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The Demutualization of the Botswana Stock Exchange Unpacked

As the demutualization of the Botswana Stock Exchange (BSE) ensues, prospective investors are advised to be well informed about the intricacies of the capital markets. The Botswana Stock Exchange Act under the old dispensation did not make accommodations for individual shareholders. Therefore, it is necessary for the BSE to demutualize to separate membership from ownership.

 Currently there are four-member brokers who have agreed to demutualize from the Stock Exchange as per the Transition Act. Shareholding has been allocated according to proprietary trading rights and share premium, as per the agreement. Stockbrokers Botswana received (5.75%), followed by Imara (5.75%), Motswedi (4.32%), and African Alliance (2.88%). Consequently, there are some perks to being the first members of the Botswana Stock Exchange – starting with the reception of funding from government coffers leading up to the signing of the agreement, we have done away with conjecture and moved to an environment that is more intuitive.

A Rand Merchant Bank (RMB) report nixed any possibility of the brokers’ ability to serve as anchors in a demutualized Stock Exchange. Anchor status would favor the hands of member brokers in directing the growth prospects of the Stock Exchange. However, that status remains the purview of government – a benevolent shareholder that while endowed with the wherewithal to further the development of the Stock Exchange, may be bogged down in too much bureaucracy to propel significant growth prospects for the Stock Exchange.

The appeal for a look through the demutualization exercise aimed to determine whether it would not be in the best interests of both groups to have a more equitable shareholding structure. While the brokers would have hoped to have a more equitable shareholding structure and a pipeline of growth prospects to look forward to, the BSE is holding its cards close to its chest.

The RMB report, which forms the basis of the Botswana Stock Exchange’s valuation, outlines the framework for a demutualized exchange but falls short of offering visibility on the prospects of a demutualized Stock Exchange. A more transparent outlook of a demutualized exchange warrants some attention, as the spin-offs are innumerable. Naturally the public can then have a premise on whether to have an inclination towards investing in a demutualized exchange or not. Under the status quo, the Stock Broking community is compelled to curtail their expectations for a more equitable shareholding, as plans are already in place to float the BSE’s shares.

Traditionally precedent has dictated that member brokers nominate Directors onto the BSE Main committee. However, the new dispensation has made way for a new system to be employed selecting board members. That system, which employs a voting methodology, was put in place during the maiden board of directors meeting towards the end of August. New board members were proposed after having been nominated by shareholders.

The proposed directors were subjected to a vote and a new Constitution was adopted. Certain board members were cut and pasted from member brokers while others were not. Juggling executive functions, board duties and lobbying for BSE initiatives to be adopted will be the order of the day. The CEO of the newly incorporated company, Thapelo Tsheole, who owes his comeuppance to such juggling acts, will have to dig in his heels to strike a balance. Whether its punting exotic equities or rough and tough fixed income securities, there remains an incessant appeal for a certain kind of aesthetic within the BSE – permanent and pensionable!

Given that the BSE is at the epicenter of capital markets, the BSE will be looking to present a new face to the investment community. While having received the short end of the stick, the broking community will be looking to firm up support with investors to prepare for the initial public offering of Botswana Stock Exchange Limited. The CEO and the new board of directors will be charged with spearheading the floating of BSE shares on the stock exchange.

Such a task will come with its fare share of challenges given the limited public float that will be made available. However, fresh capital will give the Stock Exchange the shot in the arm it needs to pursue its long-term goals. Similarly, the cash hoard that the BSE is sitting on might be used to inject some ingenuity into the capital markets. For example, the BSE has not inducted a new broker dealer into the membership of the Stock Exchange in over 10 years.

Surely the stock exchange will be looking to groom new member brokers amongst the fresh crop of graduates. Most candidates might be overwhelmed with anxiety at the thought of embarking on a career within the capital markets space. While daunting, it is manageable for those who are conscientious about their craft. Firstly, one would need to become a dealer. Thereafter, candidates can pursue the rigorous RPE exams. RPE’s consist of two exams administered by the BSE.

However, for eligibility to be a dealer, an individual must have a degree as well as two years in a relevant field, of which one year must have been served with a stockbroking firm or a securities exchange. The one year allows for one to be well acquainted with the Stock Exchange’s Automated Trading System (ATS), a trading platform that has the capability to interface with users at the front end and facilitate administration at the back end.

I can vividly remember the workshops that ushered in the BSE’s ATS. Invitations were extended to all participants to convene at Kgale Mews to learn about the intricacies of ATS. As fate would have it, it’s a one-shot deal. When indoctrinated into the workshop; in not getting the first pitch, there’s bound to be collateral damage. In not getting the second pitch, a flaw is inevitable. The brokers that attended the workshop took to the platform like fish to water.

Ultimately, the BSE pulled off a miraculous launch that saw volumes increase exponentially. Naturally as technological innovations become more advanced, brokers, through workshops offered by the BSE, will have new opportunities to spruce up their core competencies in Trading, Research, or Client Servicing Initiatives.

Several stock exchanges have been through the process that is demutualization. The most notable on the continent being the Johannesburg Stock Exchange. The stakes are high in any case, as one may expect, a demutualized exchange looks to offer technological innovations necessary to compete on a global scale with other exchanges. It would not be far-fetched to see the BSE partnering with other Stock Exchanges which have demutualized. The demutualization of the New York Stock Exchange is exemplary of the value that can be unlocked via demutualization of a stock exchange.

However, studies show that not much value has been unlocked when members remain shareholders in the Stock Exchange. Demutualization further enables management to operate the affairs of the stock exchange unhinged providing scope for growth. One need only observe the dynamic environment wherein other demutualized Stock Exchanges operate to get an idea as to how demutualization will pan out. Either government or the brokers will need to cede ownership of their shares towards the introduction of an IPO. A deadlock between the two groups of shareholders might see either side being diluted to provide impetus for the public to invest.

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Debswana-Botswana Oil P8 billion fuel partnership to create 100 jobs

18th May 2022
Head-of-Stakeholder-Relations

The partnership between Debswana and Botswana Oil Limited (BOL) which was announced a fortnight ago will create under 100 direct jobs, and scores of job opportunities for citizens in the value chain activities.

In a major milestone, Debswana and BOL jointly announced that the fuel supply to Debswana, which was in the past serviced by foreign companies, will now be reserved for citizen companies. The total value of the project is P8 billion, spanning a period of five years.

“About 88 direct jobs will be created through the partnership. These include some jobs which will be transferred from the current supplier to the new partnership,” Matida Mmipi, Head of Stakeholder Relations at Botswana Oil, told BusinessPost.

“We believe this partnership will become a blueprint for other citizen initiatives, even in other sectors of the economy. Furthermore, this partnership has succeeded in unlocking opportunities that never existed for ordinary citizens who aspire to grow and do business with big companies like Debswana.”

Mmipi said through this partnership, BOL and Debswana intend to impact citizen owned companies in the fuel supply value chain that include transportation, supply, facilities maintenance, engineering, customs clearance, trucks stops and its support activities such as workshop / maintenance, tyre services, truck wash bays among others.

“The number of companies to be on-boarded will be determined by the economics at the time of engagement,” she said. BOL will play a facilitatory role of handholding and assisting emerging citizen-owned fuel supply and fuel transportation companies to supply Debswana’s Jwaneng and Orapa Letlhakane Damtshaa (OLDM) mines with diesel and petrol for their operations.

“BOL expects to increase citizen companies’ market share in the fuel supply and transportation industries, which have over the years been dominated by foreign-owned suppliers. Consequently, the agreement will also ensure security of supply for Debswana operations, which are a mainstay of the Botswana economy,” Mmipi said.

“Furthermore, BOL will, under this agreement, transfer skills to citizen suppliers and transporters during the contract period and ensure delivery of competent and skilled citizen suppliers and transport companies upon completion of the agreement.”

Mmipi said the capacitating by BOL is limited to providing citizen companies oil industry technical capability and capacity to deliver on the requirements of the contract, when asked on helping citizen companies to access funding.

“BOL’s mandate does not include financing citizen empowerment initiatives. Securing funding will remain the responsibility of the beneficiaries. This could be through government financing entities including CEDA or through commercial banks. Further to this, there are financial institutions that have already signed up to support the Debswana Citizen Economic Empowerment Programme (CEEP),” Mmipi indicated.

While BOL is established by government as company limited by guarantee, it will not benefit financially from the partnership with Debswana, as citizen empowerment in the petroleum value chain is core to BOL’s mandate.

“BOL does not pursue citizen facilitation for financial benefit, but rather we engage in citizen facilitation as a social aspect of our mandate. Citizen facilitation comes at a cost, but it is the right thing to do for the country to develop the oil and gas industry,” she said.

Mmipi said supplying fuel to Debswana comes with commercial benefits such as supply margins. These have traditionally been made outside the country when supply was done by multi-nationals for a period spanning over 50 years. With BOL anchoring supply for Debswana, this benefit will accrue locally, and BOL will be able to pay taxes and dividends to the shareholders in Botswana.

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VAT in Africa Guide 2022 – Africa re-emerging

18th May 2022

PwC Africa has presented the eighth edition of the VAT in Africa Guide – Africa re-emerging. This backdrop of renewal informs on the re-emergence of African economies and societies which have been affected by the COVID-19 pandemic.

In this edition, which has been compiled by PwC Africa’s indirect tax experts, covers a total of 41 African countries. It is geared towards sharing insight with our clients based on the constantly changing tax environments that can have a significant impact on business operations.

Within Africa, governments continue to focus on expanding the tax net by improving revenue collection through efficient compliance systems and procedures. PwC Africa has observed that revenue authorities also continue to take a keen interest in indirect taxes as part of revenue mobilisation initiatives.

Maturing VAT system and upskilling SARS 

“In South Africa, VAT is becoming more relevant as a revenue source for the government,” says Matthew Besanko, PwC South Africa’s Indirect Tax Leader. “Strides have been made to upskill South African Revenue Service (SARS) staff and identify VAT revenue leakages, particularly in respect of foreign suppliers of electronic services to people and businesses in South Africa.”

Broadening the tax base and digital economy

In the past year, South Africa, Mozambique and Zimbabwe saw updates to their VAT legislation, or introduced specific legislation targeting electronically supplied services (ESS), which is in line with the global trend of attempting to tax the digital economy. “The expectation is that Botswana will also introduce VAT legislation in due course, while the National Treasury in South Africa has also made mention of revising the rules to account for further developments in the digital economy,” Besanko says.

South Africa’s National Treasury has also drafted legislation with the intention to introduce a reverse charge on gold, which is expected to come into effect later in 2022. While in Zimbabwe, revenue authorities have introduced a tax on the export of raw medicinal cannabis ranging between 10% and 20%, which came into effect on 1 January 2021.

ESG and carbon tax 

Key strides have also been made within the Environmental, Social and Governance (ESG) space. “ESG leadership, strategising and reporting is essential now for organisations that wish to flourish and remain relevant,” Kabochi says. He adds that companies need to consider how ESG and tax intersect, since tax is a significant value driver when businesses need to deliver on their ESG goals.

In South Africa, a carbon tax regime, which is being implemented in three phases, has been adopted. The second phase was scheduled to start in January 2023, however phase one was extended by three years until 31 December 2025.

Until then, taxpayers will enjoy substantial tax-free allowances which reduce their carbon tax liability. At the beginning of 2022, the South African government increased the carbon tax rate to R144 (about US$9), which is expected to increase annually to enable South Africa to uphold its COP26 commitments.

With effect from 1 January 2023, carbon tax payers in South Africa will also be required to submit carbon budgets and adhere to the provisions of the carbon budgeting system which will be governed by the Climate Change Bill. Where set carbon budgets are exceeded, the government plans to impose penalties. “At PwC, we are continuously focused on our renewed global strategy, ” The New Equation,” Kabochi says. “Through this strategy, a key focus area for PwC Africa is to support clients in adding value to their ESG ambitions and building trust through sustained outcomes.”

The New Equation is also an acknowledgement of the fundamental changes in the business environment in which PwC’s clients and other stakeholders operate. PwC continues to reinvent and adapt to these changes as a community of problem solvers, combining knowledge and human-led technology to deliver quality services and value.

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Economists project lower economic growth for Botswana

18th May 2022
CBD

Local and international economists have lowered their projections on Botswana’s economic growth for 2022 and 2023, saying the country is highly likely to fail to maintain high growth rate recorded in 2021 hence will not reach initial forecasts.

Economists this week lowered 2022 forecasts for Botswana’s economic growth rate, from the initial 5.3% to 4.8% and added that in 2023 growth could further decline to 4.0%. The lower projections come on the backdrop of an annual economic growth that recovered sharply in 2021 with figures showing that year-on-year real Gross Domestic Product (GDP) growth increased to 11.4%, up from a contraction of 8.7% in 2020.

Economists from the local research entity, E-consult, this week stated that the 2021 double digit growth that exceeded projections made at the time of the 2022 budget may be short lived due to other developments taking place in the global economy. E-consult Economist Sethunya Kegakgametse stated that the war in Ukraine has worsened supply problems in the global economy and added that before the war, macroeconomic indicators were seen as improving and returning to pre-COVID levels.

According to the economist the global economy was projected to improve in 2022 and 2023. Recent figures show that global growth projections have been revised downwards from the initial forecast of 4.9% in 2022 with the World Bank’s new estimate for global growth in 2022 at 3.2%.

The statistics also shows that International Monetary Fund revised their growth projections for 2022 and 2023 down by 0.8% and 0.2% respectively, falling to 3.6% for both years. “The outbreak of war has severely dampened the global recovery that was under way following the COVID-19 pandemic,” said the economist.

She stated that despite Botswana being geographically removed from the conflict, the country has not and will not be exempt from the disruptions in the global economy. “The disruptions to global supply chains resulting from the war will have a negative effect on both Botswana’s growth and trade activities.

The economic sanctions against diamonds from Russia will add uncertainty to the market which will have knock on effects to Botswana’s growth, exports, and government revenues,” said the economists who added that the disruptions are driving prices up and result with very high inflation in the local economy.

Kegakgametse projected that in an attempt to limit inflation Bank of Botswana will be forced to raise interest rate “Should the sharp increase in both global and local inflation persist, Bank of Botswana much like other central banks around the world will be forced to raise interest rates in a bid to control rising prices. This would mean an end to the expansionary monetary policy stance that had been adopted post COVID-19 to aid economic growth,” she said.

In the latest projections, the UK based economic research entity Fitch Solutions lowered 2022 real GDP growth forecast for Botswana from 5.3% to 4.8% “In 2023, we see economic growth rate decelerating to 4.0%,” said Fitch Solutions economists who also noted that the 2022 and 2023 economic growth projections may come out lower than the current forecasts, as it is possible that new vaccine-resistant virus variants may be identified, which could result in the re-implementation of restrictions. “In such circumstances, we cannot rule out that Botswana’s economy may post weaker growth than our baseline scenario currently assumes,” said the economists.

According to the projections, Fitch Solution stated that there is limited scope for Botswana government to increase diamond production and exports, following the economic sanctions imposed on Russian diamond mining companies operating in Botswana. The research entity added that De Beers is unlikely to scale up diamond output from Botswana in order to prop up diamond prices.

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