NAMIBIA managed to attract at least N$59,4 billion in foreign direct investments between 2009 and 2019 - largely through mining and financial institutions.
This flow of funds raises the question about the country's seriousness to industrialise, given its dream of being an industrialised economy by 2030.
The two sectors also accounted for more than 80% of all Namibia's foreign investments stock between 2017 and 2019.
Less investment has, however, made it to key sectors such as manufacturing, wholesale and retail, which have been driving employment and inclusive growth over the years.
It also shows the economy is overly dependent on the extractive industry and fails to attract investments in diverse economic activities.
Michael Humavindu, deputy executive director of the Ministry of Industrialisation and Trade, was recently quoted as saying the strategy for attracting foreign investments had to be scrapped, because it not only neglected local investors, but also barely made a dent in the country's industrialisation goals.
A study titled 'Understanding FDI Profitability in Namibia: Reinvestment or Repatriation', released by the Bank of Namibia's research team last month, found most of the foreign investments in Namibia was from China, South Africa and Mauritius.
China and Mauritius mainly invested in the mining sector, while South Africa supported the financial and retail sectors.
The government has for decades tried to lure foreign investments, even adopting laws and incentives such as export processing zone (EPZ) legislation, which exempts certain companies from paying taxes, levies and lessening administration burderns.
The central bank's research conceded that over the years, investments from outside the country were a combination of resources and profit seeking, and that profits realised leave the country.
This was mainly allowed by the favourable investment climate and the financial system that enabled foreign enterprises to easily remit capital and profits abroad, the researchers said.
On average at least 2% of gross domestic product worth of profits leave Namibia, the study revealed.
In absolute terms, foreign direct investments (FDI) into Namibia cumulatively amounted to N$59,4 billion between 2009 and 2019, driven by new greenfield investments in the mining sector, mainly in uranium, gold and copper mining.
The N$59,4 billion was not actual cash, but included 20% of already made assets that are used at such investments.
Between 1998 and 2008, these assets were, however, at about 25,6%. This means that sources assets are now mainly available in the Namibian market and no longer need to be imported from outside.
The end result was the about N$25,2 billion - which mainly comprised equity capital and reinvested earnings.
The researchers attributed this fall to domestic investment through the public sector.
"This reflected the relative increase in domestic investment, particularly the strong growth in public sector investments as a policy measure to counter the negative effects of the 2009 financial crisis," the study revealed.
The researchers also found that foreign investment inflow in the form of inter-company debt has become a major source of finances to investment receiving entities in Namibia from 2009 to 2019.
They explained this is due to the decline in interest rates as well as the increase in liquidity globally, which made the cost of debt cheaper than the cost of equity.
Making it easier for multinationals to support their subsidiaries with debt, the share of inter-company debt increased to 18,6% of total FDI financing, up from 3,8% observed between 1998 and 2008.
The research suggested considering Namibia's higher tax rate, "foreign direct investors prefer financing their Namibian investee companies through debt because interest on debt is deductible from the affiliates' taxable income".
Therefore, reducing the tax burden was compared to the cost of equity that is non-deductible - despite the country having an EPZ status and some of them falling under it.
According to the central bank, direct investment through inter-company lending to investee companies stood at N$64,6 billion by the end of March this year.
Foreign invested companies operating in Namibia have spent around N$1,7 billion in repaying inter-company lending by the end of the first quarter of 2020 as part of servicing external debts - compared to the N$7,1 billion paid out to external holders by the end of 2019.
RESOURCES VS PROFITS
The study revealed the mining and quarrying sector continues to dominate Namibia's resource-seeking FDI due to the abundance of natural resources.
Major sources of investment in the extractive sector were China, Mauritius, Canada and the Netherlands.
Proximity to South Africa resulted in lucrative market-seeking FDI in the financial intermediation as well as wholesale and retail trade sectors.
Investment from South Africa is not only repaid in profit, but also through import as the country buys 65,1% of its total imports, mainly involving consumer goods.
"FDI in the manufacturing sector, which is largely efficiency seeking, remained relatively low, accounting for less than 10% of the total FDI balance," the study found.
The researchers said inflow in the value-addition sector were disappointing.
"Despite tax incentives and a tax-free EPZ dispensation, the manufacturing sector had little success in attracting investment," it said.
The disappointment is partly explained by rising input costs, particularly high labour costs, water and electricity, as well as a decline in the ease of doing business in the country.
Although FDI inflows have been on the decline, the country's resource-seeking investments helped outperform most Southern African Development Community (SADC) and Southern African Customs Union (Sacu) countries in attracting FDI between 2009 and 2018.
"As a percentage of assets brought in, the country's FDI inflows averaged 20,2%, which was higher than SADC and Sacu's average of 9,4% and 7% per annum, respectively," the researchers stated.
FDI often enters the economy in the form of greenfield investments, such as the construction of a new mine or the expansion of foreign retail store branches in the host economy.
The researchers used return on equity (ROE) of foreign direct investment companies (affiliates) to measure profitability, which is typically the net income after tax divided by the total equity of foreign investee companies.
The overall ROE of foreign investee companies in Namibia has been positive between 2009 and 2019, mainly driven by profits from entities in the financial intermediation and manufacturing sectors.
During this period, the researchers found the return on equity averaged 12,1% per annum, indicating strong returns on investment by foreign-owned enterprises.
However, the ROEs differed substantially at sectoral level - the strong profitability was maintained by increased profits from foreign-owned firms operating in the financial and manufacturing sectors.
On the contrary, the returns on investment in the mining sector were low and more volatile than in the other sectors.
The study found in the financial intermediation sector, which is heavily dominated by large and profitable foreign-owned institutions, ROE averaged 19,9% per annum from 2009, indicating a sound and healthy financial sector.
While the extractive sector has a strong dependence on commodity prices and the fact that Namibia has many marginal mines with low ore concentrates, the sector recorded an average ROE of 1% per annum between 2009 and 2019.
This proves that the foreign investments pooling in this sector is resource seeking rather than seeking returns on investments.
Despite a low flow of FDI into the manufacturing sector and the fact that it is underpinned by developments in the mineral-processing industry, it recorded high but volatile returns on equity.
"Namibia's inward FDI in the manufacturing sector is concentrated in the mineral-processing industry, especially in diamond polishing, refined zinc and the processing of copper," the study shows.
The ROE for the sector mirrored developments in commodity prices, particularly the international prices of zinc and copper, which averaged 19% per year between 2009 and 2019.
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