Transforming the boardrooms of Namibia’s SOEs is key for long-term growth
Namibia’s growth prospects have been curtailed by weak investment from SOEs and private sector
In Namibia, growth in the country’s real gross domestic product (GDP) has virtually stood still since 2016. Its economy has been contracting since the second quarter of 2017 up until the first quarter of 2019 – thus eight quarters of negative growth. Forecasts for 2020 peg growth at below 2%, and even that carries significant downside risk.
Transforming the boardrooms of state-owned enterprises (SOEs) is a key lever for kick-starting long-term growth, and adding a business dimension to these boardrooms is one way to stimulate growth.
SOEs touch many areas of Namibians’ lives: from making a cup of tea, which requires water and electricity, to a phone call. The water and power utilities are both 100% state owned. The dominant mobile operator, MTC Namibia, is fully state-owned, although it is due to be publicly listed.
A debate on the partial privatisation of SOEs is overdue and critical for two reasons. First, the government is struggling to rebalance its finances. Offloading some assets could help it raise funds while reducing the dominance of the state in the Namibian economy.
Second, because of the nature of shareholding there are a number of entities that are not incentivised to create value for the shareholder, the government. Private interests permeating the boardrooms of these entities is likely to resolve this dilemma.
SOEs need to be optimised to help address Namibia’s challenges. The country’s growth prospects have been severely curtailed by weak investment demand from both SEOs and the private sector. Granted, changes in the public procurement framework are also contributing to the delay in state investment spend. Therefore, in addition to public entity reform, there is a debate to be had about optimising public procurement.
Part of the challenge is that the fiscal space is constrained and government spending cannot help shore up demand. In fact, there is pressure on the government to continue consolidating expenditure, which is likely to further hurt growth prospects. Because of relatively weak domestic demand, private sector spend has also slowed. So what needs to be done to stimulate growth and thereby economic development?
There are opportunities for the government to streamline its balance sheet (especially its holdings in SOEs) and create further avenues for either foreign direct investment or domestic, private-sector-driven participation. Bringing in private sector interests will be beneficial for board decision-making. It is also likely to create sustainable shareholder value and, through the right partnerships, ensure better governance.
There are a few candidates that are ripe for differentiated shareholding, such as Namibia Wildlife Resorts, Air Namibia and NamPower. This is not alien territory for Namibia. In the next year or so, the government will dilute part of its shareholding in MTC Namibia through an initial public offering.
The Windhoek Country Club Resort, where the Legacy Group is managing a state asset, is also a successful demonstration of how private sector participation in the management of an SOE can result in a financial turnaround. These examples show that Namibia is ripe for further privatisations, even if they are partial.
Under ideal conditions, private capital brings in innovation, skills and the discipline of managing assets to create shareholder value. At the moment, the discipline for delivering profits and sustained returns to shareholders is not there. To put missing value creation into context: the approximate value of the assets managed by SOEs is in the order of N$100bn (R100bn), yet only a handful of these entities pay dividends. Ideally, all SOEs operating in the economic clusters, such as those running lodges, hotels, the electricity utilities, road builders and railway operators, should provide a return to the shareholder.
Their cumulative N$100bn balance sheet is sizable when compared with Namibia’s nominal GDP in 2019, which was pegged at about N$190bn. Instead, the government has to disburse about N$30bn in transfers to some of these SOEs even though they display limited performance upside. The challenge is that such government transfers have become routine, without much expected in return.
Society does not benefit from this type of incentive regime as it crowds out other spending on economic and social infrastructure. By the end of the 2018-19 fiscal year, the government as shareholder only received N$1.2bn in dividends from three entities, two of which are diamond mining and trading joint ventures with De Beers.
These ventures paid 77% of the dividends earned by the state, which bolsters the argument that having different shareholders can benefit all shareholders and, hence, the need for expanding this model to sectors beyond hotels and diamond mining.
The government should, as part of the reform of the governance of SOEs, introduce private capital through direct joint ventures, as is the case with De Beers and Namdeb Holdings; through listings; and through co-investments, with management control vesting largely with the co-investor where the skills reside.
So what is the key in terms of growth?
It is simple. A better organised and focused business seeks out and capitalises on growth opportunities as they arise. Thus we may see the right risk appetite for growth projects as investment capital will flow to the boardrooms where discussions on governance and business development are aligned. At present, such alignments are impossible given current shareholding, because sometimes managers are not allowed to respect the laws of “creative destruction”.
For example, reducing workforce numbers to ensure the long-term survival of a business is a taboo. Such discussions are actively avoided in many boardrooms, which impairs growth prospects. Augmenting the shareholding would help many SOEs prepare for medium- to long-term growth.
Crucially, a business that has a mandate to create sustainable shareholder returns is likely to focus on projects with the right risk/return matrix. That, in turn, benefits society at large.
Visit the Rand Merchant Bank website for more information.
This article was paid for by Rand Merchant Bank.