Rude awakening looms for parastatals

Mbongeni Mguni | Monday November 8, 2021 06:00

A high number of the 64 parastatals or State-Owned Entities (SOE) spread across the different ministries are loss-making, with several having run in this position for many years. Meanwhile, each year, government, allocates the majority of the P15 billion or so it spends under 'grants and subventions', on parastatals. The balance goes to local authorities.

Parastatals are key to service delivery in the country and a number of them are generally expected to run as going concerns and provide a return to government as the shareholder. The parastatals are divided into commercial and non-commercial, meaning those expected to run on a profitable or 'going concern' basis and those that by the nature of their activities exclusively rely on support from government for sustenance.

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

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

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

Judging by the annual submissions before the Public Accounts Committee and the Auditor General’s reports, the reasons for these performances range from below cost-reflective tariffs, stiff market competition and poor management to corruption, spending inefficiencies and even exorbitant executive remuneration.

In the 2019-2020 fiscal year, the last period before COVID-19 hit, government spent nearly P14 billion on subventions and grants or nearly a third of recurrent spending. In 2020-2021, it is expected that when the accounts are balanced, this figure will be found to have risen to P16.2 billion or 32% of the recurrent budget. Next year, government plans to cut this support by P600 million.

Amidst mounting pressure on government revenues in the short term, winds of change are blowing in the parastatal sector, with growing calls to streamline support and ramp up the performance of entities.

“In terms of government budget, the remaining major concern is the allocation of government spending,” reads a report released on Wednesday by Econsult analysts on the budget forecast. “The public sector wage bill and subventions to the bloated State-Owned Enterprise sector is still huge and accounts for a high proportion of total spending, leaving insufficient funds for the maintenance of existing public infrastructure and investment in new projects.”

Concerns about heavy spending on parastatals have been heightened by the fact that much of government’s estimated P20 billion in budget deficits in the past and current financial years, is being funded by domestic borrowing, where the interest paid is on the rise. The portion funded by foreign borrowing is denominated in hard currencies such as the dollar.

Both of these facts mean a higher cost associated with each thebe spent by government and, consequently, a requirement for higher results per thebe spent.

Within central government, technocrats have noted that another major factor behind parastatals’ underperformance and high cost, is overlapping mandates. To this end, the 'comprehensive rationalisation' exercise first mentioned by former Finance Minister, Thapelo Matsheka in his February budget speech, is said to be a few months away from taking effect. At the time, Matsheka said some parastatals had been identified for privatisation, while others could be closed to reduce government spending and align mandates with President Mokgweetsi Masisi’s transformation agenda.

In fact, the rationalisation exercise is behind schedule as Matsheka had said decisions on which entities to merge, restructure, privatise and liquidate would be announced in the first half of 2021.

Recently, finance ministry technocrats announced that changes were afoot.

“There are a lot of reforms taking place in government such as rationalisation of parastatals and rationalisation of government,” finance ministry permanent secretary, Wilfred Mandlebe recently told an internal consultation meeting that included heads of parastatals. “As part of government, we are not immune from those. “Somewhere along the line, we will be affected.”

Parastatals are also facing pressure to enhance their governance and financial reporting and accounting protocols. This is in line with the Auditor General’s perennial findings that most parastatals delay the publication of their financial results and when they do, the reports are usually full of inaccuracies, omissions, abuses of mandates, lack of controls and others.

“We have no choice when it comes to compliance with the law,” Mandlebe said. “If the law says financial statements should be done within six months, that means that if you don't meet that requirement, you are breaking the law. “You are breaking the law regardless of the reasons.”

Members of the Parliamentary Committee on Statutory Bodies and State Enterprises recently blasted several parastatals for failing to submit their financial statements for examination. One of those which came under fire was Air Botswana, the national airline, which has been recording losses since at least 2008.

The airline’s managing director, Agnes Khunwana has explained that the financials could not be finalised as auditors were waiting for a letter of support from government, without which Air Botswana could not be audited as a going concern. Without the letter, Air Botswana would have to be found to be insolvent.

Meanwhile, finance minister Peggy Serame says she has noted that governance issues are another factor behind the poor performance of parastatals.

“My chairpersons, the CEOs say they are managing you so that when there’s an issue you don’t see anything wrong,” she told the heads of parastatals at the consultative meeting. “That’s not always a bad thing and of course the relationship between the chair and the CEO must be cordial and they must relate. “But it must not compromise you when you need to make the right decisions. “The performance of parastatals is one area that we really need to improve as a country.”

The Botswana Accountancy and Oversight Authority (BAOA) meanwhile, says parastatals are amongst the major culprits in the abuse of financial reporting and corporate governance standards.

The BAOA, which itself is a parastatal, conducts cyclical reviews on financial reporting and corporate governance, and with its newly amended Act has promised to begin imposing punitive fines on errant entities.

In a recent appearance before the Parliamentary Committee on Statutory Bodies and State Enterprises, BAOA CEO, Duncan Majinda revealed that the National Development Bank and Botswana Savings Bank both had modified audit opinions indicating that auditors do not agree with the books presented by management. He also said mounting losses at the Botswana Power Corporation and the University of Botswana had raised concerns around the level of government support required to maintain them as going concerns.

In terms of corporate governance, parastatals exhibit many of the problem signs of corporate misgovernance, such as having an acting CEO or no CEO for prolonged periods, operating without boards or full boards over time, persistently delayed finalisation of financial statements and others. In fact, by some estimates, there are up to 12 acting CEOs across the country’s parastatals.

“Generally, it’s a concern if you have a company or entity that goes without a substantive CEO for more than three years, because you ask what is going on,” Majinda previously told Mmegi. “The position of acting CEO comes with uncertainty because you do not know what the future holds and you cannot take certain decisions. “It’s like being the acting coach of a team. You have to make do with what you have and you cannot buy and sell players.”

Critics of the latest proposed interventions by government say the fact that the urgency for change has come because of a downturn in the budget, suggests that when surpluses return, the urgency for change will wane.

“Proposals for downsizing the civil service and rationalisation parastatals have been on the cards since as far as back as 2010,” a local public finance expert told Mmegi on condition of anonymity. “The fact is that there is no political willpower. “The deficits have caused the urgency to transform, but again there are national elections within two years’ time, so such unpopular moves will be unpalatable for the politicians. “The improvement in the budget caused by better diamond sales and the recovering economy could reduce the urgency for the transformation of the parastatal sector. “Government can opt to ride out the storm until after the next elections.”

By the fourth quarter of 2020, about 19,000 people were employed in the parastatal sector, down from around 27,000 in the first quarter of 2020. Changes in the winds over the sector suggest this figure could further be reduced.