Sovereign wealth’s gains and poor funding questions

In most developed and developing economies, governance is a business. This is shown by observed commitments to investments in development projects, the expected effective returns and transparency in the management of public funds, vis-à-vis sayings.

For Nigeria, from arguments over the establishment and operations of the Nigeria Sovereign Investment Authority (NSIA) in 2012 to poor funding of its activities till date, the wealth manager still ekes out funding for sovereign investments.

Though with marginal improvement now, it is still the opposite compared with those of other global economies. But what could be better than investing right – in something that guarantees returns? If only Nigeria has really implemented the law that prescribed the funding of NSIA, the agency would have become its major financier in these days of revenue crisis.

For example, activities and performance of the authority showed a total comprehensive income, including the impact of foreign exchange gains of N44.34 billion in 2018, against N27.93 billion in 2017. So, why is the country not placing values where it would yield further values?

There are many ways to fund the NSIA without crude oil revenue. Who has cared to explore them? The global players in sovereign wealth have used crude oil and solid minerals, while others use the government owned companies.

Singapore, for example, has no oil, but has one of the biggest sovereign wealth funds in the world. It was funded with resources from government owned in companies. China has no crude oil, but China’s sovereign wealth is one of the biggest in the world, with assets that the country didn’t need to manage. Norway used all its oil resources for sovereign wealth. These are now benefitting from the investments, whether the global economy is moving forward or backwards.

The most important thing for Nigeria at the moment is to be serious about operationalising NSIA’s law, perhaps looking at other asset that are not properly managed and put them into possible use or scheme. This is for the future.

The just released financial result of NSIA, the manager of Nigeria’s Sovereign Wealth Fund, came with strong performance in a year when many international markets underperformed and the global economy experienced a moderate pace of expansion, generating aggregate returns of 8.2 per cent.

NSIA has core capital of $1.5 billion, while other third party managed funds comprised Presidential Infrastructure Development Fund (PIDF) – $650 million; Debt Management Office – $122.6 million ($120.95 – fair value as at 31 Dec 2017); Nigeria Stabilisation Fund – N13.64 billion. 

There is also gross sum of $417.46 million ($350 million principal plus returns) repaid to the Nigeria Bulk Electricity Trading Company Plc, following the expiration of the four-year investment term.

The Managing Director, NSIA, Uche Orji, said the NSIA Act mandates the organisation under, his leadership to run three ring-fenced funds – Stabilisation Fund, Future Generations Fund and Nigeria Infrastructure Fund, with asset allocation of 20:30:50 respectively.

“The NSIA mission is to play a leading role in driving sustained economic development for the benefit of all Nigerians through building a savings base for the Nigerian people, enhancing the development of Nigeria’s infrastructure and providing stabilisation support in times of economic stress.

“Despite concerns over international trade flows, slow growth in key economic indicators and increased volatility across financial markets, the authority’s investment strategy proved robust with headline numbers maintaining a favourable trajectory across the three funds,” he said.

NSIA’s total comprehensive income, excluding the impact of foreign exchange gains, stood at N26.29 billion, against N26.28 billion in 2017, while total assets recorded a growth of 16 per cent to N617.7 billion, compared with N533.88 billion in 2017.

Return on Capital Employed (ROCE) on the core funds showed that Stabilisation Fund had 100 per cent deployment; Future Generations Fund, 81 per cent and Nigeria Infrastructure Fund, 17 per cent.

Total income grew by 88.5 per cent, rising from N30.62 billion in 2017 to N57.73 billion in 2018. 

Considering the volatile global and generally challenging local investment environment, this performance reflects the strength and capability of portfolio and risk management within the institution.

Interest income at N23.82 billion in 2018, represents a nine per cent year-on-year increase from the N21.77 billion in 2017, which underscores a commitment to generate fixed income returns from low-risk securities that generate predictable interest and steady returns, including Eurobonds and treasury bills, among others.

The authority rebased its foreign denominated balances to N325/$ from N305/$, to reflect its foreign exchange transactions appropriately in line with its market. Therefore, the Group recognized a foreign exchange gain of N18.05 billion.

The feat, according to Orji, came through application of sophisticated deployment strategy with the funds remaining evenly apportioned across global public equities, private equity, hedge funds and “other diversifiers”.

As at December 2018, NSIA had deployed about 81 per cent of its capital across all the strategic asset classes. 

Interventions
During the year, there was also increased focus on domestic infrastructure projects, specifically in agriculture, healthcare, and infrastructure enabling financial institutions. These interventions would have been larger had Nigeria invested more in NSIA earlier, through enhanced returns.

For instance, on healthcare, the company reached financial close on three healthcare projects, including a Cancer Centre at Lagos University Teaching Hospital (LUTH).

The Advanced Diagnostic centres at Federal Medical Centre Umuahia (FMCU) and Aminu Kano Teaching Hospital (AKTH) are scheduled for commissioning in the second half of 2019.

Already, LUTH’s cancer centre, structured under a public-private partnership arrangement, between the NSIA and the hospital, covering the rehabilitation, equipping and operation of an existing cancer centre co-located in facility, has been commissioned by President Muhammadu Buhari recently and would soon be fully open for clinical operations.

Also, the Presidential Fertiliser Initiative (PFI), increased with approximately 12 million bags of fertiliser produced to date, with a total of 18 blending plants participating, while PIDF received $650 million from the National Economic Council and commenced capital deployment across three of the major road projects under it, including second Niger Bridge, Lagos – Ibadan Expressway and Abuja-Zaria-Kaduna-Kano Road.

As the appointed programme manager of the PIDF, NSIA has already disbursed N77.6 billion under the PIDF programme, while other projects being undertaken under PIDF include Mambilla Hydro-Power Project and East West Road.

Orji said NSIA’s involvement in the projects is principally to ensure an increased inland road stock, while creating cross-country arterial roads to catalyse the flow of economic activities.

The agriculture sector remained a focus area to the authority. Continuing its role as programme manager, the NSIA sustained the implementation plans for PFI. As at year end, an addition of 5.5 million bags of NPK 20:10:10 fertilizer had been produced and sold in Nigeria, bringing the total project output from inception to date at over 12 million bags.

Furthermore, two additional blending plants were accredited in Kaduna and Zamfara respectively bringing the number of plants to 18 in total. With PFI, NSIA is helping to reduce input induced food price inflation.

The joint venture of NSIA and UFF reached financial close on $200 million 50-50 co-sponsored agriculture fund – Project Novum, a fully integrated farm located on 3,500 hectares of land in Panda, Nasarawa State.

The authority expects to start farming activities in late 2019 with the completion of irrigation facilities expected to be finalised in second half of 2019. NSIA, having created InfraCredit, attracted other investors to the company and de-recognised it from the book. New investors in InfraCredit are AfDB and KfW.

Outlook
In 2019, there are other key infrastructure projects in the pipeline. Progress has been made on the Commodities Exchange, which is now in the process of choosing a strategic partner. There is also investment in basic chemicals with OCP Morocco: Basic Chemical Platform, to produce ammonia and other fertilizer products.

The global market in 2018 experienced high volatility, however 2019 is expected to return to a relatively stable terrain.

According to JP Morgan, there is a deceleration in growth momentum, which is expected to end by mid-year, on account of policy changes that support China’s easing and the Federal Reserve pausing.

In NSIA’s report, there are no apparent expectations of recession risks in 2019, but it would continue to monitor the market conditions with the view to leverage the upside risks that avail themselves in the market.

“We expect that our strategy will continue to deliver positive returns. The deployment of the Presidential Infrastructure Development Fund will play a key part of our infrastructure investment strategy for the year.

“Healthcare remains a focus area going forward with the implementation of next phase of diagnostic and treatment centres. The board has also approved gas industralisation, as an area of focus,” the report noted.