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Something to talk about

May 24, 2009

Feigning naivety about the impact of the global economic crisis on Nigeria would be like an ostrich hiding its head in sand. As oil prices spike and slide – OPEC has contented itself with $50 per barrel for 2009. Food prices remain above the pre-food crisis levels. Signs are that Nigeria is further feeling the wave of the global crisis. To wrap their minds round the looming crisis, 120-plus Nigerian CEOs gathered together to talk at the CEO Forum organised by BusinessDay in partnership with McKinsey, a consulting firm, on 8th April 2008 at the Civic Centre in Lagos.

Unanswered questions

The one day event kicked off with a plenary session “Effects of the global financial crisis on the Nigeria Economy” set in motion an inconvenient truth: Nigeria is experiencing a crisis of its own making; exacerbated by the global meltdown. An asset bubble fuelled by poor regulation of banks – with 65 percent of a 100 percent equity-based capital market, misaligned monetary and fiscal policies; public sector inefficiencies (earlier oblivious of huge leakages because of huge inflows). What are businesses doing to survive the storm? Are there opportunities to be taken advantage of?

A presentation by Mckinsey’s Acha Leke, as a backdrop to the first session, dissected Africa’s GDP. He showed that African middle-income earners, those with access to credit, will take the most hit. Also, dwindling government income from commodity-exports will widen the funding gap of most African economies. In addition, rising cost of capital,  heightened by the risk of debt default was not ruled out.

Some African countries, including Nigeria, have had to postpone raising funds from the international capital markets. Furthermore, Africa’s huge infrastructure deficit[1], a recurring decibel at the event, was identified as a hindrance to surviving the recession. But it wasn’t all bad news.

The panelists for the first plenary session insisted that Nigeria – the public and private sector, must first admit that it isn’t business as usual. Accepting that things had gone wrong and working collectively to solve key problems were identified as imperatives.

Concretely, among other things, a call was made for improving risk and operational management; latching on the surge in talent, as Nigerians in Diaspora return home, and ensuring adequate energy supply. If power, in particular, can be unfettered of its inadequacies, it is projected to unleash entrepreneurial energy. Unshackling the economy from self-imposed fetters couldn’t be better timed.

Still in denial

But, Nigeria is yet to transit the early stages of denial to acceptance. And critical questions remain unanswered. The panelists called for more fundamental steps ie, irreversible policies before political contests for 2011 become a distraction.

Nigeria’s laundry list also includes reducing the influence of vested interests, permanently correcting structural fixed costs of governance eg, former Bendel State had 15 commissioners compared to 66 commissioners for both Delta and Edo State today, and developing institutional capacity – inefficiencies can’t be solved by throwing money at the problem.

With an economy significantly composed of an informal sector, stimulus packages such as tax cuts are feeble. The informal sector isn’t captured on the taxman’s radar. Diversifying the economy by channelling investments into agriculture (backed by the construction of feeder roads, rails and bridges), ensuring contract sanctity and reform of the land tenure system were noted as pragmatic alternatives for stimulating the economy. The lingering question on how to fund Nigeria’s huge infrastructure gap didn’t escape the radar of the forum. One of the three breakout sessions was on “Innovative models for public-private partnerships (PPP).

Building roads and bridges to somewhere[2]

The PPP panel, moderated by Funso Philips of Philips Consulting, was made up of Rotimi Oyekan, Lagos state commissioner for finance, Andrew Alli, managing director of African Finance Corporation, Wale Tinubu, managing director of Oando and Jules Seely, of Mckinsey. Jules Seely’s presentation – based on international experiences, made stark the case for PPP as a funding alternative to ramp up Nigeria’s infrastructure deficit.

According to Seely, population growth, strong economic development, and a growing middle class were the key drivers of infrastructure demand. Governments like Australia, China and the US, he noted, are spending their way through the recession by building roads, rails and ports. Immense infrastructure investments that Nigeria can ill-afford to ignore.

The alternative: being left behind, again, isn’t a beguiling option. Particularly given that Nigeria’s installed base, in comparison to other emerging economies, is deleterious. Though it was admitted that PPP wasn’t a panacea – but one of many delivery approaches, the panel advocated for flexibility. For instance, a regulatory framework that passes into law ownership of projects beyond the tenure of the concessioner, ie the government.

Lagos State, a worthy PPP case-study, is currently exploring a law with accompanying guidelines. While such a law addresses time-consistency aspect of PPP infrastructure projects, other challenges exist eg, project selection. It was observed that infrastructure investments are an emerging asset class. Macquarie, an Australian investment bank, led the foray into infrastructure finance. Today, investing infrastructure has become mainstream.

Private equity firms and Sovereign Wealth Funds (SWFs) are funding such projects. Despite its vanilla like flavour, salient features must be borne in mind to get PPP funding right. It’s important to understand its characteristics, unlike investments in, say, equities; PPP projects have a social contract nature and a lower, but stable and predictable rate of return. PPP’s four key benefits: efficiency, appropriate risk allocation, leveraging on private sector strengths, new sources of finance considering governments’ stretched budgets, make it an attractive funding option.

The panelists reiterated that private capital to fund such projects exists.  According to them, the long-term fundamentals for infrastructure PPP remain attractive. Incentives such as risk sharing rights, political and economic stability, transparency, governance, robust and respected framework, and a pipeline of bankable projects and deals will lure the private sector.

Besides, not only does “PPP pay for itself via the project’s lifetime ” its inflation-indexed nature and inclusion of penalties for maintenance failures allow for long-term win-win sustainability. Other innovative approaches like bundling projects with property development guarantee the generation of multiple income streams and further diversify risk.

Oando’s 100km gas pipeline project in Ikeja is a testimony to successful PPP projects. Lagos State –  focused on delivery, merit-based case by case assessment and a regulatory framework that captures a projects bankability – was willing to experiment with Oando. Though their cost of funds and rate of returns differed, both parties overcame the phobia for policy missteps.

The deal, according to Wale Tinubu, the boss of Oando, though dead on arrival – because of his company’s lack of pedigree and initial difficulties with sourcing finance, was an eventual success. These pipes, currently supply power to the industrial area of Ikeja – significantly paring down the energy bill of companies located there, will also power Lagos state’s planned light rails.

Oando and Lagos State are mulling over the possibility of fuelling the bus rapid transit (BRT) buses with gas. Wale Tinubu urged that, as Nigerian’s return home, indigenous firms should build capacity by leveraging on their skills and tapping local finance to fund specific infrastructure projects in partnership with the public sector.

[2] Peter Drucker, in his 1992 book Managing in a time of great change, listed information and technology ie, the insatiable demand for telephone services in developing and emerging countries and the growing need to repair, replenish and upgrade physical infrastructure especially transport systems eg, roads, railways, bridges, harbours and airports as the other new markets. Drucker’s predictions are no less true today, as countries seek ways to outgrow the downturn.

[1] Bismarck Rewane, the boss of Financial Derivatives, a financial advisory firm, estimates Nigeria’s infrastructure deficit is $100 billion. The ICRC puts it within a $60-$90 billion range. Related ratios from the World Bank’s Little Data Book on Africa 2008 put things in perspective. The ratio of paved to total roads in Nigeria is 15 percent. 51 percent of Nigerians have access to electricity. (Mind you, access isn’t synonymous with uninterrupted supply). Of every 100 Nigerians, 24 are telephone subscribers; while there are 6 internet users per 100 Nigerians. In 2008 Sub-Sahara Africa’s GDP was US$744 billion, equivalent to 28% of China’s GDP, 69% of Brazil’s, 74% of Russia’s, and 80% of India’s. The economies of South Africa and Nigeria comprised 56% of SSA’s GDP.

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