The anatomy of a white elephant

Elephants of the natural variety are normally grey. These natural pachyderms can be dangerous  as they will trample fields and people but they are not half as dangerous as man-made  white elephants. The formula for creating these deadly beast is, in all places, the same. Just add three parts hubris, two part ignorance of the facts (or in some cases just greed will do) and one part cowardice and sure enough, there you have a perfect man-made white elephant. If a country makes enough of these it will financially self-destruct. I have seen many and the one recently built at UNAM, the Medical Faculty fits the formula perfectly.

 In the past you could be assured that if you sent your child to study medicine or nursing they would, unlike so many other graduates, end up with a good well paid job. Based on that assumption large numbers of Namibians sent their children abroad to countries like South Africa, Russia,  China, Ukraine and Cuba for medical studies. Many have started to return and they have begun to compete with the increasing number of home-grown UNAM doctors seeking internships that are the next stage of completing their studies and apprenticeship. As of 2017 government was training  more than 180 medical interns under a two-year programme at three of its biggest hospitals, the Katutura Intermediate Hospital, the Windhoek Central Hospital and the Oshakati State Hospital. The estimates are that there are some 200 doctors returning from overseas this year.

The first 35 UNAM medical graduates entered the  market in 2015 and since then the Medical faculty has expanded and the number of graduates in was 80 but based on agreements with health and education is expected to have an intake of 60 in 2018 , with  drop outs this will mean about 40 will graduate in six years. But staff in 2016 there were 130 staff on the recently renamed and recession proofed, Hage Geingob Campus. It is staff-student ratio that teachers in other faculties of UNAM only dream of but it is precisely that which makes the UNAM Medical faculty a white elephant. Recent reviews of the School of Medicine have indicated that UNAM has the lowest staff student ratios of any medical school in sun-Saharan Africa.

In 2016 UNAM spent some N$240,000 (US$18,000) per medical student per year. In other words for a six year medical degree the cost of the education is, give or take,  $N1.5 million. This does not include the cost of the two year internship nor does it include the grants given by government to support medical students or the cost of university and residence fees.  By contrast the University of Pretoria costs some ZAR 390,000 for a six year medical degree. So why is Namibia so expensive? The reason that the cost is so high is common to virtually everything the country produces – economies of scale. We are simply too small to be low cost. The University of Botswana which created a very similar and expensive white elephant in its own medical faculty estimated that in order to enroll 100 students it would need approximately 125 staff. In Namibia the Medical faculty employs good highly specialized professionals and most of the people who teach doctors are foreign specialists who require internationally competitive salaries to be attracted to come and work in remote places like Botswana and Namibia.

 

The most recent problem is that the number of internships is insufficient for the number of graduates coming from UNAM as well as the Namibians returning from studies overseas. The problem is that there is a desire and a real need to expand the number doctors and if you look at the data Namibia has approximately half the number of doctors per head of population compared to neighboring South Africa. Clearly, Namibia needs more doctors but increasingly government simply does not have the revenues to be able to hire the number of doctors required or to produce enough to make  the medical faculty viable.

In the 2017 state of the nation address the President, Mr Hage Geigngob said that ‘in  the public health sector,  our per capita ratio is one doctor to every 5,092 people and one registered nurse to 914 people.  In contrast, the World  Health Organisation’s benchmark is one doctor or one nurse per 435 people, respectively’ So how much would this cost? It would mean that we have to increase the number of doctors from around 450 in the public service to around 5,000 doctors for the public service to achieve this WHO target. That would cost the government N$7.6 billion just to train that many doctors and then a further $2.5 billion in extra salaries every year. Clearly, having the right number of doctors is an important objective but one that will have to wait until the country has a real economic recovery. So we have a medical faculty that produces expensive doctors and a government that does not have the money to keep hiring them. That is the definition of a white elephant but surely one that any reasonably trained official could have readily foreseen.

 So if it costs that much to train a doctor in Namibia then perhaps the least cost option is to close the faculty and send the students abroad as was case before Namibia built its very expensive white elephant. This might make accounting or economic sense but it would be difficult to find a politician or health/ education policy maker that would countenance such an option even if setting up such a high cost institution as the medical faculty for 2.3 million people was utter economic foolishness in the first place. Politicians don’t readily admit such colossal  blunders and so we will continue to drain the nation’s resources and will soon produce unemployed doctors because the government does not have the money to hire them. 

What then are the options if closing the faculty is politically unpalatable? There are several options and they relate simply to becoming bigger. UNAM could co-operate with UB on training because the two countries are simply too small to support such expensive white elephants on a national scale in both countries. But the very purpose of the medical faculty is based on developing  national capacity rather than relying on external sources. The unwillingness of small African countries to co-operate is pure political hubris- arrogant pride rather than being based on something that makes any economic sense in terms of development of the country.

The broader question that arises is how do countries like Namibia and Botswana make such colossal financial mistakes and how can they be stopped? It is not because there are no competent people in both the ministries of health and education who could not warn their superiors that with such a small country could not possibly undertake such a venture in a cost effective way. So why was such foolishness not stopped by a bureaucracy that should know better? Some ministers want pyramids built in their name so that they are remembered. And those that care nothing for pyramids at least want the 10% kick-back on the construction project. Those who know the facts are, for good professional reasons, unwilling to tell political or bureaucratic masters that such infrastructure proposals are an economic nonsense. Only those who agree with their political and bureaucratic masters get promoted, troublemakers or those who ask difficult questions are on a fast track to nowhere. The only way to protect the people from such folly is to submit all these massive proposed infrastructure projects to a thorough and independent cost-benefit analysis which could be undertaken by the ministry of planning or, better still, by an independent parliamentary agency that would rank them and tell the people the facts. Otherwise we shall continue to propose and build white elephants that only harm the long term development of the country.

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

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The Walvis Bay White Elephant

In Namibia we love our elephants but as with so many things, and the white ones seem greatly favored above other colors. The Walvis Bay port expansion is amongst the newest addition to the species and will cost Namibia N$4.2 billion. The project was was initiated by Namport and funded by the African Development Bank. The Chinese built port, when the expansion is completed will in effect increase the size of the port to carry 1.05 million TEU (twenty foot equivalent containers) per year. The current capacity is about 350,000 TEU  and there now seems that the expansion and the resulting debt will probably result in a further deepening of Namibia’s economic morass because Namport, which should be able to carry the debt for the expansion from revenues, may not be able to do so and the government of course has had to provide loan guarantees to the lenders.

            The problem is that container shipping at Walvis Bay is not growing but is in rapid decline. Most importantly the trans-Kalahari railway from Botswana has not and probably will not progress and container traffic in transit through the port is in decline. The transshipment to Angola was supposed to be the economic basis for the expansion of Walvis Bay port but to assume that Angola would not develop its own ports in the wake of the civil war and that Walvis Bay would continue to act as its major transshipment centre was economic folly. New ports are being constructed all over Angola by the Chinese at Cabinda with a US $600 (N$7.2 billion)  loan from China and there has been an expansion of the container port at Lobito the end of the Chinese reconstructed the US$1.8 billion (N$20 billion) Benguela Raliway to DRC and Zambia. The first shipments of manganese from DRC arrived at the port of Lobito in Angola earlier this year.

The question that Namibians must ask is how did the nation get into this mess and how do we stop the development of yet more multi-billion dollar white elephants? There are many white elephants in Namibia, this deadly species is not in any imminent danger of extinction  and we will almost certainly continue to build more.  The market section of the feasibility study for the Walvis Bay port expansion was done by Namport in 2011 when TEU through Walvis Bay peaked at 334,000 containers. Since then it has decreased to 203,000 in 2017 but according to the AfDB projections it was supposed to be 561,000 TEU by 2017. Most of the decline was because of the collapse of transshipment. This will mean that, based on current throughput, the new 1.1 million TEU port will operate at 20% capacity and that the expansion was simply an unnecessary investment that Namport will now struggle to repay. The N$3 billion borrowed from AfDB will have to be repaid by government and people of Namibia if Namport cannot. The growth of shipping in 2011 made it look possible to believe that a 1.1 million  TEU port might make sense one day in the very distant future but only so long as the transshipment traffic to Angola continued. No-one, especially the AfDB, should have assumed such a thing, which should have done its own assessment when it finally agreed to the $N3 billion loan in mid-2013 by which time shipping was already in decline. This white elephant is not just a case of unfortunate future projections on shipping demand as this could have been foreseen by 2013 if there was a proper review by AfDB just  prior to disbursement.

The only way to stop this sort of economic folly from continuing and ultimately bankrupting Namibia, which no-one should doubt will be the end result,  is for the President and National Assembly to protect the people from some of their ministers. Some, but not all ministers build white elephants out of pure vanity and hubris and the hope that it will be a ‘pyramid’ in the their name. Others have even less noble objectives such as getting kick-backs which are common in such large infrastructure projects. In theory the Ministry of Planning should be mandated to conduct an independent review of all infrastructure projects using proper economic cost-benefit analysis. But the ministry cannot be trusted not to be leaned on by one or other powerful ministers to give a favourable outcome. What the country needs is to resurrect the now defunct NEPRU (Namibian Economic Policy Research Unit) directly under the control of the National Assembly. It should change into an independent economic watchdog, based on the US Congressional Budget Office model,  that would publish an independent analysis of any proposed infrastructure project in the country. The IMF has earlier this year warned Namibia that one of  the nation’s greatest financial risks lies amongst our state owned enterprises and their penchant for such sub-economic projects. It is time for parliament and the President to protect the people and insist that proper facts based cost-benefit analysis be done by an independent parliamentary body before any large infrastructure project is approved. If we do not then the herd of white elephants we are building will destroy our economy and further impoverish the people of Namibia.

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

De Beers new Nuclear Weapon

Fifty years ago De Beers and General Electric were the leading technology firms making synthetic, man-made  diamonds. It was held as a truism in the global diamond  industry that De Beers would only use the synthetic technology to produce industrial diamonds  which can readily be bought in any hardware shop and are used as cutting tools. These are an essential ingredient in construction and are manufactured in China by the billions of carats. But one De beers CEO after another would solemnly promise that De Beers would never produce gem quality synthetic diamonds because, after all, that would undermine their highly profitable mined diamond operations. While they were protesting their innocence Element 6 which is the De Beers synthetic diamond arm, was busily filing patents for gem quality synthetics and preparing for what happened in May and June

 Two months ago De Beers dropped a huge bomb on the global diamond industry and by extension the relative prosperity of Botswana and Namibia, by far the two most diamond dependent countries in Africa,  by announcing that it would establish a new firm under its existing Element 6 which would produce  gem quality synthetics. The new company called  Lightbox will manufacture synthetic diamonds for jewellery at a price range of US200 for a quarter of a carat to $800 for a one carat diamond.

These are modest prices and are aimed at tempting back ‘Millennial’ consumers who as a group are simply not interested in ‘bling’ in the same way as their parents. This new younger generation of affluent consumers looks at a range of possible luxuries when buying and diamonds are only one option and so De Beers has purposely targeted the price range that will compete with branded leather hand bags. This strategy could not be done with quality mined diamonds which are much more expensive.

For Botswana, Namibia, South Africa Angola and Zimbabwe this move is nothing short of an economic disaster because it will certainly not be long before De Beers begins to compete against more high value stones. Namibia produces amongst the world’s most valuable rough diamonds selling at unit export price of more than N$7000 per carat. The Namibian Ministry of Mines appear to have been totally silent about the De Beers move even though in one swoop the old cartel master of African diamonds has completely undermined any bargaining power that African countries have by giving itself  a ‘nuclear option’. In the three countries where De Beers has mines in Africa; Botswana, Namibia and South Africa it has seen government policy towards diamonds decrease their relative power and market position as governments try to extract ever more surplus from the industry.

As the technology for manufacturing modern synthetic gem quality diamonds matured at the beginning of this century Botswana, which already owns 15% of De Beers signed a secret  agreement with De Beers in 2004 that if De Beers ever began to produce gem quality diamonds that it would form a 50/50 partnership with the government. What remains unknown is whether this has eventuated in the case of the US$94 million plant in Portland Oregon and what will be the financial stake of the government of Botswana in the impoverishment of its people.

Why this move is the nuclear option for Africa’s mined diamond producers has to be understood in light of what has happened in the past to the price of industrial diamonds after GE and De Beers started producing synthetics. These were first developed in the 1950’s and GE went into production in the 1960’s. De Beers then entered in a big way in the 1970’s and after 1981 prices on the global market collapsed. First Japan in the 1990’s developed synthetics followed by China at the beginning of the current century. The world’s biggest producer of diamonds is not Russia or Botswana but China which manufactures what is estimated between 4- 8 billion carats per year but has no mines.

The entry of De Beers, then Sumitomo in Japan and finally China collapsed the price of industrial diamonds on the world market. Prices fell in the US from a peak in 1981 of US Synthetic industrial diamonds from a unit import price of US$26 million per tonne to approximately US$2 million per tonne by 2009. Synthetic industrial diamonds are now more than 98% of total global production of industrial diamonds. This sort of massive price decrease for mined diamonds can now be reasonably expected in the gem market once the Japanese and Chinese enter synthetic gem production in the same way they did for industrial synthetics in the last 20 years.

For Botswana and Namibia De Beers has been granted a nuclear weapon with which it can bomb the African economies. So why is De Beers now willing to in effect bomb its own diamond mines with synthetics when it made no sense before? For years De Beers has complained that its market was progressively being eroded in one negotiation after another with African governments. The rates of return on their African mines have declined massively since the heyday in the 1990’s when they were making 500% return on share capital in Debswana, its joint venture with Botswana

But this is only the beginning. De Beers is not the first synthetic gem quality diamond producer but it will for a time be the largest. But having opened what De Beers would argue was the inevitable flood gates of synthetic gem quality diamonds, De Beers will eventually lose complete control of the diamond market that it once monopolized for almost a century. The logic of the market, the often superior quality of synthetics and the competitiveness of Chinese synthetic producers will make mined diamonds much less profitable. The victim will be, once again Africa’s modest prosperity which has come from the twins of relatively good management and good fortune. One of the most important pillars of Namibia’s wealth and the very foundation of the Botswana economy is being undermined by the new De Beers policy. Diversification of the economy is now an utter necessity if Namibia and the other diamond dependent countries of the region are not to slip backwards into further poverty. These are the views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed.