## cr18258 ## Source details **Canonical URL:** [cr18258](https://www.imf.org/-/media/files/publications/cr/2018/cr18258.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18258.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18258.pdf.json) --- ### PREFACE — Mission objectives, activities, and acknowledgements - Mission: IMF Fiscal Affairs Department (FAD) visited Windhoek during January 17–31, 2018 at the request of the Ministry of Finance (MoF) of Namibia to analyze main sources of fiscal risks, notably Public-Private Partnerships (PPPs) and Public Entities (PEs), and advise on monitoring, managing and reporting these risks. - Team: Led by Carolina Renteria (FAD Division Chief) and included Isabel Rial, Avril Halstead (all FAD), Katja Funke, and Malcom Pautz (external experts). - Activities delivered: - Workshop on international experiences managing fiscal risks (focus: PPPs and PEs). - Training in IMF-World Bank PPP Fiscal Risk Assessment Model (PFRAM). - Training in a two-step methodology for assessing likelihood of fiscal risks from PEs. - Acknowledgements: Special thanks to Ms. Rauna Mukumangeni, Mr. Johannes Shipepe, Ms. Monika Uandara. Technical assistance financed by AFRITAC South. ### Economic and fiscal developments — recent history and macro-fiscal context - Key macro-fiscal outcomes and projections: - Real growth slowed to 1.0 percent in 2016. - Fiscal deficit increased from 4.3 percent in 2014/15 to 10.3 percent of GDP in 2015/16. - Public debt stock reached 44.2 percent of GDP, including NAD3.9 billion in domestic arrears (2.4 percent of GDP). - Rating actions: Moody’s and Fitch lowered Namibia’s sovereign credit rating to below investment grade; public debt expected to approach 70 percent of GDP by 2022 absent consolidation. - Article IV and FSAP identified risks: slower recovery in mining and construction; housing market corrections; declines in SACU revenues; lower demand for key exports; subdued commodity prices; tighter global financial conditions; weak demand and decelerating private credit. - Fiscal trajectory without consolidation: deficit projected to continue growing to around 9–10 percent of GDP; government gross financing needs would average about 21 percent of GDP per year; public debt could approach 70 percent of GDP by 2022. - Policy response and fiscal risks: - Consolidation program implemented but deficits and debt remain high due to late-year reductions in non-wage current expenditures and public investment, high budget inflexibility, and persistent wage and capital spending pressures. - Increased use of PEs and PPPs to overcome budget constraints has increased explicit and implicit fiscal contingencies. - Initial quantification of explicit contingent liabilities includes: - Loan guarantees to state-owned entities equating to 4.3 percent of GDP. - Guarantees for housing loans to public employees. - PPP guarantees. - Information gaps: lack of timely/reliable data on contingent liabilities; poor publishing of regular annual reports and financial statements; weak legislative compliance by state-owned entities. ### Fiscal Risk Management and the Fiscal Risk Statement (FRS) - Concept and five-stage management approach: 1. Identify sources of fiscal risks and assess magnitude and likelihood. 2. Decide mitigating steps to reduce fiscal exposure. 3. Determine whether to budget or provision for residual risks. 4. Determine whether additional fiscal space is needed. 5. Report fiscal risks. - Reporting practice: - Governments should regularly publish a Fiscal Risk Statement (FRS) at least annually to assess aggregate exposures, identify interactions, and strengthen accountability. - Box 1 (Outline of a Comprehensive FRS) lists components: macroeconomic risks, public debt sensitivity, government lending programs, guarantees, PPPs, public corporations, state and local governments, financial system exposures, natural disasters, legal claims, and other material fiscal risks. - Recommendation 1 (explicit): - Develop systematic identification, quantification, analysis, monitoring, management and reporting of central government fiscal risks. - Short term: produce a FRS as part of the mid-year budget review with high-level assessment of most significant fiscal risks. - Annually: produce comprehensive FRS covering contingent liabilities in central government, PEs and PPPs; expand coverage over time. - Include in legal/regulatory framework requirement to prepare a FRS to inform fiscal policy and budget allocation decisions. ### Public Entities (PEs) — scale, structure, indicators and fiscal implications - Sector scale and classification: - Current PE sector comprises 71 entities (number based on current definition and may change). - Sectoral concentration: PEs in energy, transport, communications, water, education, and financial sectors account for more than 90 percent of the entities’ assets. - Employment: PEs provide over 5 percent of total employment in the country. - Classification of the 71 entities: 38 non-commercial; 22 commercial; 11 financial institutions. - Aggregate sector size and fiscal exposures (exact figures reported): - Total assets of PEs: 52 percent of GDP. - Total liabilities of PEs: 25 percent of GDP. - Liabilities of non-commercial PEs (reported as part of general government): 5 percent of GDP. - PEs receive subsidies amounting to about 7 percent of current budget expenditure per year. - Loan guarantees provided by government: 6 percent of GDP. - Table 2 key indicators (by category): - Number of entities: Non-commercial PE 38 | Commercial PEs 22 | Financial institutions 11 - Employees: 5,583 | 11,475 | 483 - Subsidies in percent of current expenditure: 4.9 | 1.7 | 0.1 - Liabilities in percent of GDP: 5 | 16 | 4 - Guarantees in percent of GDP: 0.2 | 3.1 | 1.7 - How fiscal risks materialize from PEs: - Lower dividends and taxes from PEs. - Increased need for subsidies or recapitalization. - Unanticipated calls on PE-related government guarantees. - Indirect macroeconomic impacts and changes in government net worth. - Two-step risk assessment approach: 1. High-level screening with key financial indicators to identify vulnerable entities. 2. In-depth assessment for high-risk and macro-critical entities (additional ratios, sensitivity/scenario analysis, stress testing, qualitative factors). - Concentration of risk: - At least 5 of the 10 entities with the largest liabilities are likely to pose high fiscal risk. - The 10 largest entities account for close to 80 percent of PE liabilities and more than 90 percent of government guaranteed debt. - Specific entity issues (selected): - Nampower: 2016 performance negatively impacted by higher costs of power imported from Mozambique; costs recovered through adjusted tariffs; performance recovered in 2017. - Nampost: deposit-taking activities create potential liquidity risk; low capitalization. - UNAM: substantial debt and dependence on government for close to 75 percent of its revenue; liquidity deteriorated and arrears accumulated during 2014/15. - Telecom: liquidity risk with high trade payables relative to cash and receivables. - Transnamib: technically insolvent; operational losses; accumulated long-overdue arrears. - Air Namibia: no financial reports since 2012; indications of technical insolvency, operational losses, and low liquidity; government servicing aircraft leases. - Aggregate trends and implications: - Non-commercial PEs accumulating arrears and debt due to budget cuts not matched by activity reductions and allocation of new policy responsibilities without funding. - Commercial PEs’ financial position deteriorating in aggregate; inability to operate profitably and large project exposure increase fiscal risk. - Recommendation: non-commercial public policy activities undertaken by commercial PEs on behalf of government should be funded directly from the government budget. - Restructuring: delays in restructuring non-viable PEs will continue to deplete fiscal resources; realistic restructuring plans for Transnamib and Air Namibia need swift conclusion. - High-level financial indicators used in assessment (Box 4): - Financial dependence (Binary: No / Yes). - Profitability — Return on equity thresholds: >15% ; 8% - 15% ; 0% - 8% ; -10% - 0% ; <-10%. - Solvency — Debt ratio thresholds (liabilities to assets): <30% ; 30% - 50% ; 50% - 80% ; 80% - 100% ; >100%. - Debt servicing — Debt to EBITDA thresholds: <1.5 ; 1.5 - 2 ; 2 - 3 ; 3 - 5 ; <5. - Liquidity — Current ratio thresholds (current assets to current liabilities): >2 ; 1.5% - 2 ; 1.2 - 1.5 ; 1 - 1.2 ; <1. - Source for thresholds: Standard & Poor’s Rating Services Corporate Methodology and staff analysis. - Recommendations for PEs (explicit): - Recommendation 2: Strengthen information base, analysis, monitoring, management, and reporting of fiscal risks from PE. - MoF to agree information requirements with MoPE for inclusion in PEMES. - MoF to collect up-to-date annual financial reports and strategic plans for at least the ten entities with highest liabilities and any entities receiving government guarantees. - Undertake high-level and detailed assessments of high-risk and macro-critical entities; implement restructuring plans where required. - Strengthen accounting and auditing to ensure timely and reliable PE information. - Recommendation 3: Include information on fiscal risks from PEs in the FRS or, initially, in the mid-year budget review. - Include portfolio overview, review of each high-risk and macro-critical entity, details on budget support, quasi-fiscal activities, contingent liabilities, risk assessment and mitigation measures. - Recommendation 4: Enforce oversight powers requiring PEs to submit audited financial statements; build accounting and auditing capacity. - Recommendation 5: Amend legislative framework to strengthen MoF’s fiscal oversight role (powers to obtain plans/statements, regulate borrowing/contingent liabilities, require compensation for quasi-fiscal activities, statutory requirement to report on PEs in FRS). - Recommendation 6: Assign PE monitoring function within MoF and build capacity (experts in financial analysis, corporate governance, corporate finance, law and sector knowledge). - Recommendation 7: For statistical reporting, classify all public entities in line with GFSM. - Recommendation 8: Delineate commercial and quasi-fiscal activities; migrate funding of quasi-fiscal activities to the budget; set financial performance targets and monitor. - Recommendation 9: Report key financial information on government entities in the budget documentation (Budget 2019/20 reference). - Recommendation 10: Ensure non-budgetary government entities do not accumulate debt; instruct ministries to align business and financing plans and prohibit borrowing by government entities. ### Public-Private Partnerships (PPPs) — current use, pipeline, fiscal exposures, and tools - Current PPP usage and pipeline: - PPP investment to date accounts for about 0.2 percent of GDP; limited use to date (energy, water & sewerage, housing to lesser extent). - Notable projects (reported investment amounts as of December 2017): - Rosh Pinah PV Plant 2017 Electricity 134 M NAD — Risks: Termination clauses, force majeure — Level: Public entity. - Karibib Solar Power Plant 2017 Electricity 126 M NAD — Risks: Termination clauses, force majeure — Level: Public entity. - Northern Electricity 1996 Electricity 24 M NAD — Not assessed — Level: Public entity. - Reho-Electricity 2000 Electricity 6.0 M NAD — Not assessed — Level: Public entity. - Goreangab Water Plant 2001 Water & sewerage (entry truncated). - PPP pipeline includes projects in energy, housing, water, and transport; a large energy project under evaluation: "135 MW Concentrated Solar Power project" with an estimated investment of 10 billion NAD (about 7.0 percent of GDP). - Total listed projects sample: Total 267 M NAD (with itemized entries such as 0.5 M NAD and 80 M NAD for housing in 2012 in the source table). - Information gaps and institutional arrangement status: - No central database records total fiscal commitments (direct and contingent) under PPPs; PPP Law (2017) allows PPP unit at MoF to compile data but database development is early. - Financial information on existing PPP projects is limited; current budgeting/accounting practices do not support PPP transaction compilation. - PPP unit (created 2015) verifies cost-benefit, value-for-money, and provides opinions on fiscal affordability, but implementation challenges remain. - PPP Act approved on July 14, 2017; regulations being drafted; expected effect from beginning of 2018/19 budget year. - Types of fiscal impacts from PPPs: - Direct liabilities (fiscal costs): - Upfront viability gap payments — Expenditures, increase in deficit; increase gross debt (or reduce cash). - Availability payments — Expenditures, increase in deficit; increase gross debt and government non-financial assets same amount (construction value). - Output-based payments — Expenditures, increase in deficit. - Contingent liabilities (fiscal risks): - Guarantees (exchange rate, debt, minimum revenue) — Expenditure only if called; no change in gross debt when contingent. - Force majeure and termination payments — contract-dependent fiscal exposures. - Other risks: governance risks and weak public investment management. - Six-step PPP evaluation process proposed for Namibia: 1. Verify project rationale. 2. Estimate government exposure. 3. Check fiscal space. 4. Develop risk management and mitigation measures. 5. Ascertain fiscal affordability. 6. Accommodate residual risks. - Quantification approaches and tools: - PFRAM used to assess UNAM’s hostel student accommodations (in operation) and CSP 135 MW plant (concept level). - Approaches: - Maximum exposure (face value) when likelihood = certain. - Expected fiscal exposure = fiscal impact times likelihood (probabilistic weighting). - Methods for quantifying fiscal implications (summary): - Fiscal costs (viability, availability, output payments): Present value of annual payments over project life; Likelihood: Certain (probability = 1). - Guarantees: Scenario analysis (present value under alternative scenarios); Probabilistic analysis (expected value via stochastic simulations); Option-valuation techniques (estimate probability of default). - Termination payments: Maximum value of termination payment under baseline assumptions; Likelihood contract dependent. - PPP ceiling design guidance: - Namibia lacks specific ceiling for PPP fiscal exposure; existing legal ceiling (10 percent of GDP) applies only to government loan guarantees and does not cover all PPP contingent liabilities. - Recommended features: - Coverage of all PPPs regardless of funding structure. - Integration with existing contingent-liability ceiling; possibly a "sub-ceiling" for PPPs. - Target: set PPP ceiling on stock of total fiscal costs (direct liabilities) and risks (contingent liabilities) as percent of GDP; consider ceiling on total government payments related to PPPs as percent of total revenues if portfolio becomes government-funded. - Valuation: set ceilings on maximum exposure accompanied by sensitivity analysis to main risk drivers (e.g., GDP, contract triggers). - Disclosure: publish maximum exposure and sensitivity analysis with budget documents. - Institutional note: PPP unit should participate in design but should not set the ceiling to avoid conflicts of interest; assign responsibility to different MoF unit. - Simpler scenario-based methods recommended given data limitations. - Recommendations for PPP governance and management (numbered): - Recommendation 11: Introduce six-step process as basis for informed decision-making; link to integrated public investment and budget framework; take stock of existing PPPs and pipeline; agree assessment process. (MoF, PPP Unit) - Recommendation 12: Estimate government exposure to fiscal risks and costs from current PPP portfolio; use PFRAM to identify and quantify costs and risks. (MoF PPP Unit) - Recommendation 13: Design a PPP ceiling and integrate with broader government contingent-liability ceiling; discuss within MoF and present to Cabinet. (MoF, PPP Unit, Cabinet) - Recommendation 14: Develop and approve a risk management and mitigation strategy for PPP fiscal costs and risks; summarize current practices, approve overall strategy and issue directives. (MoF, PPP Unit) - Recommendation 15: Check fiscal affordability of PPP proposals by comparing estimated fiscal costs/risks against procuring entity’s fiscal envelope; compile PPP database and disclose within budget documents; develop PPP chapter in FRS. ### Legal, institutional and procedural weaknesses — MoF role and oversight gaps - Inadequate legal powers and fiscal oversight by the MoF: - MoF lacks statutory powers to obtain necessary information from PEs to assess/monitor fiscal risks. - MoF lacks key instruments: joint involvement in approving strategic plans; setting performance targets; being party to governance/performance agreements; regulating mergers/acquisitions and major transactions; determining dividends; appointing/removing board members. - Recommendation: include MoF’s strengthened oversight powers in PEGA or PFM bill and embed them in legislation rather than regulations/policy. - Weak implementation and information shortfalls: - Up-to-date audited annual financial statements unavailable for many PEs. - Recommendation 4: Enforce existing legal requirements for PEs to submit audited financial statements; build accounting/auditing capacity. - Tripartite agreements being concluded by MoPE could be expanded to include MoF; MoPE should collect and share information with MoF in the interim. - Institutional arrangements within MoF: - Asset, Cash and Debt Management (ACDM) department currently oversees seven PEs (financial institutions); reviews reports but not comprehensive financial analysis. - Recommendation 6: Assign PE monitoring function within MoF and build capacity (financial analysis, governance, corporate finance, law, sector expertise). - Budgeting, accounting and reporting: - Distinguish between public corporations and government entities for budgeting/accounting/reporting to improve fiscal management. - Government entities should not be allowed to run deficits, accumulate debt or arrears; integrate them into budget process. - Public corporations’ quasi-fiscal activities should be clearly delineated; costs of such activities should be transparently included in and funded from the budget. ### Transparent accounting and reporting for PPPs — IPSAS 32, current bias, and reform steps - Key points: - Transparent accounting and reporting systems are central to effective risk management; cash accounting can underestimate fiscal costs and risks from PPPs, especially during construction. - International standards: - IPSAS 32 "Service Concession Agreements: The Grantor" (2011) sets best practice for accounting PPP operations. - IMF’s Government Finance Statistics Manual 2014 (GFSM 2014) and PSDS 2011 prescribe best practice for reporting. - IPSAS 32 expectations: - Covers both government-funded and user-funded PPP contracts. - Under IPSAS 32 most PPP contracts would result in assets and liabilities being regarded as belonging to the government when: (i) the grantor controls/regulates services provided, to whom and at what price; and (ii) the grantor controls significant residual interest in the asset at the end of the term. - If conditions met, both deficit and gross debt would be affected during construction as in publicly financed projects. - Current practice in Namibia: - Public sector accounting and statistical practices not fully aligned with IPSAS 32 and GFSM 2014; all existing PPPs being accounted off-budget, contributing to a PPP bias. - Recommended actions: - Compile information on fiscal costs/risks of PPPs and disseminate in FRS. - PPP unit to publish forecasts of future cash flows under existing/planned PPPs and ensure inclusion in medium- and long-term fiscal projections and debt sustainability analysis. - Migrate over time toward IPSAS and GFSM 2014 adoption for accounting and statistics. - Specific recommendations (numbered): - Recommendation 16: Strengthen legal and regulatory framework to include guidelines for contract termination, ceilings to contract amendments, accounting/reporting guidance for PPPs, and consistency checks between draft PFM law, PPP Act, and regulations. - Recommendation 17: Access PPP projects within PIM framework and budget process; separate PPP promotion from monitoring; integrate new PPPs with PIM and budget process. ### Debt portfolio vulnerabilities and macro sensitivity (selected points) - Deviations in macroeconomic parameters from forecasts will impact government debt and debt servicing obligations. - Noted vulnerabilities: - Susceptibility to a decline in SACU revenue. - Non-rand debt reaching [32] percent of total debt (text placeholder), increasing exchange rate exposure. - Short-term debt comprises [42] percent of domestic debt and [27] percent of total debt (text placeholders). - External debt increasing (noted as reading [xx] percent in 2016/17 in source—placeholder). - Portfolio features: - Impact of changes in real interest rates considered small due to a sizeable share of fixed-rate debt. - Mitigation: diversifying funding sources and instruments, extending maturities, issuance in international capital markets. - Public enterprises and fiscal linkages: - As at [31 March 2016], the ten largest PEs’ liabilities totaled NAD[31.4] billion and account for approximately [80] percent of total PE liabilities (placeholders in some narrative sections retained from source). - Aggregate financial results for largest PEs (2014–2016) — selected exact figures: - Revenue (NAD): 2014: 3,967,840,000; 2015: 4,480,514,000; 2016: 5,005,992,000 - Net profit after tax (NAD): 2014: 616,379,000; 2015: 531,247,000; 2016: (296,388,000) - Growth in revenue: 2014: 20.03%; 2015: 12.92%; 2016: 11.73% - Growth in costs: 2014: 21.24%; 2015: 19.28%; 2016: 42.20% - EBITDA margin: 2014: 26%; 2015: 21%; 2016: 5% - Operating costs to revenue: 2014: 34%; 2015: 34%; 2016: 47% - Return on capital: 2014: 4.65%; 2015: 3.85%; 2016: -1.59% - Equity (NAD): 2014: 13,262,833,000; 2015: 13,807,725,000; 2016: 18,584,930,000 - Liabilities (NAD): 2014: 9,805,094,000; 2015: 9,908,100,000; 2016: 11,648,273,000 - Current Ratio: 2014: 3.40; 2015: 3.12; 2016: 6.24 - Debt ratio (Debt to assets): 2014: 43%; 2015: 42%; 2016: 39% - Interest Coverage: 2014: 0.82; 2015: 1.02; 2016: -1.09 - Debt to EBITDA: 2014: 2.55; 2015: 2.62; 2016: 10.09 - Selected entity financial data (UNAM and Transnamib) reported exactly where available (see above section for UNAM and Transnamib tables and indicators). ### International example — Annex III and Annex VIII: Colombia experience (lessons and instruments) - Colombia reforms after 1999–2002 crisis: - Identified main sources of fiscal risk: natural disasters; legal proceedings against the state; debt guarantees; PPP guarantees (infrastructure, transport, electricity). - Institutional reforms: defined procedures for identification/recording of fiscal risks; created comprehensive, permanently updated contingent liabilities databases; MoF mandated to review all contracts with potential contingent liabilities. - Risk assessment methodologies: probabilistic models estimating expected costs (gross exposure × probability) used to determine contract viability and required commitments. - Mitigation strategies: - Natural disasters: appropriations for infrastructure strengthening, increased insurance, contingent credit lines, CAT bonds. - Debt guarantees and PPPs: state contingency fund with entity contributions based on MoF risk assessment. - Legal contingencies: budget appropriations for expected payouts. - Legal and disclosure reforms: Fiscal Responsibility Law (2003) requires 10-year rolling forecast with contingent liabilities detail; 2012 PPP Law requires assessment and valuation of all contingent liabilities. - Colombia’s “Vigencias Futuras” (VF) instrument (Annex VIII): - VF: budget instrument allowing MoF to guarantee resources beyond the budget year to complete public investment or multiannual programs in a cash budget system. - VF features: - Three VF types based on amount committed in first year, number of commitment years, and PPP status. - Strategic/fiscal consistency validated by two councils: CONFIS (headed by MoF) and CONPES (headed by President). - VFs for PPP annuities can extend up to 30 years. - Total VF committed amount could increase up to a ceiling of 0.4 percent of GDP by 2020 and forward (in the Colombian example). - VF information integrated in MTFF and disclosed in MoF and National Planning Department information systems. - Relevance: VF demonstrates how a cash-budget country can record long-term PPP commitments and manage fiscal exposure through controlled, disclosed multi-year commitments. *Source: cr18258.* ### PREFACE ................................................................................................................ ### PREFACE ### Mission objectives and activities - At the request of the Ministry of Finance (MoF) of Namibia, a mission of the IMF’s Fiscal Affairs Department (FAD) visited Windhoek during January 17–31, 2018 to analyze main sources of fiscal risks, notably Public-Private Partnerships (PPPs) and Public Entities (PEs), and advise on options for better monitoring, managing and reporting these risks. - The mission was led by Carolina Renteria (FAD Division Chief) and included Isabel Rial, Avril Halstead (all FAD), Katja Funke, and Malcom Pautz (external experts). - Activities delivered: - A workshop presenting international experiences on managing fiscal risks, with special focus on PPPs and PEs, to a broad range of public officials of the Ministry of Finance, Ministry of Public Enterprises and a number of large PEs. - Training in the use of the IMF-World Bank PPP Fiscal Risk Assessment Model (PFRAM). - Training in a two-step methodology for assessing the likelihood of fiscal risks materializing from PEs, provided to pertinent staff members. ### High-level meetings and consultations - The mission met with: - Mr. Carl HG Schlettwein, Minister of Finance - Ms. Ericah B. Shafudah, Permanent Secretary of Finance - Andreas Penda Ithindi, and Maru Tjihumino, Deputy Permanent Secretaries of Finance - Ms. Louise Shixwameni, Deputy Permanent Secretary of the Ministry of Public Enterprises - Discussions were held with officials at the Ministry of Finance, including: - Mr. Saurabh Suneja, Head of the PPP Unit, and his team - Ms. Angelina N. Sinvula, Director of the Asset, Cash, and Debt Management Department, and her team - Other high-level officials from the Ministry of Finance, Ministry of Public Enterprises, the National Planning Commission, and the City of Windhoek - The mission also met representatives from Nampower, Transnamib, Air Namibia, UNAM, DBN, Agribank, and the Roads Fund Administration. - Representatives of donors met included the European Union and the US Treasury. ### Acknowledgements and support - The mission thanks government officials for their cooperation, hospitality, and time. - Special thanks to: - Ms. Rauna Mukumangeni - Mr. Johannes Shipepe - Ms. Monika Uandara for organizing the mission schedule and close cooperation throughout. - This technical assistance was provided with financial support from AFRITAC South. *IMF Fiscal Affairs Department mission report (Preface).* ### 1. Namibia has experienced a period of strong growth and economic stability, but ### 1. Namibia has experienced a period of strong growth and economic stability, but faces policy challenges and structural issues. ### Economic and fiscal developments - Real growth slowed to 1.0 percent in 2016. - Fiscal deficit increased from 4.3 percent in 2014/15 to 10.3 percent of GDP in 2015/16. - Public debt stock reached 44.2 percent of GDP, including NAD3.9 billion in domestic arrears (2.4 percent of GDP), increasing gross financing needs. - Moody’s and Fitch lowered Namibia’s sovereign credit rating to below investment grade, reflecting: expectations of a decline of SACU revenues, persistent high fiscal deficits, and a public debt expected to approach 70 percent of GDP by 2022. - The 5th National Development Plan (NDP5), to be implemented between 2017/18 to 2021/22, includes an ambitious infrastructure expansion and modernization program relying on development budget, PPP, PE, and private investments and projects such as Trans-Kalahari, Trans-Kunene and Trans-Zambezi transport corridors. ### Fiscal policy response and fiscal risks - Authorities implemented a consolidation program, but deficits and debt remain high due to: late-year reductions in non-wage current expenditures and public investment, high budget inflexibility, and persistent wage and capital spending pressures. - Use of Public Entities (PEs) and Public-Private Partnerships (PPPs) to overcome budget constraints has increased fiscal risks and added explicit and implicit contingencies. - Recent practices include PEs being used to clear central government arrears, with extra-budgetary operations backed by government guarantees. - Initial quantification of explicit contingent liabilities (CL) includes: - Loan guarantees to state-owned entities equating to 4.3 percent of GDP. - Guarantees for housing loans to public employees. - PPP guarantees. - Lack of timely and reliable information on contingent liabilities, poor publishing of regular annual reports and financial statements, and weak legislative compliance by state-owned entities make identification, quantification, mitigation, management and reporting difficult. ### Fiscal exposure and macro-fiscal context - Developments have increased Namibia’s fiscal exposure, adding to macro-fiscal and financial risks. - Article IV and FSAP identified macroeconomic, fiscal policy and financial risks including: - Domestic macroeconomic risks: slower recovery in mining and construction, housing market corrections, and financial sector vulnerabilities. - External macroeconomic risks: declines in SACU revenue, lower demand for key exports, subdued commodity prices, and tighter global financial conditions. - Slippages in fiscal policies: a consolidation of about 2 percent of GDP per year is expected; absent measures, the fiscal deficit projected to continue growing to around 9–10 percent of GDP. - Public debt dynamics: without consolidation, public debt would continue rising and approach 70 percent of GDP by 2022, and government’s gross financing needs would average about 21 percent of GDP per year. - Financial risks: weak demand, decelerating private credit, house price declines, elevated household indebtedness, and risks to bank asset quality. ### Historical evidence on fiscal risk realizations (summary points) - Macroeconomic shocks: relatively frequent; public finances typically hit by their occurrence every 12 years with an average fiscal cost equivalent to around 9 percent of GDP. - Fiscal risks from the financial sector, natural disasters and public corporations were also significant. - Different sources of fiscal risks show different patterns of occurrence and costs. --- ### Fiscal risk management and the Fiscal Risk Statement (FRS) - Fiscal risks are factors that may cause fiscal outcomes to deviate from forecasts; they include explicit liabilities (e.g., government loan guarantees) and implicit liabilities (e.g., public expectation of bailouts). - Managing fiscal risks involves five stages: 1. Identifying sources of fiscal risks and assessing magnitude and likelihood. 2. Deciding mitigating steps to reduce fiscal exposure. 3. Determining whether to budget or provision for residual risks. 4. Determining whether additional fiscal space is needed. 5. Reporting fiscal risks. - Governments should regularly publish a Fiscal Risk Statement (FRS) at least annually to assess aggregate risk exposures, identify interactions between risks, and strengthen accountability. - Box 1 (Outline of a Comprehensive FRS) identifies components to be covered, including macroeconomic risks, public debt sensitivity, government lending programs, guarantees, PPPs, public corporations, state and local governments, financial system exposures, natural disasters, legal claims, and other material fiscal risks. ### Namibia’s institutional progress and gaps - Positive initiatives: - A legal framework for governing public entities and PPPs has been issued. - Initiative to reform the State Finance Act and develop a PFM Act. - Limits on contingent liabilities from loan guarantees have been issued. - Creation of the Ministry of Public Enterprises and the PPP unit in the MoF in 2015. - The PPP Act was approved on July 14, 2017. - Gaps and needs: - MoF needs to list and quantify all potential fiscal risks as an initial step toward producing a FRS. - Capacity constraints in generating realistic macroeconomic forecasts were noted by a 2017 AFRITAC South TA mission; developing macro-forecasting and macro-fiscal risk analysis capacity will require time and close MoF–Bank of Namibia cooperation. - Time is required to identify and quantify specific contingent liabilities; initial Article IV analysis identified loan guarantees, housing guarantees for public employees, and PPP guarantees (mainly for local governments) as main explicit contingent liabilities. - Better understanding, quantification and reporting of CLs and analysis of historical deviations are necessary. Given PEs and PPPs are potential major sources of fiscal contingencies, methodologies for managing and mitigating these risks are developed in subsequent sections. --- ### Public Entities (PEs) — scale and structure - Current PE sector comprises 71 entities (number based on current definition and may change). - Sectoral concentration and employment: - PEs in energy, transport, communications, water, education, and financial sectors account for more than 90 percent of the entities’ assets. - PEs provide over 5 percent of total employment in the country. - Classification of the 71 entities: - 38 are classified as non-commercial. - 22 as commercial. - 11 as financial institutions. - PEs are owned and supervised by several portfolio ministers, with the largest entities under the Ministers of Mines and Energy, Works and Transport, Information and Communication Technology, and Finance. --- ### Recommendations (explicit) Recommendation 1. Develop systematic identification, quantification, analysis, monitoring, management and reporting of central government fiscal risks. - Identify principal sources for macroeconomic, fiscal policy, financial and specific fiscal risks. - Undertake initial quantification, scenario and sensitivity analysis. - Define risk mitigation and management strategies. - In the short term, produce a FRS as part of the mid-year budget review providing a high-level assessment of the most significant fiscal risks. - Produce annually a more comprehensive FRS reporting in more detail on contingent liabilities in the central government, PE’s and PPPs; over time, expand it to cover other risks. - Include in the legal or regulatory framework the requirement to prepare a FRS, so that it can be used to inform fiscal policy and budget allocation decisions. *IMF staff report content (Article IV Staff Report consultation and related analysis).* ### Box 3. Terminology ### Box 3. Terminology ### Definitions and classification - In Namibia, "public enterprises" refers to companies that are wholly or majority owned by the state and other entities established under law or listed in Schedule 1 of the Public Enterprises Governance Act (PEGA). - Draft amendments to the PEGA propose distinguishing between: - Commercial public enterprises: provide a product or render a service and have the potential to generate a sustainable profit. - Non-commercial public enterprises: the remaining public enterprises not meeting the commercial definition. - The Government Financial Statistics Manual (GFSM) defines: - Public corporations: legal entities controlled by the government that are engaged in market production (provide all or most of their output at economically significant prices) and which are capable of generating a profit. Capability to generate a profit is based on whether the company is able to cover at least half of its operating costs with revenues (excluding subsidies). If unable to do so for three or more years, it would not be classified as a public corporation for statistical reporting purposes. - Financial public corporations: those principally engaged in financial sector activities. - Nonfinancial public corporations: all other public corporations. - Terminology used in this report: - "Government entities": all entities controlled by the government but which do not meet the criteria to be classified as public corporations. - "Public entities": collective term for government entities and public corporations. _Source: PEGA Namibia, GFSM_ ### Size and key indicators of Namibia’s PE sector - Aggregate sector size and fiscal exposures: - Total assets of PEs: 52 percent of GDP. - Total liabilities of PEs: 25 percent of GDP. - Liabilities of non-commercial PEs (reported as part of general government): 5 percent of GDP. - PEs receive subsidies amounting to about 7 percent of current budget expenditure per year. - Loan guarantees provided by government: 6 percent of GDP. - Table 2. Namibia: Key Indicators of the PE Sector - Non-commercial PE | Commercial PEs | Financial institutions - Number of entities: 38 | 22 | 11 - Employees: 5,583 | 11,475 | 483 - Subsidies in percent of current expenditure: 4.9 | 1.7 | 0.1 - Liabilities in percent of GDP: 5 | 16 | 4 - Guarantees in percent of GDP: 0.2 | 3.1 | 1.7 - Data provenance: - Data on PEs provided by the MoPE from the Public Enterprises Management and Evaluation System (PEMES). - Financial statements used correspond to years: 2012 (1), 2013 (1), 2014 (6), 2015 (11), and 2016 (31). - For 19 entities, financial data was not available. ### How fiscal risks from PEs materialize - Fiscal risks occur when funding requirements are higher than expected or revenue shortfalls occur, including: - Lower dividends and taxes from PEs. - Increased need for subsidies or recapitalization. - Unanticipated calls on PE-related government guarantees. - Indirect impacts through influence on the economy. - Changes in valuation of PE balance sheets affecting government net worth. ### Preliminary high-level risk assessment approach and findings - Overall approach: - Two-step process: (1) high-level screening using key financial indicators to identify vulnerable entities; (2) in-depth assessment for high-risk and macro-critical entities including additional ratios, sensitivity and scenario analysis, stress testing, and qualitative factors. - High-level indicators examine need for fiscal support and assess profitability, solvency, and liquidity. Financial independence is a yes/no metric; other indicators are rated as sound, low risk, moderate risk, high risk, or very high risk. Consolidated into an overall risk-rating of high, medium, or low. - Concentration of risk: - At least 5 of the 10 entities with the largest liabilities are likely to pose high fiscal risk. - These 10 entities account for close to 80 percent of PE liabilities and more than 90 percent of government guaranteed debt. - Recommended follow-up: - Undertake in-depth analysis of high-risk and macro-critical entities to examine a wider set of ratios, historical trends, forward-looking projections, and qualitative factors; this may change preliminary risk ratings. - Information needs: - Additional information from line ministries, regulators, industry bodies, and meetings with PE management for deeper assessment. ### Specific entity findings and drivers of financial condition - Notable issues identified from meetings and additional analysis: - Nampower: - 2016 performance negatively impacted by higher than anticipated costs of power imported from Mozambique to ensure energy security. - Costs being recovered through adjusted electricity tariffs. - Performance recovered in 2017. - Nampost: - Deposit-taking activities provide a cost-effective but short-term source of funding, creating potential liquidity risk. - Low level of capitalization compared to other deposit-taking institutions. - University of Namibia (UNAM): - Substantial debt and dependence on government for close to 75 percent of its revenue. - Liquidity deteriorated and arrears accumulated during 2014/15 despite an increase in the government subsidy; situation worsened when subsidies were reduced. - Telecom: - Liquidity appears to be a risk with high levels of trade payables relative to cash and receivables. - Transnamib: - Technically insolvent; recorded operational losses because revenues (including government subsidies) were insufficient to cover high fixed cost base. - Accumulated long-overdue arrears. - Air Namibia: - No financial reports since 2012. - Indications of technical insolvency, operational losses, and low liquidity. - Government is servicing the company’s aircraft leases. ### Aggregate trends and implications - Non-commercial PEs: - Accumulating arrears and debt primarily due to: - Budget cuts not accompanied by commensurate scaling back of entity activities (e.g., UNAM). - Allocation of new policy responsibilities without adequate budget funding (e.g., Namwater). - Commercial PEs: - Financial position deteriorating in aggregate, increasing likelihood of fiscal risks materializing. - Contributing factors: - Inability to operate profitably in highly competitive sectors (e.g., Air Namibia). - Tasking of PEs with large projects exposing them to significant risk (e.g., Development Bank of Namibia). - Policy implication: non-commercial public policy activities undertaken by commercial PEs on behalf of government should be funded directly from the government budget. - Restructuring: - Delays in restructuring non-viable PEs likely to continue depletion of fiscal resources. - Realistic restructuring plans for Transnamib and Air Namibia need to be concluded swiftly; credibility depends on alignment of policy and fiscal considerations. - Strategic decisions required in the energy sector regarding sector evolution and role of Nampower. ### High-level indicators used in the initial assessment (Box 4) - The high-level assessment is based on five key financial indicators: - Financial dependence: indicates whether the company depends on fiscal support from the Government through subsidies, equity, loans, guarantees to continue operating. (Binary: No / Yes) - Profitability — Return on equity thresholds: - >15% - 8% - 15% - 0% - 8% - -10% - 0% - <-10% - Solvency — Debt ratio thresholds (liabilities to assets): - <30% - 30% - 50% - 50% - 80% - 80% - 100% - >100% - Debt servicing — Debt to EBITDA thresholds: - <1.5 - 1.5 - 2 - 2 - 3 - 3 - 5 - <5 - Liquidity — Current ratio thresholds (current assets to current liabilities): - >2 - 1.5% - 2 - 1.2 - 1.5 - 1 - 1.2 - <1 - Source for thresholds: Standard & Poor’s Rating Services Corporate Methodology and staff analysis. - Note: A broader set of financial ratios should be used for an in-depth assessment during the second step. ### Risk-based monitoring framework and reporting - Risk monitoring: - The size of potential government impact is estimated based on the quantum of the PE’s outstanding liabilities. - PEs with a high-risk rating and a large potential impact should receive intensive supervision; smaller, lower risk entities require a lower level of monitoring. - Reporting recommendations: - Government should regularly publish a Fiscal Risk Statement (FRS), providing an assessment of their PE portfolio, at least annually as a chapter of a more comprehensive FRS. - Typical contents of a PE FRS: - Details on all direct and indirect support between the government and public corporations. - Report on overall financial performance of the PE sector. - Fiscal risk assessment. - Financial analysis of individual macro-critical and high-risk entities. - PE section of the FRS usually prepared by the MoF in collaboration with key ministries or agencies responsible for PE oversight (e.g., MoPE). FRS often complemented by a detailed report on public corporations. - A draft of an illustrative FRS for Namibia is provided in Annex 2. ### Key policy recommendations (Recommendations 2 and 3) - Recommendation 2. Strengthen information base, analysis, monitoring, management, and reporting of fiscal risks from PE. - MoF to agree information requirements with MoPE for inclusion in the Public Enterprises Management and Evaluation System being developed by the MoPE. - Meanwhile, MoF to collect up-to-date annual financial reports and strategic plans, at least for the ten entities with the highest liabilities and any entities receiving government guarantees. - Undertake a high-level assessment of fiscal risks and a detailed assessment of high-risk and macro-critical entities. - Deepen the understanding of critical entities and take action to manage and mitigate risks, including implementing restructuring plans. - Produce risk assessments and mitigation measures for PE; include them in the Fiscal Risk Statement report. - Strengthen accounting and auditing to ensure availability of timely and reliable PE information. - Recommendation 3. Include information on fiscal risks from PEs in the FRS, or, initially, in the mid-year budget review. - Include an overview of the portfolio performance and a review of each high-risk and macro-critical entity, with details on budget support and transactions with government, quasi-fiscal activities, contingent liabilities, a risk assessment and mitigation measures. ### Institutional models and legal framework - Institutional models for PE oversight: - Centralized model: shareholder and fiscal oversight functions located within a central ministry; policy making remains with line ministry. - Decentralized model: shareholder and fiscal oversight responsibilities separated; fiscal responsibilities remain with MoF; shareholder responsibilities may be centralized or vested in different ministries (often policy ministry). - OECD recommends separating policy making and shareholding responsibilities. - Namibia’s current model and proposed amendments: - Current: decentralized model with shareholder responsibilities exercised by line Ministers; Minister of Public Enterprises advises line Ministers. MoF’s role largely limited to issuance of contingent liabilities. - Proposed amendments: hybrid model where Minister of Public Enterprises acts as shareholding minister for all commercial entities; shareholding responsibilities for non-commercial entities remain with relevant line Ministers; Minister of Public Enterprises retains advisory capacity. - Legal framework highlights: - State Finance Law governs PFM, including budgeting and issuance of contingent liabilities. - PEGA clarifies roles and responsibilities of the shareholding ministry, establishes standard oversight framework, and includes provisions for submission of audited financial statements and strategic plans. - Companies Act specifies fiduciary duties of company directors and audit requirements for incorporated public entities. ### 37. However, the current legal framework does not provide adequate financial controls ### 37. However, the current legal framework does not provide adequate financial controls ### Inadequate legal powers and fiscal oversight by the Ministry of Finance (MoF) - The current legal framework does not provide adequate financial controls to enable the monitoring and mitigation of fiscal risks by the MoF. - Fiscal risks may arise from any of the PEs; the MoF needs to exercise fiscal oversight over the entire portfolio of PEs. - Currently, unlike the MoPE, the MoF does not have statutory powers to obtain the necessary information from PEs to assess and monitor fiscal risks that may be arising. - The MoF lacks key instruments helpful for managing identified fiscal risks, including: - joint involvement in approving the strategic plans; - setting the performance targets; - being a party to the governance and performance agreements; - regulating mergers and acquisitions and other major transactions; - determining dividends; and - appointing and removing board members. - Rather than replicating the ownership function of the shareholder Minister, the MoF’s prime focus is on ensuring fiscal sustainability. By jointly exercising these functions (rather than one Minister acting only as an advisor to the other), the two Ministers would act as an important check and balance on one another. - Box 6 (Role of the MoF in New Zealand) describes an institutional model where the MoF and the relevant policy ministry jointly agree performance targets; public entities submit half-yearly and annual reports to both ministers; and ministers determine dividends payable by the PE based on a proposal from the board. - Appropriate provisions to strengthen the MoF’s role could be included in the PEGA or in the PFM bill; these powers should be embedded in legislation, rather than in regulations or policy statements. ### Weak implementation and information shortfalls - There is weak implementation and enforcement of existing legal provisions. - Up-to-date audited annual financial statements are not available for many PEs. - Comprehensive, clear, reliable, timely, and relevant information on PEs is critical for effective decision making and accountability. - Close coordination must be maintained between the MoF and the MoPE, as well as with the policy ministries and PEs. - Tripartite agreements that the MoPE is concluding with the policy ministries and PEs could be expanded to include the MoF. - In the absence of legal provisions requiring PEs to submit strategic plans and financial statements to the MoF, the MoPE should collect and share information with the MoF; the two ministries could pool resources in capturing and analyzing this information and collaborate in producing the report on PE. ### Recommendations (enforce existing powers; amend legal framework) Recommendation 4: Enforce oversight powers provided by the existing legal framework. - Enforce existing requirements for PEs to submit audited financial statements. - Build public sector accounting and auditing capacity to improve the timeliness and reliability of information relating to PEs provided by PEs, shareholder and policy ministries. Recommendation 5: Amend the legislative framework to strengthen the MoF’s fiscal oversight role in relation to PEs. - Align definitions and procedures prescribed in the PEGA and the PFM bill. - Expand the tripartite agreements and establish institutional structures to enable collaboration and avoid duplication between the MoF, MoPE, policy ministries and PEs. - Public entities should be required to submit to the MoF their strategic plans, audited annual financial statements, in-year monitoring reports and any other relevant information required by the MoF to enable the monitoring of fiscal risks from public entities. - The MoF should be empowered to regulate borrowing, the issuance of contingent liabilities and the sale and pledging of assets by public entities, to limit the implicit contingent liability exposure that this can pose to the fiscus. - The legal framework should provide the MoF with the powers necessary to manage fiscal risks arising from public entities. - Eventually, a statutory requirement that public entities must be compensated for any losses associated with quasi-fiscal activities they are required to undertake (see Section E below for more details). - A legislative requirement for the government to report on public entities in the form of a fiscal risk statement should be provided for in the legal framework. Ideally, the key elements to be reported upon should be specified in law. ### Supporting institutional arrangements within the MoF - The Asset, Cash and Debt Management (ACDM) department of the MoF currently oversees only seven public entities (financial institutions) reporting to the Ministry. - For each of these entities, the department reviews the PEs’ reports and prepare an assessment, but this does not include a financial analysis. - Regular quarterly meetings take place between these PEs and the MoF. - ACDM is also responsible for assessing and maintaining a record of the contingent liabilities that have been issued to public entities. - Many advanced and middle-income countries have established a dedicated monitoring unit within the MoF with responsibility for overseeing PEs. Typical functions include analyzing PEs’ financial plans, setting performance targets, monitoring performance against quarterly and annual financial reports, and advising on dividend policies and requests for funding. Recommendation 6: Assign responsibility for the PE monitoring function within the MoF and build capacity through the provision of training or acquisition of the necessary skills. - Acquire or develop experts in financial analysis, corporate governance, corporate finance and law as well as knowledge of the sectors in which the public entities operate. ### Budgeting, accounting and reporting on Public Entities (PEs) - Distinguishing between public corporations and government entities when budgeting, accounting and reporting contributes to better decision making and fiscal management. - In Namibia, PEs are currently categorized into (i) non-commercial entities; (ii) commercial entities; and (iii) financial institutions. - With some exceptions, this allocation is largely in line with the GFSM categorization of (i) government entities; (ii) public corporations; and (iii) financial public corporations. - The GFSM classification used for reporting of government statistics may differ from how the entities are classified in terms of Namibia’s legal framework. - Based on the GFSM definition, it may be required that PEs like Air Namibia and Transnamib be classified as government entities for statistical reporting purposes. Government entities - To mitigate fiscal risks, government entities should not be allowed to run deficits, accumulate debt or arrears. - Government entities need to be integrated into the budget process and be under the same scrutiny as central government budgetary entities. - Each entity should be reviewed to determine whether they are undertaking an important public function that the government wishes to preserve and whether there is still a sound rationale for this to be done by a separate legal entity. - Existing debt from government entities should be reported; in the absence of integrated government accounting and consolidated reporting, debt should be disclosed in debt or fiscal policy reports or included in a FRS. Public corporations and quasi-fiscal activities - Public corporations may be involved in policy activities not provided on a commercial basis; these activities are termed quasi-fiscal activities. - Examples in the Namibian context include concessional lending by Agribank, and Nampower providing services at prices that are below cost recovery. - Quasi-fiscal activities can generate implicit contingent liabilities and, because they are often not subject to the budget process, impede effective prioritization of government activities. - International good practice suggests: - Commercial activities of public corporations should be required to be financially viable and to provide the government with a return on investment that is in line with private sector conditions; and - Costs of quasi-fiscal activities undertaken by public corporations that are not covered by revenues related to the activity, should ultimately be transparently included in and funded from the budget. Recommendations on classification, quasi-fiscal activities and reporting Recommendation 7. For statistical reporting purposes, classify all public entities in line with GFSM. - The categorization of PEs for statistical reporting purposes, should be in line with GFSM. Recommendation 8. Clearly delineate commercial and quasi-fiscal activities of public corporations and migrate toward funding quasi-fiscal activities through the budget. - The MoF in cooperation with the MoPE should prepare guidelines and issue instructions for separating commercial and quasi-fiscal activities in the public corporations’ business and finance plans, and annual financial statements. - In the medium term, the MoF and the MoPE agree financial performance targets with reasonable returns on commercial activities. They monitor the implementation and agree on actions with public corporations in case of underperformance. - Quantify all quasi-fiscal activities, migrate toward having the costs of these activities funded through the budget and disclose all transfers between government and public corporations. Recommendation 9. Report key financial information on government entities in the budget documentation. - The MoF should provide in the budget information on government entities, including on main financial indicators and on their relation to the budget. (Budget 2019/20) - The MoF should report liabilities from government entities together with debt from budgetary government. - Consolidate government entities as part of the general government. Recommendation 10. Ensure that the activities of non-budgetary government entities do not accumulate debt. - The MoF instructs line ministries and government entities to align government entities’ business and financing plans as to ensure that the costs of the entities are covered from own revenues and budget allocations. - The budget directorate ensure that the business and financial plans of government entities are consistent and that they do not entail a financing gap after transfers included in the line ministry’s budget. This includes the resources needed to repay any outstanding loans of the government entity. - The MoF issues instructions that government entities are not allowed to borrow and monitors their implementation. ### Public-Private Partnerships (PPPs) and fiscal risks - Namibia has not made extensive use of PPPs to procure public infrastructure; total investment in PPPs account for only about 0.2 percent of GDP. - So far, experience in PPPs is limited to a few projects in the energy, water and sewerage sectors, and to a lesser extent in housing. - As of today, the PPP portfolio is not a large source of fiscal costs or risks for government. - Most existing PPPs have taken the form of user-funded contracts (concessions), except in the water and sewerage sector, where contracts are mostly government-funded (i.e., with annuity payments). - All PPP contracts are exposed to fiscal risks arising from contract termination clauses and force majeure, but it is not clear whether these risks are significant in current contracts. - Namibian authorities have begun developing standardized PPP contracts as a way to manage fiscal risks arising from legal contract design. Notable PPP projects and reported investment amounts (as of December 2017) - Rosh Pinah PV Plant 2017 Electricity 134 M NAD — Sources of risks: Termination clauses, force majeure — Level of government: Public entity - Karibib Solar Power Plant 2017 Electricity 126 M NAD — Sources of risks: Termination clauses, force majeure — Level of government: Public entity - Northern Electricity 1996 Electricity 24 M NAD — Sources of risks: Not assessed by the mission — Level of government: Public entity - Reho-Electricity 2000 Electricity 6.0 M NAD — Sources of risks: Not assessed by the mission — Level of government: Public entity - Goreangab Water Plant 2001 Water & sewerage (entry truncated in source) *Source: cr18258 - 37. However, the current legal framework does not provide adequate financial controls* ### 0.5 M NAD Demand, nominal exchange rate, ### 0.5 M NAD Demand, nominal exchange rate, ### PPP pipeline, scale, and potential fiscal impact - Several PPP projects in the pipeline could increase the PPP portfolio and associated risks, including projects in energy, housing, water, and transport. - A large energy project under evaluation: "135 MW Concentrated Solar Power project" with an estimated investment of 10 billion NAD (about 7.0 percent of GDP). - Total listed projects sample: Total 267 M NAD (with itemized entries such as 0.5 M NAD and 80 M NAD for housing in 2012 in the source table). - The WBG-PPIAF database is cited as of January 15, 2018, but may be incomplete or have upload delays. ### Information gaps and institutional arrangements - No central database currently records total fiscal commitments (direct and contingent) under PPPs; the PPP Law (approved in 2017) allows the PPP unit at the MoF to compile data, but database development is at an early stage. - Financial information on existing PPP projects is limited; current budgeting and accounting practices do not support compilation of PPP transaction data. - Namibia does not have an overarching framework to manage fiscal risks from PPPs. Gaps increase the risk of fiscally unsustainable PPP portfolios. - Progress noted: - New PPP Act approved in 2017; regulation being drafted. - PPP unit in the MoF (created in 2015) verifies cost-benefit analysis, value-for-money and provides opinions on fiscal affordability, but challenges remain in implementation. ### Types of fiscal impacts from PPPs (as framed in the source) - Direct liabilities (fiscal costs): - Upfront viability gap payments (capital transfers) — Expenditures, increase in deficit; increase gross debt (or reduce cash). - Availability payments (regular payment conditional to availability) — Expenditures, increase in deficit; increase gross debt and government non-financial assets same amount (construction value of the non-financial asset). - Output-based payments (payments made per unit services) — Expenditures, increase in deficit. - Contingent liabilities (fiscal risks): - Guarantees (e.g., exchange rate, debt, minimum revenue guarantees) — Expenditure only if guarantee is called; no change in gross debt. - Force majeure — can trigger fiscal exposure (contract dependent). - Termination payments — other fiscal risks, contract dependent. - Other fiscal risks include governance risks (e.g., weak public investment management). ### Six-step PPP evaluation process proposed for Namibia's PPP unit - Verify project rationale. - Estimate government exposure. - Check fiscal space. - Develop risk management and mitigation measures. - Ascertain fiscal affordability. - Accommodate residual risks. ### Estimating government exposure and analytical tools - All PPP projects, whether government-funded or user-funded, generate fiscal costs and risks. - Government-funded PPPs: - Flow effects: payments such as viability gap, availabilities, output-based payments typically recorded as government expenditures. - Stock effects: increase government gross debt by amount equal to construction cost of related asset. - Can generate contingent liabilities from contract clauses (force majeure, termination payments) and government guarantees. - User-funded PPPs: - Typically do not require government payments during operation, and may generate revenues (e.g., royalties). - Still exposed to risks: force majeure, termination payments, guarantees if applicable. - Under international accounting standards, under certain conditions user-funded PPPs also generate fiscal costs. - No systematic assessment of Namibia’s PPP fiscal costs and risks has been performed to date. - The PPP Fiscal Risk Assessment Model (PFRAM) was used during the mission to assess: - UNAM’s hostel student accommodations (in operation). - CSP 135 MW plant (concept level). - PFRAM can estimate macro fiscal costs — impact on fiscal deficit, gross and net debt, and stock and flows of contingent liabilities. - Quantification approaches: - Maximum exposure (face value) when likelihood = certain. - Expected fiscal exposure = fiscal impact times likelihood (probabilistic weighting). - Both maximum exposure and expected fiscal exposure are important. ### Methods for quantifying fiscal implications (summary from Table 6) - Fiscal costs (examples): - Gap viability payments, availability payments, output-based payments — Fiscal impact: Present value of annual payments over project life — Likelihood: Certain, probability = 1. - Fiscal risks (examples): - Guarantees — Scenario analysis: Present value of estimated annual payments under alternative scenarios for main risk trigger variables (e.g., GDP, inflation). - Guarantees — Probabilistic analysis: Expected value of estimated annual payments (stochastic simulations). - Option-valuation techniques: Estimate probability of default (structure model). - Termination payments — Fiscal impact: Maximum value of termination payment under baseline assumptions — Likelihood: Contract dependent. ### Practical guidance and recommended design features for PPP ceilings - Namibia lacks a specific ceiling for government fiscal exposure to PPPs. Existing legal ceiling (10 percent of GDP) applies only to government loan guarantees and does not cover all contingent liabilities arising from PPP contracts. - Key features for a potential PPP ceiling (recommended in the source): - Coverage: Cover all PPPs regardless of funding structure (government-funded and user-funded). - Integration: Integrate with existing ceiling on contingent liabilities by: - Maintaining existing ceiling on loan guarantees; - Extending coverage to include all government contingent liabilities, including PPPs; - Identifying a "sub-ceiling" within the overall ceiling for PPPs so PPPs compete with other sources of fiscal risks. - Target: Given Namibia’s macro-fiscal concerns and PPP composition, set a PPP ceiling on the stock of total fiscal costs (direct liabilities) and risks (contingent liabilities) as percent of GDP. If PPP portfolio becomes largely government-funded, consider adding a ceiling on total government payments related to PPPs as percentage of total revenues. - Valuation: Set ceilings on maximum exposure of total costs and risks from PPPs, accompanied by sensitivity analysis to changes in main risk drivers (e.g., GDP, triggers for contract termination). - Disclosure: Disclose both maximum exposure and sensitivity analysis together with the budget documents. ### Institutional and procedural implications - Setting a PPP ceiling is a technical decision requiring political support and should be grounded on a comprehensive macro-fiscal model with high-level endorsement (e.g., Cabinet). - The PPP unit at the MoF can participate in designing and discussing the PPP ceiling but should not set it to avoid conflicts of interest; responsibility should be assigned to a different unit in the MoF. - Simpler, intuitive methodologies (scenario analysis) are recommended for Namibia given data limitations; complex probabilistic techniques may be difficult to implement and interpret. *Sources: WBG-PPIAF database as of January 15, 2018; Fund staff and World Bank, “Implementing a Framework for Managing Fiscal Commitments from PPPs,” 2016.* ### 73. Once a PPP ceiling is designed and a level determined, a process to manage the ### 73. Once a PPP ceiling is designed and a level determined, a process to manage the ### Step 4. Developing risk management and mitigation measures - Objective: determine who absorbs costs and risks if they materialize, define the process to manage them, and identify mitigation tools (e.g., budget provision, contingency reserves). - Regulatory recommendation: include general principles for managing fiscal costs and risks from PPPs in the regulations supporting the PPP Law. - Institutional coordination: managing contract-structure-specific risks requires collaboration between line ministries, public entities, PPP unit, and regulators. - Namibia status: - Currently does not have a documented strategy for managing and mitigating costs and risks from PPPs. - Some general practices are emerging; practices in some sectors are relatively standardized (example: existing contracts in the water sector have a standard indexation clause). - The authorities are developing regulations of the PPP Act — an opportunity to standardize and include practices in the regulations. - Implementable mitigation strategies: - Establish a clear intervention process to trigger mitigation actions promptly (e.g., provision in the budget, adjust contract, abandon project). - Standardize interventions where possible. - Examples from other countries: - Create additional budget flexibility by including a contingency reserve in the budget to meet calls on contingent liabilities. - Create a fund upfront from which contingent liabilities will be paid if they materialize (see Annex 8 for Colombia example). ### Step 5. Checking fiscal affordability - Objective: assess fiscal affordability of a new PPP by determining whether required payments can be met from the line ministry’s budget or estimated expenditure envelopes if fiscal costs and risks materialize. - Assessment method: compare estimated annual costs of PPPs, both direct and contingent, with the annual and medium-term budget ceilings of the procuring entity. - Challenges in Namibia: - Cash-based budget system does not fully capture fiscal implications of multiannual projects and long-term contracts. - The annual budget and MTFF cover three years and capture only commitments falling into this three-year period. - Large investment projects and PPPs often entail commitments that reach far beyond this horizon. - In Namibia, PPPs are not reflected in budget documents unless they require budget cash appropriations; most PPPs so far have been user-funded, thus fully off-budget. - Budgeting differences: - Government-funded PPPs: budgeting for future government payments (e.g., availability) is relatively straightforward because timing and approximate value are known. - User-funded PPPs: budgeting is more challenging and depends on whether the budget process can accommodate long-term commitments. - Recommendation for transparency: - Make explicit the fiscal costs and risks of PPPs before procuring a contract and disclose this information within budget documents. - Present existing and newly proposed long-term commitments openly in the budget documents. - Box 8. Budgeting for long-term PPP Commitments — three possibilities: 1. A medium budget framework that treats PPPs in the same way as publicly financed projects, ensuring PPPs require the same approvals in the budget and budget plans as publicly financed projects. 2. Commitment budgeting, in which the legislature approves not only the government’s cash expenditures in the budget year, but also the future commitments to spend money in later years. 3. A two-stage budgeting process, in which all projects must first be approved in budget planning on the assumption that they will be publicly financed, and only then a decision is made about the financing method. - Source referenced: Funke, Irwin, Rial, International Transport Forum, OECD 2013. ### Step 6. Accommodating residual impact - Objective: identify residual impact of the PPP project on main fiscal aggregates (expenditure composition, deficit and debt) and determine potential policy actions. - Triggered policy actions if PPP fiscal costs and risks materialize and cannot be accommodated within the line ministry’s existing budget: - Increase in taxes, or - Reduce other expenditures, if a higher deficit is not a policy option. - If residual risks are too large under current policies: - Reconsider or abandon the project. ### Recommendations (summary) - Recommendation 11. Introduce a process to support informed decision-making in assessing fiscal costs and risks of PPPs. - Use the proposed six-step process as a starting point. - Link the process to an integrated public investment and budget framework. - Actions: - Take stock of existing PPPs and pipeline projects; collect detailed data for each project. (MoF, PPP Unit). - Agree on a process to assess PPP proposals. (MoF, PPP Unit). - Recommendation 12. Estimate the government’s exposure to fiscal risks and costs from the current PPP portfolio. - Identify and quantify fiscal costs and risks at project and portfolio level systematically. - Action: - Use the PFRAM to identify and quantify costs and risks from existing PPP contracts. (MoF PPP Unit). - Recommendation 13. Design a PPP ceiling to assess PPP proposals. - Current ceiling on contingent liabilities does not specifically address PPPs. - Actions: - Research and analyze options for ceilings on fiscal risk exposure to PPPs; integrate PPP ceiling with broader ceiling for government contingent liabilities. (MoF, PPP Unit). - Discuss PPP ceiling options within relevant MoF departments (MoF, PPP Unit, Macroeconomic Department, others). - Approve PPP ceiling and present to Cabinet for endorsement. (MoF, Cabinet). - Recommendation 14. Develop and approve a risk management and mitigation strategy for fiscal costs and risks arising from PPPs. - No documented strategy or predetermined set of mitigation measures currently exists. - Actions: - Summarize current practices in managing and mitigating fiscal risks in PPPs and discuss internally. (MoF, PPP Unit). - Approve an overall strategy for managing risks from PPPs and identify potential mitigation measures. (MoF). - Issue directives with general policies for managing and mitigating fiscal risks in PPPs. (MoF, PPP unit). - Recommendation 15. Check fiscal affordability of PPP proposals by comparing estimated fiscal costs and risks against the fiscal envelope of the procuring entity. - The PPP Unit, procuring entity, and other Treasury divisions (budget, ACDM) should verify that, if risks materialize, they can be accommodated in the medium to long-term fiscal framework of the procuring entity. - Actions: - For ongoing PPPs, compile a database on fiscal costs and risks from PPPs and disclose this information within budget documents. - For projects under evaluation, estimate fiscal costs and risks and use this information before the project goes to procurement. - Develop a PPP chapter to be included in the Fiscal Risks Statement. ### C. Strengthening Supporting Institutions - Implementation requires supportive legal and regulatory framework, strong institutional arrangements, and transparent accounting and reporting practices. ### Supporting legal and regulatory framework - Good-practice features PPP laws/regulations should entail: (i) a clear definition of PPP and their scope; (ii) full integration of PPPs into the government’s overall investment strategy, MTFF, and budget cycle; (iii) clear assignment of the budgetary authority’s role and responsibility to safeguard public finance against fiscal costs and risks from PPPs; (iv) transparent mechanisms for competitive processes; (v) explicit guidelines for conclusion, renegotiation, and termination of PPP contracts including dispute resolution mechanism; (vi) standard mechanisms to facilitate project finance; (vii) limits/ceilings on aggregate public sector PPP exposure; (viii) transparent accounting, reporting, and auditing procedures in line with international standards. - Namibia status: - Published the Public Private Partnership Policy in 2013, and approved the Public Private Partnership Act in 2017. - Regulations of the Act are being drafted and will come into effect at the beginning of the 2018/19 budget year. - A Public Financial Management Act is currently drafted and under revision. - Areas for strengthening: - PPP Act and regulations could be strengthened to support a more effective PPP risk management function. - The PPP unit should consider reviewing the draft PFM Law to ensure consistency between the PPP Act, its upcoming regulations, and the draft PFM Bill. - Contract termination: Act and draft regulations lack guidelines and general principles for termination; recommendation to include general principles and a (non-exhaustive) list of possible grounds for termination, covering private and public sector causes. - Contract amendments: legislation does not provide limits to amendments after awarding; good practice suggests ceilings on contract amendments (on average in a range of 5–15 percent of the construction costs of the PPP-related asset); consider introducing ceilings and run simulations to estimate potential ceilings. - Accounting and reporting: current legislation does not provide guidelines for accounting and reporting PPPs in public accounts. Legal framework should include—or refer to—clear procedures for accounting and reporting PPP operations, future flows, and contingent liabilities, drawing on IPSAS and GFSM 2014 as benchmarks. Require full disclosure of current government commitments (including guarantees) and expected budgetary costs of existing PPP contracts. ### Supporting institutional arrangements - PPP Unit: - Established under the MoF in 2015. - Core functions: (i) provide analytical support to MoF; (ii) assist in issuing regulations; (iii) assist public entities in preparing and taking PPP projects to market; (iv) ensure consistency in project preparation and evaluation with PPP policy; (v) promote PPPs within Government. - Conflict of function: unit currently oversees and promotes PPPs — control and promotion should be separated; MoF should focus on oversight (assessing, controlling, managing firm and contingent fiscal implications). - PPP Committee (legislated by PPP Act): - Approves PPP projects at various stages. - Minister nominates the seven members; presiding member has a deliberative vote. - Committee approvals required at multiple stages: after feasibility assessment; before issuing request for qualification; before issuing request for proposal; evaluation of bids; the PPP agreement; and additional approval for amendments. - Current approval process is not linked to PIM and budget process — it should be. - Integration with budget and PIM process: - PPP process runs in parallel to the PIM process and outside the budget cycle. - Decisions on all public investment projects, including PPPs, should be taken through an integrated PIM and budget process. - Roles should be clearly delineated between MoF, line ministries, and National Planning Commission (NPC). - Given the ambitious investment program, limited resources, co-existence of multiple actors, and institutional capacity constraints, Namibia would benefit from a Public Investment Management Assessment (PIMA). - Decision support: - Decisions within the PPP approval framework should be supported by risk assessments from the six-step process. - Assessment of a project’s firm and contingent fiscal implications should be undertaken through the six-step process and updated or repeated as the project moves from appraisal through selection to implementation. *Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18258.pdf* ### 94. Transparent accounting and reporting systems are key supportive elements of an ### cr18258 - 94. Transparent accounting and reporting systems are key supportive elements of an ### Importance of transparent accounting and reporting systems - "Transparent accounting and reporting systems are key supportive elements of an effective risk management function." - The "widespread misperception that PPPs can be used to provide public infrastructure without increasing reported government deficit and debt, has created a bias in favor of PPPs, reducing the quality of project selection and, more broadly, exposing governments to excessive risks." - "The way PPP transactions are accounted for and reported in the government’s accounts, is an important factor contributing to the bias in favor of using PPPs." - Countries with pure cash accounting, such as Namibia, "may underestimate fiscal costs and risks from PPP transactions, particularly during the construction of the related asset." - "In this case, the main fiscal aggregates—fiscal deficit and debt—do not fairly portray the level of risk undertaken by the government." ### International standards, IPSAS 32, and statistical guidance - "International standards for accounting and statistics differ, but have broadly converged over the years." - Accounting standard: "International Public Sector Accounting Standards (IPSAS) 'Service Concession Agreements: The Grantor' (IPSAS32), published in 2011, sets the best practice for accounting PPPs operations." - Reporting standards: "For reporting purposes, the IMF’s Government Finance Statistics Manual 2014, and the 2011 Guide on Public Sector Debt Statistics (PSDS 2011) prescribe best practices." - IPSAS 32 scope and expected treatment: - "IPSAS 32 covers both, government-funded and user-funded PPP contracts." - "It is expected that under IPSAS32 most PPP contracts would result in assets and liabilities being regarded as belonging to the government." - Under IPSAS32 the government recognizes an asset and a liability (with the corresponding flows) in its financial statements when the following conditions are met: - "(i) the grantor controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price; and" - "(ii) the grantor controls—through ownership, beneficial entitlement or otherwise—any significant residual interest in the asset at the end of the term of the arrangement." - "Experience suggests that most PPP contracts would comply with these conditions." - Fiscal implications under IPSAS 32: - "If IPSAS 32 conditions are met, both the deficit and gross debt would be affected during the construction of a PPP asset, as in the case of a publicly financed project." - "A detailed analysis of the implications on government deficit and debt of the implementation of IPSAS 32 is detailed in Annex 4." ### Current practices and the PPP bias in Namibia - "Like Namibia, most countries deviate from international standards—IPSAS 32 and GFSM 2014—when accounting and reporting for PPP transactions, which increases the bias towards PPPs." - "Reasons for such deviations vary on a country-by-country basis, as well as countries’ capacity to avoid the PPP bias." - "However, public sector accounting and statistical practices are not fully aligned in Namibia with international standards, resulting in all existing PPPs being accounted off-budget." ### Recommended actions to reduce PPP bias and improve fiscal transparency - "To reduce the bias in favor of PPPs, Namibia should compile information about fiscal costs and risks of PPPs and disseminate it in the Fiscal Risks Statement." - "The PPP unit can prepare and publish forecasts of future cash flows under existing and planned PPP contracts and ensure those forecasts are incorporated in medium- and long-term fiscal projections and analyses of debt sustainability." - "More challenging, but critical in the long-term, Namibia should start working toward migrating to international standards, both in accounting (IPSAS) and statistics (GFSM 2014)." ### Specific recommendations (numbered) - Recommendation 16. Strengthen the legal and regulatory framework to support a more effective PPP risk management framework. In the context of the revision of the draft regulations of the PPP Act, the PPP Unit should: - "Include general guidelines for contract termination." - "Introduce ceiling to contract amendments." - "Provide guideline in terms of accounting and reporting PPPs in the public accounts." - "Review and provide comments regarding the consistency between the draft PFM law, the PPP Act, and the upcoming regulations." - Recommendation 17. Access PPP projects within the public investment management (PIM) framework and budget process, and clarify roles and responsibilities of main institutional actors involved in evaluating PPPs. In the context of the revision of the draft regulations of the PPP Act, the PPP Unit should: - "Separate monitoring and promotion function for PPPs, assigning the promotion function outside the MoF." - "To effectively manage fiscal risks, new PPPs should be integrated with the PIM and budget process." ### Illustrative fiscal disclosure practices referenced - Fiscal Risks Statement content suggested excerpts: - "The economic and fiscal forecasts presented in the Budget incorporate assumptions and judgments based on information available at the time of preparation." - "Unanticipated changes in macroeconomic conditions will cause fiscal forecasts to differ from those presented in the budget." - Example macro risks listed: "lower demand for key exports and subdued commodity prices, a slower recovery in mining and construction activities and if growth in South Africa deteriorates or if growth in Angola and other trading partners slows." - Scenario approaches for sensitivity analysis described, including weaker external conditions and stronger domestic growth scenarios. - Public Debt example (incomplete extract): "General government debt is forecast to continue growing, reaching [61.9] percent of GDP by" *Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18258.pdf* ### 2020. Deviations in macroeconomic parameters from forecasts will impact on government debt ### 2020. Deviations in macroeconomic parameters from forecasts will impact on government debt ### Debt portfolio vulnerabilities - Deviations in macroeconomic parameters from forecasts will impact on government debt and debt servicing obligations. - The debt portfolio is susceptible to a decline in the Southern African Customs Union (SACU) revenue. - External debt has been increasing, reading [xx] percent in 2016/17. - Non-rand debt reaching [32] percent of total debt, increasing the exposure to a deterioration in the exchange rate. - The majority of debt denominated in foreign currency is denominated in [set out currency composition, i.e. share in USD, EUR for major currencies]. - [Provide a quantification of the impact of a change in the exchange rate on the value of the debt portfolio]. - The impact of changes in real interest rates is small due to a sizeable share of fixed-rate debt. - The portfolio has some exposure to refinancing risks: - Short-term debt comprises [42] percent of domestic debt and [27] percent of total debt. - Refinancing risk has been mitigated somewhat through diversifying funding sources and borrowing instruments and extending maturities, including issuance in international capital markets. - [For inclusion in subsequent statements: Table X shows the sensitivity of the debt portfolio to changes in interest rates and the exchange rate.] ### Public enterprises: scope, assets, and governance - Namibia has [71] public enterprises: - [38] classified as non-commercial enterprises, - [22] as commercial, - [11] as financial institutions and extra-budgetary funds. - Public enterprise assets total NAD [89.2] billion ([25] percent of GDP). - Enterprises in the energy, financial, transport and communications sectors account for just over [80] percent of total public enterprise assets (see Figure A1). - The Public Enterprises Governance Act (PEGA) provides an overarching framework and specifies roles: - Shareholding minister assigned responsibility for each public enterprise. - Minister of Public Enterprises acts in an advisory capacity. - Government is amending PEGA to move all commercial enterprises under shareholder oversight of the Minister of Public Enterprises. - In terms of PEGA: - Board members are appointed by the shareholding Minister. - Shareholding Minister enters into a performance agreement with each board member and a governance agreement with the board as a whole. - Public enterprises must annually submit a business and financial plan and audited annual financial statements. - Dividends are decided by the shareholding Minister based on board proposals. - There are [x] incorporated public entities governed by the Companies Act; majority report on IFRS. - [Provide any further details on institutional arrangements, legal framework and ownership policy for overseeing public enterprises] ### Financial relations between central government and public enterprises - Transfers to public enterprises included in the initial budget have been declining: - 2016/17 funding totaled NAD [6.4] billion, a [20] percent reduction compared to 2015/16 when NAD [8.0] billion was allocated. - 2015/16 allocation was [16] percent lower than 2014/15 allocation of NAD[9.5] billion. - Main 2016/17 recipients: Namibia Students’ Financial Assistance Fund (NSFAF), University of Namibia (UNAM), Air Namibia, Namibia Training Authority (NTA), Namibia University of Science and Technology. - NSFAF funding to provide loans and financial assistance to students. - Universities received funding for operational and capital expenditure. - Allocations to Air Namibia and NTA were for operational expenditure. - [Provide a table summarizing the main allocations, preferably covering 3-5 years of history as well as forward looking projections that cover the MTEF. Also add in information regarding the actual allocations and explain any areas where these deviated from the budgeted allocations] ### Loans, guarantees, and contingent liabilities - The central government provides loans financed from budget resources and on-lends IFI-borrowed funds. - As at [date], total debt outstanding to public enterprises totaled NAD[xx] million. - To date, government had an outstanding contingent liability exposure to public enterprises totaling NAD[8.6] billion ([6] percent of GDP). - Most significant exposures: Air Namibia, Development Bank of Namibia (DBN), Namibia Ports Authority. - [Insert table showing the main guarantee exposures by PE. Ideally, expand the table to provide historical information on the beneficiaries and guarantee exposures over the preceding 3-5 years] - [Highlight where any new guarantees were provided during the reporting period and the purpose of these guarantees?] - [Indicate whether any companies are not up-to-date in servicing their guaranteed debt] ### Dividends and non-commercial activities - Boards of commercial public enterprises submit proposals on profit distribution to the Minister of Public Enterprises; Minister agrees final amount and submits recommendations to Cabinet. Cabinet may direct dividend payments. - Companies Act prohibits dividend payments that would result in insolvency or inability to meet debts. - [Further explain the government’s dividend policy, in particular has a percentage of profits that public enterprises are required to pay as dividends been set?] - Public enterprises undertake non-commercial activities; if uncompensated, these can erode finances and increase fiscal support needs. - Current practice: provision has been made in the budget to cover costs of some non-commercial activities. - Main examples of non-commercial activities: - Nampower smooths and moderates electricity price increases using funds collected through the long-run marginal cost levy and a grant previously provided by government; - DBN and Agribank manage facilities funded by government and donors providing client and farmer support, finance project preparation, and similar activities; - Air Namibia operates unprofitable routes to promote connectivity; government contributes by servicing aircraft lease payments; - Transnamibia provides freight services without fully recovering costs; government supports via annual allocations and rail network rehabilitation responsibility; - UNAM expanding through new campuses contributing to skills development; - Several public enterprises undertake public investment projects on behalf of government. - [Discuss any other non-commercial activities, if possible quantifying the annual costs of the activities, and provide any further details on the government’s policy relating to the mandating and funding of public policy objectives executed by public enterprises.] ### Fiscal risk assessment of public enterprises - Fiscal risks arise from poorer-than-anticipated performance, liquidity pressures, or weakened financial positions leading to lower dividends/taxes, increased funding needs, or calls on guarantees. - Fiscal risk assessment based on [2015/16] financial results of the ten public enterprises with largest outstanding liabilities: - As at [31 March 2016], these enterprises’ liabilities totaled NAD[31.4] billion and account for approximately [80] percent of total public enterprise liabilities. - Classification based on five key financial indicators (Box A1): financial dependence, return on equity, debt ratio, debt to EBITDA, current ratio. - Indicators assessed as: sound; low risk; moderate risk; high risk; or very high risk. Consolidated into overall ratings of high, medium, or low. - Based on analysis, [five] public enterprises were classified as high risk, with total outstanding debt NAD[11.5] billion or [xx] percent of GDP as of end of the [2015/16] financial year. - Government actions: - Plans for restructuring Air Namibia and Transnamib being developed. - Reforms to legislative framework governing public enterprises are in the pipeline to strengthen supervision and financial controls. - [Indicate any other remedial actions that are being taken] ### Aggregate financial results for largest public enterprises (2014–2016) - In [2015/16], the [ten] top public enterprises: - Generated NAD[11.8] billion in revenue, a [9.7] percent increase from [2014/15] when revenues totaled NAD[10.8] billion. - Profit declined from NAD[828] million in 2014/15 to NAD[220] million in 2015/16 due to costs growth ([19.2] percent) outpacing revenue growth ([9.6] percent). - Return on equity was [0.9] percent (lower than [4.8] percent in 2015). - Nampower materially influenced sector performance; 2016 performance temporarily impacted by higher costs for imported power from Mozambique; costs recovered through adjusted tariffs and performance recovered in 2017. - Leverage improved slightly with [just over half] of public enterprise funding coming from debt (2015: [58] percent), but cash generation and liquidity remain low. - Summary financial statistics (Table A1): - Revenue (NAD): 2014: 3,967,840,000; 2015: 4,480,514,000; 2016: 5,005,992,000 - Net profit after tax (NAD): 2014: 616,379,000; 2015: 531,247,000; 2016: (296,388,000) - Growth in revenue: 2014: 20.03%; 2015: 12.92%; 2016: 11.73% - Growth in costs: 2014: 21.24%; 2015: 19.28%; 2016: 42.20% - EBITDA margin: 2014: 26%; 2015: 21%; 2016: 5% - Operating costs to revenue: 2014: 34%; 2015: 34%; 2016: 47% - Return on capital: 2014: 4.65%; 2015: 3.85%; 2016: -1.59% - Equity (NAD): 2014: 13,262,833,000; 2015: 13,807,725,000; 2016: 18,584,930,000 - Liabilities (NAD): 2014: 9,805,094,000; 2015: 9,908,100,000; 2016: 11,648,273,000 - Current Ratio: 2014: 3.40; 2015: 3.12; 2016: 6.24 - Debt ratio (Debt to assets): 2014: 43%; 2015: 42%; 2016: 39% - Interest Coverage: 2014: 0.82; 2015: 1.02; 2016: -1.09 - Debt to EBITDA: 2014: 2.55; 2015: 2.62; 2016: 10.09 - Source: Analysis of public enterprises’ annual financial statements. - [1/ Current metrics based on staff analysis of public enterprises’ annual financial statements that were available, to be updated by the authorities before publishing.] ### Financial results of selected public enterprises UNAM - UNAM: largest higher education institution with 12 campuses, 7 regional centers, serving 24,759 students; overseen by Minister of Higher Education. - [2014/15] financial statements received an [unqualified audit opinion]. - 2014/15 performance: surplus of NAD[72] million (2014: NAD[68] million shortfall), driven by increase in government grant to NAD[871] million (2014: NAD[608] million) and increased student fees. - Table A2 summary for UNAM: - Revenue (NAD): 2014: 1,088,262,000; 2015: 1,477,727,000; 2016: [blank] - Net profit after tax (NAD): 2014: (67,692,000); 2015: 72,432,000 - Growth in revenue: 2014: 0.00%; 2015: 35.79% - Growth in costs: 2014: 0.00%; 2015: 24.46% - EBITDA margin: 2014: -7%; 2015: 5% - Operating costs to revenue: 2014: 109%; 2015: 100% - Return on capital: 2014: -275.22%; 2015: 75.78% - Equity (NAD): 2014: 24,596,000; 2015: 95,579,000 - Liabilities (NAD): 2014: 2,476,877,000; 2015: 2,733,533,000 - Current Ratio: 2014: 1.05; 2015: 0.85 - Debt ratio (Debt to assets): 2014: 99%; 2015: 97% - Interest Coverage: 2014: -82.62; 2015: 22.32 - Debt to EBITDA: 2014: -24.36; 2015: 24.53 - Source: Analysis of annual financial statements. 1/ 2015/16 annual results not yet available. - UNAM has high levels of debt relative to cash-generating ability: debt to EBITDA in [2014/15] was [25] times. - Liquidity weak: current liabilities exceeded current assets at end of [2014/15]. - Trade payables increased by [67] percent from NAD[140] million in [2013/14] to NAD[235] million in [2014/15]. - UNAM funding of infrastructure expansion funded from operations and cash reserves; PPP for student accommodation at University of Windhoek; exploring similar PPPs elsewhere. Transnamib - Transnamib provides rail and road transport; wholly government-owned; Minister of Works and Transport exercises ownership function. - In [2015/16] company received a qualified audit opinion. - 2015/16 realized a loss of NAD[83] million (improved from NAD[456] million loss previous year) due to reduced operating costs despite NAD[181] million increase in retirement benefit provisions. - Government grant increased to NAD[353 million] (2015: NAD[150] million) — noted larger than budgeted NAD[301] million. - Transnamib technically insolvent: liabilities exceed assets by NAD[282] million ([21] percent). - Company revaluing assets currently reflected at depreciated historical book value. - Loans from government amount to NAD[410] million: - NAD[328] million originally on-lending (government has settled underlying loan), - NAD[81] million relates to financial assistance for payroll and creditor settlement. - Liquidity weak: current liabilities exceed current assets, though outstanding arrears were reduced during 2015/16. - Restructuring plan aims to return to profitability over 5-year period through [downsizing the business, investing in rolling stock complemented by investments in rehabilitating the rail infrastructure by the government and growing the volumes transported by rail.]; proposal under government consideration. - Table A3 summary for Transnamib: - Revenue: 2014: 0; 2015: 425,391,000; 2016: 435,085,000 - Net profit after tax: 2014: 0; 2015: (455,972,000); 2016: (83,327,000) - Growth in revenue: 2014: 0.00%; 2015: 0.00%; 2016: 2.28% - Growth in costs: 2014: 0.00%; 2015: 0.00%; 2016: -14.35% - EBITDA margin: 2014: 0%; 2015: -95%; 2016: -8% - Operating costs to revenue: 2014: 0%; 2015: 202%; 2016: 176% - Return on capital: 2014: 0.00%; 2015: 226.99%; 2016: 29.32% - Equity: 2014: 0; 2015: (200,875,000); 2016: (284,202,000) - Liabilities: 2014: 0; 2015: 1,368,090,000; 2016: 1,636,938,000 - Current Ratio: 2014: 0.00; 2015: 0.73; 2016: 0.92 - Debt ratio (Debt to assets): 2014: 0%; 2015: 117%; 2016: 121% - Interest Coverage: 2014: 0.00; 2015: -26.85; 2016: -5.93 - Debt to EBITDA: 2014: 0.00; 2015: 0.00; 2016: 0.00 - Source: Analysis of annual financial statements. ### Financial sector risks and mitigation - Risks if government provides unanticipated support to troubled banks to protect depositors and prevent spillovers. - Vulnerabilities from strong interlinkages between sovereign and banking sector and close integration with South African financial market. - Generally, banks remain profitable and well-capitalized. - Under baseline and adverse scenarios, capital adequacy ratio remains above [16] percent. - Banks’ reliance on wholesale funding creates vulnerability to liquidity shocks: moderate liquidity shortfalls could be experienced by some big banks within one or two months after a shock. - Exposure to counterparty and portfolio concentration risks. - Mitigating actions: - Strengthening financial sector oversight. - Overhauling legislation governing the sector in line with international norms. - Enhancing quality of on-site supervision of banks. - Establishing a new deposit guarantee scheme managed by the Bank of Namibia in line with international norms. *Source: cr18258 - 2020. Deviations in macroeconomic parameters from forecasts will impact on government debt* ### Annex III. Managing Contingent Liabilities in Colombia ### Annex III. Managing Contingent Liabilities in Colombia ### Background and motivation - Colombia experienced an economic recession paired with a fiscal crisis and materialization of large fiscal contingencies at the turn of the century. - As a result, authorities implemented a framework for managing contingent liabilities to strengthen the government’s capacity to identify, assess, mitigate and monitor contingent liabilities. ### Main sources of fiscal risk (identified for 1999-2002 crisis) - Four areas were recognized as the main sources of fiscal risks during the economic crisis of 1999-2002: - natural disasters, - legal proceedings against the state, - debt guarantees, and - PPP’s guarantees, particularly those related to infrastructure, transport and electricity. ### Institutional and procedural reforms - A procedure was defined for the identification and recording of fiscal risks to guarantee that new liabilities were appropriately recorded. - Comprehensive databases were permanently updated, and a management software to store and analyze the information was designed. - The contingent liabilities databases have played a key role in the strategy to strengthen the country’s legal defense to mitigate (reduce) payments of claims against the Government. - The Ministry of Finance (MoF) was given the mandate to review all contracts that have the potential to constitute a contingent liability for the government; without MoF approval, the contract cannot move forward. ### Risk assessment methodologies - Specific methodologies based on probabilistic models for assessing each one of the four types of contingent liabilities were developed and are constantly reviewed for improvement. - A common feature is the estimation of expected costs, which is calculated based on the gross exposure that would impact the fiscal accounts and the probability of the event occurring. - The expected-cost estimate is fundamental for: - determining the viability of the contract, - defining commitments required from the interested party, and - assessing the overall risk assumed by the government. ### Mitigation strategies by risk type - Natural disasters: - additional resources for strengthening public infrastructure were appropriated, - insurance coverage increased, and - a financial strategy with contingent lines of credit, CAT bonds was implemented. - Debt guarantees and PPP contracts: - a state contingency fund was created, to which entities make contributions based on the risk assessment carried out by the MoF, - these contributions are updated periodically to reflect changing economic conditions. - Legal contingencies: - appropriation of resources in the annual budget to cover the expected payout. ### Monitoring and legal framework - Monitoring was strengthened with the approval of the Fiscal Responsibility Law in 2003 which requires the government to present a 10-year rolling forecast with detail of contingent liabilities and lump-sum amount for future years, distributing the commitments’ information between sectors, projects and/or type of risk. - In 2012, a PPP Law was approved with clear guidelines for the presentation, analysis and approvals of PPPs and, in particular, it requires that all contingent liabilities be assessed and valued. *Source: “Ministry of Finance and Public Credit, Colombia “Contingent Liabilities: The Colombian Experience,” 2011.* ### Annex VIII. Colombia’s Budget Commitments to PPPs through ### Annex VIII. Colombia’s Budget Commitments to PPPs through “Vigencias Futuras” ### Mechanism and purpose - The mechanism of “Vigencias Futuras” (VF) is a budget instrument in Colombia that allows the MoF and the budget, despite the fact that is a cash budget system, to guarantee the resources required, beyond the budget year, to complete a public investment or any multiannual program. - VF provides certainty to the private party of the government’s commitment to the project and is a cornerstone of the PPP agreements that the country has implemented for decades. - VFs are closely regulated, recorded and monitored by the MoF to avoid an over commitment that may reduce the flexibility of the budget, create excessive fiscal pressures and reduce the maneuverability of future administrations. ### Classification, approval, and oversight - VFs are divided into three types depending on: - (i) the amount to be committed in the first year of the initiative; - (ii) the number of commitment years; and - (iii) if they are for a PPP. - Strategic and fiscal consistency must be validated by two councils for the VF to be approved: - the fiscal council (CONFIS) headed by the MoF; and - the CONPES, headed by the President. ### Time horizon, limits, and sectoral use - VF for annuities for PPP can extend up to 30 years into the future. - The total amount that can be committed can gradually increase up to a ceiling of 0.4 percent of GDP by 2020 and forward. - VFs can be used by any sector; most of the resources that have been approved thus far are for investments in transport (83 percent), including road infrastructures and public transportation systems. - Other areas that have benefited from the use of this instrument are: housing, water and sanitation, and a reconstruction fund for flooded areas during 2010-11. ### Integration with public investment management and disclosure - As any project that requires a commitment from the government, VF, even for PPPs, must adhere to the country’s PIM framework and follow the guidelines for approval, execution and monitoring of public investment. - Existing regulation demands comprehensive disclosure of VF information. - VFs are recorded in the information systems of the Ministry of Finance and the National Planning Department. - The Medium-Term Fiscal and Expenditure frameworks must include: - a section on the amount of fiscal commitments that the VFs represent for the next 30 years; - how the resources are distributed between sectors and programs; and - a “pipeline” of projects that are in the process of securing VF. ### Presented metrics and reporting visuals - The source includes a graph in the 2017 MTFF reporting VF for the PPP (Alianzas Publico Privadas) program showing trajectories from 2016 through 2041 and annotations such as: - PPP Ceiling Execution (March 2015) - % of GDP scale from 0.00% to 0.45% - Generation 1 PPPs, Generation 2 PPPs, Other PPP, Global PPP Ceiling, Ceiling for Transport Sector (March 2015) - All numbers in the graphic are "in million of Colombian pesos, at current prices, as percent of GDP". - Macroeconomic assumptions of March 2015 were used for the graphic. *Fiscal Affairs Department, International Monetary Fund — Annex VIII. Colombia’s Budget Commitments to PPPs through “Vigencias Futuras”* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18258.pdf_