By Daniel Motinga, Senior Relationship Manager at RMB Namibia
Since 2016, growth in real GDP has virtually stood still. The economy is in contraction since the second quarter of 2017 until first quarter of 2019 – thus eight quarters of negative growth! Forecasts for 2020 peg growth at below 2% only, and even that has significant downside risk. Transforming state-owned entities’ boardrooms is a key lever for kick-starting long-term growth. Adding a business dimension to these boardrooms is one way in which we can get growth going.
State-owned enterprises touch many areas of our lives in Namibia. From making a cup of tea, which requires water and electricity, to a phone call, we’re reliant on their services. The water utility is 100% state-owned, and so is the power utility. The dominant mobile operator, MTC, is fully state-owned, although it is due to be publicly listed. A debate on partial privatisation of state-owned entities is overdue and critical for two reasons. First, the government is currently struggling to rebalance its finances and 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. Our contention is that private interests permeating their boardrooms would likely resolve this dilemma.
State-owned entities need to be optimised to help address Namibia’s growth challenges. Namibia’s growth prospects have been severely curtailed by weak investment demand from both state-owned entities and the private sector. Granted, the 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 expenditure cannot help to shore up demand. In fact, there is pressure for 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 state-owned entities) 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, and is 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 government will be diluting part of its shareholding in the dominant mobile operator, MTC Namibia, through an IPO. The Windhoek Country Club and Resorts, where the Legacy Group is managing a state asset, is also a successful demonstration of how private sector participation in the management of a state-owned entity 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 the shareholder is not there. To put missing value creation into context: the approximate value of the assets managed by state-owned enterprises is in the order of N$100 billion, yet only a handful of state-owned entities pay dividends. Ideally, all state-owned entities operating in the economic clusters such as those running lodges, hotels, the electricity utilities, road construction, and railway operators should provide a return to the shareholder. Their cumulative N$100 billion balance sheet is sizable when compared to Namibia’s nominal GDP in 2019 which was pegged at approximately N$190 billion. Instead, government has to disburse approximately N$30 billion in transfers to some of these entities even though they display limited performance upside. The challenge is that government transfers to some entities have become routine, without much expected in return.
I don’t think society benefits from this type of incentive regime as it clearly crowds out other spending on economic and social infrastructure. As at the end of the 2018/19 fiscal year, the government as shareholder only received N$1.2 billion in dividends from three entities, two of which are diamond mining and trading joint ventures with De Beers. These JVs paid 77% of the dividends earned by the state, which bolsters my 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 state-owned enterprises, introduce private capital through direct JVs as is the case with De Beers and Namdeb Holdings; through listings; and 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 really 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 not possible 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. My assessment is that such discussions are actively avoided in many boardrooms, and that impairs future growth prospects. Augmenting the shareholding would help many state-owned entities 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.