Revolution without reform

Roman Grynberg | Friday January 17, 2014 17:09

 

Botswana Meat Commission figures for 2013 are not yet available, but losses will almost certainly be much lower than in previous years.

The traditional business model of the BMC has seen that the farmer was in effect the residual claimant on the revenues of the BMC. What that means is that after all the costs were met, the farmer was paid in effect whatever was left over. After the nationalisation at independence, the levels of the costs of the abattoir rose and the share of BMC revenue that went to farmers steadily fell over time. A normal well functioning abattoir pays cattle farmers 80% of its revenues.  But by the 1990s, the BMC was paying farmers only some 55% of its revenues.  In the early days, the BMC was paying farmers approximately 80% of it revenue, but this steadily declined as more and more inefficiencies arose in the abattoir's operations. The industry was in crisis and decline in the 1990s as farmers left the industry in droves.

As a result, government introduced a revolution in cattle farming in Botswana. In 2006, then Minister of Agriculture Johnnie Swartz announced to Parliament the imminent introduction of the weaner system whereby farmers would not be given incentives to sell oxen as they had done since time immemorial but would instead become in effect commercial farmers who would sell young weaners that would then be sent to feedlots for fattening. This would, in theory, have enormous benefits for all concerned. Farmers would massively increase the productivity of their land because rather than raising one old ox, they would be able to raise three or four weaners on the same amount of land. For the BMC, the weaner system would mean a final end to a system of production which had greatly hindered its profitability.

An abattoir is an industrial process and relies on a steady supply of cattle for slaughter. The highly seasonal and erratic supply under the oxen system made it extremely difficult for the BMC to operate profitably.  The benefit to consumers was also significant in that despite what is so often said of European and South African consumers, they prefer their beef to be finished in a feedlot. It is simply more tender than cattle that have had to walk the dry Kalahari in search of feed.

This new weaner system signalled a revolution in the relationship between the Motswana farmer and his cattle. While cattle have always been regularly sold by farmers, the off-take was traditionally low (about 10% or below) because cattle remain to this day a vital source of wealth and status and are only slaughtered when there is a special occasion, a need for money or when the cattle are too old and can no longer plough. This oxen system had to go if efficiency in the rural areas was ever to be increased and rural poverty dealt with in a sustainable manner.

But several things had to happen for this revolution to succeed. First, farmers had to be paid a good price for weaners, and so the absolute price of cattle had to rise and so did the price of weaners relative to less desirable cattle like oxen. Second, a commercial system had to be put in place for the BMC to buy and transport the abattoir and a commercial system of feedlots established that would fatten the cattle and supply them for slaughter. A failure of any of these and Botswana's agricultural revolution would fail. But this revolution was not spontaneous; it took the BMC fully three years to implement the new system.

 

Meanwhile, back at the ranch...

Meanwhile, in 2005, the government had commissioned an important study on what was needed to improve the functioning of the BMC. Irish consulting firm IDI was blunt and to the point. It said without internal reform, the BMC faced imminent collapse and that costly reforms were needed before the country could embark on structural changes to the cattle industry. The first of the reforms proposed by IDI was the closure of the unprofitable abattoir at Francistown which had continually lost money, and the second was the sacking of a further 500 workers at the BMC, which was over half the workforce because the company was simply bloated. The government rejected both the closure of Francistown and the lay-offs.

The IDI report had also recommended a complete reform of the marketing system and the complex corporate structure of the BMC. In 2005, the abattoir had a massive staff at its UK office of some 80 people as well as a dozen or so subsidiaries, including - quite amazingly for a parastatal - three in secret tax havens. The IDI consultants also recommended that the CEO position be opened for competition and that a system of appointment be based on merit. For at least two decades, the CEO of the BMC was essentially chosen from among senior government officials and business acumen had rarely been a consideration. All these vital internal reforms were rejected either by the CEO, the board or the government.

Importantly, IDI recommended a proper sequencing of reforms - the BMC should first become an efficient low cost producer, and only then should reforms in the cattle industry take place. They were keenly aware that without reforms, a revolutionary change in agriculture would only increase costs that the BMC could simply not absorb. Unfortunately, the sequencing was backwards. The BMC remained a bloated, inefficient producer but the move to weaner production proceeded nonetheless. The reason the cattle industry was so anxious to see the system go ahead was that it was associated with a fundamental change in cattle pricing paid by the BMC.

In 2005, the BMC introduced a system called 'export parity pricing,' which meant that farmers were paid according to the price paid for cattle in South Africa, with adjustments for transport. Export parity was a blessing for farmers but came at a most unfortunate time as it corresponded with a period when South African producer prices spiralled upwards at a rate that had not been seen for decades.

This change led to a trebling of producer prices between 2005 and 2012 in Botswana when prices went from P695 per 100kg CDM to P2,008 per 100kg CDM in 2012. But the more important effect of export parity was that farmers were - for the first time in almost half a century - protected from paying the price of the BMC's inefficiency by a system which meant that they were first claimants, meaning that the BMC had to pay them export parity. Unfortunately the new system of pricing made the taxpayer - the Ministry of Finance, that is - the residual claimant, and how they paid for BMC's inefficiency!

While cattle prices being paid by BMC were rising due to export parity and the BMC board paying premiums of P2/kg over export parity, the marketing system of the beef was performing badly. Meanwhile, the government's own investigation suggested that the prices obtained in the UK in 2010 were at least P100 million below what they should have been.

Equally, there was evidence of under-pricing in the South African market and that retail meat prices in Botswana were the lowest in SACU.

This under-pricing could be the result of either incompetence or corruption. Virtually everyone who has ever reviewed the BMC from IDI in 2005 to Parliament in 2012 has recommended that a detailed forensic audit be undertaken to determine whether corruption and malfeasance were occurring. This has never been implemented because it was blocked by BMC management.  

 

MBA not required

The elements needed to explain the BMCs insolvency over the last five years require no advanced studies in business. Cattle prices trebled between 2005 and 2012 until the BMC finally abandoned export parity pricing in July of the latter year. At the same time, beef marketing was high cost and poor quality while beef processing remained highly inefficient by any international standard.

Worse still, most of the stakeholders resisted change and the reforms that would have driven down costs. This was all it took to explain the BMC insolvency - a premature agricultural revolution that should have followed  - and not preceded - BMC internal reform. 

What compounded the situation in 2011/12 was the loss of market access to Europe caused by poor implementation of Botswana's traceability obligations to the EU. But that is for another day and is not the essence of the problem.

* These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy where he is employed.