Sell property to improve return on capital

A serious reality check hit government finances last week when only 2% of an offered N$160 million issuance could be raised in the local capital market. Described by investment managers as an “underperforming government debt auction” this outcome raised important questions on the government’s ability to source sufficient funding from the local market.
A local economist said that this could have have been due to the cyclical nature of the liquidity market or a sign of weak confidence in the Bond market which could put public finances and Namibia’s good investment rating at risk.
Capricorn Asset Management’s newly promoted Chief Operating Officer, Ian Erlank speaking to the Economist this week said, alternatively the government could raise funds for projects by leasing out government-owned properties. The Ministry of Finance is in the process of compiling a list of underperforming State Owned Enterprises, including the real estate on their balance sheets, as part of a cost cutting exercise. Many of these properties can either be sold or let to third parties in the private sector.
Erlank said that the leasing of government property allows for a more sustained period of economic contribution reducing the immediate impact on cashflows. “These assets can be sold in order to provide funding to government to finance projects that will have a positive long-term sustainable economic contribution.”
This, he said, could possibly improve Namibia’s economic rating outlook, which also hinges on many other factors. “The option to sell off property could be a solution to add to the government’s financing options and take pressure off other funding avenues.” Erlank said these government-owned assets currently provide little to no return on capital.
In a Capricorn newsletter, Erlank goes further and suggests that State Owned Enterprises (SOEs) housed in these properties can be privatized and run more like a business, adding to both the tax base and the provision of basic goods and services.
Infrastructural and other similar government projects are vital for economic growth. However, Erlank pointed out that these are expensive and gets funded via long term borrowing such as Bonds. This, in turn increases the debt to GDP ratio and government spending on so-called statutory expenses, the budget jargon for the interest it pays on its debt.
By privatizing, this would release government from the duty of having to fund the expansion of SOEs and reduce future financing requirements. Over time it could reduce the overall funding requirement and improve the rating outlook provided that Namibia experiences strong GDP growth.
There are also state assets in business ventures that are highly profitable and can be sold to decrease the funding requirements for state projects. However, Erlank said there are no quick wins as the suggested structural readjustments take time and resolve to correct.
With the risk in bonds growing due to South African downgrades and investors opting out, Erlank’s view of this asset class is that there is some risk in bonds weakening further due to a SA downgrade.
“The ever increasing spreads between Namibian and SA bonds should make Namibian bonds more attractive but no one will buy if they think the spreads are going even higher. Liquidity does have some impact but that you would rather see it in the Treasury Bills.”