New Partnership to advance Telecom Co-location in Africa

It has been reported on various business newswires (Reuters et al) that a group of investors have committed to pool US$ 350 Million in equity commitments to build a pan-African mobile telecoms tower company: Helios Towers Africa (HTA). This is the brainchild of Helios Investment Partners: an Africa focused Private Equity manager that has already legitimised the co-location business with its Nigerian portfolio company: Helios Towers Nigeria (HTN). Helios Investments managed to convince investment heavyweights, such as Soros Strategic Partners (yeah the “financial alchemist” himself), the famed Rothschild banking family and Albright Capital Management LLC (an investment firm led by former US Secretary of State Madeleine Albright), to serve as co-investors in the company.

Truth be told, I have been quite impressed by the antecedents of Helios Investments and the quality of its investments. Some of the firm’s portfolio companies (in which it holds significant stakes) include First City Monument Bank (FCMB) in Nigeria, Equity Bank in Kenya and the entire African operations of Portugal Telecom. Furthermore, the firm – according to its website – has over US$ 575 Million in fund commitments, which should make it one of the largest PE fund ( if not the largest) in Sub-Saharan Africa (ex-South Africa). It's quite refreshing to finally see a PE fund with the scale and access to the significant resources needed to make a meaningful impact.

Furthermore, I think co-location and managed infrastructure is set for a really serious boom in various African markets (Nigeria inclusive). This is bound to occur as the mobile telephony markets in Africa move beyond the pioneering, build-as-fast-as-you-can stages into a stable and possibly maturing market in which margins begin to thin. Truth be told, practically all affluent and middle-class Africans living in non-conflict areas already have a cell phone service, this means that new mobile customers will tend to be largely lower-income and/or rural people. This will likely bring down the Average Revenue Per User (ARPU) – a key measure of profitability for telecoms companies – across board.

Telecoms companies will therefore be seeking ways to cut down on their operating costs to remain profitable and the outsourcing of cell towers and other passive infrastructure is a “low hanging fruit” in this regard. Recent moves by Zain Nigeria is indicative of this trend as the company has gone further to outsource the management of its core network infrastructure to Ericsson as part of various cost cutting measures. It is not hard for me to imagine the same company selling its cell sites to 3rd parties and expanding its footprint to less lucrative rural areas in Nigeria through co-location providers such as Helios. This trend will very likely spread to other African countries such as Ghana, Cote D’Ivoire and Cameroun that have had GSM services for a while and there should be rich pickings for Helios Towers Africa in each country.

I believe Helios’ strategy of incubating a scalable business that enjoys first mover advantage serves to acknowledge a fundamental difference between private equity investing in frontier markets and that of developed markets. While PE investing in developed countries is increasingly reliant on complex financial engineering and leverage for returns, PE investing in frontier markets like Africa should be based more on identifying underserved, profitable business models and applying world class practises in managing them. Therefore, most successful deals will be “debt-lite” due partly to underdeveloped debt capital markets and the inherent high risks involved in operating in Africa. To put financing risk on top of that – in the form of a highly leveraged acquisition – will be like sitting on a keg of gun powder and lighting a match.

I think PE investing in Africa is set for strong growth in the next decade as the established exotic regions such as India, China and Brazil begin to mature and more closely resemble western markets. Seeing hard nosed capitalists like George Soros and the Rothschilds begin to take investment positions in Africa indicates that the so called “smart money” is beginning to take African growth prospects seriously and may transform African PE sector from being the sole domain of quasi-charitable development firms such as the IFC, ADB etc that have long dominated investments in the sector.

Much ado about Capital Markets experience

It is no longer news that Ms. Arunma Oteh – a Vice President of the African Development Bank (ADB) – has been nominated by President Yar’Adua to be the next Director General (DG) of the Securities and Exchange Commission (SEC). A lot has been said of her stellar credentials: former Treasurer of the ADB, graduate of the Harvard Business School, first class graduate of the University of Nigeria, Nsukka (UNN) etc. It is widely expected that she would bring a heightened level of professionalism, exposure and dynamism into a role that has tended to be conducted in the shadows of capital market operators and other regulatory and/or quasi-regulatory bodies.

However, a minor storm has been brewing over her perceived “lack of qualification” for the job with her detractors hinging their arguments on the Investment and Security Act (ISA) 2007, which states that a candidate for DG of the SEC must have 15 years of “capital markets experience”. This requirement – coupled with a tradition of appointing stockbrokers as DGs of the SEC – has made some people assert that the SEC’s top job is “reserved” for stockbrokers. Hence the thinking in some quarters is that Ms. Oteh is not qualified for the job because she has not been practicing as a stockbroker for at least 15 years or at all in her own case. This perceived requirement is preposterous and seems to me like a desperate gambit by people interested in frustrating reforms.

To say that Ms. Otteh lacks 15 years of capital markets experience is to assert that the equity market is the only form of “capital market”, this is of course not a very reasonable stand to take. The capital markets go beyond equities and encompass fixed income, risk management, derivatives, alternative investments etc. A cursory glance at her work history reveals that she has worked in various fixed income capital market roles – since 1992 – within the ADB which culminated in her appointment as Treasurer. The ADB is a frequent issuer of bonds in multiple currencies, it has an asset portfolio in excess of US$10 billion and a multi-billion dollar swap/derivative portfolio for managing its foreign exchange and interest rates risks globally. I am hard pressed to understand the logic in saying that someone who has had the responsibility for managing this extensive enterprise lacks the required experience to serve as our capital markets regulator.

Furthermore, her appointment as DG of the SEC may help bring fixed income investments into the mainstream of the Nigerian investment banking space. The fixed income space in Nigeria has tended to be dominated by bank treasuries and discount houses with very little overlap and cooperation with the (equity centric) investment banks in Nigeria. Appointing another stockbroker – with their associated ingrained predisposition to the equity markets – as DG of the SEC may not augur well for the efforts to diversify and deepen our capital markets. In the next few years, we would need to develop regulatory capacities and infrastructure for the bond market and for risk management and derivative products. Having a person with the experience and exposure of Ms. Oteh as DG of the SEC, will help speed these processes up.

I think it is high time that we get more serious as a country in ensuring that capable hands are at the helm of regulatory institutions such as the Central Bank and the SEC. A narrow and transparently deceitful reading of the eligibility requirements for the SEC DG’s office is definitely not a step in the right direction. Let us concentrate on the candidate’s qualifications, experience, agenda for the office and integrity please!

Social Impact investing: A new frontier?

A new concept has been unfolding stealthily in the last decade, it is been hatched in various talking shops, NGOs and universities. Cynics say it is a fad of very questionable value, optimists say it is the holy grail that will solve all of the world’s problems. Realists – like myself – believe that it is a positive development with the potential to increase global prosperity and opportunities for those left out of mainstream finance. The concept is Social Impact Investing and at its core is the belief that the pursuit of the public good can be incorporated into traditional investment decision making. In essence, social impact investors seek to prove that doing good to society is not necessarily decoupled from making good returns on investment.

Socially Responsible Investing (SRI) has been in vogue for many years and has been mainly practised through the use of negative screens. So investors can decide not to invest in tobacco companies, strip mines, users of child labour etc. Social impact investing takes this further by applying positive social and environmental screens to investment decision making. Impact investors have double bottom-line investment criteria: the investments must make sense from both financial and social perspectives. Money must be there to be made and lives must be improved in the process. Empirical data has shown that companies and investors have profited – in clear monetary terms - from becoming greener and/or becoming more socially conscious. Wal Mart – the biggest discount retailer – is expected to save hundreds and millions of US Dollars from its green initiatives. It is saving energy costs, reducing its carbon footprint and improving its operating margins simultaneously. Fedex is expected to also save millions of dollars in annual fuel costs through the introduction of hybrid vehicles into its fleet of delivery vans.

On the investing side, Mohammed Yunus’ work with the Grameen Bank has proven that a portfolio of microloans granted to poor market women in Bangladesh is not necessarily riskier than a corporate loan book in the United States or Europe. The financial results published during the IPO of Banco Compartamos , a for-profit microfinance bank in Mexico has also shown that microfinance can be very profitable. This robust historical financial performance made the IPO 13 times oversubscribed. Microfinance is not the only success strory, companies have made money investing in clean energy sources, promoting healthcare in poor and undeserved communities and regions and affordable (not subprime!!) housing.

The Clinton Global Initiative (CGI) – often derided as the “Philanthropy Oscars” because of its glitz – has teamed up with JP Morgan and the Rockefeller Foundation to set up the Global Impact Investing Network (GIIN). GIIN will work to set up common standards, benchmarks and infrastructure to speed up the adoption of impact investing worldwide. Its work may end up motivating businessmen and activists to jettison the counterproductive “sue the bastards” approach that had characterized their relationships in favour of mutually beneficial partnerships.

Book review: The Partnership

Just finished reading a newish book ; The Partnership: The Making of Goldman Sachs, written by Charles D. Ellis. It is the most enjoyable business book that I have read so far in my - admittedly young - life. I found the book to be very engaging and instructive not only to investment bankers and potential investment bankers, but also to anyone interested in building a knowledge based organisation. Some of the reasons I enjoyed reading the book include:

Thematic arrangements: this just sealed it for me. I don’t know what goes through business writers' minds that make them organise books in chronological fashion. I am tired of reading books with arrangements such as "the Early Years: 1870-1900", "Dawn of a new century: 1900-1920". I honestly find this practice quite unhelpful as few lessons in business - as in life generally - are chronological in nature. Lessons - at least the valuable ones - tend to be in themes that cut across various years and they should be treated in a coherent manner. The author had the foresight to group the chapters around themes that have defined Goldman Sachs' success with chapters such as "Getting Great at selling": that describes how Goldman Sachs built a vibrant institutional sales force over a few decades. While in the “Innocents Abroad” chapter: the author traced Goldman Sachs' efforts to expand internationally and the successes and interim failures that the firm experienced on the way to its current global reach and dominance.

Informed 3rd party view: a lot of similar books written recently have been from ex-employees of the subject companies. These employees broadly tend to either want to sing the praises of their former employers or bust their bubbles. These viewpoints inevitably tend to colour the books that they author. The author of this book has the double privileges of inside knowledge and objectivity that come from having an extensive and long lasting strategy consulting relationship with his subject, Goldman Sachs. I believe this unique perspective has resulted in a book that is neither adulatory nor vindictive in its tone and approach.

It is not an epic saga: authors of some of the books that I have read on the history of companies tend to view their brief as an invitation to spin colourful stories about larger than life characters and forget that readers are actually supposed to learn something from buying the book. The Partnership has its fair share of vivid descriptions of powerful personalities but the author does not lose sight of the broader, more important objective of providing readers with positive case studies to ensure they learn from reading the book.

The book has not only increased my knowledge of investment banking and financial markets, it has more importantly given me some insights into the steps that can help an organisation achieve greatness. I would give the book a 5/5 rating and advice anyone with some time on his hands and money in his pocket to go grab a copy now!.

Investment Banking Pay Structures: What are shareholders paying for?

It is a well known fact that Investment Bankers, traders and salesmen are some of the most highly paid professionals on God's green earth. Even the near collapse of the global financial and economic system has not succeeded in burying multi year guaranteed contracts or multimillion dollar paychecks.

One question that I seem not to have answer to is: why are investment bankers and traders so highly paid? Yes the hours are crap and job security should be described more in the lack of it. But do investment bankers work harder than Resident Doctors, I really don't think so. Is the job security any worse than that of military or police officers, whose careers - and indeed lives - can be easily terminated by a posting to a war zone or a chance encounter with a trigger happy bandit. So we cannot justify the outsized pay by citing job insecurity or hazard, so what drives investment banker pay?

Another often cited rationale for astronomical pay is that traders often make so much money for the company that they are guaranteed a cut of the profits - sometimes as much as 50% - as compensation. However, a bigger question that needs to be answered is who made the money in the 1st place, the trader or the Bank?. Will the same trader have been able to make as much money if he had been working for a lesser name, without access to teams of research analysts, structurers, systems people and access to real time trading flows?. Will Andrew Hall - the Citi energy trader to whom a $100 Million paycheck is due - have made so much money if he had been working for some nameless XYZ securities firm?. I seriously doubt it!. A lot of his success can be attributed to the stellar cast that Citi has been able to amass to support his efforts. He has access to the best systems, the best analysts, a far-reaching and global informal information gathering network and a whole lot of other things. So if a lot of an investment bank's success is attributable to teams of people working in concert, why are individuals then as richly rewarded as they currently are in Wall Street and the City of London?.

Let me clear, I believe that the capital markets play a very central role in ensuring the proper functioning of the world's economy. Without capital markets and the work being done by the often maligned bankers and traders, we would all still be economic cavemen. Without bankers and traders, excess capital will accumulate in one region of the world or country while other opportunity-rich regions remain starved of capital. That being said, the skills/knowledge required to be a successful investment banker/trader are neither exceptional nor scarce. Though some bankers/traders invented options, swaps and other mind bending derivatives, the truth is that the bulk of investment bankers - including many that earn million dollar bonuses - just originate and process deals. The mental aptitude required for investment banking is not on the same page as that required to be a world class poet, a Nobel prize winning physicist, brain surgeon or a Fields medal winning mathematician. Investment banking does not require or demand "out of this world" skills and as the British City Minister said "Derivatives traders and others are not footballers and should not be paid as if they are". Well said!

Although I don't support explicit pay caps for bankers, because I believe it is an example of an externality that can impair markets and unduly stifle innovation. However, the current global downturn should not be allowed to go to waste, shareholders and chief executives have a chance to force through tough pay reform measures while the financial jobs market is still soft and this has to start from the bulge bracket investment banks. Bulge bracket investment banks - such as Goldman Sachs, Morgan Stanley etc - should actually pay out the least bonuses rather than be industry leaders in terms of compensation packages. They need to develop compensation models and systems that strip out the portion of their firms' revenues and profits that are franchise/reputation driven and those that are employee initiative driven. The truth is that if Goldman Sachs pitches for 10 capital raising mandates, it would get at least 2 or 3 due to its market reputation and global coverage, even if the banker(s) making the pitch(es) is(are) near completely clueless!. It is therefore not very smart to reward a banker for free-riding on the bank's reputation in this manner.

I think bankers' compensation are business decisions that are best handled by shareholders and not by governments. However, shareholders need to be aware that the current compensation models need not be cast in stone and like any discerning buyer they must demand to know exactly what value/"alpha" they are getting from the bonuses they are paying the bankers and traders that work for them.

Much Ado about Islamic Banking

A lot of hot air has been blowing over the recent pronouncements of the CBN regarding Islamic Banking in Nigeria. With many commentators and analysts - who should know better - mentioning it as evidence of a sinister religious and/or northern agenda at play in the ongoing banking sector reforms. Although it is commonly said that there is no smoke without fire, I am convinced trhat that there is no fire in the smoky discussions - or much better: allegations, surrounding the CBN Governor's pronouncemnets on Islamic Banking.

First of all, the CBN is not trying to "introduce" islamic banking into Nigeria, as this form of banking has already been introduced and tested in Nigeria decades ago. Habib Bank (now part of Bank PHB) was licensed to carry out Islamic Banking activities- among other things - in Nigeria in 1981. Furthermore, Jaiz Bank International Plc has already obtained the greenlight - conditional upon meeting the minimum capital requirements - from the CBN to operate non-interest banking in Nigeria since 2004. That the go-ahead was obtained in 2004, under the stewardship of Joseph Sanusi - a Southern Christian - should allay the fears of cynics who view slamic Banking through the biased lenses of tribal and religious sentiments.

Secondly, an important characteristic of democracy is the opportunity it gives various segments of a pluralistic society - such as ours - to express themselves. A large number of Nigerians are muslim and many of them are desiropus of financial products, systems and institutions that are compliant with the dictates of their religion. To deny them of this opportunity - because some people are uncomfortable with the sound of the name - is not only undemocratic it is condescending and near paternalistic. Islamic Banking is one of the fastest growing fields of modern finance, with conservative estimates of assets in the field now exceeding US$ 500 Billion. Shariah-compliant financial products now cut across Investment Banking (i.e. Sukuk Bonds), non-interest bearing deposits and asset management products. Matter of fact, a Shariah compliant equity fund has been offered in Nigeria since 2008 and is even listed on the Nigerian Stock Exchange.

Lastly, one thing is clear: the decision to offer (or not offer) Islamic Banking is a business decision. For an Islamic Bank to kick off - or even raise private capital - a legitimate business need must exist for it and this legitimacy cannot be legislated into existence by lawmakers or the regulators. If there is no consumer base for Islamic Banking in Nigeria to justify its practice, then it will fail. That is the simple law of the business jungle!. Islamic Banking has been growing the world over, because it has found a ready customer base and it is serving legitimate business needs. Even non-Islamic issuers - such as the very German state of Saxony-Anhault - have found Sukuk Bonds to be an attractive and cost-effective financing tool.

I think the tribal and religious sentiments being whipped up in the wake of the Nigerian Banking sector is despicable and indicative of a worrying trend towards abondoning logical arguments in favour of sensationalism. I agree that this trend is not specific to Nigeria, even American critcics of Barack Obama's reform agenda have accused him of wanting to "Kill Grandma!". A discussion outside of the facts of the case is wrong and the people who should know better but keep on whipping these dark sentiments are doing the entire nation a disservice.

This argument should not be about a "northern agenda" or an "islamic agenda" or an attempt to "snatch the banking system from southerners". What is material to this discussion is whether or not certain executives at the helm of our financial institutions have acted in contravention of established laws or regulation and by so doing earned their day in court. It should be about whether or not certain executives at the helm of our financial system have acted in ways that put the Nation's financial at serious risk. I don't have answers to these questions and I think the accused people should be assumed innocent until proven guilty. However, I am certian that painting the CBN governor's action in a sinister and sectarian manner does everybody a lot of harm. Let's have an enlightened discussion please!

Corporate Debt Markets in Nigeria: Emergence of Green Shoots?

True to their typical bandwagon form, Nigerian Corporates (particularly the Banks) have been falling over one another to announce one multi-billion naira bond issuance programme or the other over the last few weeks. These programmes are designed to cover potential multiple bond issuances across various maturities and structures over the next 2 years (which is the typical life of a Shelf filing in Nigeria). Some of the deals announced include: GTBank Plc - N200 Billion (US$ 1.4 Billion), First Bank Plc - N500 Billion (US$ 3.5 Billion) and UBA Plc - N500 Billion (US$ 3.5 Billion). Many more of such deal announcements are expected in the coming weeks.

Though I am very skeptical of the chances of success of these Jumbo Bond programmes and slightly disgusted at the "follow follow" nature of their potential issuers, I am generally pleased with their implications for the financial markets and economy. Corporate Debt has been, and remains, an underinvested asset class in Nigeria with the last publicly issued corporate bond being Access Bank's Convertible Bond issued in 2006. Since its redemption, the number of corporate bonds in issue in Nigeria amounts to a grand total of" ZERO!.

Despite the flurry of announcements, the building blocks of a decent corporate bond market are largely non-existent in Nigeria. There is no network of corporate bond dealers willing to make markets, settlement platforms for bond trading are largely non-existent while skilled and experienced hands in bond structuring are few and far between. Furthermore, the Stamp Duty and other related charges on primary debt issues make bond issuances a very expensive proposition for would be issuers.

Despite this, the story is not all gloomy. The considerable success of the Federal Government of Nigeria (FGN) Bond market and its network of Primary Dealers/Market Makers (PDMMs) may be leveraged on in corporate bonds. FGN Bonds are so liquid and highly traded that annual volume of trades last year exceeded that of the Nigerian Stock Exchange (NSE) handsomely. The banks and Discount Houses serving as PDMMs can scale up their activities to include making markets in corporate bonds. The active trading of these bonds has also created - for the first time in Nigeria - a risk free yield curve (extending to 20 years) from which corporate bond issues of various maturities can be priced.

The demand side also gives much to cheer about. The advent of Pension Fund Administrators (PFA) has resulted in serious latent and unmet demand for corporate bonds. All PFAs are currently grossly underweight in this asset class as they are permitted to invest up to 30% of their assets in corporate bond instruments. Many of them are likey to be enthusiastic buyers in the near future as they seek to build up their corporate bond portfolios from a near zero basis. The supply side of the equation is also going to get deeper as the effects of the banking sector sector crisis and subsequent cleanup cause banking loan portfolios and appetites to shrink across board and lead to seriously compromised financial intermediation capabilities. Many highly rated corporates may decide to approach the debt markets directly for financing rather than be at the mercy of banks that are probably in a weaker financial position than they are.

On the regulatory side, the stars also seem to have aligned very nicely in favour of corporate bond market development. The CBN Governor has - from his first press briefing - always reiterated his support for a virile corporate debt market to reduce pressure on the banking sector. The current Finance Minister: Mansur Muhtar served as a Director General of the Debt Management Office (DMO) and it was under him that many innovative measures - such as the PDMM framework - were introduced into the FGN Bond Market. Debt Market proponents are very likely to get a receptive hearing from him. In addition to these people, the recently nominated Director General of the Securities and Exchange Commission (SEC), Arunma Oteh, was a past treasurer of the African Development Bank (ADB) and has spent most of her career working in Supranational and Sovereign Debt Capital Markets and funding. I dare say that Nigeria has never had a trio of people so conversant with, and supportive of, Debt Capital Markets as we currently do, this chance must not be wasted but seized upon to bring lasting development to the Corporate Debt marketplace.

Storm in the Banking Teacup: Interesting and depressing times ahead

That the Central Bank unceremoniously fired the CEOs and Executive Management of five (5) banks in Nigeria on Friday, August 14th will only be news to either those just let off the kidnapping hook of the gentlemen from MEND or illiterate Nigerians on the fringes of civilisation. The Central Bank in what is now being termed as “Black Friday” has done the undoable and touched the supposed untouchables of the Nigerian business sector. To say that fear of the CBN has now become the beginning of banking wisdom in Nigeria is to be stating the bloody obvious. While the decision and the Gestapo like efficiency of its execution is interesting in itself, I believe the greater interesting points lie in the wider implications of the decision for the banking sector and the Nigerian business environment in general.

The sack of these executives and the emergence of “kings who do not know Joseph” in the form of interim management teams appointed by the CBN to steady the affected banks and recoup the Central Bank’s investments has serious implications for the Banks’ creditors. Various loans which have now gone bad were granted to either related companies of the ousted executives; longstanding customers of the affected banks and/or close personal/business associates of the executives. The interim executives – who are mainly retired folk – would most likely swing towards loan recovery if the choice came to either recovering loans through asset sales or maintaining the existing business and personal relationships of the ousted executives. As a result, we are very likely to see a huge rise in forced sales of various collateral assets in the coming months and something tells me that in light of the prominence given to downstream Oil and Gas loans we are likely to see a preponderance of tank farm and Oil Tanker sales in the coming months. The next few months will be very appealing for companies and individuals seeking to acquire downstream Oil and Gas assets as banks seek to recover whatever they can. Same goes for relatively under occupied high end real estate assets in Lagos and shares of companies listed on the Stock Exchange. The NSE’s All Share Index is likely to dip further as considerable selling pressure will be on the affected Bank’s shares which constitute a very significant portion of the index, this selling pressure may yet spread to other banking and non-banking stocks as banks recover whatever they can of the margin loans they have given out.

Beyond the expected pressure on asset prices across board in the coming months, the actions of Mr. Lamido Sanusi is very likely to result in changes to the ownership structure of the affected banks with shareholders of these banks likely to find themselves left out in the cold. To put this in perspective, the CBN Governor stated that one of the affected banks had a Capital Adequacy Ratio (CAR) of only 1.01% as against the minimum regulatory requirement of 10% (this implies that the said bank has only N1 in capital for each N100 in Risk Weighted Assets). The CBN is injecting fresh funds – in the form of hybrid Tier 2 capital – to bring the CAR to the 10% minimum, what this means is that the CBN is going to inject – into the bank over this weekend – new capital amounting to 9 Times! the current capital of the bank. Needless to say, current shareholders of that particular bank are practically wiped out as their current shareholding will amount to only 10% of the capital of the bank post bailout!. While the CBN has signified its intention to recoup its investment in the banks as soon as practicable through capital raising exercises that the interim managers are expected to conduct in the near future. It is clear that given the near comatose state of the Nigerian Equity Capital Markets, a normal public offer of securities will be very unlikely to succeed. As a result, the guys who will be supplying the funds – to ensure the CBN’s exit – will be deep pocketed strategic investors and not the thundering herd of gullible, over leveraged retail investors that have typified our markets. This will provide a very good opportunity for the foreign banks - whose incursions have been very effectively blocked by Prof. Soludo - to finally enter the banking sector. I will be very surprised if at least one or two of the affected banks do not fall into the hands of foreign banks in the next 12-24 months.

Finally, we are likely to see a big change in the competitive structure of the Banking industry with each of the affected banks losing market share over the next few months as: interim managers focus on fighting fires rather than growing the business; depositors grow increasingly wary of the Banks’ survival chances and competitors swoop on them like vultures. I believe a number of big ticket accounts may flee those banks for the refuge of supposedly more stable banks such as GTBank, First Bank and UBA with the affected banks losing the marketing and business generation edge provided by their very charismatic and highly connected CEOS.

The next few months are likely to be interesting and depressing in equal parts with losers and winners being thrown up by the current crisis, we can only keep our minds attuned towards seeking opportunities in the crisis!

Recent Developments in the Nigerian Banking Sector: A defence of Fair Value Accounting

There have been much debate and outcry over the recent statements of the new Governor of the Central Bank of Nigeria: Sanusi Lamido Sanusi regarding the health of Nigerian banks and the need for full disclosure of asset quality. This new line has prompted a number of hitherto unprecedented write downs by Nigerian Banks in their latest results: Ecobank Nigeria has written off N12 Billion; First Bank - N25 Billion and to the mother of all writedowns: Oceanic Bank - N42 Billion. These write downs have primarily been in their margin and other equity collateralised loan portfolios and are meant to reflect the steep losses witnessed in the Equity Capital Markets over the last 15-18 Months. Many analysts have sought to paint this new found penchant for fair value accounting on the part of the regulator as being ill-advised and a misguided adoption of western standards. I however beg to differ, I believe the dual and complementary emphasis on detailed disclosure and adoption of fair value accounting are two of the best initiatives in the Nigerian Banking Industry.

A bank’s – and indeed any company’s – balance sheet should be a reflection of value and its stated asset valuations should reflect the monetary value that can be obtained as consideration for the sale of such assets (there is no point listing an asset that can only fetch N40 Billion in an arms length sale as being worth N100 Billion in any balance sheet). This principle should apply to banks as well, for example I don’t think a N5 Billion loan - wholly and solely collateralised by equity securities of an equal value - advanced by a bank to a brokerage firm in 2007 is worth the same in 2009 when the basket of underlying securities serving as collateral has declined in value by over 50%. The truth is that the bank will be lucky to get N2 Billion if it recalls the loan by seizing the underlying collateral and selling it off in the market. To then account for this loan at the initial value of N5 Billion - even if a token and often reduced interest is still being paid - is unrealistic at the very best and downright fraudulent at the worst.

Fair value accounting also helps bankers and portfolio managers make the tough decisions necessary for the functioning of markets. Many bankers and portfolio managers will remain reluctant to exit losing investments under a cost or historical value accounting system, since they would not have to book the losses until they actually sell the investments. Fair value accounting helps them out by making decision making more straightforward: they would have to recognise the losses whether or not they sell the securities , so they might as well recoup whatever is left of shareholders’ or investors’ capital. Furthermore, marking down the loan books will make the Asset Management Company being proposed by the CBN more effective, without the writedowns most banks would have been seeking to sell their margin loan books to the Company at historical values.

Although I am aware that Fair Value accounting is not without its drawbacks and that it often results in volatile Balance Sheets, if given a choice between Fair Value and Voodoo accounting, I will choose Fair Value accounting over and over again!

Michael Jackson – Le Roi est mort, vive le Roi!

Anybody for whom the death of Michael Jackson is still news must either be: living under a rock or just waking up from a very deep coma. The news of his death put so much stress on – and sometimes crashed – Google search; Tweeter; numerous SMS platforms and TMZ.com. To say that he was a superstar is to underestimate the scale of his achievements, he was the superstar and it is by him that superstardom will come to be measured and defined. His music transcended race; religion etc and made a mockery of geographic boundaries, he was as accepted in Western Europe as he was in America, Africa and the Far East and he came to be accepted as the first true global icon. I can remember that growing up in a little corner in Nigeria, my elder brother had a full Michael Jackson outfit complete with sequined glove; black loafers and white socks.

He is sure to add – in death - many more record sales to the estimated 750 Million that he was reported to have sold during his lifetime. He went from prodigy to superstar then on to megastar and finally – in the last 2 decades of his life – to Wacko Jacko (the crazy uncle in the attic!). In his five (5) decades on earth he achieved more success and attracted much more controversy to last a couple of lifetimes, a friend of mine described him as a bicentennial man who experienced near universal acclaim and hero worship in the first century of his life and then endured near universal gossiping; ridicule and oftentimes disgust in the final century.

In the sheer significance of his life – whether in fame or infamy – lies the true lessons to be learnt from the death of Michael Jackson, the King of Pop. He lived for only 50 years but he will be remembered for centuries and will join a small group of men who lived relatively short lives but whose memories have endured in the minds of generations to come. His death made me remember a sermon I heard many years ago in Secondary School, the preacher recited the whole of Genesis Chapter 5 (which by the way is a litany of XXX begetting Methuselah, who then begat XXX who in turn begat XXX and so forth). However two things were striking: each of the guys in the passage must have lived for at least 900 years and they were each allocated just one sentence in a Bible that must contain millions of sentences. Then contrast this with another man (Jesus Christ) who lived for only 33 years but had five entire gospels devoted to chronicling his short life and whose death led to the creation of a sect of Judaism whose devotees were named in reference to him: Christians. This “sect” – initially regarded as a body of people on the fringes of society – has become the biggest religion in the world and a source of hope; pride and moral anchor for billions on planet earth.

Alexander the Great also died at 33, yet he had conquered the entire known world before his death and turned a group of bickering city-sates into a nation called: Greece. Joan of Arc died at age 19 but had managed – despite being unschooled in millitary affairs – to lead French armies to victory over an imperious England; and succeeded in uniting her country (in the process earning the epithet: Maid of Heaven). John F. Kennedy died at just 46 but only after he had succeeded: in winning election as President of the United States; in instituting a new policital order (which came to be regarded as the Age of Camelot) and in establishing the concept of the celebrity politician (of which Barack Obama is just the latest incarnation).

There is one inalienable truth: we will all die, but when we die will we just be accorded a sentence and quickly forgotten by men? Or will we leave our indelible footprints on the sands of time? Are we going to have a life of impact or just one preoccupied with subsistence; survival and the accumulation of wealth?. The King is dead but he lives on: in the hearts of his numerous fans; in the pages of the countless tabloids and biographies that will each attempt to put a new spin on his life and death. Above all, he will live on in the minds of generations yet unborn who will download “Billy Jean” and think its the coolest song ever or attempt to borrow a few lines from the lyrics of “Speechless” to convince some teenage girl to go out with him on a first date.

Buying to the Sounds of Cannons

Reading about the jumbo 1.5 Billion Pound profit made by the Abu Dhabi based International Petroleum Investment Company ("IPIC") under the leadership of Sheikh Mansour Bin Zayed Al Nahyan (pictured on the left) on an investment made in Barclays Bank Plc in October 2008, I was reminded of a rather apt quote. Nathan Rothschild (one of the founding sons of the illustrious Rothschild banking family and a notable financier and speculator) was said to have remarked that his investment strategy was to “buy to the sound of cannons and sell to the sound of trumpets”.

Nathan Rothschild must have been referring to the various wars that plagued European kingdoms during his day and the tendency for shares and bonds to crash deeply during wartime and rise spectacularly in times of peace and prosperity. While nation states are less prone to war in this age than they were during Nathan Rothschild’s lifetime, the modern age has its own parallels to the “sound of cannons” of the 19th Century in the form of stock market failures and credit crises. While Nathan Rothschild bought British Consols (i.e. a Government Bond variant) which had become undervalued and oversold during the battle of Waterloo by a skeptical (some might even say paranoid!) investing public and later made a killing from his position when victory was attained and investors’ fears turned out to be unfounded. So also Sheikh Al Nahyan has made a ton of money, after only 9 months, as a result of having the wisdom (and above all the guts) to invest in Barclays Bank when most other investors thought that the sky was falling; the global financial system was headed towards oblivion and that we would abandon modern finance and go back to trade by barter. The IPIC has sold its nearly 12% stake in the bank to, largely, the same class of investors who would not invest in the Bank at less than half the price about nine months earlier.

History has so often taught us that the best opportunities present themselves at times of great danger and uncertainty and that those investors who are willing to take calculated risks are likely to make huge gains. These scenarios also play out in investment opportunities related to Nigerian companies and investment opportunities, with Guaranty Trust Bank Eurobonds being a case in point. In the aftermath of the Lehman collapse (around November last year) GT Bank Eurobonds were trading at Yields To Maturities of between 27-28% on the international markets after being issued at Yield to Maturity of about 8.5% less than 2 years before. That the yields on the debt of a bank that was in no grave danger would widen by such a margin is quite ridiculous, especially when viewed against the fact that the Bank had minimal exposure to margin loans; next to zero exposure to complex derivative products and has maintained a conservative lending policy and healthy Net Interest Margins. A really smart investor would have bought the bonds at those yields (at an implied price of about 60 Cents per US$1 of face value) with a very high probability of being made whole at maturity, as the fundamentals of the bank remain unchanged and are more likely to be enhanced by the recent minor shakeup in the Nigerian Banking industry. As at the time of my writing this post, the Yield to Maturity for the bonds had narrowed to 17% and market value increased to about 81 Cents per US$1 of face value.

The Nigerian equities market also tell a similar tale, the Nigerian Stock Exchange’s All Share Index shed 30% of its value in January of 2009 alone and by the end of March the Index was down by 37%, prompting investors to dump their shares and leave the market in huge numbers. However, with the benefit of hindsight, these periods presented wonderful buying opportunities and were in essence our own “sounds of cannons” and should have been a cue for savvy investors. Since the trough of the Index on the 26th of March, the All Share Index has gained about 50%!. While the markets are essentially flat on a year-to date basis, many investors with the foresight (and I must say: courage!) to invest during the first quarter of the year have achieved returns (in certain stocks) of between 50-100% and have started to unload their shares at a profit during the recent rally (i.e. “sound of trumpets”!).

"The King is Dead, Long live the King" - My wish list for the next Governor of the CBN

It is becoming increasingly likely that Prof. Chukwuma Soludo, the Governor of the Central Bank of Nigeria (CBN), will not be getting a second 5-Year term in office. His replacement or, unlikely, renomination is due to take place on Friday, 29th May when President Yar'Adua is expected to forward the name of the nominee to head the apex Bank to the Senate for confirmation.

Although Prof. Soludo has received some knocks in the recent past over some of his recent actions, such as the poor handling of the recent naira devaluation and hurried closure of the Interbank Fx Markets, most market participants are of the opinion that he has performed creditably. The consolidation programme embarked upon during his first few months in office has been widely hailed as a success and has led to the emergence of 24, relatively, strong banks from an unwieldy bunch of 89 banks that could hardly finance projects or transactions of any significance.

Without the consolidation process, the disappointments and setbacks witnessed in the last one year in the Nigerian Financial markets will probably have degenerated into a full scale crisis. In addition, the stealthy and effective use of the Expanded Discounted Window offered by the CBN ensured continuous liquidity in the banking industry and prevented the collapse of any bank, an event which may have resulted in an acceptably high risk of systemic failure. To further assure the stability of the system the CBN, under Prof. Soludo, gave its tacit approval and encouragement to the acquisition of certain perceived weaker banks by other banks deemed to be stronger and capable of absorbing potential losses.

I believe the skills needed in the next CBN Governor are those of a consolidator; effective regulator and technical specialist not necessarily that of a grand strategist in the mould of Prof. Soludo. The Nigerian banking industry is entering a new era in which the gains made in the last 5 years will need to be consolidated; bigger and more systematically important financial institutions more closely monitored and the foundations of a more effective and modern financial sector laid.

Strategy for the industry should be left to the industry players to decide and not be suggested to them by a regulator (I see no reason why every bank should seek Shareholders' Funds of at least US$ 1 Billion, as they should not all have the same strategic focus and capital requirements). I do not think every one of the 24 banks in Nigeria ought to have an Investment Banking/Capital Markets subsidiary or branches across Africa and Europe, some banks may position themselves as wholesale banks while some others can emphasise retail/consumer lending activities.

While the average central banker wears two (2) hats: that of a regulator of a country's banks and that of its macroeconomic manager, the focus of central bankers for such a long time in Nigeria has been on the regulatory aspect to the detriment of the macro economy. The next CBN Governor should strengthen the linkages between the banking sector and the broader economy to ensure that profits and activities in the Banking Sector reflect the health and performance of the real sector. The health of the national economy must be reflected in the profits/performance of the financial industry (as US President Barack Obama said: "we can't have a thriving Wall Street while Main Street suffers").

In addition to the above, the Central Bank needs to broaden its scope and appropriate the role of national economic manager and guardian of systemic risks. The scope of the next Governor should go beyond the Money Markets and the familiar economic management tools such as Open Market Operations ("OMO") and others. The CBN must take an active interest in the evolving Debt Markets and even the Equity Markets to ensure that potentially destabilizing
bubbles are not been built in areas it has been overlooking, for example Banks' exposures to the Stock Markets have to be actively monitored by the CBN and limits placed from time to time on their activities. These exposure measures have to be reasonably broad, with limits set not only on the level of margin loans that may be granted by a bank but also on the level of loans that may be collateralised by equity instruments. This exposure monitoring should not be limited to only the equity markets, exposures to Real Estate markets need to be monitored and curtailed when necessary as well. The real estate sector is as prone to disaster causing bubbles as any market in the world (the entire world probably has the American real estate market to thank for the problem we are all in!).

Finally, and somewhat contradictorily to my earlier points, the new CBN Governor should champion financial innovation both in products and service delivery. Because derivatives and securitization have been blamed as the main causes of the current global economic crisis, it is easy to forget the very important roles they have played in broadening access to financial markets; reducing financing costs and generally supporting the upward march of civilisation and innovation. It is shameful and unacceptable that structures have not been put in place to ensure that credit worthy people in Nigeria have access to mortgage loans, this is largely a consequence of the absence of a secondary market for mortgage trading in Nigeria. Swap lines are largely non-existent for transforming fixed rate loans into floating rate and vice-versa. Nigerian corporates can hardly hedge their foreign currency transaction risks as our banks are severely curtailed in their ability and capacity to deal in Foreign Exchange Futures and Forwards, thereby making our largely import dependent companies have highly volatile earnings (case in Point: Starcomms Plc declared a loss of 8 Billion Naira (the worst in Nigerian Corporate history)largely as a result of foreign currency translation losses). Even Automated Teller Machines ("ATM") only became widespread in Nigeria in the last 5 or so years!!, and Naira Credit Cards are about a year old. Ultimately, I believe the next CBN Governor should be judged not only by how well he manages to avoid financial disasters but by how much he succeeds in laying the foundations of a banking and financial system that supports Nigeria's economic aspirations and empowers our companies and citizens in their quest for increased prosperity and a better life.

"Investors from the vasty deep" - Nigeria and the quest for new Oil and Gas Investors

Reading the news report in the Tuesday papers that the Special Adviser to the President on Energy: Dr Emmanuel Eghogah was seriously lobbying for new investors at the Offshore Technology Conference ("OTC") holding at Houston and assuring them of the security of their investments in the nation's Oil & Gas Sector, I was reminded of a dialogue in one of William Shakespeare's plays: Henry IV.

In Part 1 of the Play, two characters (and bitter rivals): Hotspur and Glendower had this very interesting conversation:

Glendower (boasting):
I can call spirits from the vasty deep.

Hotspur (responding):
Why, so can I, or so can any man;
But will they come when you do call for them?

The moral of the dialogue is that anyone can wish upon or command anything he desires, the critical thing is whether the desired outcome/wish will occur. This dialogue seems all the more relevant, when one considers the fact that the Nigerian government is currently seeking new foreign investors for the upstream Oil and Gas sector while the deep-seated investment-inhibiting issues plaguing the sector remain unresolved.

The security situation in the Niger Delta, which was alluded to in Dr. Egbogah's statement at the conference, is abysmal and has led to a situation of near anarchy with various "packages" (i.e. human beings, preferably Caucasian) being kidnapped at will and huge ransoms being demanded and, almost invariably, paid to secure their release. A kidnap and ransom industry has blossomed to complement the already established bunkering industry in the Delta, culminating in the emergence of large numbers of young men with criminal careers that are so lucrative, and near risk free, as to make the pursuit of any legitimate career or trade unrewarding and unreasonable in comparison. All this happens despite the launching of various "expeditions"(with often scary names) by the police and armed forces which seem not to make a dent in the seemingly impenetrable armour of militants motivated by quick riches. To solve the Niger Delta crisis, we need to go beyond sloganeering and begin to tackle the structural issues which have made lawlessness second nature to the youths of the region. The problem at hand has gone beyond that of ensuring a nice and friendly neighborhood, it has become a matter of national economic survival. The activities of these "restive youths" have led to severe losses in Crude Oil production (Nigeria's lifeblood), reducing our current average daily production rate to about 1.78 million barrels as against 2.6 million in 2006 and a 2009 budget benchmark rate of 2.29 million. Yet no end seems in sight to this crisis as our politicians seem incapable and/or unwilling to make the tough choices and concessions necessary to maintain our collective security and prosperity.

The security situation in the Niger Delta is by no means the sole militating factor against foreign investment in our Oil and Gas industry, equally troubling is the incoherent and often volatile policy regime of the current administration. In the last 2 years, various companies have watched their concessions and/or contracts being revoked, with the Korean National Oil Corporation (KNOC) being the latest company to join the "revocation club". KNOC is currently contesting the revocation of its Oil Prospecting Leases (OPL) in the federal courts and if the antecedents of our justice system are anything to go by, the company faces a long, hard and tortuous road to justice. The government cites the non-payment of US$ 231 million out of the US$ 323 Million required for the leases as the reason for its revocation order, while KNOC maintains that the US$ 231 million balance being cited by the government had already been written off by the immediate past administration in return for the construction of much needed infrastructure (such as a power plant and gas pipelines) by the Company. This incidence just adds to the string of policy somersaults and reversals that have plagued our country in the recent past, how can we begin to think seriously about attracting investments into the country when companies can't be sure that agreements survive the transition into another government of the same political party!. I don't want to sound unduly alarmist, but it is increasingly beginning to seem as if agreements in this country are not worth the paper on which they are written.

Until we begin to adopt investor friendly policies; strengthen our judicial and other independent institutions and improve the security of lives and property, we may struggle to attract serious investors with long term investment horizons. And like Glendower, we may continue to boast of the ability to call "investors from the vasty deep" but it is far from assured that they will come!

Pirates Ahoy!: Lessons from the rising scourge of Somali Piracy

It is no longer news that piracy around the Horn of Africa has been on a steady, near meteoric, rise. Neither is it newsworthy to state that the same pirates have given "brazen" a new definition, almost no week goes by without another news of them hijacking another vessel surfaces. Their targets are varied: they have attacked vessels ranging from trawlers; to Container ships; luxury yachts and even crude-laden supertankers. The condemnation from the international community has been strident and concerted, over 15 warships belonging to superpowers such as the United Kingdom and the United States, and Emerging powers (such as China and India) now patrol the waters. What is particularly galling is that despite the open display of naval might and superiority by the world powers, the Somali pirates - often armed with light machine guns and moving with speedboats - have continued to hijack vessels with reckless impunity.

I believe the lessons to be learnt from this scourge lies in understanding why these pirates took up piracy in the first instance and why they are such potent adversaries despite their obvious firepower disadvantage. Somalia, the native country and base of the pirates, has witnessed decades of civil war and sectarian fighting which has resulted in the complete breakdown of law and order. The country has practically been a "no man's land" for upwards of 2 decades and the last semblance of a government in the country - the militant Islamic Courts Union - was kicked out of power by Ethiopia. This state of anarchy has given rise to total economic breakdown; deprivation and hopelessness therefore ensuring that there are next to no opportunities in Somalia for attaining any level of prosperity through legitimate means. For many of the pirates, piracy, and other acts of brigandage, is nothing more than an occupation that may lead to some material prosperity in a lawless land where might is inevitably right.

Then why are they such a potent force despite the overwhelming military might of the superpowers? The answer is simple: the world is against an enemy who has nothing to lose and whose everyday existence is little better than death. It is clear that no navy can totally protect the high seas or completely secure every inch of water, the bulk of the benefits from the display of naval power is the deterrence that it provides to potential "disturbers of the peace" (i.e. pirates, sovereign aggressors etc). The key challenge in this case is: how do you deter a non-state aggressor who is neither afraid nor unwilling to die?. It is instructive to note that the bulk of these pirates are in their late teens and early to mid twenties, therefore they have come of age during a period of constant warfare, starvation and epidemics. These are young men who have watched parents, friends and relatives die from either bombs, bullets, disease or starvation and as such they place little value on their own lives or those of others. They have nothing to lose, if they do not die in the course of a pirate raid they may as well die on their beds from hunger; from a mortar shell or even from disease. They are particularly formidable because they cannot be threatened; reasoned with; bribed or even negotiated with. In their view the world offers nothing and they might as well see it burn. If ten pirates are shot dead, there will probably be another ten recruits willing to take the place of each of the dead pirates.

So is the situation beyond redemption? Is there a possible solution lurking somewhere?. I believe - like every other challenge facing the world - this scourge has a solution, I only doubt whether the solution is a military one. The Somali piracy problem has made very clear to the world the devastating effects of poverty; sectarian violence and poor economic expectations. Also made evident is the fact that rich and poor countries alike will suffer, either directly or indirectly, from these effects. While hunger may be far from the streets of Houston, Riyadh or London, the Somali pirates (products of the circumstances mentioned above) can hijack crude oil supertankers originating from from these cities; endanger the lives of their citizens and increase the cost of doing business for their corporations ( either by increasing the cost of shipping insurance or by increasing freight costs as a result of longer routes taken to avoid the pirates!). The rest of the world has to take very seriously the problems in Somalia and realise that the scourge of piracy cannot stop until Somalia is stabilized; a legitimate government established and economic rehabilitation and reconstruction embarked upon. This same situation applies to various impoverished and/or devastated regions of the world which are dangerously close to violence. International development needs to be redefined from being a "nice" thing championed by "bleeding heart" celebrities such as U2's Bono and Bob Geldoff. International development should be championed henceforth by calculating, hard-nosed strategists in developed nations as a matter of national security and self preservation. Nobody can be safe from large groups of people who have so little to look forward to in life that they cannot be scared of death.

Fair trade practices; responsible African leaders and private sector investments must be actively encouraged by world leaders in order to reverse the twin scourges of despondency and poverty that often lead people down the path of violence and recklessness. A "Marshall Plan for Africa" should be designed in consultation with responsible African governments, to ensure that the people who Prof. Collier of Oxford University has so aptly named the "Bottom Billion" can have a stake in the world to prevent them from being so inclined to destroying it. New generation of African businessmen and political leaders must be encouraged to emerge; policies to improve the capacity of African financial markets instituted and fair trade policies to ensure that African farmers have a short at profiting from the global commodities trade also put in place. Roads have to be built to ensure that crops do not rot on farms; hospitals stocked with vaccines to reduce alarming rates of child mortality and resource rich but despotic governments discouraged from plundering their country's treasuries and murdering its citizens.

The Somali pirates can (and must) be defeated, but they will not be defeated at sea or by naval worships. They will only be defeated when they have something to hope for in life to prevent them from being so fearless about death and unmindful of the value of human life. This can only happen when the whole world (including other African leaders) get serious about bringing lasting peace, development and prosperity into the region.

Dead Aid: Another entrant in the Trade Vs. Aid Debate in Africa

It is a well known fact that the African continent is increasingly attracting more vocal supporters - within the Continent, in the Diaspora and even among former colonial masters- for its development. What is less well known is that many of these supporters passionately advance either of the following viewpoints: 1.) Africa needs aid and the rest of the world should be shamed into providing more aid and grants to Africans; 2.) Aid is practically useless and in fact encourages corruption in African Leaders as it doesn't promote the sort of monitoring and accountability that the financial markets and taxpayers dictate; and 3.) the middle of the road people, who think Africa needs a little of both to develop. I am happy to report that I fall into the 3rd Category, I am a passionate member of the "Middle Roaders club"!. I believe that Africa needs a combination of both free-market liberalism and plain old-fashioned handouts (the Politically Correct synonyms are Aid and Grants!) to develop in the short to medium term.

The newest entrant - and a loud one at that - is a new book titled "Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa" written by a former economist covering Sub-Saharan Africa at Goldman Sachs: Dambisa Moyo. A quite comprehensive and really critical summary of the book is given in the here. I am yet to get a copy of the book, but the summaries and commentaries which I have read indicate that the book was quite strident in its criticism of western aid in Africa. The crux of the book - from the summaries I have read - is that aid tends to make governments and political leaders corrupt; fund white elephant projects and avoids the sort of accountability which funding through taxation or through international debt markets demands from governments and politicians. She (i.e. the Author) has identified 3rd world countries which have been able to raise financing from international capital markets for their developmental projects and who have, as a result of improved macro-economic management, been able to improve their credit ratings. Which has in turn has led to lower borrowing costs on such bonds and the attention of a wider investor universe.

On the whole, while I believe that the whole "Trade not Aid" movement has many significant merits, I believe the efforts of celebrity "do-gooders" such as U2's Bono and Bob Geldof in increasing aid assistance to Africa is also not without some merits. I believe aid has a large role to play in the re-emergence of post-conflict states such as Liberia, Rwanda etc. I doubt that many purely profit motivated investors will be inclined to invest in such countries or buy bonds issued by them in the international capital markets. These countries can hardly be expected to get back on their feet without some assistance (i.e. Aid!) from the international community. In these sorts of situations, it will be quite difficult to make an informed argument against the provision of western aid.

However, providing aid to more established, mineral-rich and relatively stable countries such as Nigeria is a totally different matter. I believe a country like Nigeria does not deserve foreign aid, given our rich resource base; relatively developed domestic financial markets and large population. Foreign aid is only likely to compound our governance problems as it will only provide another "accountability-lite" source of funding for our already corrupt politicians. We need to subject ourselves to the disciplines of the international debt markets and the associated credit rating process which places considerable pressure on governments to pursue sound macro-economic policies. In the alternative, our government can seek to better finance itself by broadening the tax base, which will in turn constrain it to pursue sound economic policies which will improve citizen "wealth being" and subject politicians to the anger of taxpayers who would not like to see their hard earned money squandered or downright stolen.

I think the most strident view of the book was provided by a columnist writing in the Washington Post. However, the Oxford Don: Paul Collier (author of the book: "The Bottom Billion" and a well known Africa expert) gives a much more balanced view of the book and the "Trade Vs. Aid" debate which I am more inclined to align with.

CBN caps on Lending and Deposit Interest Rates: An exercise in futility?

Yesterday the Governor of the Central Bank of Nigeria (CBN): Professor Charles Soludo announced that interest rates on deposit and loans in Nigerian Banks are now subject to a maximum of 15% and 22% respectively.

While I am not unmindful of the destabilizing effects of rising interest rates and I fully appreciate the need to put in place measures to stem the trend, I am convinced that this particular measure is an exercise in futility. I believe that one of the lessons the current market crisis has thought us is that bankers can hardly be forced into doing anything, America's Congress has not been able to get banks to increase lending despite the fact that the American Taxpayers are basically responsible for the continued existence.

Nigerian Bankers, and bankers everywhere, are quite famous for acting in their perceived self-interest and for being able to creatively work around regulations that have potentials to reduce their profits. I am sure that by now, each bank will have worked out its strategy of beating the 22% maximum lending rate restriction. What we are likely to see is that each bank will obey the restriction in theory, but will resort to filling their credit offer letters with all sorts of hidden and open charges that will ensure that their lending rates inch up to the rates they will like to lend at (and not what the CBN wants them to lend at!).

Furthermore, the maximum deposit rates of 15% can also be easily breached in practice as banks desperate to attract sizable deposits from their competitors will devise new products that will ensure that they can offer depositors interest rates in excess of 15% and still not breach the letter of the law. For example, instead of offering 180-day fixed deposit products, a bank may simply issue a 180-Day Commercial paper yielding say 18% to a potential depositor. This commercial paper, though technically not a deposit, has the same effect liquidity-wise on a bank. It may even be more attractive to a potential investor since they are discount instruments which do not attract interest payments (which are subject to withholding tax), the implied interest is capitalised and is realised through the capital gains at redemption. Since capital gains are not taxable in Nigeria, the depositor (because that's what he effectively is) will have received tax-free "interest" from the bank and the bank will also have "stolen" depositors from other banks (maintaining 15% deposit rate limits).

In addition to this, the cap will also limit credit creation in the industry, which is a situation we really cannot afford in a slowing economy. For instance, there are quite a number of companies who can still access financing from banks, but they can only do that at high interest rates such as 25-26% in view of the risks perceived by the banks. Setting an interest rate cap (of 22%) may result in banks cutting off credit to these categories of borrowers who may then reduce operations or lay off workers.

In conclusion, I believe reactionary measures such as the one currently being proposed by the CBN will not solve the crisis in the banking sector but only create avenues for "black markets" and rule dodging. Since market forces have pushed up interest rates in our banking system, we need to also find a market-based approach to solving the interest rate crisis not just wish them to stay at a rate through fiat!!.

Book Review : Outliers- The Story of Success

I just finished reading (over the extended weekend) Outliers: The Story of Success, written by the writer - and the world's favourite "drugstore sociologist" - Malcolm Gladwell, author of bestselling works: Tipping point and Blink. The core essence of the book is the idea that men of great abilities and achievements did not get there by only their own efforts but that many of the ingredients and determinants of success are often beyond the control of most people and highly dependent on the opportunities presented by society and cultural legacies.

The author weaves together anecdotes and case-studies of various successful businessmen, academics, scientists and lawyers to support his assertion that successful people are not necessarily outliers with indecipherable secret formulas, but products of a complex interplay of personal effort (e.g. the 10,000 hour rule), unique opportunities (a 13 year Old Bill Gates was fortunate to attend a private school with a more powerful computer than many universities at that time) and enduring cultural legacies (Asians are generally smarter than most other people due to their increadible work ethics, which is in turn necessitated by the demanding nature of the primary occupation of their ancestors: rice cultivation).

The first part of the book: Opportunity describes the unique advantages enjoyed by many successful people, which ensured that they had a deeper and more meaningful preparation - than most of their competitors - for the careers and/or goals that they later embarked upon. He stated that Bill Gates probably had logged in over 10,000 hours of programming time before he was 19 at a time when most people his age had never even being within a 10 meter radius of a computer in their entire lives. To illustrate the importance of opportunity in developing successful people, he mentions a case of a man with an IQ of 190 (Albert Einstein's was a mere 150!) who spends his time on a horse farm, lacks a college degree and has spent his entire adult life doing a string of low-income jobs such as ranch hand, bouncer etc. The answer is simple: Einstein had access to people, systems and institutions that provided him with a platform to develop and display his talents, while the 190 IQ man had nothing in his life or background to help him develop and display his abilities. As the author wrote about the man: "He had to make his way alone, and no one — not rock stars, not professional athletes, not software billionaires, and not even geniuses — ever makes it alone."

The second part deals with the effect of history or cultural legacies on our abilities to achieve great things and he asks a simple question: why do Asians (particularly Chinese) seem to beat almost everyone else at Mathematics and Science?. Is it because they are smarter than everyone else?, the author's simple answer is simple: Cultural Legacy. The Chinese were primarily rice farmers for much of their history and rice cultivation is an infinitely more demanding activity (which requires a mastery of various sophisticated value-addng tasks) than wheat cultivation which was the norm in Europe (or yam, Cocoa and cassava cultivation in West Africa!!). This has resulted in Chinese and Japanese people being more comfortable with having highly demanding work schedules and School Calendars that last more days in the year than most people in the world!

Overall, it was a very enjoyable book as it makes a good attempt at explaining the sources and characteristics of success and successful people. According to the author: Success "is not exceptional or mysterious. It is grounded in a web of advantages and inheritances, some deserved, some not, some earned, some just plain lucky"

Beyond the ICRC - Infrastructure Concessions and Investing in Nigeria

It is longer news that the Federal Government has appointed a high powered board (under the chairmanship of former Head of State: Chief Ernest Shonekan) to oversee the Infrastructure Concession Regulatory Commission (ICRC). The ICRC, established in 2005, is charged with creating and managing a framework for regulation of Public Private Partnerships (PPP) in Infrastructure Development in Nigeria. While the fact that we must - as a country - make significant investments to improve our dilapidated infrastructure is not in doubt, what remains to be substantiated is the level of our preparedness to embrace Infrastructure Concessions and investing in this country.Infrastructure concessions have become an increasingly important activity the world over, with infrastructure rapidly attaining the status of an asset class in which specialised firms such as Macquarie and Babcock & Brown (both Australian companies) have built time-tested profitable business models. Infrastructure concessions cut across a wide cross-section, ranging from: Toll roads, to airports & seaports to electricity projects and even waste management. Despite this broad spectrum of activities which may be classified as infrastructure investing, most successful infrastructure regimes share similar characteristics (which I attempt to describe below).

Infrastructure concessions are highly dependent on strong contractual, and stable political, frameworks, this is due to their capital intensive nature and standard lengths of concession (not usually less than 30 years, often extending to 90 years or more). Concessionaires not only need to enter into binding contractual agreements with the relevant authorities, they must also be confident in the ability of the concessions they have received to withstand changes in governments and political alignments. Nigeria's recent history of reversed privatisations and concessions (the Abuja Airport transaction is a good case study!) is very discouraging and doesnt signify the willingness and/or enthusiasm with honouring agreements (contractual or gentlemanly) which may have been entered into between investors and previous governments. Therefore, for us to begin to contemplate raising serious money for our PPP initiatives , the government has to display a greater willingness to honour and abide with convenants already agreed to and prove its commitment to a stable polity.

An equally important "ingredient" for successful Infrastructure Concessions is the depth and sophistication of domestic financial markets. Infrastructure projects (such as Toll roads, power plants and rail lines) are capital intensive projects with long gestation periods and as such they depend on access to long-dated financing arrangements. Most of the infrastructure projects originated by Macquarie Bank (probabaly the biggest firm in the infrastructure asset class) are sold and passed on to dedicated infrastructure funds (both listed and unlisted) that it manages. Furthermore, the firm routinely has access to long term bank financing with various lenders advancing loans with tenors up to 30 years to augment its equity contribution. In the case of Nigeria, two (2) quick questions come to mind: 1. Do we have investors with the competence, capacity and appetite to invest equity in infrastructure projects?; and 2. where are the sources of long term debt financing which will enable project sponsors complete their deals. The longest-dated bank financing in Nigeria - at least that I have heard of - is the 12-Year term loan given to the Lekki Concession Company - developer and operator of the Lekki Toll Road, the first toll road in Nigeria - by First Bank and UBA. A 12-Year term loan is a significant development in Nigeria (at least given where we are coming from) but it will be barely scratching the surface if bigger projects such as the Port Harcourt-Maiduguri rail line and the Lagos-Ibadan expressway are to be developed by the Private Sector. It is clear that for Infrastructure Concessions to take off and become serious business in Nigeria, we must begin to put structures in place to mobilise private capital (in the form of debt and equity) for executing various infrastructure projects.

Despite the obvious limitations cited above, I am of the opinion that - once proper structures are put in place - infrastructure investing has a bright future in Nigeria. The opportunities are so great (to the point of being limitless) due to our very low development base. The electricity situation in Nigeria is so bad and demand so far outstrips supply that almost any business model
for generating and/or distributing electric has a high chance of returning a profit to its sponsors. The same idea applies to investing in urban transportation, the proposed Red and Blue lines up for concession by the Lagos State Government will serve such an obvious need that I wonder how concessionaires operating these railway lines will lose money. If the Government backs up its talk with action and the proper incentives, infrastructure concessioning may turn out to be the "silver bullet" (if any exists!) which we have been seeking to our currently dreadful infrastructure situation.

Proposed Deregulation of the Downstream Petroleum Industry - Good riddiance to an unsustainable system

The Federal Government of Nigeria announced its intentions to deregulate the downstream petroleum industry by discontinuing the current government subsidy on petroleum product pump prices and privatising the Country's refineries. I believe this announcement has potentially beneficial implications for the growth of the sector and for the encouragement of private sector participation in building refining and distribution capacity in the Country.

Although, a cross-section of Nigerians and organised labour are up in arms against the proposed discontinuance of the subsidy and have described it as being insensitive I believe the policy has the potential of modernising the industry, encouraging private sector investments and strongly mitigating the cronyism and patronage for which the sector has achieved notoriety (even in corruption riddled Nigeria!). I cannot help but wonder how much of the 1.6 Trillion Naira (about USD 11 Billion) in Government subsidies was spent in supporting the inefficiencies and corruption in the system and not on actually alleviating the burden of high Crude Oil prices on Nigerians. For example, what warped logic dictates that imported petroleum products which are offloaded in Lagos should sell for the same price in Maiduguri which is hundereds of kilometres in the hinterland, despite the considerable costs involved in trucking these product over hundreds of kilometres from Lagos to the far north.

The current industry structure and the monopoly enjoyed by the PPMC (downstream arm of the NNPC) reminds me of the pre-2001 regulatory regime in the Nigerian telecommunications industry when NITEL was "lord and master" over all. A not so distant era during which NITEL officials had to begged, bribed and paid homage to before we could get overly expensive telephone lines which broke down for more days than they worked. The liberalisation of the telecoms industry and the advent of the various Mobile and Fixed Wireless Access (FWA) operators filled the deep void created by NITEL, rendering it practically irrevelant in the scheme of things with the Nigerian subscriber being the better for it. I am sure that a liberalised downstream petroleum sector will be ultimately beneficial to Nigerians, as it will lead to increased transparency engendered by competitive tension, reduced inefficiencies and greater mobilisation of private resources in building capacity.

Furthermore, the deregulation will help mobilise private investments in developing and improving the Country's refining capacities. All the refineries in Nigeria (which are currently under government ownership and control) are either moribund, grossly underutilised or both, this is in spite of the hundreds of millions of US Dollars which have been spent on various Turn Around Maintenance (TAM) contracts. The best option is for us to privatise the nation's entire refining capacity, so they can quit constituting a drain on the public treasury and a conduit for lining politicians' pockets.

An often cited reason for the inability of private refineries to kick off in Nigeria is the difficulty in securing financing for the projects. This lack of investor appetite is directly attributable to the current pricing regime, as we will be hard pressed to find a rationale investor who will be willing to spend hundreds of millions of US Dollars in developing an immovable asset (i.e. a refinery) to produce goods (petroleum products) over which he will not have pricing control. As someone else (the all knowing Federal Government of Nigeria of course!) will dictate their pump price all over the country and will almost certainly prevent him from exporting to other markets if he is uncomfortable with the prices the Government dictates in the domestic markets. Even if such an investor can be found, I am sure that he/she will not be able to get a bank that will be willing to provide financing for such a venture.

On the whole, I believe the deregulation of the downstream petroleum sector is one of President Yar'Adua's better decisions since taking office. Although the effects may sometimes be difficult for Nigerians to bear, we will all eventually be the better for it.