Namibia has a very ambitious infrastructure development program requiring investment of at least N$223 billion over the next 6 years. The program is aimed at replacing aging infrastructure, maintaining existing infrastructure and investing in new infrastructure to boost economic growth. Of the N$223 billion of funding the Bank of Namibia estimates is required; about half is earmarked for the transport sector, a quarter for the energy sector and a remaining 20% for housing.
However, the required spending on infrastructure of N$223 billion far outweighs the planned funding of N$74 billion; with only a third of the required spend having planned funding. This leaves Namibia with a net funding gap, according to BON, that is estimated around N$150 billion over the next six years. This figure is likely significantly higher as the required funding only includes known projects in the pipelines of State Owned Enterprises and not all potential infrastructure development and upgrading projects in the country.
Government is mostly to thank for funding the wide network of infrastructure Namibia currently boasts. According to BON, over the last three years government spending on infrastructure totalled N$24 billion, or 5% of GDP. This excludes the funding provided to SOEs and the issuance of guarantees for SOE borrowing. Although government plans to continue playing a vital role in infrastructure development, contributing 20% of the planned N$74 billion of funding, it is clear that government cannot shoulder the burden alone. Private capital needs to help close the funding gap.
What’s Stopping Private Capital
Although it is clear that private capital needs to be mobilized to close the funding gap, the key challenge is around what I call ‘alignment of interest’. Private investors have the intention to invest but not all the role players are on the same page as to how to actually ensure they realise this aspiration. Among these role players are government, financial institutions, SOEs and regulators. Not everyone is familiar with, or understands, the process required to financially close a project and the implications thereof. Thus the framework and system is not set up to effectively facilitate investment. This misalignment transcends skills gap and capability.
Importantly, a robust, consistent and predictable legal framework is required to fast track infrastructure investment and to provide assurances to long term investors. It is fundamentally important to know what your operating criteria are when embarking on an infrastructure project. Projects are mostly project financed and are highly leveraged and thus there is not much scope for variance. A stable and certain legal framework is thus a prerequisite for infrastructure investment. This includes legislation around concessions and around ways for private investors to invest alongside government and SOEs.
Affordability is another area of misalignment. Not all infrastructure projects are bankable due to their low investment return compared to the cost of capital. However, if the project is socially desirable and believed to be necessary from an economic perspective a degree of subsidy or concession is required to make it bankable. This is particularly true for certain social infrastructure projects.
Currency risk can at times be an issue for infrastructure projects. Some projects and tariffs are hard currency funded and priced while revenue streams are in local currency. Materials and machinery may be imported from outside of Namibia and South Africa. Although hedging and insurance can offer some protection, they do not protect completely and can be costly strategies. Ways to assist in protecting investors from these risks should be considered.
Getting Private Capital Involved
The sources of funding for infrastructure projects beyond government and SOEs include contractual savings - pension funds and insurers, commercial banks, debt capital markets, annuity concessions, infrastructure bonds, listed infrastructure funds, DFI’s, retail investors and private equity funds.
Pension funds and long-term insurance funds have a long term horizon and as such can be good sources of funding for infrastructure projects. According to BON, the assets of Pension Funds and Long-term Insurers were estimated at N$141.7 billion in 2013 and currently less than 2% is invested in unlisted investments, including infrastructure investments. Thus there is scope to increase investment in unlisted infrastructure up to the maximum 3.5% allowed according to Regulation 28 and 29, as well as to invest in infrastructure through listed vehicles.
Private equity funds are becoming a more common phenomenon in Namibia. They use money raised from institutional and private investors to invest in unlisted entities over a 7 to 10 year horizon. Although no local funds have a pure infrastructure focus, infrastructure projects could offer attractive returns to these funds and their investors, and align well to their investment horizon. Pure infrastructure funds from other parts of the continent might be considered to invest alongside local investors to not only bring capital, but experience from other successful projects.
Public-private partnerships (PPPs) have grown in importance as a procurement method for infrastructure services. They have numerous benefits, including effectively pooling capital from the private and public sectors, accelerating delivery of projects, improving efficiency of infrastructure and spreading risks between the various parties. Three things are important in making these partnerships successful. Most importantly, they must be governed by a complete framework and supported by strong institutions that plan and coordinate investments. Secondly, the risks of the projects should be fully understood, allowing them to be financially quantified and spread between investors appropriately. Finally, local skills and capacity need to be built to support the PPP program in its structuring, negotiating and monitoring. Namibia has drafted a PPP policy and will soon set up the institutions required to implement it.