Are the proposed BMC Act amendments in the producer's interest?

28 April 2010, Mmegi
URL: http://www.mmegi.bw/index.php?sid=10&aid=1889&dir=2010/April/Monday26

If the Ministry of Agriculture's (MOA)proposed BMC Act amendments scheduled to come before Parliment at its winter session are passed,they will change the very nature of the BMC fundamentally, argues PHILIP FISCHER. To inform our MPs, producers and the general public debate, the BCPA is issuing a press release in two parts.

Part 1 is an explanation of the underlying purpose and principles of the BMC which few technically understand. Part 2 will explain each proposed amendment, its implications and the BCPA's recommendations in respect thereof.

Purpose and underlying principles of the BMC.   What Is The BMC?

The BMC is a non-profit or public benefit corporation (PBC) created in terms of the BMC Act as a body corporate (i.e. Statutory Corporation) without share capital (Section 3). As a Statutory Corporation, BMC's duties and functions are prescribed by the BMC Act with which the BMC must operate in strict compliance. Unlike private companies, the BMC cannot engage in any activities which are outside the scope of the BMC Act itself.

Who owns the BMC?  As a Statutory Corporation without share capital, the BMC has no shareholders. Technically, therefore, the BMC is not "owned" by Government or by producers. Though it is subject to Ministerial control under the BMC Act and ultimately to the will of Parliament, the BMC notionally owns itself.

Who controls the BMC?  The power to operate the BMC is vested in its Board of Commissioners (Section 5) which is given the power, subject to Ministerial direction, to achieve the statutory purpose for which the BMC was established.

What Is The Purpose Of The BMC? The purpose of the BMC (Section 4.1) is to carry on the business referred to in Section 4(2) " ... in such a manner as to promote the interests of the livestock producing industry of Botswana..." and in particular:

to be the cattle buyer of last resort; to pay reasonable prices; and to perform other functions which the Minister deems to be in the interest of cattle producers.

Who Are The BMC's only statutory beneficiaries?

In terms of Section 4(1), the purpose of the BMC " ... is to carry on (the) business in such a manner as to promote the interests of the livestock producing industry of Botswana". As such, producers are the BMC's only named statutory beneficiaries or stakeholders. In other words, the BMC does not have the statutory authority to promote the interests of any persons other than producers.

What Is The Business Of The BMC? Section 4(2) provides that the business of the BMC is:

to buy and slaughter cattle; to process and sell beef and beef by-products; to sell live cattle;  to promote schemes for the improvement of the standard and condition of cattle to be sent for slaughter or sold on the hoof; and to promote commercial schemes for the development and improvement of the livestock industry.

Can the BMC make a profit?  No. It is self-evident that a non-profit company cannot make a profit. For a non-profit company, the excess of revenues over expenses is referred to as a "surplus", not a profit. As such, the word "profit" does not appear in the BMC Act or in the BMC Annual Reports which only refer to "surplus".

The BMC's non-profit status, which is its central underlying principle, finds expression in the BMC Act under Sections 3, 4, 7, 17 and 18:

* Section 3 creates the BMC as a closed corporation without share capital, i.e. there are no shareholders to whom "profits" in the form of dividends can be paid;

* Section 4 names producers as the BMC's sole beneficiaries, i.e. all economic benefit must flow to producers who are the beneficial "shareholders" of the BMC;

* Section 7 requires the BMC to operate economically and efficiently, i.e. to operate a non-profit company on a businesslike basis by minimizing costs and maximizing revenues for distribution to producers in the form of the highest possible every day producer prices;

* Section 17 requires the BMC to break even at the end of the year after covering its costs and allocations to the BMC's Development and Price Stabilization Reserves. In effect, Section 17 requires the BMC to pay producers high enough prices during the year to ensure that it breaks even at the end of the year.

* Section 18 is a critically important safeguard measure to ensure that the BMC complies with Section 17. In the event the BMC underpays producers during the year which results in a year-end "surplus", Section 18 requires the surplus to be distributed to the producers who supplied cattle to the BMC during that year. In other words, Section 18 prevents the BMC from intentionally underpaying producers during the year to create a surplus and then keeping that surplus to cover its inefficiencies.

Note that the MOA is not proposing to amend Section 17 which, in combination with Section 18, embody the central statutory purpose of the BMC, which is to maximize every day producer prices. Inexplicably, however, the MOA is proposing to remove Section 18 which would render Section 17 unenforceable and therefore meaningless, contrary to the statutory purpose of the BMC Act. The BCPA therefore strenuously objects to the Ministry of Agriculture's proposal to remove Section 18.

BMC's misleading characterization of a "surplus" as a "profit"

If the BMC was a private profit making company, its objective would be to minimize costs, including the price it pays for cattle, in order to maximize profits for its shareholders. In this context, making a "profit" would be an indicator of success.

The BMC, on the other hand, is by law non-profit. In this context, a year-end BMC surplus accumulated by underpaying producers would not be an indicator of success as the word "profit" is intended to imply. Rather, a year-end surplus would represent the BMC's failure to pay high enough producer prices during the year to break even at the end of the year as required by Section 17.

The BMC's longstanding practice of referring to a "surplus" as a "profit" is therefore misleading. For example, in 2009 the BMC declared a "profit" of P84.2 million for 2008 which was not a profit at all but rather a surplus which the BMC had accumulated by underpaying producers during 2008.

Is the BMC's distribution of a surplus a "bonus"?

No! A "bonus" is defined as a discretionary reward for the achievement of a goal. The so called BMC "bonus" is not a bonus at all but rather a statutory entitlement under Section 18 for producers to be paid any year-end surplus representing the amount by which they were underpaid during the year, less allocations to reserves. In accounting terms, a BMC surplus would be a "cost of goods" as a back payment for cattle supplied and not as net revenue.

Though the BMC might argue that it must underpay producers during the year to create a surplus from which it can top up the Price Stabilization and Development Reserves, this producer price reducing strategy has proven to be self-sabotaging as BMC prices based on less than full export price parity will continue to send negative price signals to producers, triggering a negative supply response which, to a large extent, accounts for the BMC's chronically low throughput.

Can the BMC make a loss?

No! For a non-profit company, the shortfall of revenues below expenses is referred to as a "deficit", not a loss. By law, just as the BMC cannot make a profit, neither can it make a loss. Under Section 19, if the BMC fails to break even, the shortfall below breakeven is referred to as a "deficiency", not a loss.

Can the BMC have a deficiency?

Yes! A common misinterpretation of Section 17 is that the BMC Act prohibits the BMC from making a loss in any given year, which is incorrect. The statutory interpretation of the Section 17 phrase "... taking one year with another" means that on a rolling average basis over a prescribed number of consecutive years, the BMC must break even. The statutory authority for this can be found in Section 19.

Section 19 provides that if in any financial year, BMC revenue together with any prior year surplus are insufficient for the BMC to break even, the deficiency must be met from the Stabilization Reserve and if insufficient, from the Development Reserve " ... except as the Commission may otherwise determine with the approval of the Minister." In any given year, therefore, the BMC may have a deficiency (below breakeven) as long as over the prescribed averaging period the BMC does break even.

As the BMC Act is silent on the length of the rolling average period, the BMC Board of Commissioners has a duty, subject to Ministerial approval, to prescribe the rolling averaging period. For example, if the BMC decides to adopt a five-year rolling averaging period, the BMC may decide to run a deficiency over the first two years to allow Price Stabilization Reserve funds to be used as bridge finance to support producer prices in order to stimulate production and supply of weaners to increase BMC throughput rather than to meet prior year deficiencies.

Botswana beef value chain mapping & analysis required before BMC act is amended

Every product is created in a chain of interconnected value adding activities where raw materials are taken by various actors through various stages of transformation up to delivery of the final product to the end user. This is called a value chain.

The competitiveness of a product is a function of the competitiveness of the value chain that produces that product. In terms of Botswana beef, it is therefore the Botswana beef value chain as a whole "from farm to fork" which competes for market share with the beef value chains from other countries.

To maximize the efficiency and competitiveness of Botswana's beef value chain and therefore the competitiveness of Botswana beef, the BCPA has formed the public/private Botswana Beef Value Chain Working Group with the participation of all key stakeholders, including the MOA, to map and analyze the Botswana beef value chain as the basis for a beef sector strategy going forward.

As the BMC (which is the central link in the Botswana beef value chain) has a significant impact on the competitiveness of Botswana beef on international markets, it would be premature, and some would argue imprudent, to amend the BMC Act unless and until the Botswana beef value chain has been fully mapped and analyzed and an appropriate new role for the BMC in a liberalized, post-BMC export monopoly era that will enhance the market driven sustainable competitiveness of the Botswana beef value chain has been carefully determined with the consensus of all stakeholders.

A new role for the BMC

The BCPA commends the MOA for its openness in engaging with the BCPA and other stakeholders on the proposed BMC Act amendments and shares the MOA's desire to move the beef sector forward, in particular to fully exploit the preferential market access market opportunity created by the EPA (Economic Partnership Agreement) in terms of which Botswana now enjoys perpetual duty and quota free access to the premium EU beef market.

The BCPA also acknowledges the enormous investment that producers have made in the BMC, which is a national asset, and the strategic role that the BMC now plays and will continue to play in the development of an internationally competitive Botswana beef value chain. It is therefore critically important that the underlying motivation for restructuring the BMC and for amending the BMC Act is not to free the BMC to use producer funds to exploit its dominant market position to unfairly compete with the private sector as called for in the BMC Strategic Plan.

Rather, the BMC's new role in the Botswana beef value chain should be as a key facilitator whose mandate is to use its strategic resources to enhance competitiveness in the beef sector by creating a conducive environment for private sector investment along the entire beef value chain in breeding, weaner production, feedlotting, value addition and exports.

For example, this value chain oriented approach would call for amending the BMC Act to require the BMC to provide third parties, and in particular new market entrants, with unfettered access to BMC abattoirs to slaughter their cattle for a reasonable fee enabling them to take back their carcasses for further processing for their own account.

*Philip Fischer is the Chairman of the Botswana Cattle Producers Association Email: philipsfischer@gmail.com