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EAN contributes every second week an editorial to Business 7, these articles can be found here.

Transport services, jobs and motor cycles – John Mendelsohn

We generally look to the developed world for ideas on how to improve circumstances in Namibia. And normally we adopt formal, rather than informal systems or services. We do this because development needs to be regulated, attractive to ‘investors’, and to contribute to GDP.

However, the informal world has much to teach us, especially when it comes to innovation and filling gaps left by the formal sector. One good example comes from our northern neighbour, Angola.

There are few places, even in very remote rural areas of Angola, where you won’t find motorcycle taxis, willing to take you anywhere for a modest fare. Most road junctions in rural areas have several taxis parked there for much of the time. All are ready to go, wherever and whenever needed. They carry not only people, but also goods that have to be transported from rural homes to markets. Many a motorcycle is to be seen carrying one or two goats, or bags of charcoal or maize. Imagine how long rural residents would have to walk without this service. And incomes earned from sales in markets are invaluable in rural areas where there are no other sources of money.

The majority of taxis though operate in and around urban areas between residential and commercial zones. Here they complement the services of blue and white mini-bus taxis (called candongueiros), which provide transport along major roads and in-and-out of central business districts. These two services work together. It is the motorcycles that make their way along narrow, rough roads in dense informal settlements, for example. And they fill other gaps left open by the bigger, more formal mini-buses or even large inter-city buses.

Cheap motor cycles are available for sale in every town, and every significant market offers spares, workshops and mechanics to fix problems. The motorcycles are licenced, but helmets are not required and several passengers can squeeze themselves on to ride pillon.

Accidents happen, of course. But their costs are outweighed by the number of jobs and services provided by Angola’s motorcycles. They provide millions of Angolans with transport services, and with livelihood opportunities that come from people being able to move themselves and their goods. Tens of thousands of motorcycle drivers are gainfully employed, and their taxis are supported by thousands more mechanics and traders who help maintain this service.

Many of us see these motorcycles as dangerous, messy. We just don’t want this kind of informality. We are somehow better, more organised, perhaps more developed. But those perspectives only come from people who seldom, if ever need a taxi. Certainly, no critic has had to take a bag of vegetables to market, and then use the proceeds to buy medicine for a child.

Namibia would gain much by allowing motorcycle taxis. Thousands of jobs would be created, and valuable services would be available to those Namibians who spend too much time ‘footing’.

Published in Business 7 – 7 February 2018

Business 7 – Taxis and travel

Namibia in the next Base-metals Boom – Lauren Davidson

Much hope is pinned on the mining sector to help Namibia recover from recessionary conditions, with poor growth performance recorded in 2016 while GDP forecasts for 2017 remain bleak. A strong rebound in the mining sector recorded this year definitely lends itself as an area of focus to help leverage the economy out of murky waters, however, some vital aspects are often overlooked.
In particular, the promising outlook for the prices of base metals; copper, zinc, lead and gold have some important implications on the development and growth of Namibia’s mining sector. With the right actions and decisions taken by Government, such opportunities can be effectively harnessed to propel such growth and expand on current linkages already being created by the sector. Furthermore, exploration activities underpin the sustainability of mining activities and with the promising trend in the prices of base metals, investments into exploration are almost certainly set to increase.
Unlike many other African countries, Namibia’s mining sector generally has a proven track record of ethical conduct towards the state, but most importantly to the country’s citizenry. Apart from export earnings and revenue through taxes and royalties, Namibian mining companies make significant contributions to the local economy through strong commitments to Corporate Social Responsibility programmes and to development areas of national priority, such as housing, to name a few.
In spite of significant opportunities for growth, the international community’s perception of Namibia as a favourable destination for investment in mining has unfortunately deteriorated over the last two years. The recent 2016 Fraser Institute Survey of Mining Companies revealed that Namibia slid to 9th place after being rated as the most sought after African jurisdiction in 2014. Uncertainty relating to the proposed empowerment policy and legislation (NEEEF/B) as well as Additional Conditions to licences was cited as the primary cause for concern. The recent downgrading of Namibia’s investment status to ‘Junk’ by ratings agencies Fitch and Moody’s will undoubtedly further erode investor confidence in the mining sector.
Drawing attention to these issues among central policy makers, members of parliament and the line ministry necessitates action in addressing policy uncertainty and some of the administrative challenges in the issuing of mining licences. Prioritising these issues is key in ensuring that Namibia is competitively positioned to optimally benefit from the next base metals boom.
Published in Business 7 – 29 November 2017

Business 7 – Base metal boom 2017

Public-Private Partnerships – What can we expect? Klaus Schade

The first Public-Private Partnership was established in 2000 with the launch of the Walvis Bay Corridor Group. The WBCG consists of a diverse range of stakeholder including various ministries and private sector associations involved in the logistics sector. The concept received more attention with the signing of the SADC Protocol on Finance and Investment in 2006, since Annex 1 to the protocol required SADC Member States among others to facilitate the use of PPPs for the development of the region. This resulted finally in the establishment of the PPP Unit in the Ministry of Finance and the recruitment of a director during the 2014-15 Financial Year.

The PPP Policy was adopted in 2015 and the PPP Act gazetted in July 2017, while the regulations are expected to be gazetted before the end of this year. At the same time, Government is developing the capacity to manage PPPs. The institutional, policy and legal frameworks are required to attract private sector investments that involve millions and billions of Namibia dollar. PPPs often focus on infrastructure development in the area of transport, water, electricity, health etc. The Minister of Finance in the Medium-term Budget Review referred also to PPPs as a potential source of funding for necessary infrastructure projects.

However, PPPs in particular when they are established to address major infrastructure shortages usually take time to materialise. The critical part of PPP negotiations is allocating and managing risks. These risks include political and legal risks (such as changes in tax laws, but also public opposition), currency risks (the foreign investor prefers payment in foreign currency and a guarantee to repatriate profits, while fees and charges are paid in local currency), cost and time overruns, change in demand for the services provided, potential competition, etc. While these risks are inherent in most large projects, PPPs require the allocation of risks or a specific portion of the risk to the partners involved; ideally to the partner that is in the best position to manage the risk. Agreeing on the allocation of risks requires a careful balancing of the potential costs and benefits, keeping in mind that the opportunity costs for the country of not implementing the project are often several times higher than accepting a higher than initially planned risk. This is, of course, not to say that Government should agree to bad deals.

While PPPs certainly hold benefits for Namibia and can improve the infrastructure beyond what Government coffers would be able to afford, they are no quick-fixes to close infrastructure gaps. This is in particular true for Namibia that needs to develop the skills in negotiating, implementing and monitoring the outcome of PPPs. Starting with the careful selection of less complex PPPs and building on the experience could help avoiding costly pitfalls.
Published in Business 7 – 15 November 2017

Public-Private Partnership PDF

Would a Land Value Tax reduce the housing backlog? Klaus Schade

Much has been said and written about the lack of housing in Namibia that is often linked to the slow pace of serviced land delivery. In addition, high land prices and high costs of servicing land limit the affordability of housing. However, we do not use serviced land optimally. Some mixed-use developments in Windhoek where the lower floors are used for commercial purposes such as shops and offices, while the upper floors are used for residential purposes indicate a shift in the use of a scarce resource – serviced land. However, in the suburbs we are continuing to use the land sub-optimally by constructing single family houses. The costs of providing basic infrastructure to family houses is high. Every house needs to be connected to the sewerage, water and electricity infrastructure and be accessible by a road. Increasing the density of buildings such as the multi-storey flats in and near the city centre demonstrate would reduce the costs of infrastructure per household since the same length of a road, water or sewerage pipe and electricity cable would serve many more households than it is currently the case. At the same time, the higher density will accelerate the supply of residential space, since the new infrastructure enables the construction of multi-storey flats instead of single houses. Tens of families can be accommodated on space that is currently occupied by two or three families. Denser residential areas also increase the viability of public transport, since a bus stop will serve more people and hence can attract more customers than in the case of family houses. Or, they reduce the need for travelling, since the workplace, the shop or the service provider is just around the corner or even in the same building.

The introduction of a Land Value Tax could provide incentives for developers to plan suburbs differently, increase the density of urban land and reduce cost and time of delivery of housing. It is not only the buildings on the land, but land itself has a value owing to its proximity to other facilities. The tax is based on the value of the land less the value of the buildings on that land. Therefore, the higher the value of the buildings the lower the tax base and consequently the amount of tax paid. The value of the buildings will increase with increased density. Hence, the introduction of a land value tax could result in a more optimally use of a scarce resource – serviced land – and accelerate the supply of housing at lower costs.

Published in Business 7 – 1 November 2017

Land Value Tax PDF

Will the Mid-term Budget Review strengthen investor confidence? Klaus Schade

On 11 August Moody’s Investors Services downgraded Namibia from an investment grade to a speculative grade – commonly referred to as junk status. The decision was met in the country with criticism, since it was felt that some of the reasons provided were taken out of context (increase in the share of personnel expenditure over total government expenditure) or were rather speculative such as the assumption that the SWAPO Congress and general elections in 2019 could loosen fiscal policy.

Growth prospects remain challenging for this year since Namibia remains in a technical recession. Quarterly GDP has contracted since the second quarter 2016. Other parameters have, however, improved, most notably the import cover. Foreign exchange reserves received a boost from the first tranche of NAD3.0 billion of a loan from the African Development Bank during the second quarter of 2017 and from the repatriation of investment abroad. Foreign exchange reserves were below the international benchmark of three-month import cover, but have increased to above five-month import cover. The improved position will ensure investors that Namibia can honour foreign obligations. The loan also improved the domestic liquidity situation since it enabled Government to settle arrears.

However, Namibia has to attract more foreign direct investment and close the trade gap between imports and exports in order to increase reserves further to repay foreign loans such as the Eurobond and the AfDB loan. Furthermore, the loan increased total Government debts to some 41 per cent of GDP as anticipated in the national budget; a level that remains a concern to rating agencies.

While foreign exchange reserves and liquidity in the domestic market have improved, which should mitigate fears of foreign investors and rating agencies, striking the right balance between operational and capital expenditure will remain one of Government’s main fiscal challenges.

Cutting capital expenditure was inevitable in the short term in order to rein in rising budget deficits and total debts. Government also used the opportunity to reduce wasteful expenditure such as Subsistence and Travel Allowance, bail-outs to State-owned enterprises or shelve capital projects that do not contribute meaningfully to economic growth, such as new offices. However, the tough task lays still ahead, namely to adjust the civil service to sustainable levels and free financial resources for much needed investment in infrastructure that can improve Namibia’s competitiveness, attract private sector investment and stimulate job creation. Investors and rating agencies will look for signs in the Mid-term Budget Review whether Government is on the way to get this balance right.

Published in Business 7 – 18 October 2017

Will-budget-review-strengthen-investor-confidence

Namibia’s Renewable Energy Feed-In Tarif (REFIT) Program, second year in – Jan-Barend Scheepers

The REFIT Program, initiated by the Electricity Control Board (ECB) has 14 Power Purchasing Agreements (PPAs each for 5MW), which were signed between NamPower and various Independent Power Producers (IPPs).
24 months after being launched, where do these 14 projects stand? Designed to add 70MW to the Namibian embedded generation capacity, five plants have been completed and commissioned (now selling energy to NamPower). These include: Grootfontein (Hopsol), Osona near Okahandja (InnoSun), Karibib (O&L), Lorelei in Rosh Pinah (Aloe) and Ombepo Wind in Lüderitz (InnoSun). Another six plants are hot on their heels and hope to be done by the end of this year. These six include: Ejuva 1 and 2 in Gobabis, Momentus Solar in Keetmanshoop, Camelthorn in Outapi, Alcon in Aussenkehr and Trekopie. The remaining three REFIT licences are all around Okatope and include Tandii, NCF energy and Unisun energy. It is hoped, these will be complete in the early months of 2018.
With eleven plants likely completed by Christmas, NamPower would have boosted local power supply by 55MW, around 10% of Namibia’s demand. The original deadline had been July 2017; however, some projects experience unforeseen delays ranging from bad weather through to possible onsite landmines, none the less close to an 80% successful implementation rate by the end of this year for the REFIT program (a completely new sector) is not bad at all.
When asked what has changed in the grid and what developments might be beneficial into the future, several NamPower representatives mentioned generation intermittency as a concern and that the existing REFIT IPPs should consider and be allowed to upsize and add energy storage solutions to their existing plants. In laymen’s terms, larger capacity and stored energy will help smoothen out sudden production troughs due to clouds, haze or drops in wind. This would reduce the burden on NamPower suddenly having to compensate for generation shortfalls due to bad weather. It is hoped that the ECB will favourably consider this in the near future as it would greatly improve reliability without greatly changing the nature of the REFIT program, neither Generation Licences nor the PPAs.
The ECB should strongly consider how to best handle the fact that Namibia has built up a capable domestic renewable installation industry; one of Namibia’s few large growth sectors right now. Companies have purchased millions worth of equipment and trained hundreds of workers. Future projects can be built far quicker and cheaper now because the tricky learning curve is done. It would be tragic if this were the first and last for these types of projects. Each project has increased Namibia’s tax base, with no government funding, and reduced the billions spent annually on energy imports. Similarly, if future projects are delayed by more than several months (past mid 2018), this installation industry with its workers will suffer. This is a test to see if the ECB can facilitate rather than stifle the sector’s growth. As an example, just see the havoc caused to the renewable sector by Eskom’s delays in awarding new renewable energy projects in South Africa. Considering the current financial climate in Namibia, it would be a shame to sink this new, competitive and highly productive strategic industry capable of financing itself. One which puts money into government coffers rather than taking.

Namibia’s REFIT Program – Jan-Barend Scheepers

Kimberlite Schools – Jan-Barend Scheepers

A few things are blocking Namibia’s development and growth. Many relate to education. Thankfully the government spends massively on this critical need. Unfortunately, a few problems remain: Teacher training and accountability, resource allocation inefficiency, curricula relevancy, lack of external support and mentoring for students, low minimum passing level, no recognition for the dignity of vocational training and a mismatch between training focus and the labour market’s needs. This is not meant to be pessimistic and ungrateful for what has been achieved in the last 27 years. Thankfully UNAM, NUST, NamCol and others have facilitated a great many individual success stories with learners eventually doing great things both inside Namibia and abroad. All protocol observed.
Now to a possible solution. Kimberlite schools with the following basic formula. A school where the maximum class size is 15 to 25 students. 25% of the class should be “fully private” (financing from parents or externally scholarships). The next 37.5% of the class can be a mixed subsidized batch, receiving scholarships due to either their academic, cultural or sporting achievements. The final 37.5% segment will be a lucky draw of students unable to enter in the previous two pools.
The first will assist with the school’s financing as well as attract well to do and favourable parents to form part of the PTFA and enrich the networking and supporting structures in the immediate vicinity of the students (not to say the other parents would not be able to play this role too). The second batch will attract any diamonds in surrounding areas to better fully realize their potential in an enhanced schooling environment. The final component will be there to help break the repetitive cycle of educational privilege while also giving a strong grounding and humble reality check to those of the first section.
The school’s aim should not be focussed on university graduates, but also emphasize the importance and dignity of those in a vocational direction. This is sorely needed in Namibia.
Finally, a formula for the teachers. Their basic teacher’s salary is 50% of the expected government salary. However, an ambitious incentive scheme is applied based on the short-term performance, growth and long-term impact of their students. Incentivise additions of mentoring, cultural and extracurricular aspects for teachers to go the extra mile. Climbing the ladder of incentives to a salary 2 or 3 times the national average. The low basic salary will force poor performing teachers to leave. The high-performance bonus will obviously attract many dedicated educators.
Kimberlite is the geological formation where the perfect environment existed, with all the required material and pressures to produce a concentration of diamonds. Imagine Namibia got five Kimberlite schools in the next five years spread across the country? How much closer would Namibia be to sealing our deserved title as Africa’s leading Diamond producer?
Published in Business 7 – 6 September 2017

Kimberlite-Schools – Jan-Barend Scheepers

The role of public sector in infrastructure development – Dylan van Wyk

The role of public sector in infrastructure development – Dylan van Wyk
Infrastructure is an essential ingredient to economic growth and prosperity in any country. Recently the case has been made that state-led infrastructure investment is needed to boost growth, especially in the current times of recession and high unemployment. This type of spending directly stimulates the economy by creating employment and drives growth through the multiplier effect it has on other sectors of the economy. Creating new and enhancing existing infrastructure also boosts economic productivity allowing an economy to produce more efficiently with its given resources.
Traditionally, infrastructure investments have been financed with public funds. However, government deficits and high debt to GDP ratios have limited the capital available for these projects, a global development which Namibia is not exempt from. This has increased the need for increased private investment to address the infrastructure gap plaguing many emerging market economies.
Project finance has become the vehicle of choice to attract private capital as debt and equity investments can be split, and risk can be distributed. Equity investments are normally taken by corporate sponsors and developers while debt funding has been primarily provided by banks in the form of syndicated loans. However, there are a myriad of parties which have an interest in investing in infrastructure, including pension funds, insurance companies and sovereign wealth funds.
Additionally, the public-private partnership model has allowed the public sector to maintain control of the planning and regulatory role. The public sector may also become the off taker of goods or services produced by the project, allowing them to reap the benefits of higher efficiencies and higher cost effectiveness associated with the private sector.
With a strong demand and supply of private capital and expertise, as well as the proper structures in place for cooperation, the largest challenge becomes attracting and maintaining private investors.
A survey conducted by Allen & Overy demonstrates which factors investors consider when embarking on infrastructure projects. Surprisingly, financial support and guarantees from government are very close to the bottom of the list. Instead investors look for stable regulatory settings and minimal political interference. In fact, uncertainties in the regulatory and political environment as well as renegotiation of contracts are risks investors feel most uncomfortable with. The role of public sector in infrastructure development becomes clear: Provide a conducive investment environment for the private sector by minimising policy uncertainty, curtailing political interference and promoting a transparent and stable regulatory setting.
Published in Business 7 – 23 August 2017

The role of public sector in infrastructure development – Dylan van Wyk

Perpetuating inequality on a daily basis – By Klaus Schade

Reducing income inequality has been one of Namibia’s national development objectives since independence. Although some progress has been made using the Gini-coefficient as a measure, much more needs to be done. High income inequality is not only detrimental to social cohesion and social development, but also to economic development. The better off in society spend a large share of their total income on imported goods and services, while the poorer people purchase more domestically produced goods, but can often not satisfy their needs. A more equal distribution of income would result in increased demand for local products and consequently in job creation.

Income inequality needs to be tackled at various fronts. To mention a few: On the macro level, we need the right policies that incentivise domestic and foreign direct investment in sustainable, genuine businesses as well as the creation of decent jobs. We need to improve the quality of education in order to empower the young generation to become successful in life and contribute to income and job creation. There are other factors that contribute to income inequality, but usually do not receive attention. One area are wages and salaries. While some in top management reportedly receive an annual guaranteed salary increase of 10%, the large majority of employees have to fight for an inflationary adjustment usually below 10%. However, the currently published average inflation rate is only a crude measure, since it covers vastly different consumption patterns caused by different income levels. For instance, high food price inflation affects poorer households more, since they spend a larger share of their total consumption on food that more affluent households. Calculating additional inflation rates for low, middle and high-income groups would provide more guidance for salary negotiations. Moreover, performance bonus payments to management only that are several times the average annual income in Namibia further cement inequality and are questionable not only at institutions that are continuously dependent on state bail outs, since achieving certain targets usually depends on the contribution of other employees as well.

Likewise, the habit of increasing rental fees annually automatically by 10% is not in line with the income increase of most tenants and hence widens the income gap between lessors and lessees.

There are many more examples in daily life, including fencing in of communal land, the allocation of land for residential, agricultural or business purposes, the allocation of licenses, etc. that prevent us from making more progress in reducing inequality.

Addressing these areas are relatively easy since they do not require new policies or new legislation. Breaking with these practices is in the hands of individuals that could play their part, as small as it may seem, in contributing to a more equal society.

Published in: Business 7 – 9 August 2017

Perpetuating inequality on a daily basis

Incentivising and Financing Quality Education Acceleration through Edu-Points – By Jan-Barend Scheepers

The Namibian Employment paradox is that we have massive unemployment, but almost all skilled sectors complain of massive Namibian skill shortages. How do we bridge this gap? Education, skills transfer and mentoring. The government is already investing heavily to address this but maybe the private sector can help build an efficient bridge?
Enter an Education Investment Incentive. Give benefits to those who successfully facilitate the increase in Namibian skills. Benefits can include tax cuts or preferential treatment in government tenders or DBN or GIPF financing, foreigner work permit allocation or fines. The more Edu-Points earned, the greater the benefits. But what is essential is that Edu- Points are transferable and sellable on a free market.

Bursaries already increase the access to education; however, let’s broaden the net with the right incentives, greater financing and participation.
For example, a company earning over several million annually would be expected to earn 100 Edu-Points per year. Every university degree facilitated, 20 Edu-Points are earned by the company. For every Master Craftsman/technician between 20 and 15 Edu-Points. Each Matric student 2 Edu-Points.

The average business owner would be sceptical as educating people will divide their focus from running their business. Hence why Edu-Points must be transferable or sellable. Like the Carbon Credit model, Company A could continue polluting and just purchase Carbon Credits to stop them being fined. Another Company B who invested in greener technology, reduced emissions and earned Carbon Credits, then sells the extra to Company A. The net result is polluting Company A is financially strained and will consider going green. Company B, doing good can sell their Carbon Credits, earn additional income and grow their business. Altogether, less carbon is created. How about Edu-Points? If a business is losing tenders, paying fines or paying higher tax on not having enough Edu-Points, then they can give bursaries, or buy Edu-Points. Companies with established bursary and CSR schemes will be early beneficiaries of selling their extra Edu- Points. To remain competitive, many companies will have to buy Edu-Points. Here some education funds could now finance themselves. Eventually businesses will start that focus on creating Edu-Points. Scouting for talented children, financing their education and creating Edu-Points, then sell to companies not able to create Edu-Points. Net result: money flows to successful education.

The Edu-Point sector will scout all schools to find promising candidates at every level. Towns, farms and villages. After all the talented kids are found, then the free market will be forced to unlock more talent by investing in basic education, mentoring, extra classes, tutoring, beneficial extracurricular activities, social programs etc, to keep the needed Edu- Points flowing in the economy. The eventual increased investment in fundamental inputs will allow average and underprivileged individuals to grow into promising and competitive members of the Namibian society.

Published in: Business 7 – 26 July 2017

Incentivising and Financing Quality Education Acceleration through Edu-Points