Solomon Adegbie-Quaynor is the immediate past country manager at IFC – International Finance Corporation, the World Bank’s private-lending arm. The IFC plans to maintain investment spending in Nigeria at $1.5bn this year, Adegbie-Quaynor told BusinessDay’s analyst PATRICK ATUANYA in this interview. Other topics of discussion include reforms necessary for Nigeria’s growth, oil slumps impact on non-oil sector expansion, and IFC’s planned interventions to improve Nigeria’s debt market. Excerpt:
What has been the major difference between when you came in and now?
I came into Nigeria when government regulators were beginning to look at the areas in which they needed to make reforms for the economy to grow. So, I came in at a time when that was beginning to happen in the banking sector. Since then, we’ve seen reforms, especially in power, and then we began to see a greater focus on reforms, not just in the financial sector but in the productive sector which creates jobs and then allows banks to fund true growth as opposed to funding margin loans and things of that sort which are more really, should I say paper transaction. So, the big change has been a greater demonstration of government commitment to reforms in sectors, but broadly on also the overall investment climate.
We talk with a lot of investors and there is this sense that reforms have not gone deep enough or as far as they should go. What do you think is left to be done in terms of reforms?
It’s hard to encapsulate reforms in just one paper, but maybe if I step back and tell you how I see the Nigerian economy, then we can talk specifically about which reforms. I see the Nigerian economy as what I call the hockey stick economy, it takes government and also sometimes private sector a while to get to a point of agreement and also a demonstration of government commitment, but whenever that happens, it really unleashes a lot of potential. So, we saw it in the telecoms sector, we started off, I think with only a hundred thousand lines, during that period and there was a lot of discussion about, should we privatise NITEL or should we not, should we open the markets for GSM or should we not. But during the Obasanjo regime, there was really a willingness to take risks, a commitment to see the reforms through and then, there was a transparent process to bidding out the GSM licence.
And this is where we began to see the MTN, the Econet and so on, and we went from a subscriber base of a hundred thousand and today we have over a hundred million subscribers. So, government commitment to create an environment where there is as much as possible, certainty is what the private sector looks for. The private sector wants to understand these are the rules of the game, they would like to also influence the rules of the game, sometimes they ask for too much, but this is where having a dialogue between public and private brings things into equilibrium and once that is in equilibrium, once that is known, once that is not changed because of the change in administration, then we begin to see greater activity in the private sector and the private sector is really the best creator of jobs, not governments.
Coming back to your original question, I began to see government both at the federal and at the state level. It’s important to also mention the state level, I began to see a greater commitment to long-term reforms that are irrespective of which political administration is in place, and Lagos State is another example from Bola Tinubu to Governor Fashola we’ve seen continuity. Overall, those are really the differences between then and now, but once again the private sector evolves, relative to the whole market environment, so nowadays, we are seeing a greater trend towards urbanisation and that is creating new opportunities.
So, you were asking me what do I see going forward, urbanisation is going to be one of the biggest drivers of private sector activity and expectations of government reforms going forward and when you have a critical mass of people together, you are able to now look at changing retail patterns. So, it’s not only the Palms or the shopping mall that we see in Ikeja but you’ve heard of Oluwole Market, we begin to see different retail patterns for different demography. Then I think the other thing that has changed or is going to change is within this urbanisation envelope is also the fact that the middle class in Nigeria is growing and has grown because then the middle class can really underpin viable private sector projects.
When I was driving down here, I saw a lot of cranes, a lot of construction activities. Is there a risk of interruption of that activity in today’s market environment, with everything happening with the naira, oil prices. Are we going to see a drying up of capital flows into the sectors of the economy that is really driving growth, which is really the non-oil sector, it seems investor sentiment is being shaped by what is happening with the oil. But if you look at the Nigerian economy for the last four or five years, it is the non-oil sector that has really been driving growth, whether it is construction, whether it is the consumers, whether it is e-commerce, whether it is retail; so how do you see that shaping out?
Let’s break it down this way, government budgets and revenues are based on oil so the size of the budget or the amount of money available to create the enabling environment for private sector is impacted by oil. We’ve tried our best in the last several years to catch that by having a reference oil price that is far below the market price and having really the excess proceeds go into an excess crude account or the Sovereign Wealth Fund.
So, hopefully that has somewhat mitigated the impact of declining oil prices within a reasonable period to not destabilise an economy, but we’ve seen a significant decline in oil prices recently and we are approaching elections which mean the various levels of government are looking to spend money and demonstrate within the state levels that they are actually delivering what they promised, the election promise. So, if you follow the money and if you look at it that way, declining oil prices would impact government’s ability to deliver the common services whether its health education, infrastructure, etc. But if indeed the government has created a good reserve, if indeed government is open to public private partnerships and creating the right environment for these things to thrive, then maybe the impact will not necessarily be as negative. When there is devaluation, investors are always concerned, sometimes, these things are short term. But if also you don’t get your exchange rate to the right level, you also don’t facilitate export and so on.
Currency depreciation especially if one doesn’t know how it is going to be managed means a lot of investor returns will be lost as a result of depreciation so investors will be cautious but investors will take a long term view and would not just look at the short term impact but they are going to say ok, what is government trying to do. But this was an explicit depreciation initiative by the bank so once they have a better understanding of what government is trying to do and they see how it is going to impact their investment long term they may be willing to absorb the short term impact for the long term benefit. So I don’t think it’s easy to criticize the devaluation, however, there’s going to be short term exogenous impact that all of us will not be happy about. Having said all of that, we still have a thriving non-oil economy and as long as the trend between income, consumption services continue the economy is not necessarily going to be largely and adversely impacted.
How is IFC investing in this environment?
During the eight years I have been here, we’ve gone from the investment amount annually of $150 million to about $1.5 billion, about 10 times increment. We clearly wouldn’t have done a 10 times increase if indeed the economic environment wasn’t improving. Where we’ve seen our investments in the sectors we are strategically focusing on going forward are power, not because we are looking to make money in power, but because, the cost of power in this market, reliability of power, the effective cost with petrol price, diesel prices and so on is such that a lot of businesses are not doing as well, especially if you compare them with competitors overseas.
So, we’re not really allowing the local economy to grow. This is one of the reasons, not only IFC but we’ve joined with our sister organisations, the World Bank and MIGA, and we’ve said we would work with government, we would work with developers, we would work with financiers in a proactive way to make sure that power is mostly resolved. And we do believe that once those are resolved, Nigerians are very entrepreneurial, they are very dynamic. Even the vulcaniser on the street would improve their business and improve their profitability because it’s really the power that is cutting into a lot of their profits.
We are taking a look at sectors where we can help catalyse big changes, so power is one, and we’re going to look at the whole housing value chain; from developing affordable housing and when I say affordable housing, it’s not the wealthy homes, not the luxury flats, so some of the cranes you talked about, it’s for the wealthy and commercial real estate and the warehouses and so on. We need to actually see that come more into the middle income and the lower middle income and they can afford it. If we take a look at the amount they pay in terms of one year rentals, two year rentals, that’s the equivalent of the deposit of a home.
Just a quick follow up; you’re saying the $1.5bn is going to remain steady right, in spite of everything that is happening, and you don’t see a decline?
I believe so. You have to ask my successor. Once again, I go to the point I have made already, you’ve got to be careful about judging the long-term potential by the short-term. We have elections coming up shortly, things are not necessarily going to work as planned, however, the long-term trend is in the right direction.
We were looking at the deals that IFC have done over the last couple of years and what stood out was that IFC was brave enough to provide credit and equity financing for the micro subsector of the economy. What made the IFC so brave, what kinds of guarantees do you think they will give in return for the investment because the problem investors have investing in that sector is that books are not properly kept in most cases. How is it that the IFC is able to so bravely invest in the micro sector?
First and foremost, that micro level, it is women who are running most of the businesses and there is a natural trust level that women scale-up their businesses only as far as they can manage them, and that also women are not going to spend money on the Mercedes and all the other things that are not included in the reason they borrowed. So, it’s not as risky as people make it up to be. Yes, its growth potential for each individual microbusiness may not be huge but there are so many people doing the microbusiness and that in aggregation is a large part. My point is to rather say I don’t think it’s as risky as people would think and also, fortunately sometimes, the return is far higher than the return you get from corporates.
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But we need to manage that. We cannot apply these things downwards that we apply to medium corporates to the micro. So, instead of asking for books, what you may ask for rather is do you have a loan officer who walks around the market, who understands business. We may use esusu system, which is, I serve as a back-up to you because if you embarrass me, you embarrass all of us so they are different mechanisms for mitigating the risk. Ultimately, I think one of the things we have tried to tell people is don’t assume that small and medium and micro enterprises are riskier. They can be riskier is you throw too much money at them when all they need is small.
And we began to see this in the micro sector, you remember the central bank indicated that several microfinance banks were insolvent and that’s because some people began to go a little bit extravagant about it. If you have a measured approach, and this is what we’ve done, we’ve worked with partners that know how to really assess the risk and help manage the risk of working with micro enterprises. So this is where the Accions, the Groomings, the Lapos, not just the international groups but local groupsthat have learnt about the key methodologies that haveworked elsewhere and have adapted them to the local condition. In other words these are good businesses but more importantly, it helps support jobs, increases income to what is primarily a female segment. About 90 percent of micro enterprises are really owned by women.
Many people complain of access to capital at the micro level. What can be done to make the ease of access to capital improved for them?
I would say for us, we try to be catalytic so we do not have enough to provide for the poorest across the whole of Nigeria. For that population, our capital just won’t match. What we are trying to do is demonstrate that it works and then hopefully, other partners will come in and help.
I will give you an example. A lot of banks have not been comfortable lending to microfinance institutions because most of them don’t have collateral and the banks look for collateral, but in IFC working with a number of these microfinance institutions and they’ve seen our comfort with them and our continued financing of them, a lot of banks have now expressed interest in financing these microfinance institutions, especially if they pass the IFC test. But we can’t finance everybody as IFC. This is where we began to go, from smaller micro finance institutions to larger ones. LAPO is in 26 states, Grooming is in about 22 states, so we are looking now at national microfinance institutions so we can help them have a lot of impact. But we are trying to crowd in the banks, we are trying to say banks, at least, you don’t have to worry about lending to these enterprises and always require collateral because you’re not going to get collateral.
That education process is bringing even a lot of local currency funding to help in that space. My hope is that with time at least at the micro level, you are not going to see a lot of people complain about access to finance. They may complain about the cost of financing but this is where that cost ultimately starts off really from the government’s borrowing cost as government reduces it borrowing treasury comes down, you’d see that most of the cost of financing would also come down.
What are you trying to achieve with the IFC-Naira bond programme, what is the timeline of issuances going forward? We can’t really go through an economy without corporates issuing debt or refinancing their debt, raising capital either debt or equity but both have to be active so we can have a very healthy market. Please, share your thoughts about that?
You’ve hit into an area I am very passionate about. I don’t think we should always be worried about foreign direct investments (FDIs), we should also be concerned about local direct investments (LDIs), and LDIs come in a number of ways. What we’ve become used to in Nigeria is LDIs through banks. Banks have a broad branch network they can mop up deposits and then they lend in return, and a lot of times they are not lending even to SMEs or to microfinance institutions. However, you take a look at Nigeria and you see that the pension deposits is growing rapidly. Right now, it’s about $35 billion 70-80 percent of which is invested in government treasuries.
There’s something wrong with that. And a lot of these pension funds are risk averse because it’s your future and my future that they are looking at. So, what we’ve been trying to do is create new asset classes that the pension fund can invest in and we can do that by partially guaranteeing some of the corporate bonds you are talking about and also by helping standardise a lot of issues in the market. The cost of issuance is one and there are so many things related to that so we at IFC spent time in working with SEC, PENCOM, CBN to rejuvenate the corporate bond market.
We focused particularly on bond because everybody had focused on equity and when you have too much equity chasing no real production then you get a situation where you had many people going into margin loans and lost all their money. For me, this is where we can somehow pool local financial resources and find the best way to channel it into the productive sector.
Talking about the guarantee for the corporate bonds; is there anything on that happening with you people?
There are lots of things that we are exploring, but nothing that we can report right now. But we are also working with partners like the Sovereign Wealth Fund. For example, we are trying to create an institution that would provide guarantees to the different tranches and that would make pension funds more comfortable investing in housing, investing in infrastructure, etc. There are a number of things really at play. One of the reasons we did the IFC-Naira bond was to actually demonstrate that all the advice that we’ve given to SEC, PENCOM, CBN to reform the entire bond market could work.
If it’s working for us as an issuer then it must be working for any potential corporate issue. But the other reason we did that too was that in the future we want to provide naira financing to companies that earn revenues in naira you know it doesn’t make sense to give them money in dollars when they earn revenues in naira. This is another way for us to channel local long term and affordable money to the productive sector.
What is next for you and what do you think are some of the big issues still outstanding for the country to tackle, whether at the macro or micro level?
Before I talk about what next for me, let me talk about what next for Nigeria. Frist of all, I don’t think there’s any other country like Nigeria, and I’m even worried that I’m not going to be as excited working in Africa after I leave Nigeria because this is the most exciting place to work. Part of that reason is Nigeria is very dynamic, very entrepreneurial. Sometimes, we push the envelope a little too much. By the way, I’m an ECOWAS citizen, I’m half Nigerian, half Ghanaian, so depending on who’s winning the football match you know where I’d swing (laughs).
I see so much potential in Nigeria and the only thing holding Nigeria back is Nigerians. As we work through those reforms, when we get it right, there’s nothing stopping Nigeria. My hope is that governments going forward and the populace going forward, when they see the positive impact of the reforms they would hold the governments more accountable to make those types of reforms through the election system, in other words you come, you don’t deliver you go.
Going forward, the areas we’ve discussed as commitment to reforms and the implementation of the reforms happen, the non-oil economy will take off and the reason it’s also important to me is because it doesn’t benefit just Nigeria, it benefits the entire region. Now my passion is Africa, after Nigeria, most likely in my new role I will still be doing something in Nigeria because Nigeria is such a big part of Africa. My big focus going forward is to strategically facilitate cross-border investment. For example, working with South African corporate that have the right deals and experience we could go to the rest of Africa working with Nigerian corporates, Nigerian financial institutions that have the innovation, the ethics, etc, to go to the rest of Africa.
Would that be with IFC or with another institution?
With the IFC. You know, IFC is a great platform for helping developing nations. You can see I haven’t said anything about development. For me, I’m an African and good business in Africa is development and my background is investment banking. I joined IFC to come and add value in Africa so long as it continues to be such a great platform to help Africa.
PATRICK ATUANYA
