Derailing private sector

A more robust private sector can boost Namibia’s economic recovery from the recession and the Covid-19 pandemic, but state-owned enterprises (SOEs) ruling the market and benefitting from preferential treatment erode the full potential of the sector.
“Namibia’s largely monopolistic market structure and dominant public sector create an uneven playing field for the private sector,” the World Bank and the International Finance Corporation (IFC) conclude in the Namibia Country Private Sector Diagnostic (CPSD).
The report, named “Creating Markets in Namibia: Creating Resilient and Inclusive Markets”, states: “Namibia can transform its economy, create jobs, reduce inequality, and recover faster from the impact of Covid-19 by deepening private sector reforms and increasing private sector participation in key sectors.”
The report was released last week amid growing discontent among owners of private fuel filling stations about the aggressive expansion of state-owned National Petroleum Corporation of Namibia (Namcor) in the retail sector.
The SOE started opening its own filling stations three years ago. It current has 11 in operation, while 10 more are under construction. Namcor is targeting 27 operational filling stations by next July, and 33 by 2024.
According to the CPSD, “SOE sector dominance in a small economy such as Namibia’s creates anticompetitive effects, especially when SOEs operate in monopolistic and privileged positions in key sectors of the economy—as they do even in sectors where private participation could be more efficient and transformative.
‘CONFLICT OF INTEREST’
The report specifically mentions Namcor when it refers to some SOEs lacking a separation between operating and regulatory functions, providing incentives to keep competitors out.
According to international best practice, an SOE that is active in a sector of the economy should not have a simultaneous regulatory function for that sector. Yet, legislation assigns both regulatory and operational roles for several key SOEs, the World Bank/IFC say.
“For example, Namcor was appointed as an advisor to the ministry of mines and energy (MME) and has been assisting in regulating the upstream petroleum sector. At the same time, Namcor is also involved in upstream exploration licensing and is an active shareholder in a new oil exploration project led by the Canadian Reconnaissance Energy Africa Ltd,” they say.
This creates a conflict of interest, the World Bank/IFC adds.
The report continues: “Downstream, Namcor is managing the National Oil Storage Facility and putting up service stations across the country while also advising the MME on various regulatory issues, including fuel price, even though Namcor is also the recipient of a significant portion of the fuel levy.”
BENCHMARK
According to the report, Namibia has 22 designated commercial SOEs in the across at least 15 sectors. In total, the country has 81 SOEs.
Despite having a much smaller market size than most Organisation for Economic Co-operation and Development (OECD) countries, Namibia has the same number of SOEs as the OECD average, it states.
SOEs have 90% to 100% of market share in electricity generation and import, fixed-line telecommunication services, postal services (other than couriers), air operation infrastructure, maritime transport infrastructure, railway transportation, road infrastructure, water supply, and mobile telecommunication, according to the report.
Over four-fifths – or 82% - of all recorded SOE losses were due to Air Namibia, TransNamib, and the Roads Contractor Company (RCC), it points out.
“Given the small market size, overall efficiency and productivity gains could be achieved by carefully delineating sectors able to benefit from private participation and sectors where existing SOE performance could be enhanced,” the World Bank/IFC say.
KEY ADVANTAGES
Overall, SOEs have key advantages over private firms, the institutions say.
“According to an assessment of 19 indicators of product market regulation, the restrictiveness of product markets is linked to several factors: state involvement in business operations through SOEs; controls on certain prices that may increase costs for final consumers; barriers to entry, trade, and investment; and ineffective enforcement of the antimonopoly policy,” the elaborate.
Another factor inhibiting competition is the government’s decision to approve infant industry protection to protect the domestic market, in the form of quantitative restrictions or high customs duties in certain sectors (poultry, cement, milk).
“This has made it difficult for foreign firms to enter certain sectors, and SOEs are likely to continue dominating the market given the small private sector in Namibia,” the report states, adding: “Thus, despite progress in developing a legal framework for competition, the effectiveness of competition policy and regulation remains limited.”
PREFERENTIAL ACCESS
SOEs enjoy several advantages that inhibit the entry and success of private participants, according to the World Bank/IFC.
They have preferential access to sources of production such as finance and land, legislated monopolies in specific sectors, preference through policies and oversight practices of shareholders, and multiple roles that create conflict between regulatory functions and operations, the institutions say.
When it comes to access to finance, SOEs have a competitive edge over private firms given their access to subsidies, guarantees, and bailouts, they continue.
“The artificial propping up of public enterprises that are uncompetitive—for example, through public subsidies and guarantees—leads to inefficiencies and imposes a substantial fiscal burden on the government,” the reports states.
However, it is encouraging that the medium-term expenditure framework (2021/22 to 2023/24) intends to reduce these support mechanisms.
Public enterprises have also benefited from preferential treatment from commercial banks and development finance institutions, the World Bank/IFC say.
“For example, the Namibia Wildlife Resorts is still servicing a 2006 loan from the Development Bank of Namibia, and for more than 10 years has paid only the interest portion,” they say.
LAND
Some SOEs also enjoy preferential access to land, which is a significant constraint for the private sector, according to the report.
“For example, the National Petroleum Corporation of Namibia (Namcor) was able to set up a public use fuel station within the boundaries of the Namibia Airports Company (NAC), despite the existence of a private fuel station just beyond the boundary.
“Other examples include the expansion of Namibia Port Authority (Namport) to the north of Walvis Bay and the Agricultural Business Development Agency’s access to irrigation farms,” the World Bank/IFC say.
Several SOEs have sectoral monopolies, including in transport, water, power, and tourism, according to them.
TransNamib, Namport, and the NAC are exclusive service providers in the rail transport, seaport, and airport operations subsectors, respectively.
The Namibia Power Corporation Ltd. (NamPower) has exclusive rights to develop and maintain the country’s power transmission network and is currently fully in charge of national power generation, according to the report.
“This situation may change soon with the uptake of the Modified Single Buyer model, which will provide for direct offtake by bulk power consumers (private companies, municipalities, offices, ministries and agencies of government, and public enterprises) from the independent power producers,” the report adds.
Namibia Wildlife Resorts (NWR) is the only tourism operator in Namibia that may operate inside national parks. Community-managed conservancies have been granted some park access rights, but not the right to set up tourism lodge facilities inside the parks, it points out.
The Namibia Water Corporation (NamWater) controls the full value chain for bulk water supply—generation, transmission, and distribution to bulk customers.
‘UNEVEN PLAYING FIELD’
“Private firms are dependent on these government-owned monopolies for key inputs and support services such as port operations, aviation and bulk rail transport services, electricity, water, and telecommunications.
“Without competition, SOEs are unlikely to deliver these inputs and services efficiently, which undermines core government objectives such as improving competitiveness, economic diversification, growth, and provision of affordable, reliable, and accessible basic services,” the report states.
SOEs and the private sector operate on an uneven playing field because they are not held to the same standards of accountability and compliance to the law, the World Bank/IFC say.
As of June 2020, several public enterprises were not in compliance with the provisions of the Public Enterprises Governance Act and the Companies Act, they add.
According to the report: “A private company seeking financial support or banking services from a commercial bank must furnish audited annual financial statements. But public enterprises do not publish such statements, and in some instances still enjoy banking services and facilities despite this failure to comply with the Companies Act.
“SOEs are also not held to the same requirements for value added tax, corporate tax, or payroll-related obligations such as PAYE (pay as you earn), pension fund contributions, and employees’ benefit premiums. Noncompliance can often make public enterprises appear more competitive than they are.”
CHANGES
In November 2021, government announced changes to the ministry of public enterprises (MPE) over a five-year period.
Based on the recommendation of a high-level panel on the Namibian economy, the MPE is envisaged to become a holding company under the ministry of finance (MoF), which would have direct oversight into the financial and operational performance of public enterprises and ensure that subsidies were more aligned to compliance and performance.
This will also enable the MoF to have control of and be directly involved in the establishment of the holding company, the report states.
The move is part of the government’s efforts to transform Namibia’s public enterprises and streamline the administration. There are on-going initiatives to improve SOE governance and efficiency, through the SOE ownership policy and transformation plan, it adds.
“These reforms, if well implemented, can open new opportunities for the private sector including small and medium enterprises (SMEs) and enhance overall economic competitiveness,” the World Bank/IFC say.