Premier beer maker, Kgalagadi Breweries continues to suffer because of the controversial Alcohol Levy. The company’s profit after taxation continued to hit a downward trajectory as the 2018 half financial results mirrored a 14.2 percent contraction compared to the 2017 first half performance.
This information is communicated by the company’s unaudited financial results for the six month ended June 2018 released this week. Kgalagadi Breweries Limited is the sole investment of Botswana Stock Exchange listed Sechaba Holdings Limited. Despite an increase of 9.8 percent in profit before tax against the prior half year ended June 2017 driven by increase in volume and efficiencies in the operations of the business, profits after tax shrunk primarily due to increased alcohol levy.
According to the report, the decline in profits after taxation can also be attributed to additional deferred tax which was caused by timing difference of the accounting and tax base of property, plant and equipment. During the period under review total volume performance increased by 8.2 percent compared to the six months corresponding period in 2017. Volume performance increase was realized in all categories except the Traditional beer segment.
The Traditional beer segment volumes which are predominantly the famous Chibuku beverage has been on a decline since the implementation of the tough beer trading regulations restricting homestead trading hours of Chibuku. In the entire 2017 financial year the division registered 7.6 % decline. Sechaba Holdings has continuously outlined for the past 2 years that the Alcohol Levy significantly hurts company financials.
The Alcohol Levy Regulation was amended effective 1st of April in 2018. The levy rate for alcohol content of 5% and less reduced to 50% and for alcohol content of above 5% remained at 55%. Additionally the calculation for the levy on locally produced alcoholic beverages was revised to include excise duty payable in terms of customs and excise Duty Act.
Last year during the 12 month period ended December 2017, KBL Profits contracted by 12.2 %. This decline was driven by poor performance in the company’s major beverages categories being Traditional Alcoholic Beverages which registered a decline of 7.6 percent ; Non Alcoholic brands which realized a 7.0 percent contraction while Clear Beer category posted a decline of 2.7%. Beer in both Traditional and clear beer had a tough start to the year on the backdrop of a slow economic activity in the last quarter of 2016 which spilled into the 2017 trading year.
Sechaba Brewery Holdings Limited is an investment company listed on the Botswana Stock Exchange. Currently Sechaba holds a 60% shareholding in its sole investment, Kgalagadi Breweries (Pty) Ltd (KBL), whilst AnheuserBusch InBev (AB InBev) holds 40%. AB InBev holds a further direct stake of 16.84% in Sechaba. AB InBev is the largest brewer in the world, with more than 500 beer brands sold in more than 150 countries and some 200,000 employees in over 50 countries, following a merger with SABMiller Plc in October, 2016.
AB InBev has management control over KBL, offering insight and experience with regard to management, technical, brand building and distribution expertise. KBL operates four traditional beer breweries, a clear beer brewery, a sparkling soft drinks production plant and four sales and distribution depots around the country.
Botswana Development Corporation, wholly government owned investment entity owns 25.59 % stake in Sechaba Holdings Limited while Botswana’s largest Pension fund, BPOPF holds a significant stake of over 20 % through its different assert managers. For this half year period Sechaba declared an interim dividend of 22 thebe per share for its shareholders.
Following an agreement between AnheuserBusch InBev (AB InBev) and The Coca Cola Company (TCCC)for the latter to acquire the non –alcoholic ready –to –drink business segment of Kgalagadi Breweries early this year, on the 3rd of July 2018 the two companies entered into a Master Purchase Agreement in terms of which the Sellers have agreed to dispose of their interests in KBL’s business of preparing, packaging, distributing, promoting and selling of non –alcoholic ready –to –drink beverages with exception to Mageu. Sechaba reports that KBL is currently going through a restructuring exercise in order to re-organize the shareholding of the KBL and the new company as well as to separate the business from KBL‘s business promotion.
ALCOHOL LEVY REVIEW
Meanwhile the liquor and breweries industry hopes to leverage from the new trading hours which took effect beginning of this month as well as a recovering macro economy. The 2003 Liquor Act was amended by the just ended winter session of the 11th parliament. The motion was tabled by Minister of Investment, Trade & Industry Bogolo Kenewendo. The previous trading hours restriction was one of the many changes that were championed by former President Lt Gen Dr Seretse Khama Ian Khama during his presidency.
The review of the Liquor Act was viewed by many as the brain child of current President, Mokgweetsi Masisi who observers note he is on a quest to undo many of Khama’s restrictive regulations. Currently the Ministry of Health & Wellness is also engaged in public consultations with a view to review the Alcohol Levy which companies in the beverages and liquor industry continue to report as an impediment to business. Since inception the Alcohol levy has collected over 2.6 billion pula.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”