PRIVATIZATION PROGRESSING SLOWLY

UNCLAS SECTION 01 OF 02 GABORONE 001165

SIPDIS

AF/S FOR MUNCY
EB/CIP FOR CARNEGIE

E.O. 12958: N/A
TAGS: ECON EINV PGOV BTIO BC
SUBJECT: PRIVATIZATION PROGRESSING SLOWLY

REF: GABORONE 532


1. SUMMARY. Privatization in Botswana is moving in the
right direction - slowly. Mr. Joshua Galeforolwe, CEO of
the Public Enterprise Evaluation and Privatization Agency
(PEEPA),described to Charge and Emboffs the political,
institutional, and economic challenges facing the
privatization movement in an August 15 meeting. Support
for privatization needs to be consolidated within the
Government and cultivated within the general public.
Separation of planning and implementation of
privatization policy, as well as pending regulatory
reforms and lack of project management capacity, have
complicated privatization efforts to date. Botswana's
narrowly based economy, and consequently limited capital
market, has obstructed progress as well. Nonetheless,
Mr. Galeforolwe expressed confidence that, with the
assistance of development partners such as the United
States, Botswana would succeed in putting privatization
on a faster track. END SUMMARY

PRIVATIZATION OFF TO A SLOW START


2. The Government of Botswana established the Public
Enterprise Evaluation and Privatization Agency (PEEPA) in
2000 to facilitate efforts to develop a stronger and more
diverse private sector in Botswana. PEEPA, led by CEO
Mr. Joshua Galeforolwe, advises the GOB on divestiture of
state-owned enterprises, the creation of public-private
partnerships, and outsourcing services provided by the
Government, in addition to performance monitoring of
parastatals. After three years of deliberation and
drafting, the Cabinet adopted in March 2005 the
Privatization Master Plan prepared by PEEPA. That
document listed public enterprises that were feasible to
privatize, those that required some restructuring first,
and others that were not suitable for privatization. The
Plan anticipated two to three major privatizations each
year for the next four years.


3. So far, however, progress has been slow. PEEPA hoped
that the privatization of Air Botswana would start the
ball rolling on divestiture. The GOB's initial attempt
to divest from the airline sidelined PEEPA and, perhaps
not surprisingly, failed to attract an investor. The
Government has returned to the drawing board and is
looking at alternatives to private ownership of the
airline, such as franchising. In the meantime, it has
started developing privatization strategies for other
enterprises. Mr. Galeforolwe explained, for example,
that Mackenzie and Company had just completed a
feasibility study for the privatization of the Botswana
Telecommunications Corporation, which he thought could
occur within two or three years. A state-run insurance
scheme, a tannery, and two publicly owned banks are all
slated for privatization during the next two years.

NEED TO CONSOLIDATE GOVERNMENT SUPPORT


4. Although the Government generally recognizes the
value of privatization to invigorate the private sector,
Mr. Galeforolwe described some of the biggest obstacles
to this process in Botswana as political. Although
lawmakers had recognized the need for legislation on
public-private partnerships, for example, they had
demurred on PEEPA's proposal for legislation on divesture
of state-owned assets. Contrary to the general trend
toward privatization, the National Assembly passed a
Telecommunications Act in January 2005 that actually
restored to the Ministry of Communication, Science and
Technology regulatory powers that had previously been
granted to the Botswana Telecommunications Authority
(reftel). If the government expects to attract private
investors to participate in the privatization of the
Botswana Telecommunications Corporation, PEEPA will have
to convince Government to reverse that decision to ensure
investor confidence in the autonomy of the industry's
regulator.

NEED TO GENERATE POPULAR SUPPORT


5. Not only is the Government's commitment to
privatization patchy, public opinions on this subject are
generally uninformed and antagonistic. Mr. Galeforolwe
explained that, apart from some economically savvy young
people, the public tended to equate privatization with
"giving away the family silver." At its genesis, PEEPA
had requested that the Government fund a mass media
campaign to educate Batswana about privatization but was
denied. Given the multiple demands on the Government's
attention, this left the field of public discussion over
privatization to the opposition parties who have employed
populist arguments against it.

INSTITUTIONAL ENVIRONMENT A HINDRANCE


6. In addition to political challenges, the
institutional environment within which PEEPA operates
poses some difficulties. Separation of the development
of privatization strategies (PEEPA) from the
implementation of these plans once approved (ministries),
impedes rapid progress, Galeforolwe argued. PEEPA's lack
of authority is illustrated in the fact that the
Government's March 2004 liquidation of shares in Anglo-
American, its sale of debt owed by parastatals, and its
early attempts at privatizing Air Botswana did not flow
from PEEPA recommendations. Not surprisingly, ministries
are often reluctant to relinquish to the private sector
or to an independent regulatory body functions it has
controlled heretofore. PEEPA is armed only with its
powers of persuasion to elicit cooperation from these
agencies.


7. Even when ministries accept the logic behind
privatization, the regulatory environment governing a
particular service provider might not be suitable for
private investment. In such cases, some regulatory
reforms or other restructuring is needed before the
private sector can be expected to take interest. Efforts
to encourage outsourcing have run up against lack of
project management capacity within Government entities.

NEED FOR FDI VERSUS NEED FOR LOCAL PARTICIPATION


8. Botswana's small, narrowly based economy has
complicated privatization plans. Unlike in many
countries that preceded it down the road of
privatization, Botswana's domestic capital market is not
sufficient to absorb assets liquidated by the state.
This has forced Botswana to woo foreign investors, which
requires the demonstration of an attractive legal, policy
and regulatory environment.


9. At the same time, the Government must demonstrate
that privatization will benefit Batswana as well as
potential foreign investors. To that end, the Ministry
of Finance and Development Planning has stated that while
foreign investment will be welcomed, the Government may
give preference to local firms and investors and restrict
"foreign participation in certain companies for strategic
or other reasons that will be considered on a case-by-
case basis."

COMMENT


10. Consistent with our ongoing focus on promoting
economic diversification through trade and foreign direct
investment, Mission will enhance our advocacy in favor of
privatization as an essential ingredient in sustaining
economic growth. Given PEEPA's efforts toward
privatization of the Botswana Telecommunications
Corporation, a round table discussion hosted by EB/CIP/BA
on competitive telecom markets, fair and transparent
regulatory policies, and privatization could be a timely
and effective intervention in support of privatization in
Botswana.
AROIAN