Africa-Press – Namibia. IMMANUEL KADHILA
THE SHALLOW nature of Namibia’s capital market, the infrastructure funding gap and the size of the country’s long-term savings make a good case for infrastructure/projects bonds.
The Namibian Stock Exchange (NSX) is probably the shallowest, despite being one of the oldest on the continent, with the number of primary listed companies standing at just 11.
This number has remained unchanged for years and provides limited choices for investors.
The depth of the capital market doesn’t only help companies with cheaper sources of funding but also attracts foreign investors searching for yields.
Namibia only managed to add three companies to the main local board over the past 11 years, despite several attempts by the government, through the Namibia Financial Institutions Supervisory Authority (Namfisa), to attract capital.
About 24% of the local NSX market value is owned by the Government Institutions Pension Fund (GIPF). In comparison, the Johannesburg Stock Exchange (JSE) currently has 800 listed securities and approximately 400 listed companies, indicating a deep capital market.
Similarly, 93% of the local bond market is directed to government issuance. Non-sovereign bond programmes make up less than 7%, the majority of which is commercial bank bonds.
Only 0,6% of the bonds on the NSX are issued by government affiliated entities, which is just the Development Bank of Namibia. Nearly 40% of the outstanding bonds on the NSX are owned by the GIPF.
State-owned enterprises (SOEs) are entrusted with the management of the economic infrastructure of the country and are expected to drive the infrastructure development programme. They are expected to be the dominating issuers of corporate bonds, which is not the case.
Instead, they rely on governmental funding or often expensive commercial bank overdrafts.
Bank of Namibia (BoN) research on infrastructure funding requirements in 2014 indicated that the country was faced with financing needs of over N$223 billion, and a funding gap of N$150 billion. This gap has widened since then.
Despite this, capital continues to leave the country in search of investment, the government continues to crowd out the private sector, mostly because corporates prefer to use bank debt, while Namfisa regulations require a minimum investment of 45% in the local economy.
Due to a lack of financial instruments, most of these funds sit in commercial banks’ money market products, which then find their way out of the country, mostly to South Africa, or for placement in treasury bills.
As corporates continue to rely on commercials banks as their only source of funds, often short-term in nature, Namibia’s infrastructure gap continues to widen and capital will continue to flow to countries with deep financial markets.
The dependency of our SOEs on the government will keep them away from the capital market, leading to a forever shallow market, however, just imagine the impact on the depth of local capital markets if the following companies issued financial instruments on the NSX:
TELECOM
A lot of Telecom’s infrastructure is ageing and needs replacement. The company should be embarking on laying fibre across the country, as the need for fast, reliable internet increases. Imagine what education would be with fast internet through modern telecom infrastructure?
Telecom has a large balance sheet and it boggles the mind that they don’t tap into the capital market for capital project funding. Two years ago, Paratus issued a bond to finance the data centre and restructure some of their debt. The bond was oversubscribed, indicating investor hunger for alternative instruments.
Despite once coming to the market, Telecom has not returned. Its balance sheet is well over N$2 billion, with lease liability being the only significant debt. The same can be said of MTC.
There are funds looking for a home, while telecom companies are sitting on unleveraged balance sheets worth billions and the market is looking for Telecom Infrastructure bonds.
NAMPOWER AND THE REDS
Just like Telecom, NamPower and the regional electricity distributors (Reds) have massive infrastructure needs.
NamPower’s five-year strategy indicates it needs over N$15 billion in funding for infrastructure expansion to achieve its ambition of becoming a leading electricity service company of choice in SADC.
Part of these financing needs can be sourced locally through long-term bonds.
One would expect NamPower to issue long-term papers to finance specific projects whose revenue can be ringfenced. The utility’s balance sheet stands at over N$40 billion and their biggest liability is deferred tax of over N$9 billion, with no other notable borrowing.
Instead, NamPower is looking west for cheap financing (or at least that’s what they believe) instead of issuing local bonds and inviting Westerners to buy local instruments free of currency risk to NamPower.
Entities like NamPower complain that the Namibian capital market is expensive. However, cost is relative to the depth of the market. The more assets we have on the local exchange and the more diverse the set of issuers, the lower the cost of borrowing for bond issuers.
NAMWATER
NamWater has several unfunded water projects, especially around networks and aged infrastructure. Part of the water crisis in Namibia is due to the lack of interconnection between different parts of the country.
Consider water shortages in the central-north compared to an abundance of water in the south, yet it’s almost impossible to pump water from south to the north.
To resolve this, NamWater needs funding, which is available on the capital market.
The company’s balance sheet is over N$7 billion, and their biggest long-term debt is deferred income, not outstanding bonds.
MUNICIPALITIES
Namfisa regulations allow for pension funds’ money to be invested in municipal bonds, however, none of our local authorities issue financial instruments. None have ever tried.
Municipalities in Namibia have massive funding needs for capital projects, while sitting on massive untapped revenue sources like rates and taxes.
Most municipal capital projects, with funding, can unlock additional revenue in rates and taxes and other municipal charges. This will spoil asset owners in terms of various choices and will lower funding costs for local authorities.
Lack of access to long-term capital for municipalities will continue to hamper faster infrastructure development, which will impact the quality of services to residents in future.
Besides timely financial statements, there’s no reason the City of Windhoek cannot issue long term municipal bonds. They can even issue revenue bonds supported by revenue generated from specific projects.
The City of Windhoek’s unaudited financials show that they sit on net assets worth over N$16 billion. The last audited financials were in 2018. Their most notable loan is a bank overdraft of nearly half a billion dollars, which could have been raised through conventional cheap and long-term bonds. Unfortunately, most municipalities with sizeable balance sheets haven’t produced financials in ages.
TRANSNAMIB
This is a special Namibian child. Let’s just say its balance sheet is among the biggest, affording them the ability to access cheap funding. Their biggest liabilities are deferred income, a loan from the government and a bank overdraft.
Why can’t these be consolidated in a bond programme?
We could continue with an endless list of SOEs in this country but the key takeaway is that these entities, alongside several capable private sector companies, are part of the reason our capital market is not deepening.
They are the reason investors take money out of the country to buy Toyota bonds, Barloworld papers and Mercedenz- Benz bonds.
Commercial banks are commendable for keeping the market alive by issuing bonds periodically, such as Bank Windhoek, the first bank to issue green bonds in Namibia, giving local investors access to the investment potential of green technologies, services and infrastructure with positive environmental benefits.
Standard Bank followed suit, in addition to a series of bonds they issue annually.
New companies like RTO Namibia registered over N$5 billion worth of long-term bonds on the NSX to try to resolve housing issues. Namib Mills came to the market with a sizeable private placement to fund its expansion. The market welcomed the issuance and attracted a fair subscription.
So why can’t SOEs do the same?
The more issuances we have on the capital market, the more choices we give investors, and the cheaper the capital.
One added advantage of issuing debts is accountability. Bonds come with covenants which should be adhered to. Failure to adhere can lead to technical defaults, a reputation most companies wouldn’t want to be associated with. As a result, companies tend to be more accountable when they issue bonds. Companies will produce timely financials, meet their periodic debt repayments and make sure they invest the funds in the right projects.
The reason other markets are deep, developed and attractive to investors is because someone made a deliberate decision to develop them. As a country we can do so by compelling SOEs to finance their capital projects by leveraging their balance sheets.
It’s not amusing to have institutions like municipalities not producing financials for years. It’s unfair for institutional investors like the GIPF and long-term insurance companies to keep scrabbling for government bonds, and loading funds into money market funds to comply with local asset requirements.
This often leads to concentration risks, while big balance sheet corporates run to the government or foreign markets for capital project funding. By implication, when SOEs sit on their balance sheet, they postpone implementation and funding of much-needed capital projects to the detriment of the country. It is also unfair for the government to balloon its debt levels with billions every year, risking its credit rating, while SOEs and municipalities sit on assets that could be productively leveraged.
* Immanuel Kadhila is the head of treasury at the Government Institutions Pension Fund. The views expressed in this column are his own.
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