‘Nigeria needs discipline to develop sovereign wealth’

MR. UCHE ORJI is the Managing Director and Chief Executive Officer of the Nigeria Sovereign Investment Authority (NSIA). He has been reappointed by the current administration for a fresh term of five year, having led the organisation creditably from inception. Through NSIA, he has been driving a growth strategy for the country, making NSIA a vehicle for implementing key infrastructural projects and investment of Nigeria’s savings.

Orji has a degree in Chemical Engineering from the University of Port Harcourt, Nigeria, and an MBA from Harvard Business School, Massachusetts, United States of America. In this interview with Business Editor, CLARA NWCHUKWU and Assistant Editor, Finance/Economy, CHIJIOKE NELSON, he enumerated lost opportunities for late establishment of the sovereign wealth fund and huge benefits inherent in consistent contribution to the fund by government.

How would you describe NSIA’s operational profile thus far?

We started operations in October 2012, and if I look at the way other people run theirs and the way we run ours, I think it is important to understand three things.

First is that the NSIA have a value defence mandate compared to other sovereign wealth bodies.

In other sovereign wealth countries, you have two mandates, one of which is stabilization, the other is future generation.

In NSIA, in addition to having both the stabilization mandate and the future generation mandate, we also have a mandate to invest in domestic infrastructure, which most other commonwealth countries do not have that.

So, what we have in the NSIA is a home grown solution that addresses all the trade issues that the sovereign wealth countries is supposed to address; stabilization, savings for future generation and investment in domestic infrastructure, which is where we really have a significant challenge.

NSIA model has been copied by so many countries, especially developing countries, because developed countries have solved their infrastructure problems through their budget, so they are saving up their sovereign wealth fund to provide for the future, but we have presently, infrastructure problems, so that makes a big difference in what we are doing and what the other countries are doing.

But with the way Nigeria’s sovereign wealth fund is run compared to other countries, cuts across in a ranking that is done by the sovereign wealth institute in United States, which is looks at the operations of the sovereign wealth funds.

I am very pleased to inform you that for the last four years, we are still in the top quartile in terms of transparency and governance and that I think is one of the most important things we have achieved.

This ranking, basically is not about the performance, in a terms of the returns you make, although add we have been comfortable in a row in the last five years in the NSIA.

But it is also about the governance, the transparency, and the way the operations affect us.

We don’t know who they are at the institute and they work independently. The ranking in terms of transparency and governance gives us a little bit of comfort.

Now, in terms of areas we need to improve, it is in the consistency and discipline of funding the sovereign wealth fund.

Other countries have gotten that part, in terms of how the funding works.

We are still trying to get the will properly and all the basic elements of the law that defines how the sovereign wealth fund should be funded is adhered to.

Once we are able to do that, the NSIA consistently overtime would receive funding and I think that would go a long way in making a big difference to the way the NSIA operates.

However, I am generally pleased, but I believe we can do more and I think the most important message is that we can do more with the NSIA.

From where we are so far, I think in general, the organization has received the support of the government.

The management team was appointed by the last government and retained by this government.

We are one of the first organizations to receive a new board from this government, which speaks the fact they take our governance seriously.

To what extent has your operations incorporated the sub-national governments?

In terms of the governance of the NSIA, yearly, we report our results to the National Economic Council (NEC), which is a subset of our governing council.

In the NEC, all the state governors are members and we present our reports on how far we have gone and where we are going.

They are part of the governance structure. Secondly, they are all shareholders. We have given all of them certificates of contribution.

So, for every time we receive allocation into the sovereign wealth fund, we provide certificates to the states to make sure that shareholder register reflects contribution of every state and local government in the country.

After passage of profits, the law says we should start providing dividends and so, we are hoping that at some point, we will approve some dividends and we will pay all the states and local governments, as well as the Federal Government, by the ratio of their shareholding contribution.

In the last two or three years, we have become very active in terms of our infrastructure investment and in everyone of those our investment, we seek the support and the collaboration of the state governments that we are investing with.

In the recent programme with the Presidential Fertilizer Initiative, which we designed as part of the NSIA, we revived about 12 blending plants across the country, mostly in the north and one in the Ebonyi State.

It has helped create quite a good number of jobs and it also helped bring down food price inflation.

The key thing I will say is that almost every investment we have made on infrastructure development is at the state level, so at the moment we are working on the second Niger bridge project.

Julius Berger has been mobilized and work would be significantly seen once the rain subsides.

We are at the moment funding the rehabilitation of the Abuja-Kano highway, which is going to be a tolled road and we are also putting in place, the Lagos-Ibadan expressway, which would be taking on under the NSIA, through the presidential infrastructure development fund.

We have also invested heavily in healthcare and many other projects across the country.

We are taking over the Oncology Department of Lagos University Teaching Hospital under a public-private partnership.

Through the NSIA governing council, which the state governments are part of the governance and through the profitability of the organisation, there will be dividend, as soon as the board of the NISA approves dividend policy, but we are going to do that because we have been profitable five years in a row.

If you are doing all these wonderful works across the states, what is the grouse of the states against NSIA?

That happened in 2012 or thereabout, which is a long time ago.

At the moment, the state unanimously supported NSIA initiatives and the last two contributions was initiated by the states.

We didn’t ask for it, but they were the ones that moved for it. In fact, they are asking us whether we can help them with their own wealth management.

The relationship between the NSIA and the states has changed significantly.

How successful are the three ring-fenced funds you mentioned earlier?

So far so good, we have been very profitable. One thing I don’t try to talk about so much is profitability, because it can be volatile, but the most important thing for me is not to lose money.

We try to ensure we remain profitable, but not taking too much risk, else we’ll lose everything. Are we in top quartile in terms of returns? No. But we are in some areas.

If you look at the infrastructure fund, infrastructure projects take a long time, so there are periods, like during construction, when you are just spending money and you are not earning any return yet.

For the road projects, we are not making any money until we finish the construction, then we start tolling and making money, which might take a while. For such projects, there are two ways to measure the performance.

The return is one thing, which is very sacrosanct to us in the long term period of the project, but may not be in the short term.

But the most important thing to think about is the impact.

Think about what the implication of the travel cost would be between where we are making the investment, then the benefit in terms of the ease of travel across the states.

We are very excited about the impact of these projects. In summary, they are all designed to be profitable but I need you to understand that they all have different approaches.

The stabilisation fund make money on a daily basis and short term in terms of the way it is designed.

The future generations fund has a mix of assets- private equity asset and public equity asset. Public equity asset is a daily performance.

They all have different investment strategy. In the long run, we expect that every one of them would be profitable to the organisation and to the country.

Let’s look at the roads since you are talking about profitability in the long term. Does that pre-suppose the return of tollgates on these roads that you are constructing?

Yes. They are all going to be tolled. At the moment, the NSIA has a company, a subsidiary, called NSIA Motorways Investment Company. So, it is the concessionaire.

Who will determine the amount for the tolls?

We are in discussion with the government. Obviously, there will surveys on willingness to pay and the economic activities of the place, which would go into the concession period.

If the government says “Build, Operate and Transfer” in 10 years, the toll would be high, but if it says in 50 years, then the toll would be lower.

All of these factors are important to consider.

Since the establishment of NSIA, you have only produced four financial reports. What has been the issue?

We started October 2012 and 2013 report and combined 2012 and 2013 reports, because in 2012, it was only three months.

Others came out, while 2017 is about to come out. But we already published our accounts, because the yearly report is just a picture book.

We have produced five accounts accounts not four since we started. We publish our accounts before the end of March every year.

Like I said, the 2017 accounts have already been out there online. It was out in June. The picture book would be out soon.

We understand that in 2016 was the heat of recession, but it appears NSIA did very well in the results. Where did you achieve the successes?

We invest in about 17 different countries and currencies.

If you look at our investments, through the reports, we invested in public equites from Japan to U.S. and China and all that.

If you look at the private equities, we invested mostly in U.S. and Africa, particularly Nigeria.

Most of the success came from the facts that we haven’t started deploying a lot of capital to infrastructure and the global market.

Nigeria was in recession, but the global market was not in recession.

So, Nigeria’s exposure, for us, is currently less than 20 per cent.

In 2016, Nigeria’s exposure was less than three per cent, so we were protected from the domestic market issues but our Nigeria exposure is rising significantly.

So, we are going to find ourselves more affected by local economic challenges, especially because of our infrastructure exposure. That is first.

Secondly, remember, sovereign wealth funds report in their local currency, but because we have a significant amount of our assets in US dollars and in other currencies, apart from the naira, we benefited from the exchange rate valuation significantly, which is a clear strategy to avoid that exposure in the domestic market in the early days and that paid off.

It was a good bet and when we now brought back our assets from the U.S. in dollars to Nigeria, it became significantly high, because we avoided a bulk of devaluation.

Our exposure to Naira then was actually lower than 10 per cent.

How was the 2017 performance?

Like you said, when you invest in infrastructure, you are pulling capitals and putting in projects that are not generating anything until many years after construction and that would be the trend going forward.

In the long run, infrastructure would be 40 per cent of our investments and that means that you could have projects which are under constructions for some times before they start making money and that’s good news because the profit we were able to make in external markets in 2016, were now joined in 2017 and 2018 to now use it to invest our infrastructure fund.

So last year was about N27 billion profit, but again last year, we had no benefits of exchange rates devaluation because there was no Naira devaluation at all in 2017, but we were also, now beginning to deploy capital into the country in infrastructure projects.

In 2018 you are going to see more deployment of capitals in infrastructure projects.

In your 2016 report, you had $1.25 billion in total assets, then compare it to Norway which has $1 trillion, UAE, $875 billion and Kuwait, $524 billion. Why is our own so low?

It’s because you just started. When Norway started, it was with $1billion. Look at Kuwait, they started in 1953, so you have to contextualize the thing. You spoke about Norway and in my previous career I have done a research in London and was one of those managing part of Norway’s assets.

It was controversial at a time, like ours, because the younger ones said, we need the money, let’s build new airports and the other people said, look let’s save the money because Norway had been occupied once by Russia and they understand the pain of being an occupied territory and so they wanted to have financial independence.

It was controversial and eventually they agreed to build the fund.

So, it took a long time for Norway to get to a $10 billion. When they finally got it and started putting money aside, they were very serious.

In 2014 during the oil boom, the Norwegian government put $1 billion a week into the fund. Norway is a country of five million people, but they produce two million barrels of oil a day, the same quantum of oil Nigeria produces.

The Norwegian government took a decision not to use their oil money to find their budget. A large portion of their budget is funded through fishing, agriculture and small industries.

The fund does not invest in their local market at all. So all the revenue from crude oil, don’t forget, they make the same amount of crude oil as Nigeria, but all revenue are put in the fund.

They are putting different strategy. But if you look at Nigeria, being 180 million people and more, we all gather every month to share oil revenue because without it, we would not be able to provide infrastructure or do anything.

It’s only when you have the occasional oil price above the budget that we are able to approve money into the fund, otherwise, our strategy and God knows that is how we have chosen to run our country and other people chose to run their own differently.

So, that comparison needs to be contextualized with how other countries run their countries and when they started.

So, the real lesson for Nigeria is that it is not too much to have a (Sovereign Well Fund), it is the consistency and the discipline of future contributions to the fund that is more important than anything else so that 20 years later, you can look back and say that you now have money that you’ve built up.

Can you imagine if that time our reserves was very high, we had a lot of excess crude oil revenue, that the Sovereign Well Fund was set up in 1999, and that we were consistently putting in $1 billion a year, today we would have been at $19 billion and that’s how to do it.

It’s about consistency of the contribution.

Do we have a specified contribution to our fund?

The law basically says revenues above crude oil sales, less amount reserved for budgetary smoothing, should be put into NSIA. provides for a specified contribution.

The interpretation of that law and operationalising of it is a matter of negotiation.

It will take us time to get to the point where we all agree that this is how it is going to be. I also think that it is important that the NSIA and it’s management, to prove that they are capable, so that the shareholders can feel comfortable in giving money to the NSIA and I believe that over the last five years, the management of NSIA has gone a long way in proving their productivity, and so with that, you start to win confidence and over time, we will start to see the contribution become more consistent.

You realised that in 2016, during recession, this government made the only other contribution the NSIA have received since it was founded. Last year, they put more money into the NSIA and this year they put more money into the NSIA.

So, I think that this government has shown the discipline to the contribution.

Nigeria is borrowing quite a lot and one would expect that the stabilization fund would come in handy now but that doesn’t appear to be the case. Why?
I disagree.

I think that the stabilisation fund was set up for when there is economic crisis and there is no economic crisis at the moment.

That may not also, pin point that you need the stabilisation fund of the NSIA.

Number two is that the stabilation fund is still very small and so it won’t even be enough to stabilise the economy.

For you to rely on the stabilisation fund to stabilise the economy, it is important that it is raised to five per cent of the Gross Domestic Product (GDP).

So, if you have a GDP of $500 billion, you need to have at least $25 billion in your stabilisation fund.

So, it’s still a long way to the point. The third thing is that people talk of all these projects finance loans we are borrowing from China.

I think that all these project finance loans are important because it is significant form of capital that will help us deliver on the key projects that we are working on in the country.

What exactly do you see as your challenges all these while you’ve been at NSIA?

The most important challenge is having the right people with the right skill set to run the organisation.

So far, it’s been difficult to get the right level of experience and the right quality if people who will bring the right culture.

The second thing I would speak on is the actual intermediation challenges on each of the projects.

From community and environmental issues to contract and management issues, it’s a lot of challenges and huge projects.

The third is that the local political economy is facing it’s own challenges.

This is because we are using our fund as a catalyst for bringing in funds in respect to other best placed. So you have to manage the perception of the economic performance of the country.

Asset management is all about people. It is about empowering the right people, the right foreign exchange, the right skill set and making sure you balance them with the local challenge of the country.