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O n 12 May, Namibia launched a sovereign wealth fund (SWF) to fast-track hydrocarbon development following oil giants, TotalEnergies and Shell’s oil and gas discoveries. On 24 February, TotalEnergies announced that it had made noteworthy light oil discovery of more than one billion barrels of oil in its Venus prospect, offshore southern Namibia.

Funding the future

The mineral economy has been a key economic driver but the government has consistently had its eye on economic diversification. Decoupling economic performance from the growth of the mining sector and reducing government debt have posted an uphill challenge. In 2020, the government enlisted the help of the Harvard Growth Lab to find “new growth drivers that promote inclusive development”. The outcomes of this project will contribute to policymaking processes but the real work will be in ensuring effective implementation.

The government has expressed concern about financing the infrastructure development needed to enable economic diversification, hence the creation of the Welwitschia Fund. The SWF has been created to bridge the country’s financing gap and support the government’s efforts to achieve fiscal stability. Following a cabinet decision in June 2020 to create the SWF, the Ministry of Finance released a policy framework in August 2020. The initial details were scant but the recommended timeframe for launch – Q2 of the 2021/22 financial year – put forward by the High-Level Panel on the Namibian Economy (HLPNE) was ultimately achieved when the fund launched this May.

The establishment of the fund is one of the first goals of the Harambe Prosperity Plan II (HPPII), a medium-term economic development action plan spanning 2021–2025. The legislative governing structure, the Welwitschia Fund Act, has not yet been drafted. However, the Ministry of Finance and Bank of Namibia have been granted an oversight and management role to reduce set-up costs.

The fund’s policy framework does not specify who will have signing rights for withdrawals. However it states that all withdrawals and their use should be made public through a press release. In summary, the government will own the fund’s assets, which will be independently managed by the Bank of Namibia and the Finance Minister will ensure adherence to the legislative framework.

Finding the funds

Named after a plant species unique to the Namib desert, the fund will receive an initial injection of USD 16.3 million of direct seed capital from the government and a contribution from the dividends declared by the Bank of Namibia, with 2.5 percent of its portfolio invested locally. Six sources of funding have been earmarked including Southern African Customs Union (SACU) revenue, 10 percent of all revenue obtained from the sale of fishing quotas, 15 percent of mining royalties, 50 percent of budget surpluses and 33 percent of the sale of state assets proceeds. The government is planning on privatising 22 state-owned enterprises, the biggest of which is the country’s largest telecommunications company, MTC Namibia, with a 90 percent market share.

The SWF will be split into separate investment sub-accounts, namely the Stabilisation Account and the Intergenerational Savings Fund, with different objectives and risk thresholds. Coincidentally, an adult welwitschia only produces two leaves during its entire lifetime. The Stabilisation Account will largely rely on regular contributions from public revenue such as SACU receipts and mining royalties. According to the Bank of Namibia, it will be invested in offshore fixed income assets with a focus on low risk and liquidity over a three-year investment horizon.

The Intergenerational Savings Fund will be funded by privatisation proceeds and proceeds from natural resource utilisation. The fund will have a longer investment horizon – 10 years  – and have a higher risk appetite that skews toward riskier asset classes including equity, real estate, and infrastructure. A 2.5 percent provision will be made to invest domestic in infrastructure projects with multigenerational impact. The majority of the SWF’s portfolio will comprise of foreign holdings. There is a strong likelihood that the government will appoint external asset managers, as is the case for Botswana’s Pula Fund and the Nigerian Sovereign Investment Authority’s (NSIA) stabilisation fund.

Eyes on the green hydrogen prize

The government aims to accelerate the development of the country’s oil, gas, and hydrogen resources with support from the Welwitschia Fund. Rapidly improving technology and decreasing costs for fuel cells is making green hydrogen a more appealing fuel alternative in Africa. Namibia plans to become a green hydrogen player by 2026 through developing and exporting green hydrogen.

Taking into account the continent’s substantial renewable energy resources, the International Renewable Energy Agency estimates that renewable energy capacity in Africa could reach 310GW by 2030 and countries like Egypt, Morocco and South Africa are positioning themselves to become global renewable energy players. The development of green hydrogen projects can help countries address rising energy demand and contribute to domestic energy independence. It can also provide an environmentally sustainable fuel alternative while decarbonising key sectors that are hard to electrify such as steel and cement production.

Hyphen Hydrogen Energy, a Namibian registered green hydrogen development company.
Source: Hyphen African

In November 2021 Hyphen Hydrogen Energy was appointed by the government to develop the country’s first large-scale, vertically integrated green hydrogen project in the Tsau Khaeb National Park. During an event hosted at the COP26 Commonwealth Pavilion on the same month, Economic Advisor to the President and Hydrogen Commissioner James Mnuyupe noted that the region is particularly suitable due to its large solar and wind resources, as well as its proximity to the coast. The USD 9.4 billion project will produce either pure green hydrogen or a derivative such as green ammonia. A progress update was given at this year’s World Economic Forum in Davos. The completion of the project will significantly assist with job creation – 15,000 direct jobs during the four-year construction of both phases and 3,000 jobs during the operational phase, of which 90 percent will be occupied by Namibians.

Past mistakes

Although the recent oil discoveries can be used as an opportunity for economic transformation and stabilisation if managed wisely, there are concerns that the fund may not be feasible given local and global macro-economic headwinds Criticism has also been expressed about the fund possibly experiencing the same fate as SME Bank, which was looted.

SME Bank, liquidated in 2017.

SME Bank Scandal

The government founded the SME Bank in 2012 after the dissolution of the Commercial Banking Institution, the Small Business Credit Guarantee Trust (SBCGT). Its mandate was to provide superior, targeted banking products and services to small, medium, micro, and informal enterprises. However, the SME Bank was poorly managed, lost money at an alarming rate and failed to carry out its responsibilities as a banking institution.

The Bank of Namibia took over the management of the SME Bank at the beginning of March 2017 after a large investment that the SME Bank placed with Mamepe Capital had gone missing. The SME Bank invested NAD 196 million (about USD 13 million) of which NAD 150 million (USD 10 million) was then invested with VBS Mutual Bank. However, according to VBS Mutual Bank, the only investment made with it was a deposit of NAD 10 million that was made in August 2016 and withdrawn a day after. The money was allegedly paid into accounts in the name of several other beneficiaries. VBS Mutual Bank, liquidated in 2018 is shroud in controversy after allegedly defrauding South African citizens and tax payers.

In 2017, the High Court ordered SME Bank to be wound up as it was found factually and commercially insolvent. SME Bank’s liquidators, alleging that large-scale theft was perpetrated at the bank, are suing the bank’s six former directors for failing to perform their functions as company directors. This incident damaged the reputation of the country’s banking sector.

At the Welwitschia Fund launch on 12 May, political analyst, Graham Hopwood acknowledged the governance concerns, stating, “We remember the SME Bank, which was also approved by the Bank of Namibia, but then collapsed. We really need to make sure the way this is managed and governed is really robust so that there is no possibility of any funds being mismanaged”. Governance concerns have also been noted by opposition parties; Independent Patriots for Change President Panduleni Itula placed emphasis on the need for preserving the fund’s independence from political interference and to that end, suggested an independent monitoring system to hold the Bank of Namibia to account.

It's all in the DNA

Namibia is joining a small but growing club that includes Angola, Botswana, Libya and Nigeria. By mobilising and leveraging national savings, African SWFs can increase governments’ capacity to finance infrastructure development. In recent years, they have played a role in enabling innovative public-private partnerships in healthcare, telecoms-infrastructure, ports, airports, utilities, and roads. However, their potential to securitise state assets or use leaseback arrangements to fund public entities remains largely untapped. The success of a SWF is strongly influenced by the strength of a country’s institutions. For instance, Botswana’s Pula Fund has strong management and is governed well, while the government-manged  Libyan Investment Authority (LIA) has been criticised for its opaque management, suspicious investments and lack of transparency in its governance. Nigeria and Angola’s weak institutions impact the effectiveness of their funds.

The launch of the SWF, the country’s offshore potential and green hydrogen prospects may signal a new era of sustainable investment in Namibia. With effective management, clear governance structures and robust transparency mechanisms, the SWF has the potential to achieve the government’s stated ambitions. The genus Welwitschia is appropriately called a “living fossil” because some are as old as 1,500 years. The hope is that now that Namibia’s SWF has taken root, that it contains the resilience and longevity of its namesake.