The idea of establishing a Sovereign Wealth Fund met with resistance when it was first muted, and even now, it is unsavoury to some in political leadership. Nevertheless, the Managing Director of the Nigerian Sovereign Investment Agency, Uche Orji, sees it as the safeguard Nigeria has when its oil wells eventually dry up. He speaks with the Group Business Editor, Simeon Ebulu.
Was Nigeria on target when it started the Sovereign Wealth Fund?
In my place, they always say, whenever you wake up, you say good morning. We have woken up to this and our morning for this has started. Obviously if we had started the SWF in 1976, at the same time that Abu Dhabi started theirs, which at the time, I was told, they started with less than $30 million, Abu Dhabi has built a complete business now of $675 billion. Abu Dhabi produces less oil than Nigeria.
In 1996 when Norway started, and Norway produces about the same amount of oil as Nigeria, it with $300 million, and I remember this clearly, because when I was at Goldman Sachs Asset Management, we co-managed a portion of their funds for them. Today, the Norwegian government puts into their SWF, the equivalent of $1 billion every week. When I met with them last October, they said every week since last year and the year before, they’ve been putting $1 billion.
As we are sitting down here, they are doing that every week. And now they have built their SWF to be the World’s biggest to about $840 billion.
The point is, we can sit back and say, if we apply the same principles that Norway, or UAE applied in 1976, or 1996, we could have been much bigger. But all of that is water under the bridge. We have woken up, the most difficult challenge is to make sure that the contribution is consistent. The biggest danger is that you start and you stop. It becomes difficult to achieve what you want to achieve with this business.
What is the underlying priciple guiding SWF management?
Sovereign Wealth Funds are managed conservatively. They don’t borrow money the way banks do, so you can’t compare this business to banking business. For every dollar of banking equity, you know sometimes, they leverage it, may be 100 times. This business does not expose itself to that kind of risk. It is not the same thing as private equity.
They invest in equity as a diversified pool of asset, so you don’t take the same extreme level of risk as other people take. The value-added of Sovereign Wwealth Fund is the consistency of contribution by the governments that started it. That is the only way you distinguish SWFs from other forms of investments.
How soon are we going to be able to measure the success of this venture?
Well it is helpful in answering that question to accept that various governments in the past, particularly that of President Olusegun Obasanjo, through the Excess Crude Account, attempted to do this. But with the government of President Goodluck Jonathan, a law was actually enacted to make this happen. It is now a question of: Can we consistently keep to that law? If we can, then we will most likely, succeed.
You measure the success of SWFs, not in weeks, or quarters, you measure it actually in most cases, in decades. I can tell you this because when Norway started, I was there. At Goldman Sachs, they gave us a small slice of $50 million to manage for them. Here we are almost 20 years, and it is one of the biggest SWFs in the world.
We’ve stated today, which is great, but we must contribute consistently to this, because really, this is not about me, or any individual. It is the foundation that you put in place today- the consistency of the contribution that will determine the success of the Nigerian SWF in 20, 30 years time.
Let’s not forget why we set up this Fund. Our oil resources, who knows when it will run out, but one thing is guaranteed-it will run out. We don’t know when, but it will, so we have to be prepared.
If SWFs have that much success quotient, as you said, why was there resistance to its creation?
Number one, it is not unusual that there was resistance to the creation of the SWF. Firstly, there are competing needs for the resources, and it’s a question of, do you save, or do you invest. Even in other places, there are issues, even in Norway, you will hear about people saying, oh, we have saved enough, let’s start spending. The younger generation now want to spend the money. Whenever there’s a pot of resources, the debate has always been, do we invest, or do we save?
I also need people to understand that the two are not necessarily mutually exclusive. So there is perception issue as to what a SWF does. I personally believe that the bridge in the conversation is to accept that the best way to save is to invest.
Let me explain. If you keep N10million in your bank account, and it’s cash, every time somebody comes to say, this one, you give, that one, you give, that money will never be of any use to you. But if you take that money and buy a flat and you rent the flat out and start collecting rent, you can spend that return and keep your capital, and may be your capital will appreciate.
So it is a matter of how you decide to approach what people have perceived as a conflict in definition. So when I hear people say, why are we saving when the roof is leaking, my answer is, it’s not so much about saving, it’s about savings through investing.
Because we asked the same question 20 or 30 years ago. In the first Gulf War, we had a lot of money, in the oil crisis in the 70s, we had a lot of money. Could you imagine, if we consistently saved a bit of that since the 70s, where we will be today? We would have enough pool of capital to take on major projects. So the resistance is the age-old perception of the difference between savings through investing and spending.
The number two reason, is obviously the matter in court between the Federal Government and the states, on which I cannot comment, but the reality of the issue is, we are investing this money.
But I want you to take away one impression, which is that, it is not unusual to have a debate around the issue of, do we save, or do we invest. People should understand that we are investing this money, we are not taking it, and the best way to save, is to invest, that’s my personal view.
Don’t you think there’s need for enlightenment?
It does call for a lot of enlightenment, which on the one hand we can do, but it’s not just us. It’s enlightenment across, by the government and the media, who have the benefit of seeing and hearing about other countries where this has worked. It is a stakeholder enlightenment by everybody who understands what this, is.
So for everybody to expect that I would be the one to go about and explain to all these people, there’s already a conflict of interest issue here. You need to understand this, that this is not so much about my career. I was a managing director of an investment bank for almost 15 years before I took this job. So I’ve had a successful career, but this is about all of us. So, I will do my best to enlighten people, by making sure that people like you who shape opinion, understand it better so that you will be able to help shape peoples opinion.
What’s the assurance that this will be a win-win adventure?
Make no mistake about it, the markets are volatile. It’s not every investment we make that is going to work, but so far so good. We score ourselves highly on the little investments that we have made so far because we’ve been very, very careful.
But there’ll be moments when things would be a little difficult when you have significant macro-economic issues.
The Norwegian Sovereign Wealth Fund in 2011, or sometimes within the last five years, lost over a $100 billion, and two years later, they made $120 billion. Sometimes it can be that volatile, but people need to understand that is how the markets are.
But in the long-run, one thing is clear. It has been proven that the markets always end up expanding, because demography is growing, innovation is happening, businesses are becoming more efficient. All of these are the reasons we need to be more patient about the long-term effect of this business.
How will you define the NSIA mandate?
The law requires us to manage three funds. The first is the Stabilisation Fund, which has to provide daily liquidity for us to give to the government whenever the government needs stabilisation.
That fund is not designed to earn a lot of money. It’s not long-term. We’ve invested in a way that it yields daily liquidity. That fund in my opinion will earn, somewhere roughly two per cent, or less.
Returns and duration are correlated. The longer the duration, the higher the returns. Essentially that‘s how the fund is structured. We’ve tried to push the returns higher while maintaining the requirement for daily liquidity as defined by the law. We have put 20 per cent of the fund there.
The main returns will come from the Future Generations Fund and the Infrastructure Fund. The Future Generations’ Fund, in many ways is where we expect to see significant returns. There, as at the end of March, we have committed 50 per cent of the Generations Funds to various assets.
And the Future Generations Fund is 40 per cent of the SWF. It is a wealth with five pool of assets in the following categories.
Essentially, how have you deployed the fund?
First of all, we invested in Hedge Funds. Hedge Funds are businesses that are designed to try and protect you in a market downturn, as well as maximise returns in the market upscale.
Those Hedge Funds have done very well. The best performing Hedge Fund we have in the first-three months of the year, returned 12 per cent, which is remarkable.
The worst one was down 2.8 per cent, but all-in-all, our Hedge Fund strategy is up, quite significantly. On a blended basis, we are up somewhere around seven per cent.
The markets have been in our favour. So we expect the Hedge Funds to continue to do well. We have invested in four of them. 25 per cent of the Futures Generation Funds is with Hedge Funds.
Given the volatility in the financial markets, what safety nets have you put in place? What is the profit margin you are targeting?
The steps we have taken at the top level, is to structure the Futures Generation Funds in a way that will allow us to cover US inflation rates, plus another four per cent, that will give us, roughly another five-six per cent expected returns, and don’t forget, we are programmed to earn this annually. So over a period of five-10 years, the Fund will actually grow significantly.
And the way we have done this, is to invest 25 per cent of the Futures with Hedge Funds, 25 per cent with private equities, which is long duration. But most private equities will return the money anywhere between three, four times the value of the money over a period of 10 years.
We have also invested in public markets, public equities. We are yet to make investments in commodities, which we will, we are yet to make investments in hard assets such as real estate, which we will. These are the steps taken to find the asset classes to put the money in that will give us this fort of returns.
All escrow?
Some escrow some local, but mostly escrow, mostly external. So, 20 per cent in stabilisation, 40 per cent is generation.
Into which sector have you invested the balance?
The remaining 40 per cent is infrastructure, which we have started to invest locally. This is Nigeria infrastructure.
The Infrastructure Fund will be long duration. The first investment we’ve made is the Second Niger Bridge, which is on-going, work has continued. It is a four-year construction period. Two years of initial operations and then we start earning returns after six years. But over 25 years, the expectation is that we will earn somewhere about 15 per cent a year return from our investment.
Something we have also signed up to is Eagle Hills. One of the projects we are evaluating is the Centenary City, which is a whole Economic City. We are also evaluating other related projects in Lagos, and other parts of Nigeria as well. Again we anticipate earning about 10-15 per cent a year from those kind of investments.
We have also made commitments to invest in agriculture and we anticipate to earn over 20 per cent a year.
What informs your investment decision?
There are four things that guide our investment strategies.
Number one, is it a national priority, and that has been very important in making us focused and we have put this constraint on ourselves as an early stage-guide. We have small capital and we will want to use it wisely. Somebody came and wanted us to invest in his water park. I said Water Park is a good idea, but not a national priority.
Number two; is the regulatory and legal environment conducive for private investment, number three, can we attract private co-investors and four, can we earn a reasonable return?
The minimum specified return for us in infrastructure is, US inflation rate plus five per cent, so we are looking to earn seven – eight per cent, in dollars. These are the four immediate guiding factors.
What are your areas of core interest?
For now, we are focusing on five areas, which are power, agriculture, healthcare, real estate, which is in commercial and affordable housing, highways and motorways.
More recently, we have been given money by government to invest in gas infrastructure. Gas was what we wanted to do later on, but the government said gas is priority right now, and they have given us $200million to work outt opportunities to invest in gas.
In motorways, there are three projects we have evaluated. The second Niger Bridge, we have already announced. We are working with Julius Berger on the Lagos-Ibadan Expressway and we have been in discussion for a long time on that. The government will be in a position to make a pronouncement on that very soon. There is one more project in the Northern side of the country. We are still in the early stage of discussion on that. We have set up a subsidiary vehicle, the NSIA Motorways Investment Company and some of our staff are mid-wifing it.
Once the national tolling policy is a place, we will become more active in this sector.
There are many things to do and I hope that when the primary client, the federal and state governments make these projects for PPP participation we will be there.
