Rewane: How Nigeria Can Attract More Foreign Direct Investments

A member of the President’s Economic Advisory Council and Managing Director, Financial Advisory Council, Mr. Bismarck Rewane, in this interview provides insights into steps the federal government can take to ramp up its share of global foreign direct investments. He also speaks about the move by the government to reintroduce tollgates on highways in the country. Obinna Chima provides the excerpts:

Nigeria’s share of Africa’s $75 billion Foreign Direct Investment (FDI) has been put at $3 billion, despite the fact that we are the biggest economy in the continent. What do you think the government should be doing to attract more of such investments?

First of all, let us understand that FDI is usually by companies that have a stake in this country. It is distinct from portfolio investment. FDIs are people that want to take risk and FDIs more than any type of investment, is a function of risk in the system. Therefore, our share of FDIs in Nigeria compared with the total FDIs in the world is 0.27 per cent. Now, our share of global population is 2.6 per cent. In other words we have 206 million out of eight billion people. So, if your share of population is 2.25 per cent and your share of flows of investments is 10 times lower than your population share, it means that you are punching below your weight and that means you have to do something. So, what are the things that we can do to ensure that we get confidence of investors? Investors take calculated risks based on what their perception is. So, we need to be focused. It is easy to complain that we are not attracting enough FDIs, but the solution is that we need to have policy consistency, policy stability and clarity in all respect. So, pricing of our petroleum products, pricing of our electricity and essential commodities, are all important. So, you basically have to minimise subsidies and increase efficient market hypothesis so that investors can plan. Firstly, they know they can price their products after cost, they know that if they are bringing money in, they can take it out at a rate that they can predict and they know that they would be borrowing at market rate, rather than subsidies. So, once all these things are there, you will find out that Nigeria will transform from being a potentially attractive destination of investment, to an actual destination of investment.

So what is hindering the government from doing these things?

You see, in decision-making process there are trade-offs. So, you have goals. Your goals could range from economic patriotism to protectionism, to allowing open market to determine prices, to protect the bottom of the pyramid, and others. So, there are so many goals, but in trade-offs, you give up something to get the other and you look at what is strategic from what is tactical. So, as far as I know, there are a lot of strategic things that Nigeria needs to do which includes the government doing it first and people respond. Look at our exchange rate management for example, we are moving slowly in the right direction, but the markets are not sure. If we become more deliberate and more predictable, you will see that we would have major inflows. So, one is not going to be dictating the pace of this, but definitely if the pace is increased, we would see some response. If we come up with some clarity on our petroleum subsidy regime, we would see lots of investments such as the Dangote Refinery. If you have invested so much, you need to be allowed to price your product properly.

Last week, the federal government disclosed plan to reintroduce tollgates on the highways 18 years after, was that part of the recommendations by the Economic Advisory Council (EAC), which you are a member of and what is your take on the plan to bring back the toll gates?

First of all, we don’t advertise our advice as an EAC and so I will not tell you that. All I do know is that concessioning of idle assets is an integral part of sweating the assets. You know if you have a road that is not being sweated, let’s say a N300 billion road, for example, Lagos to Ibadan and every year we spend maybe N20 billion maintaining it, if we now concession it to someone who buys it from us and then collects tolls and uses the tolls to maintain it, it saves the government outflows which it can use to do other things. The government can also take another road, concession it and use the money from that to complete other roads that have not been completed. The concept of concessioning is to free up money and give you money to acquire new assets for the good of the people. I support concession, but it must be transparent and there must be value for money. We’ve had some concessioning that didn’t work, which was because it was concessioned to the wrong people. Then in any case, most of the things you are seeing these days are much more transparent.

There have been divergent views about the proposed Eurobond issuance by the federal government, especially regarding the effect on public debt. What is your opinion about that?

It is what we call debt sustainability and fiscal consolidation. If you are borrowing and our level of borrowing, especially international borrowings have increased sharply, then any time there is an adjustment in the exchange rate, your nominal debt increases. However, if the debt is used for projects that would increase productivity of the people, then the outcome of that asset that is being acquired with the liability that have been created with the new loan would more than compensate for the debt service. So, it is not just the quantum of the debt, buy what it is being used for and the impact of that. But let me tell you, if you have uncompleted projects and you do not complete it, what would happen is that the principal is gone, the interest would be paid and yet the project is not completed and it is not adding any benefit to the people. If you look at Nigeria, it is dotted with incomplete projects and projects that are suboptimal. So, if we are to borrow so that we can cover existing projects so that we can begin to get productivity out of it, I would go for that.

What is your comments on earnings released on the stock market generally?

First and foremost, 2020 was a tough year, but it was a good year for the Nigerian stock market – the best performing market in Africa with over 50 per cent returns when inflation was around 18 per cent. So, enter 2021, what are we seeing? We have seen volatility, we have seen choppy trading, we have seen interest rate going up and then going down again. So, investors are kind of confused, but at the same time are happy that they have options. So, what are we seeing? We have seen that the market has lost year-to-date, 2.7 per cent. But in the last two months, we have seen a gain of 1.9 per cent. What does that tell you? It shows that we are going to start weak, but end strong this year. Now, why? Two things: Sentiments and earnings. Now that we are talking about earnings, let’s go to that. Generally speaking, we take seven companies. Of course, the ones with the highest nominal growth in earnings, being Dangote Cement. We have Lafarge, MTN, Airtel, Nestle, Nigerian Breweries and Total. We start with MTN. MTN recorded drop in subscriber numbers, increase in average revenue per user, but also a shift in the earnings structure. Most important was that revenue was up 31 per cent, while the sector grew seven per cent. It means that MTN outperformed the economy, outperformed manufacturing and every other metrics. But what is interesting is that digital and fintech revenue grew by 54 per cent and data revenue grew by 53 per cent. Guess what? Voice went up by only 18 per cent, SMS was about three per cent. So, you can see where the growth is. Why? Streaming, news, media, settlement of transactions and social media were all responsible for the growth. In any case, profit after tax went up by 59 per cent. These guys make money by going to bed. Now, N68 billion in a quarter. So, what have they done? They are investing in capacity, they are paying high taxes. And it is not just the profit of MTN, Airtel and others are enabling other sectors to become more efficient. So, productivity is affected positively. So, don’t look at the telcos in isolation. Then, they have opted to construct the Enugu – Onitsha highway in the task for project, which is very interesting. So, some companies are opting to repair those roads which are death traps, so I think we should encourage them. Now, let’s go further to Dangote Cement. Dangote Cement has 72 per cent market share, its domestic sales was up by 33 per cent, revenue was up by 57.2 per cent. We talked about MTN, but this company’s revenue was up by 57. 2 per cent. There is ongoing civil construction of roads and affordable housing all over the place. They have commenced the Okpella plant in Edo State, they have expanded their operations and provided power and they have N309 billion road construction swaps, which is huge. More than anything else, they have the Africa initiative. So, just like the Road and Belt Initiative of China across African countries, this company is all over the place and they are really growing. Now, let’s go to Total. The downstream sector has been decimated because of subsidies and all sorts of scandals. But this company grew by 132 per cent in revenue, in a sector that grew by minus two negative. So, in effect, they outperformed the economy by 135 per cent. They had a previous year loss of N374 million, but now they have gone to a profit. Now, the question is what will the impact of the Dangote Refinery as well as the refinery initiatives of the federal government have on Total? I think that is important. The Dangote Refinery and petrochemical and fertilizer complex project is a fully integrated, single train, cutting edge with modern technology, for the whole of West and Central Africa because refineries go by the hub syndrome. So, you have one in Singapore, Rotterdam, Houston, because it has to do with scale. Don’t forget that refineries are low margin, high volume business. So, that is why the Federal Executive Council approved the 20 per cent stake. What is in it? Dangote is not a philanthropist, he is there to make money. Nigeria has a responsibility also to provide downstream products, such as aviation fuel, one of the most expensive. Of course, with this, the Dangote Refinery comes under a lot of scrutiny.

So, how did you see the media report that the Asset Management Corporation of Nigeria (AMCON) was considering taking over Dangote Refinery, even though AMCON has come out to say it is not true?

First of all, the thing about rumour is that first of all you have to scrutinise it whether it makes sense. If it doesn’t make sense, the typical thing is to ignore it. But in Nigeria, because of the level of ignorance, if you ignore it, you may be fuelling it. So, it is important to make some facts clear. I read the story which says there is an $8 billion debt service. For you to pay interest of $8 billion, the nominal loan itself should be in excess of $150 billion. The total economy of Nigeria is about $450 billion. It would mean that one company in Nigeria is owing one third. So, it doesn’t make sense. Nigeria as a country pays about $3 billion a year in interest, how can a company within Nigeria be said to be paying twice the total interest of the entire country. I would have ignored it, but I think it is clear that there is vested interest by people who are afraid of the entire irreversible momentum of change across the whole of West Africa. With the African Continental Free Trade Area agreement, and other initiatives, things are going to consolidate. First and foremost, let’s make it clear that the story has no basis and it doesn’t make sense. Also, let’s look at the inevitability of that change of people investing in sectors that would grow. For example, Saudi Arabia’s total oil earnings in one year is $145 billion. It would mean that Dangote Refinery’s loans would be about the total oil earnings of Saudi Arabia, which is the largest oil producer in the world. Secondly, is this the time to be investing hugely in this kind of business? Yes it is. We said that we are consuming 103 million litres of petrol a day. Obviously, that is false and it is exaggerated, but we need to start doing most of these things domestically to create jobs and to ensure that there is sanctity of production and that people can get the products when they want it. I think that is important. Now, let’s spend some time to talk about Nigerian Breweries and others. Interestingly, Nigerian Breweries revenue was up by 51 per cent to N103 billion. That was huge, at a time when drinking has actually declined. But, what has happened? Because of the COVID-19 lockdown, parties were controlled and bars were controlled. So, does it mean that Nigerians were drinking that much at home? Well, not so. What it actually means to me is that the controls and restrictions were meaningless because parties still take place and Nigerians are not willing to compromise their weddings, funerals, birthdays or any reason to celebrate. So, what we have seen is that the total beverage and alcohol business has shifted in structure. So, we are seeing more people drinking spirits because most of them are now made in smaller bottles. We have seen more of these being targeted at the bottom of the pyramid, where we have the drivers, bricklayers and more of such persons. And there have been less of stout and malt and more of sugar-free drinks. But, the other thing that we noticed is that the younger people, back in the day when people go out to party, if you start with beer, you end with beer and if you start with stout, you end with stout, but now we have seen mixtures. People now mix spirit with beer, stout, Vodka and all that. So, the last of the companies we are reviewing is Nestle. For Nestle, coffee, Maggi, Milo, Golden Morn. So, what you are seeing is industrial processing of agriculture commodities, from maize to cocoa, sugar and all other things, being done at same time. So, they reported a growth of 19 per cent to N84 billion, while others are suffering. So, what you see is that the dominance and financial clout of Nestle is playing out. So, all of these companies that we have talked about – from Total, Dangote, MTN, Nigerian Breweries and Nestle – their stock prices have done very well. So, what I would like to say is that whilst the market is choppy, whilst investors are tentative, look out for those stocks the companies are dominant, and they have financial clout, muscle and more than anything, don’t just look at profit, and look at free cash flow. In all of these companies, their free cash flow is just rising as fast as their profit is. Like they say, profit before tax is vanity, dividend is reality.

What is your projection for the rest of the year?

My projection is that there would be growth. I tend to agree with the World Bank and others that the annual growth would be at about 2.5 per cent, but there would be some slowdown. The second quarter, based on base year effect would be better, but we are not going to have stellar growth this year because of so many things and now with the Delta variant and the possibility of lockdown, the economy may stall a little bit. But generally speaking, we think that because the price of oil is at $70 per barrel, because our production quota is up, our oil revenue will be better. Therefore, if we’ll deployed, we should be able to navigate our way slowly out of this fragile situation we find ourselves