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Competition for Green Hydrogen Capital

As the government was conceiving a response to some of the economic challenges after the 2019 drought and the Covid-19 pandemic, a key approach that was consensual between both the private and public sectors was that where possible, the government needed to move in a manner that attracts much-needed foreign direct investment from the private sector.

This consensus was driven by the narrative that public expenditure levels were to remain muted, given limited fiscal space, and the private sector was heavily indebted.

The other key part of the formula for gross domestic product (GDP), was net exports, which was deemed to be an expected output from key investments made.

This has left the investment arm of the formula as the key lever the government was to pull.

One effort the government has embarked upon was to spark the development of the green economy.

The now much spoken-about green hydrogen opportunity and more than N$2 billion mobilised in foreign direct investments in less than two years is a direct result of government-led efforts.

Scepticism from local economists and members of the Economic Association of Namibia has been heard, with some public advocacy supporting approaches that would, in the government’s view, make Namibia less attractive in its bid to attract foreign direct investment in what is a globally very competitive space in which some countries are offering up billions of US dollars in subsidies.

It is foreign direct investment that drives economic growth, as for every dollar foreign investors earn, the Namibian economy will earn several.

If foreign investors choose to invest their hard-earned capital elsewhere, it is those countries, and not Namibians, who will benefit.

The sheer scale of capital required, combined with the complexity of implementing projects that are a first of their kind in the world, require skills and financial resources Namibia just does not have.

This is why Namibia has turned to foreign investors to help launch this new industry.


The question is: How is Namibia looking to fund its 24%-negotiated equity stake in the Hyphen Hydrogen Energy project?

First, we need to know why, in this industry, a direct equity stake is preferred over a free carry.

The most elementary assessment of a free carry reveals that it reduces the returns available for private investors as this capital still needs to be paid by someone.

The effect of a free carry, for example, a profit reduction, is relatively benign for sectors that require relatively small capital investments, where the resource is very scarce and which have a steep cost curve between low- and hight-cost producers.

Examples of such industries are oil, copper, cobalt and diamonds. For example, in the oil industry some countries can produce oil at US$5/barrel, and others at US$80/barrel.

This leaves a lot of room for free carry for those industries with a low-cost base, as the value of the resource in those countries is higher.

Green hydrogen projects have different economic structures and require a more intricate and dynamic approach.

You will agree that all countries have the required resources: sun, wind and land.

Some are better equipped than others, but the difference between Namibia, Mauritania, Australia and Chile, for example, is small.

This means large hydrogen projects can be built in many countries around the world. As there is limited capacity globally to build these projects, there is a global race for projects to be the first to market.

Given the size of the green hydrogen opportunity, various governments in wealthier nations have in fact resorted to providing billions of US dollars in subsidies and tax credits to make those countries more attractive to developers in order to attract investment.


There is broad recognition that this is an emerging industry and that public sector policy support is required before it is mature enough to stand on its own two feet.

While the European governments have led the way with billions of Euros in subsidies to establish this industry, the most recent subsidies established under the Inflation Reduction Act in the United States (US) has been the most staggering.

This piece of legislation offers up to US$3/kgH2 in tax credits (money back to the developer) for a green hydrogen project developed in the US if various conditions are met.

Bearing in mind that cost estimates for projects could range anywhere between US$4/kg to US$6/kg this subsidy is massive.

This is on top of billions of dollars of investment incentives already advanced in the US in 2021 for the establishment of renewable generation capacity under the Infrastructure Act.

One should consider that these incentives will last for 10 years, over which period the cost of green hydrogen could drop to below US$2/kg.

So, when our Namibian sceptics advocate that the government must ask for 24% free carry because the wind and the sun are ours, they are doing so without possibly fully appreciating all the facts and the globally competitive market dynamics we operate in.

Additionally, these calls for free carry are made without considering the fact that Namibia will earn land rentals and royalties from green hydrogen sales and taxes, on top of the job creation and localisation targets the project has been tasked with delivering.

A few points are therefore relevant.

Wind and sun alone do not produce ammonia – rather, it is US$10 billion’s worth of equipment in building out the full value chain, all operated by capable and trained Namibians under very high precision, that produces ammonia, which we will sell.

The profits will be used to repay capital providers for the funding made available to design, develop, build and operate such a complex project.

Unlike mining or oil, where the government traditionally receives next to nothing for leasing out land (for mining exploration licences for example, the government gets paid N$10 000 per licence), it is going to net a quarter of a billion Namibia dollar over the next two years.

This means the government is already being compensated for making land available for development.

The margins in green hydrogen are likely to be much lower than traditional sunset industries like oil and gas, or even commodity extraction.

So, there is less space to be ‘generous’ with project returns.

With massive amounts of capital required to establish this industry, calling for a free carry in Namibia where other competing countries are not just reduces the competitiveness of the Namibian industry, which is the opposite of what competing countries are doing which are offering massive incentives to attract investment.

The government has negotiated hard to maximise the benefit Namibia will receive in cold hard cash from the establishment of its green hydrogen industry, ensuring a combination of fixed and variable revenue streams are secured.

These include land rentals that escalate with an index amount, and, depending on the developmental phase of the project, environmental levies that escalate by an index amount, revenue royalties that ensure the government receives benefits before any operating expenses are incurred, and income taxes.

There are also expected dividends from any equity stake the government holds.

Furthermore, indirect and induced economic impacts will ensue from the project, which remain to be quantified.

From all direct revenue lines, the government expects it would receive over 40% of all the distributions available from the project, increasing to over 50%, including its 24% equity stake.

This means for every dollar a private investor earns, Namibia is likely to earn the same – despite only providing a quarter of the requisite capital.

This excludes any other indirect and induced economic impacts, which should be several times this amount.

In addition to these direct and indirect economic benefits, the project has been tasked with implementing the project in a way that ensures that 90% of all jobs and 30% of all procurement will be from Namibians.

Based on the our early estimates, the Hyphen project alone could generate up to 20% of Namibia’s current fiscal take every year for the next 30 to 40 years.

Importantly, however, the government is focused on establishing a competitive and scalable industry, with conservatively 15 to 20 or more equivalent-sized projects.

Therefore, rather than trying to maximise its returns on one project, Namibia is trying to maximise the probability of success of the establishment of this transformative industry in the country.


The European Union (EU) has taken a different approach: While it has provided incentives for the production of green hydrogen in Europe, it has also provided incentives for green hydrogen projects on the African continent as part of the Just Energy Transition, as a ‘once-in-a-generation’ opportunity for African states to industrialise, and at the same time make the most of Africa’s renewable energy potential to combat climate change.

It is this approach that is espoused in the Global Gateway Initiative and which has led to the N$2 billion in grants received to date from Team EU in a bid to help Namibia compete with relatively wealthier nations as we seek to establish a competitive synthetic fuels industry.

So what has transpired practically? The development budget of the project up to final investment decision is €93 million.

The government was able to negotiate to acquire a 24% stake in Hyphen, which results in a funding obligation of €23 million (€93 million x 24%).

Namibia has already received €40 million from the Dutch government in grants to help with the development of this and other projects in Namibia, which means the government still has €17 million to use to derisk other hydrogen projects.

We have placed the €40 million in the SDG Namibia One Fund and intend to raise another €60 million from other sources around the world, all to be used to derisk the development of this industry in Namibia.

When the project takes its final investment decision and prior to financial close of phase one of the project, the government will consider whether to retain all of its equity or reduce some of its stake and allow other investors to buy a now derisked interest in the project at a profit to the government.

This would include local pension funds, banks and other local strategic investors.

All this is possible because the government had the foresight to recognise that the world is moving strongly to combat climate change, and was looking to make help available from any country that was willing and able to contribute to this effort, which requires us all to hold hands among ourselves at home and with the global community at large.

To fund its equity at financial close, the government has secured a letter of intent from the European Investment Bank (EIB) of €500 million in funding, which should be sufficient to fund 100% of its equity requirements for phase one.

The government will evaluate other funding options for its equity at financial close, including grants and debt funding from other financiers, should they be more favourable than the terms being offered by the EIB.

In summary, we urge all Namibians to consider supporting the government’s humble efforts to provide jobs and livelihoods to the people of Namibia, while at the same time meeting its policy objectives to industrialise, diversify the Namibian economy, improve employment and livelihoods, and to become a responsible citizen of the global community.

The indefatigable Wangari Maathai appropriately said: “We all share one planet and are one humanity; there is no escaping this reality.”

Namibia, like many other governments, is taking this advice to heart and is moving in ways that espouse Maathai’s wise words, while retaining the mission our founding president gave us back in 1994 through Vision 2030.

• James Mnyupe is president Hage Geingob’s adviser on economic matters.