•Minister of Finance, Ngozi Okonjo-Iweala

07/12/2011 (The Nation) -  In all sectors of the economy, Nigeria appears to be witnessing increased inflow of foreign capital despite macroeconomic challenges. Taofik Salako reports on the underlying currents and prospects of the inflows.

Most quoted multinationals have in recent years invested in additional production capacity and consolidation of their market shares. From Nestle Nigeria to Cadbury Nigeria, GlaxoSmithKline Consumers Nigeria, PZ Cussons Nigeria and Lafarge Cement Wapco Nigeria, the core foreign investors have been enthusiastic to fund new production plants and upgrades. In some instances where Nigerian investors appeared tepid in providing their equity funding, core investors like Cadbury UK brought in additional capital to take over the equities and ensure the realisation of the corporate renewal plan.

The increased investments by long-established core investors in major quoted companies mirror similar activities among several existing private companies as well as renewed interests by new foreign investors. Large private companies such as Promasidor Nigeria and Procter and Gamble Nigeria are increasing production capacities to further situate Nigeria as the hub of their sub-Sahara Africa operations. The Founder of the Promasidor Group, Mr Robert Rose, recently visited Nigeria to step up preparations for the expansion of its Nigerian business, which already accounts for almost one quarter of the group’s operations in 30African countries. Rose said the group planned to build another factory in another part of Nigeria, in addition to its multi-billion naira complex in Lagos.

Procter and Gamble also last month inaugurated a new manufacturing plant that would further domesticate local manufacturing of its products. Already, some 70 per cent of Procter and Gamble Nigeria’s products are manufactured in Nigeria.

New foreign investors are showing keen intents to invest in the country, especially in the infrastructure sector. A group of investors led by Califco Group at the weekend announced plans to invest $2 billion in the Nigerian energy sector. The consortium, which included Califco Group, Frazimex Limited, Geiconn Nigeria Limited, NJJ Power Services and Ecoinvest Capital, would invest in a project that would see it improve power generation in Nigeria by 2000mw in the next five years.

Rebuilding local capital with foreign

The financial services sector has, particularly, benefited from the foreign capital inflow. It has witnessed two epochal reforms in the past seven years. In the 2004-2005 banking consolidation years, capitalisation was the central theme of the reform. With the increase in minimum capital base from N2 billion to N25 billion, banks had embarked on unprecedented massive capital raising exercises. Some N3 trillion was raised through the domestic capital market. But remarkably, there was no significant foreign capital injection into the Nigerian banking system. Beside the recapitalisation of their Nigerian subsidiaries by a handful of international financial institutions, the recapitalisation was largely unable to attract substantial foreign capital investments in spite of the opportunities presented by glut of offer and saturation of the Nigerian bourse.

In the contrast, the ongoing banking reform has witnessed almost unprecedented expressions of interest and participation by foreign institutional investors. Although the thematic framework of the ongoing reform is systemic change rather than capitalisation, the sub-theme issue of capitalisation has attracted much interest within the few available opportunities. In the course of this reform, Nigerian banks have attracted some $1 billion foreign capital investments, putting foreign capital as the dominant finance as against previous experience of re-gurgitation of existing capital as new capital.

Beside the significance of the value of foreign capital inflow, the quality of the foreign investors also vindicates the success of the banking reform and positive perception of the Nigerian banking industry within the global investment market. From the International Finance Corporation (IFC), the private sector investment arm of the World Bank; to Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution; African Capital Alliance (ACA), the Netherland’s FMO and several other global private equity firms, pedigrees of the new foreign investors are expected to impact positively on corporate governance, banking products and services and returns to investors.

In a vote of confidence, IFC granted First City Monument Bank (FCMB) Plc a $20 million convertible arrangement, which would eventually give IFC between two to three per cent equity stake in FCMB. Already, shareholders of FCMB have mandated the board of the bank to allot ordinary shares to IFC, which had granted FCMB $50 million loan to support the bank’s lending operations.

Besides, IFC had earlier invested about $24.6 million in Diamond Bank Plc, further consolidating its profile as a leader in supporting Nigeria’s financial sector through trade finance, and partnerships with commercial banks and specialised financial institutions with equity investments. IFC provided new investment commitments of $926 million in Nigeria in the fiscal year ended June 30, 2011, representing an increase of 34 per cent on $690 million posted in the previous year.

The biggest foreign equity investment in Nigerian banks in the past seven year was struck late September with the shareholders’ consent to $750 million investment in Union Bank of Nigeria (UBN) Plc by a consortium of international investors.

With the shareholders’ mandate, Union Bank would receive about N76 billion ($500 million) equity capital and N38 billion ($250 million) Tier 2 capital from a consortium of international investors to retain its nearly century-old brand and regain its competitive verve as one of the strongest and reliable banks in Nigeria. African Capital Alliance (ACA) is leading other partners including ACA B-Holding Limited, which included the FMO Netherland; The Keffi Group VIII LLC, ABC Holdings Limited and the Discovery Group in the $500 million equity investment through a special purpose vehicle- Union Global Partners Limited (UGPL). UGPL now has 60 per cent controlling equity in Union Bank.

Besides, Overseas Private Investment Corporation (OPIC), the United States Government’s development finance institution, would provide $250 million Tier 2 capital in further support of the equity investments by two US sponsors- Keffi Group and Discovery Group. The Union Bank’s core investors deal has been cited by many analysts as a vote of confidence on the ongoing banking reform, especially given the profiles of the partners in the consortium.

Founded in 1977, ACA has grown to be a leading private equity firm focused on Nigeria and West Africa. With over $600 million funds raised to date, ACA is a dominant player in its markets and has a significant track record of successfully exiting investments. ACA already has equity investments in several private and quoted Nigerian companies including Cornerstone Insurance Plc, a leading quoted insurance company.

ABC Holdings Limited is the holding company for BancABC, a Botswana-based pan-African financial services provider with subsidiaries in several African countries including Mozambique, Tanzania, Zambia and Zimbabwe. ABC Holdings is listed on the Botswana Stock Exchange (BSE) and also has secondary listing on the Zimbabwe Stock Exchange (ZSE). ABC is owned by several reputable financial institutions including Old Mutual, Botswana Insurance Fund Managers (BIFM), IFC and Citi Venture Capital Investments - the investment arm of Citibank.

The Keffi Group is a New York-based private investment firm focused exclusively on fundamental, research-driven value investing. Founded by Jide Zeitlin, a former partner and Global Chief Operating Officer of Goldman Sachs’ investment banking businesses, Keffi Group focuses on return by optimising the fundamental performance of the investment. Discovery Group is a US-based hedge fund manager.

The involvement of OPIC is also expected to impact on Union Bank tremendously. Established as an agency of the US Government in 1971, OPIC operates on a self-sustaining basis and provide services for new and expanding business enterprises in more than 150 countries worldwide. OPIC mobilises private capital and helps US businesses gain footholds in emerging markets by providing investors with financing, guarantees, political risk insurance, and support for private equity investment funds. OPIC has supported $200 billion worth of investment in nearly 4,000 projects in developing countries and emerging markets.

Vote of confidence

With clear benchmarks, the foreign capital inflow would significantly drive competition in the Nigerian banking industry. The $250 million financing from OPIC is expected to be used by Union Bank to introduce new financial products, including mobile banking technology that will enable the bank reach unbanked segments of the population.

According to OPIC, the facility would encourage establishment of an objective performance evaluation system to create opportunities for advancement; identification of needed training and tying staff performance to rewards as well as creation of Union Bank Academy to provide in-depth training in customer service, credit analysis and risk management. OPIC would also support the bank with an institutional support office to act as a resource pool for bank management for specialized banking such as foreign exchange management, agricultural credits, factoring and other specialised skills.

OPIC President and Chief Executive, Elizabeth Littlefield,said the Tier 2 capital was in support of "Nigeria’s serious commitment to reform its banking sector and restore investor confidence" adding that OPIC was "particularly pleased that the project will result in greater availability of credit to ordinary Nigerians".

"With the participation of its experienced investment team, this project will encourage the adoption of best international practices of corporate governance; increased transparency; strengthened credit and risk management procedures; and improved customer service, through the participation of an experienced investment team," Littlefield said.

Jostling for a stake
 
Many other foreign capital investments are expected to be closed in the months ahead as foreign investors jostled for opportunities in the banking industry. Already, the Asset Management Corporation of Nigeria (AMCON) has confirmed that it has received 15 expressions of interest (EOIs) from foreign investors and five EOIs from Nigerian investors in relation to the proposed sale of the three nationalised banks- MainStreet Bank, Keystone Bank and Enterprise Bank.

Besides, existing foreign core investors in Nigerian banks have showed increased appetites for additional stakes and strengthening of their footholds in Nigeria. Standard Bank Group, the majority shareholder in Stanbic IBTC Bank Plc, has already indicated interest in further acquisition to boost the retail banking franchise of its Nigerian subsidiary.

Ecobank Transnational Incorporated (ETI) Plc, the pan-African bank-holding company, the parent company of Ecobank Nigeria Plc, has not only recapitalised its Nigerian subsidiary it recently acquired Oceanic Bank International Plc, one of the rescued banks that concluded mergers and acquisitions late September. ETI is amassing a $3 billion war chest to pursue mergers and acquisitions and other investments in African markets including Nigeria.

With the increasing flow of foreign capital and expertise, the ongoing reform has addressed two major shortfalls of the previous recapitalisation exercise and put the Nigerian banking sector on a stronger foothold for international competitiveness in best practices and products and service delivery.

A group of Nigerian investors and foreign investors under the auspices of Assur Africa Holding (AAH) recently acquired the majority stake of Guaranty Trust Bank (GTB) Plc in Guaranty Trust Assurance (GTAssur); a trend that many analysts said might increase in the period ahead as banks dispose their non-banking subsidiaries. Incorporated in the Republic of Mauritius, AAH’s shareholding structure of AAH is made up of six members comprising three international developmental finance institutions – DEG (Germany), Proparco (France) and FMO (Netherlands) and three private equity funds with substantial investments across Africa – ADP I Holding 7, subsidiary of African Development Partners I, LLC and ADP I L.P. (together "ADP I"), advised by Development Partners International LLP ("DPI") based in the United Kingdom, AfricInvest II LLC and AfricInvest Financial Sector Limited, both advised by AfricInvest Capital Partners ("ACP") based in Tunisia. The deal brought in a total consideration of N11.910 billion, approximatEly $76 million.

Attractions to economy

Population, natural resources and relatively stable polity confer comparative advantages on Nigeria, especially with the recessions in the advanced economies and waning returns from some other emerging economies. With a population of more than 160 million, Nigeria is the most populous African nation and the demography of its largely youthful population makes it a huge market for products and services. "Our biggest market is Nigeria because you have more people than any other country in the continent. You have a population of about 150 million and at the moment we sell to about 600 million people in Africa, so Nigeria in our minds will always be 25 per cent of our business. Nigeria should be the biggest market for us. It is a wonderful market but it’s been neglected over the years," Rose summed up the rationales for the drive for expansion in Nigeria.

According to him, Africa with its huge opportunities and untapped potential has better prospects for higher returns than Asia or anywhere else.

"The feeling today is that the opportunities in the continent are even bigger. In the next 50 years, the opportunities will even be greater in Africa than anywhere in the world. The Far East, especially China is growing very fast, at about eight per cent per annum but it does not have the resources that Africa has, which should grow faster. We got to work it out so that we can grow better," Rose said.

He said Promasidor has not reached its potential in Nigeria and thus plans to grow its market share in Nigeria.

"When we came to Nigeria 18 years ago we did not have reliable data to know what the size of the market was. But with what we have done with our products, not only has it increased our market share but it has grown the market many times but my belief is that it is nowhere near where the potential is and we will continue to grow the market," Rose said.

With the burgeoning world population, many investors see Nigerian agricultural sector as a cash cow. In spite of the dominance of oil revenues in government earnings, Nigeria remains largely an agrarian economy with agriculture the largest sector and employer. With a land area of 910,768 square kilometres out of a total area of 923,768 square kilometres, Nigeria’s arable land use stands at more than 33 per cent. From the North to the South, from West to East, Nigeria’s climate and terrain are suitable to cultivation and breeding. Notable agriculture produce across the regions include Cocoa, Peanuts, Palm oil, Corn, Rice, Millet, Cassava, Sorghum, Yams, Rubber, Cattle Sheep, Goats, Timber, Fish among others.

Besides, the Nigerian economy has sustained a stable growth with most analysts predicting further growths in the years ahead. In contrast with the contraction in advanced economies, the economic outlook of Nigeria has continuously improved, largely driven by the real sector, especially agriculture. First half economic report for 2011 showed that GDP grew by 7.3 per cent during the period, a development that largely reflected the growth in the output of the non-oil sector, which had risen by 8.7 per cent and accounted for 84.1 per cent of the total. Provisional aggregate index of agricultural production had grown by 5.6 per while industrial sector’s index improved by 3.0 per cent over the level in the corresponding period of 2010. Nigeria’s GDP had grown by 7.9 per cent in 2010 as against 7.0 per cent in 2009, surpassing in both instances global estimates and five-year average annual growth rate of 6.7 per cent between 2006 and 2010. The non-oil sector had grown by 8.5 per cent in 2010, with agriculture contributing the highest percentage points of 2.4 per cent to total growth.

Nearly all analysts agreed that the financial reform and economic stability have placed Nigeria on the path of steady growth over the coming years, with a conservative growth trajectory of the International Monetary Fund showing six per cent growth between 2015 and 2016. Several analysts, including Renaissance Capital which, stated that Nigeria could achieve and sustain double-digit growth, are, however, more optimistic about the growth potential of the Nigerian economy. Drawing on the potential impact of the power sector intervention fund, analysts said the plans to improve electricity generation and transmission could help GDP growth accelerate in the coming years.

The challenges linger

But insecurity, poor infrastructure and fiscal and monetary instability have continued to encumber the attractiveness of Nigeria as the preferred destination for foreign investments. With escalation of the security threats by various armed groups across the country, especially in Borno State and adjoining states and bloody tribal and class clashes in Plateau State and Benue State, insecurity has emerged as the primary challenge to the nation. President Goodluck Jonathan recently admitted that security challenges were holding back foreign investments. "We are worried about the security challenges we are now facing in the country because it is preventing investors coming into the country," President Jonathan said in a recent interview.

Rose said poor infrastructure has been major obstacles against the development of many African nations including Nigeria. "Africa is two per cent of the world’s Gross Domestic Product (GDP) and it should be 25 per cent or more. All of us have to do something about it and that is the only way. It is one of my objectives to set up a foundation across Africa and in Nigeria which will encourage improved governance generally and which will grow equity across the continent. There is huge unemployment but we have huge resources and we got to do things better. We have to provide infrastructures and building blocks for growth- basic education, basic medical services, and many other basic facilities. Africa can be put back on the map of global marketplace if we hold people accountable and demand for good governance. We have got the resources to be better," Rose said.

Conclusion

With many analyses indicating that Nigeria could be the sixth of the five acknowledged emerging economies- Brazil, Russia, India, China and South Africa (BRICS), the shift in the global economic balance, characterised by the recessions in America and Europe as well as unrests in the Middle East, places Nigeria at a vantage position to leverage on its enormous resources to become an emerging economy. But the onus lies on the government to provide amenable macroeconomic situation to domesticate foreign capital, since such capital are continuously in search of comparatively better operating environment.