I was recently invited to M&G Investments Leonard Krüger’s insightful presentation on ‘Resource Discovery: best practice and avoiding the resource curse’.
Yes, I am sure many readers also noticed how many media commentators are already counting their blessings and awaiting the new dawn in great anticipation of securing personal riches. Leonard’s talk aimed to put our newfound riches into perspective to moderate exaggerated expectations and warn that things can go horribly wrong, as they have in many other countries, if Namibia does not promptly establish sustainable resource exploitation policies.
Leonard pointed out that while Namibia is one of the world’s ‘hottest exploration plays’, there were many other significant discoveries worldwide in 2022 and 2023, notably Guyana, Iran, and Namibia only in third place. Namibia’s resource represents less than 1% of the global fossil fuel resource. Namibia is competing against many other countries and faces the challenge that its resource is in ultra-deep waters on the edge of what can be exploited economically with current technology, making it very expensive for investors.
Deepwater production only represents 7% of global production. Based on international experience, the developers would have to incur capital expenditure on developing our resource of about N$2.5 billion annually for the next ten years and then anticipated to decline to around N$500 million for another 25 years. The best estimate of future potential production expects commencement in 2030 with around 200,000 barrels per day, peaking at around 500,000 for only four years from 2034 to 2038 and declining sharply to only 100,000 by 2048. Namibia would thus only be endowed with this windfall rich for around 18 years!
Leonard used the ‘Dutch Disease’ as a classic case study of how things could go wrong without sustainable policies. ‘Dutch Disease’ refers to the negative consequences of the Netherland’s approach to its natural gas discovery in 1959. Although the Dutch economy increased its revenues from the export of natural gas, the significant appreciation of its currency from the large influx into the sector resulted in a higher unemployment rate and a decline in its manufacturing industry.
The rapid development of the crude oil sector precipitated a decline in other economic sectors due to the substantial increase in its currency, making its products uncompetitive. It made the Dutch economy very vulnerable to price fluctuations in the natural gas price and impeded economic diversification, exacerbating the challenges of changes in global market conditions.
The current tax legislation would result in producers earning roughly 36% of revenue. In comparison, the state coffers would harvest 54% through corporate income tax (35%), royalty fee (5%), additional profit tax (between 5% and 12%) and annual license fees and training levy. Leonard presented Guyana as a showcase for developing its recent discoveries with best practice.
On the positive side, Namibia has reputable partners with long experience and strong balance sheets. He also cited that Namibia’s corruption index rating at around 50% was noticeably better than South Africa’s and Guyana’s 40%, giving it a competitive edge on investors.
Leonard noted potential financial and monetary implications of the resource curse to be wary of as the impact on Namibia’s balance of payments, SACU transfers, the Rand-peg, diverging monetary policy and fiscal requirements, the 45% minimum domestic investment requirement, the prevailing low domestic entrepreneurship and the high public wage bill and other structural impediments such as infrastructure, climate change, job opportunities, and education.
In dealing with the windfall revenue from our new resource, Leonard showcased Norway’s sovereign wealth fund (SWF), the largest such fund in the world. Norway transfers 100% of its revenue to its SFW and has set up strict fund management rules. The rules are designed to safeguard the fund’s assets, maximise its returns and preserve the benefits of Norway’s oil wealth for future generations. Its investment mandate supports the government’s long-term objectives.
The government may spend a maximum of 4% of the fund on its budgetary needs, but it is limited to maintaining the fund’s purchasing power. It diversifies across a broad range of domestic and international assets, applies strict ethical guidelines that prohibit investment in tobacco and arms manufacturing, transparency in its management, robust risk management practices to ensure that investment decisions align with its objectives and risk tolerance, and is governed by the Norwegian Ministry of Finance.
It was interesting to hear from a delegate of the Bank of Namibia that it has tasked an in-house team to formulate policies and guidelines for Namibia’s sovereign wealth fund, which already exists with maiden funding from the MTC windfall. One delegate suggested that Namibia is still a developing country, in contrast to Norway, which has one of the highest per capita incomes in the world. Oil was discovered in Norway’s waters in the late 1960s, with significant production starting in the early 1970s.
At that time, Norway’s per capita income was relatively moderate compared to today’s standards. Norway’s real per capita income and economic prosperity have grown significantly since the discovery of oil, mainly due to prudent management of oil revenues through the sovereign wealth fund. However, the Norwegian government implemented its fiscal spending rule only in the early 2000s.
Namibia’s oil riches are expected to only last for around 15 years. This short time span makes it so much more important to transfer the windfall into a sovereign wealth fund that systematically and sustainably supports Namibia’s economic development over many generations. I believe the much-heralded TIPEEG programme was launched to cushion the effects of the global financial crisis while addressing socio-economic challenges and fostering development in the country at the same time.
Unfortunately, it produced typical symptoms of Dutch disease. It overburdened our economic capacity. Additional capacity had to be imported, primarily from Eastern countries. Many local businesses went under when this bonanza ended, creating more unemployment. At the same time, the capital that left Namibia no longer circulates within the country to generate taxes and employment. With our newfound oil riches we will hopefully have learnt from the TIPEEG experience and do it better, this time around!”
*Tilman Friedrich is a Chartered Accountant and a Namibian Certified Financial Planner® practitioner, specialising in the pensions field. He is co-founder, shareholder, and Chairman of the RFS Board and retired chairperson, and now a trustee of the Benchmark Retirement Fund.
