Orji: There Must Be Commitment to Grow Sovereign Wealth Fund

Uche Orji

In this interview on Arise TV, a sister broadcast station of THISDAY, the Managing Director of the Nigeria Sovereign Investment Authority, Mr. Uche Orji, provides insights into the status of the Sovereign Wealth Fund, update on ongoing infrastructure projects among other issues. Peter Uzoho presents the excerpts:

Tell us the status of the fund today as well as the value of the assets under your custody?
In terms of asset contributed to the fund, so far we have asset to fund to the tune of $1.5 billion. We have had returns over the last past years, we have been profitable five years in a row but the returns are on top of what we have contributed to the government. So $1.5 billon is the actual size of the contributions to the fund. Now, there are also third party funds that we manage on behalf of various agencies of government and also on behalf of the government. There was $350 million that we manage for NBET, that mandate expired at the end of July 2018 and we returned the fund at the end of August 2018. Then, we also have $650 million which we manage as part of the Presidential Infrastructure Development Fund, again, funds that are not really part of the NSIA shareholder funds. If you look at the NHIS Shareholder fund, all together it’s roughly about $1.5 billion of contributions. Last year, we made profit of $95 million, a year before we made over $130 million of profit. So, it’s been quite accreting. In terms of the status today, we are roughly at about $1.8 billion.

We have three major funds under your management which is the Stabilisation Fund, the Future Generation Fund and the Infrastructure Fund. How are the assets allocated to each of these funds and which of them generates the most in revenue?
There are three funds and three different mandates when people look at the NSIA mandate. Initially, we started with 20 per cent Stabilisation Fund; 40 per cent in Future Generation Fund; and 40 per cent in the Nigeria Infrastructure Fund, with different horizons. The Stabilisation Fund is actually short term and it’s not expected to generate a huge amount of return because is short term you couldn’t instrument. We are expected to liquidate within seven days and make any demand from the federal government. So, short-dated instrument, very liquid, is expected not to earn a huge amount of return. But in 2017, we did about six per cent return on that fund in dollars. The Future Generation Fund is really where we expect to see a lot of returns; that is about 10 years horizon, and it’s across the diversified private equity, public equity, global, local. Also we look at things like other devices like hedge fund asset, commodity investment, real estate investments, all in that fund. That fund returned 8.6 per cent last year in dollars. Now, we expect that fund to really be the engine of the NSIA in terms of generating returns because of the kind of assets invested in. So if you take private equity for example, we tend to double our money in every private equity business we make. So over a period of five, six years we are looking at another return of 15 to 20 per cent in private equity.

So have those expectations been met so far?
In some, yes! Some, the investments are still running. Because in private equity we invest and most times at the end of the investment you sell the asset before you can actually receive a return. Now, the Infrastructure Fund is very different, the shortest thing we have done in infrastructure is our healthcare project which we are commissioning a Cancer Centre in January at the Lagos State Teaching Hospital as part of the Public Private Partnership (PPP) projects. We are also commissioning a Cancer Diagnosis Centre in Kano and Umuahia. That took 18 months to build. So the returns expectations are very different. We have a 20 years horizon in our infrastructure fund. We mentioned the Second Niger Bridge, that’s going to take 25 years – about three years, four years to build; at 25 years we are able to exit our investment. So that is expected to make money. We expect that that will make in some cases on average we are looking at making about 7-8 per cent from some those projects. That’s not a snapshot you can take immediately. It takes a while to invest, build those assets before can be able to make a return.

Now, under the Infrastructure Fund, the NSIA has undertaken the funding of the Second Niger Bridge as you have just mentioned, which is obviously a major infrastructure project that you said will take you 25 years to exit. And it’s supposed to provide the link between the South-east and the rest of Nigeria. What is the status of that project, how much is that costing the NSIA, and who are the other partners funding it?
For the construction period, we expect to finish the project by 2022; that includes the bridge, the access road, because it’s a big project. The bridge section alone is about 11. 7Kms, the Third Mainland Bridge is about 13.6KMs. That gives you an idea of what we are building there. Then you have an additional road section of 33Kms; it’s a massive project. So we are expecting construction to be done by 2022 at the latest. Then we start operating; it’s a toll bridge, it’s a toll road, so it’s going to take time before our returns can come back from that project.

Where we are today, most of the panels have been done as at November 2 which was my last status visit to the project. We expect that by March, latest by June next year most of the pillars will be up and by the end of 2019 most of the slabs will be on. So you will actually see a bridge by end of 2019. Now the access/approach roads will still take another couple of years before that can be completed. So we are actually targeting commissioning by 2021, 2022.

What other infrastructure projects are you funding under the infrastructure fund?
So there are key areas we are involved in infrastructure. Road is one, power, agriculture, healthcare, and more recently we are looking at gas and gas-related infrastructure. So on road, Second Niger Bridge is one, Abuja-Kano Highway is the second one, and the Lagos-Ibadan Expressway, recently, we had just released fund for that as part of the projects under our portfolio. Now, that is being managed through the Presidential Infrastructure Development Fund that is being managed by the NSIA. In agriculture, we were involved in the Presidential Fertiliser Initiative which we ran at the NSIA which by the way I think is most spectacular success.

At the beginning of 2014, there were 36 milling plans across the country, most of them moribund, not working; we used to import fertilizer with huge amount of money spent on subsidy. But this could have been replaced through local manufacturing. So we entered into a transaction where we actually have the industries revived locally. As the first time in the last two years, we haven’t had complaints about fertilizer shortages. By the way, there was no subsidy spent on these things within the period. So we would have had N250 million subsidy spent but the relative was the number spent on most of programmes. So, agriculture I think for us is one standard areas of success. So we’ve been quite busy in agriculture and I think that’s one area we expect to see a significant success. Now, in healthcare, by January 15, our Cancer Centre at the Lagos State University Teaching Hospital (LUTH) will be commissioned. It’s a Public Private Partnership (PPP) project with LUTH. At the moment it’s owned by the NSIA. We expect over a seven year period to earn our return and then overtime transfer to LUTH. In that seven year period we would have earned our money back, we would have also been able to train the people especially in LUTH to be able to run it. So it’s a build, operate and then transfer eventually. The same is happening in Kano and in Umuahia. So we are looking at commissioning all three projects between January and February but LUTH is the first to go and they will start taking patients soon after that. Now, that is the first phase of 13 of such projects across the country. There is a huge opportunity in healthcare that we are wasting in this country. People still go to Ghana for cancers treatment. We can get those things done locally, and I think that is something that we see as an opportunity. By the way, this are not a social investments, these are actually commercially viable investments that we are making across these space and we expect to make between 8 to 12 per cent from some of these projects in healthcare. Now, in gas-related infrastructure, it’s still early days for us in gas but we believe that it’s part of the new marketing industrialisation strategy for Nigeria. The recent policy to increase the cause of flare gas I think is providing an opportunity for people to actually invest in this area. There is an offshoot of the agriculture programme. We are building an ammonia plant with OCP of Morocco; that was announced last year, where are still in the first year of actually doing preliminary work on that but we expect that that will help to balance fertilizer trade. What is fertilizer trade? At the moment we buy Phosphate from Morocco. But Phosphate is coated with ammonia; ammonia is made from natural gas. Nigeria has natural gas but we flare it. We want to turn around ammonia for export, that’s the logic behind the agreement with OCP. So we are looking in the next couple of years to have a plant ready export of ammonia and that turns our natural gas that are being wasted into products that we can actually make some money out of it.

We are talking about a lot of projects and since we are on the commercial viability of some of these projects, I want to look at the financials at a glance. Your audited financial account for 2017 showed that even though the NSIA has declared profit after tax of N22.6 billion, some of your investments in fertiliser like you just mentioned, the blending facilities were still operating at a loss. So why do you continue to retain such investment subsidiaries if they are not profitable?
No, no, so it’s the first year and from the eight year we are going to recoup some of those losses and my view is that over the next two, three years. It was a 12 years operation, so we took 12 blending plants from standing style from actually complete moribund. Most of these places they look like a war zone completely abandoned. The business plan we have is that by the third year my sense is that we are going to recoup some of these losses.

I want us to also talk about some of your shareholder funds. In 2017, looking at those funds, the annual report stood at N501 billion or the equivalent of $1.64 billion obviously using the N305 to a dollar exchange rate. It’s apparent that your shareholder funds are stagnant. Why is that the case, and isn’t this indicative of that the return on investment appears to be very low?
Well, no, there are two ways to look at it. The first is obviously contributions have not been as strong as they should be. So we’ve had billion dollars and then we’ve had $250 million coming towards the end of 2016 and then another $250 million coming towards the end of 2017. You need to look at the returns on the average of some of the assets. So anyone looking at 2017, we didn’t have N500 billion for all of 2017. But $1.25 billion was what we started the year with and then we received $250 million towards the end of the year. So you can’t use the snapshot at the end of the year.

How much had been used up before you got that $250 million?
So, most of the year was $1.25 billion. We didn’t have the last $250 million until September. We didn’t have the money to work until November when we got that money to work. So the easy was simply to use most of the $1.25 billion for most of the year. Now, the returns on that is coming out at an average 7.6 per cent which in dollar terms is not something to dismiss that, it is not inconsequential in dollar terms. And again, two different funds have two different mandates. The Stabilisation Fund, the benchmark is two per cent. The benchmark is capital preservation in dollar terms but we made more than that. Each fund has its own benchmark.

If you made more that, how much more did you make?
We made about six per cent on the stabilization Fund against the benchmark of two per cent. The Future Generation Fund, we made more than eight per cent – about 8.6 per cent, I don’t have the numbers right in front of me, and it’s 2017 we are talking, so these numbers are loaded, you can always go back to the accounts and look at the numbers. Now, could that have done better, yes! But the standard criticism on this job is very simple: lose money you are a fool; make money you didn’t make enough. So I came into this job knowing fully well that everybody has the right to be curious about that and make those statements. But when I took this job and one of my mentors who was had been the CIO of the Courier Investment company said this to me: ‘the standard criticism of the sovereign wealth fund manager in Nigeria is that you could never satisfy the… performance; don’t lose money but if you make money you don’t know how much you make, it’s not enough.’ Now, in aggregate, that I don’t think is something to dismiss. Now, it’s not third quarter, it’s second quarter anyway in terms of when we look at our peers. The real challenge in this job is frankly in a market that is quite volatile. By the way, in 2018 we started to have more volatile market than 2017. This same year, the US Stock market made record highs and in this same year, two to three weeks we lost everything. So it’s incredibly volatile market and so holding stables sometimes is actually not a bad thing and it’s kind of more challenging than you think.

So, are you saying that part of your assets are invested in the US Stock market?
Some, 10 per cent of the FGF is in developed market’s open market.

Isn’t that too volatile?
It’s an asset allocation that we agreed and published and said that this is what we are going to invest in.
But why don’t you invest in bonds which are safer?
Are they? What makes you think they are?
They are safer!
No, no, no, let’s go to that for a minute; this is what happens to bond prices: in a rising interest rate environment bonds tend to collapse in terms of valuations. And then, two, if you invest in a corporate bond and the company goes bankrupt, it’s the same risk. So the point I’m making is that it’s safer than equity.

Don’t you think it’s lack of political will to save excess proceed from crude oil sell for the Nigerian owners of the fund which is obviously the federal government, the states and the local governments, that is the challenge and what needs to be done to grow our fund for future generations?
I agree with that; in terms of the size of the NSIA relative to the size of the GDP of the country, it’s small. And I think very soon the argument we started late, there must be the commitment to invest in the Sovereign Wealth Fund. We ought to have three mandates: The Future Generation, the Stabilisation and the Infrastructure. We are probably the one with those three mandates. Most other Sovereign Wealth Funds have only two mandates – Stabilisation, Generation/Assets, it’s focused on domestic infrastructure in particular. It’s a whole different skill-set to manage and invest in that area. And that means that the NSIA took its mandates and it’s all about consistency and contribution. The other sovereign Wealth Funds that you have mentioned are doing that. Abu Dhabi started in the 70s, Qatar started in the 50s. So there must be a consistent approach to investing in Sovereign Wealth Fund and the impact should be measured in decades because that’s not what we have been comparing them with. Today you are comparing them after 30, 40 years or 70. We must be consistent at a start, and I think that is something we need to address as a nation.