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A proposal for the producer-driven privatisation of the BMC

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Changing lanes: The BMC is under privatisation PIC: KENNEDY RAMOKONE
Some background Abattoir throughput capacity utilisation To be financially viable an export abattoir must operate at 85% of its maximum throughput capacity i.e. an abattoir with the capacity to slaughter 1,000 head/day must slaughter a minimum of 850 cattle/day to be financially viable.

Producer prices

To incentivise production and supply cattle producers must consistently receive a positive price signal from the abattoir.

To consistently send a positive price signal to producers, a not-for-profit abattoir must return 85% of its gross sales revenue to producers in the form of producer prices.

Chronic supply-side constraint

A shrinking national herd and increasing domestic demand for beef leave fewer cattle available for slaughter at the Botswana Meat Commission (BMC), which currently operates at less than 50% capacity based on its theoretical throughput capacity of 800 cattle/day.

In a type of death spiral, BMC’s low throughput increases its fixed unit input costs thus eroding its gross margins and producer prices, which disincentivises production and supply further compromising BMC’s throughput and commercial viability.

Would the BMC be viable without its statutory export monopoly?

As there are not enough cattle for the BMC to operate at 85% capacity utilisation in spite of its export monopoly, it is self-evident that the BMC would not be viable without its statutory export monopoly as multiple export abattoirs would dilute and fragment cattle supply to all.

Under the Economic Partnership Agreement (EPA) with the European Union (EU), Botswana has the right to export an unlimited amount of beef to the high-value EU market duty-free forever, which equally applies to post-Brexit UK. To illustrate relative market values, a ribeye steak currently sells for P90/kg in Botswana, P150/kg in RSA and P300/kg in the UK. Without the efficiencies and scale economies that can only be achieved by aggregating the supply of cattle through a single export abattoir it would be uneconomic for multiple lower-throughput abattoirs to export Botswana beef to the EU thus effectively cutting Botswana off from its most lucrative export market.

The knock-on effect would be to prevent multiple export abattoirs from generating the gross margins necessary to pay the producer prices required to incentivise producers to increase supply by converting from oxen to weaner production, the only practical sustainable way to significantly increase off-take from the shrinking national herd.

Accordingly, there is a practical need to aggregate the supply of cattle through a single export abattoir so it can achieve and sustain the minimum 85% capacity utilisation necessary to attain the efficiencies and scale economies required to return 85% of gross EU revenue to producers.

If the BMC loses its statutory export monopoly could it be commercially privatised?

Given that the BMC’s export monopoly would arguably be the BMC’s only asset of any real value to an investor, the loss of its export monopoly would render the commercial privatisation of the BMC through the sales of shares unlikely.

And even less so if the GoB retains control of more than 50% of the equity. More to the point, a private equity investor would want to minimise the price he pays for cattle to maximise profit, which is not in the interest of Botswana cattle producers. 

Would a privately-owned export abattoir be granted the export monopoly?

It is self-evident that an abattoir with the exclusive right to export could not be privately owned. It is equally self-evident that giving the monopoly to any one producer group such as a producer co-op would be problematic due to questions about representivity, capacity etc.

The proposed solution

The Botswana Cattle Producers Trust

The BCPT would be created as a non-profit trust under the new Trust Property Act No 11 of 2018 for the benefit of all cattle producers in Botswana.

The objective of the BCPT is to abide by the original statutory purpose of the BMC Act, which was to maximise returns to cattle producers; by operating efficiently (85% capacity utilisation) and economically (85% of gross sales revenues paid to producers); by breaking even and distributing all surplus revenue to producers in the form of maximum possible producer prices and if necessary, paying a year-end surplus revenue distribution to producer suppliers on a pro-rata basis; and by being the buyer of last resort for all cattle producers in Botswana

The operating company

The BCPT

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would create an operating company (‘BeefCo’) without share capital to ensure that all surplus revenue would be distributed to its producer suppliers. BeefCo would develop a modern, high-efficiency EU approved 1,000 cattle/day export abattoir in Lobatse, which would be professionally managed.

The GoB would grant BeefCo the exclusive right to export cattle, beef and beef by-products.

Trust governance

The BCPT would be governed by an 11-person Board of Trustees, which would include all major stakeholders with the majority being from the private sector. For example:

Private Sector Trustees

  • Chairperson of the BCPT Board of Trustees = Chairperson of the BNBPU in his ex officio capacity
  • Chairperson of the Feedlot Association in his ex officio capacity
  • Large Animal Veterinarian
  • Commercial cattle producer
  • Communal cattle producer
  • Managing Partner of one of the ‘Big 4’ accountancy firms
  • Managing Partner of one of the ‘Big 4’ commercial law firms Public Sector Trustees
  • MOAD&FS: Director of Animal Production in his ex-officio capacity
  • MOAD&FS: Director of Veterinary Services in his ex-officio capacity
  • MITI: Director of International Trade in his ex-officio capacity
  • BITC: Executive Director Export Development and Promotion

Historical perspective

In his book ‘Botswana: The Road To Independence’, Peter Fawcus explained that almost 70 years ago the Bechuanaland Protectorate was dealing with the same vexing issue that we face today about the ownership and management of what is now the BMC.

Four privatisation options were considered:

Making the abattoir a private enterprise and eliminating the monopoly, but it was considered undesirable to place it completely in the hands of private industry “…with all the vagaries involved therein”.

Converting the abattoir into a producer co-operative governed by its own members but they felt that the farmers in Bechuanaland “…were too far-flung and diverse in nature and ability to operate on this approach”. Transforming the abattoir into a livestock producers trust but it was thought that “…it would be difficult to obtain adequate representation amongst the membership of the

Trust of all the segments of the diverse meat industry in Bechuanaland”  …and it would be “…difficult for the Trust to obtain adequate professional management as an alternative to the CDC in the foreseeable future”. They settled on a statutory corporation, which was thought to offer the following advantages over any other type of organisation:

It would provide greater stability in times of changing political and economic conditions

It would provide government with greater influence in the national industry

It would enable representation of a complete cross-section of those concerned in the meat industry

Conclusion

Though the BMC Act itself is a brilliant piece of legislation designed to maximise returns to producers, the BMC has been unable to achieve this central statutory purpose.

Now almost 70 years on, Botswana in general and cattle producers in particular have advanced to the point where privatisation of the BMC into the hands of producers through a trust would be a viable preferable option particularly in light of the recent enactment of enabling legislation (Trust Property Act No 11 of 2018). The BCPT represents a unique, pragmatic and commercially rational made-in-Botswana solution that would give the GoB an elegant exit from the BMC, while leaving the GoB with 100% ownership of its three abattoir assets.

In this regard, once the BCPT comes into being the GoB might wish to consider converting the BMC into a holding company for its three abattoirs one or more of which could be operated as non-EU municipal abattoirs where cattle producers and butcheries could have their cattle slaughtered for a fee which would be kept to a minimum absent the financial burden of deboning, rendering, canning and EU compliance and distribution.

PHILIP FISCHER*

*Philip Fischer is executive chairperson of The Hurvitz Group, the first Botswana company ever to export beef to Europe thus freeing Botswana from the stranglehold of apartheid South Africa on Botswana cattle producers. The group has been involved in extensive commercial cattle ranching, large scale commercial feedlotting and for many years was the Botswana Meat Commission’s largest supplier. The Hurvitz Group’s latest venture is large-scale commercial horticulture production



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