Despite a difficult business year in 2017, the Managing Director/CEO, Nigeria Sovereign Investment Authority (NSIA), Uchi Orji, while presenting the 2017 financial results in Abuja, expressed confidence its diversified assets allocation strategy to direct investments in the development of domestic infrastructure will drive a turnaround next year. EXCERPTS:
PT: You appear to have changed your investment strategy?
ORJI: No! Our investment strategy is not changing. NSIA is evolving. We have always said infrastructure takes a longer time to develop. We said we were not going to rush into it from the first day. We said we will be in a better position to start making such investments from years 4 and 5. That is where we are today.
The new focus of NSIA now is on infrastructure. We are going to see more capital deployed on investments in infrastructural development. The first two or three years of operation were for the deployment of Future Generations Fund (FGF), Stabilization Fund (SF) on international investments outside the country.
From the third year onward, we said we will be more active in deploying the Nigerian Infrastructure Fund (NIF) on direct domestic investments in the country.
Therefore, since 2017, we shifted focus to domestic direct investments. First, to invest more in projects with longer gestation periods; investments that take a long time before revenues start coming in.
These are investments in toll roads, power, agriculture and real estate. Unlike the past where returns on investments were almost instant. Now, we are going to make investments and wait for returns later.
Since last year, any new contribution from our shareholders now shifted from 40 per cent for infrastructure to 50 per cent, at the expense of Future Generations Fund. The deployment has always followed the 20:40:40 ratio – 20 per cent SF, 40 per cent FGF and 40 per cent NIF.
Going forward, the ratio now is 20 per cent SF; 30 per cent FGF, and 50 per cent NIF.
Also, our focus areas, which is different from our areas of interest, has narrowed down. We are going to actively pursue, develop, sponsor, if necessary, invest in projects, like agriculture, power, toll roads healthcare and real estate.
Our focus is shifting from investing internationally to investing more domestically.
PT: The 2017 financial year result showed huge losses compared to the performance in the previous year?
ORJI: Last year, there was no adjustments in foreign exchange. It was largely stable. The previous year, we invested in 17 different currencies around the world, as Naira shifted from N196 to N305 to the dollar. Those diversified investments across 17 different currencies resulted in a huge boost to our income.
In 2017, the currencies were flat. We are looking at earnings for the year without the currency boost versus earnings on a constant currency basis.
The total comprehensive income for the year, which includes the minimal gains from foreign exchange, was N27.9 billion against the previous year’s figure of N149.8 billion, with a huge impact from the foreign exchange.
Excluding the impact of foreign exchange, the net income in 2017 was N26.3 billion, compared to N46.24 billion in the previous year.
Our total asset grew by 27 per cent, from N420.9 billion to N533.9 billion, with 68 per cent of the asset growth coming from the $250 million received from government in the third quarter of 2017. That money was not really available for investment for most part of 2017.
So, when we think about our returns, it means most of it came from the original $1.25 billion we had.
Again, we went through a period at the beginning of the year when our Board was announced in January and we had to wait for four months till May before actual inauguration.
This coincided with the time most of our investments in private equities and other structured notes matured. So, we had close to $150 to $200 million available for three to six months to market and make money, but could not deploy.
Before beginning to get involved in long term investment decisions, one needed to know the direction of the current Board. If a strategy runs with one Board and a new Board comes, there is a tendency to wait and realign properly. So, we lost three to five months before deploying the cash. That cost us a lot.
Our deployment in Infra-Credit was a big investment. To set up cost us about N540 million. So, most of last year was just set up. That was a loss on its own.
We also lost some money towards the end of the year in the Presidential Fertilizer Initiative. We were making money for three quarters of the year. Then, the Apapa Road problem started, basically as a result of logistics problem. It took a long time to clear at the port. That actually pushed the business over the edge.
We had two vessels, one of them had 42 days demurrage, because we could not berth in Apapa port. The roads in the area got damaged during the rainy season. So, trucks took more than seven days to access the port to evacuate their consignments, because there was no space to berth.
PT: What’s the situation now?
ORJI: What we have done now is that we have gone to Onne. Our trucks now go and lift instantly. We made 17,000 truck movements last year for fertilizer. We did not lose even one.
That saved government over N60 billion it could have used to subsidise the supply fertilizer to farmers last year at the rate of N3,000 a bag, to allow the commodity be sold at N6,000 a bag.
With our involvement, the price of fertilizer was down by 45 per cent year-on-year. That is why we are inspired to pursue the urea production plant projects. We are going to do it. It takes at least three years to build a urea plant.
So, Infra-Credit broke even during the first quarter of this year.
On returns basis, the goal this year is to be at the same level as 2017 for the FGF and SF. One cannot value infrastructure immediately, since most of the projects are long term. They have about 36 and 48 months construction period before one begins to get returns.
But, returns on capital employed was 5.17 per cent for SF in dollar terms; six per cent for FGF and NIF 3.5 per cent.
The key highlights for the year was the rapid deployment of funds into infrastructure projects in agriculture, healthcare, education and infrastructure enabling financial institutions.
InfraCredit is one such institutions set up between the NSIA as sponsor and Guarantco in the United Kingdom, to provide credit enhancements for infrastructure bonds. We believed this was missing in the deployment of infrastructure projects in Nigeria.
In other countries, most infrastructure projects are funded by infrastructure bonds, which get enhancement. Every developed country has institutions that provide that.
We cannot develop infrastructure unless we create that kind of institution. Without enhancement, pension funds will not invest in infrastructure.
After three years, we have attempted to solve this problem, by creating Infra-Credit and getting other investors into it.
At the moment, NSIA and Guarantco, backed by DFID, are the owners of this company. It’s fully operational right now. It is based in Lagos. Their first transaction was completed last year. It was phenomenal, providing enhancement to a company that provide captive power, which has been borrowing money at 26 per cent from the local banks to fund their operations.
But, with the intervention of Infra-Credits, the company was able to issue a ten-year bond with a double ‘A’ rating of Infra-Credit and are now able to borrow money at under 16 per cent. So, we were able to reduce cost of capital to this company by a significant amount of about N10 billion.
PT: The Presidential Fertilizer Initiative held so much promise. How much of a setback is the loss you reported?
ORJI: Nothing significant. We are already recouping the losses. This is one initiative we are so proud of. Late 2016 and into early 2017, the NSIA created a wholly-owned subsidiary company called, NAIC-NPK to supply the raw material to produce fertilizer to blending plants.
Most blending plants in the country had become moribund. Farmers depended on imported fully blended fertilizers. The cost to Nigeria was foreign exchange and jobs as well as lack of availability of fertilizer to farmers on time.
What NSIA did was to work with fertilizer producers and suppliers associations of Nigeria and created a vehicle that would use a lot of domestic components to replace imported materials – urea, limestone – by about 63 per cent.
With only 37 per cent of these components imported, we revived all the blending plants. In 2017, these entities produced about 8 million bags of fertilizer without any subsidy, at a 50 per cent decline in price between the previous year and 2017. So far, so good.
We planned to make about 5 per cent profit. But, we were challenged by logistics issues I spoke about earlier. But, we believe over time the business will become sustainable and more profitable as we reflect the market pricing.
PT: What other initiatives are you looking at?
ORJI: We also created two joint ventures with Old Mutual – one in agriculture and the other in real estates. The agricultural joint venture, UFF-NSIA has made its first investment by creating a farm in Nasarawa State; to do everything integrated, from maize, soya beans to feed mill production.
It’s a commitment of $25million funding by NSIA and another $25 million by our partners.
There are many such things from that joint venture in the pipeline to be announced in the course of this year.
The real estate joint venture has not taken off. Foreign exchange rate challenges made it difficult for the real estate ventures to invest. The NSIA made its first investment in social infrastructure, to provide high quality primary education to low income members of the society. The school has now taken off with most of the SUBEB schools in Edo State.
Other things in the pipeline include the Nigeria Commodity Exchange, healthcare projects.
The Exchange has been a long walk to the point we can start to develop it. From now, there is going to be some real movement. The exchange will be the pinnacle of everything the NSIA is doing in agriculture –from produce, store, transport and transparent pricing mechanism. We are working with the Bureau for Public Enterprises (BPE) and the Ministry of Agriculture to transfer some of the warehouses to us for effective use.
Cancer treatment has been a big area of challenge for Nigeria for a long time. We did a survey across the country and realised that one of the major critical equipment needed to treat cancer is not available in the country.
NSIA is partnering with LUTH (Lagos University Teaching Hospital) to build an advanced cancer radiotherapy treatment centre. In Aminu Kanu Teaching Hospital as well as in Umuahia, we also undertaking medical diagnostic centres equipped with modern facilities. We believe this will start to provide immediate relieve for those who are already suffering from cancer.
We hope they will be commissioned from the end of this year. We have selected operating partners who would run them in a manner to help transfer skills to the people and provide the necessary equipment.
We hope to have these programmes established in every geo-political zone. So, we have another ten more of the projects to be rolled out across the rest of the country.
On core assets under management at the end of 2017 was $1.5billion. But, NSIA also manages money for other people. We have $350 million for the Nigerian Bulk Electricity Trading (NBET). That has increased to about $390 million at the end of 2017. We have another $100 million for Debt Management office (DMO), which is now $121 million.
PT: Year 2017 appeared not to have been such a good year. What’s your outlook for 2018 and beyond?
ORJI: The global market was volatile in 2017. We expect it will remain so for a long time. Even the Nigerian Stock Exchange had a period it rallied in January before coming down in February. This is the same thing in the international market. Many factors account for that, from geo-political tensions in Iran to trade wars between United States and China.
Tariffs among the G-7 is something we never heard of in decades. These are new factors that made the market volatile. NSIA is not a bank. We invest in the financial market as well as direct investments. Sometime, investments can be volatile and we are being buffeted by the market.
I believe 2018 is going to be a very challenging year, because of the volatility in the market place. However, we believe NSIA’s diversified assets allocation, particularly as we begin to look at direct investments in domestic infrastructure will help weather that volatility.
We expect the announcement of the Presidential Infrastructural Development Fund (PIDF) will drive significant infrastructure development activity in 2018 and onwards.
About $650 million has been voted for the NSIA to enable it drive the PIDF. With this, including the returns NSIA has made, the core capita injected into the NSIA by the shareholders in now $2.15 billion. The expectation is that we will see more injection into the PIDF over the next 12 months.
The PIDF is targeted at completing some most critical ongoing projects, namely second Niger Bridge, Mambilla Power, Lagos–Ibadan expressway, East-West Road and Abuja-Kano highway.
We said we will evolve to begin making those investments in infrastructure. The time is now. Nigerians are going to see NSIA more active in agriculture, healthcare, power, toll roads and other projects.
The Babban Gona Farmers Services Limited is a company that gets farmer cooperatives together to ensure they have proper extensive services and organize them to have access to markets for their products.
We believe this will continue to be a positive investment. The cooperatives are very well run. The rate of repayment is about 99.98 per cent. So, there is no challenge about some of these problems.
NSIA is the largest shareholder in the Nigerian Mortgage Refinance Company with 21 per cent equity holding. We will continue to catalyze housing development in the country. The NSIA also holds 20 per cent equity in the Development Bank of Nigeria on behalf of the Federal Government. We played a significant role in helping incubate the company, which is also up and running.
NSIA is also a shareholder in the Family Homes Funds Limited, an initiative of the Federal Ministry of Finance to ensure social housing infrastructure is well developed in the country. We own 49 per cent equity in the company.
The Stabilization fund is doing what it supposed to do. The Future Generation Fund will face slightly challenging situations this year, because of the volatility in the market. But, we believe our assets allocations strategies will continue to give us a comfortable business.
PT: When would your investors expect their first dividend payment?
ORJI: We considered making dividend payments. But, the law says we should show profit in the three funds consistently for five years after before declaring dividend. This is our 5th year of consistent profitability in the three funds. Maybe next year. Who knows?
But, the dividend policy was considered by the Board, but had to be stepped down for reconsideration next year. We have to come up with a policy that would be approved by the National Economic Council (NEC).
PT: It is curious that in all these discussion, you appear not to have any plan for the refineries?
ORJI: That’s not true. There are all kinds of conversations going on at NNPC at the moment. NSIA is actively interested in the refineries. A lot of work has gone in the area of developing modular refineries to produce kerosene and diesel and put the remaining into export for the country. We concluded a lot of meetings with most of the IOCs to ensure we can get crude oil for the modular refineries.
You may have heard the announcements in recent times by the NNPC about going back to some people, including the original builders of the existing refineries, to help revive them.
The NSIA is following those conversations actively. NSIA has been invited to play a role in that effort. When the time is right, we will let the public know what we will do.
Refineries are very important. The day we fix our refineries, we would see our foreign exchange usage change instantly. It is not right that we sell crude oil, only to use the proceeds to buy petroleum products. This is not the way to make progress. So, we are taking this very seriously and if the terms are right, we will invest.
Beyond refineries, as an offshoot from the fertilizer programme, one of the things we are working on next is to help build an ammonia plant and getting into urea production. The plan is for NSIA to be able to sell ammonia back to those we import one of our components for fertilizer production.
There are opportunities in this area. There are a lot of work being done at the NSIA, both at the refineries and petrochemicals. Something major announcements will be made before the end of this year.