UCHE ORJI : Nigerian Economy Remains Attractive for Investors

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2020 is, no doubt, a tough year for Nigeria and most economies globally. However, amidst the turmoil and downturns, there are rays of hope. Managing Director/Chief Executive Officer, Nigeria Sovereign Investment Authority(NSIA),Mr. Uche Orji, confirms this in an interview with Kunle Aderinokun and Obinna Chima as he gives the recipe for mitigating effects of the looming economic recession in the country. Orji, who gives the details of operations of NSIA, the managers of the Nigeria’s Sovereign Wealth Fund, speaks extensively on how important and beneficial its programmes have been to the economy

The NSIA’s Future Generations Fund is targeted at the next generations of Nigerians. What is the NSIA doing to prepare the next generation to benefit from the fund?

Before I answer the question, let me provide you a background. The NSIA was set up with a three-fold mandate: provide a savings base for the Nigerian people; provide stabilisation support during times of economic stress; and invest to enhance Nigeria’s infrastructure.

It fulfills this mandate through the Stabilisation Fund, the Future Generations Fund, and the Nigeria Infrastructure Fund; these funds originally held the assets of NSIA in the following ratio: 20:40:40, respectively. These allocations are ring-fenced; meaning we cannot move the funds around once made.

Recently, we have reordered the allocation with future allocations weighted more to infrastructure with the ratio changed to 20:30:50. The NSIA Act specifies that each of the three funds must hold a minimum of 20per cent of the capital, and the rest is at the discretion of the board.

The NSIA started with an initial fund allocation of US$1billion, and from the start we recognised the need to balance the needs of the current generation (infrastructure) and the need of the future generations (savings) so we equally weighted the fund allocations 40:40, leaving the minimum 20% to stabilisation fund. However, as the daunting nature of the infrastructure needs became obvious to us, we tweaked the allocation for future contributions to increase the allocation to infrastructure.

The future generations fund invests in a diversified pool of assets ranging from private equity, global public equity, hedge funds and other alternatives. These are mostly internationally invested, and we aim to earn stable steady returns. This fund has also invested in almost every private equity and venture capital fund in Nigeria as we believe that developing this asset class is essential for the future of capital formation in Nigeria, as well as earning good returns for the NSIA. The investment horizon is 10years and the minimum expected return is US Inflation (CPI)+5 per cent.

The future generations fund is allocated 25% in private equity; 25% in public equities, 25% in hedge funds and 25% in other diversifiers. Within private equity, NSIA is invested in over 30 different private equity funds in Europe, USA, other African countries, and Nigeria. Recently, this allocation also includes venture capital with investments made in Nigeria VC funds and USA VC funds. Within hedge funds, NSIA also invests in secondary interests in private equity firms. NSIA is invested in public equity markets globally with 2/3 in emerging market funds and 1/3 in developed market funds. In hedge funds, the strategies we invested include global macro funds, long-short equity funds, global credit funds etc. and finally within other diversifiers, we invest in a lot of interesting funds that create other non-correlated returns such as healthcare royalty companies, aircraft leasing funds, commodity funds and real asset funds.

The infrastructure fund invests in the following areas of focus: agriculture, healthcare, gas industrialisation, power, toll roads and financial markets infrastructure. In addition, it has also invested in education (mainly primary education for the underprivileged through its ownership of 10 per cent of Bridge Academies Nigeria, a technology-driven school system – a prime example of the adoption of this system is the Edo best primary school system which adopted this strategy).

The investment horizon is 20 years, and it aims to earning a minimum of US CPI +6 per cent. The investments in financial markets infrastructure include Infrastructure Credit Guarantee Company Limited (InfraCredit), which provides credit guarantee for infrastructure bonds; Nigeria Mortgage Refinance Corporation (NMRC); Development Bank of Nigeria (DBN); NG Clearing, a derivative clearing house sponsored by Nigeria Stock Exchange. We believe these institutions are essential to a robust financial market. In healthcare, the NSIA developed PPP projects with Lagos University Teaching Hospital Oncology Centre; Aminu Kano Teaching Hospital in Radiology and Diagnostics as well as Federal Medical Centre Umuahia in Radiology and Diagnostics.

Within the Infrastructure Fund, it also manages third-party funds such as the Presidential Infrastructure Fund which is funding via a PPP, the Lagos-Ibadan expressway, Second Niger bridge and Abuja-Kano road; and co-investment funds such as its 50:50 Agriculture co-investment fund, with a Dutch/South African specialist agriculture investor partner, UFF/Old Mutual. NSIA also manages the Presidential Fertiliser Initiative (PFI) which revived the domestic fertilizer blending industry. These third-party funds are not included in NSIA balance sheet, but held for the account of the third party such as the FGN.

The Stabilisation Fund invests in investment grade fixed income such as Treasury Bills and investment grade bonds. It is short term in nature and can be drawn at short notice to meet the demand of the government. For example, recently in May 2020, we received a notification from the Minister of Finance (following due approval process as stipulated by NSIA Act) to provide US$150million from this fund for budget support; it was made available within two week, (although it took a further few months before the government actually drew down the cash). This is the only fund that the government can withdraw at short notice. The other funds are not accessible except through dividend payments.

So here is how are we preparing the future generation of Nigerians. First by preserving the funds and earning a return. The funds have been profitable for seven straight years. We aim to keep it that way and use the power of compounding to grow the fund.

Secondly, we encourage the government to contribute more into the fund. This has not been as successful we had hoped and as the country would have needed. The NSIA received US$1billion in 2013, US$250million in 2016, US$250million in 2017 and US$250million in 2020. Whilst US$150million was also withdrawn in 2020. Compared for example to Norway, which started with ~US$10billion in the early 1990s. Today through aggressive contributions they are now over US$1.1trilion. If I recall clearly, for most of 2012/2013, the country was contributing US$1billion weekly into the fund.

Thirdly, by making investments that are essential for the future generation: agriculture and healthcare are essential – we must eat and be healthy. Toll roads must be financed differently through PPPs. The current budgetary process is structurally unfit for purpose. In the budget, rarely will any project receive more than 5% of its budgeted cost in a year. This means all things being equal – meaning no inflation, no deterioration, no standstill costs, and interests- it will take 20 years to finish any project. That is just wrong! So, we are taking some major projects in a PPP structure with an aim of raising the necessary capital and finishing them. Our target for Second Niger bridge and Lagos Ibadan expressway is 2022. Abuja-Kano road will see some sections completed in 2022 and the rest we are targeting 2023. Note that NSIA did not award these contracts, it was done by FEC prior to NSIA’s involvement. NSIA’s role is to finance and operationalise through tolling and other revenue earning structures and where possible, conduct value engineering.

Fourthly, by attracting co-investment funds- such as with the Agric Fund, we have set up with UFF – a US$200million Agric Fund with initial commitment of US$25million from the NSIA and the rest from our partners with our anchor partner, UFF committing US$25million as well. We also worked with KfW and Ministry of Agric to sponsor the Fund for Agriculture Finance in Nigeria (FAFIN) in 2013, this is managed by Sahel Capital and makes private equity investments in agriculture across Nigeria. We are developing other similar funds for areas such as “Innovation Fund” and an “Industrialisation Fund”, which if approved by the board are aimed for early next year.

Fifthly, by bringing good governance to our enterprise and aiming to be an example of how government entities can be managed to world class standards. At least, that is what our goals are, and we strive daily to achieve that. Our healthcare PPP projects are an example. I am very pleased with our investment in Bridge Academies which is making first class academic curriculum accessible to children of the under privileged. That is what has underpinned school systems such as Edo best and making progress in other states.

How is NSIA investing in programmes to engage the youth, considering issues around the recent protests and the country’s high youth unemployment?

There are a number of investments that have created jobs and we are commencing a monitoring and evaluation to effectively track the impact, but let me mention a few: Some have created low-end jobs and some have created high-end jobs (if you will please permit me to use this distinction). Let me start with the “low-end”

The Presidential fertiliser initiative is reckoned by the Fertiliser Producers and Suppliers Association as having created about 50,000 jobs. This programme was designed to domesticate fertiliser production, reduce prices, and create jobs. When we started in 2017, only five blending plants were operating with less than 500,000MT capacity. Today, we have 32 blending plants with more than 4 million MT capacity. This past year, we have blended and delivered 12 million bags of fertilizer. The price of a bag of NPK fertiliser at the inception of the programme was N11,000 – N13,000 a bag and the programme brought prices down to N5,000 per bag in its first year. How did we do it? By implementing a contract manufacturing process that we designed along with the Fertilizer Producers and Suppliers Association of Nigeria (FEPSAN). The NSIA imported the key raw materials and negotiated discounted prices for the local raw materials and the blenders produced for the PFI and sold at the recommended price. The programme has run a four-year course and is now being restructured with the NSIA support being sharply reduced so that the revived blenders can begin to stand on their own.

The UFF/Old Mutual-NSIA Agric JV has invested in a farm in Nasarawa State which is a major demonstration maize/soya farm and feed mill processing farm rising from ~1300HA to >3000HA. The maize yields at this farm are currently 7tonnes/HA compared to 2tonnes/HA for the average Nigerian farm. We will be at 13tonnes/HA after our irrigation equipment are installed this year end. UFF and NSIA are commencing a similar farm in Gurara in January 2021. We have six other projects in our pipeline in other parts of Nigeria.

The programmes create jobs across the agriculture value chain. NSIA invested in Babban Gona, a social enterprise part-owned by the networks of smallholder farmers it serves through a model created specifically to attract youth. The members receive development and training, credit, agricultural inputs, marketing support, and other key services. The Babban Gona agriculture franchise overcomes a key underlying structural problem that keeps Nigerian smallholder farmers poor. Utilising a sustainable private sector model, it provides cost effective end-to-end services to a network of franchise farmer groups. The programme has helped thousands of farmers.

NSIA worked with the Ministry of Finance to set up Family Homes Funds which develops low cost housing. NSIA is a catalytic investor, but now in the process of divesting its investment as FHF is now fully established and running on its own. It aims to develop more than 200,000 units of housing including student housing which is going to be of keen interest to Nigerian youth. The various housing projects to be undertaken is and will continue to provide jobs for thousands of Nigerian youths.

On the higher end: the healthcare investments, particularly in cancer treatment, radiology/diagnostics and soon in pharmaceutical manufacturing have created and will continue to create high-end jobs. The oncology equipment we have installed there are some of the first in Africa and we hope to improve the tools available to Nigerian doctors. By the way, I believe medicine is an area of competitive advantage for Nigeria, we just need to invest and provide equipment to aid the effort of our highly trained doctors.

We have made investments in venture capital funds and almost every private equity fund in Nigeria who have gone to create companies that have created jobs.

There are many other areas in the works that will see us investing in innovative ideas. We are exploring ways to address Fintech, digital infrastructure, social infrastructure, and biotech. These are sectors that will open new opportunities, which will prove attractive to the younger generation.

How is NSIA prepared for a period of Nigeria without oil revenue? Is there any plan to grow the fund despite the thinning margins from oil revenue for the future?

The NSIA is working on several options to grow the fund. We cannot predict when oil revenue will cease to be impactful, but there are a few things we are working on to grow the fund:

NSIA is working with the FGN and National Assembly to increase the contribution of funds through other means outside the excess crude account into the NSIA.

Co-investment funds: The NSIA is creating co-investment funds with other investors as a way to increase the impact of its investments and also leverage specialist investment skillset.

Asset management for government. An option that has been used successfully by other funds such as Singapore is a transfer of government assets to their sovereign wealth funds. We are exploring this option to grow the fund.

Gas Industrialisation: whilst clean energy may reduce the demand for oil, I personally believe that gas industrialisation will remain a viable industry for a long time. Gas to Urea fertiliser, gas to methanol, petrochemicals, ammonia etc. will continue to grow. I believe demand for compressed natural gas and LNG is unlikely to fall as quickly or as sharply as oil is predicted to fall and will remain a growth sector. Hence, why it is an area of investment focus for the NSIA.

How do you think the outcome of the US Election will affect NSIA’s return prospects for 2020, especially in the medium term?

I do not think there will be a material impact frankly; however, on balance, I am positive. The NSIA portfolio is diversified and the world is more multifaceted now. Whilst the USA remains the most powerful driver of global financial markets, other countries are proving to carve their own direction lately, for example China. On the subject of the USA elections there are three factors to pay attention to: one, tax policies of the incoming government; two, the role/stance of the Federal Reserve- hawkish or dovish, and three, foreign policy especially their commitment to co-investing in Africa.

Other policies to pay attention to include: Biden’s clean energy policy may prove a double-edge sword – it may cause short-term production slowdown in the USA as they stop drilling in reserved areas and possibly stop fracking, and on the other hand may accelerate adoption of electric cars, hence depressing demand. We shall find out soon enough.

There is a fear that President-elect Joe Biden’s tax policies may be negative for capital and lead to a decline in the value of financial market assets. I disagree. Under former President Obama, the markets were strong, and Biden’s tax policies is unlikely to be different from the position under Obama.

The transformation NSIA is promoting through investment in Healthcare Centres of Excellence is encouraging. However, what are the plans for national coverage of those programmes?

As you would note the healthcare facilities so far built are sited strategically across the country with one each in the North, East and West. So, we had designed the location strategy from the onset to afford to accessibility to people wherever they may be within Nigeria. In terms of further expansion, there are 14 projects in the NSIA pipeline, and we plan to execute about 3 or 4 next year in other parts of Nigeria. We are looking to build a center for advanced medicine in partnership with another agency of government, and preliminary work has commenced on this already. We are also looking at pharmaceuticals manufacturing. One of the major challenges of COVID -19 was the depletion of our pharma supplies as India stopped selling to other countries. COVID-19 showed us the limitations of trading as solution to all problems.

The need to build manufacturing and pharmaceuticals is critical in my view.

We have had three projects as proof of concept, and we have learnt from our mistakes. We will now aggressively drive implementation in other places. Oncology is high on our list. We will be working in partnership with teaching hospitals to build more of such centres as we built at LUTH.

What is NSIA doing to address the issue of affordability at those healthcare institutions where it had invested?

NSIA cancer treatment center is much cheaper than the alternatives. Our rates for radio and chemotherapy for 30 days treatment is roughly one fifth of the cost of the same treatment in Ghana. Certainly, much more expensive in Europe, Dubai, and India; because you must add the additional travel cost and expenses associated with traveling with a care giver. We believe our equipment is superior to Ghana and our centre is more modern. We have also appealed to foundations and endowments to help create a support system to help Nigerians offset the cost of care.

Is the NSIA not considering going into a partnership with NHIS to broaden the net for the uncovered?

We have had discussions with NHIS in the past and at this stage still studying the health insurance sector. Presently, I cannot see a possible role for NSIA in this sector just yet.

What is the state of the second Niger Bridge and has COVID-19 in anyway affected your anticipated delivery timeline?

It’s ongoing. Yes, COVID-19 affected the pace, but not by more than a few months. We are hoping to complete the phase of the bridge that the NSIA is handling in 2022. Today, you will see the decking is almost completed on one side of the bridge and the second decking will commence soon. The River Niger is a strange river where water level rises to a height of up to 12 meters between dry season and peak of rainy season, with a lot of flooding in the nearby areas. So, it is a tricky piece of engineering.

InfraCredit, DBN, NMRC, FHFL are all interested sub-segments and necessary component for a well-rounded financial market. What is NSIA planning to address next?

There are couple of other areas that are in the horizon. The most immediate area of focus is the Commodities Exchange for which we expressed interest as far back as 2016, but have been unable to make headway with that investment so we are exploring other ways to participate, including setting up a Greenfield exchange. We are under NDA on the other areas as well, so we’ll let you know as soon as we are able to disclose, because we are working with third parties here.

When will the Infraco, which was announced by the CBN Governor and approved by the federal government take off?

The Central Bank of Nigeria is leading this effort, whilst NSIA and AFC are investors and co-sponsors. I will allow the CBN to guide the market on the timing.

As we move closer to 2021, what should Nigerians expect from the NSIA next year?

Hopefully, 2021 will not be as disrupted as 2020, we expect to deliver 3-4 projects in healthcare, capital raise efforts for the toll roads (Second Niger bridge, Abuja Kano road and Lagos-Ibadan expressway) with significant progress in construction and full corporatisation of the PPP structure. Final Investment decision on our US$1.2billion Ammonia plant in partnership with OCP of Morocco and possible commencement of work; two more projects in Agriculture and active fund raise for the co-investment fund; conclusion of our 10MW power plant in Kano and an effort to raise co-investment funds to roll out these projects across other parts of Nigeria.

What’s the total assets under NSIA’s management?

Our reporting currency by our Act is Naira, so I will share as is reported in the accounts in Naira.

In 2019, it was N649.84billion (using then exchange rate of N325/US$). So far in 2020 as at August, we have earned about N45billion, plus a further over N60billion in devaluation gain as exchange rate (this is unaudited) moved to N380/US$ for NSIA books. I will wait until year end to give you a firm set of numbers.

What’s NSIA’s current operational capital?

Government contribution is about US$1.6billion. NSIA has made cumulatively over US$350million in earnings.

Have the 36 states of federation been cooperative with NSIA and what’s their level of financial commitment?

So far, they have been very cooperative. But in the era of scarce resources they have their priorities too and their contribution has not been as consistent as one may hope.

Could you let us into NSIA investments in and around the world and the rates of returns?

Sure, we can! At the end of 2019 the returns range from 5.7 per cent for Stabilisation Fund, 6.11 per cent for Future Generations Fund and 6.8 per cent for Nigeria Infrastructure fund

What qualifies a project for execution or what are the criteria used to select a project?

A project must pass the following four-point test: 1. Is it of national importance? 2. Can we earn a balance of commercial returns and social impact? 3. Can we attract co-investors? 4. Is there a supportive legal and regulatory investment?

Once it passes these four-point test, we have to decide, if it is an area of focus – i:e we can sponsor, or co-develop and invest; or an area of interest, in which case we can only invest and not play the other two roles of sponsorship or co-development.

For most third-party investments, we only invest convertible or straight debt instruments. We no longer consider investing equity in third-party sponsored projects (because we have struggled with valuation and share agreements tend to be tricky if the project is already on the way) unless we are joining from the point of inception. And even then, our preferred option is debt as a way to protect NSIA’s funds

With the current state of the economy, can you say Nigeria is attractive to foreign investors?

These are challenging times for Nigeria as FDI has declined relative to our peers. But the Nigerian economy presents a lot of opportunities and in my opinion remains attractive. With the population and demographics, there are opportunities for investors.

I make haste to add that we should not discountenance domestic investors. The quantum of cash that pension funds and other funds can invest is quite substantial and is being channeled now to the stock exchange and real estate markets as money market yields have declined sharply. So, we are also focused on channeling these into the markets. This was the primary reason for which the NSIA created InfraCredit to help pension funds invest in infrastructure bonds.

As an international finance expert and banker, how can Nigeria mitigate the looming economic recession?

There are a few tools that can help us in this recessionary period. One, a focus on construction that relies on locally available materials should be encouraged. More housing starts, more projects like the cement road built by Dangote and Hi-tech have the potential to create jobs without causing inflation associated with construction projects that use imported materials.

Two, Nigeria is asset rich, with a lot of its assets either undervalued or not even reflected on the balance sheet adequately. Revaluing these assets, making them assessable to investors are all possible options – privatisation, commercialisation etc. If we can create a geographic information system for all land across the country (not just Lagos, Abuja and the big cities and build infrastructure, it will attract investments).

Three, we need to clear debilitating regulatory and legal hurdles for investors. The relative decline in investments in the oil sector is a case in point, due to the lingering PIB which thankfully is being cleared up now.

Fourthly, reviving stalled state assets are important. Whilst we are looking at building new rail lines perhaps, we should put the narrow-gauge rail line to work as a lot of money has been spent on fixing it.

Finally, unlock the stalled privatisation programmes- Ajaokuta, ALSCON represent some of the most valuable assets that are being allowed to waste because of protracted legal challenge to the privatisation.

PWC reckons that the value of ‘dead capital’ in Nigeria~ is up to US$900billion. This should be an area of focus as it can attract foreign investments

Has the NSIA been assessed by international ratings agency, in recent times? If so, can you share the ratings with us?

The NSIA has not been assessed by an international rating agency because from our early engagements with them, we were informed our rating cannot exceed that of the Nigeran Sovereign State rating. So, Nigeria is currently BBB internationally by Moody’s. The NSIA, being owned by Nigeria is unlikely to exceed that. Domestically, however, it is expected to be AAA given that InfraCredit, which was wholly owned by NSIA at one point was AAA rated, and that was before it invited other shareholders such as AFC.