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Wale Shonibare: Everything is driven by government policy

Posted on Friday, 25 September 2015 11:56

TAR: Where do you make most of your income from?

Wale Shonibare : Most of the profile of the group comes from the investment banking business.

We do a lot of landmark transactions. For instance on the power sector privatisation, we advised 50% of the bidders for the assets.

Bidders raise money to acquire government assets – we do a lot of that. Then we’re also very active in oil and gas with the Shell asset disposals.

We’ve been very actively involved in supporting the [new] indigenous owners of these assets who are having to raise significant amounts of money. And now that everybody is broke – including the state governments and they’re having to come to the capital market to issue bonds – we are one of the most dominant players in that sector.

At a sovereign level, we’re also involved. We’re doing the first diaspora bond for the Nigerian government as one of the local book runners.

Given the lending for upstream assets and what with the price of oil being where it is, are some Nigerian banks holding on to a tricky proposition?

Well, you know the great thing about oil and gas is that for as long as the oil is in the ground, you’ll always recover your loan.

You may have to take some short-term provisions, but it’s better than lending to a business that goes bankrupt.

If the oil’s there, okay you have to cope with lower prices, which means you have to restructure the tenor of the loan, but it’s still better.

Banks love oil and gas because they hardly ever go completely bad.

The Nigerian pension regulator says that when it comes to pension funds investing in infrastructure, the will is there but the packaging isn’t. What can be done?

There are very strict regulations around the world about how you can deploy pension monies – and rightly so because you’re talking about people’s pensions.

Particularly in the case of infrastructure, you’re also having to finance greenfield projects that do not have a credit history.

It’s difficult to get a rating. Typically, pension funds are only allowed to invest in investment-grade instruments.

The great thing about oil and gas is that for as long as the oil is in the ground, you’ll recover your loan

If you don’t have a rating, then it means you’re issuing a junk bond and pension funds are not allowed to invest in junk bonds.

So what happens in other parts of the world when you want pension funds to invest in infrastructure is you credit enhance those instruments.

We’ve seen it on the road sector with the privately financed road in Chile in the 1990s.

They created bonds with credit enhancement to allow Chile pension funds to get involved.

You have special institutions that do credit enhancement for infrastructure, in particular monoline insurance companies which started life in the US credit wrapping municipal bonds.

What those institutions do is that they provide the investment-grade rating because they are triple-AAA rated.

By wrapping the bond like an insurance product, you say to the pension funds: ‘If anything goes wrong, I will pay you as the monoline insurance company’. We have a gap in this market. We don’t have any monolines operating here.

Secondly, for existing infrastructure, the natural place for power companies to go to raise money is the capital markets.

It’s only now with privatisation that power companies will be able to benefit from that.

In about two or three years’ time when we’ve cleaned up the accounts of these power companies – under government they didn’t publish accounts for maybe three or four years and they were not investment grade – we’re going to list these companies on the Nigerian Stock Exchange.

A pension fund can buy the shares, and these companies will be issuing bonds so pension funds will be able to get involved.

It seems that the banks are getting plugged into productive lending as opposed to consumer lending. Why?

Everything is driven by government policy. For a long time and it is even still the case now, we’ve been a very import-dependent economy, and government is realising that you have to promote local production.

I mean, that’s the only way the naira is going to remain stable, if we produce as a country and not just import.

There was a time we imported cement. Now we’re an exporter of cement because government introduced the right policies to promote local production of cement.

The same is happening in agriculture where, thankfully now, incentives are being provided to farmers in a way that bypasses the fraudulent practices of the past.

The central bank itself has taken a more active developmental role by introducing all these special funds that will provide low-cost money to certain sectors of the economy.

At the same time, government is closing the loophole that meant that banks can make easy money by just going to finance government deficits and not doing very much with the money […] So you have to provide an incentive for banks to take the additional risk of lending to the real sector.

It’s happening, but there are many more reforms to come.

And the other thing is because the banks are now quite large, they can’t sit on all this money […] You have to deploy funds, so many of them are having to look at small and medium-sized enterprises and more retail-type banking.

If you have a large population, you have to bank that population profitably.

Would tax revenue be a route through which government could wean itself off oil money?

They have an opportunity to do that because the rebasing has shown this is an economy of almost $600bn and there’s economic activity that’s grown that has not been taxed.

We have a tax collection rate of about 12%, which is one of the lowest in the world – in fact one of the lowest in Africa […] So it means there’s a lot of work to be done.

That’s why running an oil-based or natural resource-based economy makes you lazy – because you don’t have to put the administrative systems to allow efficient tax collection.

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