To The Moon

Originally published in the Informanté newspaper on Thursday, 27 July, 2017.

Forty-eight years and one week ago, mankind first landed on the moon. This means that more than three-quarters of Namibia’s population was not yet born when this momentous occasion happened, and of those that were, a significant portion were either too young to remember it, or did not have the technological capability available in their homes to witness it. For those who missed it, this written account should hopefully suffice. 

The journey to the moon started a few days earlier, on 16 July 1969. At the Kennedy Space Center stood a Saturn V rocket – the largest ever constructed at that stage. At 13h32 UCT, its engines fired, and the journey started. After a mere twelve minutes, the craft entered orbit around the earth, at an altitude of 186 km. They orbited one and a half times before the third-stage rocket engine fired, and pushed the spacecraft onto its trajectory towards the moon. 

30 minutes later, the Apollo Command/Service Module separated from the rocket stage, and turned around. It docked with the rocket stage to retrieve the Lunar Module that was still attached to the rocket stage, and once that was done, adjusted its course to head for the moon, while the rocket stage continued on a trajectory past the moon and into orbit around the sun. 

Three days later, Apollo 11 passed the moon and fired its engines to enter orbit around the moon. Three days, and 384 000 kilometres later. A little known fact is that all other planets in the solar system can fit in between the Earth and the Moon – and our astronauts covered that distance in three days. The orbited thirty times, passing over their selected landing site in the Sea of Tranquillity while preparing for their descent. 

On July 20, 1969, Commander Neil A Armstrong and Lunar Module Pilot Edwin ‘Buzz’ E Aldrin, Jr, entered the Lunar Module ‘Eagle’, leaving Command Module Pilot Michael Collins along on the Command Module ‘Colombia.’ As the Eagle separated from the Columbia, it first pirouetted before Collins so he could ensure it was not damaged.

As their descent began, the crew of the Eagle saw that they were passing the surface about four seconds ahead of what was expected, and reported that they would land west of their target location. Five minutes into the descent, they found themselves with a problem. The Lunar Module navigation and guidance computer started reporting ‘1202 and ‘1201’ alarms. This computer was not a large one, with a Central Processing Unit running at about 1.024 Megahertz, or about 2000 times slower than a modern iPhone 7’s CPU, with core memory of about 4 kilobytes, or less than this entire article in plain text.

What had happened was that a radar switch was placed in the wrong position due to an error in the manual, and it was bombarding this small computer with signals it did not require. Its software, fortunately, was smart enough to realize this, and the alarms indicated that it was suspending non-essential tasks to focus on the important ones – the ones needed for landing. 

Computer Engineer Jack Garman realised this, and told guidance officer Steve Bales that it was safe to continue descent, and it was relayed to the crew. Armstrong looked outside, however, and saw that the computer’s landing target was filled with boulders, and at the edge of a crater. Armstrong took semi-automatic control, with Aldrin calling out data to allow him to control the descent. 

A few moments before landing, Aldrin noticed the light that indicated one of the 170 cm probes hanging from the Eagle had touched the surface, and he said, “Contact light!” Three seconds later, the Eagle landed, and Armstrong said, “Shutdown.” Aldrin followed this with, “Okay, engine stop. ACA – out of detent.” Armstrong acknowledged him with, “Out of detent. Auto.” Aldrin continued, “Mode control – both auto. Descent engine command override off. Engine arm – off. 413 is in.”

The Capsule Commander at NASA, Charles Duke, acknowledged their landing with, “We copy you down, Eagle.” Armstrong first acknowledged Aldrin’s checklist completion with, “Engine arm is off.” Then he responded to Duke with the message, “Houston, Tranquillity Base here. The Eagle has landed. “ 

Armstrong had unannounced and unplanned changed their call sign from Eagle to Tranquillity Base to emphasize that their landing was successful. Duke expressed his relief at this, and accidentally mispronounced the call sign as he responded, “Roger, Twan— Tranquillity, we copy you on the ground. You got a bunch of guys about to turn blue. We're breathing again. Thanks a lot.”

The mission now called for a five-hour sleep cycle for the astronauts, but they elected to continue preparations for their extra-vehicular activities, as they felt they would not be able to sleep. Preparation took longer than the two hours scheduled, but soon they were ready to begin. The highest heartrates recorded from the Apollo astronauts occurred with their egress from the Lunar Module.

Armstrong stood on the footpad of the lunar module and described the surface dust as very fine-grained, and almost like a powder, before, six and a half hours after landing, he stepped off the module and declared, “That’s one small step for a man, one giant leap for mankind.” 

After more than 21 and a half hours on the lunar surface, they started their journey back. They had left behind several scientific instrument that would continue sending data back, as well as an Apollo 1 mission patch and a memorial bag containing a gold replica of an olive branch, the traditional symbol of peace. But perhaps most memorable was the plaque left of the lunar descent stage, bearing drawing of both hemispheres of Earth, the signatures of the astronauts and President Richard M Nixon, and an inscription that read:

Here men from the planet Earth first set foot upon the Moon, July 1969 A.D. We came in peace for all mankind.

Bank of Last Resort

Originally published in the Informanté newspaper on Thursday, 20 July, 2017.

The last few months, the Bank of Namibia has been in the news almost constantly after its take-over of SME Bank, and the past few weeks especially, given that bank’s liquidation. This is, of course, the result of Chapter 17, Article 128 of the Namibian Constitution, that states, “There shall be established by Act of Parliament a Central Bank of the Republic of Namibia which shall serve as the State's principal instrument to control the money supply, the currency and the institutions of finance, and to perform all other functions ordinarily performed by a central bank.”

The Bank of Namibia is that central bank. As to how central banks came to be, well. As with most institutions in the modern age, central banks originated from the last great empire – the British Empire. Back in the 1690’s, the Kingdom of England was involved in a war with France, and King William III’s government found it difficult to procure funds for this war. Credit of a government, up until that point, was tied to the reigning monarch, and different ones had different levels of fiscal responsibility. Monarchs are notorious for not wanting to relinquish authority until they have no other choice, and so too here. 

Up until that point, the printing of currency was under the sole authority of the king, which is why he was having credit issues. Lenders did not want to lend money to a king who would just print more currency, and thus devalue the money they lent to him. Thus, the Bank of England was born, to which was entrusted not only the accounts of all of government, but also the exclusive right to issue bank notes. When the Bank of Namibia was established this was one of the responsibilities it gained.

Initially, all of the money printed by the bank was backed by gold, but the first cracks in this system appeared in 1797, when a bank run to convert paper money into gold occurred. The Bank of England suspended conversion into gold, and in the analysis of the bank run afterwards, it was resolved that the central bank should not only act to stabilize the currency, but also act as a lender of last resort for other banks. And so the final few functions normally attributed to central banks was born.

So the Bank of Namibia is also Namibian banks’ lender of last resort. What does this mean? Well, to explain that, we need to examine the concept of fractional-reserve banking. While banks originated simply as a place to store depositors’ money, the problem was that inflation always ate away at that store of value. As such, big depositors usually did not store their money for long in a bank, before using it to invest in a venture that would enable them to growth their money at least a bit more than inflation.

Businesspeople would thus often approach a bank to try and find out who would be able to assist them in financing their ventures, and soon the banks realized there was an additional service they could offer. Many depositors would invest willingly when offered such chances, but several found the additional hassle too much. Others would have liked to invest, but had too little to offer. So banks started offering interest of deposits held by them, with the understanding that they would take these deposits, pool them, and invest it in ventures to earn greater returns. Banks thus no longer just offered deposits, but loans as well. As a result, only a fraction of deposits would be held in cash as a reserve for deposits – hence ‘fractional-reserve banking.’

This presented a problem, however – if banks lent out too much of the money deposited, then they’d have nothing to give those depositors who wanted to withdraw their deposits. When that happened, word would spread amongst the depositors of a bank, and they’d all run to the bank to withdraw their deposits. With loans generally being on longer terms than deposits, the bank would quickly run out of cash, and would have to recall all loans – often driving them out of business. This is what is called a ‘bank run.’

So when that bank run in 1797 occurred, it was established that central bank would act as lenders of last resort. When a bank ran out of cash for depositors, it would supply that cash to the bank to prevent a bank run – but there was a price to be had. For this to work, the lender of last resort institutes several regulatory measures to try and prevent it needing to do so on a regular basis – to try and mitigate the moral hazard it presented to banks. This ranges from instituting the fraction of deposits that must be kept in reserve, up to and including taking over management of a bank that requires such assistance to see what lapses occurred to require such assistance in the first place. 

When we take a look at the SME Bank, then, we can see this is almost exactly what happened. When a large depositor wanted to withdraw an investment, the bank could not produce the cash required. Based on the information the Bank of Namibia had, the bank should not have been in this position. As such, it took the drastic step of taking over management to see what went wrong. As such, the ill-advised investments at that bank came to light, and the Bank of Namibia realised that the investments were not recoverable, and thus could not extend liquidity as lender of last resort, as that would throw good money after bad. As a result, they placed the bank in liquidation.

So the Bank of Namibia in the final act did perform its duties as central bank admirably, but it did reveal several lapses that should not have occurred. After all, it was their duty to regulate the bank to such a degree that this would not be possible – taking over management and liquidation is its nuclear option, and the assessment of a bank’s investments is part of its regulatory mandate. Let us hope that the Bank of Namibia takes this lesson to heart – otherwise the Namibian nation will lose its faith in its central bank, and that never bodes well for a nation’s future.

State Owned Returns

Originally published in the Informanté newspaper on Thursday, 6 July, 2017.

During Trustco’s Results Presentation keynote, Dr Quinton van Rooyen revealed a very telling statistic about the Namibian economy – namely that 58% of the net worth of the top 30 companies reporting public financial information in Namibia is owned by government. Furthermore, analysis of his figures showed that whereas foreign companies and Namibian companies generally give a return on equity of 18% and 21%, State-Owned Entities only managed a return of 2% - of which 97.6% was contributed by Namdeb and MTC! 

When we consider that government itself constitutes about 30% of the economy on its own, these figures reveal that through state owned-enterprises, government itself thus has effective control of a much larger segment of Namibia’s GDP than can be easily seen. Thus, when the nation is in a recession, it seems like government itself should have the capability to kick-start the economy itself – after all, it is in direct control of a large part of it. Why then are we having a recession? And if government cannot leverage optimal returns from the SOE’s, why do they exist?

Well, state-owned enterprises form as a result of a failure of the free market due to natural monopolies. A monopoly exists when a specific business is the only supplier of a particular commodity. As a result, if a business is a monopoly, it seeks to maximize profit – but as a monopoly, it can SET the price of the commodity, as it is the only supplier. In a competitive market, other suppliers would compete, and drive prices down to the marginal, or per-unit, cost of the commodity, but when no competitors exist, the monopoly will increase prices to maximize profit.

A natural monopoly arises when a business requires high fixed costs to start-up, and has unique resources that can only be acquired once – such as a port at sea, etc. Natural monopolies, then, mostly arise due to infrastructure. After all, once a road network or power distribution network is built, it is much easier for those owning the networks to expand, and conversely, prevent any competitors from springing up. Hence, when such a natural monopoly is created, it is in government’s interest to own it, as government can then ensure that it is run for the people. Or at least, that’s what they intend.

Unfortunately, state-owned enterprises fall victim to what is known as the principal-agent problem. The principal-agent problem develops when a principal (investor/owner) creates an environment in which its agent’s (managers/officers) incentives don’t align with its own. Where in a private company, investors demand profits, and align its employee’s incentives to reward them for increasing profit, either via increased sales or greater efficiency by reducing costs, now the government usually wants to run the monopoly to serve the most people. Unfortunately, governments are used to run government – and set up their incentives in the same way they’re used to.

For any government, its greatest incentive is to remain in power – to provide whatever promises and services is needed to ensure they retain the trust and, more importantly, the votes of the public. Government funds itself via tax revenues – which they can raise because the people demanded this or that and they need to fund it. When such incentive structures are replicated in a monopoly, however, you start to see a problem. With incentives designed to stay in power, there is no incentive to remain efficient, to provide returns for the people. For the first few years, the SOE is run at prices much closer to marginal cost, but without incentives to stay there, soon the incentives to stay in power take hold. 

Above-average salary increases are granted, with perks to keep staff loyal. This increases costs, but no matter – the SOE is a monopoly and can adjust prices. They are still, after all, cheap. Yet a few years down the line, these price increases can no longer be tolerated – the people complain. The principal demands that prices be kept down, and the agents have no choice but to comply. To sustain their incentive structures, corners are cut. Efficiency drops, and pretty soon all the returns that had to go to the people, are now going to those managing the SOE. 

That is how the return on equity of a state-owned enterprise ends up in the doldrums. When we take a look at our own State-Owned Enterprises, is this not exactly what we see? The solution is simple – fix the principal agent problem. Ensure that the incentives of the managers and officers of state-owned enterprises don’t reward staying in their positions, but rather that they are rewarded for efficiency and service delivery. 

If government finds this difficult, it should consult the private sector for guidance – after all, these are the companies that know how to align employee incentives for above-average performance. In the private sector, there is no qualms about firing employees who do not contribute to performance. It might be a painful adjustment for those managing state-owned enterprises, but it is what we as a public not only expects from them, but what we require from them.