HAG Y ION * FRINE-A * AL* 0ME mmm I I -Ale In-hetr.nr4 SOr -i II I ''-s i + I >~~~' i g . " Windhoek. )'J A-'" L' ,-.- G o - THE AGENCY FOR INTERNATIONAL DEVELOPMENT PRESENTS Critical Issues For American Investors in Namibia Prepared and published by Business International 40 Duke Street, London WIA IDW United Kingdom Reproduction and transmission in any form without prior permission prohibited © Business International Limited February 1991 Namibia 0 km 200 400 miles 100 200 [ -Main roads - Main railways - International boundaries -' Main airport ZAMBIA ANGOLA .- Katima Mulilo Oshakati 0 ieOndangua CAPIVISTRIP'O Ohopoho. Rngad Andarai... Sesfontein Etosha n, Okaukuejo Otavi Tsue G, S Grootfontein Otjiwarongo NAMIN B1A On.aruru Usaks Okahandja Karibib~BOTSW Gobabis BTWNA Swakopmund (Uranium mine) WINDHOEK WALVIS BAY Rehoboth 0Stampriet , ATLANTIC MaltahdheI---- Mariental OC EAN Keetmanshoop i ritrz - Bethanie ~Aroab SKarasburg oo°aawd Wama SOUTH ' AFRICA BASIC DATA: NAMIBIA Land Area: 823,145 square kilometers (excluding the Walvis Bay area of 1,124 square kilometers) Population: 1.3 - 1.6 million Main Towns: Windhoek 160,000 (estimate 1990) Rundu 15,000 Swakopmund 14,000 Climate: Semi-arid and sub-tropical Languages: English (official), Afrikaans, Kwanyama, Ndonga, Herero, Nama and German Measures: Metric system Currency: South African rand (R) = 100 cents. Average exchange rate for 1990: R2.586 = $1 Time: 2 hours ahead of GMT Contents Page Executive Summary 1 Introduction 12 Chapter 1 The Political Background 18 Chapter 2 A General and Sectoral Analysis of the Economy 24 Chapter 3 The State's Role in the Ecoromy 48 Chapter 4 Infrastructure 53 Chapter 5 Trade 63 Chapter 6 Labor and Employment 74 Chapter 7 The Government 81 Chapter 8 The Financial Environment 85 Chapter 9 Debt and External Financing 92 Chapter 10 Foreign Investment 97 Chapter 11 The Regulation of Foreign Investment 102 Chapter 12 Foreign Exchange Control 108 Chapter 13 Price Controls and Inflation 111 Chapter 14 Taxation 114 Chapter 15 Intellectual Property Rights, Patents and Trademarks 120 Appendices One Proposed Labor Code Two Foreign Investment Bill Three Potential Namibian Joint Venture Partners Four Acronyms Executive Summary Namibia is well on the way to establishing one of the most attractive investment climates in Africa. The government has taken the initial and crucial step in providing an enabling environment conducive to foreign business by enacting a foreign investment act in December 1990 which sets out visible and clear ground rules for the participation of overseas investors in the economy. Although this does not of itself provide specific incentives in the form of tax holidays, export or regional grants, the government is considering a package of possible incentives to be published at a later stage. The fact that the act was passed with all-party support within nine months of Namibia's independence is in itself indicative of the generally positive attitude towards the promotion of inward investment flows. Of equal importance is Namibia's position as a full member of the Common(Rand) Monetary Area (CMA) and the Southern African Customs Union (SACU). The former groups Namibia with South Africa, Lesotho and Swaziland and the latter the same countries pius Botswana. The government is moving ahead with the establishment of an independent financial system and plans to introduce a national currency, the Namibian dollar, in about two years time. The dollar will be at parity with the rand for at least an iniial period and Namibia will remain within the CMA while it evaluates the possible benefits of ctelinking its currency from the rand. At present investors are in a position 'o benefit from the two-tier exchange rate system of a commercial and financial rand, by using the financial rand for establishment of new investments. However, transactions at the preferential financial rand rate are subject to the strict exchange controls. Applications for financial rand by nonresidents will be judged by the exchange control committee on what contribution the investment concerned will make increasing productive economic activity and providing employment to Nanibians. The two-tier exchange rate system may be abolished by South Africa in the not too distant future, now that country's external debt position has improved, investors therefore have a limited period in which to take advantage of the present system. The government has stated that once Namibia introduces its own currency, the intention will be to introduce a more liberal exchange control regime. This will in practice depend on the strength of Namibia's balance of payments position and its accumulation of sufficient foreign exchange reserves to provide normal import cover. At present dividend remittances to overseas investors are made at the commercial rand rate. Namibia's membership in the Southern African Customs Union (SACU) has a twofold significance for overseas business. The main disadvantage is that exporters face a high Business International 1 external tariff comprising a basic customs duty and in the case of luxury items a scaled tax that can be as high as 110%. This provides a significant competitive advantage to South African companies who are exempt from most of these taxes and already have a strong position as suppliers to the Namibian market. Given that Narnibia is keen to diversify trade and reduce dependence on South Africa, the government has indicated it is looking at ways of improving the competitive position of non-SACU firms. One measure under consideration is to exempt sales to government organizations from customs duty while duty imposed on certain products, including luxury goods such as automobiles, may be reduced or abolished. On the other hand, US and other overseas firms establishing a direct presence in Namibia can trade free of customs duty with South Africa and other SACU members. This particularly important given is that the small size of the Namibian market and low purchasing power of the bulk of the population means limited internal trade volumes. The access to a larger market provided within SACU offers the economies of scale that may make a given investment more worthwhile. The government has made clear that it would wish to facilitate investments in value-added manufacturing activities that have an export potential and Namibia's membership of SACU make it a good base for exporting to ihe region. To this advantage can be added those of a sound local financial services sector, excellent infrastructure between the principal centers, and a generally accessible bureaucracy. Senior members of the government are fully accessible to potential investors wishing to discuss particular projects, and the investment center recently established within the Trade and Industry Ministry is intended to function eventually as a one-stop investment clearing house. Another feature of importance is the use of English as the official language it is and also steadily replacing Afrikaans as the main business language. The Role of Private Enterprise The private sector is predominant in the commercial economy and most mines, manufacturing plants and farms are owned by companies, partnerships or There is as yet individuals. no stock exchange in Namibia, but a proposal for the establishment one is being considered of by the government. Most large concerns are either subsidiaries of South African or other nonresident companies, family-owned businesses or sole proprietorships. As a resulh business ownership is concentrated in relatively fewJ hands and at present few commercial concerns are operated by black entrepreneurs. The most extensive black-owned businesses are in the north and engaged predominantly in the retail trade. 2 Business International Local companies are engaged primarily in manufacturing, financial services, transport and tourism and the principal industrial activities are food processing, brewing, steel and other structural metal products, building materials, plastics, leather goods and textiles. However, in many cases the final production process takes place outside Namibia, usually in South Africa. A case in point is cereals- although wheat is milled locally production of breakfast cereals takes place in South Africa. Firms from South Africa enjoy a major share of the market for a number of reasons apart from the close administrative ard financial links characterizing pre-independence Namibia. Through serving a larger market in South Africa these firms enjoy economies of scale which enable them to produce goods in sufficient volume to sell at reasonable prices in Namibia. The effect of the SACU tariffs protect these companies from outside competition, while local firms have frequently claimed predatory pricing tactics have been used to undercut attempts to compete in the domestic market. The development of secondary industries involving value-adding to locally available natural resources is encouraged by the government as one means of diversifying sources of supply from the present heavy dependence on South Africa. Although immediate trade opportunities to service the Namibian market may be limited, establishing a local presence is a way of gaining a foothold in the region. While the Foreign Investments Act provides for equal treatment of nonresident and foreign firms (including those from South Africa) applications to establish manufacturing capacity where there is import substitution or export potential will be regarded with particular favor. Innovative companies could