Building a broader, deeper and more competitive private sector in Botswana
Changing Botswana’s growth model and building up an export-oriented, diversified economic base relies on the presence of a strong private sector, where entrepreneurs invest and have the competitiveness to survive and expand into export markets.
But, both the structure and competitiveness of Botswana’s private sector has, to date, fallen well short: entrepreneurship has been limited in scope and concentrated on non-tradable; export share has been limited, and the survival of firms and exports has been low. Suggesting the hindrances to private sector investment relate both to the returns on investment (competitiveness) and on the relative returns in the context of alternative sources of employment and investment.
So what are some of the circumstances impacting both? Such as the incentive framework and the business environment that entrepreneurs face in Botswana?
At the core of the discourse around private sector development in Botswana is concern over what is perceived as low levels of entrepreneurship. This has long been identified, and significant programs and resources, including agencies like the Citizen Entrepreneurial Development Agency (CEDA) and the Local Enterprise Authority (LEA), established to address this gap.
Given Botswana’s history (there was little-established business when diamonds were discovered) and the attractiveness of public sector employment, lack of entrepreneurship is not surprising. Around two-thirds of university-educated Batswana were employed in the public sector as of 2015.
Entrepreneurship: trending upward, but weak on survival
But the latest data from the Global Entrepreneurship Monitor (2015), presented suggests the picture is not so simple. While Botswana has a low number of active entrepreneurs, the overall share (20.9 percent of the adult population) is higher than in some peers and perhaps substantially above perceptions.
The data also suggest that entrepreneurialism is gaining ground: while just 3.4 percent of the adult population is running an established business (among the lowest in the entire survey), the rate of new business establishment is 10.2 percent, higher than almost all peers. Close to 60 percent of those surveyed showed a motive to start a business – the highest among peers and four times the rate in South Africa. This picture of dynamism is supported by data from the Botswana Registrar of Companies, which shows a high rate of company formation, running at around 1,500 per month.
The big question then is what drives the gap between the static and dynamic picture emerging from the survey? One interpretation is that the long-term efforts to promote entrepreneurialism (perhaps combined with fewer public sector opportunities) are bearing fruit. Whereas a less sanguine interpretation points to the high discontinuation, or failure, rates of Botswana private sector enterprise and suggests there is a problem with either the quality of the entrepreneurs and or with the business environment in which they are trying to operate. The reality, however, is that we have a limited understanding of how various factors come together to shape entrepreneurship decisions and business success in Botswana.
There are also likely to be considerable discrepancies in how these factors shape the business success outcomes for entrepreneurs with high growth potential and those in the micro-enterprise sector, including many informal enterprises. One thing we can surmise however is that the “opportunity” entrepreneurs" are younger and better educated and focus on higher value-added businesses such as manufacturing, transport, and non-retail services. While capacity constraints appear to be a problem for all small businesses in Botswana, which may be most of a constraint on growth for micro-enterprises, which also face the perennial challenge, common across all countries, of access to seed finance.
Openness and competition: costly protection, and reluctant privatisation distorting incentives
Attracting domestic entrepreneurs and FDI to invest in tradeable's in Botswana requires first a policy environment that enables private firms to be competitive and gives them the impetus to focus on exports. And while there are issues of scale and capacity in Botswana’s private sector, the domestic environment, and government policies, has not been effective in raising the bar for competitiveness. In fact, through protection and incentives that raise the relative returns to focus on the domestic market, they may contribute to undermining the potential for a more competitive private sector to emerge. This may well be a critical factor in the overall entrepreneurship question in Botswana.
Part of the issue is competition. Long-standing policies to protect the domestic market for Botswana’s producers in certain sectors have knock-on effects on other producers in non-protected segments of the market, and for consumers. The most prominent example is in the poultry sector where the SACU ‘infant industry’ protection has been in force for two decades.
Because of these policies Botswana not only has among the highest poultry prices in Africa, but small farmers are also shut-out of domestic and international markets by large protected players, with these protectionist policies leading to the privileging certain sectors, thus ensuring that programs like the Economic Diversification Drive (EDD) support the development of new domestic entrants to Botswana’s markets, whilst avoiding entrenching already powerful firms, and building competitive firms with an emphasis on export markets will be critical.
Some of the biggest concerns with competition in Botswana arise in sectors where parastatals play a dominant role. In telecommunications, Botswana Telecommunications Corporation (BTC) has an effective monopoly on the fixed- line network, including the local loop, national backbone, and international gateway. Despite government commitment, plans to sell a 49 percent of BTC have stalled. Which has contributed to a broadband environment that is diminishing in its regional competitiveness.
Inadequate technology and capacity and high prices resulting from underinvestment and lack of competition have severe implications in stifling the development of a possibly important knowledge-based services sector in Botswana. Beyond telecommunications, parastatals dominate across the energy, transport, and communications sectors and government is invested in firms in a wide range of sectors, including banking, insurance, real estate, education, trade, and agribusiness.
Privatisation and PPP have been prominent in government plans since at least 2002, and in 2009 the PPP Policy and Implementation Framework was developed, directing the establishment of a PPP unit. But the unit remains without a head. And no PPP legislation has followed.
Important privatisations are nearing completion, including the National Development Bank and BTC, and BPC invited proposals for an independent power producer to invest in a 300MW plant at Morupule. Overall, however, the capacity and will to carry out privatisation and PPP stay questionable. This not only narrows the scope of activities for domestic private sector investment but also contributes to an environment where entrepreneurs face high cost and poor quality in critical services inputs.
Skills: poor work ethic, skills gaps, and a closed market
Setting aside the incentive environment, which prejudices against investment in tradable's, entrepreneurs that persist face a host of obstacles to competitiveness. Chief among these is the broad issue of access to skills and its contribution to low productivity. Although firm quantitative evidence is difficult to come by, the poor ‘work ethic’ of Batswana has been highlighted consistently in the annual World Economic Forum Global Competitiveness Index as the single biggest constraint facing firms in Botswana and is politicians and the business community have continually echoed this.
Who have found the biggest skills gaps were not technical but behavioural, with personal characteristics such as honesty, commitment and hard work, reliability and punctuality, communication, and teamwork considered most crucial for employers.
But the skills issues goes beyond work ethic. Despite large investments in education, outcomes in primary and secondary education trail objective benchmarks And while the Tertiary Education Council has put in places measures to address quality and relevance in Botswana’s tertiary sector, there is concern that Botswana’s system is poorly aligned with the needs of employers, having long been structured to turn out civil servants, while the vocational system fails to address the higher level technical training needed by employers.
Slow growth in tertiary enrolment may be a barrier to innovation and Botswana’s attempts to develop a knowledge economy. A study carried out by the Botswana National Productivity Centre (BNPC) showed that the number of firms citing insufficient skills as their single most important constraint grew from 10 percent to 18 percent between 2005 and 2015. While the time required filling vacancies is growing, despite high levels of unemployment.
Constraints to accessing skills are aggravated by a restrictive regime for getting work permits for foreign skilled workers. Despite moving to a points-based system to make the process more transparent, domestic firms and foreign investors almost unanimously cite work permit restrictions as the most serious barrier to growth and investment.
The recent launch of the ‘one-stop-shop’ at Botswana Investment and Trade Centre BITC may help ease the procedural delays in getting permits, but the process is only part of the issue. Deeper political considerations are at play, and that the objectives of ‘citizen empowerment’ are driving the policy around skilled immigration. Skills shortfalls not only reduce productivity and hinder new growth, they also contribute to Botswana’s low levels of investment in R&D and broader innovation, both in the private and the public sectors.
While work permits are often cited as the biggest headache facing businesses in Botswana, other aspects of the business regulatory environment also hinder the development of a more diversified and competitive private sector.
And while Botswana rates well relative to peers on some measures of the ‘Doing Business’[1] index, including resolving insolvency, registering property, protecting investors, and paying taxes, it is far behind to start a business, trading across borders, getting credit and getting electricity. Although substantial efforts have been made, through Botswana’s “Doing Business Committee”, to address these and significant qualitative improvements have been achieved in improving Botswana’s overall administrative and regulatory environment.
Connectivity: trade facilitation and infrastructure gaps
Botswana’s trade enabling environment also remains a serious barrier to exploiting regional and global trade opportunities. Ranking a lowly 88th of 188 countries in the World Economic Forum’s 2015 Global Enabling Trade Rankings. Whilst Botswana’s landlocked position and distance from ports is a structural barrier that further raises costs for import and export. Adding an additional 15-20 percent to imports – some three to four times higher than in developed countries.
In Botswana’s case, the problem is not so much infrastructure, but also a scale and coordination challenges, aggravated by regional policy issues, including restrictions on third-country transit.[2] With a policy of 24-hour border posts seen as a necessity to help overcome the responsiveness challenge with customs and inspections by other border agencies that result from Botswana’s peripheral location.
And while Botswana’s internal infrastructure is well developed, significant gaps remain in connecting to regional and global markets. Road infrastructure is broadly adequate and will be improved with the construction of the Kazungula Bridge to Zambia due for completion by 2018. Rail infrastructure, however, requires massive investment if it is to support the growth of the minerals sector and air transport infrastructure remains at a limited scale, with no long-haul connections yet established. Although, there is a direct connection to Nairobi several times a week.
Finally, the recent landing of the WACS submarine cable to Namibia gives Botswana a second option for routing broadband, which should offer the potential to reduce the cost of broadband connections, which have been prohibitive. At the moment, however, broadband prices remain high and inconsistent access to high-speed services is a serious constraint to the development of Botswana’s fledgeling modern services export sector.
Access to finance:
Crucial to the development of any private sector is a financial sector that allows access to credit for firms (of all sizes), to support start-up, expansion, and ongoing operations. Botswana has a relatively strong financial sector that was largely unaffected by the global financial crisis.
Yet the structure and incentives in Botswana’s financial sector biases away from support to SMEs. With relatively risk-free Bank of Botswana Certificates, T-Bills, and government bonds along with a largely captive market of government employees against which lending is backed by salaries and a corporate market including large parastatals, the fragmented and relatively high-risk SME market having been relatively unattractive.
Until recently, this was also aggravated by limited competition, According to the Banking Supervision Report released by the Bank of Botswana (BoB) the four largest banks, Stanchart, Barclays, FNBB and Stanbic, accounted for 90 percent of total assets, total deposits and total loans in 2015. Although the recent growth of entrants such as Bank of India (Botswana) Limited (BOI) and Bank SBI Botswana Limited has stirred some banks to focus more attention on SMEs.
A third reason is related to the SMEs, often micro in nature and may, in fact, be unbanked as individuals. Grassroots, nonbank financial institutions that could offer micro-financing services have not yet emerged.
Finally, mobile phone-based banking offers some promise to support access to finance for micro- businesses; however, initial pilots have not gained much traction outside urban areas. Under the Financial Sector Development Strategy (2012-16), several initiatives are underway to modernise many aspects of the regulatory structure, including the preparation of new legislation governing the regulation of banks, insurance companies, and pension funds. To date, however, progress on implementation of the strategy has been slow.
In the meantime, the historical gap in credit to the private sector has been filled through government institutions including the National Development Bank and, most notably, the Citizen Entrepreneurial Development Agency (CEDA), which provides substantial and subsidised loans and credit guarantees to Botswana’s SMEs.
However, CEDA has had a relatively poor record of success in its lending portfolio, with high rates of non-performing loans. While some reforms of CEDA structures and processes may be required, poor performance also suggests there may be a lack of enough credit-worthy SMEs. Overall, while finance is often noted as a constraint to investment, there is little evidence that this constraint is a binding one in Botswana.
Technology: low adoption and a misplaced focus
Low levels of technology adoption also hinder private sector competitiveness in Botswana, with Botswana ranking poorly on global measures of technological readiness and innovation. Although, this reflects problems across the entire innovation system in Botswana, and at the heart of the issue is low-level of technology use and overall weak business sophistication in Botswana.
The establishment of the Botswana International University of Science and Technology, the expansion of the University of Botswana and other institutions, and the investment in developing the Botswana Innovation Hub will contribute to supporting innovation and development of the knowledge economy.
Botswana’s science and technology strategy also biases the country toward ‘blue-sky’ innovation, emphasising spending on research and development and establishing an environment for leading-edge technology development. In the context of weak business sophistication and low technology adoption, and in a country with limited scale and still relatively low levels of human capital development, the opportunities for growth through technology might be better oriented toward learning rather than creating, with a later emphasis on technology adoption and absorption.
Botswana’s road ahead:
In conclusion, Botswana urgently needs to shift its growth model away from a reliance on diamonds and the public sector toward a model that can deliver the broad-based employment growth that will be needed to make sure sustainability of poverty elimination, shared prosperity, and over time, structural change. Such a model can only be built around the development of a diversified, competitive, private sector, oriented toward export markets and focused on activities where Botswana has or can develop a strong comparative advantage.
Thus, Building Botswana a competitive, outward-oriented private sector requires improving the absolute and relative returns to investing in such activities, and by extension this will demand the transformation of a policy environment that incentivizes focus on the domestic nontradable and the public sector, whilst improving the competitiveness of firms and the overall environment in which they operate.
[1] Data source – World Bank – Doing Business (www.doingbusiness.org); “distance to frontier” calculated as DB score relative to highest performer in that category across time
[2] Third country transit rules prevent, for example, a Botswana-registered transporter from transporting goods between Zimbabwe and South Africa unless they are transiting through Botswana; while cabotage restrictions would prevent, for example, a South Africa transporter from picking up and/or dropping off a load in Botswana as part of a trip delivering a shipment from South Africa to Zambia.
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