Namibia - Private Sector Assessment (Vol. 1 of 2) : The Overview

Report NO. 15469-NAM CONFIDENTIAL 15469-NAM Namibia VOL. 1 Private Sector Assessment (In Two Volumes) Volume I: Overview June 7, 1996 Macro, Industry and Finance Division Southern Africa Department Africa Region Document of the World Bank LJ CURRENCY EQUIVALENTS (January 1996) N$1.00 = US$0.27 US$1.00 = N$3.65 FISCAL YEAR April 1 - March 31 GLOSSARY AMCOM Amalgamated Committee Holdings BDRC Business Development Resource Center CMA Common Monetary Area CMC Central Management Committee EPZ Export Processing Zone FIA Foreign Investment Act FNDC First National Development Bank GAT' General Agreement on Trade and Tariffs GRN Government of the Republic of Namibia GST General Sales Tax IMLT Institute of Management and Leadership Training LEDA Local Interprise Development Agency ME Microenterprise MLMD Ministry of Labor and Manpower Development MLRR Ministry of Land Resettlement and Rehabilitation MOF Ministry of Finance MRLGH Ministry of Regional and Local Government Housing MSE Micro and Small Enterprise MTI Ministry of Trade and Industry MWCT Ministry of Wildlife, Conservation and Tourism NCG National Credit Guarantee NDC National Development Corporation NEPRU Namibia Economic Policy Research Unit NGO Non-Government Organization NNCCI Namibian National Chamber of Commerce and Industry PE Public Enterprise PTO Permission to Occupy PSF Private Sector Foundation RFP Revolving Fund Project SACU Southern Africa Customs Union SARB South African Reserve Bank SE Small Enterprise SIDB Small Industries Development Board SME Small and Medium-Scale Enterprise SSIID Small Scale and Informal Industries SWAWEK Southwestern African Water and Electricity Corporation TA Temporary Admission TAC Total Allowance Catch TFEZ Tax-Free Exporting Zones UNAM University of Namibia Namibia: Private Sector Assessment ACKNOWLEDGEMENTS This report is based on the work of a World Bank-IFC mission to Namibia in March 1995 and a Bank mission in February 1996. Mission participants were Yvonne Tsikata (mission leader), David Donaldson (investment environment), Sunita Kikeri (parastatal sector), Anne-Marie Chidzero (small and micro-enterprises), and Denis Gallagher (financial sector). The report benefitted from the comments of IFC (CAFDI and CPLDI). David Donaldson and Woldai Futur coordinated IFC's inputs. Maria Teresa Benito provided valauble research assistance. Mrs. Fe N. Santos and Ms. Lucy Kimani produced the report. The Managing Division Chief is Mr. Ataman Aksoy, the Lead Economist is Mr. Gene Tidrick, and the Managing Director, Ms. Katherine Marshall. The mission's main counterparts were the Ministry of Trade and Industry, the Namibia Investment Centre, and the Namibian private sector. Namibia: Private Sector Assessment NAMIBIA: PRIVATE SECTOR ASSESSMENT Table of Contents ACKNOWLEDGEMENTS.................................................................................................i EXECUTIVE SUARY.................................................................................................v O V E R V IEW.....................................................................................................................viii 1. THE ECONOMIC SETTING ..................................................................................... 1 A . IN TR O D U CTION ............................................................................................. 1 B. ECONOMIC BACKGROUND ......................................................................... I a. Sectoral Profiles and Prospects................................................................... 5 C. THE PRIVATE SECTOR IN NAMIBIA..........................................................7 D. THE ROLE OF MACROECONOMIC POLICY.............................................. 1 E. CON CLU SION S ................................................................................................ 13 2. THE INCENTIVES FRAMEWORK .......................................................................... 14 A. INTRODUCTION ............................................................................................. 14 B. REVIEW OF INVESTMENT INCENTIVES................................................... 6 C. RECOMMENDA ON S ................................................................................... 26 D. OTHER INVESTMENT PROMOTION AND BUSINESS SUPPORT SERVICES ...................................................................................... 27 3. THE LEGAL AND REGULATORY FRAMEWORK..............................................30 A. INTRODUCTION ............................................................................................. 30 B . LICEN SIN G ....................................................................................................... 31 C. FOREIGN EXCHANGE MANAGEMENT......................................................34 D. LAND AND LAND REFORM ......................................................................... 35 E . LA B O R .............................................................................................................. 37 F. LEGAL AND JUDICIARY ................................................................................ 39 4. INDIGENOUS PARTICIPATION .............................................................................. 40 A. INTRODUCTION ............................................................................................. 40 B. MAIN CONSTRAINTS.....................................................................................41 ii Namibia: Private Sector Assessment C. INSTITUTIONAL SUPPORT........................................................................... 43 a. Government Support Programs .................................................................. 43 b. National Development Corporation............................................................ 45 c. Non-Government Organizations ................................................................. 46 d. Evaluation of Support Programs................................................................. 52 D. RECOMMENDATIONS...................................................................................57 5. PARASTATAL REFORMS - INCREASING PRIVATE PARTICIPATION.......59 A . BA CK G R O U N D ...............................................................................................59 B. PARASTATAL SECTOR: SIZE, IMPACT AND PERFORMANCE..............60 C . K E Y ISSU E S ..................................................................................................... 63 D. STRATEGY FOR PARASTATAL REFORM.................................................. 65 a. Increasing Private Sector Participation....................................................... 66 b. Enterprises to Remain State-owned............................................................ 74 E. KEY RECOMMENDATIONS .......................................................................... 75 a. Short-term M easures................................................................................... 75 b. Medium-term Measures.............................................................................. 75 6. SYNTHESIS-AN AGENDA FOR PRIVATE SECTOR DEVELOPMENT ..........76 A. INTRODUCTION .............................................................................................76 B. POLICY REFORM .......................................................................................... 77 C. HUMAN CAPITAL ISSUES.............................................................................77 D. INDIGENOUS PARTICIPATION .................................................................... 78 E. A LABOR-INTENSIVE STRATEGY FOR THE NORTHERN REGIONS .... 79 iii Namibia: Private Sector Assessment List of Tables, Figures and Boxes EI Matrix ofPolicy Priorities ...xxxiv 1..1 Composition of GDP. . . . . . . . . . 2 1.2 Private S ct r hain the .Economy.. .................... ............................................... oiio8 2.1 Investments Proposals Received by Investment Centre ..........................15 2.2 Summary of Incentives: Christ as Comes At Least Once a Y........................... 3.1 New Company Registrations 1985 - 1995 4............ . ........................................ ......... 3 4.1 Summary Table - Microenterprise and Small Enterpise Support Organizations.47 5.1 Econom ic Performance of P............................... Figures: 2. I Comparative Average Real W a6s .6.e...aA.......................... .. . . .......................... 6 5.1 Decision Tree for Classification ofPs Parast. ............................................................. 79 Boxmes: El Expanding Outreach to Non-traditional Clients: The South Africa Case....................... x E2 Privatization of Kenya Airways.......................................................................................xxx 2.3 Investment Incentives: The Holy Grai......................................................................... 27 2.4 D ecentralising ................................................................................................................ 3 1 3.1 W ork Perm its: Crowding Out, or Crowding I ?........................................................... 41 4.1 Government M inistries Engaged in Supporting M SEs................................................. 51 4.2 Key Principles in the Provision of Technical Assistance ............................................. 61 4.3 Ten Principles for Sustainable Lending to Microentrepreneurs ................................... 63 4.4 Nam ibia Cooperatives Credit Union League ................................................................ 64 Maps I Namibia Resource Base 2 Population Distribution in Namibia 3 Economic Activity in Namibia iv Namibia: Private Sector Assessment EXECUTIVE SUMMARY INTRODUCTION Namibia has enjoyed a relatively stable political and macroeconomic environment since Independence in 1990. The small economy is relatively open and there are few economic distortions. The private sector plays a dominant role in all the key productive sectors: mining, fishing and agriculture, and accounts for two-thirds of GDP. Resource allocation is generally market-determined: there are few price controls, no widespread subsidies, and no import and export licensing. The transportation network of roads, railways, airports and harbors is well- developed. As a result of a cautious borrowing policy, the country is lightly indebted. Nevertheless, the country faces daunting challenges. The legacy of apartheid is a population facing huge disparities in income, assets and access to services, and consequently massive unemployment and widespread poverty. In short, it is a country characterized by extreme socio-economic dualism. The country's growth path has been heavily dependent on mining, an enclave whose prospects are on the decline, and whose linkages to the rest of the economy are minimal. Namibia thus has to make an awkward transition from a rent-driven to a skill-driven economy for which it is ill-prepared. Alternative sectors of growth such as fishing and tourism are vulnerable to the vagaries of the external markets. Manufacturing growth has been stunted by the small domestic market and the proximity to South Africa. This sector's prospects of generating significant employment are low since it is starting from a very small base. Finally, because of the economic, commercial and financial linkages to South Africa, Namibia is constrained in its macroeconomic policy. ISSUES AND CONSTRAINTS Any private sector development strategy will have to take into account the need to ensure widespread participation in the economy. No single policy measure will result in a broad- based private sector boom that will achieve the goals of economic diversification and job creation. Instead, a strategy that increases the efficiency of investment by reducing transactions costs, makes the incentive and regulatory framework more race- and size-neutral, and develops a labor-intensive growth strategy for the economically lagging geographic areas of the country is likely to contribute more to attaining the country's economic development objectives. The key constraints facing private sector development in Namibia are largely a function of the country's history, geography and endowments. These constraints are outlined below: * A limited number of macroeconomic levers. Namibia has no independent trade or monetary policy due to its membership of the Southern Africa Customs Union (SACU) and the Common Monetary Area (CMA). External tariffs, interest rates, and capital controls (all important variables for foreign investors) are determined by South Africa. In addition, the v Executive Summary and Overview Namibia: Private Sector Assessment Namibia dollar is linked at parity to the South Africa rand, meaning there is no independent exchange rate policy either. Consequently, fiscal policy is the key lever for macroeconomic management. * Limited access to factors of production by indigenous people. The legacy of the apartheid system is poor access to land and capital for most blacks. Whereas the freehold system of land tenure prevails in (formerly) white areas, black communal areas are characterized by "Permission to Occupy" (PTOs) which have not been recognized by lending institutions as collateral. Blacks have historically been excluded from finance by high collateral and deposit requirements, and a concentration of bank branches in Windhoek and other mostly white areas. * Limited access to public goods and services has compounded the problem by limiting the opportunities available to blacks to increase their incomes. Agricultural extension, training, irrigation, education, and fertilizers, for example, have historically been underprovided in the communal areas compared to white commercial farms and industrial areas. Consequently, the labor force lacks basic skills and is characterized by low productivity. * Parastatals and public enterprises that are unaccountable and non-transparent. The parastatal sector in Namibia is not a fiscal drain and individual enterprises are highly autonomous. This is both a blessing and a curse. It is a blessing because in contrast to elsewhere, there has historically been little political interference in the day to day operations of Namibian parastatals. It is a disadvantage because the lack of accountability (for example, most do not pay dividends or taxes) gives them an unfair advantage over private operators; moreover, the parastatals have failed to significantly accelerate delivery of key services (such as electricity) to the previously neglected black areas. REFORM AGENDA The overall conclusion of this report is that while the macroeconomic and general incentive environment facing the private sector in Namibia is not overly distorted, increasing private participation and the efficiency of investment in the modem sector is possible through specific interventions. The key reforms to address private sector development are grounded in the need to provide a stable economic environment and to provide opportunities to broaden indigenous participation. Specifically: * Macroeconomic stability is needed to reassure investors and provide certainty for their investment decisions. Given the limited instruments available, fiscal discipline and civil service reform is critical. * Improve the quality of labor input by making labor market regulations more flexible and by encouraging skills upgrading of the labor force in the short-run; and by increasing the efficiency of social sector expenditures in the long-run. * Serious consideration of privatization options by introduiing legislation to make public enterprises more accountable; establish the legal an institutional framework for privatization; classifying PEs on a case-by-case basis according to whether they should be privatized or not; analyze privatization prospects of selected large enterprises. vi Executive Summary and Overview Namibia: Private Sector Assessment * Improve property rights via increased access to land, by accelerating the conversion of PTOs to freehold status, and by making more industrial land available in the Windhoek area. * Microenterprises are an important means of increasing the participation of the black population. However the current plethora of (government and non-government) institutions attempting to assist them could be more effective. The most important interventions are: continued deregulation to level the playing field for small businesses, investment in institution building, promoting entrepreneurship development programs, improved coordination among the NGOS and other intermediaries, and establishing strong intermediaries to deliver financial and technical services to microenterprises. * Rationalize and consolidate the numerous incentive schemes which are confusing and underutilized and continue the deregulation of licensing, notably in transport and tourism. These reforms will not, however, be sufficient to address the development issues facing the country, given the widespread poverty and inequality, the limited growth prospects, and the existing location of industry (mostly centered around Windhoek). Private sector development in Namibia is after all not an ends in itself but rather a means to addressing the widespread poverty and inequality. Thus any development strategy for Namibia should encompass not only initiatives intended to stimulate the modem sector, but also a regionally focused agenda for the North where 60% of the population lives in abject poverty. The most important reforms to stimulate the development of the North that the Government may wish to consider are: * Decentralize appropriate government offices and services to the North; e.g. Agriculture, Tourism, Wildlife and Environment; * Implement the market-based modest redistribution of land envisioned in the Land Bill, and formalize property rights by converting the PTOs to freehold status; * Increase available water resources in the communal areas through irrigation; * Improve agriculture extension, emphasizing the use of private agents; and * Emphasize labor-intensive construction methods in community social infrastructure (e.g. schools, clinics) and in major regional infrastructure projects, such as the proposed extension of railway to the North, the Opuwo-Oshaakati-Rundu east-west highway. vii Executive Summary and Overview Namibia: Private Sector Assessment NAMIBIA: PRIVATE SECTOR ASSESSMENT OVERVIEW 1. Focus of the Report: This report reviews the business environment necessary for private sector development in Namibia. The private sector in Namibia is expected to continue playing a critical role in the country's development strategy. It is expected to be the driving force behind economic growth, contribute to job creation, and eventually help bridge the economic dualism in the country by broadening participation. The fieldwork for this report was carried out in March 1995 and February 1996. 2. The report has two volumes. This volume summarizes the material contained in the main report (Volume 2). In addition it presents the main recommendations in a time-bound policy matrix. The main report is made up of six chapters. Chapter 1 presents an economic overview of Namibia and provides the macroeconomic framework. Chapters 2 and 3 look at other aspects of the business environment: investment incentives, and the legal and regulatory framework. Chapter 4 examines the business environment for non-white entrepreneurs, most of whom can be found in the micro- and small-scale enterprise sector. Chapter 5 reviews the role of parastatals and public enterprises, and the scope for enhanced and broader-based private participation in the public arena. Chapter 6 presents an agenda for accelerating private sector development, focusing on the policy, structural and institutional changes required, as well as the strategic underpinnings. 3. Country background- A tale of two Namibias: Namibia which gained Independence in 1990 is a country full of contrasts, both economic and geographic. There are effectively two Namibias: one modem, one traditional. While the country has a per capita income of US$1890, this figure masks extreme inequalities in incomes and assets that are the result of apartheid and which are amongst the worst in the world. The modern "white" sector of the economy has a per capita income of about US$16,500 per year, while blacks in the subsistence sector earn only about US$85 per year. The roughly 5% of Namibia's population that is white accounts for over 70 % of income. These inequalities also prevail in access to infrastructure and other services. Two major deserts -- the Kalahari and the Namib -- occupy large portions of the country. At the same time, the northern border with Angola is marked by tropical forests. 4. A narrow economic base: The modern sector is dominated by mining, fishing and agriculture, the first of which provides 76 % of export earnings. Manufacturing accounts for a mere 5% of GDP. The country experienced rapid rent-driven economic growth during the post World War II commodity boom. But growth slowed markedly in the 1970s, and in the 1980s per viii Executive Summary and Overview Namibia: Private Sector Assessment capita income declined by one-fifth. Namibia faces an especially awkward transition from rent- driven to skill-driven growth because the apartheid system reinforced the tendency of mining to function as an economic enclave: most Namibians are poor and they lack the skills or productivity commensurate with the country's average per capita income. Namibia was seen as a source of cheap raw materials and as a captive market for South African manufactured goods under the colonial administration. In addition, manufacturing growth was further stunted by the denial of access to entrepreneurial skills, basic education, technology and capital to the majority of the population. The narrow economic base makes Namibia vulnerable to exogenous shocks and makes the need to diversify urgent. 5. The "Gulliver" Effect: A final characteristic of the country that is relevant to any inspection of the private sector is due to the historical relationship with and the sheer size of South Africa. The Namibian economy is very closely linked to the South African in many ways: historical, economic and financial. Under apartheid, a repressive legal and regulatory framework restricted the development of small and indigenous entrepreneurs. Namibia inherited this byzantine system of laws. On the economic front, Namibia's membership of the Southern Africa Customs Union (SACU) and the Common Monetary Area (CMA) and its trading relationship with South Africa strengthen the link between the two countries. The Namibia dollar is issued at parity with the (convertible) South African rand (which continues to be legal tender in Namibia). Finally on the financial front, many of the commercial banks and insurance companies in Namibia have either full or partial South African share ownership. 6. Why macroeconomic policy matters: The fight for Independence and uncertainty about the Government's policies resulted in a wait-and-see attitude on the part of foreign investors. Hence, stable macroeconomic policy is extremely important to reduce business uncertainty and encourage investment that is needed to accelerate private sector development in Namibia. Since Independence in 1990, Namibia has generally followed a fairly responsible and open macroeconomic policy, and a fully participatory democracy has thrived. This has resulted in a macroeconomic environment, which, while not perfect, is quite stable. There are no major macroeconomic distortions. The economy is very open, and key prices such as the exchange rate and interest rates are market-determined. The fact that the macroeconomic environment is not unduly distorted is reflected in the fact that macroeconomic policy uncertainty consistently ranked as unimportant in the mission's interviews with the domestic private sector. 7. Few degrees of policy freedom: Macroeconomic policy is nonetheless, constrained by the economic, commercial and financial ties with South Africa alluded to above. Specifically, there can be no independent monetary, trade or exchange rate policy. Fiscal policy thus remains th key policy instrument. Despite the pressing demands of redressing the inequalities described above, fiscal policy has not spiraled out of control. However, the size of the budget deficit is one visible indicator to investors of the Government's macroeconomic management skills and prudence. For this reason, the slight fiscal deterioration since Independence is grounds for concern. From a surplus of 1.2% in FY 1989, the fiscal account has moved into a persistent deficit averaging 4.3% since then, reflecting both revenue contraction and higher wages for a larger civil service. It is therefore critical that the fiscal deficit be reduced. 8. Recent economic performance: Namibia averaged a modest GDP growth rate of 3.5% between 1990-95, just slightly higher than population growth. Potentially higher growth was dampened by exogenous developments (such as terms of trade shocks, drought, and events in South Africa), and a declining trend in investment and its efficiency. Gross domestic investment ix Executive Summary and Overview Namibia: Private Sector Assessment has been low in the 90s, both relative to historical levels and compared to other middle-income countries. The country's overall balance of payments is sound. It has typically been characterized by sizable current account surpluses arising from favorable trade and services balances. In contrast, the capital account of the balance of payments has been marked by large net capital outflows representing foreign investment by non-bank financial institutions (NBFIs), mostly insurance companies and pension funds. 9. Wanted: jobs. Apartheid systematically denied access to education and training to blacks. Not surprisingly, literacy and education levels are low by both middle- and low-income country standards. There is an acute shortage of accountants, engineers, managers and people with basic literacy and numeracy skills. Unemployment is very high: estimates vary, but range between 30-50%, with the highest rates prevailing in the urban areas. This situation is anticipated to worsen in the medium-term, given the young demographic profile of the population, and the rapid population and labor force growth. The largest sector, mining, employs only 3.8% of total wage employment, reflecting its capital-intensive nature. Agriculture is the largest employer, accounting for 47.5% of total employment, mostly through subsistence activities. 10. But high wages may be part of the problem: Formal sector wages in Namibia are considered to be high relative to other countries in the region, with the exception of South Africa, and internationally. This is a legacy of the wage structure inherited at Independence, a testament to the strength of the politicized labor unions, and a reflection of the scarce supply of technical skills. The net result is a labor force that is highly paid relative to its productivity and poorly trained. The story is the same for unskilled labor. Namibia's 1995 minimum wage was six times higher than labor costs in Madagascar, four times India's and more than a third greater than Malaysia's. These figures suggest that productivity will have to increase significantly, and labor policies become more flexible, in order for Namibia to become competitive. 11. Profile of the private sector: Accurately assessing the private sector in Namibia is difficult because of the lack of information. Typically, government statistics on the "private sector" include both parastatals and public enterprises in addition to the private sector proper. Surveys by government and non-government organizations have focused on manufacturing, which represents a small fraction of the private sector. Moreover, it appears that there are many large informal businesses in the northern part of the country which are not legally registered. Any analysis of the private sector is constrained by these factors. 12. Not an economy dominated by the state: The private sector plays a dominant role in all the key productive sectors: mining, fishing and agriculture. The private sector produces approximately two-thirds of GDP and accounts for a similar proportion of wage employment. The private sector share in total investment in the economy averaged 59.6% between 1990-94 and was concentrated in fishing and mining. Total private savings consistently exceeded investment in the 90s. However, the public sector (through parastatals and public enterprises) owns and controls vital services such as electricity, water, ports, railroads, trucking, national airlines and telecommunications, that the productive sectors use and need. 13. Key constraints raised by the private sector: A number of private sector surveys have been carried out in the past two years on the manufacturing sector in Namibia and one gets a sense of "survey fatigue" among firms. The Commonwealth, UNIDO, Ministry of Trade and Industry (MTI) and Namibia National Chamber of Commerce and Industry (NNCCI) have all x Executive Summary and Overview Namibia: Private Sector Assessment carried out surveys. The mission carried out a limited survey of 24 firms. The key constraints identified across all the surveys were associated with factor access and quality: access and cost of capital, and the scarcity of competent as well as skilled/technical workers. 14. In general, access to finance and credit was a constraint to firms regardless of size. It, however, appeared to be a greater constraint for smaller firms. For example, in the survey of the informal sector in Windhoek, almost half the firms surveyed (49%) cited access to finance as the major problem they faced. In the MTI survey of small firms, 25% cited finance as the most binding constraint on their development. For many of these small firms raw material costs accounted for up to two-thirds of operating costs, making working capital prohibitively expensive even for well-established firms. In addition, the lack of collateral and the administrative costs discouraged borrowing. The larger firms in the Bank survey were more likely to cite the = of finance'rather than access as the issue. Indeed, real interest rates at the time of the survey were in the 11-12% range. 15. The next major binding constraint falls in the broad category of skills and training. The average score for this constraint was 4.7 (where 5 represents the most severe constraint). This constraint refers to both basic skills, such as literacy and numeracy, as well as technical skills such as accounting and managerial. With respect to the informal sector, there was also the perception by NGOs and others providing support services that entrepreneurial skills and culture were lacking. Finally, the high level of wages relative to productivity was also seen as major constraint. The Financial Sector 16. The challenge for the Government is to balance the value to private sector development of a healthy financial sector enjoying minimal Government intervention, with the need to encourage financial institutions to expand their market. For example, while it is understandable that the Government would wish to promote Namibian industries and employment by recycling contractual savings in local investments, the route of raising the prescribed asset ratio to 35% of liabilities is potentially dangerous. In other countries, this policy has been sometimes detrimental to the financial viability of the contractual savings institutions and to the Government's own financial discipline. 17. Financial dualism: The commercial banks appear to be relatively well-run and profitable (a result both of high lending rates and conservative lending policies). The two largest banks earn twice the rate of return on assets compared to their South African parents. Despite being highly developed, the financial sector reflects the dualism we have seen in other aspects of the economy, and various survey results suggest it is also narrowly focused in its lending and outreach programs.2. Bank services are for the most part confined to the urban areas, particularly Windhoek; the branch network is extremely limited, especially in the north where 60% of the population live; black and small entrepreneurs find it extremely difficult to obtain loans. City Savings and Investment Bank was established to serve the disadvantaged Contractual savings (pension funds and life assurance) are the largest source of savings and the leading contributor to net capital flows to South Africa. 2 Chapter 8 of the 1992 CEM gives a comprehensive description of the Financial Sector which remains largely valid. xi Executive Summary and Overview Namibia: Private Sector Assessment community in 1994, but it became insolvent and was bought out by a Malaysian state-owned bank. Maintaining financial prudence on the one hand, and serving the non-white population which may lack a track record or standard collateral on the other hand, are not mutually exclusive. It does require a fair amount of innovation and judicious risk-taking. South Africa provides a very pertinent example of how this can be achieved (see Box El) Two key facts influence the lessons from the design of the South African apex unit. First, there appears to be far less internal pressure for Namibian banks to lend to MSEs compared to South Africa. Second, the geographical overlay, where 60% of Namibian population is in the north, suggests that geographically based fiscal incentives should also be considered. 18. There are other weaknesses of the financial system. Key are the limited range of financial instruments available and the limited medium- and long-term operations. Finally, supervision of the banks is weak due to inadequacies in the current banking law, and overlapping and unclear responsibilities between the Bank of Namibia and the Ministry of Finance. Box El: Expanding Outreach to Non-traditional Clients: The South Africa Case The South African economy, much like Namibia, remains characterized by profound inequalities between the black majority and the white minority as a result of historical apartheid legislation. As in Namibia, the new government is committed to sharing the fruits of economic growth more widely. As part of this goal, it seeks to ensure that small businesses form an integral part of the nation's economy. The proposed framework takes a systems approach, acknowledging that the financial needs of a range of borrower sizes and capabilities can best be met by a range of institutions with different approaches. The principal mechanism is a Financial Services Apex Institution (FPAI) which will support the development of self-sustaining retail intermediaries, serve as a catalyst for the introduction of techniques and innovations based on best practices in microenterprise finance, and intermediate resources (according to strict commercial principles) from organizations with funds to retail financial intermediaries that finance microenterprises. Two means are proposed to encourage banks and financial intermediaries to lend to black microenterprises: incentives to serve that market; and an institutional development program to introduce best practices. Both of these are intended to reduce transactions costs. Incentives include subsidies and a guarantee scheme. Subsidies available during a five-year learning period will enable banks and retail intermediaries to cover the initially high transactions costs of lending to microenterprises. The institutional development program will include a diagnostic of the participating institution by the FPAI and development of a program to address constraints and weaknesses. The apex unit will provide funds and assistance for refinancing, seed grants, capitalization, and institutional development to institutions that are committed to meeting stringent standards of performance. In addition to commercial banks, three categories of nonbank intermediaries, including development corporations and NGOs will be eligible to participate: those that have already achieved substantial efficiency and scale of operations and are approaching the minimum international standards of best practice; those that have some track record in microenterprise finance, but whose portfolio is characterized by low volume or high arrears, and whose operational efficiency is low (eligible for seed grants and institutional development funds); new entrants with outstanding potential, perhaps based on the provision of nonfinancial services to microenterprises. Adapted from Thyra A. Riley, South Africa: Reducing Financial Constraints to Emerging Enterprises, September 1995. xii Executive Summary and Overview Namibia: Private Sector Assessment BUSINESS ENVIRONMENT 1: TAXES AND FISCAL INCENTIVES Taxation 19. The system of taxation influences the business environment by changing cost and price structures, and investment decisions. There are three areas in which the taxation system in Namibia distorts the incentive framework and makes it less attractive: the current system of indirect taxation is inefficient; high and uneven levels of protection prevail; and the corporate tax rate is comparatively high. In each of these areas, the policy reform required is clear. 20. The current system of indirect taxation is characterized by both a General Sales Tax (GST) levied at differential rates of 8% and 11% on goods and services respectively, and an Additional Sales Duty (ASD) levied at differential rates of 5%, 10% and 15% on top of the GST. This system results in significant cascading and is inefficient. About one-third of sales tax revenue for FYI 992 was estimated to have been improperly derived from taxes on business inputs. We echo the recommendation made in the Public Expenditure Review for the introduction of a Value-Added Tax (VA )3 as quickly as possible, for efficiency reasons. 21. As a member of SACU, Namibia faces the same external tariff as South Africa. The inadequacies of South Africa's trade regime up until 1995 have been well-documented.4 In summary, the average level of protection was high relative to middle-income countries, and the regime extremely discretionary, resulting in considerable dispersion, a multiplicity of rates, and uneven protection. The net effect of the tariffs was a significant anti-export bias against Namibian manufacturers. It also resulted in a heavily protected and inefficient (in many cases) manufacturing sector in South Africa. This is particularly devastating since the overwhelming bulk of Namibian consumer goods are imported from South Africa. The nominal rate of protection has been calculated as 37%, higher than that for South Africa because of the differing composition of imports. (Consumer goods which are mostly imported from South Africa are a larger share of Namibia's imports and face high tariffs to protect South African manufacturers. By contrast, South Africa imports more capital and intermediate goods which had lower tariffs). 22. In the medium-term, this loss of competitiveness will be addressed by the GATT offer made by South Africa. The offer is to be implemented over the five-year period, 1995-99. It envisages a significant reduction in average tariff levels from 27.5% to 16.6%, and a reduction in the number of rates to 6 (ranging between 0% and 30%) leading to reduced dispersion. We recommend that Namibia use the SACU renegotiations as a forum to press for continued trade liberalization, and for increased flexibility in instituting its own drawback and other such schemes. 23. Common law taxation remains relatively high. The standard corporate tax rate, in particular, is 35% for non-mining enterprises and 25-55% for mining enterprises; this is higher than many African countries, and much higher than the East Asia "miracle" countries where Introducing VAT would also add an incentive for firms to move to the formal sector. See for example, Belli (1993), UNCTAD (1994). xiii Executive Summary and Overview Namibia: Private Sector Assessment rates of 15% or less are common. Whilst many firms are given favorable treatment through various incentive schemes, for those unlucky enough to be excluded, taxes are penalizing. This is particularly important at the frontier with the informal sector. Informal sector firms pay little or no taxes, and a corporate tax rate of 35% presents a significant disincentive to formalize, offsetting many of the business advantages of being in the formal sector. A lower corporate tax rate, more uniformly spread, as well as the introduction of the VAT would encourage formal entry and provide a more level playing field. To that end, within the ongoing tax reform review, we urge serious consideration of a lower corporate tax rate. Fiscal Incentives Since Independence, Government has generally adopted a pro-active stance towards private business. In view of the need for employment creation and economic diversification, the Government has introduced: * a variety of fiscal and other incentives for investment; * a series of efforts to promote investment and improve business support services; and * a number of measures to deregulate the business environment, undoing a restrictive web of controls that existed before Independence, and to make the legal framework more conducive to private sector growth. * 24. Much progress has been made. Namibia's overall policy environment now compares favorably with many African countries, though less so with countries like Malaysia and Chile. The response has been limited -- private investment has only been moderately forthcoming. It is important that policy-makers not be misled by this. Other constraints exist to private sector development in Namibia. In particular, there are skill shortages, and natural disadvantages such as remoteness and water shortages, which are ineradicable, or will only diminish over time. Further improvements =an be made in the policy environment, and the impact of these may not be negligible. Indeed, these are the subject of the report. By their nature, however, and especially because the Government has already come so far, they will not transform private sector development in Namibia dramatically. 25. Is the private sector response to policy reform doomed to remain as disappointing as it has been in the first years since Independence? For three reasons the answer is: no. The first is that it has actually started to pick up as measured by the flow of investment ideas to the Investment Centre, and the approval of manufacturing incentive packages. The second is that further improvements in the policy environment should engender some response, particularly in the fish and meat-processing sectors, and in the value added by tourism and as local small producers increase their participation. The third reason for cautious optimism is that, provided the Government does nothing to engender uncertainty, the private sector's confidence in investing in Namibia will gradually increase. Private investors are nervous creatures, whether they are those adopting a wait-and-see attitude across the border in South Africa, or the millionaires up in the North who have made their money outside the pre-Independence apartheid-based system of regulation and have not yet acquired a taste for formal sector activity. When a country has had a history as unsettled as Namibia's, a long period of stability is required before private sector confidence returns. The Government's achievement since Independence is xiv Executive Summary and Overview Namibia: Private Sector Assessment that it has provided this stability and the response will come. There is not much more the Government can do in the form of new fiscal incentives to hasten this: but a single iniudicious policy decision could retard it substantially, 26. Like the rest of industrial policy, the incentives available for different classes of investors in Namibia have undergone fundamental revisions in the period since Independence. Prior to 1990, incentives were hugely distorted. Domestic incentives were a mixture of high nominal rates of taxation and generous exemptions. These were combined with discretionary concessional loans, and restrictive licensing which allocated local or national monopoly powers to those lucky enough to receive them, and denied the legal right to engage in many economic activities to most Namibians. Unless they came from South Africa, foreign investors were either unwelcome (if they competed against domestic industry), or put off by the war and apartheid. 27. In trying to provide a more even, non-discretionary and attractive package of incentives, the Government has focused on areas of the economy that it perceives to have suffered from the distortions of past policies, particularly manufacturing, and non-natural resource-based exports. Yet the initial response, particularly from foreign investors, has been slow. This has caused the Government to revise fiscal incentives frequently, each revision more generous than the last. 28. A review of the experience of the last five years leads to five key conclusions regarding the incentive framework for investors in Namibia: * too many incentive packages exist and there is too much variation in benefits * the economic basis for some of the packages is unclear * export promotion must address putting all exporters on an even footing with competitors abroad * other ad hoc incentives need to be systematized * the legal status and responsibility for administration needs to be made clearer 29. The Government is constrained in the future, partly because of its membership of SACU (which for fiscal reasons must be retained in the short-run), and partly because its capacity to implement reform is limited. The recommendations below therefore propose two phases of reform. The first phase involves some rationalization and improvement of the existing situation, and suggests measures that can be undertaken relatively swiftly in the short-term. The second phase indicates measures that could be taken in the medium-term (2-5 years). Phase one: short-term Remove discretion: i) by abolishing the Status Investment, abolishing corporate tax concessions for new manufacturing firms, and abolishing concessions relating to Arandis EPZ Consolidate: i) the Walvis Bay and generalized EPZ schemes; ii) full exemption of GST and import duties for all goods for all exporters; iii) depreciation, and enhanced tax deductibility to be the same for all firms; xv Executive Summary and Overview Namibia: Private Sector Assessment Extend i) introduce temporarily duty drawback/temporary admissions scheme for all exporters ii) extend this to indirect exporters, suppliers, etc.; iii) and pro rata for those exporting only part of output; iv) extend existing corporate tax regime for manufacturers to all sectors excluding fishing, tourism and mining, where rates should remain at 38%, 38% and 25-55% respectively; Phase two: medium-term Switche i) to auction-based allocation of licenses/concessions/determination of royalties for mining, fishing and tourism Consolidate: i) Mining, fishing and tourism into standard rate of taxation; ii) Exporters' corporate taxation with standard regime at around 10%; iii) Depending on experience with EPZs, increase EPZ taxation5 to 10% and incorporate EPZ's into a combination of standard taxation package plus drawbacks/temporary admissions. 30. The Government is actively considering reforming its investment promotion efforts. The approach to reform differs for the private and public sectors, and for large formal firms as against the SME sector. In the public sector, the watchwords are rationalize and divest. For large firms, duplicated efforts must be trimmed down, a single entity established with responsible for coordinating investment promotion. This should probably be the Investment Centre; though, for the SME sector, the chosen organization has to have a regional reach, and the National Development Corporation (NDC) or the Namibia National Chamber of Commerce and Industry (NNCCI) would be the more appropriate candidate. In both cases, however, the agencies' prime responsibilities should be to coordinate; and the promotion activity itself should be designed by, operated by, and at least partly, funded by, the private sector. As the staff of the agencies concerned are the first to admit, free investment promotion organized by civil servants rarely does anybody any good. 31. In involving the private sector in investment promotion, the operating principle should be precisely the opposite; the more (competition) the merrier. Efficiency and creativity in investment promotion, as in almost everything else, is best delivered by private sector firms working in a atmosphere of competition, and rewarded on the basis of success. The single government agency should therefore put the management of all promotion activities (for example, the organization of trade fairs), out to competitive tender, perhaps offering a matching grant arrangement to subsidize the activity overall, but assessing proposals on the basis of the ability of the tendering firm to deliver. The current system of extending tax relief to export promotion activities is difficult to administer, and should be reevaluated. With grandfathering. xvi Executive Summary and Overview Namibia: Private Sector Assessment 32. Business support services. A similar situation applies to the provision of business support services, such as tax, finance and management advice, accountancy and audit, information technology, and so on. Partly due to Namibia's close economic relationship with South Africa, many of the necessary services are available to formal sector firms in the urban centers, and the appropriate institutional framework for their provision exists, though manpower shortages mean that they are relatively expensive. This and the small size of the market probably also results in limited competition. The sector is therefore adequately catered for, and the most important reforms relate to addressing skill shortages (such as work permits). The traditional -problems of access are exacerbated by a regional dimension -- even if the market demand justified it, providers of business services (and this includes banks, buildings societies and so on) have difficulty recruiting qualified people who are prepared to work in the North. Most of the recommendations regarding business support services apply to the SME sector. Little action is needed to develop business services for the large, formal sector -- except possibly promoting regional decentralization. 33. In general, the extent of government consultation is perceived by the private sector to be relatively good. As is almost inevitably the case, however, the formal sector dominates; though NNCCI has been successful in generating greater regional interest, the informal sector is not well represented. The NNCCI is not the only avenue through which Government consults with entrepreneurs. Laws such as the new Liquor Act, for example, have been based on extensive public consultations and are likely to reflect the views of informal shebeen operators. In general Government's policy is to consult widely in many of its policy initiatives. 34. We recommend that this process be formalized and consultation be systematized, in a form ofpublic/private sector advisory group operating at a relatively high level, meeting periodically to review the policy environment as it affects the private sector. This initiative has been long talked about, but never yet implemented. Government will have to ensure that this is not just focused around the big firms, but that smaller and informal firms are adequately represented. BUSINESS ENVIRONMENT 2: THE LEGAL AND REGULATORY FRAMEWORK 35. As discussed above, the Government has actively tried to improve the business climate in a number of areas; and the regulatory framework has been no exception. A number of measures to deregulate the business environment have been instituted, undoing a restrictive web of controls that existed before Independence, and making the legal framework more conducive to private sector growth. 36. The incentive system discussed above is important in shaping economic development, and in encouraging investment. Experience from other countries shows, however, that just as important are a wider set of influences on the investing firm, ranging from perceptions of political stability, to the quality and cost of infrastructure services, and to the operation of the legal system and the network of rules and regulations it faces. It is useful, conceptually, to think of these as determining the cost of transactions. Profit margins and competitiveness are determined not only by comparative advantage - cheap labor, natural resources, technological capabilities and so on -- but also by how easily and efficiently these can be transformed into goods on shelves. When a business waits three weeks to clear a needed machine from Customs, when it takes three months to get a license, when a dishonest worker cannot be fired, when a contract cannot be legally enforced because there is no qualified magistrate, when a loan cannot xvii Executive Summary and Overview Namibia: Private Sector Assessment be taken because the collateral laws are outdated, transactions costs are increased, and competitiveness is eroded. 37. The report analyzes six key aspects of the impact of the legal and regulatory system on the costs of doing business in Namibia: licensing, foreign exchange, labor, land, legal and the judiciary. From the point of view of transactions costs, the three most important legal and regulatory constraints are: licensing (particularly in the transport and tourism sectors); land; and labor regulations. Licensing 38. The cumbersome licensing procedures that the Government set about dismantling after Independence were primarily designed to exclude the majority of the population from engaging in a wide range of economic and commercial activities. The Consolidated Licensing Ordinance of 1935 which is due for repeal is still being discussed. It was intended to remove restrictive licensing procedures for many operators, making licensing dependent only on registration for taxes and health and safety inspections, and removing the need for a court hearing and judicial process. The passing of the Local Authorities Act and Regional Council Acts of 1992 allows general licensing to be decentralized to local authorities. 39. General licensing was founded on a number of basic principles: (i) prevention of undue competition; (ii) health and safety compliance; (iii) zoning and town planning compliance; (iv) assessment of the operator's character; (v) raising revenue by charging variable licensing fees based on ability to pay; (vi) records registration. In practice not all of these are desirable. and few are appropriate for consideration as part of the licensing process. For example, the prevention of undue competition was aimed at excluding access to economic power, and is not valid in today's Namibia; Government policy is now to promote the entry of new, unestablished operators. Similarly, licenses should not be used to raise revenue or to redistribute income; this is properly the business of the tax administration. Fees should be flat rate to simplify their calculation. Ultimately they should be designed to cover the costs of the procedure, but at present they should be kept low to encourage informal operators to formalize. Finally, while health and safety standards are essential aspects of business regulation, compliance should be continuously monitored after the license has been granted. The manner in which an operator conducts him- or herself must also remain within the law; but, once again, this is a matter for practice to determine, not prior agreement. Therefore the only real prior consideration in business licensing ought to be zoning and town planning aspects (including the environment), and records registration. The latter should, in fact, be an automatic product of the process. 40. Whilst the intended repeal of the Consolidated Ordinance Act is therefore welcomed, it is recommended that the operation of the licensing system be streamlined by examining (i) the appropriateness and efficiency of its fee structure; and (ii) whether health and safety features should really be a matter of inspection rather than of licensing. 41. An Unlevel Road: Transport licensing continues to be extremely restricted. Any prospective freight transporter wanting to operate 40km from base needs a public carrier license, and existing facilities have to be shown to be "insufficient or unreasonable in cost" (Road Transport Act 1977). The process is lengthy and expensive, generally involving a lawyer. Even traders wanting to carry their own goods more than 80km have to apply for a private carrier's xviii Executive Summary and Overview Namibia: Private Sector Assessment 6 permit and to make a case for not using the railway . Similar restrictions exist for passenger buses too, though in practice only Windhoek has a competing (and loss-making) municipal bus service, the remainder of bus transport being privately operated. Taxi permits have been more easily available in recent years, though restrictions persist on where different taxis can operate. 42. As a consequence, only 20 firms are licensed as public carriers, and the market is dominated by six. TransNamib, the integrated publicly-owned transport company which dominates the market, absorbed one of these in Ovamboland recently. Apart from market position, TransnNamib has a legal monopoly on the transport of certain goods on certain routes for rail. An example of the difficulty of securing licenses in the sector; a tourism operator recently applied for a license for buses and planes to transport its clients from Windhoek to facilities elsewhere in Namibia. Its case for a transporter's license could not be examined before the vehicles were purchased. The license was then refused on the grounds that the facilities competed with TransNamib's scheduled facilities, even though they were not on direct scheduled routes. Another recent example: the transport of meat from Walvis Bay to Windhoek is undertaken by a single firm, and a firm which proposed to do so more cheaply (in partnership with a South African firm) was refused a license. 43. This restrictive system of licensing is costly, and prevents competition in one of the key areas with potential for early entry by black entrepreneurs. A Transport Advisory Board is currently reviewing the Transport Act. Proposals that appear to be gaining support involve moving to a controlling body that will license on the basis of truck safety, operator competence and a level playing field between railways and road. This would apparently involve increasing road user charges/petrol taxes to cover maintenance costs, which is only possible within the SACU framework. 44. It is not clear, however, that much progress will be made with this in the short term; in the meantime, the restrictions remain. The importance of the sector and the clear danger of the domination of the licensing procedure by protectionist interests, leads to the recommendation that licensing under the transport sector be implemented under the general licensing provisions. Vehicle worthiness should be managed by a system of inspections that is separate from the granting of the license. 45. The licensing of tourist facilities is centralized at the Ministry of Wildlife, Conservation and Tourism (MWCT) established under the Accommodation Establishments and Tourism Ordinance of 1973. The rules are strict; for example, cheap forms of accommodation are prohibited by exacting standards, and hotels are required to have at least ten rooms and a fixed ratio of garages (2 rooms: I garage!). As a result lower-grade hotels geared towards local business travelers or holidaymakers are currently illegal. 46. The draft Tourism White Paper proposes that this centralized licensing system be retained, though with different requirements for different standards, embodied in a national grading system. the key policy instrument for rationing access to those National Parks in danger of environmental damage is to use park fees, and in-park licensing to restrict access to the appropriate number, with fees charging the appropriate economic rate (preferably determined by competitive bidding). Other tourist facilities should then be free to provide facilities of the 6 Excluding certain categories of merchandise, including farm produce. xix Executive Summary and Overview Namibia: Private Sector Assessment nature and quality that the market considers appropriate and licensing, once again, should only require compliance with zoning and town planning requirements. The national registration system should be voluntary and self-financing. This will be supplemented by the international grading systems already in existence to ensure that tourists are confident their choice of facilities will meet their expectations; so the existence, side-by-side of five star facilities with cheaper facilities need not damage Namibia's international reputation. This system of licensing and voluntary grading has the twin advantages of maximizing exploitation of the tourism market, and permitting legal operation of facilities geared towards domestic business and social use, all within the umbrella of controlling flows in environmentally sensitive areas. It also allows Namibia to attract different market segments thereby maximizing revenues. 47. It is also important that the current practice of barring foreigners from investing and operating in national parks be relaxed. In other countries, foreign established tourism operators have brought a wealth of expertise, marketing links and, most importantly, money to invest; all necessary to maximize the economic potential of the national parks for Namibia. Foreign exchange 48. A convertible Namibian dollar is a key building block of business confidence, and, for this reason, we recommend that Namibia retain its membership of the CMA, and the dollar's parity with the rand, in the absence of overwhelming pressures to delink. This necessarily restricts the country's ability to pursue independent exchange control arrangements. All that can therefore be recommended is that Namibia use what weight it has in the CAA to press for further decontrol of capital flows, full access to foreign exchange for all uses, the rights of nationals to operate foreign exchange accounts, and the abolition of ceilings on lending rates. Land 49. The complexities and restrictions of the law regarding land ownership in Namibia are a fundamental obstacle to the development of small-scale enterprises. The problem hinges on the inability of much of the system of land tenure to be collateralized -- in a sector where collateral is often the key to opening doors. 50. Two legal regimes regulate the ownership of land in Namibia; that of the old municipalities and the commercial farmlands, and the regime of the "communal areas". In the former there are no legal difficulties concerning land, permitting its use as a security against bank loans, for example, its sale and resale, and so on. In the latter there is no private ownership of land, and confusion of overlapping administrative responsibilities prevails. 51. Based on a series of Acts enacted under the system of apartheid, and starting with the Native Trust and Land Act, No 18 of 1936, two Ministries, through their local councils, are empowered to issue certificates called Permission to Occupy (PTOs), which are the only means to start a business legally on a piece of land. 52. PTOs grant rights to use land for residential, business or commercial purposes for a period of up to 35 years. It is estimated that around 70% of the land users on proclaimed land in communal areas possess PTOs. Although they confer rights of occupation and trading, PTOs have not been recognized by lending institutions in the past as security for loans; perhaps in part XX Executive Summary and Overview Namibia: Private Sector Assessment because the land (and, formally, any developments on it) revert to the authorities when the PTO expires. 53. Outside the proclaimed areas there are far fewer PTOs, and most land is allocated for use by the traditional tribal authority, on an informal and discretionary basis, corresponding to accepted traditional practices. The issue of land reform, as everywhere in Africa, is very complex, with many conflicting claims to land, including the State, the traditional authorities, and the existing occupiers. Yet its resolution is central to the future development of the communal areas. 54. What are the prospects of this taking place? The answer depends on whether the land has been surveyed or not, and on whether it is customary land or not. Most PTOs have been granted within the municipal boundaries for commercial, residential or industrial use. Moreover, most of the towns have been surveyed, so there is no practical blockage, and PTOs should be converted to full leases or ownership in the near future. Indeed, last year, for the first time ever, a local developer built houses in Oshakati with bank finance despite the absence of full title deeds, suggesting that forward-looking banks and developers have decided that the risk that something will go wrong with the PTO process is worth taking. 55. In certain areas, particularly outside the towns, however, in order to convert PTOs to title deeds under the current Title Deeds Act, the land has to be formally surveyed, which is an expensive process. Moreover, there are very few surveyors. Granting a lower form of tenure based on a less thorough survey is currently being experimented with. 56. For customary land, moving towards proper title deeds will be much more difficult. In many cases the tribal authorities would see this as a direct challenge to their power; and, for agricultural land, the occupier's moral claim to ownership might be considered less, as the value of the developments on the land are smaller relative to the underlying value of the land itself. 57. The priority for urban land reform is the adoption of a mechanism for formalizing PTOs to enable their use as collateral. This process is underway for certain areas. The Government might wish to consider a scheme whereby it develops a limited financial guarantee which can be offered on the basis of PTO, enabling it to be used as security before formal title deed is granted, thus short-circuiting some of the bureaucratic delay. Reform of customary land tenure must be approached much more slowly, and voluntarism is the key principle. One option would be for Government to develop a set of straightforward legal vehicles (with the co-operation of the Council of Traditional Leaders, and current tenants), and a supporting service department, which would enable the traditional authorities to permit non-traditional forms of land use -- leases, concessions and outright purchase -- as and when they judge appropriate. This would also need to involve agreed and transparent uses of the revenues involved for the benefit of the tribal administration as a whole. There are, in fact, precedents for this: the Cabinet recently approved a long lease on land for a large development in the North West, side-stepping the traditional PTO. Labor issues and regulations 58. There are four principal aspects of labor markets in Namibia which influence private entrepreneurs. These are: a pronounced shortage of skills; the difficulty in obtaining work permits; the relatively high wage rates; and the new Labor Act of 1992. xxi Executive Summary and Overview Namibia: Private Sector Assessment 59. The shortage of skills is acute, and is ranked high as a constraint by almost all private entrepreneurs interviewed as indicated in Chapter 1. It is underpinned by low average levels of educational attainment nationwide: adult illiteracy is around 60%. Particular occupations cited by entrepreneurs where qualified Namibians are difficult to find include accountants, managers, engineers, and technicians at many levels. 60. Empirical evidence suggests strongly that expenditure on primary education is an important determinant of economic growth. The Government has signaled the priority it places on education by the high share of public expenditures going to education (about 27% of recurrent expenditures). The efficiency of this spending, however, could be improved substantially. In particular, the distribution of education expenditures per learner across regions should be made more equal to reduce the high drop-out and repetition rates; design standards for schools should be simplified; and community participation should be actively sought in the building, rehabilitation and maintenance of schools. The Government should also consider ways to involve the private sector in the planning, design and management of educational facilities. Just as important as basic primary education are programs for vocational training, apprenticeships, and skills upgrading, and reviewing curriculum development. 61. The shortage of skills means that potential employers often have to seek work permits to import expatriates, and it is here that Government policy can be improved significantly in the short-run. Entrepreneurs interviewed in our formal sector inquiry invariably cited the process of obtaining work permits as difficult and protracted. Work permits in the private sector are more likely to be job-creating than job-displacing (see Box 3.1). The employment of Namibians in the formal sector would expand if work permits were administered more automatically and more generously. We recommend the adoption ofa "negative list" system, such as employed in the United States, which prohibits foreign employment in a list of specified, occupations for which local skills are in excess supply, and where special factors like trust are unlikely to be so important. Permits should then be granted automatically for applications outside this list. 62. The Labor Code of 1992 establishes rules on hours and conditions of service, including procedures for severance and dismissals. It also establishes a procedure for Wages Councils to intervene in the setting of wages; the most important is the minimum wage, which is currently N$3.50 an hour. As an example of its kind, the Act is not terribly onerous, and few formal sector private firms see difficulty in complying with it. 63. The Labor Code is likely to cause problems in three areas, however. For the Export Processing Zones trying to attract non-traditional manufacturing firms, two provisions of the Labor Act will be major problems; the limitations on hours that employees may work, and the requirement that staff be allowed to refuse overtime, and, particularly, the minimum wage. The Walvis Bay EPZ is exempt from the Labor Code, but the unions have indicated they intend to take legal action to prevent this. 64. Minimum wages and statutory terms and conditions will also cause problems for those small and micro-enterprises on the boundaries between the formal and informal sector. They are likely either to be: (i) ignored, to the extent that administration is weak; or (ii) reduce the ' World Bank (1992a). xxii Executive Summary and Overview Namibia: Private Sector Assessment creation of jobs, to the extent that they are enforced. Informal sector entrepreneurs operate on slim margins, and, for many of them, having to pay the minimum wage is likely to make a key difference in the choice between paying someone to sweep the floors and doing without. 65. Decisions on minimum wage legislation and on Labor Codes are primarily made for political reasons. In economic terms, outside the existing formal sector, they are likely to adversely impact on jobs creation; and, from the economic perspective, this report recommends against them. 66. Apart from the three key areas identified above, (licensing, land and labor regulations), the regulatory framework in Namibia is either already relatively liberal, or is in the process of being liberalized. There are few price controls; exceptions include margarine and petroleum products. Registration of companies, for example, is not a problem in Namibia. The register appears to be relatively well kept. BUSINESS ENVIRONMENT 3: MICRO- AND SMALL-SCALE ENTERPRISES AND INDIGENOUS PARTICIPATION 67. Indigenous participation is a cross-cutting theme in this report -- from the removal of laws and regulations that are "unfair", to increasing indigenous participation to the extent possible in any parastatal reform. The dualism described above in income, and access to services extends to the business sector. A key theme of the First National Development Plan (NDPl) is poverty reduction and a narrowing of the gap between races. The development of the non-white business sector is fundamental to the strategy. At Independence Namibia inherited a private sector dominated by white-owned and managed formal enterprises. Apartheid laws prohibited non-whites from operating businesses, and restricted their involvement in the formal economy to low paying jobs. Non-whites had limited access to educational and technical vocation training and hence were unable to improve their skills and apply for more productive and higher paying jobs. The business environment for micro- and small enterprises is critical because this sector is a key point of entry for non-white entrepreneurs. 68. Thus, one of the challenges faced by the Government is how to promote private sector development while stimulating the growth of micro-and small enterprises (MSEs) owned and operated by non-whites. Not only is this a question of dismantling existing institutional structures, improving the regulatory framework, and increasing access of MSEs to business services, but it will also require changing attitudes towards the role of government, building a business culture, and fostering relationships based on trust between established and new players in the business community. Although MSEs contribute very little to GDP (2-3 %), they provide an important source of employment in an economy that is only generating 3,000 to 4,000 formal jobs per year for about 16,000 new job seekers. Estimates indicate that MSEs employ up to 30 % of the workforce, which is approximately 150,000 people. 69. The constraints facing the development of MEs and SEs in Namibia are similar but differ in the degree of importance. They include: a lack of entrepreneurship; less than optimal coordination among ministries, NGOs and donors; weak support institutions and an especially difficult regulatory framework for MSEs. xxiii Executive Summary and Overview Namibia: Private Sector Assessment 70. Entrepreneurship. Entrepreneurial behavior has been suppressed as a result of a system of apartheid regulations that discouraged entrepreneurism among the non-white population. This behaviour can be unleashed with the assistance of entrepreneurship development programs and business support services. In addition, the formal and vocational school curricula should be modified to include entrepreneurship development programs. 71. Institutional Support. Support programs are weak and the record of programs providing financial services to MEs is poor. The number of loans issued is small and repayment rates low. This is more due to the novelty of services, the attitude of clients and government, and the lack of experienced practitioners than faulty delivery mechanisms. Indeed, most programs come close to applying so-called "best practice" principles. The reach and sustainability of intermediaries must be improved. This will require investment in institutional building, and capitalization of loan funds, as well as improved coordination among NGOs and other intermediaries, donors, and government. 72. Coordination. There are numerous government and private support programs for MEs and SEs in Namibia. It is worth noting that although Government is involved in the direct provision of services to entrepreneurs, there is a trend, led by the Ministry of Trade and Industry, towards it being more of a facilitator. The Government should be commended for efforts taken to encourage the development of private programs and for recognizing the need to coordinate the activities of the various ministries. To realize the MSE potential more rapidly and efficiently the following steps are needed: reduce Government's role as a provider of services, increase its role in developing the enabling environment for MSE development, and develop a more systematic and integrated approach for better dialogue between itself, NGOs and the private sector. 73. Regulatory environment. As discussed, the regulatory environment is not conducive for the development of small business and continued deregulation will be important in leveling the playing field for small business. 74. The high priority given to ME/SE development is clearly demonstrated by the number of Ministries engaged in this area. However, the provision of services to MEs/SEs should be left to NGOs and private sector institutions; the Government's role should be to mobilize the financial and technical resources to improve the institutional capacity of these institutions to better serve their clients, and to develop the policy framework to guide government and donor support, and promote private sector development through greater participation of non-whites. 75. Areas this policy would need to include are: legal procedures for the creation of businesses, and collateral and land tenure policies; improving the educational system to better serve the needs of business and promote the development of an entrepreneurial culture among the non-white population by; strengthening local institutions and consulting companies that are providing non-financial services to MEs and SEs through the provision of financial (seed capital) and technical assistance (staff training and curriculum development); and improving physical structures for operations of MEs (i.e. provide financial assistance to municipalities to develop market places). 76. The policy and institutional framework should be developed in a coordinated manner. A consultative mechanism involving the major players in this field needs to be officially created. This consultative process should be initiated with the shortest delay possible to launch debate on initiatives proposed by the donor community and NGOs. xxiv Executive Summary and Overview Namibia: Private Sector Assessment THE PARASTATAL SECTOR: INCREASING PRIVATE PARTICIPATION 77. While public enterprises in Namibia are not a fiscal drain, introducing a more rigorous regulatory framework in conjunction with increased private participation will improve accountability, efficiency, as well as the provision of services to the underserved black communities. More generally, a strategy for the public enterprise sector as a whole needs to be clearly articulated by the government. 78. Few parastatals: Namibia inherited the bulk of its parastatal sector at Independence in 1990. Of the 41 entities classified as parastatals by the Namibian government, a large number are decentralized agencies and funds of a non-commercial nature that in other countries are not normally considered public enterprises (PEs). Commercially-oriented public enterprises are few in number and are dominated by a core group of seven firms concentrated in public utilities and transport; in general, parastatals play a minor role in manufacturing and agricultural production. The PEs are important players in the overall economy, with the four largest accounting for about one-third of gross domestic fixed investment 79. Not your "usual" parastatals: Unlike those in many other countries, PEs in Namibia operate autonomously and are insulated from political interference in day-to-day matters (as should be). Government's rights as shareholders are limited, and PEs have full autonomy on all operational decisions. They are run virtually as private sector companies and are considered to be relatively well-managed. Most are profitable and operate on a sound financial footing with minimal reliance on the government or the banking system for financial support. Of course, it is easy to be profitable when one is the only player, a result of them being defacto monopolies in most cases. What is important is the level of service provided, which in many cases is inadequate to reach the majority of Namibians. The sector as a whole accounted for less than 7% of the government expenditures in 1995, over 90% of which involved direct subsidies to two enterprises (broadcasting and the university). 80. A NEPRU study showed that the main PEs/PBs generated a total surplus in 1993 of N$95 million, with Meatco, Telecom and SWAWEK being the most important contributors. NamPost is the only core PE running at a loss, largely due to low tariffs. SWAWEK has been allowed to set prices at levels which have made it profitable; this has enabled it to build up substantial reserves. In recent years, however, SWAWEK experienced a downturn in profitability as a result of the halting of the Ruacana hydroelectric station due to low water levels, and subsequent imports of coal and electricity from South Africa at a higher unit cost to make up for the shortfall. An increase in bulk electricity tariffs was approved in early 1995 to offset the downturn. 81. The core commercial PEs, by contrast, receive no operating subsidies. Government support, albeit relatively limited, is however provided in the form of grants and loans. Loans have been made to Meatco (for start-up operations), NDC (to finance new projects in the northern areas), and to SWAWEK (for rural electrification). Equity injections have also been made in NDC and SWAWEK, as well as in non-core parastatals. Unlike in other countries, government/ enterprise debts and arrears do not appear to be a major problem; while precise data are unavailable, there are reportedly few delays in payments from PEs for government services or by government for PE services. At the same time, PEs do not contribute to government xxv Executive Summary and Overview Namibia: Private Sector Assessment revenues. With the exception of SWAWEK, PEs have not paid dividends. They have also been exempted from paying taxes. PEs in general, and core PEs in particular, are also not a burden on the banking system. Most of their operations and investment have been financed through own resources. While no explicit "crowding out" of private investment has occurred from PE borrowing, the failure to pay taxes or dividends constitutes an implicit subsidy. 82. Why reform? It would appear from the above analysis that PEs are not, as in other sub- Saharan African countries, a pressing economic or financial problem and hence an area for urgent reform. This is, however, deceptive. There are areas of growing concern, particularly in terms of the institutional and financial relationship between parastatals and the government, the ability of the PEs to deliver services to the previously disenfranchised population and consequently alleviate poverty, and the impact ofPEs on private sector development in Namibia. 83. Growing concern that PE autonomy has not been balanced by adequate accountability: There are four main reasons for this. The first is limited flexibility on the part of government to exercise its ownership rights in terms of board appointments. While government has the right to appoint and dismiss board members, it has seldom replaced directors given the severe scarcity of senior management skills in Namibia. 84. A second reason underlying the concern about how to ensure accountability is that the mission statements of most parastatals are very broadly defined with no easily measurable outcomes. In the case of TransNamib, for example, the Transportation Act only requires the company to provide affordable services in the "national interest" (not defined) and to operate on commercial principles. The objectives of SWAWEK are to provide electricity at affordable prices wherever technically and financially possible to do so. For Telecom Namibia, a loose performance contract has been established which obliges the company to provide affordable service for every Namibian and stipulates that the company cannot withdraw from rural areas. Vaguely defined objectives gives broad powers to parastatals to interpret and set their own service levels, which has led them to concentrate on commercial (and mostly white) areas at the expense of providing services to the majority of the population in rural areas. 85. SWAWEK's (now NAMPOWER)'s approach is instructive. It does not provide services to the townships, instead selling to the municipalities and hence limiting its risk. It has failed to respond to the redistribution challenge that the new government faces of extending the power network to the black townships and to the North. This is in marked contrast to the approach followed by ESKOM, its South African counterpart. ESKOM designed a comprehensive and far-reaching program of extended electrification prior to the South African elections of 1994 and has accelerated delivery since then. However, ESKOM's service is not on a commercial basis. An alternative for SWAWEK is to stick to its core activity of bulk distribution, but award a concession to carry out the distribution at the tertiary level. 86. A third problem in accountability is that the legal limitations on shareholder rights have constrained government's ability to obtain basic data on PE performance and activities, and thus to evaluate and monitor bottom-line results. By law, PEs operating under the Company Act are required to submit audited accounts on an annual basis to the Company Department of the Ministry of Trade and Industry. However, PEs are not obliged to provide access to information other than the legal minimum required under the Company Act. Lack of access to information on wage and salary scales, detailed cost structures, and financing plans, as well as on accounting, procurement and other practices, combined with lack of government oversight and monitoring xxvi Executive Summary and Overview Namibia: Private Sector Assessment make it difficult for government to fully and accurately assess PE operations and performance. These problems are particularly acute in companies such as TransNamib, where the multi-modal nature of the company allows TransNamib to cross-subsidize between profitable and loss- making modes and to invest operating surpluses in loss-making parts of the business. 87. The fourth reason for concern is that the full extent of indirect transfers is unclear, partly because the legal status of many of the larger parastatals is ambiguous. Thus, the requirements for payment of tax and dividends are still being resolved. Moreover, it is difficult to estimate the level of customs duties and other taxes paid to government. Most imports are made from within SACU, so government revenue deriving from PE/PB imports is dependent on the customs union arrangements. Nonetheless, the extent of indirect government support seems to be small from a budgetary point of view. From the perspective of the private sector however, indirect government support to parastatals contributes to the lack of a level playing field. It also minimizes the incentive to further control costs and improve efficiency, and permits PEs, in combination with generous depreciation allowances, to build up substantial reserves over which there appears to be relatively little shareholder control. 88. Crowding out of the private sector as the regulatory framework favors them: However, in competitive or potentially competitive sectors such as road transport, meat processing and agricultural services, the legal and regulatory framework combined with market power of parastatals inhibits competition and crowds out private sector development. Parastatals such as TransNamib and Meatco do not have legal monopolies but are by far the largest operators in the domestic markets. TransNamib competes with about six Namibian private companies in road transport and with owner/operators (particularly on lucrative routes), although it is still the dominant player with the largest operating fleet in the market. Restrictive licensing regulations for new entrants under the 1987 Road Transportation Act combined with TransNamib's dominant market position have made entry for new private operators difficult and have resulted in a concentrated road transport industry. 89. The Government has decided to address parastatal reform as a matter of priority in promoting private sector development in Namibia. A number of steps have been taken involving the establishment of high-level committees and task forces. Efforts are underway to clarify the legal status of parastatals, particularly of Meatco. A number of activities presently performed in government departments are being commercialized, for example in tourism, transport services, and water operations. Privatization of commercial activities is also being considered on a piecemeal basis in a variety of sectors. These are important steps in the right direction, but an overall strategy for parastatal reform in Namibia still needs to be clearly articulated by Government. The goal should be to reduce the government's role in critical areas of the economy and foster greater competition through commercialization and private sector participation in state enterprises. 90. Even though PEs are not a pressing economic or financial problem and already operate like private companies for the most part, strong arguments can be made for increasing the role of the private sector in Namibia. A first reason is that properly regulated private enterprises would allow eovernment to achieve the development challenges facing it in two ways: ensuring that services are extended to previously neglected black communities in a way that the presently unaccountable PEs do not. and by allowing it to concentrate its scarce managerial and financial resources on delivery of critical social services such as health. education and nutrition, rather than on activities that are easily carried out by the private sector. xxvii Executive Summary and Overview Namibia: Private Sector Assessment 91. Second, privatization would further improve the efficiency gains brought about by commercialization. In Namibia, the experience with commercialization has been positive. Political interference in day-to-day decision making has been limited, PEs generate a surplus, and they are financially not dependent on the government. Indeed, for these reasons, other government activities are also being commercialized, often in preparation for privatization. In tourism, for example, the Resorts Division is being converted from a department in the Ministry of Wildlife, Conservation and Tourism into an autonomous parastatal prior to privatization. Similarly, the Ministry of Works, Transport, and Communications (MOWTC) has developed a five-year plan (MOWTC 2000) which includes commercialization and eventual privatization of functions such as road maintenance, airports and air navigation, the government garage, and road machinery equipment. In the water sector too, efforts are underway to commercialize the operations of the Department of Water Affairs, the bulk water supplier to municipalities. Commercialization can and should also be extended to other parastatals (such as NBC, NAMPA and New Era Publications). 92. Yet, international experience shows that the gains from commercialization are usually partial and difficult to sustain over the long run. Commercialization works best when the full package of reforms -- i.e. managerial autonomy and accountability, clear incentives, hard budget constraints, competitive market environment -- is put in place, and this is usually hard to do. More importantly, even where governments do succeed in putting the reforms into place, the gains are not usually sustainable as political interference tends to creep in over time. Many countries have thus used privatization to "lock-in" the gains of commercialization by severing the links between parastatals and government. Privatization also enhances PE efficiency by bringing in badly needed skills, both at the management and technical levels. Experience from other countries shows that privatization of well-managed commercialized public enterprises resulted in expanded and better quality services, and improved economic welfare when a good legal and regulatory system was in place. By unbundling and privatizing separately activities that are presently carried out by single entities, privatization would also help increase competition in the overall economy. 93. Third, privatization, if done right, would address a fundamental political economy issue of maior concern to government. i.e. the extreme concentration of assets and economic power in the hands of a privileged few resulting from Namibia's colonial legacy. It would reinforce and complement interventions to enhance indigenous participation in the economy. Divesting countries the world over have used privatization as a tool to achieve equity and distributional objectives, and in the process to jump-start capital market development. These objectives have been achieved by selling shares at deep discounts or giving them away for free -- as in voucher privatization programs in former socialist economies -- to small investors, employees, and institutional investors such as pension funds. Namibia's parastatals, and in particular utilities such as SWAWEK and Telecom, are especially amenable to such distributional techniques given their strong financial position and good operating track record. Moreover, their privatization would offer viable investment opportunities to non-bank financial institutions (insurance companies and pension funds) to invest some of their sizable savings in Namibia rather than in South Africa; along with smallholder participation this would contribute to capital market development. 94. The need to raise private equity financing for new investments and free government from the risks of borrowing or guaranteeing loans is a fourth reason for privatization, particularly xxviii Executive Summary and Overview Namibia: Private Sector Assessment of infrastructure firms. Fortunately, Namibia is well endowed with basic infrastructure, including good road networks, ports, adequate airport facilities, and a functioning railway system. Communication and power systems also function well in comparison to other sub- Saharan African countries. Yet, substantial investments are likely to be required over the medium-to-long-run, especially in the historically neglected communal areas. Most assets are fully depreciated and will need to be rehabilitated or replaced, while expansion and modernization are also needed. In short, PEs appear to have limited capacity to finance the large future investment needs, for example in Telecom, and will need to seek other sources of finance, including from the private sector. 95. An overall strategy and legal framework for privatization and private sector participation is needed. The strategy should reduce the Government's role in critical areas of the economy (such as Telecom, Transport). The critical next steps are: identify privatization objectives and classify enterprises for privatization, identify methods of privatization including indigenous share ownership schemes, establish guidelines for restructuring of parastatals prior to privatization, develop a social safety net, and establish institutional arrangements for decision- making and management of the privatization process, including procedures to enhance transparency. 96. Classification ofparastatals. As a first step the parastatal sector should be reclassified from the present classification based on legal lines to one based on economic and financial criteria. Broadly speaking, parastatals can be broken up into three categories: * Parastatals or activities to be privatized or liquidated in the short-term * Parastatals that are to be privatized in the medium-term * Parastatals that are to remain state-owned for the foreseeable fiture Figure 5.1 in Chapter 5 illustrates the process by which PEs could be classified. 97. Indigenous share ownership schemes. A major concern in Namibia - as in many other divesting countries -- is the fear that privatization will lead to concentration of ownership and power, and will benefit foreigners or a small economically powerful group dominant since colonial times. Increasingly, privatization methods that promote indigenous participation are becoming available to address this concern. One such method is public share offerings where shares are sold through the stock exchange to the general public and institutional investors. Companies with high growth prospects and a steady revenue base (such as utilities) are particularly attractive candidates for public offerings. Shares to small investors could be priced at a discount to ensure maximum participation, while shares to institutional investors are sold at a higher premium. Care should be taken to sequence candidates for privatization in a manner that would not flood the market and drive down share price. The absorptive capacity of the Namibia Stock Exchange (NSE) is limited, although privatization itself could help boost capacity. NSE currently has a total of 15 listed stocks with an overall market capitalization of N$39 billion. However, much of this reflects the listing of South African parent companies (banks) on the NSE under the provision for dual listing, rather than investments in Namibian assets, and share trading volumes remain relatively low. Xxix Executive Summary and Overview Namibia: Private Sector Assessment 98. In countries with weak capital markets, alternative methods to involve indigenous investors are being used. These include: deferred public offerings, the use of trust funds and pension funds, and voucher- based mass privatization are all options. The pros and cons of these and other options are discussed in Chapter 5. 99. One common element of all such indigenous share ownership schemes is the need to strike a balance between distributional and efficiency objectives. Spreading ownership widely among a large number of dispersed shareholders does little to enhance management performance and accountability and bring in capital for investment. Improving efficiency should be a major goal, and the evidence is overwhelming that the presence in a firm of a dominant owner or investor with access to capital, managerial skills, technology and markets increases efficiency. The severe shortage of domestic investors suggests that foreign participation will be key, particularly in infrastructure. Concerns about foreign domination of key economic sectors -- that in general are decreasing with increasing globalization and technological changes -- can be mitigated by: diversifying the base of foreign investors; using instruments such as the golden share, which gives government control over limited but key policy decisions; developing a fair and credible legal and regulatory frameworks to assure good behavior of the foreign operator; and by combining the sale of core shares with widespread distribution of remaining shares through the methods discussed above. Box E2 below describes the recent privatization of Kenya Airways which had to address many of these concerns. Box E2: The Privatization of Kenya Airways In the early 1990s Kenya Airways was saddled with debt after years of losses. As the situation approached crisis point, the Government decided to take drastic action. The Government replaced the entire Board and gave it a mandate to privatize the airline. Over the next three years the Board restructured the airline's operations, management and labor force. The Board then approached the International Finance Corporation (IFC) to cement these changes through privatization. The Government wished to achieve a politically acceptable ownership pattern, balancing the benefits of a foreign strategic partner against the desire to have local majority ownership. This was a business imperative as well: bilateral route rights depend on the airline being owned substantially by Kenyans. IFC identified a divestiture policy to meet these objectives. In January 1996 a 26% stake was sold to a strategic partner, the Royal Dutch Airline KLM. Kenya Airways shares were then immediately listed on the London and Nairobi stock exchanges. Both of those offerings were substantially oversubscribed. Kenyan institutions and individuals acquired a 34% of the shares, international investors, 14% (in addition to KLM's 26%), airline employees enrolled in a special program to purchase 3%, and the Government of Kenya retained 23%. The privatization involved the largest-ever public offering on the Nairobi Stock Exchange and was the second largest privatization to date in Sub-Saharan Africa. Kenya Airways now has the largest number of shareholders of any company in the country - the domestic offering was eventually taken up by 110,000 different shareholders, of whom 90,000 received the minimum shareholding of around $200. Many of Kenya Airways' employees also subscribed to this offering, independently of their special program. 100. Institutional framework for privatization. A strong coordinating mechanism within government to ensure consistency, coherence, and transparency is critical to successful implementation. This requires establishing a small but strong focal point with overall Executive Summary and Overview Namibia: Private Sector Assessment privatization responsibilities. Most countries have established a high-level interministerial commission reporting directly to the top with responsibility for all decision-making, backed by a small technical secretariat for implementation. The latter would be responsible for preparing privatization work programs, preparing companies for sale, developing privatization methods, valuing companies, procuring the appropriate technical and financial skills from the private sector, and carrying out other technical tasks related to privatization. In Namibia, the secretariat could be located in the Ministry of Trade and Industry, which has already initiated the work on parastatal review. 101. Another option for managing a privatization program is to rely on sectoral line ministries responsible for PEs. For example, the Department of Agriculture and Rural Development (DARD) would be responsible for the privatization of agricultural enterprises and so on. Leaving implementation to line ministries has, however, a number ofpitfalls: it slows down the process since ministries usually have the least interest in privatizing; it creates duplication and dispersion of scarce technical resources; and it fragments responsibility, leading to lack of transparency, unclear authority lines, and lack of uniformity in procedures. For these reasons, line ministry specific privatization programs are not recommended. To benefit from the sector- specific knowledge of line ministry staff, the relevant personnel could be seconded to the secretariat. 102. Improving the information base: Privatization is not an immediate solution and there are many parastatals that are likely to remain state-owned in the medium-term. For these parastatals, regular information gathering should be a priority. Basic data on contribution to GDP, value added, investment, and employment, as well as on the financial flows between parastatals and the government (subsidies, equity contributions, loans, interest payments, dividends, taxes) as well as the banking system need to be collected. Systematic reviews of PE performance, at the individual and aggregate level, also need to be conducted. Wercoflmmend that the collection ofsuch information should be centralized in the Ministry ofFinance, which already gathers basic data on transfers and subsidies to parastatals. 103. Increasing accountability: For parastatals that are to remain state-owned over the medium to long-term, measures to enhance parastatal accountability while continuing to maintain strict operational autonomy are needed. The aim of greater transparency and accountability should not be to interfere with managerial decision-making but to ensure that government revenue is correctly calculated and that government finance is not used when parastatal reserves could be used. This would involve a review and clarification of the legal status of parastatals, clear definition of objectives, independent external audits, and monitoring of basic financial information. The State Finance Act, presently under preparation and soon to be submitted to the Cabinet Committee on Legal Affairs, proposes greater accountability via legal requirements for parastatal reporting. Government should apply stringent tests to the project borrowing of large parastatals, and ensure that taxes are paid. A small monitoring unit may need to be established in the Ministry of Finance for these purposes. A LABOR-INTENSIVE GROWTH STRATEGY FOR THE NORTH 104. As highlighted earlier, Namibia is a mature mineral economy which experienced rapid rent-driven economic growth during the 1946-70 mineral boom. But growth slowed markedly thereafter. Mining functioned as an economic enclave so that the country's relatively high per xxxi Executive Summary and Overview Namibia: Private Sector Assessment capita income masks huge income inequalities. Most Namibians are poor and they lack the skills and productivity commensurate with the country's per capita income. Consequently, Namibia faces an especially awkward transition from rent-driven to skill-driven growth. 105. Accelerated economic growth requires rapid diversification, because mining is likely to continue to decline in relative importance, albeit with possibly more buoyancy than the NDPI assumes. Through the medium-term, fishing and tourism offer the strongest diversification options with manufacturing becoming more important thereafter. However, these sectors are unlikely to generate employment anywhere near the 19,000 annual increase in the labor force, let alone help to reverse the rise in unemployment. Moreover the rapid post-independence expansion of public sector employment makes it undesirable that workers should look there for employment: rather job reductions might be more appropriate in that sector. Consequently, there are real doubts as to whether the modem sector can act as a safety valve to relieve the degrading rural environment of the over-populated communal areas. 106. This suggests that a labor-intensive growth strategy is required for the northern region which has the largest concentration of poverty, but also important resources such as water, arable land, wood and energy. That concentration of people needs to be turned into an advantage as a source of demand and external economies. A labor-intensive growth strategy should take advantage of the fact that in the initial stages, expanding the natural resource base and modest transfers from the modern economy can lift regional incomes significantly. More specifically: some modest redistribution of land and water resources is required in order to ease, albeit marginally, the very high pressure of population on agricultural land; so agricultural extension is strengthened; the title to land is conferred on individuals neo-urban areas to encourage investment. Thereafter, the second stage requires emphasis on labor-intensive employment through a modest boost to farm productivity (based on recent farm research) and the labor-intensive provision of hitherto neglected local infrastructure. This process is already happening, but it is occurring largely as a redistribution objective or in response to food emergencies stemming from drought, rather than as part of a coherent overall development model. 107. In stage three of the labor-intensive model, the higher incomes encourage the proliferation of small businesses which diversify and improve local services, expand the local production of simple consumer goods and tap revenues from under-utilized tourism opportunities. Thereafter, in the fourth stage the region should increasingly integrate through trade in labor-intensive manufactures and services with both neighboring regions and the international economy. In effect, the four stage model traces the northern region's transformation from a rural economy into an urban economy which is likely to become the country's largest regional market. 108. The proposed development strategy outlined here needs to be undertaken in the context of improved measures to protect and enhance environmental services. With a largely unskilled population, Namibia is highly dependent on its natural resource base which shows clear signs of being mismanaged, notably with regard to soils, grazing land, water and energy. The compilation of shadow environmental accounts will help to underline the degree to which development can be regarded as sustainable. While such work may be indicative only, nevertheless, the efforts by research units, such as that of the Directorate of Environmental Affairs, to end the under-pricing of environmental services will enhance the efficiency of natural resource management. This will ensure that Namibia uses its resource base most effectively in accelerating economic growth and narrowing the income gap. xxxii Executive Summary and Overview Namibia: Private Sector Assessment THE REFORM AGENDA 109. Private sector development is Namibia is not an end in itself but rather a means to addressing the widespread poverty and inequality. The overall conclusion of this report is that while Namibia private sector faces only moderate constraints to its development, key reforms that will enhance private participation and increase the efficiency of investment in the modem sector include: macroeconomic stability through fiscal prudence;, improved access to land and credit, particularly for black entrepreneurs; increased labor market flexibility and human resource development; and increased accountability and private participation in parastatals. 110. These reforms, however, will not be sufficient to address the development issues facing the country, given the widespread poverty and inequality, the limited growth prospects, and the existing location of industry which is concentrated around Windhoek. Thus any development strategy for Namibia should encompass not only initiatives intended to stimulate the modem sector, but also a regionally focused agenda for the North where 60% of the population lives in abject poverty. The key reforms to stimulate the development of the North have been highlighted. 111. This report has presented an integrated view of the prospects for sustainable development in Namibia through the private sector. The matrix that follows summarizes the main policy recommendations. While the analytical work for policy and regulatory reforms in the modern sector has largely been carried out, further in-depth research is required in a number of areas pertaining to development of the northern region. These include: socio-economic conditions within the communal areas; the prospects for a labor-intensive growth strategy in the northern region; the production potential of the post-subsistence farming system; and a cost-benefit analysis of alternative means of boosting energy and water supplies. xxxiii Executive Summary and Overview Namibia: Private Sector Assessment Table El: Matrix of Policy Priorities General Problems~ Strategy Sp~cei Recmendations Economic Development (see below) * Declining mature .maximize the mineral economy development of the * Geographically modem private dispersed population sector and accelerate " Huge ithat of the lagging northern regions * poverty reduction * job creation Taxation * Indirect taxation * Rationalize indirect short-term inefficient tax system * set up high-level VAT committee to review * High and uneven * Increase costs/benefits of alternative systems of protection competitiveness of indirect taxation * Corporate tax at 35% is firms press for continued trade liberalization relatively high through SACU forum medium-term replace GST & ASD with a Value-Added Tax (VAT) for efficiency introduce broad-based duty-free import of capital and intermediates review implementation of ASYCUDA customs system to assess efficiency establish implementable fixed duty drawback and bonded ware-house scheme, based on Trade Policy Reform recommendations * Too many varying * Rationalize short-term incentives incentives * consolidate the Walvis Bay and generalized * Weak economic EPZ schemes rationale for some allow full exemptions of GST and import incentives duties forAl goods and all exporters * Confusion as to legal allow depreciation and enhanced tax responsibility and deductibility to be the same for all firms administration medium-term establish duty exemption and individual drawback schemes (see above) switch mining, fishing, and tourism to auction-based allocation of licenses/concessions/royalties * consolidate mining, fishing, and tourism into standard rate of taxation xxxiv Executive Summary and Overview Namibia: Private Sector Assessment Table El: Matrix of Policy Priorities General Problems Strategy Specific Recommendations Improving the Business and Investment Climate * Weak investment * reduce transactions short-term response and poor costs of investing * repeal the Consolidated Ordinance Act representation of * implement a flat fee-based structure for the previously licensing system disadvantaged groups skills upgrading of labor force move health and safety standards to inspection rather than licensing place licensing in the transport sector under general licensing provisions separate vehicleworthiness from the granting of licenses relax the constraint preventing foreigners from investing/operating in national parks adopt a "negative" list for work permits with permits granted automatically for applications outside the list medium-term investigate the possibility of a government scheme providing a limited financial guarantee on the basis of PTO to be used as security .......... .. . ..... .... ..... ....... .. . . . . . .. . . . . . Parastatal Reform * Non-transparent * reduce short-term parastatal sector Government's role * classify existing parastatals by economic and * Poor delivery of services in critical areas of financial criteria to previously the economy outline privatization objectives, methods, disadvantaged * increase safety net accountability * submit strategy to Cabinet for discussion and broaden private approval participation establish legal and institutional framework for privatization improve the basic information base on parastatals and institute systematic reviews of their performance through MOF develop regular information gathering and monitoring system for parastatals medium-tern develop regulatory framework for privatization of monopolies deregulate and introduce competition wherever possible introduce private participation in xxxv Executive Summary and Overview Namibia: Private Sector Assessment Table El: Matrix of Policy Priorities Geralrobem [ Straitegy SpeciG Reconmendatio management of large enterprises where ownership transfer is not possible *conduct independent external audits *investigate the options for enhancing indigenous share ownership on a case-by- case basis in any privatization scheme *implement social safety net where applicable Improving the Business Envirornent for Micreand SmaUl Enterp.rises * Lack of Entrepreneurship * develop * include entrepreneurship development and entrepreneurship business courses as part of formal and development vocational school curricula programs * Lack of coordination * establish dialogue * create interministerial body on MSEs among ministries, NGOs between all players * designate ministry to develop policy and and donors designate body to implement policy recommendations *conduct periodic meetings with private sector players * Weak institutions * strengthen * create regulations that encourage the institutions by development of a range of institutions fostering the * development regulatory environment development of conducive for the development of intermediaries that intermediaries are moving * develop second tier institution that can towards financial mobilize funds for capitalization, institution sustainability building for intermediaries that meet pre- defined standards * Especially difficult * accelerate process * conduct information and education campaign regulatory environment of deregulation on new regulations for small firms * review collateral and land tenure system xxxvi Executive Summary and Overview