Namibia’s Country Club ‘model’ -The future of SOEs in Namibia?

 

Some state owned enterprises (SOESs) are fairly obvious. With entities like Nampower, Namwater and Nampost government ownership is common in many countries  around the world. Others do not exactly jump off the page and really require a second look to understand how we got there. This is certainly the case with one of the poshest establishments in the capital, the Windhoek Country Club (WCC) which is 100% owned by the people of Namibia. 

 

The most obvious question is why would the state own a casino and  country club? It is certainly not at all a likely candidate for ‘nationalization’. The reason is historic. In 1994 Namibia agreed to host the Ms Universe contest but had no place to host it so with a period of 9 short months the hotel was built. The rest is history. 

 

But from a public policy standpoint was building the WCC with public funds just for a Miss Universe contest money well spent or was it just part of Namibia’s long problem with making highly political decisions on infrastructure project? But from a narrow commercial standpoint it was one of the more profitable investments made by the people of Namibia as unlike so many of the SOEs   this has  over the last number of years made a consistent profit.

 

Mr Jooste, the Minister of Public Enterprises  frequently uses the WCC as an unfortunate source of invidious comparison for so many of the other state owned hotels which do not have  a record that looks anything like that of the Windhoek Country Club.

 

But the interesting question is precisely why the WCC is making money and the state owned Namibian Wildlife Resorts (NWR) which holds some of the finest hotel and lodges in the country does not make money? NWR has become a financial albatross around the neck of the Minister of Finance and, according to senior government officials, has never made a profit? There is one obvious answer which jumps off the page and that is management and the board. In so many countries the Board of Directors of SOEs is stacked with politically appointed hacks, many from the public sector, who have no commercial ability and whose only interest is getting their board fees.

 

In the case of the WCC the management has long been in the hands of the Legacy Group which is a South African Hotel and leisure company with long years  of experience  of managing hotels in the region. NWR, on the other hand, while having a portfolio of some very fine properties in some excellent locations has never made a profit.  It has been and remains in the hands of government appointed managers.

 

Government ownership is not necessarily the problem with SOEs. Two minimal requirements for profitability are good management and a board of directors which is financially  astute and supportive of management. Until last year the NWR was run by a board of directors which was stipulated under the act and straight out of the ‘SOE Manual for Financial Disaster’. Under the NWR  Act (1998) the board was made of the Permanent Secretary of the Ministry Finance, Tourism , Lands Parks along with just one representative of businesses and labour. And the results were predictable- no profits. Last year, using the provisions of the new Public Enterprises Governance Act (2015) the government overrode the old NWR Act and appointed a new board made up of experienced people from the private sector.

 

However, by doing that the government has created a potential governance conflict at NWR. Do those on the board now reflect Namibia’s interest or simply that of the private sector? Tourism in Namibia is a peculiar business and for some private sector operators the fact that NWR resorts may not be well managed is a blessing in disguise. So if you own a private resort outside a national park, for example, and the NWR resorts in the park are not working effectively then you have an interest in maintaining the situation  exactly as it is. But those on the NWR  board do not appear to have an obvious interest in this sort of commercial sabotage. Those on the board from Avani or Swakopmund Hotel, for example,  have no obvious interest to support the  poor management at NWR.

 

If the recipe for financial success in SOEs as in private firms is based, at the very least, on having a good board and a good experienced commercial management, then why is NWR not making a profit? It is the second part of the equation that remains unchanged and the board has not yet brought in new management. Until professional management is brought in Namibia’s fine portfolio of hotels and resorts will remain a financial liability to the people rather than an asset. The question is why the board of NWR and the government have been unable to change the management and repeat the positive experience of the  Country Club? Perhaps Minister Jooste needs to consider the reasons why progress is not made in management reform. The longer reform is delayed the more resources government will have to pour into NWR rather than using them for important priorities like poverty alleviation. 

 

 

These are the views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed.

Of Fish and Diamonds

Several weeks ago Mr Daniel Kali, the resident Director of De Beers in Namibia wrote an article in The Namibian in June about the contribution of diamond mining sector makes to the economy of Namibia. In that article he claimed that the diamond industry had contributed some $N3.7 billion last year to the coffers of Namibia in the form of taxes and  other revenues paid. This was out of a total sales of some $N10- 11 billion and  no-one should have much to complain about with figures like that. But then Mr Kali made a comparison with another, unnamed industry, of similar value to the diamond industry which only made a meagre contribution of N$130 million. While the industry was unnamed the only industry of comparable value is the fisheries and this questions opens a can of worms, or a just a can of horse mackerel if you prefer. Fish are vitally important to Namibia and are the source of employment for 13,000 Namibians. More importantly, if we manage the nation’s fisheries properly, and that is a big ‘if’, the jobs will be there forever, unlike diamonds which are not forever.

Some might say that it is a bit unfair compare horse mackerel to diamonds and one can only reasonably expect that the diamond sector would contribute more to the economy. There is more in common between the two industries than immediately meets the eye. The fisheries sector generated some N$ 8.8 billion in exports in 2016 and yet it paid little in taxes. Needless to say the contribution of the fisheries is small but these numbers probably do not include income tax returns from all those beneficiaries of horse mackerel quotas who simply ‘flipped’ i.e. sold  their quota to actual fishing companies and received what was in 2016, a payment  of N$3,500 per tonne which is what was paid in Walvis Bay. In 2012 the last year for which data is available, the government earned only $130 million from the fisheries and it sold the quotas for N$109 million.  That means that given the total allowable catch of some 350,000 tonnes of Horse mackerel alone the government could have received N$1.2 billion if it were to auction these quotas at the going market price rather than allocate them to firms and individuals, some of whom who have the most tangential connection to the industry. Moreover, given the extreme reluctance of the Ministry of Fisheries to release the names of beneficiaries, it starts to bear a painful resemblance to the situation in the diamond industry.

This situation of opaque transactions and prices is very similar to the diamond industry. Namdia (Namib Desert Diamonds) was established by the government for one specific purpose and that was to sell 15% of Namdeb’s diamond production. The reason is, despite what Mr Kali says about the great contribution of De Beers to the economy, there has been the long held suspicion in government circles that the price De Beers pays for Namibia’s diamonds is below the market price. This mistrust of De Beers pricing is transnational in nature because there is only one price of diamonds and that remains the price established and kept secret by De Beers. Botswana, which owns 15% of De Beers and is a far larger producer of diamonds than Namibia, has also followed this route because, despite protests to the contrary, as it also distrusts its partner De Beers and the prices it sets. It has established a firm called Okavango Diamonds but unlike Namdia, Okavango auctions its diamonds and as a result there has been no controversy like that which has engulfed Namdia since its creation with continual allegations of underpricing and commercial impropriety. These allegation may be completely untrue and merely attempts by those not getting access to Namibian diamonds to discredit the process, as has been alleged by the former Diamond Commissioner and new Namdia CEO Mr Michael Hamutenya in recent press interviews.  But if the purpose of Namdia is the same as that of Botswana’s Okavango Diamonds i.e. ‘price discovery’ in the diamond industry which means finding out what the real market value is,  then Namdia’s approach of selling to a few buyers is not fit for purpose. President Geingob and the Minister of Mines and Energy, Mr Obeth Kandjoze need to look at what Okavango Diamonds is doing through its auctions in Botswana and they will conclude that the model should be copied by Namibia.  

But one should not assume too much. In both the fisheries and the diamond industry the purpose of policy may not be the efficient allocation of resources. It may be that government simply wishes to allocate both diamonds and fish to those who, for one reason or another will do as the government wishes as in the case of Fishcor or even Namdia, or are connected to the right people. It is a common objective of many post-independence states in Africa to create an indigenous commercial elite and these sorts of policies may well be designed to achieve this objective. The creation of such an elite is, simply put, a very ugly business as it requires transferring large, often public surpluses to them. It is akin to Count Bismark’s famous aphorism about making laws and sausages- both are best kept from the public eye. This policy will be opposed because the rise of this commercial elite may have nothing to with their commercial ability and everything to do with who they know. Moreover, if the elite is devoid of real commercial ability because it has accumulated wealth by favors rather than sweat, suffering or cleverness, then these people will not reinvest their surpluses effectively and are more likely to spend them on consumption.

These are the views of Professor Roman Grynberg and not necessarily of UNAM where he is employed.

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Diamond Beneficiation – Subsidizing the Living Dead

 

Earlier this year Mr Obeth Kandjoze, the Namibian Minister of Minerals and Energy very publicly tore strips off what remains of Namibia’s diamond beneficiation companies. It was a dressing down that the industry richly deserved. The office of the Diamond Commissioner indicates that only about 20 percent of the total beneficiation sales made by the Namibia Diamond Trading Company (NDTC) during 2016 was processed locally.

 

The Minister said  “We do appreciate the need for a flexible business environment that allows you to manage your Namibian business in a sustainable manner. However, the practice of exporting in some cases 100 percent of rough diamonds meant for beneficiation purposes is in our view totally against the spirit of beneficiation and I would like to put it on record that we condemn the continuation of this practice in the strongest terms,”

 

Namibia has allocated US$ 430 million ( to the 11 so-called diamond beneficiation firms)  that operate out of tax free zones in the country. This amount is supposed to be increased annually. So why are they selling their diamonds and not cutting them? The answer is simple enough. One of the prime reasons for being a De Beers (or NDTC) site holder is you get diamonds. But you can buy those same diamonds on any exchange whether it is Antwerp or Tel Aviv or Dubai so why buy from De Beers? The answer is simple – the De Beers prices are below the prices that these diamonds are exchanged on the secondary market. Diamonds are no different from any other commodity, they are cheaper at source. How much cheaper?  In a normal market, and the last couple of years  has not been a normal market you can flip a De Beers box for a normal gross premium of 8-10%. In good years it is much higher but in the last few years it was actually negative and site holders were losing money and walking away from their  allocations.

 

The main incentive for locating a factory in Namibia is that you get an extra allocation that is less than those normal De Beers site holders get and so the gross return the industry can make from just flipping the annual allocation of $430 million is between $30-40 million.  But the alternative is that they can set up a factory, some legitimate others mere ‘Potemkin factories*’, and cut stones here but it is far more profitable to flip the whole box or send it to a factory India for cutting where cutting costs are much lower.

 

In actual fact according to normally reliable sources in De Beers only 5, and industry sources suggest it is only 3, of the 11 firms operating in Namibia actually do any cutting at all. Yet under the  new policy which was announced by NDTC all of these 11 firms, even the ‘non-cutting, cutting’  firms will be rewarded by a minimum allocation of a minimum supply level of US$15 million ( $N200 million). The stated objective is to start all local diamond cutting and polishing factories off at a level of supply that ensures reasonable viability and sustainability.  Presumably this reward is because of their stellar performance of some of these firms in doing nothing for Namibia in the past. No doubt the new Diamond Commissioner will say she will monitor these firms.

 

If you speak to these firms some will tell you the reason that they do not beneficiate is they are not allocated the right type of diamonds for the purpose of cutting in Namibia. They can only make a profit from the larger  stones. De Beers on the other hand will tell you that they give allocations specifically tailored to the needs of the firm.

 

If one looks at the trade figures for polished diamond exports it tells a very sorry story of decline. Exports from Namibia of cut diamonds have halved over the last three years from N$1.7 billion in 2014 to N$875 million last year. Diamond beneficiation is in free fall.

 

Ironically last year the government of Namibia and De Beers gave the diamond cutting industry  a fabulous concession that amounts to a massive subsidy. In 2016 Namibia decided to give all its special stones i.e those stones above 10.8 carats that come from Namibia to be cut and polished by local firms. This is literally giving the local beneficiation firms the crown jewels. These huge diamonds are geological rarities (most diamonds are much less than 1 carat) and are enormously valuable but are amongst the most difficult to value. The government and De Beers need to assure close supervision of firms to make sure they are simply not ripped off by some of the firms in the cutting industry. According to  industry sources De Beers  is selling these special stones to local cutters at their  polished prices which decreases the profitability of the cutters. Access to these special stones is something the diamond cutting firms in Namibia have long sought but few of the 11 firms have the slightest technical capacity to cut diamonds of this size in the country. Some have been placing advertisements in the local paper to get local cutters ( almost none exist) with such experience in preparation for importing these cutters from Europe. Traditionally diamonds that large were sent to Antwerp, New York or Tel Aviv for cutting by an expert given that with a diamond that valuable you do not want a relative amateur doing the job. 

 

Just three years ago when the guru of the diamond industry, Chain Even-Zohar published in  Diamond Intelligence Briefs an article stating that the reason why these firms were locating in high cost Botswana and Namibia was because they were getting a  cross-subsidy from De Beers in the form of an occasional  special stone. At the time the De Beers spokesperson strenuously denied that this was happening, Now it is not just an occasional stone but policy.

 

The response of the demise of the industry in Namibia has been ever more subsidy. This is akin treating someone with a congenital skin condition with cosmetics. It is merely treating the symptom and not the cause, which is the lack of competitiveness.  As things stand at the moment we cannot possibly compete with the Indian goliath which has 800,000 people cutting diamonds, half of which originate in Africa.  To solve Namibia’s competitiveness problems is very hard work and very politically unpopular and hence there is no appetite amongst government officials to deal with this problem. They know the political and economic constraints. If you are a high bureaucrat and you try and fail to implement such a painful policy then your name will forever be associated with that failure, so why even try because failure will end your career. And so instead the nation fails to implement hard but necessary policy.

 

These are the views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed.  *In the 18^th  century Count Grigory Potemkin, Prime Minister of Russia reacted to Empress Catharina  terrifying desire to ’see how the peasants lived’. He  built a village with fake fronts of  peasants houses  with happy dancing girls along the banks of the Dnieper River and moved it as the Empress proceeded to Crimea.