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NSIA is a profitable social enterprise, says Uche Orji

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Uche Orji, CEO, Nigeria Sovereign Investment Authority (NSIA)


The management of the country’s sovereign wealth fund in relation to other climes recently threw up some issues in terms of its effectiveness, investment objectives, profitability, and growth prospects. To this end, the Managing Director/Chief Executive Officer, Nigeria Sovereign Investment Authority (NSIA), Uche Orji, intimated journalists on the exponential growth achieved since starting out as a proper business structure in 2012, and in particular its vision for investment in social infrastructure. Clara Nwachukwu was there. Excerpts:

Starting with your performance, can you take us through the operations of the NSIA in 2018?
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 fund. This is important because Infrastructure Fund takes time before it starts to yield returns; if you are building the Lagos-Ibadan Expressway and the Second Niger Bridge, it would take a while before it starts yielding returns. You need to understand that as you start making 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 be able to maintain the pace of profitability in the NSIA.

If you take out foreign exchange (forex) translation gains, we made profit of N28.45 billion; we translate our books at N325/$1, because it is the blended rate we use for most of our transactions. That gives us about $87 million 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, we 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, the East-West Road, and the Mambilla Power. This is also exclusive of the N617 billion that we have.

In 2018, the returns breakdowns 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. LUTH is completed and operational now, 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 Future Generation Fund, last year, we did 13 per cent, and the year before it was 11.5 per cent as the growth rate of the Fund. But I can’t give you the annualised performance over the past five years. It has not as aggressive as I would have liked it to be, but 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, they 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 strategies, 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. 

The Presidential Fertiliser Initiative (PFI) is it a social programme or are you looking at generating revenue from that project?
Fertiliser started as subsidy to support the government, with a view to not losing money, and if possible make money. That was the clear objective. Here is why; subsidies in fertilisers before the PFI started were as high as N60 billion a year. In the last two years, the subsidy has come down to N8.6 billion. 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, and will stop at some point. Recently, I met with some of the people who are involved in the programme and I believe many of them have revealed themselves enough such that at a certain point they may actually stand on their feet, and we would withdraw the support of the NSIA. But the real value addition here is that we have gone from importing 100 per cent fully blended fertilisers to actually importing only 35 per cent of the materials, while 65 per cent is now domestic. Blending plants that were dead and moribund are up and running, from four that were operational when we started to 22, now all hiring people, which 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.

But again, that was something done to support the government and reduce leakages in the system. At the very minimum, we have not lost any money doing this. In the last two years, the shortfall that we had, the government paid for it. But just think about the fact that it used to be N60 billion of subsidy, but now it is about N4 billion. Even with the N60 billion, there were shortages in fertilisers, 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. By doing the PFI, we got the support of some many state governors; because this is real for a lot of them. So, the direct answer to the question is that we are not losing any money; we are supporting the government, and there is an indirect benefit to the NSIA, and hopefully we would make money from it.

How are you going to get the federal government or the National Assembly to start committing more funds to the SWF, especially from some of the surplus they make, or when oil price is above the budget benchmark?
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 take 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. I give you an example: recently, we started hiring for both the Umuahia and Kano centres. Both places would hire at least 40 people; the Lagos University Teaching Hospital (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. 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: Do we have enough revenue as a country to be able to fund an institution like this? I am hoping that if oil price continues to rise and we continue to invest in the oil sector, and increase our production; get the right type of production, because all those factors are very important, and we have active engagement with the National Assembly, we will be fine. It is a relationship that has been up and down, but I think we are in a good place with them in terms of support for the NSIA.

For your infrastructure fund, beyond what government is doing are you looking at partnering private sector firms to get more funds to invest?
Firstly, we need money and we need plenty of it for the commitments we have made. There are three pillars of our strategy for infrastructure. The first is us investing 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 more than $50 million. They will bring their own money while we bring other people’s money. The same thing happened with InfraCredit, where we put $25 million and brought in other people’s money to make it about $200 million. 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.

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. For example, the agriculture one went very quickly. 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, and that affected the fund’s take-off. 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. I give you an example; the three healthcare projects we have done, we put our own money. As I speak today, I am very confident because we have another pipeline of about 11 more projects in healthcare, and we have had commitments totalling over $200 million from 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, it 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. Once people start to feel that they can feel safe investing in the NSIA, a lot more will come in. I will give you another example: one of the most consistent supporters who have been on the standby to invest in the Second Niger Bridge is the Islamic Development Bank. We are also engaged with the EU Commission, the DFID, and all of these people. We have built a significant platform and level of interest and support from various people that make us very comfortable and happy.

Now, on gas and power, we are investing. But we are also careful in ensuring that the investments we make are such that we are able to earn our returns. The sector has not really been structured for successful investments, with all the issues in the sector. 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; now power in that area has improved significantly. That investment also 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 need to be addressed fundamentally. We need to make sure that we can make that whole sector operate efficiently.

But on top of that, we have invested in renewable energy and solar. Mambilla would start, but 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. I personally believe that as far as power is concerned, we should emphasis renewable, and use our gas for industrialisation. Gas industrialisation is the most important thing for us now. It is about turning gas product into the things you can export. We have invested in gas-to-power, renewable – 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. I believe the government is addressing this. There is a lot power generation sources in the country today to meet all our power needs, we just need to distribute them very well and transmit them well.

We also need to get some of the power plants that we have that are operational that are actually built and connected to gas. If you look at some of the industrial sites that are available, many of them have power plants that have hundreds of megawatts that are not working. If we actually aggregate all the power generating sources in this country today, put them in a proper distribution metrics, you will have enough power. The real challenge is in getting transmission and distribution to work effectively in this country, and getting other things working. The good news is that the government is working on it, so we are ready to invest. 

For your fertiliser project, we have Indorama at Eleme that is into urea and even does exportation. Are they involved in your fertiliser programme?
Indorama is involved in our fertiliser programme. There are four components you need to make the fertiliser we need in Nigeria. One of them is urea. When you hear people say NPK, it means Nitrogen, Phosphorous and Potassium. The Nitrogen is urea, and we buy it from Indorama; that is, they are the established supplier to the NSIA, to the extent that we talk about local content. Thankfully, the Dangote project is coming up as well. 

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. Let me tell you what we want to do with that 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 is 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. The point I am making is that the economic waste is mind-blowing. So far, these are credible partners, and we are hoping we can announce this as our first project in gas capturing.

The ultimate reason why we are involved in LPG is this: have you ever realised that the biggest challenge we face today is climate change and deforestation? Drive to Abeokuta, you will see that people have cut down trees and they are making and selling charcoal? Who is replanting those trees? If you drive through Yobe and many places in the north, people are doing similar things. Beyond the deforestation for charcoal exploits or illegal timber trade, it is actually people cutting trees to make firewood, which they should ideally use LPG for. So, that is one of the reasons we want to increase LPG in Nigeria.    
Why is the NSIA not investing in petroleum refinery or railway projects given their importance to Nigeria?
Refining is an area of interest for us. We have looked at investing in NNPC for the rehabilitation of existing refineries; but they haven’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. You will see us in refining because it is an area of interest, but I believe Dangote Refinery would do magic for Nigeria.

Now back to the question of railway, one of the biggest challenges in this country is logistics. One refinery in Lagos is fantastic because the biggest demand for petrol is in this area. We looked at investing in rail; the issue of investing in rail for us was that it wasn’t clear to us whether it was to be public-driven or private sector-driven. For us to invest in rail, the governance has to be very clear. So, once there is a conducive legal and regulatory environment, then we would do rail.  

Finally, what is your outlook for 2019?
Year 2019 started off very volatile with trade wars as the single most important challenge that we have. It is important to us because our Future Generation Fund 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 U.S. uses tariff to drive global trade, you are going to see this affect global markets. For the rest of the year I anticipate that the market remains very volatile as long as 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. NSIA has invested significant efforts in developing a robust and transparent corporate governance framework. This is because strong corporate governance structures do not only foster successful relationships amongst the various organs of the Authority, but also sets the right precedents to encourage long-term, sustainable growth and partnerships with other institutional and private investors.


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