now being computerised suggests a lack of efficiency since large stores in the private sector have generally been computerised for some years to enable better management of stock levels and hence working capital. The fact that DoS's working capital is in effect free to the Department encourages inefficiency in this area.


20 DoS is almost entirely local. There is one expatriate, doing training and one expatriate accountant who supports DoS although he is not on the Department's payroll. The management is entirely local.


21 There has been citizen interest in the uniform business, which has been partly privatised through the cut, make and trim (CMT) operation. In the past DoS used to procure uniforms for various departments ( eg health, police, defence, customs, immigration, prisons, Government security and industrial staff) from suppliers who were generally based in South Africa. Local suppliers lacked the financial resources and management capacity to compete. Under current arrangements, DoS procures cloth and other accessories. Following competitive tenders, these are then supplied to local companies who make the uniforms.


22 There are citizens engaged in the activities which DoS undertakes.



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23 Yes, there should be. The CMT operations could be turned into full procurement operations, with the suppliers doing their own input procurement and financial management. Some preparation will be needed to ensure that existing suppliers are ready for a change of this sort but there are already companies making uniforms in Botswana without the benefit of the CMT arrangements, so it is clearly feasible. Other activities which might be turned over to the private sector are in areas where local companies could compete, eg equipment repairs and carpentry (although this is very small).


24 DoS has some 2,000 staff either on its payroll or on the payroll of ministries but responsible for stores management. Some loss of jobs is virtually certain if the private sector takes a greater role in supplying Government needs and this may not be offset by increased employment in the private sector. However, the impact of, for example, privatising some stockholding by cutting stock levels will only be gradual and hence most staff reduction may be handled by natural wastage.

_ is there a possibility of re-deploying and/or re-training the displaced workers?

25 Some staff could certainly be helped into the private sector as independent entrepreneurs with the promise of opportunities to work on assignments for the DoS. Examples are equipment repair technicians. However, in the environment of a general policy commitment to privatisation, the opportunities to redeploy staff, particularly unskilled staff, within the public sector are probably limited.

Conclusions

26 The DoS cannot hope to operate efficiently without a commercial financial and management accounting system. The present system simply does not allow proper evaluation of the trade off of storage costs, obsolescence risk and the interest cost of holding additional stock against the risk of stock-outs. Nor does it allow DoS to charge Government on a commercial basis for its procurement services. The flat mark up currently applied to purchases is certain to embody cross subsidies and it is uncertain whether or not the mark up covers DoS costs. It should therefore be an urgent priority to make DoS self accounting with its own balance sheet and profit and loss account and with instructions to operate commercially in its procurement and supply activities. Once such a system is in place it will be possible to answer the question of whether DoS plays a useful role or whether departments could be more cost effective by managing their own procurement and going to the DoS or the private sector depending on who offered the more competitive prices and conditions.

27 The computerisation project which is currently in progress is installing a commercial stock management system. The system has general ledger features and hence it would be straightforward to move the DoS onto a commercial accounting system once this system is installed. The project should be completed within the next twelve months. However, DoS would still be bound by Government accounting rules and hence would have to operate both systems. In order to overcome this problem, consideration should be given to turning the DoS into a parastatal.


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28 A commercial accounting system will also enable DoS to market test its own in house activities. It should, for example, be able to calculate the cost of repairing equipment in house and compare this with prices charged in the private sector. It will be able to set maximum and minimum stock levels on the basis of more scientific calculations of the costs and benefits of particular stock levels. It will be under commercial pressure to adopt more sophisticated procurement and tendering procedures both to reduce risk and to avoid cost. This in turn will lead to the privatisation of at least some of DoS's stockholdings as it moves towards just in time approaches to its stock management.

29 The installation of a commercial accounting system should be part of a privatisation programme at the DoS. It should not however be a pre-condition for such a programme. Ad hoc costing exercises can be used to evaluate the cost of at least some services in the mean time and they can be subjected to market testing by comparing in house costs with the prices charged by the private sector.

30 The DoS also needs to consider some more innovative approaches to its activities. For example, photocopiers do not have to be purchased and serviced in house. They can be hired or leased with repair responsibility resting with the supplier. These sort of approaches do not seem to have received consideration in the past.


GI

Appendix G

Enterprise Profile: The Department of Printing and Publishing Services

1 This appendix addresses the various questions about the Department of Printing and Publishing Services (DPPS) raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 To meet all Government printing needs. Government will continue to have such needs but in an environment where privatisation is accepted policy there is no reason to do such printing in house.


3 The DPPS is based in Gaborone and carries out most of its work there. There are separate units responsible for each stage of the printing process. There are also two other separate, very small units carrying out educational printing. There is a bookshop in Gaborone, run by the DPPS, but it operates as a public service rather than a commercial entity.

4 The Government Printer has 200 employees.


5 Government ministries and departments, which receive printing services from DPPS without payment for services rendered.


6 Departments and ministries are required to submit requests for printing to DPPS. The use of private sector printers requires DPPS approval. Material may be submitted on diskette or as hard copy. The client agrees with DPPS on the number of copies required, the deadline and the production method. DPPS then decides whether to produce the work in house or contract out.


7 In the last year, DPPS has carried out some 3,000 printing assignments for Government ministries and departments. Jobs differ in their degree of urgency. Thus examination papers and the Government Gazette are always given priority over other work. This means that the DPPS is sometimes unreliable on timing for lower priority work.


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8 The equipment of DPPS is modern and in generally good condition. It is standardising on Heidelberg equipment at the moment. It can meet most printing needs, but high quality colour assignments are sub contracted to Printing and Publishing.


9 The volume of activity will correspond with Government printing needs.

Policy Review

are there reasons for keeping some or all of the activity as a government/unction?

10 There are components of the Department's role which must stay in the public sector. There will always be a need for an ordering function in Government. Furthermore, the confidentiality of work such as examination papers or certain Government documents mean that it ·is sensible to print the relevant documents in house. However, these activities constitute only a small part of DPPS's role. The general printing of Government forms, stationery and reports could equally well be handled by the private sector.


11 There is no reason for any change to cause disruption. DPPS already contracts out some of its work and the amount contracted could be expanded readily.


12 There are a number of private printing companies which enjoy a good market reputation. DPPS has expressed anxiety that these printers may be significantly more expensive than DPPS but this cannot be established one way or the other with the present information systems in place at DPPS.


13 Yes, companies in the business include Printing and Publishing and Gaborone Printing Works. They could take on work currently done by the Government Printer. The DPPS expressed doubts over the quality standards and capacity of some printing companies. It feels that its equipment is superior to the rest of the industry with the exception of Printing and Publishing. However, this need not be an issue for many of the items produced such as forms.





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15 There are opportunities for contracting out most of the activities of the DPPS.

Business Evaluation


16 Financial performance is impossible to measure because DPPS does not have a commercial accounting system. It is slowly introducing a specialist software package called Caxton which is designed for the printing industry and incorporates job costing. It is the intention in due course to move over to a system of charging departments for their use of printing services. However, the costing package is not being linked to a general ledger package, so that it will still not be possible to measure overall financial performance.

17 It is impossible for any organisation to be efficient if it provides a service which is free at the point of use as clients have no incentive to restrict their use of it. The present arrangements give incentives to departments to order excessive quantities of stationery and reports. From observing of its operations the department seems to run quite smoothly, although there are complaints from users over delays. There is clearly scope for improving performance. For example, material which had been generated from computer records is sent to DPPS in hard copy for printing rather than on diskette.


18 Management is entirely localised. There are two expatriates, one training officer and one specialist in the bookshop.


19 There is citizen involvement in the printing industry although the quality end of the market is dominated by firms which employ expatriates.


20 Most of the functions of DPPS can be performed by citizens, but expatriate staff may be required for the more technically demanding types of printing, eg high quality colour printing.


21 Yes, there should be provided that DPPS gives priority to contracting out the sort of jobs that citizen business can tackle, ie the smaller jobs which do not have exacting standards attached to them.



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22 Negligible. Any job losses at DPPS should be offset by growth in the private sector. Because any reduction in workload at DPPS is likely to be gradual, there are unlikely to redundancies.


23 This is unlikely to be an issue.

Conclusions

24 The printing industry is changing under the impact of increasingly sophisticated and cheap printing equipment in offices and the growing use of photocopiers. Throughout the world, organisations in the public and private sector are reviewing the way they go about meeting their printing needs. The issues which they face commonly fall into three categories:-

(a) Should a printing job be undertaken in house or by a specialist printer.

. (b)

(c)

Which printing firms can meet external needs most effectively, in terms of quality, cost and reliability.

What size should print runs be.

25 Most organisations are making growing use of in house printers and photocopiers to produce documents, forms and short reports. The growing sophistication and falling costs of desk top printing software and equipment are leading to increasing use of in house facilities in areas which would have been unthinkable a few years ago, for example in printing letterheads. Reports of which limited numbers of copies are required are often produced on photocopiers rather than commercial printing equipment. However, extra convenience and speed has to be balanced against extra costs.

26 An organisation with a range of printing needs may need to look to different suppliers depending on the quality, price and speed of response which it is seeking. Services such as colour printing and carbonised paper require specialist equipment and skills. Widely circulated forms need to be printed on high speed presses in order to be produced cost effectively. Users always have deadlines for jobs, even jobs which are is not urgent, and some suppliers may not be able to meet deadlines.

27 Print runs should be set so as to balance the economies of scale available from a long print run against the extra working capital costs and risks of obsolescence or excess supply associated with printing large volumes. The final decision is usually based on judgement rather than scientific calculation but needs to be informed by analysis of the costs and risks involved.

28 In order to reach rational decisions about the approach to adopt in a particular case, organisations need systems which generate information about the cost of different options and budgeting methods which ensure that individuals behave cost effectively. Government lacks the systems to achieve these objectives. Printing services from DPPS are free at the point of use in departments. This is likely to lead to insufficient use of in house facilities and excessive demands for both quality and quantity of Government documents. Departments are not free to


GS

seek their printing requirements outside DPPS and this in tum is likely to lead to complacency and a service which is not responsive to user needs or timescales. DPPS has no costing system and as such its costs cannot be compared with those of the private sector. Investment decisions in DPPS do not have to be cost justified on commercial criteria.

29 In our opinion, a proper balance between the use of in house facilities, of the services of DPPS and of private printers is only likely to be achieved when users are responsible for meeting the costs of printing wherever it is undertaken and have the choice of where to go to meet their needs. This cannot always be achieved, for example because confidential printing needs to be undertaken within Government. But it could be achieved for the great majority of Government printing needs.

30 In order to support such a system the DPPS needs to install not only a costing system, which is already in progress, but also a commercial financial accounting system so that the DPPS acts as a commercial printer and ensures that it covers costs. This could best be achieved by turning the DPPS into a parastatal organisation. The establishment of a commercial approach would ensure that jobs which are currently printed in house would in some cases be contracted out to the private sector. The change would also force the DPPS to ensure that its investments were cost justified.

31 A programme of change of this sort would take no more than two years and need not involve significant increases in staff numbers. The DPPS is a small organisation and its accounting systems should be correspondingly simple. In the short term, it would be possible for the DPPS to contract out more work based on the results of ad hoc costing exercises and the use of tendering procedures to establish private sector costs.


HI

Appendix H

Enterprise Profile: Botswana Housing Corporation

I This appendix addresses the various questions about Botswana Housing Corporation (BHC) raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 The BHC has suffered from the lack of a clear role and objectives, largely stemming from the lack of a clear Government housing policy. BHC has been charged with responsibility for providing housing for all sectors of the nation but in practice its main role has been to provide subsidised housing to middle to upper income households. The needs of low income households are generally catered for through the Self Help Housing Agencies (SHHA) programme, which has much lower costs and is therefore more affordable to low income households. With Government policy moving away from the provision of subsidies to parastatals, the expectations on BHC have changed.

3 BHC has now set as its mission statement to be a "self sustaining commercial organisation which strives to be a leader in the property development and management by marketing its skill competitively to its customers, and committed to the pursuit of excellence through trained, motivated and an efficient work force." Its ability to achieve this mission will depend on both its management and the willingness of Government to give BHC commercial freedom.


4 There are two main operational wings, based in Gaborone. The integrated property development wing is responsible for design and construction management. The integrated property management wing undertakes property management and maintenance. These wings are supported by finance, human resources, internal audit, corporate services legal and information departments. There is a regional office in Francistown which replicates these head office functions on a smaller scale. There are also district and area offices with maintenance capabilities at Selebi-Phikwe, Sowa, Maun, Lobatse, Mahalapye, Palapye and Jwaneng. There are about 1,000 staff


5 The tenants who enjoy subsidised accommodation in BHC housing.



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6 Potential tenants register with BHC and are placed on a waiting list. BHC constructs housing at sites across Botswana in major towns and villages. Houses are then allocated to tenants from the waiting list. There is a waiting time of about fourteen years. Property is repaired in accordance with requests from tenants and maintained according to schedules, for example for painting. BHC collects rent from tenants.

7 Properties are sold to tenants if they wish and also to other citizen purchasers. In some cases, BHC sells properties outright. In other cases sales are made through the tenant purchase scheme and BHC then collects loan repayments rather than rent from tenants.


8 BHC owns about 18,000 houses which are let to tenants and maintained by BHC. It has also sold a number of houses to tenants. Outstanding advances on these properties were valued at P 58. 7 million at 31 March 1996.


9 All of BHC's housing stock is less than 25 years old and in generally reasonable condition although there are repair needs at some properties.


10 At present BHC is aiming to sell properties and is not building new housing. It will only build for identified takers and where it can recover costs. As such it is not expanding although this is not explicit policy.

11 The integrated development consultancy wing is planning to diversify into other contract work for Government and the private sector. ,

Policy Review


12 BHC is engaged in three separate businesses, property development consultancy, property management and housing finance. There are few logical links between these three businesses. A decision on whether to retain BHC as a public sector operator in any of these businesses requires Government policy decisions on its housing policy. If Government is happy to leave the middle part of the housing market, where BHC operates, in the hands of market forces then BHC can be entirely privatised. If Government sees a continuing need for intervention in this type of housing for social reasons, or wishes to keep BHC in place to provide housing for public sector institutions, then this could be an argument for keeping BHC in business in the public sector. However, there are other ways of achieving the same objectives, through co-operation with the private sector, without retaining BHC in public ownership.

/


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13 The main victims of disruption would be BHC tenants. They would see their rents rise to market levels as a result of an ownership change and many of them might have difficulty in affording the increases, which might be as great as 100%. This in tum could make the privatisation of BHC's housing stock difficult. A well planned disposal programme which avoided disruption would take some years to complete.


14 Yes, BHC supplies less than 10% of the housing market. There are other individuals and organisations providing housing for sale and for rental. Government has itself used an alternative supplier, Time Projects, to meet public housing needs. A report by Price Waterhouse states that Time Projects offered lower prices, higher standards and better service than BHC although this is disputed by BHC's management. There are three major private sector estate agencies in Botswana which carry out private sector property management and appear to have a good reputation. Banks, the Botswana Building Society, the Botswana Savings Bank and some employers provide housing finance. However, the market is very limited and the supply of housing finance in Botswana is inadequate. This is the subject of a study by Shelter Afrique, which is currently in progress.


15 It is unlikely that a single buyer could be found to take on BHC as a whole. However, there are different commercial entities providing all BHC's services in the private sector.




17 The privatisation of BHC would involve first the sale of its assets, ie the housing stock and second the sale of the three businesses in which it operates, ie property development, property management and housing finance.

18 BHC housing has been providing housing to tenants at subsidised rents. The tenants could not afford to pay commercial rents and the housing is no more affordable by alternative tenants. Hence the housing stock could only be sold off at a price which is below replacement cost, whether to existing tenants or to alternative landlords. Government must accept this approach if it wishes to initiate a comprehensive sales programme. It may not lead to financial losses because much of BHC's housing stock was built several years ago when construction costs were far lower. The current tenant purchase scheme is achieving few sales because the tenant is moving from a subsidised tenancy to a commercial purchase arrangement. Moreover, the extra costs involved are creating major default problems with the scheme. However, there is no doubt that the houses could be sold at a price.


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19 If BHC housing were sold and Government decided that the supply of middle income housing could be left to market forces then there would be no rationale for the existence of the property development and maintenance operations of BHC. They could be closed and their assets sold or the business activities sold into the private sector through a trade sale or employee buy out. The housing finance operations would have to continue as they would be responsible for collections for many years. It is possible that a financial institution might be persuaded to buy this part of the operation, although the default rate and long term nature of the loans might make a sale difficult.

Business Evaluation


20 In 1994/95 BHC made an operating loss of P 13,262,000. A similar loss is likely for 1995/96 although accounts have not yet been audited. Results for earlier years show a mixed pattern of losses and profits. However the results for individual years must be treated with caution. A major financial and management scandal at BHC in 1992 led to provisions of P 62 million in that year's accounts, wiping out apparent profits from earlier years.

21 BHC faces a rising level of interest rates on its long term loans from Government. As such it would be likely to incur continuing losses with its present financial structure and operating policies in spite of efforts to increase efficiency and revenue. This reflects a legacy of housing construction which is to standards which neither tenants nor prospective purchasers can afford. As the Price Waterhouse report argues "the choice that the BHC - and hence Government - faces is not whether to subsidise purchase or rental prices for BHC stock but how to."

22 Government and BHC have now agreed to a capital restructuring for the Corporation. Over the next two years, P250 million of Government debt will be converted into equity in two equal tranches. Financial projections show that this restructuring, together with other measures, should enable BHC to sustain its financial viability. However, there is not expected to be any dividend on the equity and the Government is therefore suffering a loss of interest income.

23 BHC has been extensively criticised for internal inefficiencies, particularly following the scandal of 1992. But there are more wide ranging criticisms of the performance of all components of BHC's business. The performance of the development department has been compared unfavourably, on both price and quality, with Time Projects. At present, development is virtually at a standstill, which clearly adversely impacts on efficiency. BHC is trying to address the problem by offering the services of the integrated development consultancy wing on the open market. The maintenance department attracts adverse comments from tenants and others. The housing finance function has arrears of P6.8 million on its loan portfolio of P58.7 million, which is high. The Price Waterhouse report comments adversely on efficiency in a number of areas.



HS

24 There are about thirty expatriates m technical and management positions, so localisation is far from complete.


25 There are some local property management companies, consultants and housing finance institutions who could undertake tasks currently undertaken in house by BHC.


26 Professions such as architecture and engineering continue to require expatriate technical expertise because the numbers of qualified citizens are inadequate to meet demand. Other areas of activity such as maintenance are within the capacity of local firms.


27 . Yes, there will, as property maintenance work currently undertaken by BHC becomes available to the private sector.


28 This depends on the approach taken to privatisation. If BHC's development and maintenance activities can be moved into the private sector before the housing is sold off, probably through employee buy outs, then there should be only limited job losses. However, if the housing stock is sold and staff are then made redundant then there will be greater problems in loss of jobs. In either case, the loss of employment at BHC should be compensated by growth in the private sector.


29 There would be a possibility of redeploying some p'ersonnel into the Department of Architecture and Building Services (DABS), although this would be subject to decisions on the privatisation of DABS itself There could also be possibilities for moving some staff from BHC to support the Self Help Housing Agencies programme. Skilled professionals should be able to find jobs in the private sector without difficulty. However, there would probably be limited opportunities for unskilled staff.

Conclusions

30 Fundamental decisions about housing policy are needed before final decisions can be taken about the future ofBHC. First and foremost, does Government need to be active in the provision of subsidised middle to upper income housing? If it decides that it does not and can leave this area of activity to market forces then in principle there is no reason why BHC should not be privatised in its entirety. However, the privatisation of BHC and consequent withdrawal of Government from this part of the housing market could not take place rapidly because of the impact of past policies of subsidisation on the size, type and affordability of the housing stock.


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31 At the same time, Government would also need to assess its policy on the housing of civil servants and parastatal employees. It is currently common practice for public sector employers to provide housing for employees. However, it would be entirely consistent with a policy of privatisation to monetize such benefits and permit employees to choose their own housing and whether they prefer to rent or purchase. If Government no longer wished to rent property direct from BHC then its attitude towards retaining the Corporation in state hands would probably change.

32 BHC has been making losses in its current role. The capital restructuring which is currently in progress wiIJ convert P250 million of BHC's debt into equity, thereby restoring BHC to viability at some cost in lost interest to Government. BHC is most unlikely to pay dividends. However, Government should be able to recover its loans and equity stake in BHC through privatisation. While properties will have to be sold at prices which are below replacement cost, the proceeds of sales are likely to exceed book values because many of BHC's properties were built several years ago when construction costs were far lower. BHC estimates that its property portfolio is worth some Pl.5 billion against a book value of Pl billion.

33 On the assumption that Government is willing to leave housing provision for middle income households to the private sector and market forces, a possible scenario for privatising BHC, following announcement of the new policy, is as follows:-

(a)

(b)

Negotiations between BHC and Government over implementation of new policy.

Increased sales ofBHC housing stock to buyers and tenants.

( c) Privatisation of BHC's businesses.

(d) Sale ofremainder ofBHC housing stock to private landlords.

Negotiations between BBC and Government

34 Negotiations between BHC and Government will be required to put the new policy into effect. The areas where agreement will be required include:-

(a) The creation of sectional title for apartments so as to permit sale of this component of BHC's stock to tenants and other buyers.

(b)

(c)

Commercialisation of BHC's development and maintenance functions, so that they put in place costing systems and have a management framework which enables them to bid for contracts. This is already happening to some extent, with the objective of BHC bidding for private sector work . However, the pace of change will have to increase once there is a privatisation plan in place.

The establishment of an arms length relationship between BHC and Government so that BHC can act commercially in its dealings with Government.


(d)

(e)

(f)

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Agreement of policies which set rents and prices for BHC properties on the basis of market forces. This is likely to lead to higher rents, particularly for the more attractive properties, and lower selling prices for properties. Under present policies, where rents are subsidised but selling prices are not, the level of sales to tenants is inevitably minimal as it often involves more than doubling financial commitments for housing.

Establishment of criteria for selling properties at below a replacement cost price. The Price Waterhouse report demonstrates that there is no prospect of selling all BHC's properties at a replacement cost price for the foreseeable future. There is no difference in principle between selling property at a subsidised price and letting it at a subsidised price and hence the fact that the selling price does not cover cost should not be an absolute obstacle to sales. However, BHC's attempts to sell its properties could in itself drive down prices in the short term. Consequently there must be safeguards in place to ensure that prices achieved reflect medium term market conditions and not the circumstances of an artificial price slump induced by BHC sales. This will be best achieved by a gradual sales programme, focusing in particular on properties which are difficult to let in the first instance.

Relaxation of the restriction on sales by BHC which means they cannot sell to expatriates. BHC's property portfolio is likely to prove difficult to sell at an acceptable price even without such restrictions. Moreover, it is already possible for a purchaser to sell a BHC property on to an expatriate. The effect of retaining the restriction is likely to be some loss of revenue to BHC.

(g) Agreement of the level of funding which Government will provide to BHC to implement this policy, accompanied by operational targets for the Corporation to meet in areas such as sales. These subsidy arrangements and operational targets will need to be renegotiated annually.

Increased sales of BHC housing

3 5 Once there is a more level playing field between renting and buying BHC property, and especially once tenants become aware that the Corporation will eventually cease to exist, there is likely to be significantly increased interest in purchases ofBHC property by tenants.

Privatisation of BBC's businesses

36 BHC has three businesses, involved in property development, property maintenance and housing finance. The new policy regime for BHC is bound to damage morale in all these businesses unless there is a clear statement at an early stage about the future of the staff

3 7 All three businesses need to be turned into free standing business entities as quickly as possible. In the case of the maintenance operation, it may be more sensible to turn each depot into a separate business.

3 8 The development function should have top priority for privatisation. This is because BHC's development role will cease once the new policy is announced. The main asset of any


H8

property development operation is its staff and as such it will probably be difficult to sell the development business to an outsider. It would be preferable to offer the operations to the staff involved for purchase through a employee buy out. BHC should be willing if necessary to provide finance for the buy out, to be repaid from operational cash flow and secured on the assets of the new development company. It may be possible to transfer some specialist staff who are not interested in the employee buy out to the Department of Architecture and Building Services.

39 The sale of the maintenance activities may be more difficult. While BHC continues in existence it will have to have a continuing capability to manage its housing stock. On the other hand, as more and more houses are sold into the private sector, the need for maintenance services is likely to diminish and hence the maintenance department's staffing requirement will fall. In time this could threaten the viability of individual depots or even the operation as a whole.

40 The best approach may be to move as much maintenance activity as possible into the private sector as quickly as possible, with the maintenance function of BHC moving into the private sector at the same time to take on the work. This could also be achieved through employee buy outs, so as to maintain continuity of employment opportunities. The maintenance business required limited capital and the expertise to run it already exists in BHC. There may be contracts between BHC and its former employees for a period of one to two years to expedite the buy outs. Once again, there may have to be finance provided by BHC to assist the EBOs.

41 The final component of BHC's activities is its role in housing finance. An efficient housing finance operation requires three things:-

(a) Access to a source oflong term finance at reasonable borrowing cost.

(b)

(c)

Market opportunities, in the form of borrowers who wish to purchase properties which are within their affordability limits.

Systems for managing both borrowing and lending activities cost effectively.

42 At present, BHC's housing finance operation has long term finance, through its access to Government funding, on terms which are reasonable compared with interest rates elsewhere in the economy. However, there is a serious doubt over its capacity to evaluate borrowers or manage the repayment process. The Price Waterhouse report draws attention to arrears of some 7% of total annual repayments on the tenant purchase scheme and recommends sale of the loan book to a commercial lender. Arrears now amount to 12% of the advances outstanding. Sale of the loan book is a reasonable approach. However, in order to market the loan book, it may be necessary to transfer some liabilities (ie long term loans from Government) along with the assets (ie loans to purchasers). This will enable another financial institution to take on the loan book without putting strains on the term structure of its balance sheet.

43 The loan book could be split between several financial institution·s in the sale process. BHC could then aim to develop relationships with a number of such institutions to support its future sales programme. They would evaluate borrowers, make loans to house purchasers, and


H9

take the credit risk on those loans. When the loan was taken out, BHC and Government would transfer some of its long term loan portfolio from BHC to the funding institution. This would ensure that the Government continued to take a role in providing long term housing finance while allowing credit evaluation, financial management and repayment risk to be moved into the private sector.

44 Through the privatisation of these three business activities, BHC would be substantially moved into the private sector. There would however continue to be a residual role for BHC in managing its remaining housing stock and its sales programme. The role would be reviewed year by year as the programme progresses. There are bound to be problems in discharging this continuing role, first because morale is likely to drop in BHC with no prospect of permanent employment and secondly because the remaining staff will in effect have an incentive to delay progress on privatisation in order to preserve their jobs. There are ways of handling this issue, for example by setting a closure date for BHC, putting staff on contract until closure and giving financial incentives depending on progress made. The final parts of the sale process could then be placed in the hands of a liquidator.

Sale of remainder of BHC housing stock

45 There are bound to be some tenants who prefer not to purchase their properties and stay in rented accommodation. In due course, BHC could aim to sell its remaining housing stock to private landlords. This could be done through, for example, sales to investors in potential variable rate loan stock companies who could be seeking long term property investments. These sales would be made later on in the programme and properties would be sold in batches of a size likely to appeal to investors.


II

Appendix I

Enterprise Profile: Botswana Telecommunications Corporation

I This appendix addresses the various questions about Botswana Telecommunications Corporation (BTC) raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 The role of BTC is set out in the Act which established the Corporation as being to provide "all public telecommunications services, both national and international, for Botswana, together with such other activities as may appear to the Corporation to be conducive or incidental to the attainment of all or any of its objectives." The objectives are still relevant to Botswana but the statutory monopoly under which they are pursued is not relevant in the current socio-economic situation in view of the rapid rate of technological change in the industry since BTC was established.


3 BTC is organised on functional lines, with different departments responsible for engineering, finance, commercial and corporate services. There are regional managers in the North and South of the country, responsible for all aspects of BTC services. Their role is to take BTC closer to its customers.


4 Telecommunications users. Domestic and rural users are particular beneficiaries as they receive a subsidised service, at the expense of urban and business users.


5 Potential customers apply to BTC for service appropriate to their needs. The range of services provided by BTC includes local and international telephony, P ABXs, VSA T services, payphones, private circuits, pagers and data circuits. BTC provides service as and when it has the capacity. There are often delays in obtaining telephone circuits, especially in Gaborone, although there is now excess capacity in other parts of the country such as Francistown and Selebi-Phikwe. BTC provides and bills customers in accordance with the use they make of the service.


6 There are currently some 60,000 telephone subscribers.


12


7 Most of BTC's equipment and facilities are of modern design, reflecting the rapid growth in demand for its services, and consequent investment, in recent years.


8 Demand continues to grow at 10%-20% per annum and BTC plans to respond to rising demand. There are unsatisfied customers at present who want a service from BTC and are obliged to wait for a connection. Growth at BTC may slow with the additional competition which liberalisation will bring.

Policy Review


9 The regulatory functions which BTC currently discharges should certainly be retained by Government. A bill transferring these regulatory powers from BTC to an independent regulatory authority has recently and should be passed in the next session of Parliament. The other functions can and should be privatised.


10 There is extensive international experience of privatising telecommunications utilities. With proper planning there is no reason for any disruption in services.


11 Private companies deliver some or all telecommunications services in most countries and generally do so in an efficient, cost effective manner.


12 There are no companies in Botswana which could take over BTC's operations. Rather, privatisation would take the form of licensing additional operators to compete with BTC and selling off BTC under its own licence conditions.


13 At least two cellular licences are likely to be available shortly. BTC plans to bid for one of them in collaboration with a joint venture partner. However, there should be at least one fully independent operator. This will whether there are companies interested in competing with BTC. Bearing in mind the high level of competition which already exists in South Africa and the willingness of investors to provide cellular services in other African markets such as Uganda and Tanzania, competition in this area should be regarded as a certainty. However, the competition will be restricted to major towns and will not cover the' same area as BTC's services.


I3

14 The market for terminal equipment is also being liberalised and competition is certain. Indeed, BTC's monopoly over terminal equipment is already ineffective as users import equipment which meets their requirements.


15 Virtually the entire operations of BTC are suitable for privatisation with exception of its regulatory role.

Business Evaluation


16 BTC's accounts show satisfactory financial performance in that the corporation is consistently profitable and has a strong balance sheet. However, this is not a difficult outcome for a monopoly supplier to achieve in an industry such as telecommunications where demand is growing fast and the costs of service are falling as a result of technological change.

17 It is difficult to gauge the standard of operational performance. BTC is providing a mixture of commercial and social services and cross subsidising between the two and it is impossible to separate the impact of these aspects. However, there is clearly a deficiency in performance in the sense that customers are obliged to wait, often for long periods, to obtain telephone services, even in major towns such as Gaborone.


18 There are about 45 expatriate staff at BTC, most of them in technical and financial positions, out of a total staff of some 1650. Until two years, BTC was managed by Cable and Wireless, a British telecommunications company. Since the management contract was terminated, the position of chief executive has been localised and BTC has sought expatriate support on an ad hoc basis from a number of sources, including Sweden and the UK.


19 There is certain to be some citizen interest in the opporturut1es arising from the liberalisation of telecommunications services. However, the interest is likely to be at the low technology, low capital cost end of the business.


20 There is likely to be a continuing need for expatriate involvement in the sector in view of the technical requirements, which cannot be met locally.


I


14

21 The liberalisation and eventual privatisation of BTC will be accompanied by significant new opportunities for citizen businesses. These opportunities stem from the rapidly changing and expanding nature of the telecommunications sector as well as from the potential implementation of a privatisation policy in the sector.


22 There is likely to be continuing overall growth in employment numbers in view of the rapid growth rate in the sector. But technical change is generally leading to lower employment levels in certain areas of telecommunications and these trends will limit the overall beneficial effect on employment numbers.


23 This is unlikely to be necessary.

Conclusions

24 The worldwide telecommunications industry is going through a period of profound transformation, driven by technological change, market growth, liberalisation and privatisation. Until recently, the standard organisation structure for the industry was based on public ownership and monopoly. The structure was justified partly on the economic argument that telecommunications service provision is a natural monopoly, and that competition would consequently be wasteful and inefficient; and partly on social arguments concerning the desirability of widespread, affordable access to the telephone network.

25 The economic justification for the monopolistic structure, always open to question, has been rapidly eroded by technological progress. The falling costs of computer-based switching technologies and optical fibre transmission systems, the development of new wireless and broad band technologies, the convergence between fixed and mobile communications, and the development of multi-media services have all meant that an industry structure based on competition is increasingly viable across most if not all sectors of the telecommunications marketplace. Even the provision of local telephone service in rural areas, arguably the last bastion of the natural monopoly, is now potentially competitive, given the declining costs of the more flexible wireless-based local loop technologies. While competition may not yet be viable in the more remote areas of Botswana, the scope for competition is increasing all the time.

26 The emergence of competition has been accompanied by a growing move towards private sector ownership, partly because the economic rationale for state ownership has largely disappeared, and partly because a publicly owned operator is likely to be ill-equipped to compete effectively against privately owned and commercially run operators.

27 The pace of change in Africa is lagging behind the rest of the world and the pace of change in Botswana is lagging behind much of the rest of Africa. The typical steps in a reform programme are:-

(a) transfer of regulatory functions to a regulatory authority;


(b)

(c)

(d)

(e)

IS

establishment of the telecoms business as a public limited company, subject to the normal provisions of company law;

liberalisation of most, if not all, telecoms markets;

establishment of a new regulatory policy framework for the telecommunications sector, suitable for the new commercial environment; and

privatisation of the telecommunications operator, through a private sale, a public flotation, or some combination of the two.

28 Although there are some African countries ( eg Zimbabwe) which aim to maintain a public sector monopoly over telecommunications, the pace of reform elsewhere is generally faster. Even countries such as Uganda and Tanzania, which are not generally considered as reform leaders, have already licensed a cellular competitor to their national telecommunications company, turned those companies from public corporations into companies regulated under the Companies Act and begun to consider the modalities and timetable for a sale of the companies.

29 Botswana has recently announced a new telecommunications policy, through a report issued by the Ministry of Works, Transport and Communications in December 1995. A bill has recently been published to give effect to the aspects of the reform programme which require legislation. The bill is likely to become an Act later this year. The main features of the new policy are:-

(a) The establishment of a regulatory authority, independent of both the Ministry and BTC, to regulate the sector in accordance with Government policy.

(b)

(c)

(d)

The issue of licences to private operators to provide services. There will be various types of licence. Licences to provide packet switched data services and paging services should be freely available. However, licences to provide telephone services would be restricted. Licences to provide cellular telephone services should be granted soon after the Act has been passed and procedures have been put in place. The number of licences will be limited but there will be at least two. The regulator may also in due course issue further licences for local, national and international services. The Government will determine the timing of any new licences and the number will be restricted. In practice it may be some time before any new licences are issued.

The imposition of price controls. These controls will cover national long distance services, cellular services and local network services.

The establishment of a performance contract with Government to cover BTC's services which are not subject to competition under the new framework. This contract will cover such topics as agreed network expansion plans, targets for connection of customers, compensation for providing unviable services and performance in efficiency, reliability and accessibility of seFVices.


(e)

I6

The operational and financial separation of BTC's compet1t1ve and non competitive businesses. New competitive services introduced by BTC are expected to be introduced through separate subsidiaries. The existing operations are to be separated into network operations and maintenance, services that are expected to remain sub economic for a considerable time and other services.

(f) There will be a mandatory requirement for interconnection between operators.

30 The new policy envisages BTC remaining in public ownership and there are no plans for its privatisation. However, it would be totally consistent with the policy reforms to transfer ownership of BTC into the private sector as part of the reform programme. Indeed, many aspects of the reform package would be enhanced as a result. There are three major problems with the proposed industry structure, as follows:-

(a)

(b)

(c)

There is significant overlap between the role of Government as one of the parties to the performance contract and the role of the regulator. For example, the regulator will control tariffs. But the level of tariffs will influence the extent to which BTC can cross subsidise its rural operations and hence the level of subsidy needed from Government. These topics are part of the performance contract. Price control will also affect cash flow and hence the availability of funds for network expansion, another area covered by the performance contract. The close relationship which the regulator and the Ministry will have to develop in preparing the performance contract are likely to detract from the independence of the regulator from Government.

Government faces a continuing conflict of interest between its commitments to BTC and to liberalisation. On the one hand Government wishes to sustain the finances and cash flow of BTC so that it retains its value and is able to continue with investment in network expansion. On the other hand, liberalisation demands rapid licensing of new competitors, who are bound to target their market offerings at the most profitable ofBTC's customers. BTC is bound to argue for a slow liberalisation programme and the relationship between BTC and Government will encourage Government to agree.

Potential entrants to the industry will see that the playing field is not level and that BTC continues to enjoy a privileged position. Because telecommunications is so profitable, there is still a likelihood that some competitors will enter the industry, but they may not be the best qualified competitors or offer the keenest prices or invest as rapidly as they might with a more equal structure.

31 These problems could be overcome by full privatisation. In practice, Government has two legitimate concerns about selling off BTC. These are firstly how to sustain network expansion within the structure of a privatised industry and secondly how to maintain the affordability of basic service. Both objectives can be met within the structure of a privatised industry.

32 BTC already has a commitment to expanding its network into rural areas. The potential investment requirements in achieving higher levels of network penetration and


I7

service availability are huge. Whilst liberalisation provides access to private sector finance, there is a risk that this will be channelled into the most profitable segments of the market (e.g. international calls and business customers), leaving the requirement for investment in the less attractive residential and rural markets untouched. Several countries, particularly in South America, have addressed this problem by granting the privatised operator a monopoly on basic service for 5-10 years, in return for a commitment to meet specified network expansion and service quality targets. Thus areas which are currently subject to control through the performance contract could be brought within the ambit of the regulator, enabling the Government to take a more arms length role.

33 There appear to be extensive cross subsidies in the ex1stmg structure of telecommunications tariffs, with international and business users subsidising domestic and particularly rural users. This pattern is common to most telecommunications utilities and we understand that the balance of tariffs is under active consideration by Government in the context of planned liberalisation. This issue is also linked to the achievement of network expansion and centres on the risk that the price increases required to attract investment could make services unaffordable and therefore defeat the objective of improved network access. The difficulty of dealing with this problem is compounded by the uncertainty over the likely response of demand to price changes.

34 The issues to be addressed by policy-makers are complex. They concern not only the extent to which urban/business customers should continue to subsidise rural/residential subscribers, but also how such cross-subsidies should be effected e.g. through interconnection rates or a regulatory mechanism such as a universal service fund. A key requirement is to ensure that the adopted targets for network expansion are consistent with the speed at which BTC will be permitted to rebalance its prices towards cost. However, these problems are not solved by keeping BTC in public ownership. The proposed regulatory structure already anticipates controls on the majority of tariffs which permit operators to make commercial returns. The structure of tariff control can be developed just as well with BTC in the private sector as with it in public hands.

35 It would therefore be entirely logical to extend the existing liberalisation programme to include the privatisation of BTC. This need not delay the planned liberalisation. Indeed, except in the short run, it ought to speed it up.

36 The steps in carrying out the privatisation ofBTC would be as follows:-

(a)

(b)

Turn BTC into a Companies Act company. This could be done in the forthcoming legislation to change regulatory arrangements. But even if it is deferred for later legislation it need not cause any difficulty as the legislation would be straightforward.

Decide whether to seek a strategic partner for BTC as part of the privatisation process. BTC had a long standing relationship with Cable and Wireless but there are other operators who might be interested in entering the market and taking on such a role as a shareholder. The introduction of even partial competition from a cellular operator will produce sharp commercial incentives for BTC to improve its performance. A strategic investor, led by an established foreign telecommunications operator, could support BTC in responding to the


(c)

(d)

I8

radical changes in its environment which will occur as the liberalisation programme develops.

Initiate changes to the regulatory environment necessary for the sale of BTC. This will necessarily involve ending the performance contract and transferring its provisions to BTC's licence as necessary.

Carry out a valuation of BTC. The valuation should be undertaken on the basis of discounting future cash flows from the business. Such valuations are heavily dependent on such key variables as the prospects for market growth, which are in tum linked to the growth of the national economy; the regulatory environment, particularly with regard to the degree of competition in the most profitable markets and licence provisions in such areas as service provision and network expansion obligations; and the choice of a discount rate, which should reflect the rate of return investors are likely to require on their investments, and will depend on business risk, regulatory risk and country risk.

37 . These steps are necessary preliminaries to precede the sale of BTC. The issues to be considered in the sale programme itself include:-

(a)

(b)

(c)

(d)

(e)

The capital structure of the balance sheet of the company and in particular the debt to equity ratio at which the company should be sold.

The size of stake to be sold to the strategic investor (if any) and the premium which should be paid for any management control.

The basic selling price for other investors.

The size of the stake to be offered on the local stock market and the incentives to be offered to small, local investors. It is frequently necessary for Governments to sell telecommunications utilities in tranches because of their size and the potential impact on the absorptive capacity of the local stock markets. BTC had shareholders funds of P226 million at the and of March 1995. This may be compared with the total capitalisation of the Botswana Stock Exchange at about Pl.2 billion.

The incentives to be offered to managers and staff to become investors in the newly privatised utility.

(f) The size of stake to be retained by Government and the commitments which Government gives over the use which it will make of its stake.

38 The range of tasks described above is extensive. It incorporates a number of other time consuming activities such as preparation of a sale prospectus which are not described in detail here. It will therefore clearly take some time to complete the sale process, particularly in a small market such as Botswana where implementation capacity is limited. However, once a decision in principle is taken, it should be possible to complete the sale in less than three years.


JI

Appendix J

Enterprise Profile: Botswana Meat Commission

1 This appendix addresses the various questions about Botswana Meat Commission (BMC) raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 To purchase and slaughter livestock and to process and sell meat and other animal products in such a manner as to promote the interests of the livestock industry in Botswana.

- how is the SOE or unit organised and staffed?

3 BMC has its headquarters in Lobatse. The facilities in Lobatse include a complete and integrated complex of abattoir, canning, tanning and by-products plant to handle a throughput of 800 cattle and 500 small stock per day. A branch abattoir in Francistown has a capacity of 400 cattle and 150 small stock per day. BMC has another abattoir in Maun which is currently not operational and is likely to be closed down permanently for economic reasons. BMC also owns marketing subsidiaries in the UK, Germany, Holland and Greece, an insurance company in the Cayman Islands, cold storage facilities in the UK and South Africa and transport and property companies in Botswana. Currently there are 1 873 staff members on BMC's payroll.


4 Mainly livestock producers who sell their produce to BMC and to a lesser extent the consumers in Botswana.


5 BMC purchases cattle and small stock at pre-determined producer prices and slaughters, processes and sells meat and other animal products in Europe, South Africa and Botswana. BMC is currently taxed at 15% on turnover less marketing expenses. From the net surplus certain amounts are appropriated to the capital reserve and the stabilisation reserve and the remainder is distributed amongst the livestock producers (who sold their produce to BMC during that financial year) by way of a bonus. In this respect, BMC operates as a livestock producers' co-operative.


6 During the financial year ended 30 September 1995, BMC's throughput was 166,531 cattle and 5,206 small stock. BMC currently has the capacity to handle a'throughput in excess

I I I I I I I I I I I I I I I I I

12

of 200,000 cattle per year. Average annual throughput achieved during the 30 years to December 199 5 however was only 170 460 cattle.


7 Over the years BMC has developed and adopted advanced technologies to enable it to adhere to stringent quality considerations of the European Union, its principal market. The recent upgrading of the Lobatse abattoir included the introduction of plate freezers, hide pullers, chillers and a modem boning room. BMC is in the process of obtaining ISO 9002 accreditation from the International Standardisation Organisation to reassure its customers as to the quality of products.


8 There are no immediate plans for expansion. However, BMC is now half way through the three year refurbishment programme of the Lobatse abattoir to improve safety and hygiene levels to the levels expected by the meat trade. There are regional opportunities in the meat industry, for example in Zimbabwe and Zambia. However, BMC would be far better placed to exploit these opportunities if it were privatised first, as a regional role would be difficult to justify with BMC's existing status.

Policy Review


9 Livestock production, especially beef production, has been a dominant activity in the rural economy and a major foreign exchange earner for the country. The livestock industry will continue to be a major contributor to rural incomes and employment, and therefore the Government is bound to have a continuing interest in the industry, especially in ensuring that there is an acceptable marketing infrastructure and that standards are maintained. This does not require public ownership of BMC. However, it does require a continuing strong regulatory role for Government, through the Control of Livestock Industry Act. It may also make Government understandably wary of full privatisation of BMC in the short term.


10 Currently BMC provides a reliable marketing infrastructure to cattle farmers and it is unlikely that the service would be disrupted by privatisation.


11 BMC, after privatisation would be able to operate more efficiently and commercially without being subjected to sub-commercial considerations. There is scope for reducing overheads, particularly through staff reductions, which can be more easily achieved under private ownership.

I

I I I I I I I I I I I I I I I I

J3


12 Since BMC has a monopoly for exporting livestock products of Botswana there is no competition from the private sector.


13 It is unlikely that there will be any form of competition for meat exports from the private sector in the foreseeable future, even if licensing rules were relaxed, as BMC itself has sizeable spare capacity within its facilities. At present the main constraint is the inadequate throughput.


14 There is scope for privatising the activities of BMC, excluding its regulatory role, but the privatisation will have to be approached with caution in view of the status of the industry.

Business Evaluation


15 BMC has been operating efficiently and profitably almost from its inception 30 years ago. During the year ended 30 September 1995 BMC Group made a surplus after tax of P31.6 million compared to P33.75 million made in the preceding financial year. During 1995 the rate of turnover tax applicable to BMC was reduced to 15% from 3 5% in the previous year. Apart from the saving in tax, continuing cost control, favourable exchange rates and good results from the local and overseas subsidiaries enabled BMC to maintain a healthy surplus.

16 Operational performance of BMC has always been up to international standards. The facilities are regularly upgraded to meet the demands of the international meat trade particularly to improve hygiene and efficiency and reduce maintenance and operational costs. Soon to be awarded ISO 9002 accreditation is a testimony to high operational standards at BMC.

17 It is acknowledged that there is some over-staffing at BMC, which clearly affects performance adversely. Furthermore, performance could improve further by increasing throughput and hence capacity utilisation.


18 At present there are six expatriate staff in the local operations of BMC, most them in financial positions, out of a total staff of 1,873.


19 Beneficial interest in the services provided by BMC is entirely with citizen livestock producers.


14


20 There is likely to be a continuing need for expatriate involvement in the financial field for the foreseeable future.


21 Citizen livestock producers will be able to participate in partial privatisation of BMC.


22 Management has recognised that some departments of BMC are over-staffed. Privatisation would increase the pressure to achieve rapid productivity increases and might result in an accelerated staff reduction programme.


23 Staff with marketable skills could expect to find other employment opportunities perhaps not in the public sector. There could be problems in finding opportunities for unskilled staff

Conclusions

24 The Botswana Meat Commission is an unusual corporate entity. It is not a commercial parastatal in that its obligation is to distribute any surpluses back to farmers, after meeting its expenses and obligations and allocating funds to reserves. It does this through bonuses at its year end. It has no equity capital and all funding from Government has been provided in the form of loans. In this sense it resembles a producers' co-operative. On the other hand, the Commission has duties and responsibilities towards Government. The framework for BMC's operations is provided by special legislation, which Government could change. Various decisions require Government approval. The members of the Commission are appointed by Government.

25 These dual accountabilities make the privatisation of BMC complex. A successful structure for privatisation must have the following features:-

(a)

(b)

(c)

It protects the continuing strategic interests of Government m the cattle industry.

It protects the interests of farmers.

It provides a viable framework in which the privatised business can operate and prosper.

26 BMC is a large modem capital intensive business. It is clearly not suitable for a trade or asset sale or an employee buy out. Rather, ownership has to be spread in some way across a group of stakeholders. The obvious way to achieve this is through a public offer of BMC's


15

shares. There are a number of practical problems with this approach, which we discuss further below. But there is also a major issue of principle to be addressed. A public company has to be run in the financial interests of its owners, ie the shareholders. However, for the past thirty years, BMC has been run in the financial interests of cattle farmers. Under the public company structure, the interests of the shareholders would be in conflict with those of the cattle farmers since higher prices for farmers would translate into lower profits for shareholders.

27 We considered and rejected two possibilities which would get round this problem by ensuring that BMC was owned by cattle farmers, thus ensuring that owners and farmers were the same people. First, we considered turning BMC into a co-operative society under the Co-operative Societies Act. But the co-operative business model is not suitable for running a large modern capital intensive business such as BMC.

28 We then considered turning BMC into a company, but with ownership of the shares restricted to cattle farmers. The value of BMC's capital reserves and revenue reserves, which would equate to shareholders funds if the company was in the private sector, was Pl47 million at 30 September 1995. This compares with annual purchases from local farmers of Pl02 million. Even if shares were given to cattle farmers in the first instance, it is difficult to envisage a way in which they could be made sufficiently liquid to be traded between farmers effectively thereafter. Such trading as did take place would probably concentrate ownership in the hands of a limited number of farmers, thus creating over time the problem of conflict of interest between farmers and shareholders which was discussed above.

29 We therefore concluded that the best approach to privatisation is to turn the Commission into a public company, with its shares quoted on the stock exchange, but with safeguards to protect the interests of both farmers and Government. This is a process that will take some time to complete since it will involve legislation followed by a sale process, along with regulatory change in the industry.

3 O The most important issue that legislation will have to resolve is the ownership of the industry. Under current legislation, BMC does not have an owner. It is not owned by Government, even though it was set up by legislation, since the Government has no equity stake in the Commission and has always funded it through loans. Nor is BMC owned by cattle farmers who are its customers. The farmers are entitled to any surplus, but the capital reserves of BMC have been built up in accordance with the legislation and hence farmers have no claim on them.

31 Both farmers and Government have contributed in different ways to the success of BMC and hence it would be reasonable for both to take an equity stake in the Commission when it is turned into a company. One possible approach would be to allocate the stabilisation reserve to farmers and the capital reserve to Government, on the basis that the farmers have a claim on the stabilisation reserve but not on the capital reserve. On current figures this would leave farmers with about 25% of the equity and Government with 75%. The farmers' equity would then have to be divided between them on the basis of their past sales to the Commission.

32 This distribution of equity to farmers could take place either before or at the same time as a public offer of shares. If it takes place before the public offer then a market in the shares may well develop, although it would not be possible for the shares to be quoted on the stock


16

exchange unless they accounted for at least 30% of the company's total equity. In any public offer of shares, there could be preferential arrangements for cattle farmers to buy further shares. This could involve a financial discount on the price at which shares were available to the general public or a commitment to give preference to cattle farmers in the allocation of shares in the event of over subscription for the public offer.

33 The regulatory structure of the industry will also need to change. At present, section 21 of the BMC Act effectively gives the Commission a monopoly over the export of cattle and edible products from cattle and over the operation of export slaughterhouses. It would be quite inappropriate for a private company to have such powers. Responsibility for licensing of exporters and exports slaughterhouses should be vested in the Ministry of Agriculture. Section 29 of the Control of Livestock Industry Act gives the Ministry all the powers it needs.

34 The Ministry should adopt a more liberal approach to licensing. Controls should aim to maintain the reputation of the industry and its access to international markets and avoid the spread of disease. But they should not be designed to protect the position of BMC or any other exporter. Under present arrangements, the export of cattle is illegal but, depending on relative prices in South Africa and Botswana, may at times be commonplace. We see no difficulty over licensing such exports provided that they are approved by the Director of Veterinary Services. This will be an important element in providing a more competitive market for farmers, thus preventing a privatised BMC from adopting an unfair pricing regime. It will also have the benefit of bringing back into repute the licensing arrangements, which are currently flouted for financial gain. Farmers would be likely to be more responsive to the law if they viewed its purpose as being the veterinary protection of their industry.

3 5 There is little short term likelihood of any competition for BMC in running export slaughterhouses. There is already excess capacity in Botswana. Thus while the Ministry of Agriculture should in principle welcome competition in this area, provided that it meets international quality standards, there is unlikely to be such competition in practice.

3 6 The conversion of the BMC into a company operating under the Companies Act should be an integral part of the legislation. It is unlikely that a commercially oriented company would retain the current remuneration arrangements for farmers. The stabilisation reserve would certainly not be part of the financial structure. It is unlikely that there would be final bonuses either. This need not be to the disadvantage of farmers. The new company is likely to use forward markets to reduce the risks associated with meat trading rather than the existing financial structure. The farmers may experience some greater fluctuations in price but the costs of this must be evaluated against the possible distribution of free shares arising from the privatisation process and the likelihood of higher initial prices.

3 7 There are a number of ways in which BMC could be privatised. Peripheral activities such as the canning and tanning operations, which are secondary to BMC's core business, could be sold separately. This can be achieved by turning these activities into separate subsidiaries and privatising them by way of a public share offering. Such sales would keep the strategic core of BMC in the public sector and may have appeal as a way of testing privatisation for a part of the industry before the main operating entity is sold. Government and the industry has to take a view on whether these activities have to be retained along side BMC's core activities.


J7

38 The sale of BMC's core operations by a public issue would be one of the highlights of a privatisation programme for Botswana. The business is already consistently profitable and commercially managed. As such it could be one of the first public offers in the programme. However, Government is bound to look hard at the protection offered to its interests and the interests of cattle farmers in such a transaction. Participation of cattle farmers in the equity of the new company, through a distribution of shares when it is created, will provide a part of this protection ,but both Government and the industry may feel that this is not sufficient.

39 A possible additional safeguard would be for Government to retain at least 26% of the company's shares during the initial public offer. Before the sale takes place and while the Government is the majority shareholder, it could write a provision into the Memorandum and Articles of Association to the effect that the company would pay fair prices for beef in the light of market conditions. This provision could not then be changed after privatisation without Government consent because any change would require a majority of more than 75% of shareholders. There would probably continue a Government appointed director on the Board as a result of this shareholding. Government could retain its shares as a long term investment or it could sell its remaining stake at a later stage when it was satisfied that the market was working satisfactorily.

40 The sale of BMC in several stages might well make sense in any event in view of the possible size of the issue. The effective shareholders funds in BMC at present amount to Pl47 million. If we assume that 25% of this is allocated to cattle farmers, then the Government's share is worth some Pl 10 million. The value of this stake could well be higher. An attempt to market shares to this value on the Botswana Stock Exchange might exceed market capacity. The largest public offer which the market has ever handled was P3 0 million and, while capacity is clearly greater now, this reflects the interest of foreign funds in the market. Thus any effort to sell BMC in a single transaction would inevitably mean that a large tranche of the stock would be bought by foreign investors. The total domestic investment by local institutions is only about P300 million.

41 Government may also wish to consider giving BMC protection through a "golden share" arrangement or other provisions in its Memorandum and Articles of Association. These could be used to limit the level of foreign ownership in the company to below the level of 49% which is permitted under exchange control regulations or to limit the size of stake which an individual shareholder may own. Such provisions may be damaging to the price obtainable for the stock so they should be used sparingly but they may have a role in safeguarding against short term take-over of the company.

42 The tax regime under which BMC operates is unique to the company. This may be a barrier to a public offer in that investors generally do not like unique tax arrangements which apply to only one company. Government would also have to decide how to apply taxation to any BMC competitor which might enter the market in future. In general it is preferable to subject companies and individuals to a common tax regime and if possible there should be a transition to such arrangements as part of the privatisation planning.

43 The loans which BMC has received from the Government of Botswana will have to be reviewed as part of the privatisation process. It is not normal practice for Government to lend to private companies. Moreover, some of the loans are loans to Government from the European Investment Bank and the African Development Bank which have then been on-lent


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to BMC on preferential terms. These institutions may have problems with the transfer of these loans to a private sector company. The purely local loans could be refinanced through the local financial system. But the loans which have been on-lent from the international institutions are larger and would be more difficult to refinance. Any refinancing of them would certainly be on less favourable terms.

44 In any change of arrangements involving the European Union (EU), the Government and BMC will have to be particularly careful that the preferential access arrangements to the EU market under the Lome conventions are maintained. The EU has raised with Botswana the issue of who benefits from the preferential access arrangements. It has accepted assurances that, under the existing structure, the beneficiaries are exclusively local cattle farmers. The creation of an ownership structure which permitted foreign share ownership would mean that some of the benefits of access could flow out of Botswana through dividends. This would have to be discussed with the EU. If necessary, ownership of BMC shares could be restricted to local individuals and institutions in the short term.

45 These problems will all have to be dealt with as part of privatisation planning but the proble~s are not likely to be insuperable.


Kl

Appendix K

Enterprise Profile: Botswana Power Corporation

I This appendix addresses the various questions about Botswana Power Corporation (BPC) raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 The functions of the Corporation are set out in the Botswana Power Corporation Act as " ... the generation, transmission, supply and distribution of electricity in areas approved by the Minister .. " This role continues to be appropriate. The Act also gives BPC the powers necessary to discharge this role.


3 BPC has six main departments, responsible for generation, operations and transmission, distribution, finance, commercial and personnel and administration. There are also some minor departments such as loss control and security, corporate planning, projects and internal audit which are outside this structure.


4 Electricity consumers throughout Botswana.


5 Generation is concentrated at the Morupule Power Station. Other resources are obtained through imports from South Africa, Zimbabwe and Zambia. A smaller power station at Selebi-Phikwe is being closed down. Supplies are distributed to all the main centres in Botswana. Customers receive services from BPC at various voltages and on various tariffs in accordance with their needs.


6 In 1994/95, BPC had 44, 164 customers. Its sales disposition was as follows:-


Customer Group Sales (KWh million)

Mining

Commercial

Domestic

Government

Total


612.4

278.6

146.6

74.5

1,112.1

K2

8 BPC has expanded its activities rapidly in recent years. Much of its equipment and facilities are therefore relatively new and operating well within their design life.


9 Over the past eight years, demand has grown by between 3% and 11 % per annum. With continuing growth and the expansion of the network with rural electrification, this growth should be expected to continue.

Policy Review


10 Yes. The transmission and distribution of power is a natural monopoly. A private supplier could not be expected to share the commitment of Government and of BPC to rural electrification. Privatisation could therefore only be accomplished with close regulatory and licensing controls. It may be more straightforward simply to retain BPC as a parastatal.

11 There is greater potential for privatising electricity generation and for outsourcing peripheral services, which we discuss below.


12 Electricity utilities have been transferred from the public to the private sector, for example in the UK, and it can be done without disruption to supplies. However, it is a complex industry to privatise and the scope for errors and consequent disruption 1s considerable.


13 The international evidence shows that efficient, cost-effective, private electricity generation, transmission and distribution are feasible. Within Africa, there are examples of private generation projects in the Cote d'Ivoire and (under development) in Tanzania. There is a private distribution project under development in South Africa, near Cape Town. All these


K3

projects enjoy some form of public sector guarantee, for example a power purchase agreement. They are therefore perhaps better described as joint ventures rather than complete privatisations. However, they do show that private finance and management can be attracted into the power sector.


14 There are no entities in Botswana which could take over the running of BPC. There are a number of international groups with the expertise but there is a risk that they would not be interested in a market as small as Botswana.


15 There is scope for competition in power generation, and the operation of the Southern African Power Pool, although created as a mechanism for cooperation between the existing utilities in sharing their generation resources, may help to create such competition in the region. However such competition will be limited since generators are invariably looking for a guaranteed outlet for their production and hence want long term contracts for power sales. Any competition tends to be at the margin.

16 There is no real scope for competition in transmission and distribution.


17 There is some potential for privatisation of generation, although this would be a demanding privatisation from a technical point of view, and of peripheral services.

18 BPC has a site for an export power station, at Mamabula. There could be scope for bringing private finance into this project, if it went ahead. The power could be sold into the Southern African Power Pool (SAPP), which permits private generators. The development of such a project would depend on its cost competitiveness versus other power sources in the region. For base load power it would be unlikely to be competitive with hydro power. However, the existence of the pool will greatly increase the prospect of commercial viability since it means that the project could look to regional markets rather than the limited market in Botswana. In order to permit the project to proceed in the private sector, Government would have to give the station a licence to generate power under section 3 of the Electricity Supply Act.

19 BPC has already contracted out some of its security services and its construction activities. There may be scope for further contracting out. There are significant numbers of staff in areas such as security (101 staff), administration (131 staff) and maintenance (there are 80 maintenance staff at the Morupule power station) where such contracting out is likely to be easiest.


K4

Business Evaluation


20 The financial results show a viable utility with sustained profitability. Improvements in operational performance have enabled charges to be increased by less than the inflation rate in recent years. There has been a focus on improving operational performance, for example by using manpower more effectively.


21 There are about 60 expatriates employed at present in jobs requiring specialist skills. This figure is dropping and is expected to halve by 1998 as training of local staff bears fruit.


22 - Any services which were contracted out could be of interest to citizen businesses. A private generation project would inevitably have international sponsorship in view of its scale and complexity. There is the possibility that householders might be interested in using solar panels for self generation, selling some power into the grid in periods of high production and drawing from the grid at other times. This is happening elsewhere in the world ( eg the UK), but it tends to be faddist environmentalists who undertake these sorts of projects rather than the ordinary citizen. However, the costs of generation through solar panels is falling all the time in real terms and Botswana enjoys regular high sunshine levels. Hence there may be some potential in this area in future.


23 Some continued expatriate inputs to BPC are expected to be required for the next few years.


24 BPC have identified the opportunity for electricity-using business to develop in response to the extension of its distribution grid. With minimal short term privatisation prospects, there is little opportunity for citizen in taking over BPC's activities.


25 BPC have been holding down staffing levels to control costs and through contracting out. However, there are likely to be growing opportunities in the Corporation in the long term in view of its growth. The impact of any further use of contracting out on staff numbers is likely to be negligible.



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26 This is unlikely to be necessary.

Conclusions

27 There is little point m looking to BPC as a major privatisation prospect. The

contracting out of peripheral services will have little impact. A major private generation project would take years to come to fruition, although the existence of the SAPP means that there is a framework within which that project could be promoted by private finance. Transmission and distribution are a natural monopoly and as such a difficult area of activity to privatise. Certainly they would not come at the beginning of a privatisation programme, when the whole policy approach is under trial. It is preferable at this stage to focus on more straightforward opportunities.

28 Government could consider the relaxation of the rules on private generators in such a way as to encourage small private generators. This has happened in the UK and electricity utilities in other African countries are now encouraging own generation and willing to buy surpluses. In the UK there are obligations on the power pool to buy electricity from anybody who offers it and meets technical standards.

29 Any effect of such changes would be marginal in the short to medium term. However, in order to encourage further private sector involvement in the industry, we consider that the regulatory role for the industry, which is currently shared between BPC and its sponsoring department should be clearly separated from BPC and made an independent function of the ministry, with involvement from consumer interests.


LI

Appendix L

Enterprise Profile: Air Botswana

I This appendix addresses the various questions about Air Botswana raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 To provide air services within Botswana and from Botswana to international destinations.

. how is the SOE or unit organised and staffed?

3 There are 270 staff, the vast majority of whom are based in Gaborone.


4 Air travellers.


5 Tickets for Air Botswana flights are booked direct or through local travel agents. Services operate in accordance with stated timetables.


6 There are three aircraft, providing frequent daily services to Johannesburg, Francistown and Maun. There are less regular services to Windhoek and Harare and some charter services. In all, Air Botswana carries about 100,000 passengers per annum.


7 Air Botswana has three aircraft, two ATR turbo props and a BA 146 jet. It also has a large headquarters building and a maintenance facility, both at Gaborone airport. All the facilities are in good condition.


8 No. Recent efforts have been focused on reducing the scope of the airline's activities to ensure financial viability. This has led to reductions in staff numbers, aircraft numbers and the route network. Any expansion will have to be financially justified and there are few if any clear opportunities to expand profitably at the moment.

I I I I I I I I I I I I I I I I I I I I

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Policy Review


9 No. There is clear international evidence that the private sector is quite capable of providing air services efficiently.


10 With adequate planning, followed by a sale, there should not be any disruption to services. However, it is important to plan. The comparative experiences of Zambia and Kenya illustrate the point. Zambia Airways was liquidated suddenly and air services were disrupted for some months until the private sector filled the gap. Kenya Airways was privatised through a planned approach and there has been no disruption to services.


11 Yes, there are many private sector airlines providing a good standard of service.


12 Probably not from within Botswana, but certainly with international assistance.


13 There is already competition on all Air Botswana's international routes. There is also competition on local routes from surface transport and charter operators.


14 The whole of Air Botswana could be transferred to the private sector. The approach adopted in the recent privatisation of Kenya Airways illustrates the way in which this might be achieved.

Business Evaluation


15 There have been financial losses in recent years and Air Botswana has tried to stem these losses by operational restructuring. A capital restructuring in 1994 led to a write off of about P75 million of losses. There was a loss of P2. l million in 1994/95 and a further loss is likely for 1995/96. Some services are recognised as loss makers, for example services to Francistown and the midday flights to and from Johannesburg.

16 There is a continuing programme to reduce costs and increase the commercial awareness of staff Staff numbers have fallen to 270, from 350 a year ago and a peak of 450.


L3

Even so, Air Botswana has more staff than aircraft seats. In addition, the restructuring has left the airline with a number of facilities which are large in relation to need. The headquarters building is too big. There is excess capacity in fleet maintenance, which could cope with up to I 0 aircraft. Moreover, there are a number of areas where it is very difficult for a small airline to operate cost effectively, for example procurement of aircraft and spares, design of systems, marketing and insurance. Consequently there are a number of opportunities to improve efficiency further, although a strategic partner for the airline will be needed to realise all of them.


17 There are eleven expatriates employed at Air Botswana, mainly in the engineering, operations and internal audit functions.


18 Air Botswana would be a clear candidate for a public share offering. It should be feasibl~ to interest both the airline's staff and the general public in the purchase of shares.


19 There is likely to be continuing expatriate involvement in the airline industry for some years to come.


20 The barriers to entry to the aviation industry are high because of the high cost of aircraft. As such, the privatisation of Air Botswana is not likely to generate any significant citizen business opportunities.


21 Staffing numbers are likely to continue to fall, because of the restructuring programme.


22 There are few if any redeployment opportunities in the public sector. There are likely to be opportunities for staff with suitable qualifications with other airlines, including charter operators.

Conclusions

23 Air Botswana has the potential to be privatised quite rapidly and the management recognise the privatisation of the airline as an objective. There have been initial discussions with IFC, the private sector development arm of the World Bank.

24 The likely steps in such a privatisation are:-

,~


(a)

(b)

(c)

(d)

(e)

L4

Continuation of restructuring programme.

Conversion of the corporation into a Companies Act company.

Design of possible capital structure for the airline following privatisation.

Selection of a strategic partner, to become at least a minority shareholder in the airline.

Sale of some or all remaining shares to the public and Air Botswana staff

25 The restructuring initiatives to reduce costs need to continue. For example, the airline is currently evaluating contracting out its hangar maintenance and retaining in house capacity for only the most routine tasks. Efforts to dispose of the remaining BA 146 continue. The potential for major savings in cost is now more limited as the main rationalisation decisions have already been implemented. But Air Botswana is still making losses and this makes privatisation through a public sale difficult.

26 There are audit qualifications on Air Botswana's accounts and these will have to be eliminated before the offer for sale of shares in the airline. This should be part of the restructuring process.

27 Air Botswana is a public corporation at present. New legislation would be needed to tum it into a Companies Act company, which could then be offered for sale.

28 The capital structure of the airline has recently been changed by the debt write off in 1994. There will have to be a further review of the capital structure to decide the most appropriate balance between debt and equity after the sale. This will probably necessitate a further debt write off But Government should bear in mind that any loss arising from the debt write off will be offset by the sale proceeds.

29 Air Botswana clearly needs a strategic partner in order to enable it to compete effectively. The recent franchise agreement between Comair and British Airways may make this more urgent. The strategic partner is needed to give Air Botswana access to more international traffic, to provide it with access to specialist skills and systems in such areas as ticketing, marketing and reservations, and to help with the continuing programme of cost reduction through support in procurement of aircraft, spare parts and services such as insurance. International experience shows that a strategic partner can enable a small airline both to boost revenue and to cut costs.

30 The approach adopted by Kenya Airways provides a model which Air Botswana could follow. There were initial approaches to a number of carriers, offering them a strategic stake in the airline and the opportunity to provide management services. Final proposals were invited from KLM, British Airways and South African Airways. Following evaluation of their financial offers and associated management proposals, KLM were selected as the preferred partner and the sale was completed earlier this year. Three aspects of this approach are particularly important. First, Kenya Airways achieved competition between carriers for the stake which it was selling. Second, both price and non price considerations were taken into


LS

account in the evaluation of proposals from the three bidders. Third, bidders knew in advance that the Government was committed to selling a majority stake in the airline and reducing its own stake to a minority, thus addressing potential concerns over Government interference in operations after the sale to the strategic partner.

31 The final stage in the sale process is to offer some stock to local and possibly international investors. This could be done through a public offer on the Gaborone Stock Exchange. Government would face a number of decisions, including the size of any stake which it wishes to retain, the sale price, the number of shares to be sold locally and internationally, the incentives to be offered to citizen buyers (for example through discounts and deferred payment terms), the incentives to be offered to Air Botswana employees to become shareholders and the means of attracting publicity for and interest in the sale. The successful sale of shares in Kenya Airways on the Nairobi Stock Exchange shows that such a sale can be achieved.


Ml

Appendix M

Enterprise Profile: Accounting Unit - Ministry of Finance and Development Planning

1 This appendix addresses the various questions about the accounting umt m the Ministry of Finance and Development Planning raised in your terms of reference. It is followed by conclusions about the privatisation potential of the enterprise.



2 To verify the validity of claims for payment and to effect those payments.

· how is the SOE or unit organised and staffed?

3 There are about 700 staff, divided roughly equally between payments offices, which handle Government payments; headquarters staff, who are responsible for Government accounting systems; and staff in departments, who support permanent secretaries in their responsibilities as accounting officers.


4 Government as a whole and its suppliers.


5 Finance officers in ministries are responsible for monitoring the origination of payment requests. When those requests are approved they are paid centrally from the Ministry of Finance and Development Planning.


6 There are 35,000 to 40,000 cheque payments every month. This increases to 80,000 if cheque payments of salaries are included. In addition, a number of payments are made in cash. Approximately 1 to 1.5 million pieces of paper are handled monthly.

7 Payments are supposed to be made within 30 days but this target is often not met. According to the staff in MFDP, this reflects problems in ministries which are originating payment requests.


8 The system is not fully computerised and hence, by modem commercial standards in the private sector, must be considered out of date. In particular there are no computer links


M2

between ministries and the MFDP. Steps are being taken to install such links. The British Government has expressed its willingness to fund a study on improvements to the Government's accounting systems.


9 The size of the unit will reflect the level of Government payment activity. The role of the unit may change in the future if the Government moves from its cash accounting system to one based on accruals accounting. This is under consideration in Botswana, as in many other countries.

Policy Review


10 Yes. The unit is responsible for running the Government's payments system.

_ would essential public services be disrupted by a modification in ownership and/or management?

11 It would be difficult to devise an alternative payments which led to a significant private sector role while retaining control in the public sector. It is not an area suitable for private sector management.


12 Private companies run their own payments and accounting systems. While standards inevitably vary, there is no doubt that the best run private systems operate to higher standards than those of Government. The Government could benefit from exploiting this expertise but it is doubtful whether privatisation is the best means of achieving this.


13 Certainly not in Botswana and probably not from outside the country either.


14 No.


15 There may be some areas which are suitable for contracting out, such as microfiching of documents, but the bulk of the unit's role should remain within Government.


M3

Business Evaluation


16 The unit is subject to widespread criticism over delays in Government payments. These delays often arise because of problems in originating ministries but they inevitably reflect badly on the Government's payments services. These services are not up to commercial standards.


17 The establishment shows fourteen senior management positions of which two have local incumbents, three are filled by expatriates and nine are vacant. There are three other more junior expatriates. This reflects the problem of recruiting citizen accountants with Institute membership and suitable experience.

18


This is not likely to be relevant in view of the very limited potential for privatisation.

do citizens have the capacity to perform the SOE or unit's junctions or will expatriate technical expertise be required?

19 There is likely to be continuing expatriate presence in senior financial positions in Botswana in view of the limited number of citizen accountants.


20 This is not relevant in view of the minimal potential for privatisation.


21 There is unlikely to be any impact on employment.


22 This is unlikely to be an issue.

Conclusions

23 There is minimal potential for privatisation within the Ministry of Finance and Development Planning's accounting unit. Payments need to remain an integral part of the Government's activities. The only likely area is in contracting out some of its activities, such as the microfiching of documents.

24 The standards of the Government's payments services are not up to the standards of good practice in the private sector. Delays in payments to suppliers are frequent. The slow pace of computerisation also illustrates the point. The introduction of private sector expertise,


M4

possibly on a short term advisory basis could help remedy this situation. The British Government has expressed its willingness to finance a study on Government's accounting systems and this could lead to improvements. The high level of vacancies in senior positions makes it unlikely that the position will improve rapidly without external support.

Documents

I BOTSWANA CONFEDERATION OF COMMERCE INDUSTRY …pdf.usaid.gov/pdf_docs/pnabz158.pdf · BOTSWANA CONFEDERATION OF COMMERCE INDUSTRY AND MANPOWER Privatisation in Botswana ... I Joint