Moving the needle on infrastructure development
Namibia needs a wide array of investment avenues into infrastructure finance.
Sara Mezui Engo - Much discourse has taken place on the catalytic role of infrastructure development in spurring economic growth and attracting investment.
Similarly, policy makers have responded in the form of: the Fifth National Development Plan (NDP5), the Harambee Prosperity Plan II (HPP2), sustainable development goals (SDGs), climate resilience forums and public-private partnerships (PPPs), legislation and the Namibia Financial Sector Strategy, which through regulatory provisions, enforced contractual savings to increase domestic asset allocation.
Furthermore, institutions have been set up to support the cause, in particular the PPP unit at the ministry of finance (MoF) and the Namibia Investment Promotion and Development Board (NIPDB). In addition, through HPP2, government offices, ministries and agencies (OMAs) have a governance framework within which to drive efficiency and accountability.
With so much effort why has the needle not moved?
Arguably the above efforts occurred at varying timelines, some as recent as this year. I therefore trust that with time, NIPDB and HPP2 will drive much needed central coordination.
BUDGET
Counterintuitively, the national budget has not responded to the need in a strategic manner. Provision should have been made in areas where government can unlock substantial private sector participation. Sufficient allocation to project preparation would jumpstart the backlog of infrastructure projects that need preparation towards bankability.
Case in point is realising the capital from pension funds and long-term insurers. In the case of Government Institutions Pension Fund (GIPF), N$3.7 billion is committed to infrastructure, where PPP transactions are the emphasis. However, only 14% of these funds are invested.
The main reasons cited for poor deployment is a lack of bankable infrastructure projects, bureaucracy resulting in delayed action particularly at entities tasked with procurement, incapacity at entities tasked with PPPs and onerous supervision of the non-bank financial sector that is more prescriptive than risk based.
This latter point concerns the definition of infrastructure which is important for appropriate classification under regulation 13 of the Pension Funds Act. In South Africa, these regulatory limits are under review to unlock significant capital from the non-bank sector, but to also allow for better data collection and measurement. In Namibia, the definition of property creeps in when allocating to infrastructure under unlisted investments, raising eyebrows that further add to the frustrations experienced.
BANKABLE PROJECTS
The greatest impediment lies with bankable projects, which would be solved by establishing a project preparation fund. The Medium-Term Expenditure Framework (MTEF) 2021-25 shows that government has availed a total of N$15 million for the establishment of the Project Preparation Fund in 2021/22 and provision of N$96 million over the MTEF to support capital and PPP projects off-take.
This is a good start, but it will miss the mark, as over N$5 billion private capital is waiting to be deployed, while government has only earmarked two projects reaching financial close per year.
Discussions among the GIPF, the Development Bank of Namibia (DBN), the Development Bank of Southern Africa (DBSA), the PPP unit and other transaction advisory firms estimated at least N$50-million government injection, to be matched by other players to commence with a N$100 million facility that would screen at least 10 projects with a 40% success rate. N$15 million therefore, misses the mark.
REGIONAL FUND
Another means to gain traction would be to consider regional fund.
In addition to a well-funded project preparation fund, a platform approach to infrastructure finance will allow for a greater pool of capital towards sizeable transactions.
The same effort of work required for a N$500 million transaction is what is also required for a N$2 billion project. Furthermore, offshore institutional investors feel the same effort in time is required for screening a N$1 billion fund as is for a N$5 billion fund. This, coupled with their sizeable assets under management (AUM), compels them to rather spend effort on platforms with economies of scale offering reduced costs and better diversification.
It is therefore important that there be a wide array of investment avenues into infrastructure finance. This will allow for a blended finance approach where investors may be varied according to their risk/return and commercial/social return appetites. Those seeking greater social impact than commercial return would take up the first stop losses to make projects more commercially viable.
In this regard the National Planning Commission (NPC) and the MoF must be commended for their efforts in producing Namibia’s first ever development finance assessment report of 2019 launched during March 2021.
As articulated by the director general of the NPC, Obeth Kanjoze: “It provides an opportunity for closer and co-ordinated collaboration involving a broad constituency of actors from across government, the private sector and financial institutions, development partners and other non-state stakeholders to pull resources together and prioritise funding by taking into account comparative advantage for each particular finance flow.”
STRATEGIC PLAN
Government must therefore pool all its sources of development finance towards this strategic plan. This is critical as currently there is an over reliance on the non-banking financial sector, which sector is not enjoying returns commensurate with the risk of availing capital at much longer duration than banks.
Most importantly, the capital from this sector is only complimentary, the country must work towards attracting foreign capital making full use of all financial instruments and tools available within capital markets.
Some other notable impediments are local authorities not delivering services, qualified audits, under appropriation and underspending and corruption. Addressing qualified audits and strengthening financial controls at local authorities and state-owned enterprises (SOEs) will allow for municipal and SOE bonds towards infrastructure development, further deepening the avenues of deploying capital.
The HPP2 deliverables on the effective governance pillar, specifically the goals pertaining to accountability and transparency, as well as improved performance and service delivery should help address these short comings.
SHORTCOMINGS
The GIPF, through its developmental investment policy, has committed 5% of its AUM or N$132 billion towards developmental investments of which infrastructure is the lion’s share.
Management fees are being paid to funds, whilst funds are struggling to deploy this capital for the reasons cited above. If these shortcomings are not addressed, other pension funds and long-term insurers will not follow suit, dampening the efforts of sourcing contractual savings towards an asset class that very well matches the liability profile of these institutions in both duration and inflation hedging and reducing portfolio volatility, among others.
It is time to move the needle.
* Sara Mezui Engo is the manager of alternative investments at the GIPF.
Similarly, policy makers have responded in the form of: the Fifth National Development Plan (NDP5), the Harambee Prosperity Plan II (HPP2), sustainable development goals (SDGs), climate resilience forums and public-private partnerships (PPPs), legislation and the Namibia Financial Sector Strategy, which through regulatory provisions, enforced contractual savings to increase domestic asset allocation.
Furthermore, institutions have been set up to support the cause, in particular the PPP unit at the ministry of finance (MoF) and the Namibia Investment Promotion and Development Board (NIPDB). In addition, through HPP2, government offices, ministries and agencies (OMAs) have a governance framework within which to drive efficiency and accountability.
With so much effort why has the needle not moved?
Arguably the above efforts occurred at varying timelines, some as recent as this year. I therefore trust that with time, NIPDB and HPP2 will drive much needed central coordination.
BUDGET
Counterintuitively, the national budget has not responded to the need in a strategic manner. Provision should have been made in areas where government can unlock substantial private sector participation. Sufficient allocation to project preparation would jumpstart the backlog of infrastructure projects that need preparation towards bankability.
Case in point is realising the capital from pension funds and long-term insurers. In the case of Government Institutions Pension Fund (GIPF), N$3.7 billion is committed to infrastructure, where PPP transactions are the emphasis. However, only 14% of these funds are invested.
The main reasons cited for poor deployment is a lack of bankable infrastructure projects, bureaucracy resulting in delayed action particularly at entities tasked with procurement, incapacity at entities tasked with PPPs and onerous supervision of the non-bank financial sector that is more prescriptive than risk based.
This latter point concerns the definition of infrastructure which is important for appropriate classification under regulation 13 of the Pension Funds Act. In South Africa, these regulatory limits are under review to unlock significant capital from the non-bank sector, but to also allow for better data collection and measurement. In Namibia, the definition of property creeps in when allocating to infrastructure under unlisted investments, raising eyebrows that further add to the frustrations experienced.
BANKABLE PROJECTS
The greatest impediment lies with bankable projects, which would be solved by establishing a project preparation fund. The Medium-Term Expenditure Framework (MTEF) 2021-25 shows that government has availed a total of N$15 million for the establishment of the Project Preparation Fund in 2021/22 and provision of N$96 million over the MTEF to support capital and PPP projects off-take.
This is a good start, but it will miss the mark, as over N$5 billion private capital is waiting to be deployed, while government has only earmarked two projects reaching financial close per year.
Discussions among the GIPF, the Development Bank of Namibia (DBN), the Development Bank of Southern Africa (DBSA), the PPP unit and other transaction advisory firms estimated at least N$50-million government injection, to be matched by other players to commence with a N$100 million facility that would screen at least 10 projects with a 40% success rate. N$15 million therefore, misses the mark.
REGIONAL FUND
Another means to gain traction would be to consider regional fund.
In addition to a well-funded project preparation fund, a platform approach to infrastructure finance will allow for a greater pool of capital towards sizeable transactions.
The same effort of work required for a N$500 million transaction is what is also required for a N$2 billion project. Furthermore, offshore institutional investors feel the same effort in time is required for screening a N$1 billion fund as is for a N$5 billion fund. This, coupled with their sizeable assets under management (AUM), compels them to rather spend effort on platforms with economies of scale offering reduced costs and better diversification.
It is therefore important that there be a wide array of investment avenues into infrastructure finance. This will allow for a blended finance approach where investors may be varied according to their risk/return and commercial/social return appetites. Those seeking greater social impact than commercial return would take up the first stop losses to make projects more commercially viable.
In this regard the National Planning Commission (NPC) and the MoF must be commended for their efforts in producing Namibia’s first ever development finance assessment report of 2019 launched during March 2021.
As articulated by the director general of the NPC, Obeth Kanjoze: “It provides an opportunity for closer and co-ordinated collaboration involving a broad constituency of actors from across government, the private sector and financial institutions, development partners and other non-state stakeholders to pull resources together and prioritise funding by taking into account comparative advantage for each particular finance flow.”
STRATEGIC PLAN
Government must therefore pool all its sources of development finance towards this strategic plan. This is critical as currently there is an over reliance on the non-banking financial sector, which sector is not enjoying returns commensurate with the risk of availing capital at much longer duration than banks.
Most importantly, the capital from this sector is only complimentary, the country must work towards attracting foreign capital making full use of all financial instruments and tools available within capital markets.
Some other notable impediments are local authorities not delivering services, qualified audits, under appropriation and underspending and corruption. Addressing qualified audits and strengthening financial controls at local authorities and state-owned enterprises (SOEs) will allow for municipal and SOE bonds towards infrastructure development, further deepening the avenues of deploying capital.
The HPP2 deliverables on the effective governance pillar, specifically the goals pertaining to accountability and transparency, as well as improved performance and service delivery should help address these short comings.
SHORTCOMINGS
The GIPF, through its developmental investment policy, has committed 5% of its AUM or N$132 billion towards developmental investments of which infrastructure is the lion’s share.
Management fees are being paid to funds, whilst funds are struggling to deploy this capital for the reasons cited above. If these shortcomings are not addressed, other pension funds and long-term insurers will not follow suit, dampening the efforts of sourcing contractual savings towards an asset class that very well matches the liability profile of these institutions in both duration and inflation hedging and reducing portfolio volatility, among others.
It is time to move the needle.
* Sara Mezui Engo is the manager of alternative investments at the GIPF.
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