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Infrastructure, Real Estate

How NSIA is Driving Infrastructural Development Projects.

The Nigeria Soverign Investment Agency (NSIA) is determined to explore investment opportunities in the country and beyond  to ensure that they benefit from its mandate. With investments spread across oil and gas, agriculture, power, among others, NSIA appears set to guarantee returns on investments for its subscribers. In this interview with reporters, NSIA’s Managing Director/CEO Uche Orji talks of the prospects and challenges of the Authority, saying while the agency is keen on investing, it is weary of making wrong investment decisions. Group Business Editor SIMEON EBULU was there.

Can you take us through last year’s operations of the NSIA?

We had a successful 2018 by some methods, but I think we could have done better in certain aspects. It was our sixth straight year of profitability, but it was the first year when we invested aggressively in things like the infrastructure fund and we have started to see some of the benefits of the infrastructure fund. That is important because Infrastructure Fund takes time before to yield returns. So, you are building the Lagos-Ibadan Expressway and the Second Niger Bridge, it would take a while before it starts yielding returns. As we start to make aggressive investments in infrastructure, you are going to see less capital available for us to invest in markets. So, it is important that we replenish that through further contributions, to maintain the pace of profitability in NSIA. Having said that, 2018 was our six straight year of profit. If you take out forex translation gains, we made profit of $87 million (or N28.45 billion), using an exchange rate of N325/$1 for 2018. The shift towards infrastructure and direct investments in Nigeria means it will take longer for returns to start incubating. But if you include forex translations, 2017-2018, went from $22 billion to $46 billion. So, generally, it was a positive year. By the end of the year, Assets Under Management was about $1.9 billion.

In addition, we also had third party funds like the Presidential Infrastructure Development Fund (PIDF)- a fund created by the President with $650 million. It is not part of our assets. That fund is what we are using to drive the Lagos-Ibadan Expressway, Second Niger Bridge, Abuja-Kano highway and soon, the East-West Road and the Mambilla Power. So, that is exclusive of the N617 billion that we have. In 2018, the returns break down were as follows: We made 11.5 per cent in our Stabilisation Fund, the Future Generation Fund about 3.3 per cent, because the global market was down a lot in 2018 and it affected returns; and the Infrastructure Fund was up 13.8 per cent. For Infrastructure Fund, the 13.8 per cent is actually the investments we are making in markets, with the cash, not the actual infrastructure, because those ones have not started yielding returns yet.

So, the three funds that we run are the Stabilisation Fund, the Future Generation Fund and the Infrastructure Fund. We have commenced construction on our three healthcare projects. Lagos University Teaching Hospital (LUTH) is completed and operational, for Kano and Umuahia, the construction has been done and we are hiring people soon.

What was the performance of the Future Generation Fund (FGF) in 2018 and possibly since inception?

For the FGF, last year we did 13 per cent and the year before it was 11.5 per cent. That is the growth rate of the FGF. But I can’t give you the annualised performance over the past five years. Not as aggressive as I would like it to be; I will explain why. We have a very conservative assets allocation strategy. If you look at our FGF, we only put 25 per cent in public equities. Our peers like the Norwegian Sovereign Fund put 65 per cent in public equities. So, if you want to be aggressive to make money, you put a lot more funds in public equities. Having said that, because of the volatility last year for example, we had a very bad year because the market was down and they ended up in dollar terms losing more because of their aggressive strategy. My biggest problem with the NSIA when we started was that I just couldn’t take the risk of losing money. So, we were a bit more conservative. If you lost money within the first two years of your existence, the National Assembly would raise some issues and may even tell you to give them back the money; so we were a bit more careful. But I think as we get more comfortable, we try to enhance our investment strategy and, hopefully by then, we would have built up enough means of returns and if we had a bad year, we can explain to Nigerians that we had a bad year. If you remember last year, the S & P 500 was done by an additional five per cent. It is not something I am very proud of and I wish we could have done better.

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Is the Presidential Fertiliser Initiative (PFI) a social programme?

Fertiliser started as subsidy to support the government, with a view to not losing money and, if possible, to make money. Subsidies in fertilisers before the PFI started was as high as N60 billion a year. In the last two years, the subsidy has come down to N8.6 billion for two years. So, we have roughly N4.3 billion a year, from N60 billion a year and there were no shortages. Now, if you do that and it translates to money that eventually comes to the NSIA, it is value for us. Secondly, it is a programme that has a timeline. At a point, it is going to stop. But the real value addition here is that we have gone from importing 100 per cent fully blended fertiliser to importing only 35 per cent of the materials, while 65 per cent is  domestic. Blending plants that were dead or moribund are up and running, from four that were operational when we started, to 22 now, all hiring people. So, that has supported the economy and I am hoping that we would be in a position where we can earn some fees from the work that was done.

Just think about the fact that it used to be N60 billion of subsidy, but it is about N4 billion. Even with the N60 billion, there were shortages in fertiliser, but today, local manufacturing has gone even higher. And today, the foreign exchange requirement has gone down by about $150 million yearly. These are all value to the country.

How can more funds be committed to the Sovereign Wealth Fund (SWF?

What worries me is that we need to get money into the fund. It is extremely important to us because if you end up investing all our infrastructure funds, which tends to takes about five years to earn a real return, you might run out of capital and you have your margins squeezed. That is because the cost of running infrastructure is very high. Recently, we started hiring for both Umuahia and Kano. Both places would hire at least 40 people; the  LUTH will also hire about 40 people. These are costs and it would still take time before they start earning revenue. The Norway story is one that I like to tell all the time. The reason is because in one of my earliest jobs in 1998, the team I worked for was one of those that managed the Norwegian SWF’s assets. They started in 1993 with $10 billion and to see them now at over $1 trillion speaks to the power of consistent contributions. In 2013, it was reported that the Norwegians were putting in $1 billion a week into that fund. So, it doesn’t really matter how much you start with, what matters is how consistent you are. So, I think if there is one thing we need to do as a people and if we need to be serious about this, there must be consistent contribution. But those who have watched us closely would have seen us move from being fought by the governors; being fought by various others, to now be working well together. We are working well with the governors and the National Assembly. I am hoping that the NSIA has become something that they have all come to accept that it is necessary, it is important and should be funded. I think the bigger question we have is whether we have enough revenue as a country to be able to fund an institution like this. I am hoping that we do if oil price continues to go up and we continue to invest in the oil sector and get our production up; get the right type of production, because all those factors are very important.

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For your infrastructure fund, beyond what government is doing are you looking at partnering private sector firms to get more funds to invest?

There are three pillars of our strategy for infrastructure. The first is, we invest our funds directly; the second is, the co-investment strategy; and there is a lot going on there. An example is the co-investment fund we set up with UFF and Old Mutual and it started with $200 million. For that, our full commitment would be not more than $50 million. They would bring their money while we bring other people’s money. The same thing was what happened with InfraCredit, where we put $25 million and brought in other people’s money to make it about $200 million. So, we continue to have co-investment as a strategy. If you look at the PIDF, there is government money, there is NSIA money and there is the third party fund we are going to raise. It is a combination of debt and equity to complete the PIDF project, the Second Niger Bridge and the Lagos-Ibadan expressway. So, we have a strategy to raise funds from other people to co-invest with us in our projects. Now, it is not so easy to develop this co-investment strategy.

If you remember we announced one for real estate, which hasn’t happened. Soon after we announced that fund, the forex crisis in Nigeria started, when we went from N196/$ to N306/$ and at a point even fell much lower than that. So, that affects that fund’s take-off. So, we are balancing the risk of convincing people that Nigeria is investible. So far, we have had two successes and one failure and I am hoping that we learn from the successes and build on the failure to do more of this. So, the strategy we have set up is that we would have other people co-invest with us. For instance, the three healthcare projects we have done, we put our own money. As I speak, I am very confident because we have another pipeline of about 11 more projects in healthcare, we have had commitments totalling over $200 million of people that want to invest in us. So, we can’t solve all of these by ourselves. The strategy we have is that for every $1 we invest in infrastructure, we attract $4 from external parties. But for the NSIA to do that successfully, the NSIA needs to be consistent in its performance and Nigerians, including the National Assembly need to have confidence in the NSIA. I think we are on the way to doing that and we continue to work to build that confidence.

One of the most consistent supporters who have been on the standby to invest in the Second Niger Bridge is the Islamic Development Bank. Same time, we are engaged with the EU Commission, the DFID, and all of these people. So, we have built a significant platform and level of interest and support from various people that makes us very comfortable and happy. We did make an investment in gas, in conjunction with the IFC and Seven Energy to do gas infrastructure and help them get Calabar to operate. So, power in that area has improved significantly. That investment also fell on hard times. It fell on hard times because as we speak, not one bill has been paid for. So, there are funding issues in the power sector that needs to be addressed fundamentally. We have invested in renewable energy and solar. Mambilla would start, at the moment it is a $5.7 billion project. The due diligence required is going to take a lot of time and we are actively doing the due diligence. But don’t forget that Mambilla is primarily a project of the Ministry of Power; we are there as financing partners of the project, but for us to invest in it we have to be very comfortable that we would get our returns.

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We have invested in gas-to-power, renewables, solar and hydro, but there is still a fundamental issue in the power sector which we are all aware of, that needs to be addressed if we are going to attract more investments into that sector. If we actually aggregate all the power generating sources in this country, put them in a proper distribution metrics, you will have enough power. So, the real challenge is in getting transmission and distribution to work effectively in this country and getting other things working.

Are you involved in gas capturing projects?

We are involved in gas capturing; we are at very advanced stages of due diligence on a gas flare capturing project. From my last count, there are more than 300 major gas flare sites in Nigeria. For instance, those from Rivers State, at night if you drive towards Yenegoa, the night light are lit with flaring gas. These things have been flaring for decades. The economic waste is incredible. So, the project we are about to do, which we would probably announce before the end of this year, is one we are working with other partners and we are taking one of the largest onshore gas flare sites and turning it into LPG capture. What is fascinating about the project is that the LPG and the power sales would give you about 19 per cent internal rate of return (IRR). But there is a big element involved, which is carbon credit. You can actually go to Switzerland and sell the carbon credit and we are glad to do that.

Why is the NSIA not investing in petroleum refinery projects?

Refining is an area of interest for us. We have looked at investing in NNPC or the rehabilitation; it (the Federal Government) hasn’t moved for that, so we are waiting. We looked at modular refineries; we did a lot of work on that and the truth is that we have not done any investment for a number of reasons. So, you will see us in refining because it is an area of interest.

What is your outlook for 2019?

2019 started off very volatile with trade wars as the single most important challenge that we have. It is important to us because our FGF largely invests outside the country. So, when you see movements in the Dow Jones or S &P 500, they tend to affect the performance of this fund. We expect that even though we have seen a rebound in our performance because the global markets have risen, it would remain a very volatile 2019, for as long as the US uses tariff to drive global trade, you are going to see this affect global markets. So, for the rest of the year, I anticipate that the market remains very volatile as long as President Donald Trump continues to tweet and drive foreign policy. I still struggle to understand the correlation between tariff and immigration. However, we are optimistic that our asset allocation strategy will withstand downside risks and optimise market gains. Within the last 12 months, we committed and deployed over N100 billion across the priority three road projects under the PIDF. We have also commenced due diligence on the Mambilla Power Project. We are within the target project milestone on all these projects. Throughout 2019, we shall continue to focus on executing our infrastructure investment strategy in our core focus areas of power, toll roads, agriculture, healthcare and most recently gas industrialisation.

source: Simeon Ebulu.
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