US embassy cable - 05GABORONE1165

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, Economy 
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